Good morning, and welcome to the Solaris Oilfield Infrastructure Second Quarter 2023 Earnings Call. [Operator Instructions] Please note this event is being recorded. I would like now to turn the conference over to Yvonne Fletcher, Senior Vice President of Finance and Investor Relations. Please go ahead.

Good morning, and welcome to the Solaris Second Quarter 2023 Earnings Conference Call. I'm joined today by our Chairman and CEO, Bill Zartler; and our President and CFO, Kyle Ramachandran. Before we begin, I'd like to remind you of our standard cautionary remarks regarding the forward-looking nature of some of the statements that we will make today. Such forward-looking statements may include comments regarding future financial results and reflect a number of known and unknown risks. Please refer to our press release issued yesterday, along with other recent public filings with the Securities and Exchange Commission that outline those risks. I would also like to point out that our earnings release and today's conference call will contain discussion of non-GAAP financial measures, which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. Reconciliations to comparable GAAP measures are available in our earnings release, which is posted on our website at solarisoilfield.com under the News section. I'll now turn the call over to our Chairman and CEO, Bill Zartler.

Thank you, Yvonne, and thank you, everyone, for joining us this morning. I'm pleased to share another strong quarter of profitability growth as we continue to see success from our top fill and AutoBlend technologies. We grew quarterly adjusted EBITDA by 7% sequentially and 27% from the second quarter of 2022 to nearly $27 million. We generated free cash flow of $7 million, and we returned $16 million to shareholders through dividends and share repurchases under our enhanced shareholder return framework. Industry frac crews were down sequentially in the second quarter as the impact of soft natural gas prices became evident in completions activity. We saw the impact of lower completion activity in our sand system count, but we're able to offset that with earnings contribution from our top fill and AutoBlend systems, which were both up over the last quarter as well as from increased contribution from ancillary trucking services. Over the last 18 months, we have made strategic investments in new technologies with the goal of enhancing both our earnings power and addressable market potential. Our goal with these investments is to provide incremental value to our customers that complement our core sand storage offering. As a result, this allows us to expand our footprint and customer list in the Lower 48 and drive higher earnings and cash flow per frac crew we service. Our results this quarter continue to highlight the returns on this strategy. Prior to developing these new technologies, on average, we deployed one 6-pack sand system to every frac crew we covered. Today, with our expanded offering, we are deploying 50% more systems, including top fill and AutoBlend units on our covered frac fleets. We expect that further new equipment deployments in the third quarter will help drive incremental EBITDA contribution, resulting in growing…

Thanks, Bill, and good morning, everyone. I'll begin by recapping our second quarter results. We generated over $77 million of revenue; adjusted EBITDA of nearly $27 million, a 7% sequential increase and returned approximately $16 million to shareholders. Revenue in the second quarter declined 7% sequentially, primarily due to softness in completions activity across several basins as the industry frac crew count began to be impacted by the rig count decline we saw earlier in 2023. Lower margin ancillary services revenue declined sequentially, which was modestly offset by a full quarter benefit of higher rental pricing across our sand storage offering. EBITDA grew 7% sequentially as we saw strong incremental margin and contribution from additional top fill and AutoBlend deployments and improved cost management across our ancillary services, which drove higher margins from that offering. The additional top fill and AutoBlend deployments contributed to pull-through sand silo work and incremental gross profit per sand system equivalent despite softness in the broader completion market. Before I give some color on the drivers of Solaris' activity in the quarter, I would like to provide context to the evolving and expanding nature of our equipment offering and our earnings per well pad. Historically, we earned the majority of our revenue and earnings from our sand system offering. So we focused on fully utilized sand systems as our key metric. As we have expanded our rental offering to include top fills and AutoBlend systems, we feel that a fully utilized total system count is a more relevant measure of our activity, particularly as each offering offers a similar earnings contribution margin. During the second quarter, our total fully utilized system count was 108 systems, which was down 8% sequentially as the decline in frac activity was partially offset by incremental deployments of both top…

[Operator Instructions]. Our first question comes from Luke Lemoine of Piper Sandler.

A little change in the asset count methodology, and you previously talked about a well site with top fill and AutoBlend would be about $2 million to $3 million in GP per year. When we think about the new account, is it better to look at the value that can be derived or frac fleet followed its potential here still $2 million to $3 million per year if you look at it like that. And Kyle, I believe you said kind of using that metric, you're at $1.6 million per frac fleet followed annualized in 2Q?

Yes, that's exactly right, Luke. We think providing this full system count gives visibility into the sort of roughly $1 million annualized EBITDA per system. And then we're also providing what that looks like on a fully covered basis from a frac fleet standpoint. But yes, the $2 million to $3 million of earnings per frac fleet is still the way we're thinking about it. We're just trying to provide a little bit more context to you all and investors as to what that makeup looks like.

The next question comes from Stephen Gengaro of Stifel.

Two for me. First, Kyle, thanks for all the detail. That was very useful. The -- one of the things that we normally would do when we kind of back into your fleet count off of an assumed market share and our expectations for frac fleets, right? You've got about one third of the market usually. As we think about your market share as far as fleets served right now, has there been any movement in that from your perspective?

Yes, I'll kick it off, but Bill, you should finally chime in on it. Certainly, the new technologies have driven market share. It's targeted to certain majors that we've been chasing for a long time and without some of these new technologies, we wouldn't be there. From a capability standpoint, when I say that, that really around the bucket elevator. But then also the other piece that we alluded to in the call is around the electrification and we've got customers that are really pushing hard on that. And obviously demanding that service from the pressure pumpers and we're a plug-and-play solution for that, both with -- or with the bucket elevator, the sand system as well as the blender. And that's a real edge and differentiator for us. And that's driven incremental market share. And then the second piece to that, I would say, is just regionally, the Rockies Basin continues to be a growth area for us, which is just historically been underserved due to the use of belly dump trucking up in that market. And so those two pieces really have significantly given us opportunities to work for new customers. And as we look at the backlog, that continues to grow.

I think you hit it all, Kyle.

Great. And then just the second one, as we think about the deployment of more systems on a per frac fleet basis, and you've talked about the sharp rise you saw 2Q versus 1Q. Is there -- I mean I guess the question gets to like, as you talk to more customers about this, is there a stickiness where the customers who are using it want it across the spectrum? And I'm trying to think about how that impacts adoption.

I think it does, Steve. I'll answer this one. It does. But the difference between running a pneumatic truck versus running a belly dump truck is very dependent on how far you're going with that load, what the local rules are on loads. And so for instance, in Wyoming, you're running 60,000 to 70,000 pounds of truck of sand and so Nomadic is not going to haul that. So there are some regional specifics around how that adoption. I mean our goal is to once the customer uses it, that the reliability and all the ancillary benefits that come along with the systems in terms of data, technology, using the blender with the way it actually can help the reliability as well as cleaning up sand in the process leads to a very consistent use of the product by our customers for a long period of time and hopefully very sticky.

We've got multi-basin customers that are using the new technologies across multiple basins.

Okay. That makes sense. And then just one final one. You mentioned kind of what you saw was -- it feels like stability in price for the, I guess, maybe it's the wrong word, but sort of standard sand silo system. Is that -- I imagine that's just based on conversations with customers and what you're seeing or just kind of a back of that, we've also started to hear that maybe there's a little bit of a pickup in 4Q just as some of their consumable costs have come down. What are you guys seeing from that perspective? You usually have a good insight into activity changes before some of the others do.

Well, I think that's right. I mean I do think you're going to see it. It feels like if we look at the profile of the second quarter are kind of low was May. June picked up a hair. I think July feels sort of in that same level, and we'll see how the rest of the quarter shapes up. I think it's trending flat to slightly down with some talk of momentum. It's really too early to completely predict the fourth quarter. But we do see, in general, especially if commodity prices remain where they are, that there's a bit of optimism and maybe some early spending for their '24 program and getting ahead of the game, especially when it comes to locking in some lower cost operations. In terms of our costs and the way we tend to work with our customers, we're less volatile on pricing than most other services. We tend to not to raise them overly in the good times but not give them up too much in the downtime. So that pricing level with us is relatively muted compared to other aspects of the industry.

[Operator Instructions] Our next question comes from Sean Mitchell of Daniel Energy Partners.

Can you guys hear me?

Perfectly, Sean.

I kind of want to hit on this last question that was asked a little bit more if you can. Just we've heard several anecdotes not leading into the quarter, but also on some of the calls recently about a frac activity slowdown in Q3, but then accelerates in Q4. Just want to see if there's any additional color you can provide on that? And then number two, maybe just from what you have left to deliver in terms of systems or capital spend, any bottlenecks on the supply chain side that may be coming up?

I'll answer your second question first. No, we have planned for the capital program all year, and we spread it out a bit, and we had it originally a little more flat and loaded, but we have spread out the build through the second half of the year. So that's on track. Our utilization isn't where we'd like it to be on the new technology because we have had -- as we launched this very quickly, we've had some generations, the early ones that are in refurbishment, we've identified key issues with them and things that we can improve. And so we've got notionally 8 to 10 in refurbishment with low capital refurbishment, but I think as our customers see it evolve, the versions that are running today and coming off the line and are refurbished are different than the ones a year ago that they're much improved. So -- and we have not had significant supply chain. We've been able to be ahead of that for the most part for our plan for this year. With respect to the market, it feels like it's flat to drifting down a bit in the third quarter. I think the momentum is -- I think the nuance around as things pick up in September or is it in October, November, December, it's hard to say from this point. There does feel like there's additional talk on momentum to pick things back up as the year progresses. Where that falls over the course of the next three or four months is very hard to predict.

Yes. A different way of saying that, Sean, is that once we get through these upgrades and improvements in some of the early bucket elevators that if we -- but our system count would have been higher if we were able to put those out in the field because the backlog is -- for demand is definitely there. So that is an opportunity for us in the back half of the year.

We have reached the end of the question-and-answer session. I would like now to turn the call back over to Mr. Bill Zartler for any closing remarks.

Thank you, Alan. I'd like to conclude our call by thanking all of our employees, customers and suppliers for their continued support in Solaris. Our team has done a tremendous job in helping our customers realize the benefits of safer, lower cost and automated solutions we provide. And I'm impressed with how our internal manufacturing and operations group have been able to keep up with the incremental new technology deployment to support this backlog of demand. We remain constructive on the long-term commodity outlook and are confident that we'll continue to deliver on our earnings and cash flow growth and our cash return strategy. Thank you all. Stay safe.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.