Solaris Oilfield Infrastructure, Inc. (NYSE:SOI) This autumn 2023 Earnings Convention Name February 27, 2023 9:00 AM ET
Firm Members
Yvonne Fletcher – SVP, Finance and IR
William Zartler – Founder, Chairman & CEO
Kyle Ramachandran – President & CFO
Convention Name Members
Stephen Gengaro – Stifel
John Daniel – Daniel Power Companions
Operator
Good morning, and welcome to the Solaris This autumn 2023 Earnings Convention Name. [Operator Instructions] After the at this time’s presentation, there can be a chance to ask questions. Please observe this occasion is being recorded.
I might now like to show the convention over to Yvonne Fletcher, Senior Vice President of Finance and Investor Relations. Please go forward.
Yvonne Fletcher
Good morning, and welcome to the Solaris fourth quarter 2023 earnings convention name. Becoming a member of us at this time are our Chairman and CEO, Invoice Zartler; and our President and CFO, Kyle Ramachandran.
Earlier than we start, I would wish to remind you of our normal cautionary remarks relating to the forward-looking nature of a few of the statements that we are going to make at this time. Such forward-looking statements might embody feedback relating to future monetary outcomes and mirror quite a lot of identified and unknown dangers. Please confer with our press launch issued yesterday together with different latest public filings, the Securities and Change Fee that define these dangers.
I might additionally wish to level out that our earnings launch and at this time’s convention name will include dialogue of non-GAAP monetary measures, which we consider could be helpful in evaluating our efficiency. The presentation of this extra data shouldn’t be thought-about in isolation or as an alternative to outcomes ready in accordance with GAAP. Reconciliations to comparable GAAP measures can be found in our earnings launch, which is posted within the Information part on our web site.
I will now flip the decision over to our Chairman and CEO, Invoice Zartler.
William Zartler
Thanks, Yvonne, and thanks, everybody, for becoming a member of us this morning. 2023 was one other sturdy yr for Solaris as we deployed extra methods, generated optimistic free money circulate, and continued to return money to shareholders. Recapping our outcomes. For the complete yr, we generated $293 million in income, $97 million in adjusted EBITDA, and $26 million in free money circulate.
Within the fourth quarter of 2023, we generated $63 million in income, $21 million in adjusted EBITDA, and $16 million of free money circulate. We returned a complete of $47 million to shareholders within the type of buybacks and dividends and accomplished two dividend raises through the yr. Over the past couple of years, we made investments in new merchandise which have created new earnings energy and accretive money circulate generative capabilities.
In the course of the fourth quarter, we ramped up our deliberate investments in these product strains, which enabled us to drive a big improve in our free money circulate. Within the fourth quarter, we transformed 76% of our adjusted EBITDA into free money circulate. We anticipate an excellent stronger free money circulate conversion in 2024 as our new product strains generate returns and our tempo of progress capital spending slows considerably.
Earlier in 2023, our confidence on this coming inflection drove us to boost our shareholder returns program. We introduced an enhanced framework in March of 2023 to return a minimum of 50% of free money circulate to shareholders over the long run and we have now delivered on that dedication during the last 12 months.
Throughout 2023, we raised our per share dividend twice representing a rise of roughly 15% in 2023 and 20% since we began paying a dividend in 2018. We additionally introduced a $50 million share repurchase authorization, $26 million of which we exercised in 2023 to repurchase over 3 million shares.
In whole, our 2023 return to shareholders together with dividends and share repurchases of $47 million characterize over 13% of our market capitalization. We returned over 100% of our free money circulate to shareholders as we borrowed on our revolving credit score facility in early 2023 to opportunistically repurchase shares.
Yesterday, we additionally introduced that our Board has accredited a primary quarter 2024 dividend of $0.12 per share and that we repurchased a further 1.1 million in shares for about $8 million thus far this yr. This equates to a further $13 million in shareholder returns for an additional roughly 4% of our present market cap that has been or is scheduled to be returned to shareholders within the first quarter of 2024.
Professional forma for these further first quarter shareholder returns, Solaris has cumulatively returned over $170 million via dividends and share repurchases since we started to return capital to shareholders through the fourth quarter of 2018. This represents roughly half of present market cap and basically 100% of our via cycle free money circulate as we persistently return money to shareholders each quarter since then, together with through the COVID-induced downturn and through our latest progress capital years.
As we glance into 2024, we anticipate to proceed maturation of each our enterprise and the U.S. shale {industry}. Shareholder returns are definitely a big a part of this maturation theme, however I might additionally like to debate just a few different key {industry} themes that we consider Solaris is positioned nicely for.
North American oil manufacturing continues to succeed in document ranges regardless of the usage of fewer oil rigs and frac crews and operators proceed to search out working efficiencies. We anticipate operators to proceed to search for methods to extend nicely productiveness and do extra with much less. As a partial offset to this effectivity pattern, drilling and completion depth continues to develop to offset manufacturing declines that may be exacerbated by a shift from a core to a decrease tier useful resource developer. This depth comes within the type of extra sand transferring on a per day or per hour foundation than we have ever seen on this {industry}.
Our excessive throughput methods straight deal with and continues to help this progress in frac fee and depth. For instance, our Prime 12 methods mixed with upgrades we have made to our sand system present a strong mixture of our dependable and industry-leading sand dealing with tools.
These upgrades assist scale back the whole delivered value of sand for our clients by lowering the variety of entrance hundreds required via greater payloads and turning vehicles faster. Extra just lately we have provide you with further improvements to our current know-how which have helped our clients improve the quantity of sand offloaded per hour.
Additionally during the last couple of years, our methods have additionally efficiently supported the completion of simultaneous nicely frac jobs generally known as simul-fracs. We have at all times believed that your entire uncooked materials provide chain for low stress aspect of the nicely website holds super alternative for effectivity enhancements. Our tools and the complementary measurement and software program instruments are keys to unlock these course of enhancements.
As frac depth grows, it stays clear that service suppliers reminiscent of Solaris who provide dependable, secure, excessive throughput uncooked materials dealing with options can be key to serving to operators maximize their capital and operational effectivity initiatives and supply a secure setting to take action. As one other instance, the use in nearer proximity sand to drive further efficiencies has grown during the last 12 months, most prominently within the Permian Basin.
The financial savings on final mile trucking is probably the most predominant financial driver and the flexibility to maximise payload on leasehold roads when utilizing backside rock vehicles can even considerably produce financial savings. Whereas the chance set remains to be comparatively small in comparison with whole sand consumed out there, we’re working with our clients to execute on these alternatives.
One other theme persevering with to develop within the markets is the electrification of oil and fuel improvement. We’ve largely seen this play out within the rising demand for electrical frac fleets. Our methods have been 100% electrical since inception and are designed able to plug and play into the identical energy sources our clients are utilizing to produce their electrical or conventional frac operations, together with grid energy, generators, and pure fuel energy engines.
Our tools proceed to suit the invoice as operators are asking for or both requiring all electrical tools to drive decrease prices, greater reliability, and diminished emissions. And at last, consolidation at each the operator and repair firm degree continues to be a theme within the maturing US shale panorama, operators can achieve important efficiencies by executing improvement plans on bigger contiguous acreage blocks.
Pipeline service suppliers are combining [Indecipherable] and leverage operational and monetary synergies throughout a number of product strains. Right this moment, Solaris has primarily used inner investments to develop our scope. Whereas we have now not been a direct participant in consolidation and mergers but, we proceed to search for the precise match that may improve our money circulate and shareholder returns profile, preserve our stability sheet wholesome, and complement our tradition of innovation.
I would wish to summarize by highlighting that 2023 was an thrilling improvement yr for Solaris. We gained important traction and earnings from new merchandise, new clients via our general system deployment and started to see conversion of our strategic investments during the last couple of years into significant fleet free money circulate era.
We strengthened our shareholder return framework this previous yr by growing our per share dividend twice to $0.12 a share representing an roughly 15% improve from 2022 ranges and returning $26 million within the type of share repurchases as a part of our $50 million authorization.
Anticipate the next degree of free money circulate in 2024 ought to give Solaris the flexibility so as to add worth by growing liquidity, lowering revolver borrowings, rising sustained shareholder returns, sustaining our wholesome stability sheet, taking part in consolidation, and remaining prepared for the long run potential natural progress alternatives with sturdy money place.
With that, I’ll flip it over to Kyle for a extra detailed monetary assessment.
Kyle Ramachandran
Thanks, Invoice, and good morning, everybody. I will begin with recapping our fourth quarter monetary and operational outcomes. Working money circulate was $24 million after $7 million in capital expenditures, which got here in under our steerage of $10 million. We generated $16 million in free money circulate. We returned $6 million to shareholders, which was made up of our $0.12 per share quarterly dividend and the repurchase of about $1 million of shares.
We used extra money to scale back our revolving credit score facility borrowings by $7 million leading to a $30 million remaining stability along with $6 million in money at yr finish. Web debt declined to $24 million from $34 million within the third quarter. We ended the yr with roughly $47 million of obtainable liquidity.
Our exercise within the fourth quarter as measured by absolutely utilized methods was down 5% sequentially to 103 methods in comparison with our unique expectations of a flat system comp from the third quarter because of weaker than anticipated {industry} exercise. We adopted a mean of 64 frac crews, which was down 4% from 67 frac crews adopted within the third quarter.
As highlighted in Invoice’s commentary, we’re persevering with to see extra phases pumped and extra lateral toes accomplished per day, which has diminished the general variety of frac fleets required to fulfill market demand. Complete contribution margin per fully-utilized system, together with ancillary and trucking companies, was flat sequentially at simply over $1 million. On a per frac crew adopted foundation, whole contribution margin was additionally flat sequentially at $1.7 million annualized.
SG&A within the fourth quarter totaled $7.2 million and included non-cash stock-based compensation of $1.8 million. Web curiosity expense was $0.9 million. Turning to our first quarter and preliminary full-year outlook. Following the preliminary construct out of our prime, our capital spending fee has decreased considerably, which we anticipate will proceed to yield important free money circulate all through 2024.
For 2024, we anticipate whole capital expenditures to be lower than $15 million or lower than $4 million per quarter. Utilizing present consensus estimates for the primary quarter, this places our capital expenditures at roughly 15% of adjusted EBITDA and utilizing present consensus estimates for full-year 2020 for adjusted EBITDA and our present market capitalization, our steerage for capital expenditures ends in a roughly 25% free money circulate yield excluding any affect from working capital.
Our capital expenditure steerage for the yr largely displays upkeep ranges of spending, does embody some degree of continued improvement capital spending as we stay dedicated to working with operators to create options that deal with the altering nature of frac operations whereas additionally sustaining a disciplined strategy.
Nonetheless, our foremost focus can be on value-added system upkeep and upgrades. As a result of the vast majority of progress capital tasks and ongoing system enhancements are carried out utilizing our inner engineering and manufacturing capabilities, we have now the flexibleness to shortly and cheaply deal with our clients’ initiatives.
Adjusted EBITDA within the first quarter of 2024 is anticipated to be up roughly 10% sequentially, which is roughly consistent with present consensus estimates. We anticipate {industry} exercise and our system depend to be up modestly from seasonal lows within the fourth quarter and to be comparatively secure from then on.
Our year-to-date exercise ranges are up barely from the fourth quarter and we proceed to have availability to fulfill buyer demand for all our know-how choices that would drive further progress. We additionally anticipate whole contribution margin per absolutely utilized system to be modestly greater within the first quarter sequentially because of improved pricing, modestly decrease system prices as upgrades and upkeep we pulled ahead within the third quarter tapered into the fourth quarter, and incremental contribution from system deployment. We anticipate contribution from ancillary last-mile logistics companies to be flat sequentially.
SG&A within the first quarter is anticipated to be flat sequentially at round $7.2 million. For modeling functions, we anticipate the whole professional forma tax fee to be roughly flat at 26% and the professional forma absolutely diluted share depend to even be flat at 44.3 million shares as Q1 repurchases ought to offset deliberate issuances associated to annual stock-based compensation.
Much like prior years, we anticipate the heaviest use of money from working capital to be within the first quarter with subsequent quarters sometimes exhibiting a discount. We anticipate a much like modestly greater working capital draw within the first quarter of 2024 as in comparison with the primary quarter of 2023, which was a use of roughly $8 million. As in prior years, this consists of the cost of annual money bonuses and different annual money outflows reminiscent of property taxes.
Web of adjusted EBITDA roughly 10% greater sequentially and sub $4 million in capital expenditures, we anticipate optimistic free money circulate of roughly $10 million to $15 million within the first quarter. As our capital spending is anticipated to stay comparatively low for the remainder of the yr, we anticipate producing important free money circulate for the rest of the yr after the seasonally greater working capital use of money within the first quarter.
To summarize our first quarter outlook. Adjusted EBITDA is anticipated to enhance by roughly 10% sequentially. Web of CapEx of lower than $4 million and a seasonally greater working capital draw, we anticipate free money circulate to be between $10 million and $15 million. Already in 2024, we have now bought roughly $8 million in shares as a part of our repurchase authorization and introduced our $0.12 per share dividend for the primary quarter. We anticipate to make use of any extra money to proceed to strengthen our stability sheet and opportunistically repurchase shares.
Earlier than we open the decision for questions, I would wish to reiterate that we have now spent the final couple of years making strategic natural investments which can be driving earnings and money circulate progress and have enabled us to develop money returns to shareholders. Now that this progress capital program is meaningfully tapering down, we consider 2024 can be an thrilling yr in showcasing the energy in money circulate producing functionality of our expanded service providing.
All else equal, we consider our investments will allow us to ship stronger earnings energy and money circulate resilience transferring ahead as in comparison with prior cycles. We’ll proceed to deal with sustaining and rising our shareholder returns program, growing our liquidity, strengthening our stability sheet, and executing on the precise natural and inorganic alternatives that improve our return on capital.
With that, we might be comfortable to take your questions.
Query-and-Reply Session
Operator
We’ll now start the query and reply session. [Operator Instructions] The primary query is from Stephen Gengaro, of Stifel. Please go forward.
Stephen Gengaro
Thanks. Good morning. all people. I suppose the primary one for me is simply round there was some M&A introduced this morning within the Permian with two frac sand suppliers. Simply curious if there’s — how you concentrate on that and any affect on the enterprise given — I imply particularly given what one of many two gamers is placing collectively on the categorical aspect?
William Zartler
I believe as we have been in step with, the {industry} is fairly fragmented and wish some degree of consolidation and the way and what that appears like over the course of the following yr, it is onerous to say. I believe these are totally different companies but complementary in sure methods with a whole lot of the proximity mines developed by the Hello-Crush group, that are nice property and Atlas runs an amazing operation and an amazing mine.
And I believe placing the 2 collectively makes a whole lot of sense. We do some enterprise with Atlas at this time and hope that continues. A few of it pushed by buyer, a few of it pushed by simply the logistics efficiencies of our system for the excessive capability jobs within the Delaware.
Stephen Gengaro
Nice. Thanks. And after we take into consideration clearly you spent a whole lot of progress CapEx and also you’re nicely positioned going into ’24. The place do you sit so far as type of idle tools and the way ought to we take into consideration the proportion of conventional methods which have one of many new applied sciences hooked up to it as we evolve via 2024?
William Zartler
I consider we stated final quarter that we had roughly methods out there to place to work that had been upgraded on the sand silo aspect and I believe we’re operating within the neighborhood of 60 — 55 to 60 out there on the tophill methods to mix with that. And so which means we will roughly do half to a bit bit better than half of our silo methods might run with tophills for a complete of — should you checked out it from a complete system depend, that is 150 form of the whole capability perspective at this level with out a lot — with out actually any capital going ahead.
Stephen Gengaro
Nice. After which only one follow-up from me. Once we take into consideration type of the underlying pricing within the enterprise and I suppose for either side, each new know-how and type of conventional, are we fairly secure proper now or what are you seeing on the pricing aspect?
William Zartler
We’re fairly secure. For those who recall, our mannequin actually is month-to-month rental kind for our methods and so to the extent that we offer our clients with the flexibility to maneuver way more quantity via our system over the course of a month, they really decrease their prices even in a rising value setting with us.
I believe that should you appeared on the precise commodity of sand and also you have a look at the general public bulletins so far, sand pricing in an unstable setting appears to be dropping considerably as a result of we have seen further capability and at a flat frac crew depend, you are still rising sand demand. as we speak about depth. I imply we have seen sand demand go up, it is only a matter of how a lot capability — further capability can come on-line beneath that.
Stephen Gengaro
Nice. Thanks for the small print.
Operator
[Operator Instructions] Seeing no different questions, I wish to flip the convention again over to Mr. Invoice Zartler for any closing — oh, I am sorry. We do have one query that simply joined us. It is from John Daniel of Daniel Power Companions. Please go forward.
John Daniel
Sorry, guys. I assumed I did and I did not, I notice I forgot. Thanks for together with me. Invoice, you referred to as out innovation within the ready remarks as that is been type of a key traits for Solaris. I am simply curious should you might communicate to alternatives on the market whereby you possibly can pursue small tuck-in offers, which might deliver further innovation that you possibly can shortly increase. And clearly I am not searching for any names, however simply what’s the alternative set?
William Zartler
As I discussed, there are a whole lot of alternatives each on the low stress aspect to handle the provision chain of this and applied sciences round very environment friendly and dependable. Finally, the pumping hours per day have elevated dramatically and something you are able to do round that nicely website to forestall or allow the operator to run practically 24 hours a day the place you’ll be able to enhance. And so applied sciences round that, applied sciences round making certain that the entire pinch factors could be managed or set that we’re critically evaluating.
John Daniel
Okay. Does that one thing — I imply that is form of a dumb questions so I apologize. However is that extra intriguing to you than attempting to do the larger transformative deal?
William Zartler
I believe they’re all enticing to us. I believe our actual edge is round greater know-how, excessive contact, excessive service high quality with — we’re not truly operating as a lot tools as we’re ensuring that it’s dependable and serviceability and that we have got a powerful engineering group and digital group to assist be sure that each we will ship alongside with the fundamental tools is the measurement and the management and the circulate of that data again to methods at this time for distant operations for information evaluation. We will present all of that data to our clients in a method that helps them make their operations higher.
John Daniel
Truthful sufficient. Okay. Thanks for together with me.
Operator
It will conclude our question-and-answer session. I wish to flip the convention again over to Mr. Invoice Zartler for any closing remarks.
William Zartler
Thanks, Lydia. I would wish to conclude our name by thanking all of our staff for his or her super and onerous work in 2023. I would additionally wish to thank our clients and suppliers for his or her continued help in Solaris. We’re inspired by the outcomes on this previous yr and stay up for persevering with to make strides, serving to our operator clients nicely website effectivity and productiveness, in addition to persevering with to execute and develop and improve our shareholder return program. Thanks all and we stay up for sharing our progress with you in just a few months. Keep secure.
Operator
Thanks. The convention is now concluded. Thanks for attending at this time’s presentation. You could now disconnect.
