Good morning, and welcome to the Solaris Second Quarter 2022 Earnings Conference Call. . I would now like to turn the conference over to Yvonne Fletcher, Senior Vice President, Finance and Investor Relations. Please go ahead.

Good morning, and welcome to the Solaris Second Quarter 2022 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. Our second quarter financial results demonstrate the early innings for a more robust opportunity set for Solaris than we've seen in the past. Over the last few market ups and downs, our total addressable market was generally limited to having a set of 6 sand silos paired with a frac crew and a relatively small last mile service offering. During the last few years, including through the downturn, Solaris expanded its engineering software and manufacturing teams, and has been hard at work designing and building new technologies that complement and build upon our core offering. Today, our total addressable market has grown significantly as we roll out additional offerings. Although we are still tied to the number of frac crews sites in operation, our opportunity on those sites has grown significantly. Today's offering includes top fill solutions, the AutoBlend unit, water and chemical silos and a more sophisticated last mile offering that expands our potential earnings footprint per well site. These growth opportunities were born out of our internal innovation and our culture of continuous improvement in our core values for Solaris. We've always believed that the entire raw material supply or low pressure side of the well site holds tremendous opportunity for efficiency improvements just as the sand storage handling did. Our vision was to design a low-pressure side of the well site that integrated the sand, water and chemical storage and handling into one, all electric automated operating platform with minimal headcount required to operate multiple built-in redundancies for the highest reliability and the smallest footprint possible. This vision required capital investment that we began making in 2020 despite the downturn and accelerated this year as these offerings have had great traction in commercial success. They…

Thanks, Bill, and good morning, everyone. As Bill outlined, the Solaris team produced impressive results for the second quarter, and we believe they demonstrate a differentiated opportunity for Solaris and what appears to be shaping up to be a strong multiyear cycle for the industry. We generated nearly $87 million of revenue and adjusted EBITDA of over $21 million. We averaged 84 fully utilized systems, which represents a 12% sequential increase from the first quarter. We believe this growth exceeded that of the industry frac count driven by incremental demand for our new technologies and our integrated last mile logistics offering. Our gross profit margin for fully utilized system was up 18% sequentially in the second quarter. The strong incremental margin increase was driven by a combination of improved last mile profitability, fixed cost absorption due to activity growth and contribution from our new technologies as we deployed more top fill and AutoBlend units. Operating cash flow was approximately $16 million. During the quarter, working capital built by approximately $4 million to support activity growth and accelerated trucking payments associated with our integrated last mile services offering. After total net capital expenditures of approximately $21 million, free cash flow was negative $4 million in the quarter. We returned a total of $5 million to shareholders in the second quarter in dividends, which was flat from the prior quarter. The second quarter marked our 15th consecutive quarter of dividend payments, and we are now proud to have returned over $100 million in cash to shareholders in the form of dividends and share repurchases. We ended the quarter with approximately $15 million in cash and $50 million available under our undrawn credit facility for a total liquidity of $65 million. Turning to our third quarter outlook. We expect near-term industry activity adds…

. The first question comes from Don Crist with Johnson Rice.

I wanted to start with the increase in revenue quarter-over-quarter. I know it can be lumpy depending on how many systems or pads you're supplying with last mile logistics. But can you just talk about the significant increase quarter-over-quarter? And maybe talk about profits. It seems like maybe labor was a little bit of a headwind against the increasing revenue per system.

Yes. I'd say, Don, between last mile as well as the new technologies, the average revenue per piece of capital equipment does go up significantly. So on the new technologies, the commercial model at this stage is a rental plus throughput model. So we're getting -- we're generating revenue based on the actual tonnage pumped. And in general, that's going to increase over time as we're seeing more and more efficiencies. And just as a total overall magnitude, it's larger dollars. So we are seeing revenue growth, which is driving, I would say, lower percentage margin over time when we compare to, say, the 2018-2019 time frame, when we were primarily just a rental business. So I would say, as we look forward, we're going to see revenue continue to grow and margins probably on a percentage basis to decline. But the way we look at the return on capital is really dollars of contribution. And what's critical here is we're seeing expansion. In our contribution margin per frac crew that we're covering. And that's really the message here is we are growing our cash flow per frac crew meaningfully through further integration of last mile. There's significant value add there as well as the new technologies. So that's how we're kind of thinking about the evolution here, and it will continue to grow and more overtime as we have more capital going out.

I appreciate that color. I know it's difficult to predict quarter-over-quarter. But one more for me, as you've built more top load and blender systems, can you talk about any efficiencies that you've gained? I know you refined the design of it over the last few quarters, and it seems like it's kind of streamlined now. Can you talk about how many you're producing per quarter or any kind of metric that you want to put on that and if you're getting more efficient there?

We are continuing to make them and our manufacturing is very efficient. And we've outsourced subassemblies. I think we've got 14 in the fleet right now and growing. So that was only a few quarters ago. So we're making them pretty effectively and efficiently, and we're deploying them. As we mentioned, we've got a great backlog and we'll keep making them as long as we've got that and we see the incremental contribution margin. As Kyle said, I mean we really focus on the dollar return on that capital plus the dollar return on the core silo system and incrementing that up continues to perform. Sometimes it really helps us capture the margin by being in the last mile portion of the business as well versus the rental model. And it really puts us in the position of some of our customers so we can demonstrate and understand exactly how to better make a return on that capital investment on that side of it. In terms of blenders, they continue to perform. We've tweaked it. We've got 4 running and they're continuing to grow. It's not quite as straightforward to drop that kit in as you would adding a top fill on the front of the silo set. But it's working, and we're seeing tremendous reliability improvements under current blenders, and that really is encouraging for our customers.

. The next question comes from John Daniel with Simmons.

Okay. Look, this is kind of a softball, not meant to be. But just looking at the growth in Q2 top line, really impressive and then the growth in the top fill systems. And knowing, of course, that you're not going to give formal guidance for '23, but it really feels like if -- let's just humor -- let's say, we think the frac market is up 10% next year. Just make up a number for -- just for the purpose of the discussion. You guys should be outperforming this by a good factor. I mean am I off base on this? It just seems like you guys are set up well here.

No. I think if you flash back to our market, our penetration a year ago with 6 packs on every well site, occasionally 12 packs. And you start adding top fills on a significant portion of those and blenders, you really are looking at an incremental 2 to 3x per frac crew gross margin.

Yes. That's impressive. As you guys are designing the stuff, the blenders, the top fill systems now, I mean how much time is your engineering department allocating to that next opportunity? Or is right now the focus on just continuing to grow these 2 opportunities?

That's a great question, and we challenge ourselves every day to figure out our handoff. We've built up our operations team to take on the more sustaining engineering and improvements of our product solutions. We have our engineering group roughly divided up into new product design, development, launch and sustaining engineering. And for evolution of the current products and once they become current products, focused on that. So we are in that handoff process right now. We've added to our field operations team to be able to handle these slightly more complicated products and slightly more complicated pieces of kit so that we can refocus our core expert engineering on new product development and turn this over into sort of field engineering.

This concludes our question-and-answer session. I would like to turn the conference back over to Bill Zartler for any closing remarks.

Thank you, Andrew, and thank you, everyone, for joining us today, and thank you to the Solaris employees for their continued hard work and making sure that we continue to provide our customers with innovative, reliable solutions that make our industry better. We'd also like to thank our customers for trusting our innovation and helping us continually refine it and make it better. We look forward to further sharing updates as these growth initiatives take hold over the next quarter or two. Thank you all. Stay safe, and have a great day.

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