Good morning and welcome to the Solaris Oilfield Infrastructure Third Quarter 2022 Earnings Conference Call. All participants will be in a listen-only mode. I would now like to turn the conference over to Yvonne Fletcher. Please go ahead.

Good morning and welcome to the Solaris third quarter 2022 earnings conference call. I'm joined today by our Chairman and CEO, William 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 well site at solarisoilfield.com under the News section. I'll now turn the call over to our Chairman and CEO, William Zartler.

Thank you, Yvonne and thank you everyone for joining us this morning. The Solaris team has delivered another strong quarter and I'm proud to share the results with you today. During the third quarter, our fully utilized system count increased roughly 12% sequentially to 94 systems and adjusted EBITDA grew over 14% to nearly $24 million. We paid our 16th consecutive dividend and end of the quarter with $10 million of cash and no net debt. Last quarter, we spoke about how our investments in technology has increased both our earnings power and addressable market opportunity this cycle and our results today continue to support that. We believe that 12% growth in our fully utilized system count outpaced the overall growth in the frac market as we deployed incremental systems to both new and existing customers due to our broader offering. We spent the last couple of years investing in technology and broadening our well site offering to include top fill solutions, the AutoBlend unit, water and chemical silos, and a more sophisticated last-mile service offering. Our goal with these investments is to provide additional efficiencies that complement the benefits already provided by our core sand storage offering. Each of these new technologies expands our total addressable market. Through our last-mile services, we provide services for operators or service companies that prefer a bundled package, including both sand storage and delivery. Through our top fill solutions, we have added new customers that have historically used boxes or other bottom dropped solutions. And through our AutoBlend system, we provide efficiency savings for customers that are experiencing limitations with existing vendor designs, as well as provide a reliable all-electric solution for many of the electric frac leads coming to market. During the third quarter, approximately half of our net growth in total…

Thanks Bill and good morning, everyone. Our strong third quarter results are a testament to our team's innovation and strong execution. We generated over $92 million of revenue and adjusted EBITDA of nearly $24 million. We averaged 94 fully utilized systems, which represents a 12% sequential increase from the second quarter. We believe our growth exceeded that of the industry frac count, driven by incremental demand for our traditional and new technologies. This growth was partially offset by lower volume and mix in our last-mile logistics offering. Our gross profit margin for a fully utilized system was flat sequentially in the third quarter. The strong incremental margin contribution from our top fill and sand system deployments was offset by combination of lower last-mile profitability, higher system support costs, and startup costs associated with ramping new product deployments and activity in underrepresented bases. As we rolled out the top fill equipment, we've used them in many of our integrated last-mile jobs and has been able to enhance our margins. However, job mix and other issues outside of our control that can be difficult to predict, such as sand and frac availability, drove a decrease in our third quarter last-mile profitability coming off of a record second quarter. Although job mix will remain challenging to predict on a near-term basis, we see continued momentum going forward with our integrated last-mile service offering as our team continues to execute utilizing our top fill equipment. Operating cash flow during the quarter was approximately $21.5 million net of an increase in working capital of approximately $2 million to support activity growth. After total capital expenditures of approximately $27 million, free cash flow was negative $6 million in the quarter. We returned a total of $5 million to shareholders in the third quarter in dividends, which…

Thank you. We will now begin our question-and-answer session. And the first question will come from Luke Lemoine from Piper Sandler. Please go ahead.

Hey, good morning to Bill, Kyle, Yvonne.

Good morning Luke.

Good morning. On the one on the incremental 2023 CapEx, you've noted how you're seeing increased incremental demand for top fill deployments and maybe AutoBlend as well. In the past, you've given us some parameters on how accretive these can be to gross profit per system. But maybe on a more simplistic basis, van you talk about how the ROC from these investments in 2023? Or maybe even comment on how additive this could be to 2023, but our estimates are pretty low at this point at about 110 million or so?

Ye, Luke, I'll take that one. When we think about return on capital, we really target call it a two to three-year period back on all the capital we put into the business, that’s sort of on just a standalone basis. And the really compelling piece with the top fill units is we're able to redeploy idle capital. So, some of the sand silo systems that we have today that aren't working, we're able to gain market share through deployment of the top fill. So, that becomes really compelling from an incremental ROCE, we're deploying roughly $3 million of capital, but the incremental is only call it a $11.5 million.

Okay, got it. And then I believe you said, you're at nine top fill systems right now, how do you with the CapEx for 2023 -- what do you see 2023 ending up on the top fill systems?

Yes, the nine is a fully deployed system count. And so again, that's a pretty conservative way to think about it. That was the blended average for the entire quarter. So, we're adding top fills every day. And the way we think about capital cost per top fills roughly $1.5 million. So, you can kind of do some math to imply what the ending count number is. We won't probably be too descriptive here today as to what that will be, but based on the guidance, you can back into that.

Luke, a different way of thinking about it is that we've probably continued to add top fills at a similar pace and so you should continue to see both the pull-through that Kyle referenced of additional sand systems, plus the contribution on that two to three-year payback on the growth CapEx in 2023. So, I think we would agree with you that the street seems a little low right now.

Okay. And just a--

And about a third -- about one out of every three that's going to work. So, each one gets an incremental capital return, one out of three to one out of a half is actually pulling through an incremental sand silo set that would not be used that's actually idle capital, so that you will get actually increased returns on that portion.

Okay, got it. Super helpful. Thanks a bunch.

Thanks Luke.

Yes. The next question will be from Stephen Gengaro with Stifel. Please go ahead.

Thanks. Good morning, everybody. So, just to follow-up on Luke's question a little bit. When we've sort of traditionally done our Solaris model, we've sort of looked at our expectations for frac fleets and assume you guys had about a third of the market. Should we be changing that approach?

It appears as if we are gaining market share when you look at that metric. So, yes, I think incrementally with the top fill unit, we're able to hit a market that has traditionally not been using silos. Some of our current customers are using it. So, we're not changing market share, we're actually just adding capital going to work on those particular pads. But in many cases, somewhere between a third and a half, are actually pulling through new silos for new market.

Okay, great. That's helpful. And then when we think about your free cash flow generation next year. It sounds like based on your comments, in response to prior question, you think the consensus might be a little low for next year, might be a lot low, but the free cash generation should be positive next year, even with that growth CapEx you're talking about?

Yes, absolutely. And, we will manage the CapEx going into the year. Right now, our expectations is that we have plenty of demand going into next year and we'll plan on building it. If things change, we can rapidly slow that down if needed. But right now, it feels like those top fill units will go to work, be coupled with existing silos as well as bring new markets -- new to work. But even on top of that, there is additional significant free cash flow generated beyond the CapEx required.

Great. Thank you. If I could slip in one more just from your perspective of the market. I mean, you guys have -- I think you'd generally get an early insight into interactivity and you, kind of, commented on the fourth quarter. It feels like, there's a continued growth in U.S. land activity next year, albeit maybe at a slower rate because of equipment availability in general. What is your view of how 2023 completion activity plays out at this point?

Yes, you can't predict that. I think we view it as continuing to be steady to up a little bit. If oil prices rebound significantly, it's going to grow. If things happen in the election to change the sentiment around the politics in the country, things would go up faster, or it could slow down. I don't see many scenarios where it falls significantly next year. We look on our probability lens, but it always can.

Okay, great. Thank you for the details.

The next question comes from David Smith from Heikkinen Energy Advisors. Please go ahead.

Hey, good morning. Thank you for taking my question.

Good morning David.

Correct if I'm wrong, but you haven't increased pricing that much this year versus last right, I mean, certainly nothing comparable to the V increases seen across most of the other OFS assets like rigs and frac spreads. So, I'm curious if you can talk about how you view potential to improve your pricing going into 2023?

Typically, we're setting pricing once a year for the rental business, sort of on a calendar basis. So, you're right, we did reset pricing the first quarter. And for the most part, pricing hasn't moved throughout the year. As we bring on new customers, they tend to be at a higher incremental rate, or I say, the marginal rate at that point in time. But in general, we have really not reset pricing for the base float of our business. So, we do expect going into next year, there will be a price increase, we're entering into those discussions with our customers. I think our customers recognize we're investing a heck of a lot of money into our business and they're getting incremental benefit for that investment. So, there is a -- it's not a peer price increase, there are true investments we're making into the existing fleet. And you see that in some of the maintenance capital numbers, as well as a growth capital bases in terms of adding new capacity, or modifying our capacity by using a bunch of elevators. So, I think that is our expectation going into next year and stay tuned for more details as to what that looks like.

Appreciate it. And a quick follow-up if I may. If I just look at the implied growth CapEx for Q4 and 2023. It's just 60% of that were top fill sale systems, and I'm guessing it might be more than 60%. That kind of points to 30 or more top fill systems. If one out of three new top fill systems supports an incremental top end system being deployed, is this just kind of the right way to think of it that just that that growth capex alone is probably pointing to 10 or more systems being added beyond whatever, completions growth activity next year might support?

I think you're spot on David.

All right. Appreciate it. Thank you all.

Thanks David.

The next question will be from Samantha Hoh from Evercore ISI. Please go ahead.

Hey guys, congrats on the really impressive growth in the system -- fully licensed and count. Maybe just staying on that same line of discussion. I just wonder if you could talk about the pull-through from the top fill, are you displacing sort of this legacy technology? Can you, kind of, talk about just what type of customer mix or technology mix you're gaining traction with where you're able to displace the -- where we were able to pull-through the fully utilized systems?

I think we hit on dead end in the discussion around the market, so the Rockies in the Bakken, especially where you have enhanced payload capacities over the road, the offering is a very compelling improvement, to put the top fill system in those markets. Those markets themselves have grown a little bit, but we have displaced other technologies and legacy type equipment up there, but that is rapid growth. That is more incremental system pull through in those markets and others, but we're seeing increased use in the in the middle of the Delaware Basin as well, using relatively short hauls, but being able to put a higher payload per truck than you would in either a box or a pneumatic truck.

Okay, great. sorry.

No, go ahead.

Well, how does it work when you have a customer that only taking your top fill technology, do you have -- I mean, I can see how like if you have, if you're already providing the silos, you can add headcount to take on this incremental service. But when you don't have that dual blended funneling, how does that work in terms of like the number of people you need to support the top fill system?

The top fill system is only used in conjunction with our silo system. So, incremental person out there potentially to run the silo system, but it's never an independent set. It's either a silo -- it's a top fill unit with a silo system with a customer that may have had an existing silo system that is switching from pneumatic trucks to belly dump trucks or we're putting a whole new package of both sand silos and top fill unit with a new customer.

Okay, got it. Okay, no, that's great. Congratulations guys.

Thanks.

The next question is from Sean Mitchell with Daniel Energy Partners. Please go ahead.

Good morning, guys. Thanks for taking my question. Maybe just to another one on the CapEx increase for 2023. Just to clarify, is most of that or the majority of that for top fill systems versus blunders outside of the maintenance number? And then number two, is there anything in the supply chain? I mean, there's still a lot of folks on calls talking about supply chain issues today? Is there anything in that supply chain that would maybe limit your ability to fill the top fill system -- or build the top fill systems on the current pace you're building today?

Yes, Sean, I think the majority of the growth piece is going to top fill, so you've got that right. And then as far as supply chain goes, we went from building call it two sand silos system a month to eight sand silo systems a month, back in 2017 and 2018. And we've done the same thing on the top fill in terms of building out manufacturing capacity, internally, finding some third-parties to help us augment our internal capacity. And then specifically on components and supply chain, we've got multiple vendors that we've been working with for the past two years, and we've continued to build up our demand with them and they are stocking inventory to some extent, and we're negotiating, more favorable payment terms than we've had in the past. So, in general, I think the supply chain for us looks pretty good. But it is long dated. So, yes, we've obviously had to put in orders for next year deliveries for certain components. But at this point, we feel like we're managing it as best we can. It's hard to predict some unforeseen hiccups that are certainly possible. But we've been very diligent and have enhanced our team internally to address those specific areas.

That's great. Thanks for the color and congrats on the incremental demand for the top fill systems. Sounds great.

Thanks Sean.

Thanks Sean.

Ladies and gentlemen, we have reached the end of the question-and-answer session. I'd now like to turn the call back over to Mr. William Zartler for any final closing remarks.

Thanks Chad. And thank you, everyone for joining us this morning and thank you to our employees, customers, and shareholders for your continued dedication to Solaris. This continues to be a very exciting time for our company as we continue to commercialize our new technologies, improve our historical offerings, and form new and deeper customer partnerships. We look forward to finishing the year off strong and sharing updates on our growth initiatives next year. Thank you all. Stay safe and have a great day.

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