Earnings Transcript for SOI - Q3 Fiscal Year 2024

Operator: Good morning and welcome to the Solaris Third Quarter 2024 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Yvonne Fletcher, Senior Vice President of Finance and Investor Relations. Please go ahead.

Yvonne Fletcher: Thank you, operator. Good morning and welcome to the Solaris third quarter 2024 earnings conference call. Joining us today are 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 the news section on our website. I'll now turn the call over to our Chairman and CEO, Bill Zartler.

Bill Zartler: Thank you, Yvonne and thank you, everyone for joining us this morning. The Solaris team had a great third quarter. The highlights include the following

Kyle Ramachandran: Thanks Bill and good morning everybody. I'll start by recapping our third quarter financial and operational results. We will also provide a financing and guidance update. During the third quarter, we generated total company revenue of $75 million, adjusted EBITDA of $22 million, adjusted pro forma net income of $4 million, and adjusted pro forma earnings per share of $0.08. Our acquisition of MER closed on September 11th, and our third quarter results include contribution from MER for the final 20 days of the quarter. We established two new reporting segments; Solaris Logistics Solutions, which consists of our legacy energy business and Solaris Power Solutions, which consists of the acquired MER business plus contribution from our continued growth capital investment for new power-related equipment as it is deployed. I will discuss our segment profitability results, which exclude the impact of corporate SG&A and is reported separately. Our Logistics Solutions segment generated revenue of $70 million and segment adjusted EBITDA of $24 million. Revenue was down 5% sequentially due to lower last mile trucking volumes in our ancillary service offering and a slight decline in activity to 91 fully utilized systems deployed from 92 fully utilized systems deployed in the second quarter. Logistics segment adjusted EBITDA decline 6%, relatively in line with the revenue decline. As Bill mentioned, we expect activity in this segment as measured by fully utilized systems to decline roughly 10% in the fourth quarter 2024 as a result of typical seasonality. We expect some temporary decremental impact on our per system profitability levels due to cost absorption as we expect to hold on to some costs in anticipation of most of this activity coming back in the first quarter. Turning to our Power Solutions segment. Over the last 20 days of the third quarter, Power Solutions generated approximately $5 million in revenue and $3 million in segment adjusted EBITDA. These results were in line with the expectations we shared at the acquisition announcement in July, considering annual run rate EBITDA of $50 million based on contracts in place at that time. As Bill shared, we've made tremendous progress in contracting our order power fleet equipment with more than 80% of our expected capacity pro forma for all equipment deliveries now contracted with identified growth opportunities that could result in our capacity being fully committed. During the quarter, we were able to procure an additional 57 megawatts of mobile gas turbines. In addition, we were able to pull forward equipment deliveries for previously ordered equipment so that we could service near-term customer needs. Our team's ability to problem solve continues to differentiate our offering. As a result of these fleet updates, we expect to deploy an average of at least 240 megawatts on contracted revenue during the fourth quarter compared to approximately 156 megawatts in the third quarter. Our contract profile provides significant visibility into 2025. For Q1, we expect an average of at least 300 megawatts contracted in generating revenue. We expect the remaining bookings for megawatts-generating revenue to be more evenly split between the second and third quarters of 2025. Turning to guidance on corporate items for the fourth quarter of 2024. We expect total SG&A of approximately $9.5 million. We provided new detail of our segment level adjusted EBITDA in our earnings release, and the corporate adjusted EBITDA reflects corporate level SG&A and other expenses or income, less stock-based compensation and other non-recurring items. For modeling purposes, total SG&A guidance, less stock compensation, should get you close to that segment level impact. Netting these impacts to the total company adjusted EBITDA levels should result in fourth quarter 2024 adjusted EBITDA of between $33 million and $36 million. For the first quarter of 2025, our ability to deploy megawatts in our power business quicker than we originally forecast, combined with the visibility from our recently signed power contracts should drive a total adjusted EBITDA in excess of $40 million. Below the operating line, we expect interest expense to be approximately $9 million for the fourth quarter. We expect the total pro forma tax rate to be approximately 26% and the pro forma diluted share count to be approximately 61 million shares. Turning to an update on our balance sheet, cash and liquidity picture. In conjunction with the transaction, we closed on a $325 million senior secured term loan. And shortly after the quarter ended, we finalized our new senior secured credit facility that provides additional liquidity of up to $75 million. We expect to use funds from these financings as well as cash from operations to fund our near-term growth capital plans and liquidity needs. We ended the quarter with total debt of approximately $325 million and $117 million in total cash of which $98 million is restricted for growth capital expenditures. Our new credit facility remained undrawn. During the quarter, we generated operating cash flow of approximately $11 million and deployed $58 million for capital expenditures. The vast majority of these investments were for progress payments on our power equipment order book with approximately $2 million of this CapEx for sustaining capital at Solaris Logistics. Looking at the fourth quarter, we expect total company capital expenditures of approximately $130 million, which should trend down to approximately $75 million in Q1 of 2025 and approximately $75 million in Q2 of 2025, and finally, approximately $15 million in Q3 of 2025. Our capital expenditure assumptions include only the equipment we have on order today, and we will provide an update if opportunities materialize that require additional investment and provide attractive returns. Our forecast also includes approximately $3 million to $4 million of quarterly sustaining capital expenditure for Solaris Logistics as the majority of our capital expenditures will be for progress payments for power equipment on order. We anticipate taking final delivery of all equipment currently on order by the end of the third quarter of 2025 and expect free cash flow to inflect back to positive during the second half of 2025. Other uses of cash include our shareholder returns program. As Bill mentioned, our Board recently approved our 25th consecutive dividend of $0.12 per share, which will be paid on December 16th to holders of record as of December 6th, 2024. Our current share count, this should equate to a little more than $7 million per quarter in dividend payments. Pro forma for the fourth quarter dividend payment, Solaris has returned $190 million to shareholders since we began our shareholder returns program in 2018. We remain committed to sharing our success with our shareholders and employees, each of whom own shares of Solaris stock and are aligned with management to continue growing earnings, cash flow and shareholder returns. With that, we'd be happy to take your questions.

Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Stephen Gengaro with Stifel. Please go ahead.

Stephen Gengaro: Thanks and good morning everybody.

Bill Zartler: Morning Steve.

Stephen Gengaro: Well, first, thanks for all the great detail. That was a lot of detail, especially from Kyle. I think the first question, just on the mobile energy rental side. You talked about what's contracted and how it's evolving into the fleet. So, sort of two parts to the question. One is, how is availability of equipment beyond kind of what you have your eyes on currently? And the other one that's connected to that business is, do you see any material change to kind of profitability per megawatt deployed as we sort of try to model this out over the next couple of years?

Bill Zartler: Availability is still very tight. We have a great team in the Mobile Energy Rental guys, and we've been able to find a few things and horse-trade a few around with the manufacturers and move some things up in the queue. But in general, it still remains very, very tight in the marketplace. So, that happened. I think from a contractual perspective, we were very pleased to term up at rates fairly similar to where we were using shorter term. So, I think the market is telling us that its tight and it's willing to lock the power up for longer periods of time recognizing that the chunkier stuff in the data center world needs to be there for much longer than some of the original, very short-term bridge. And I think the same goes to oilfield customers as well that the recognition that -- Permian Basin, Delaware Basin, you're seeing long, long lead-times to get connected up and might as well lock this term -- lock the power up for longer term. So, we're seeing that happen. We're seeing pricing probably remain flat to up over period -- over the next several years.

Stephen Gengaro: Great. That helps. And then the other question is just kind of on the end market. Just kind of refresh us on how many -- you talked about data centers and -- are the assets being -- that are currently being deployed right now and they have visibility out for 3Q 2025. Are they all around kind of the oilfield and the data center customers? And how do you think that evolves?

Bill Zartler: Kyle can probably give you a detailed percentage. But currently, we've got 6 sites under contract. But the majority will be in two big hyperscale data facilities with the bulk of the power. And what's that percentage, about 75% of the power probably goes into the data center market. When we look forward to what -- look as of the end of the third quarter, beginning of third quarter next year is probably 75% data center. I think when we originally bought the business, we were sort of thinking it would involve 50/50. We'll tell you, the hyperscalers' demand for power has been significant and growing, and they're recognizing the need to term that up. And so I think that's weighted us heavier in that direction than we originally forecast.

Kyle Ramachandran: Yes. And the overall size of those installations is significant, so when you look at the weighted average of the megawatts from a location standpoint, it's probably closer to the 50/50, but as far as megawatts go, the data centers are very intense as far as the power demand.

Stephen Gengaro: Okay, great. Thank you for the color.

Bill Zartler: Thank you.

Operator: Thank you. We have the next question from Sean Mitchell with Simmons. Please go ahead.

Sean Mitchell: Hey guys. Can you hear me okay?

Bill Zartler: Yes, very good Sean.

Sean Mitchell: So, a couple from me. What are you -- how do you -- do you have any options on the back of the solar turbine capacity that you have locked up moving beyond third quarter? Are there any options there for you? And then Kyle, maybe for you, just how valuable are the slots of the capacity you currently have locked up in terms of dollar amount? I mean, these things have gotten way more valuable since you signed the deal, I've got to believe. So, is there any way to put a value on that?

Bill Zartler: Value of the slots, I mean, we want to take delivery of them. We've got them filled into our demand and so the return on that capital, as we've turned it up is roughly in line, maybe slightly better on average, but it's all firmed up in much longer places than we originally forecast. I think we're actually up a little bit on an overall basis. Kyle can dig into that a little bit with you. And then in terms of looking forward, yes, we're in active dialogue about what we're willing to commit to going forward and what kind of contractual arrangements our customers would like to see with that -- with those incremental assets.

Kyle Ramachandran: I think specific to a couple of our OEM partners, our team that came in through the acquisition has a long history with effectively product development with all of these guys. And so I think we and the OEMs are thinking about what the medium to long-term solutions look like for this evolving power space. So, I think there's a fair amount of value in that relationship. So, slots, yes, those are here today. But I think as we look forward and we're in a position, I think, to really be on the cutting edge of what the market looks like as far as the balance of different solutions for this evolving market. So, today, we've got a fleet of the 5.5-megawatt turbine, 16.5 megawatts, and a 35-megawatt unit. And so as we look forward that we're very comfortable with that fleet, but we are also evaluating other options within broadly distributed fleet that we see developing here over the medium to long-term for the company.

Bill Zartler: I'd add that I think that the notion of this behind-the-meter bridge power, the bridge is getting longer and that implies you need to do a few more things with the assets in terms of how long they may sit there, what we need to do from a regulatory perspective and permanent perspective. So, that market is evolving. And I think it's looking closer to longer or medium term bridges as opposed to what we thought may have been just kind of temporary short-term start-up power needs, if you will.

Sean Mitchell: Got it. And then, Bill, just on that point, you talked a little bit earlier on the call about the delays for grid connectivity. Are the customers basically saying it's getting longer? I mean, I guess it's not getting better?

Bill Zartler: Getting longer and the demands for some of the -- especially the artificial intelligence-driven data centers are higher than the utility can even get to in any near future. So, it's both longer lead-times on incremental and then pure size perspective, it's much, much longer term.

Sean Mitchell: Thanks for all the color. Its been fun to watch.

Bill Zartler: Thanks Sean.

Operator: Thank you. The next question comes from David Smith with Pickering Energy Partners. Please go ahead.

David Smith: Hey good morning and congratulations on the contract coverage. When you announced the MER deal, I think you also planned year-end 2025 capacity at 478 megawatts, went up to 525 megawatts in the September investor presentation, it's 535 megawatts now. Could you give us some color on that additional 57 megawatts, maybe how opportunistic that was and how you see the potential for additional capacity growth beyond placing orders for new equipment?

Kyle Ramachandran: Well, I think, at this point, the market is very tight and that nothing has changed there. I think importantly, all of those increments were tied directly to a demand on the customer side. So, the incremental orders were to meet a specific need. So, I think that's important. The reality is there were a couple of 1s and 2s that we were able to cobble together. From a short-term perspective, really don't see a whole lot available out of the OEMs, at least through the balance of this year and for most of next year. Options out there are other bits on the secondary market where people have secured capacity for perhaps their own end use and projects have been delayed. And so again, we've got a really strong pulse in the market. Our team has been doing this for 20, 30, 40 years. And so those relationships are sort of -- hard to put a dollar figure on them to Sean's to the point on the value of the slots. I think the pulse that we have in the market is really allowing us to have some edge in terms of sourcing in the turbine side, but also on the balance of plant side. It's not just about the prime mover. It's also about all the components that are required to deliver the customer, the voltage, and capacity that they're looking for, for their end use. So, it's very much in the spirit of our culture and the entrepreneurship and we've got a lot of different ways to win. But importantly, those ads were directly tied to needs for the customer.

David Smith: No, appreciate it. And then a quick follow-up is just regarding the line of sight you mentioned to have -- remaining order capacity contracted the 85 megawatts, just wondering if you could provide any color there. If this line of sight is contracts that haven't been signed yet, and also just fixing into what you're interested in seeing how the market might evolve before the equipment gets delivered middle of next year?

Kyle Ramachandran: Yes, I think it's a combo of the two of both demand from our current customer base as well as work and collaborate with customers on what their 2025 opportunities look like. I mean, what's nice about this business is we're seeing six, 12, 18-month look forward. And so from a planning perspective, that's super helpful. So, that's sort of a cadence of the timing of executing an opportunity from a contractual standpoint, but actually meeting it on site. I think it might be helpful to update a little bit on how we're seeing the exit rate sort of the balance of the deliveries coming in with the original Solaris Logistics business. And we announced the deal and as we've provided some updates on guidance, we've really kind of talked about a midrange of $230 million of EBITDA on an exit run rate basis next year. With where we are from a contracted standpoint with the 450 megawatts, we've effectively contracted up that level of EBITDA from the power side of things. And we've got another 15% of pro forma capacity available. which could add $20 million to $30 million of EBITDA on a run rate basis. And so we feel very confident that, that will get termed up and will be contributing to cash flow here in the business. So, we view this as just a series of stair steps for the business from announcement to closing to -- this is our first quarter of little bit of earnings from the business under our belt, and then you know the big stories on the contracting side of things. So just feel like this story is unfolding one step at a time, and we're really excited about it.

David Smith: Really good steps. Thank you for the color.

Bill Zartler: Thanks Dave.

Operator: Thank you. The next question is from Mike Breard, a Private Investor. Please go ahead.

Unidentified Analyst: How much natural gas you need to buy to make your smaller units profitable? And how much do you need for your larger unit?

Kyle Ramachandran: So, I think from a contractual standpoint, we're providing the turbines and the balance of plant to allow the customer to generate electricity power on their location. So, they're ultimately purchasing the gas or they are using their own gas in the oilfield applications in a number of instances. But when we look at sort of the total cost of ownership between the rental of the equipment and then the gas consumption for fuel, we do see the solution as being relatively competitive with alternative baseload power, particularly when you're looking on the energy side where you've got stranded field gas that really doesn't have a market, it actually may be significantly lower than what they're paying the utilities. But the turbines are very efficient and our good consumers of fuel, and we're actually working on a couple of different applications that could drive improvements in the heat rate on the units.

Bill Zartler: And Mike, you can refer to our website. Each one of the spec sheets on the equipment has their heat rates and their efficiency curves?

Unidentified Analyst: Okay. I was just wondering how much natural gas would be required to use -- for the customer to buy?

Bill Zartler: Yes, it will be embedded in the heat rate and chemistry curve. It varies at ambient temperatures and so there's an iso-number and all that specs. There's actually some graphs on our website that explain it further. The 5.7 megawatts and 16.5 megawatts.

Unidentified Analyst: Okay. Thank you.

Bill Zartler: Thanks.

Operator: Thank you. We have reached the end of the question and answer session. I'd now like to turn the call back over to Mr. Bill Zartler for any final closing remarks.

Bill Zartler: Thank you, Darwin. I'd like to conclude today's call by reiterating that Solaris remains committed to providing exceptional service quality and value add to all of our customers. We leverage our innovative technologies across both of our business segments and our leading market position within the Logistics Solutions segment underscores our unwavering commitment to our customer base, which will remain a core focus of Solaris going forward and we are equally focused on executing the large commercial opportunity set in the Power Solutions segment. It's accelerating rapidly, and it highlights a further need for bespoke behind-the-meter power generation applications across a variety of end markets. Together, the combined businesses are uniquely positioned for significant growth and increase total shareholder value. I'd like to thank our employees, customers, and suppliers for their continued partnership in making Solaris successful. Thank you.