Good morning and welcome to the Solaris Second Quarter 2019 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.

Good morning, and welcome to the Solaris Second Quarter 2019 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.With that, I’ll now turn the call over to our Chairman and CEO, Bill Zartler.

Thank you, Yvonne, and welcome everyone. During the second quarter of 2019, Solaris generated $64 million in revenue, which was up 16% from the first quarter and adjusted EBITDA of $35.2 million, which was up slightly from last quarter. During the quarter, we averaged 123 fully utilized systems earning revenue, which was up 8% from the first quarter as we added work with both new and existing customers despite a frac market backdrop that was relatively flat on average from the first to the second quarter.During the second quarter, we also grew our last mile management services, which was a large driver of the incremental increase in revenue in the quarter. Historically, we have primarily rented our mobile proppant systems, but several customers have asked us to provide a bundled solution for last mile trucking with a well site rental. Our last mile offering allows us to use our extremely reliable system and the Solaris line of software to provide a low cost delivered solution to our customers.Despite its growth this year, this bundled model represents less than 5% of our fleet. Further success in this new service offering could continue to contribute to future growth to offset industry activity reductions that we expect may occur in the back half of the year. As we shared on our last call, we continue to see increased penetration for our systems with new and existing customers whose development plans continue to shift toward more efficient completion operations such as multi-well zippers and longer laterals, which drives higher daily sand consumption.Our systems have the reliability and capability to meet their needs. This trend continues to provide us with the opportunity to grow our market leading position. With that said completion efficiency gains, when combined with operator budget discipline, likely leads to a lower…

Thanks, Bill, and good morning everyone. As Bill mentioned, during the second quarter, we generated $64 million of revenue, which was up 16% sequentially, and adjusted EBITDA of approximately $35 million, which was up slightly from the prior quarter. The increase in revenue was driven by an 8% increase in the average number of systems deployed to customers, coupled with a flat price book and additional systems deployed in our last mile service offering.During the quarter, nearly 150 proppant systems worked with varying degrees of utilization. Our calculation of 123 fully utilized systems reflects the number of equivalent systems that generated revenue every day in the quarter, which we believe is the best measure for our business activity and for modeling purposes.Gross profit for the quarter was approximately $39 million, up slightly from the first quarter primarily due to the increase in fully utilized systems and offset by lower contribution from our Kingfisher facility.SG&A costs, and salaries, benefits, and payroll taxes for the quarter were $5 million, in line with our prior guidance. The $1 million sequential increase in total SG&A was primarily due to additional headcount and the full impact of restricted stock issuances that were made in March. For the remainder of 2019, we expect total SG&A and personnel costs to run slightly above $5 million per quarter.Net income for the quarter was $22.5 million or $0.42 per share. This was net of approximately $0.5 million or $0.01 per share in nonrecurring interest expense related to the write-off of unamortized debt issuance costs in connection with amending our credit facility.Our adjusted pro forma net income for the quarter was $21.2 million or $0.44 per share, versus $21.6 million or $0.46 per share in the first quarter. As a reminder, our presentation of adjusted pro forma net income adjusts…

We’ll now begin the question-and-answer session. [Operator Instructions] The first question will come from John Watson of Simmons Energy.

Thank you. Good morning.

Good morning, John.

Bill and Kyle, you both touched on this to an extent, but I was wondering if you could provide further color on what the exact design modifications are for the chemical systems. And then secondly, is there a target date to help all 14 back in the rental fleet, or is it too early to target that as of today?

Well, I think, John, the specific design modifications we’ll probably kind of keep internal. But I think the way I would describe it is pumping our first gallon of chemicals in the early part of the first quarter and where we are today, we’ve got a lot of learnings. It’s a new disruptive technology that definitely has a learning curve not only for ourselves, but also for our customers, which include pressure pumpers, chemical providers, and operators. So it’s getting kind of everyone to work together.And initially, I’d kind of describe it as we were walking and our customers were walking as to using the system, were running it at certain rates. As we’ve gotten more advanced in the deployments, we’ve transitioned very quickly to running, and we’ve really tested the initial parameters in the system that were initially designed. And I think really what we’re seeing is an opportunity to take a step back, take those learnings, make some modifications. That allows our customers really, and I think we talked about this in prepared remarks, to really push the envelope as to driving additional efficiencies through this kit.And so I think those are kind of the learnings that we’re now taking in in-house, to look at different pump parameters, different fill lines, different inputs as well as the off-takes of the system, that allow our customers to get the most out of them.

Yes, and I think I’d add that it’s nothing massively structural that we’re doing. It’s all little tweaks to the system. So it’s been highly functional, and I think the challenge has been it’s made it easier to do things much faster. And as we do that, we’ve pushed some of the limits of the some of the initial equipment to it. So we don’t expect this to be any kind of massive change in capital per system, either. There are some tweaks and some modifications, but the core of the system is in great shape and very functional. We just see the need that it has created the desire to go faster and faster. And as we do that, we need to make some modifications. So we’ve pulled all but a couple back in to make those modifications.

Great. That’s helpful color. Thank you. And I guess switching gears to the proppant side, you mentioned the potential to take share in the third quarter. And it looks to me like you took share in the second quarter as well. In the past, we’ve discussed contracts expiring for some of your competitors presenting an opportunity for Solaris. Should we be thinking about that as a potential opportunity in the second half, or is that more of a 2020 event?

I’d tell you it’s both, John. We certainly have visibility into contracts that are expiring into the second half, where we’ve gotten some positive indication on customers where they’ve got contracts in different basins that expire at different periods, where they have had already some contracts expire in certain basins. And now we have visibility into new basins. So we see that the second half. And there is a group of contracts, I would say, that do kind of going into re-contracting at the end of this year and the first part of next year. So I think it’s both. Its continued growth. Kind of take a step back. If we look at our customers today, just a quick snapshot, we’ve got more than 30 customers.So if we kind of go back a couple quarters, that’s certainly up pretty significantly. And we’re seeing it not only from pumpers, not only from operators, but also from different sand companies who haven’t necessarily invested in last mile and see this is the industry leading solution and no need to recreate the wheel. And then also on the third party logistics companies that are set up trying to build independent last mile businesses, I think the story is that this equipment works really well. It’s fit for purpose. And ultimately, if you’re a last mile provider or you’re a sand company, you want to assure volume and you want to have repeatability and assurance that that equipment runs efficiently.And so you want to lead with that type of solution rather than something you may have, say, on balance sheet. And I think we’ve seen that evolve. We’ve seen different sand companies purchase equipment, start a private side, and several of them have either put those out for sale or resold them back to the manufacturer. So I think we’ll just continue to see this evolve as we all get back to our core competencies.

The next question will come from Stephen Gengaro of Stifel.

Thanks, good morning, gentlemen. Two things, if you don’t mind. What I’ll start with is we’ve heard on the well site storage side pockets of pricing headwinds. I also believe that you haven’t seen it on your front very much for your system. But I was curious if you could just comment on what you’re seeing out there in the market from a pricing perspective.

Yes, I think there have been different companies with different strategies. Ours has always been around providing the lowest all-in delivered cost for our customers. And we think that that’s not necessarily led with pricing, but rather it’s led with quality and reliability. So we definitely have had customers from time to time switch to other solutions based on headline rates. But the vast majority have come back once they’ve really seen the math themselves and run the MGT analysis, the waiting on sand analysis, that it’s not necessarily about the headlight rate.And so I think the concept of pricing being a lever certain competitors are using, we’re going to continue to see that. But that’s really not how we’re managing the business. We’re working with our customers to determine better ways for them to continue to drive down their cost. And we think, at $110, 000 – $10,000 a month of rental, that the needle mover is on getting more efficient, not necessarily driving that number down in context of $18 million to $20 million of capital spend per month.

Yes, and add to that the continued speed at which the sand is moving through the system. So the $1 per ton, because it’s a fixed basis, is actually accruing to our customers. And so that efficiency gain they get, whereas if it’s a $1 per ton based type system, they’re keeping it flat.

Exactly. So we think that aligns interest with our customers and is really the right model.

Okay, thank you. That’s helpful. And then as we think about the bundling of last mile trucking into the mix here, and obviously it had an impact on the revenue line in the quarter, and I think it kind of flows through at a sort of pass-through type margin, any thoughts or guidance on how we should think about baking that into the forward models? I mean, it doesn’t seem like it has a big impact on the EBITDA line. But from a revenue perspective, any guidance there because it’s evolving?

Yes, from a specific guidance perspective, I don’t think we would at this point prescribe a significant increase or a decrease as we look into the third and fourth quarter in that piece. There is a certainly opportunities. But what I would say is we’ve been through a series of RFPs in the first half of the year from majors to small privates that have looks to de-bundle the last mile. And we have seen a significant number of them obtain price discovery in a way that they’re capturing the economics but not having to take it on. And so they’re re-bundling it in several instances either with the pressure pumper or with a trucking or sand company where they don’t necessarily need us to step into that role.So we’ve got it. It’s an offer. We think we’ve got an edge with our equipment and with Solaris Lens. But at this point, we’re seeing it being a mixed reaction. And ultimately the operators are not necessarily wanting – the majority of operators not wanting to take this on themselves. They want the lowest price. And so they can capture lowest price and have maybe the pressure pumper manage it for them, who may be in a better position with their own trucks, their own dispatching capacity, their own software. That generally makes sense. And so I think that’s kind of what we’re seeing. We’ve seen majors out with big RFPs about and it ended up being re-bundled.

The next question will come from George O’Leary with Tudor, Pickering, Holt. George O’Leary: Good morning guys.

Good morning, George. George O’Leary: I’ll jump back to a question John asked earlier with regards to just customer tendering activity. It’s our understanding that there are a few E&P operators out there who maybe have historically used boxes or maybe used a mix of equipment that may actually be issuing tenders specifically for just silo only offerings, and then other customers who have historically exclusively used box systems that are going to open up tenders to all different types of on-site sand storage technology. So I wondered if you could just speak to whether those rumblings we’re hearing from the market are accurate, the degree to which you’re having those discussions. Just any color there would be super helpful.

I think what you’ve stated is accurate based on what we’ve seen. And I think Bill touched on it a little bit earlier. The velocity of sand being consumed on a per day basis continues to increase. And I think that’s what companies are coming to realize, that having a large buffer directly at the wellhead – or at the blender, rather, is the most efficient way to manage that increased velocity. And that inherent in the boxes is just a challenge around a lot of movements. And so I think that is the trend we’re seeing.We’re seeing more pads being done, more concentrated activity, more efficiencies throughout the chain. There’s other components. So the pressure pumpers are getting more efficient with their uptime. Things like the electric fleets probably lend themselves to better reliability. So the entire completion process is getting more efficient, which means more sand is being pumped per day. And so from our perspective, really the foundation of this concept of the vertical storage was put a large buffer right at the demand center. And that’s what we do, and I think that those that have been using boxes for a while are starting to open their eyes to maybe there’s another way of doing this. George O’Leary: Very helpful. And then you guys mentioned this earlier that you and Bill both spoke to it a little bit. But customers – you guys have always historically been very innovative. And you touched on in your last question too the velocity of sand is going up. And so as you mull over those incremental technology investments, which you’ll only make if you can see that economic return, what are the primary bottlenecks or issues that operators are coming to you asking you to solve? So not asking for what the technological solution is today, but what areas are operators or pressure pumpers acutely focused on improving those bottlenecks?

Its multi varied. It depends – may depend who you’re talking to and what their priority is. So as we see some of the majors come back to U.S. in a big way, I think safety becomes more and more the focus. And that may mean automation. It may mean reducing people on location. It may mean just safer practices. From a process standpoint, I think there’s a big push on ESG. We talked a little bit about our integration with electric frac fleets. The system has been designed from the start to be electric or electrically driven. And so we’re plug and play with that.And so there’s a wide range. And we are engaged, and we’ve got a pretty significant initiative from a customer interaction standpoint to engage in these discussions and what do they see as the well site of the future.

Yes. In chemicals is a key part of that that Kyle didn’t mention, in that the faster you go, the different types of friction reducers that are being done, with more recycled water and trends in acid consumption and rates, really make the automation and the flexibility around our chemical system very valuable on the well site.

The next question will come from Jon Hunter of Cowen.

Hey, good morning. Thank you. So I wanted to ask on some of the market commentary that you had for the third quarter talked about overall completions activity being down 5% to 10%, but then Solaris has some opportunity to offset some of that with market share gains. So how do you think about your fully utilized system count as we move from 2Q to 3Q? Is there an opportunity for you to keep that flat, or would you expect there to be more of a bias downward with that market 5% to 10% you talked about?

There’s certainly an opportunity to keep it flat and to grab it. But I think what we are seeing is operators get ahead of what we saw last year, which was a dramatic drop off in the fourth quarter. So we’re seeing operators indicate to us, look, we’re going to slow down here in July, and we plan to be there for the rest of the year. And the reason we’re slowing down here is to manage our capital spending. That is a corporate – mainly that is a corporate policy we are going to live with. And we don’t want to find ourselves in late October scrambling to say, okay, where are we going to cut? We’re getting ahead of that now.And I think ultimately that leads to a much more productive industry. It certainly helps us manage the business. So that’s sort of on the negative. And then on the positive, I think we’ve got, as I mentioned earlier, visibility to add with specific customers that are freeing up from contracts, as well as indications from customers that have historically not used Solaris.

Understood. And then kind of a follow-up to that, how is your activity? I mean, I guess we’re a month into the third quarter here, so how is your activity in July compared to, say, where you were exiting June?

Yes, I think on average we’re down slightly in July. As I indicated, we had a couple of operators come to us and say we’re going to slow down here, and the additions that we’re contemplating are in the later months of the quarter, I’ll say.

The next question will come from David Smith of Heikkinen Energy Advisors.

Hey, good morning.

Good morning, Dave.

I wanted to ask if any chem systems have been deployed outside of Texas, or maybe Texas plus New Mexico and, if not, whether there’s visibility on expanding the geographic profile of the chem system deployment.

It’s Texas, New Mexico, and Oklahoma so far. We’ve kept them close to home. We do have some strong interest in the Northeast and expect, once we get a couple of these modifications made in the next month, we’ll probably have a system running out to the Northeast. Especially given pad constraints and sizes up there, it’s a very logical addition to the fleet up there.

You answered my follow-up question. Thank you. Thank you very much.

The next question will come from Praveen Narra of Raymond James.

Right, good morning guys. I guess I wanted a follow-up on George’s question about growth and maybe how you think of M&A as a use of capital, because you’re obviously generating significant cash flow and building that cash balance. So I guess, one, how do you think of M&A? And then two, do you want to limit yourself to low capital intensive acquisitions, if that is something that you guys are thinking about?

Yes, great question. I think we are all options open. We’re evaluating the need of cash. We certainly like having a highly flexible balance sheet that allows us to do just about anything, and are not getting in a hurry doing the wrong thing. So we’re evaluating. We look at things from additional technology and pieces to this puzzle that add to it, like our Railtronix acquisition a couple years ago; less capital-intensive but very value added to us. And I think those are the type of things, along with sort of around our core equipment design and manufacturing competencies, where we see additional things that can add to our system’s value that we deliver to customers make a lot of sense. We’re very careful, very cautious, and we see a lot of what’s out there, but are not going to be out there just spending it because we have it.

And we’ve been successful in really commercializing the new technologies. And so the opportunity where you’ve got sort of a proven technology that needs the right, say, infrastructure, commercial manufacturing, R&D, safety kind of built up around it, those are really exciting opportunities. Now, we haven’t found very many of them, so we’ll continue to be very cautious. But our balance sheet, as Bill alluded to, is really critical to us to maintain just a lot of flexibility there, but just I think in general a pretty conservative approach to that.

Right. I guess sort of follow-up question, different topic. So you mentioned retention. Retention obviously has been good for you guys, in the 90% probably plus range. When you talk about how that’s trended, I guess obviously systems have been out there, different varieties of systems have been out there, and you guys have also had good customer acceptance. I guess I’d be curious to hear how that retention rate, even if it’s minor, has changed. Are you seeing that increase or are you seeing customers, as activity falls, looking at everything?

That’s a good question. I haven’t really thought about it that way. I think it’s been consistent for several years. When we look at the entire lifecycle of the business the last six years, it’s probably trended higher as time has gone on, as people have increased their sand consumption so that the value proposition just continues to get stronger and stronger. And I think that kind of continues. No doubt there was a lot of transition between 2014 to where we are today, switching away from old technology to new technology. So people have been trialing and testing different solutions. And I think over call it the next two to four years, there’s probably less volatility in the trials as people start to say, okay, I’ve tried everything and I really like X and I’m going to stick to X.

The next question will come from Jason Wangler of Imperial Capital.

Hey good morning guys. I was curious. In the past you guys have talked about how local sand in some of the basins doesn’t really impact you much as long as the sand is coming. I was just curious how you seen that market kind of evolve as it seems like the local sand continues to be more and more of a push. It has that changed much for you guys or is it still pretty much business as usual?

No, it’s continued to change. It really doesn’t affect us. Actually, it creates the need for a bigger buffer at the well sites, and especially in the far reaches of the Delaware Basin and places that are a long way from the local mines. We have seen, frankly, in Oklahoma the last local sand come in for regulatory reasons and possibly formation reasons. And so the Kingfisher facility has remained relatively busier than we’ve expected because of that. But in general, the local sand has been adopted for sure in the Permian Basin and I think it’s there to stay. Either way, for us it doesn’t impact us one way or the other, whether we’re running a Northern White or a local sand.

The only certain caveat I would say is several of the local mines that have been developed are offering a last mile package offering. And that has brought, I’ll say, new customers to the business, some of the local mines.

[Operator Instructions] The next question will come from J.B. Lowe of Citi.

Hey, good morning, everyone. I was just curious. I was listening to the U.S. Silica call yesterday, and I think Bryan mentioned that they were seeing new entrants into the silo space potentially it’s causing some competitive pricing. Now, I know that he’s not as close to the story as you are. But Yvonne, we have gone through the marketplace pretty extensively. I haven’t heard of any new entrants specifically. Are you guys hearing anything on that front?

Yes, there’s always here and there’s somebody with a new technology. And we’ve seen some small companies from Canada try and bring some systems down as that market has really shrunk. Haven’t seen anything of any sort of scale in I’ll say the last six months, six to 12 months.

Okay. All right, that’s what I’ve been hearing too. And then as a follow-up just on the chemical system build out, I guess first, are you guys generating revenue on any of the deployed system yet?

Yes.

Okay. And then, do you expect the full 14 to be deployed by the end of 3Q and then you would resume construction in 4Q, or is that more of a 2020 kind of resumption?

I think directionally it’s more of a 2020. I think really the rest of the year we’re focused on making tweaks, getting as many of these out to customers to really drive the adoption. So, I think from a real material impact, I think it looks like more like 2020.

The next question will come from Thomas Curran of B. Riley FBR.

Good morning. On the MPMS side, the Mobile Proppant Management System side, would you share with us what the split for 2Q was between operators and service companies, and then how that compares to 1Q and 2Q of last year?

Yes, I don’t think it’s changed a whole lot. It’s call it 50/50, and some of the 50 on the pumping side is driven by the operators. But I don’t think it’s changed a whole lot.

Okay. And then what would be your share on a volume of sand basis? And then based both on your preferred market share metric and perhaps that one as well, what do you see is the likely limit for share gain? Just how much of the market do you believe you could capture?

I think when we look at our share, we look at it in how does Solaris share in returns for its shareholders. And we define that by systems working. That’s the majority of our business today. So it’s not on a per ton basis. But if we were to translate it to a per ton basis, it’s probably a higher percentage than what we quote as to the share that we talk about. So we really articulate it relative to the operating frac fleets.

Yes, I think that’s right. And I think we don’t – market share isn’t our drive. Our drive is customers and how do we get customers that believe we can help and save them money, and sort of the market share falls out of it. And so I think from a practical limit, it really is about customers that see the benefit of this, that we believe understand what this does to their completions cost. And we really don’t – our focus, we quote it in market share because it’s grown, but we don’t think about it like that.

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

Thanks, Carrie. Before we close it out, I just want to summarize a few of the points that we’ve made. Solaris continues to be in a very unique position where we grow with our current customer base and new customers. We’ve got the current product line with all of its enhancements, and we’ve got new products that we’re continuing to develop. We aren’t completely reliant on the overall market, but we’re not completely immune to it either. We’ve built a culture that is focused on making sure that our stuff works and making sure that we can help our customers improve their operations and safety.The free cash flow that we’ve generated so far in 2019 has been tremendous and it gives us a lot of options on top of our already flexible capital budget. We’ve demonstrated our willingness to return capital to shareholders with our dividends and continue to consider all of our options that maximize our shareholder return. And thank you all for attending.

Thank you, sir. Ladies and gentlemen, the conference has now concluded. Thank you for attending today’s presentation. You may disconnect your lines. Have a fantastic day.