Good morning and welcome to the Solaris Oilfield Infrastructure Fourth Quarter 2019 Earnings Conference Call. [Operator Instructions] 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 fourth quarter and full year 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 would 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.I will now turn the call over to our Chairman and CEO, Bill Zartler.

Thank you, Yvonne. I’m pleased to share the results of the strong 2019 delivered by the Solaris team, despite a challenging market backdrop. 2019 was the first year of positive free cash flow for the Company as we began to harvest cash from investments made in prior years.Solaris generated over $80 million in free cash flow for the year and we returned $23 million of that cash to shareholders in the form of dividends and a share repurchase program. In December, we paid our fifth consecutive quarterly dividend, which, at $0.105 per share, reflected a 5% increase over the previous dividend.We also began buying back stock under the $25 million share buyback program we announced in December. These initiatives reflect the confidence we have in Solaris’ ability to continue to generate free cash flow even in a sluggish growth environment.We generated our 2019 financial results despite unprecedented efficiency gains in horizontal drilling and completion activity in 2019 that caused overall industry frac fleet count to slow in the second half of the year. That trend was exacerbated by multiple factors.First, operators had a continued focus on spending within or below their operating cash flow. Two, weak natural gas prices. Three, weak NGL prices. And fourth, poor well performance in certain place. These factors resulted in many operators slowing or halting their completion activity in the fourth quarter.Our fourth quarter results reflect this slowdown as we averaged 88 fully utilized systems in the quarter, down approximately 23% from the third quarter and in line with our expectations in prior guidance.So far in the first quarter of 2020, as we have expected, a gradual pickup in activity with average January levels in line with December average numbers with activity steadily but modestly increasing in February.This implies that activity for the first quarter…

Thanks, Bill, and good morning, everyone. During the fourth quarter, we generated $63 million of revenue, adjusted EBITDA of approximately $21 million and positive free cash flow of approximately $24 million. After adjusting for the impact of deferred revenue and other charges, revenue declined 20% sequentially and adjusted EBITDA declined 25%, which is primarily driven by a 23% decline in the average number of fully utilized systems.Nearly 125 proppant systems worked with varying degrees of utilization in the fourth quarter. Our calculation of 88 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 modeling purposes.For the full year 2019, we generated revenue of $242 million, adjusted EBITDA of $113 million on an average of 110 fully utilized systems and free cash flow of approximately $80 million. Utilized systems were essentially flat year-over-year, but adjusted EBITDA declined 8% due to, one, our margins in 2018 benefiting from a lag and ramping our cost structure to support the growth in systems that we experienced and, two, lower activity levels in Kingfisher and in software services year-over-year.As highlighted by Bill, 2019 was a turning point for the Company in terms of free cash flow. In 2019, we generated close to $115 million in operating cash flow, which was roughly flat with the prior year. We made the decision to slow capital expenditures early in the year and spent approximately $35 million in 2019, compared to $161 million in the prior year.This resulted in positive free cash flow of $80 million for the full year. Of that, we distributed nearly $23 million or roughly 30% of free cash flow to shareholders in the form of dividends and share repurchases, and used $13 million to completely pay down our…

We will now begin the question-and-answer session. [Operator Instructions] Your first question comes from George O’Leary of Tudor, Pickering and Holt. Please go ahead. George O’Leary: Good morning, guys.

Good morning, George.

Good morning, George. George O’Leary: The CapEx guidance level looks very prudent in my opinion. And just thinking about what frames the lower and upper bounds of that range. Is that mostly the adoption rate of the chemical systems or is there something else in there, including upgrading of legacy systems with new technologies that drives that range to? Just want to think about how we should think about that for the year?

I think you framed it pretty well, George. We think about, they are always being a level of maintenance/non-growth capital spending required to keep the fleet in tip-top shape and continue to drive enhancements and improvements. So, over the last couple of years AutoHopper has been a big one.We have got a couple of other things in the pipeline around remote monitoring of the systems that allows us to improve our preventative maintenance and drive some of those costs down. So, there is definitely a level of, I will just call it, non-growth in the bottom end of the range.And then, as we think about flexing up toward the higher end of the range, the levers there are adoption of the chemical system. And then we have got several R&D projects that we expect to move forward in 2020 with sort of prototypes that are embedded in that range as well.Certainly, when we look at the fourth quarter and we take a run rate there, we are far below even the bottom of the range that we provided. So, we think that is sort of the way to frame it up. George O’Leary: Okay. That is very helpful. And then just in the last 24 hours alone, you have had couple of E&Ps continue to push the drilling and completions efficiencies theme, which you guys also noted in your prepared remarks. As they, and I’m thinking of Concho and Devon in particular just in the last 12 to 24 hours, talk about completing more lateral feet per day. To your earlier point, that may reduce frac crew demand, but that also seems to highlight the importance of a profit management system that is more efficient, possibly the chemical system, down the road. How do you guys kind of strategically market to those customers who use different systems today, those kind of targeted opportunities you spoke to, how do you try to go and grab that market share strategically?

Well, I think it falls into our laps. Our equipment is really designed for high rates and so we have seen that continued throughput on a daily basis of sand through our systems go up and up and up and continue to test, how to make it more efficient with some of our thought-leading customers and what do we do to ensure the safety on a wellsite when things are moving as fast as are moving and our equipment is designed, all of our new innovations, new automation, all the things around that help make it work significantly better the faster you go.

We are working hand-in-hand with our customers to look at pad design, how are they going to lay out the pad and the rest of the equipment more creatively to really optimize the efficiencies that are driven by our system, which as we have harped on over the years, the primary benefit of a vertical-based solution like ours is the ability to offload multiple trucks in parallel.And so, if you look at your pad layout more creatively, there is lots of options and opportunities to drive down offload time and therefore increase the amount of throughput that you can get through a system in a period of time. George O’Leary: Great. And then I just want to make sure I understood the guidance correctly. When you guys said, you thought frac crews might be flattish quarter-on-quarter, is that how we should be thinking about modeling the first quarter from a fully utilized system count perspective?

I think right now that is sort of the right place to start. When we look at, I think, Bill’s comments and look at the fourth quarter into the first quarter that sort of ramp, January looks more like December, February looks closer like the average of the fourth quarter. So, we think sort of fourth quarter average is the right way to think about a starting point for Q1.

The next question is from John Watson of Simmons Energy. Please go ahead.

Thank you. Good morning.

Good morning, John.

There have been reports of the sand market in the Permian tightening. Can you comment on what you have seen on this front and maybe any impact to the cadence of completions that you just mentioned, Kyle, and more specifically, if it is impacted your activity early in the quarter?

No. It is absolutely gotten tighter, particularly on the 40/70 mesh, the local sand being developed in the Permian. We think it is somewhat acute and does get fixed, there is plenty of capacity out there. But we have seen sand pricing go up versus, call it, low teens in, call it, second half of last year.And so, we have seen the spot basis pricing go up. We have been seeing the impacts activity to be perfectly frank, that has led to more phone calls with industry participants asking us for help in supplying. But I can’t say it is had an impact on the completion cadence.

Okay, great. Secondly, it is early days, but increasing reports of people considering pop-ups, mobile mines in the Permian and elsewhere. Can you talk about conceptually how the Solaris system would fit into that change to the sand supply chain and if you have considered partnering any of those parties developing mobile mines?

We have visited with several folks that are looking at that idea. Conceptually, you still need to handle that at the blender in high rates and high velocities, so that you can handle the completions intensity and the timing. I’m trying to get 10, 12, 15 stages a day done, you need a buffer right at the wellsite.So, it doesn’t necessarily change how you handle things actually on the frac pad as you buffer into the system. But it changes a lot with the supply chain, just like local mines themselves change the - and then pulled all that rail costs out of the supply chain for sand for the northern white.So, I think it is another evolution and some creative ideas, and the industry always comes to solve challenges like this. So, we think it is an interesting thing and we are looking forward to it.

Right. Okay, great. That is all I have got. Good quarter. Thanks guys.

Thanks, John.OperatorThe next question is from Martin Malloy of Johnson Rice. Please go ahead.

Good morning.

Good morning, Marty.

Could you maybe talk about some of the drivers that we should be mindful of that might impact the rental revenue per system in 2020 and also on the cost side per rental system?

Yes. When we think about the revenue and the costs per system for our customers, we think about what is the dollar per ton or dollar per stage or dollar per well that our customers are seeing.We typically are charging on dollar per month basis. But as the efficiencies, that George alluded to, from the Concho’s and the Devon’s of the world continue to generate, our customers are actually seeing a significant discount and what they are actually paying us for our service and our equipment. So, that is sort of been the way we have framed it up.When we think about specifically pricing year-over-year, some of the levers or drivers are M&A activity among our customer base, both from our pressure pumper and operator standpoint. As we see consolidation, all things being equal, generally speaking, the concept of volume discounts does come into play and so, we can see a couple of hundred basis points of pricing movement based on some of the consolidation that we have seen applied.From a margin standpoint, year-over-year, we have got some increases in things like property taxes as our fleet grew from 2018 to 2019. We have taken some costs out of the support structure that supports the movement of the equipment that supports the operation of the equipment, but we have done it in a way that we don’t want to get too deep and cut into the bone because the heartbeat of this equipment, this business, this organization and what we do for our customers is in our service organization.So, we have been prudent to not go too deep. But we are conscious of the fact that year-over-year our activity level from a macro standpoint is much lower. So, those are kind of the levers I think about.

Okay. And then just looking at or thinking about potential inorganic opportunities. Could you remind us, maybe of some of the characteristics that you might be looking for?

Well, I think we started with our base business and understand the technological protection, whether it is patented or just based on some intellectual property or know-how that we have. We have a team, a great field organization, who is focused on quality, focusing on delivering the customer service and know our customers and how to help them almost as a consultant on the wellsite.So, when we look for what fits into this organization, it has to be businesses or product lines that will match those characteristics and have sort of rental based type returns we are looking for. So, we obviously haven’t found much and we continue to innovate internally.But we are watching closely and there is a lot of smaller things looking for liquidity, smaller businesses out there today that might have hoped for something different and this market is pretty tough. So, we are watching and looking closely at lots of opportunities. But as you have seen over time, we have been very careful and cautious about where we spend our money.

The next question is from Stephen Gengaro of Stifel. Please go ahead. The next question is from Stephen Gengaro of Stifel.

Good morning. Sorry, I was on mute. So, two things, if you don’t mind. The first, you just talked a little bit about different margin levers. If you look at the proppant, the rental and services in the fourth quarter, I think, it was a little over 53%, and I know you talked about some overhead absorption issues and some gives and takes going forward. Directionally, how should we think about that number going forward?

Yes. I neglected to highlight a pretty significant point on margin, when we look at percentage basis points of margin, and that is the last mile. So, obviously, the last mile delivery of sand is something we have been doing over the last couple of years. And as we have entered into the first quarter, that is an area of growth that we are seeing.So, that will have an impact on our reported gross margin percentage. But the way we model that, the way we propose that to our customers is trying to get back to or focus on getting back to the same profitability from a dollars perspective on a per system basis.So, I think we will see our gross margin go down quarter-over-quarter due to the fact that we are doing more last mile for our customers. That bundled an offering some of the incremental customers that we have been working with are asking for. They are switching away from other bundled offerings. So, they are looking for a bundled replacement.And so, we have been very effective at providing that. And our team has done really a great job in providing consistent service across multiple fleets in that offering. But so, I think that actually has a meaningful movement in margin. But again, like I said, I don’t think it should materially move how we think about EBITDA profitability per system.

So Kyle, just to be clear, when I think about that, that number shows up in the proppant system services line, I believe. And if we thought about that service you are providing, is there any way to quantify like sort of how much that was sort of 2Q, 3Q, 4Q as we sort of try to triangulate the impact on margins?

Yes. I think honestly most of - actually the second, third and fourth quarter of last year, it was pretty consistent as to the overall contribution in that part of our business. But as we look at the first quarter, there has been a step-up in the activity there. So, I think the way to think about it is 2019 was sort of consistent, and then there will be a pickup here in first quarter.

Great, thank you. And then just as a follow-on to the sort of CapEx and cash discussion. When you think about the CapEx, I think you mentioned some of the gives and takes to getting between $20 million and $40 million next year. But how do you think about, you have worked through this share repurchase program pretty quickly, you are generating cash. I mean, have there have been discussions already to increase it? How should we think about either frame it that way or kind of the percentage of cash you sort of expect to give back to shareholders going forward?

Yes. I think in the fourth quarter, we decided to increase the dividend by 5% and we initiated the buyback program, obviously. We initiated the $25 million level with the mindset of actively being in the market and really using that to actively purchase shares.We are very pleased with the rate and cadence that we have been able to buy back shares. I think, by my math, we have reduced the overall share count by about 2.7% just in the last six to eight weeks that we have been doing this.And I think the Board meets on a quarterly basis and this concept of capital allocation is something we talk about every quarter. And if we have exhausted this program by the time the Board meets again, it certainly will be up for discussion as to what is the next several quarters look like from an operating and free cash flow perspective. Do we think we are continuing to build cash? And if so, what are the various options that we have to use that cash?So obviously, the dividend is really the only permanent use, but when we look at CapEx and we look at buybacks, those are all levers that we can pull on, and I think if we believe there is still an attractive opportunity to buy back shares at current levels, then that may be a decision the Board makes to add more to that reserve.

The next question is from Chris Voie of Wells Fargo. Please go ahead.

Thank you. Good morning.

Good morning.

If I could ask one more on the rental margin. So, if you were to exclude the pass-through from last mile and some of the services stuff, I think in the fourth quarter you guys said you are requiring a little bit of excess costs related to an expected rebound in activity. I guess that rebound isn’t really materializing and then you have got a little bit of a headwind of a few hundred basis points from volume discount, stuff like that. Can you speak to the margin just on the rental part of the business for proppant in the first quarter. Is that going to be lower or is there any kind of tailwind from lower costs?

Yes. I think from the rental side, just pure rental margin, the drivers there are pricing and some of our fixed costs like property tax. So, as we talked about pricing being impacted slightly by M&A and then some of the pickup in some of our fixed cost, there would be some degradation in that margin.

Okay. And then I think another factor that had an impact over the course of 2019 was also a little bit higher wear and tear given little higher average age for the silos. Is that kind of leveled off at a stable rate at this point?

Yes. And honestly, I don’t know that it showed up in the numbers, but I think our maintenance spend has been pretty consistent. So, there wasn’t a pickup in the fourth quarter driven by maintenance.

Okay. And maybe just one last one on chemicals. So, I guess you added two to three units in the fourth quarter. Can you speak to the cadence of trials going forward in early 2020, if you expect that number to move up in a material way? And also whether, on the trial basis, I think they are earning revenue. Is that accretive to GP or is it kind of breakeven at this point?

I think it is roughly breakeven. We are putting more field support on it to make sure that our customers really know how to use it. So, I call that breakeven. But I think as far as cadence, we do feel like there is continued momentum with new folks that haven’t used the equipment that are new to it. We have had one customer continue to use it, I think, since early September. So, we feel good about it.The big challenge I think we have is, if you walk into an operator today, the biggest question is, how do I save $500 a stage on my AFE. And so, our proposition is to come in to make a slight investment to rent this equipment. But by doing so, you are going to drive down your overall costs significantly. That has clearly worked on the sand side.And then on the chemical side, we think as the intensities continue to go up, the chemicals become a continued pinch point for operators. And so, the value proposition will continue to be or will start to really generate and be seen more clearly as intensities go up.But it is a challenging point in the cycle to go in with a new technology that on an AFE level does have a higher cost because so much of what we are replacing is embedded in other services, just like you saw in sand.At one point, operators had no visibility into what they paid for sand until that was obviously decoupled. So, I think it is very similar. And our challenge right now is just what the overall appetite is within an operator to try something new.

[Operator Instructions] The next question is from Jon Hunter of Cowen. Please go ahead.

Hey, good morning. So, one question I had was just on the revenue per system. We saw in system and services and we have obviously discussed the trucking piece of it. Was there any shift to kind of larger system sizes to nine or 12 packs that also could be contributing to that increase?

No. I don’t think anything material quarter-over-quarter.

Got it. And then...

The vast majority are still six packs.

Got it. And then on kind of the activity moving into the first and maybe the second quarter here. Back in October, we had some visibility to some of your customers dropping frac crews kind of earlier in the quarter. I’m wondering if you have visibility today to those crews being picked up early in 1Q or is there a visibility to the same number of crews being picked up in the second or third quarter, maybe later in the year?

No. I think those are the conversations we are in every day. And yet, we are up, I would say, relative to Q4 average today and we have visibility to several folks adding crews going forward. So, the visibility is happening. It didn’t snap back on January 1, but we really didn’t expect that either.

The next question is from J.B. Lowe of Citi. Please go ahead.

Hey. Good morning, everyone. So I think I probably ask this question almost every quarter, so forgive me for being repetitive. But I’m just wondering about pricing dynamics and competitor bidding practices over the last couple of months as we exited the year and started the new year. I’m just wondering, have those changed at all, is pricing getting more cut throat? I know you guys had a different pricing model than your peers, but just wondering what you are hearing on the ground?

Yes. I think the market is still in a position where there is overcapacity and so people tend to use pricing as a way to try and grab share and put equipment to work. We have been very disciplined in our approach and not willing to do that due to the model where we have set up, where again as efficiencies get created, our customers are actually paying us less than $1 per well basis. So, I think that sort of how we would frame it up.

The market has been overcapacity for last six years. So, as the market evolve from sandkings over, there has been excess capacity of some type of sand handling equipment. And so, it is all about delivering a valuable service to the customer. And if they can just see how they justify our expenses, then it works.And as they get more efficient and you do more stages a day, you move more sand through it, the cost per ton goes down for our customers. And our goal is on top of that, allowing them to do that, add automation where they can save money on people and help all those efficiencies improve. So, pricing is ultimately where the rubber meets the road. But at the same time, our goal is to make our customers see the value that we deliver to.

And this time last year we had customers leave due to lower pricing being offered elsewhere. Most of those customers came back. We had a similar phenomenon in some of our customers in the beginning of this year and we have gotten phone calls about challenges with deliverability, with inventory on-site, equipment reliability. Very similar challenges that people have had when they have switched away and so, we think that will continue and we will be there with open arms to welcome them back.

Right. So, that kind of ties into the other question I had is just on market share. You guys have maintained a pretty steady market share over the past couple of quarters. Just wondering where you think the opportunities could be to expand on the market share side outside of any M&A-related customer pickups or anything like that?

I think we answer this question every quarter. We don’t look at market share, we look at customer-by-customer and who do we believe is the ideal candidate that we can help save them money on their completions and we target those guys going forward.And I think we have continued to gain traction with those that have used other solutions and recognized when they get a hold of this and start using it. It actually does save them money. And so, market share is a mathematical result of us chasing customers and we really look at solving the problem for our customers, not want - market share.

The next question is from Ryan Pfingst of B. Riley. Please go ahead.

Hey, good morning, guys. For the chemicals fleet, how many distinct customers have you developed a system with so far. And do you guys have any criteria that will determine when you will resume expanding the fleet?

It is been multiple. I don’t have a number off-hand, but it is been multiple operators, multiple pressure pumpers, multiple chemical providers. And I mean three different basins. So, there is a lot of people have touched it. But there are also have been a lot of that haven’t touched it yet. So, we are focused on being in front of those guys.As far as growth capital, I think we want to see the vast majority of the equipment that we have built at this point being deployed to customers on a consistent basis and them really articulating back to us that this value proposition is really making a lot of sense for them.As an example, we have had systems in September that is on one crew. They have got probably half a dozen, maybe eight total frac crews. And so, as we see people adopt this more broadly across what they are doing, I think that would be the indicator for us.

Got you. And on the competitive side, have you seen or expect any rivals to launch chemical systems of their own or maybe even water systems?

Nothing material in the market. The chemical and water handle on wellsites everyday in other forms. There is people that have added telemetry to understand what levels are and remote monitoring such that those levels are broadcast into the cloud and you can view them remotely. But nobody, I don’t thinking a full replacement of all of the assortment of pieces of equivalent that are used today.Whether it is a chemical add unit, whether it is the frac, the acid tanks, the ISO containers, the totes that are brought out, the hoover tanks, there is not only anyone’s approaching in a holistic of a manner nor in an automated remote process. We are actually driving it out of the data van. They are pulling chemical based on the amount of the clean rain on the water site. So, it is the approach that we are taking, I don’t think anyone is really looking at.

The next question is from Praveen Narra of Raymond James. Please go ahead.

Hey, good morning, guys. I guess I wanted to come back to the bundled solution question. You guys mentioned that that is increasing in prevalence. So, can you update us with how often you are doing that today? Where you think that could go through 2020? And just to be sure, it doesn’t seem like there is any capital requirement in order to do that, but I just want to make sure that is the case?

It is still less than 10% of our activity. So, somewhere in that 5% to 10%, I would say, and it varies sometimes. We will be out in providing that and the customer will say, we are going to take that back and vice versa. So, I wouldn’t say it is hard and fast. So, that is sort of where it is. I think on the increments, on a prior call, I think I mentioned 5% of 20% as a potential range. I think that is still accurate where we sit today.

Okay. In terms of I think you mentioned R&D. I wanted to make sure I understood correctly kind of what is going on. I assume that is separate from the chemical silos. And should we think of these as kind of incremental changes to the business or is there some desire to look for another outlet of capital, I guess, I will call it, but another leg to the stool?

Yes. When we talk about R&D, I think it will be outside of the chemical system that is already obviously out in the market working. So, this is additional opportunities to improve process and equipment and drive efficiencies on location and within the supply chain. So, these are things that we are not really probably talking about. Yes.

We have reached the end of the question-and-answer session. I would now like to turn the call back over to Mr. Bill Zartler for any final closing remarks.

Thanks, Kate. I would like to close with a thank you to all of our employees for all the hard work in 2019 and to our customers for their continued partnership. In 2020, we are committed to continuing our high level of service that is going to help all of our customers increase their efficiencies further, both saving money and safety on the wellsite.We will continue to innovate and evolve our offerings to help support you despite the market headwinds. I believe our culture of continuous innovation and improvement is truly what sets us apart from our competitors. And lastly, we are excited to continue to generate cash for all of our stakeholders, and we will continually evaluate the best options to use it. We look forward to updating you guys as the year goes on. Thanks.

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.