Good day, and welcome to the Solaris Fourth Quarter 2020 Earnings Conference Call and Webcast. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note, today’s event is being recorded. I would now like to turn the conference over to Yvonne Fletcher, Senior Vice President, Finance and Investor Relations. Please go ahead, ma’am.

Thanks, Rocco. Good morning, and welcome to the Solaris Fourth Quarter 2020 Earnings Conference Call. I’m joined today by our Chairman and CEO, Bill Zartler; and our President and CFO, Kyle Ramachandran.

Thank you, Yvonne, and good morning, and thanks everyone, for joining us today. 2020 was without a doubt the most challenging year in our company's history, and I'm proud of how the Solaris team managed through it. 2021 appears to start off with an interesting twist, and we want to make sure that all of your families and friends are safe following last week's unprecedented cold weather, resulting in loss of power and water for many members of our community. While much infrastructure is operational, again, the full impact of this weather event are still not completely known, as many people wait to repair damage to homes and property, and many still do not have access to clean running water. We have overcome so much over the last several years, and we will work with our employees, customers, and communities, to ensure a quick return to normal. Our team reacted swiftly in 2020 to US completion activity came close to a halt earlier in the year, and then quickly ramped back up during the back half of the year. We got leaner, adapted to evolving work environments, continued to innovate, and most importantly, we continued to provide the highest level of service quality to our customers, and did so safely. As a result, we produced another year of positive free cash flow, maintained a debt-free balance sheet, and continued to pay our shareholders a steady dividend. Completions activity in the lower 48 during the fourth quarter benefited from improved commodity prices.

Thanks, Bill, and good morning, everyone. From our beginning, our focus has always been on improving operations on the low pressure side of a well site, where sand, water, and chemicals are stored. We saw bottlenecks there seven years ago, which created a catalyst to start Solaris. Over the course of the last seven years, we've continued to identify additional challenges and opportunities for Solaris to innovate. Today, I'd like to introduce our latest disruptive innovation. Our engineering team has designed and our manufacturing team has built a patent-pending technology that extends our traditional equipment from a storage solution to a hydrated delivery system, replacing a traditional blender as we know it. The industry has improved blenders over the years, but the basic design and function hasn't changed in 40 plus years. We're reducing both the physical and human footprint through innovative design and automation, freeing up space on location, and driving costs down for our customers.

Thanks, Kyle. To recap some of our numbers, during the fourth quarter, we generated over $25 million of revenue, adjusted EBITDA of nearly $5 million, and positive free cash flow of approximately $4 million. We averaged 42 fully utilized systems deployed to customers, which represents a 24% sequential increase. Total revenue increased 23% sequentially, driven by an increase in activity, as well as an increase in last mile services, which as a reminder, has a large trucking revenue component that can be multiple tires than the rental contribution from a typical system, but contributes similar margins on a dollar basis. Over the course of the quarter, we deployed a total of 85 proppant systems, which worked with varying degrees of utilization in the fourth quarter. Our calculation of 42 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.

Thank you. We’ll now begin the question-and-answer session. Today's first question comes from George O’Leary with TPH & Company. Please go ahead. George O’Leary: Morning, Bill, morning, Kyle, morning, Yvonne. Just on the new technology rollout that replaces or removes the blender from the well side, it seems like size is fairly important here, and you guys have found a way to make this thing smaller it fits underneath those silos. I wonder if you could talk a little bit more about kind of what this looks like and what the - how you came up with the idea to displace that blender and the - I know you haven't done the field trials yet, but thoughts around reliability given the blender can often be one of the most problematic components on the well side.

Well, I think your last sentence, George, is exactly what drew us to evaluating, what are the most problematic, unreliable pieces of equipment on the well side? That's sort of how the company started and visiting jobs and being out there, half the time you'll see a backup blender sitting in the parking lot next door as close as possible, because you know it's going to be a problem. And what we did was sort of took a blank look at our system, how it fits, what works together, and created a blender system that replaces the belt. So the two most unreliable pieces are the blender and the belt systems. And so, we put the blender as mixing tubs between the sets of silos, replacing that belt and allowing fluid flow to that, minimizing movement. And the way the pumps are set up, you've taken away the rotating piece of under-screw, all those delivery mechanisms where reliability is a problem, and we replaced that with another setup. And that's all we'll say on details on it yet, but that's the way it's worked and it's so far worked reliably. Obviously, we're going to need to put millions and millions and millions of pounds of sand through it to ensure that it's there, but all the work we've done on it so far is very promising.

Yes. One other point on the footprint, the simul-frac trend is an interesting one from a number of perspectives. The footprint challenges exist in the sense that operators don't want to expand their footprints. It’s more money, right? So you lose some of the efficiency in the simul-frac, but you’ve got more equipment out there. You've got more pumping horsepower. And so, what we've been able to do is continue to compress the footprint between water, sand, chemicals, and now this mixing system, to further allow more pumps to get in and to service those simul-fracs. George O’Leary: Got it. That’s very helpful. Thank you both. And then sticking with that simul-frac topic, simul-fraction, dual-frac is increasing as a share of the overall completions pie. Have you thought about how many wells your systems were on, where you were seeing simul-fracs six or 12 months ago versus where you sit today? Could you frame that in any broad brush strokes for us?

It's up. One of the things we always talk about is, there's multiple different approaches to simul-fracs. So I don't think anyone has really ironed out what the standard setup looks like. One of the challenges is certain pads have three or five or seven wells, not nice clean even numbers like four and eight, that don't drive nearly as much sort of benefit when you look at a simul-frac. So, it's starting to gain more and more momentum. We've seen a couple of operators who previously had never done them, try them this year. So it's definitely something that's gaining momentum. But from a quantification standpoint, I don't think we have enough data points to say that X percent of our work is on simul-fracs because it does tend to flow where we’ll be at one pad with the customer where it is a simul-frac, the next pad, it may not be. George O’Leary: Okay, fair enough. That’s helpful. And just thinking about the trajectory of US frac spread count across the year, February weather related issues across the US, but most acutely in Texas aside. And if we assume commodity prices kind of hang in where they are, there seem to be two schools of thought. One, that fracs rig count rise up really quickly early in the year, and then just kind of flattens out as guys are chasing flat exit production this year. And then another school of thought that next year, there's going to be some growth on the table. So in the back half, you have to start ramping to achieve that growth in 2022. I guess, what are you seeing? What are you hearing from customers? How do you think about that kind of medium term frac spread count beyond just the next quarter?

Well, I think if we kind of look at it from a high level budget, when we calculate operator budgets, we do see continued increase in activity this year, at least capital spending on the margin. When we look at frac fleets, it's got multiple dynamics where you've got efficiencies that go against sort of the growth in capital spending. But I think when most were putting their budgets together, they certainly weren't thinking about $60 oil and probably not $3 gas. So I think the commodity is very constructive. I think there's just a ton of pent up demand that's going to support the overall supply demand component on the commodity. So, I mean, I think we feel excited about the rest of the year. There will be - as we kind of mentioned in the prepared remarks, operators will be disciplined, but we feel like there are some green shoots out there. George O’Leary: All right, I'll turn it back over. Thanks, guys.

And the next question today comes from John Hunter with Cowen. Please go ahead.

Hey, good morning. So along that same line of questioning, I guess I'm curious, with the commodity price being a little bit more constructive, have you had conversations with your customers different than initial discussions were, in perhaps November and December as you plan for the 2021 year?

I think it's a net increase. I mean, I think we've seen folks more interested. I think it's a little bit of a spread between the privates and the publics, but even the large guys are looking at this price stack, and what may have been a 2022 completion plan, maybe moving up to the third and fourth quarter 2021. It all really depends on what happens to the pricing here. So there is an increase, and obviously gas prices, where they are, maybe ending the season very low inventories, will be constructive on the gas-only drilling as well.

Thanks, Bill. And then one on the guidance for activity for the first quarter, up 10% to 20%, with January tracking up 15%. Is the thought that the March exit is equivalent to where we were in January, or is there any way you can help me think about those bookends of 10% to 20%?

The bookends are really driven by the last 10 days or so. We were out in Midland, I don’t know, 10 days back before the storm hit Houston, and we started to see things slow down. And that's obviously persisted. And it's not as easy as just turning everything back on. The supply chain does take a bit of time to ramp the sand mines. Many of them had limits on how much gas they could consume to dry sand. So we'll see some tightness there. So the supply chain is a little bit tight, and trucking probably is going to have some pockets of challenges here ramping back up. So I think that's sort of the range we provide in guidance. Historically, when we've had these weather events, our business really has not been impacted nearly as much as you'd see on say a more stage count driven business. But our business has grown in the last mile piece, as we've talked about for many quarters. And so, that business obviously is driven on a tons pumped metrics. So when we've got jobs that are down for a week, obviously there's not a whole lot of tons being pumped. So I think that's sort of why we're providing the range. Had the weather event not happened, I think we talked about January being up 15%, and we feel like the quarter is, weather aside, evolving very well. So I think that - our guidance would have looked a little bit different if we hadn't seen that weather event. So again, that's - we're still early on and trying to figure it all out, but that's why we’ve provided the range.

That's helpful, Kyle. And then last one for me is just on your cash flow outlook for the year, and I guess cash after the dividend. So you gave us this $5 million to $10 million of CapEx. Is the thought that you'll adjust your CapEx levels such that you can remain cash generative, or at least cash neutral in 2021, or how are you thinking about that?

I think it ultimately depends on the success in new capital spending is where our swing is going to be. I think we're not managing necessarily that cash. we're managing to whether we have a product that we want to spend money on. And so, we have started to ramp up spending on some of these new developments. And so, that's a swing greater than probably anything else at this point in time.

Okay. Thanks. I'll turn it back.

And the next question today comes from Stephen Gengaro with Stifel. Please go ahead.

Thanks. Good morning, everybody. Just curious on a similar vein, when we think about the new technology, and I think you guided CapEx of $5 million to $10 million this year. How much of that is targeted at developing the new technology and how much is sort of maintenance levels?

Last year was $5 million, and we spent a little bit on new technology. So the technology that's being rolled out here in March, a lot of the capital was spent last year. So you can think about the $5 million having a mix of both. But I think when we think about flat this year, year-over-year, most of that will be in the non-growth perspective, so the increment from the $5 million to $10 million, I think is where the growth piece will be.

Great. Thank you. And then there was at least one customer that came out and sort of talked about the benefits of silos as far as sand mitigation recently. When you think about your market share your pricing structure, has there been much change there as things have evolved? And then maybe along those same lines, when you think about this new technology, do you think it captures more revenue at the well site, which clearly it does, but do you think it affects your share going forward?

It is too early to tell on how that impacts share. I think we have a high share with the electric frac fleets today. And I think that's a real target market for the new blender, because it fits so well in that setup and minimizes footprint. But I think looking forward at market share and economics, we have - our pricing has been relative when new (unintelligible) service model. So we’ve hopefully done a really good job with our customers, sustaining it on a level that we're not moving pricing up and down as much as some more commoditized products have, and kept it pretty steady. So I don't suspect that we're going to try to create a whole lot of price increases throughout the year. I think we've got plenty of capacity, and we want to put it to work. We want to provide a good job for the customer. We want them to be there with us in the next downturn, whenever that is. Hopefully it's 2040, but we'll see.

Okay. Thank you.

And the next question today comes from Ian MacPherson with Simmons. Please. Go ahead.

Thanks. Good morning, everyone. I also wanted to ask about your new blending system. I would imagine there could be some friction points as you're - whenever you're displacing incumbent. The pressure pumpers have a capital-intensive late setup. And so, I wonder how you - where you see your - obviously you're well aligned on the electric fleet side, and this seems to be a problem-solver for more congested simul-frac well sites. But where do you see your natural sort of alliance and friction points as you look to penetrate with this?

I’ll start and maybe let Kyle finish, but if you go back seven years ago, every silo displaced a piece of capital equipment that a pumper owned. So we've seen the evolution of providing better equipment, more reliable, safer equipment on the well side that actually adds some value. So we think there's a value add there. As we mentioned, we haven't fully defined the business model and the revenue model and the structure of that yet with our customers, and we're going to be working through that. But I think we believe that fundamentally, equipment that saves people, saves energy, improves reliability, will have a place in the chain of fracking.

And I think we spent the last year having lots of discussions with operators and pumpers around this technology. And a year ago, the cadence was, that looks really interesting. And this is mainly from the pumpers. That looks really interesting, but I've got a lot of blenders of my own that I'm going to be focusing getting worked. Over the last year, those blenders have continued to work, and like anything else, it's incurred a lot of maintenance and sort of maintenance capital to keep it going. And so, as we've rolled this out and given people the update of here it is. We’ve actually built it. This isn't theoretical, and here are the capabilities of it, and they're seeing their business evolve with more and more sand being consumed and the need to condense footprint, I think people are much more interested in seeing the benefits and figuring out how they can work well with us. So the commercial model will be worked out in due course, but I think it's a innovative piece of technology and the industry is recognizing that innovation is key to success.

Very interesting. Thank you both. Kyle, I wanted to ask you a follow-up also regarding the outlook for your margin incrementals as we continue to ramp higher. During the last cycle from ‘17 into mid ‘19 when revenues were growing pretty consistently, your true cycle EBITDA incrementals were a little bit north of 50%. And then as we've been coming off the bottom the past couple of quarters, we've seen them 33%, 35%, I think, irrespective or separate from the new technology and what that might do to the business, but just on the current business, do you think the opportunity to get back into 50% EBITDA margins as we get some more momentum behind the business is plausible aspiration?

Yes. Thanks, Ian. Yes, I think the business has evolved. And so, when we looked at the ‘17 to ‘18 sort of time period, we didn't do any last mile work. The last mile business, generally speaking, has call it a 10% to 12% margin because of the large trucking component. So I think it's hard to really look at where we are today and say that on an EBITDA percentage basis, we would look like we did back then, because the business has evolved and we're doing more things. So I think that becomes a challenge. But one of the things I would hit on is, we've got a really lean cost structure. We’ve figured out ways to do maintenance and remote sort of insights into our operations that allow us to run the business more intelligently, with fewer people required to do the same amount of work. So I think we’re making those kinds of investments, but the peak-over-peak EBITDA margins are challenging because the business has just evolved.

Yes, that makes sense. I was going to ask one more, if there's time. This has already been teased in Q&A a little bit, but the 10% to 20% activity increase Q1, could you pro forma that for us, excluding the recent weather impacts? Would it have been 5 or 10 points higher or would you take a stab at that?

Well, I think what we talked about is January was up 15%. And so, from a pro forma, I think we're still trying to sort out what the weather impact will be, because it's not quite done yet to be perfectly frank.

Okay. We'll follow up later on the quote on that. Thank you, gentlemen.

And our next question today comes from J.B. Lowe with Citi. Please go ahead.

Hey, morning, Bill, Kyle, Yvonne. Hope you guys are doing well. Just quickly on the - I mean, I know that you guys are pretty careful about messaging your technology initiatives to the Street. So it's good to hear that - the new piece that you guys have coming out. I'm just wondering, when you're going to customers and when you were talking to customers about this potential new technology, what was the pitch? Was it on a downtime reduction effort? Was it more strictly in the footprint side? What's kind of like the pitch? If you could put some numbers around what types of like downtime reduction potential this thing could have when you're talking to your customers, that would be helpful.

We’re not pitching numbers at this point. I mean, this is an idea. This is mechanically much more sound than the old way of doing things. We've removed a bunch of pieces of equipment in the process that are reliability challenges. And so that amongst itself helps - it does shrink footprint. That’s an important driver, but that is just not as important, I think, as having something that removes people. that's more automated and is much more reliable. Really those benefits are pretty outstanding when you put - when you sort of look through it. And obviously, we have a lot more data to gather on what that does on the well side.

And back to the plan, lean manufacturing, I mean, it's just logical, if you look at what's going on today. We’re loading silos, putting them on belts and delivering it into a hopper that then has conveyors that move it into a tub. We’re just kind of eliminating a lot of those steps. So the pitch is basically, why are we doing all this? And let's do it in a more efficient and reliable way. So, I think it resonates well.

Okay. Yes. I'll look forward to hearing more about that. The next one is just on the M&A front. I know you guys don't necessarily want to discuss exactly what you're looking at, but maybe just a sense of which direction you're kind of looking at in terms of potential acquisitions. Is it more well-side equipment? Is it more on the software side? I know, Kyle, you mentioned that last mile is becoming a bigger piece. Is that something that you guys would look to expand into? Just wondering if we could talk about that a little bit.

I think it's all of the above and it has - we’re clearly selective at what we look at, and it needs to be at the right price or something we can't build ourselves or recreate. But it's all the above. We like to improve the low pressure side of the well side activity. We like to improve our ability to manage the logistics and supply support for that piece of that. And all of that wrapped up into, how do you do that? Whether it's acquiring additional technologies, whether it's acquiring additional businesses and skillsets from other companies that make sense tucking into the platform. But we’re still - they need to have the right return profile before they do anything.

Okay, great. And the last one for me is just on the chemical systems, any update there? How does this - how does the chemical system, kind of combined with - or does it combine with the new piece of technology? Just any update on that front would be great.

Yes. No, I think it does combine well. The notion that we're running all of this remotely, ties well into the chemical system, as well as the delivery system. So I think they do go well together. And just for an update, we had a couple - as we have had for a number of quarters working for customers, again, continue to really like the value proposition. One little piece I'll add, and it was I think picked up maybe in the 10-K, but we built a couple of water silos last year. When we acquired the business in 2014, there were one set of three water silos, and they've kind of been on the back fence for most of the history of the company, but probably 12 to 18 months ago, we put them back out and we built a couple last year. And so, it's again, condensing footprint, providing a hydrostatic head to the well site that allows you to use your pumping capacity more efficiently. And so, that's something that we've got our eyes on. And so, again, we've always talked about water, sand, chemicals, and now blending them all. And so, that's kind of interesting to watch as well.

Okay, great. Thanks for taking the questions.

Just to clarify on that. When we say belt, we really mean converted. So what you'll see in the K is we have 165 sand systems now, and two sets of water silos, and then 14 chemicals. Okay.

Okay. That’s interesting. All right. Thanks for the time.

The next question today comes from Thomas Curran with B. Riley Securities. Please go ahead.

Good morning. Are there any aspects of this new blending system that should enable or create the potential to leverage Solaris lens in new ways?

Absolutely. I mean, the data support in what we deliver and how you manage that is all in the same platform. So the Solaris lens is monitoring and tracking activity now at the blender level, and feedback through the densitometer, and ways to ensure that we're getting accurate blending. All of that is coming through the same data platform.

Great. And then turning to the competitive landscape, what recent changes or trends would you highlight on the private side? Have you seen private silo and box rivals, especially smaller ones, start to reactivate or market more assets, pursue consolidation or pursue the critical mass? Just what would you highlight that you've seen happening on that side?

I mean, honestly, it hasn't been a ton. I'm not seeing really a lot of consolidation. We saw one provider go through their Chapter 11 process. The innovations that we're seeing, people are continuing to try and get more and more sand per truckload. I think that become - that continues to become or that continues to be a factor of how you drive trucking efficiency. How do you turn trucks more quickly? That continues to be a theme. And we've seen people use pricing, continue to use pricing in different ways. I mean, anecdotally, we picked up some work because another provider got more aggressive with pricing, which was in some ways constructive for us to see in the marketplace, but our economics are not - do not require us to drive up pricing to make a good return. So we have seen a little bit on the margin.

Interesting. That's helpful. Thanks for taking my questions.

And our next question today comes from Chris Voie with Wells Fargo. Please go ahead.

Thanks. Good morning. Just one more question on how the new blender interacts with the chemical systems. Will you need to have a chemical silo for this to work, or will it work with conventional systems as well?

No. It will work with conventional systems as well.

Okay. Got it. And then …

I think you just - some the efficiencies around eliminating people, making the well side safer and more condensed, are obviated when you go to a more traditional chemical system.

Got it. Okay. And then, do you expect to invest more in chemical systems this year as well? I mean, the CapEx budget is not much higher. You didn't invest much in it last year. Just curious if you expect that to grow at all.

No. I mean, I think we’re well supplied today for kind of our current level of activity. We'd have to see a pretty significant increase in the adoption rate before we deploy any additional capital add.

Okay. That's helpful. And if I can just sneak one more in. the growth of plus 10% to 20% this quarter, can you maybe describe how that's looking across basins? And is the vast majority of that growth in the Permian? Is it a little spread out? Just curious for some color there.

I think it's pretty well distributed. I think if - based on a commodity, right? So we're seeing oil and gas perform well. So when we look at East Texas, Louisiana, the Northeast, those basins are performing well. But yes, I mean, the Permian has been our large basin for a very long time, and it continues to be. And so we are benefiting from the growth that that has picked up there as well.

Great. Thank you.

And the next question comes from Samantha Hoh with Evercore ISI. Please go ahead.

Hey, guys. Good morning. Quick question just about the private operators. Are you seeing any discernible trends in terms of their aggressiveness in the oily versus the gas stations? And I also wanted to just see if Bill could elaborate on his comment about the spread between large and private operators, and potentially the larger guys getting more involved in 3Q.

Well, I think there's - it's all anecdotal information at this point on what people's plans are for the course. I think the commodity prices has certainly maybe gone up a little quicker than certain people thought it would. And so, it's raised some eyebrows and some of the big guys have really had plans to be very quiet this year or steady - steady is maybe not quite the right word, but steady, and that there may be incrementally here, it may make some sense to add something towards the last half of the year versus in 2021. I think that we have seen a quicker increase in the privates’ activity than the bigger operators. And I think that's just general speed at reaction time and how quick some of the small and very active midsize folks react to pricing and do it quickly. And so, we've seen a mix of that, but it is - it’s cost. It's reacting to the gas market in anticipations of that. It’s reacting to the oil market across the board. And obviously all of - none of our customers are exactly alike and they all react to different things differently.

Okay. And then the other question that I had had to do with your ability to convert some of your proppant silos into water and such. I'm curious if the new blenders require the existing proppant systems to be converted as well? I guess deep - more intensely, I'm just kind of curious of what to expect during this trial period. Is there a sense of how long that's going to run? Is there digital technologies built into the trials that you can actually see the blenders working and analyze it remotely as you're running through the trial? Is there sort of expectations in terms of being able to actually get this new blender system to be converted to revenue potentially before mid or year-end?

I want to address the last one. We hope it would convert to revenue, but the system is designed to replace and be in a position where our current belts are, the belts that are between the silos. And so, it will change the utilization obviously. The silos themselves, there's no change that needs to be made whatsoever. We've designed it to fit neatly within the way that current silos are unloaded onto that belt. They'll unload right into a blender, which eliminates dust point and an atmospheric point on the sand. So the way it fits, there’s no capital required to change the silos whatsoever. In fact, we'll be using a little bit less of our equipment in future. This was designed with all of the sensing technology and all the data delivery technology and feedbacks with the equipment to run it through the same platform that we're currently running it today, as well - which you can run in the data there. Along with that, the tracking mechanism and the data that we gather with the Solaris lens or integration with the Amazon Web Services platform to allow our customers to track and see that data, kind of parse it and do the research and studying that they want to do with what happened in that particular wellbore. That is still - will be unchanged. In fact, it's significantly enhanced because there's a lot more data being dumped into that storage.

That sounds really great. Congratulations, guys.

Ladies and gentlemen, this concludes the question-and-answer session. I’d like to turn the conference back over to Mr. Zartler for any final remarks.

Thank you, Rocco. I'd like to finish by thanking all of our employees and partners for your perseverance and adaptability this year. It clearly didn't end, as 2021 has started off with its own challenges. The results in the company wouldn't be possible without the team, both inside and outside. Solaris has emerged from this year in a very strong position to help continue to have our customers drive innovation on their well sides. And we know at times, it certainly feels like oil and gas is extremely unpopular with the media and political landscape. We all know that we’re critical to the world's sustainability. Oil and gas not only enables new technologies such as renewable energy to even be possible, but our continued push as an industry to drive efficiency and improvements in our environmental positions, directly helps our customers lower the cost and carbon footprint of oil and gas, which helps make energy more affordable and accessible to more people around the world. I'm proud of the role that Solaris plays in that. Thank you all and stay safe. Have a great day.

Thank you, sir. This concludes today’s conference call. We thank you all for attending today’s presentation. You may now disconnect your lines and have a wonderful day.