Good morning, and welcome to the Solaris Oilfield Infrastructure Second Quarter 2018 Earnings Conference call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Kyle Ramachandran, President and Chief Financial Officer. Please go ahead.

Good morning, everyone. I'm joined today by our Chairman and CEO, Bill Zartler; and our Chief Operating Officer, Kelly Price. I will kick off the call with 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 Tuesday and the Form 10-Q filed yesterday along with other recent public filings with the Securities and Exchange Commission that outline those risks. I'd also like to point out that in our earnings release and in today's conference call, we will discuss 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 said, I'll now turn the call over to our Chairman and CEO, Bill Zartler. Bill?

Thank you, Kyle and welcome, everyone. We're excited to speak with you all this morning about our results from the quarter and our outlook. Before we get into that, I'd like to highlight some of the recent management changes that our Board of Directors has made. As of July 30, '18, I have resumed the position of Chief Executive Officer, in addition to my role as Chairman of the Board. The Board has also appointed Kyle Ramachandran as President in addition to his duties as Chief Financial Officer. Kelly Price continues as our Chief Operating Officer, where he has done a tremendous job leading our growth in manufacturing field operations, engineering and safety teams for the last 18 months. Greg Lanham, our former CEO and Director, has resigned effective July 30, 2018. Personally, I am excited to return to the helm as the CEO, the position I held from our founding until early last year prior to our IPO. As a founder of Solaris, I'm very proud of our team and what we've accomplished so far, but we are not done. The team is hungry to continue to build on our success with the culture, the people and structure to drive our continued growth and execution as an industry-leading provider of innovative logistics solutions. Now shifting on to our second quarter of 2018 results, the team did an outstanding job executing our organic growth strategy. The team manufactured and delivered 24 new systems to our customers in the quarter, a new milestone for the company. We ended the quarter with 122 systems in our fleet, which drove a 28% quarter-over-quarter increase in revenue days to a record 9,850 revenue days. Increase in revenue days coupled with the incremental activity at our Kingfisher facility led to a revenue of $47 million…

Thanks, Bill. As highlighted by Bill's remarks, we continued to grow the business significantly in the second quarter, which translated into continued record operational and financial performance. We generated 9850 revenue days, $47.2 million of revenue and adjusted EBITDA of $30 million. Relative to the first quarter of 2018, revenue days increased 28%, revenue increased 31% and adjusted EBITDA increased 37%. When compared to the growth across industry-standard data points, including rig count, well count and frac fleet count, our business has grown and is still growing at a much more rapid rate than any single industry macro indicator. During the second quarter, rental and service revenue grew a combined 29% versus the first quarter, which is in line with the growth in revenue days. Our growth in system revenue this year has been a function of both deploying additional systems with legacy customers as well as adding new customers. For example, we've seen a 42% increase in the number of systems deployed to folks who, renting our system at the end of 2017. In addition, we've seen a 19% increase in the absolute number of customers that we have versus the end of 2017. Transloading revenue at the Kingfisher facility in the second quarter more than doubled on a sequential basis. Activity ramped up in the quarter, as 3 additional customers delivered volumes during the quarter. Finally, software services revenue grew by 6% versus the first quarter. Gross profit, defined as total revenue less the cost of proppant system rental and services, transloading services and inventory software services excluding depreciation and amortization expense, increased 33% to $33.1 million compared to $24.9 million in the first quarter, primarily due to the higher revenues and operating activity discussed. Selling, general and administrative costs in salaries, benefits and payroll taxes decreased to…

Thanks, Kyle. I'll wrap up our prepared remarks by catching on outlook. Based on my experience of working in and around the energy business for the last 30-ish years, one thing I've learned is the industry is constantly changing and always faces new challenges. When we think about the takeaway challenges that are the topic of discussion lately in the Permian Basin, it feels like another hurdle that the industry must and will work through in short order. There may be periods of activity disruption from lack of takeaway, but we believe the industry will find solutions, and they're usually much quicker than we expect with a lot of smart and highly incentivized folks looking to move every barrel of oil to the market. As mentioned earlier, our systems are deployed across most U.S. onshore oil and gas activity regions, and our assets are highly mobile. Our Permian customers have a significant baseload of activity in the basin, and we expect that to sustain. In fact, we have some operator customers today that have recently indicated to us an increase in their activity levels in the basin. Switching gears, movement on that is addressing competition. Despite a rapid growth in market share expansion over the past few years, there are many folks who have developed next-generation proppant management solutions and compete against us. Many of these offerings and companies were in business before Solaris was. Put another way, our industry subsector has been competitive for a long time, and we expect that to continue, and we expect to compete. We have a unique model and are positioned to continue to grow share. Our model is built on providing constantly improving solutions to our customers. We operate around a model, and we control our manufacturing process. This dynamic gives us the…

[Operator Instructions] The first question will come from Jim Wicklund with Crédit Suisse.

Kyle, I have to tell you, I enjoyed listening to Kyle/President. That had a ring to it, so congratulations.

Thanks, Jim.

Condolences to you, Bill, for being back in the seat. At the end, you kind of whipped through that kind of the future. There's no question that you guys have been wildly successful so far, but this is a life of "what have you done for me lately." The stuff you're talking about, temporary buffer storage of everything that needs to be located at some point on the well site, do you have to buy somebody or something to get there? Or is this going to be mainly an organic effort?

Right now, Jim, it's an organic effort. And we've sort of looked around. And when you're putting together new products and new tools, we find it's better to start with a bit of a blank slate. So all of our efforts to date around this have been organic. We've talked to many assembly suppliers, if you will, as well as our customers on their needs and integrated some of their ideas into how we're designing it for the industry. But no, we're on an organic trail here.

Okay. And my follow-up if I could, I know personally you're involved in water. I get asked by people all the time, because the water companies our pitching themselves as logistics. You're pitching yourselves as logistics. Is there a combination of your current business with water in any way? Or is this just going to be chemicals and other things we think about around the well bore? Because those have just completely different delivery mechanisms is what I'm thinking.

Yes, and I think that's a good question. The water business that our other company is focused on is really permanent infrastructure and large scale. And it really is not a close fit. There's certainly overlap in customers and attitude, but it's much more of a pipeline and permanent midstream-esque infrastructure business, whereas what we're working on organically within SOI is around specific wellsite tools and equipment in a slightly more traditional manner, if you will, around the services side of the business.

Our next question will come from Martin Malloy with Johnson Rice.

Wanted to ask about the impact of in-basin mines on demand for storage at the wellsite. Some of these, in many cases, I would imagine the in-basin mines are further away than terminals would be from the wellsite. Are you seeing an increase in demand for buffer capacity at the wellsite as a result? And is that impacting the demand for the 12-packs?

Martin, this is Kyle. No, absolutely. As we've seen throughout the history of this business, that the added buffer just provides such great safety, if you will, for our customers in terms of managing all the logistics upstream of the wellhead. We have started to see, certainly see more and more locals in, in the Permian Basin being delivered into our systems. With the 12-pack, it's really a function of 2 things. It's distance to terminal as well as just complication, or local mines as well, the complication are roads. And certainly, in the press and anecdotally, we're hearing more and more challenges on the local roads from the Permian mines to the wellsites. It's getting dangerous out there, and the more we can do to help our customers, provide some insurance at the wellsite with more storage, that certainly helps. But then, secondly, I think it's important to note that, more than just storage, we're providing them with data that they can now manage multiple wellsites and storage across those wellsites such that if they fall on one site, they can redeploy inbound trucks to another site. So I think it's not only about physical buffering but it's also giving them the data to manage that as well.

Yes. And I think one other point, Marty, is that in the traditional mode, where you're moving northern white into the market, you have incremental storage in railcars. When you're running a mine, slowing that mine down for any reason is lost production. So the goal of a mining operations is to keep them running 24/7 if they can. In order to do that, we need to be able to move the sand out of there all times. And having access to the information in terms of where the wellsite inventories are, how many you can go to, whether it's 12 packs or 6 packs, that rail buffer is now out of the system and it increases the need for wellsite storage in general.

And the third thing would be trucking capacity. And obviously, we continue to see tight trucking. And by having a buffer, it just gives you, again, more insurance to manage those tight, key tightnesses you'll see in the market.

Okay. And my second question, just around your initiative on the storage of chemicals or liquids at the wellsite. Can you help us a little bit in terms of what the scope, what your scope might be in terms of revenue or EBITDA impact per wellsite?

I think it's too early to give out information on that. I think we're, there's a tremendous logistics savings to be had around those products as well and the elimination or lowering of the loads and toads handling. The people required to do this, people required to manage the blending operations. So those kind of things will be ultimately savings. And, but it's too early to make a projection as terms of what our '19 financial impact is from that business line.

The one thing I would note is, based on our current efforts on the design, I would say it's more likely closer to half of the capital than our current system. And that's purely just from a storage capacity standpoint. And this isn't likely to be 6. It's likely to be something on the order of 3. So it's a smaller kit, if you will.

Our next question comes from George O'Leary with TPH & Co.

Bill, Kyle, I thought that commentary around, we've expected you guys to push into the Bakken at some point, but I thought that comment around Canada was interesting. I guess, one, kind of what drove the decision to move there? Obviously it's an addressable market for you guys, but kind of why now? How is that decision process going? And two, how do you guys think about factoring spring breakup and that kind of downtick in activity that happens on an annual basis there? And what are kind of the levers you pull to make sure returns match those of the silo systems that you have deployed in the U.S. at this point?

Good questions, and we've talked extensively about it, which is why we're, we haven't been in Canada so far. One of the developments out there that has been attractive from our customer base is that they are, in certain locations, there are certain areas developing pads that are there to stay throughout the year, and they have less breakup issues. And so that's our focus for that market is targeted toward operations that are 12-months a year operations or at least 11 month a year operations. That said, and we have been talking to folks about the Bakken for a long time and are finally making the decision. We got the critical mass to move some equipment up there, and it's coming offline and have the demand set to move it up there, and we'll have enough systems to add the right number of folks up there and have the appropriate critical mass to monitor and service our equipment.

And I think what we've seen in our business is the adoption across multi basins with the same customer. So if we start in one basin with the customer, there's quick adoption to say, Hey, Solaris, can you come to another basin with us? And so we're seeing that. We've had demand in the Bakken and Canada from existing customers until, as the business and fleet size matures, we will continue to extend into those basins. And then just more specifically in terms of the breakup, we've had several conversations with customers who've been in Canada for a very long time, and their consistent feedback is, every year, the duration of the breakup continues to compress. So as that continues, we think we'll be a part of helping continued compression in that cycle.

Okay, great. That's very helpful color. And then, if I remember right, historically, you guys have had one service person per system, more or less, out in the field. I think there was a goal through time, and given the labor constraints we're seeing out there, it would make sense that maybe you push toward this goal sooner rather than later of reducing that ratio and maybe going to a 1 to 2 ratio, 1 service person per system, that is. I guess, any update there, on the progress there? Is that still a goal? Just curious for any color on that front.

That's still our goal. We have seen, the challenge, of course, is when our customers pay for those bodies, we of course are going to have one full time or 12-hour a day first. And then we look at how we spread it across the basin. If you take one person per system, that person can't work 24/7 and the equipment's working 24/7. So effectively, you're having one person spread out about multiple fleets. I mean, some set ratio of 3 to 1 when you sort of look at the total hours per week and the monitoring time. That said, we do not have a person at our equipment 24 hours a day or do we need to. It operates quite well. And most of our customers are trained in its operation. So we are seeing a little bit of efficiency there, but it's still, as we've grown rapidly, we've kept the ratio of 1 to 1 just to ensure that we provide the quality and the service that our customers expect from us.

Great. And then I'll sneak in one more, if I could. You guys mentioned in the press release a few days ago that market share is roughly 28%. I think that's up from 24% in the prior quarter. I guess, thinking through just dynamics in the field and where your silos are best suited, particularly on the larger pads, what do you [indiscernible] get to, what's a realistic number from a market share perspective through time for the silo business?

Let me start with the first comment you made, which was that they're well suited for the larger pads. We actually, surprisingly enough, see activity across all size jobs. So it's not just the large pad, it's not just the large, it is a effort-savings, time-savings, people-saving, logistics-saving piece of equipment in most jobs sizes. So that is, it certainly is better the bigger it is, but it is not used exclusively, and we see the loss of preparation continued use on smaller jobs, if you will, or 1 or 2 well pads as we get it out there. So that's really out there driving it. It's hard to see what our ultimate market share is. I mean, if things, as they've gone, we have displaced both sand kings over the last quarter, and we've replaced box solutions. So I think the evolution is this just is a piece of equipment that works very well, our reliability statistics are stunningly fantastic in terms of activity levels. It's in the 10,000ths of a percentage of NPT. And that goes along with the customers ensuring that we're really offering an insurance program. And everybody has insurance, so how big the market share goes, I don't know but I, we watch it closely. We watch our forward demand, and we'll throttle back capital spending as we see things and demand slow down a little bit. But right now, we're, we see a continued path at least through this year to sort of have customer demand at the numbers that we suggested in the press release.

The next question will be from John Watson with Simmons & Company.

I want to start on Kingfisher. Phase 1 is now complete. Is there any change to the guidance that was given a year ago when the facility was announced? And I'm specifically interested in the anchor tenant potentially forward staging, if that does anything to the margin profile that was originally guided to?

Hey, John. I think, as far as the guidance that we've previously provided, in that guidance, we did not include any of the incremental customers that we're seeing today and we've seen since commencing operations in January. So we're not going to provide, I don't think, new numbers. But certainly there's volumes going into the facility that we did not include in those numbers. And then as far as forward staging, the customer requested that capability in the 30,000 tons of storage that we've built. So this has always been a part of the model where they are looking for flexibility both to forward-stage local sand as well as to unload new trains.

Okay, understood. And then switching to the silo business. The guidance for Q4, as you mentioned, there might be a slowdown in completion activity. I'm assuming that's why there's a potential for us not to get 24 for the quarter. Is that right? And can you speak to just probably what you're hearing from customers with regard to activity in the back half of the year?

I think, we, John, as you may have seen, we have a tendency to want to beat our numbers rather than hit them. So one, the range we provided as 24 in the upper end and lower end is a lesson that I think we're going to watch. We clearly are watching the market closely. That's the holiday month, and it may be that we don't work everybody over Christmas and we save 2 systems in the end of December. So I think it's providing a little flexibility in the guidance in terms of what we do. But from a process perspective, that is not reflecting any massive anticipation of slowdown in the industry at all to achieve those numbers. We still see the demand there. Our customers are requesting more. Some of them are moving around and some say that their Delaware Basin activity is going to pick back up in the fourth and the first quarter. And they're adding crews rather than deleting crews. And so that, combined with movements into the Bakken, movements in the DJ, I think we're still seeing activity in the Marcellus they'll pretty well pick up. And that all combined, we still see growth by our customers.

Yes, I think it's important to recognize, obviously, completions are the driver, the core of our sector, but there are secular changes. And the ocean regs that have gone in recently, that are certainly going to drive continued demand for our systems. So certainly, on the pressure pumping side, we've seen customers this year really take a hard look at ensuring that they're doing all that they can to get compliance with the new ocean reg. So I think, even in a flat or even in a declining completion pace, we're going to continue to see share growth.

Good to hear. Good to hear. One last one, if I could sneak it in. Any update on contracting and maybe an initial read on 2019, if you have it?

Well, I think, obviously it's a little bit early days to get into specifics there. We are certainly engaged in conversation with our customers as to activity and forward-look into '19. They're starting to begin their budgeting process. When I think about '19, though, some anecdotes that I've heard recently, we have one customer that's had as many as 15 stages a day completed. So I think what we're seeing is folks are continuing to see greater and greater value out of what we're doing. And our offering is not static. So we're continuing to make enhancements in the equipment, as Bill alluded to in his prepared remarks, around improving some of the components around the integration with the blender, and also on the software side. So we're making real strides on the integration of mine to wellhead and leveraging some third-party folks to, partnering rather with some third-party folks to really ensure that they've got more than just a silo out there.

The next question will be from Praveen Narra with Raymond James.

Just wanted to come back to a clarifying point on, I think, your response to Marty's question. I guess, when you talk about the additional opportunity as being potentially 3 silos instead of 6, is it fair to think of the total addressable market of these alternative solutions as being 50% of the sand addressable market?

No, I mean, so it's every well site is going to have sand storage. Every wellsite is going to have consumable storage, friction reducer storage, et cetera. So I think it's the same addressable market as to physical locations or frac fleets, et cetera. Again, we haven't described the economic model from an earnings standpoint, but you just, very rough numbers. If we're looking at half of the physical equipment, it's likely that the capital cost is somewhere in the order of half of that. So the 50% is really more a question of what is it going to take to provide this sort of technology to our customers, not TAM from a perspective of how many systems could we build.

Right. Okay, great. I guess, coming back to John's question on pace of growth, I guess, if we think about it going forward, you mentioned the early discussions of potentially going through a dividend. Should we, do think, as we go into 2019, that certainly there's opportunities for growth at similar levels that we can hold the 24 per month or per quarter as we move forward?

I, honestly, looking for building another 24 systems a quarter for an entire year probably puts us at a market share that one would think is extreme and probably more than we can achieve. So I would hesitate to guide to 24 months for the year and recognize that we're very close to generating enough free cash right now to pay for 8 a month. So as soon as that slows down or moves toward the manufacture of other liquids equipment that we think is attractive, we will migrate that way. And there's a tremendous amount of cash that gets generated for that use or to return to shareholders or some combination of all those over the course of '19, and we're evaluating all those options live.

But that being said, what I would say is, 15 months ago, 4 systems a month was our target, and we felt that's what the pace of the market was. And we've been certainly surprised with the rapid adoption that has allowed us to put 8 systems a month into the market for 5 or 6 months in a row at this point. I mean, when you just think of a quantum there, that's pretty significant. So we surprised ourselves over the last 15 months as to our penetration. So I'd certainly echo those comments, but I think there is an opportunity out here to gain more market share than you would traditionally see in a service offering. Given, again, some of the things that we've talked about in the past, this is a very low overall cost relative to the cost of the well, and it saves people a heck of a lot of money, and it works really well. So I think there is an opportunity here to grow at a rate that would be probably higher than what you'd see in a traditional offering.

Okay, perfect. If I could squeeze one more in. You mentioned you have a couple of your belly dump systems out there. I guess, could you update us on the turnaround speed of trucks on the belly dump systems?

It's anywhere from 16 to 18 minutes, I would say, per truck. And it's additional flexibility for our customers. I think there've been some discussions around this, the elimination of pneumatic trucks or systems that only use belly dump trucks. And we certainly think there's an appetite for flexibility in your supply chain if you use those belly dump trucks. The challenge, I think, ultimately is, it's ultimately about how much throughput can you put into a system over, say, an hour period. And our pneumatic delivery allows us to deliver up to 24 trucks in parallel, while in the belly dump solution, you're doing 1 or maybe 2 trucks in parallel. And so even, I'd say, 15 minutes per truck, the actual hourly throughput is much lower in a belly dump system. So we think there's an opportunity to deploy additional belly dumps, but we don't think the pneumatics go away. The customers that we have are what we would describe as the most efficient in terms of managing their sand supply chain. The majority of them rely 100% on pneumatics, and they're able to manage that process just as efficiently or more efficiently, I'll say, than when you're using a belly dump at 1 or 2 at an interval. So it's really about throughput. It's not about, it's not necessarily about belly dump versus pneumatic. It's about how much volume can it offload in a given period of time.

And on top of that, the evolution of the pneumatic trucks and cabs are lightening up for the milk runs back and forth, especially when you start moving into local mines. And they're able to get significantly more sand in, in some of the pneumatics than certainly you can in the boxes.

That's very much. Thank you very much guys.

[Operator Instructions] The next question comes from Jason Wangler with Imperial Capital. Please go ahead.

Was just curious, it seemed like the margins kind of popped up again in the second quarter. And I know in the first quarter you had some good price increases, but I don't think that happened in the second quarter. Could you maybe just talk about it maybe on the cost side? It seems efficiencies, or maybe what's happened there as the margins kind of keep higher.

Sure. Certainly, on the rental side, as we've described in the past, we set pricing for the most part for all of 2018 with our customers. So I don't think we saw a whole lot of price increase in the in the second quarter. But as far as margin profile, we did get some margin appreciation, really, on the service side. As we talked about last quarter, there were some payroll taxes that kicked in, in the first quarter, and some of those had started to be fulfilled. So we have seen some expansion there. And secondly, in terms of our field technicians, we talked about it in the last quarter, we did have a ramp up in field techs in the first quarter as we were anticipating ramping to 8 systems a month, and we started to normalize that out. So we didn't have quite as much hiring in the second quarter, given the ramp-up in the first quarter.

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

Thanks, everybody, for participating and listening to our call. Appreciate your support.

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