Good morning, and welcome to the Solaris Third Quarter Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note this 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.

Good morning, and welcome to the Solaris third quarter 2019 earnings conference call. I am joined today by our Chairman and CEO, Bill Zartler; and our President and CFO, Kyle Ramachandran.Before we begin, I'd like to remind you of our standard cautionary remarks regarding the forward-looking nature of some of the statements that we will make today. Such forward-looking statements may include comments regarding future financial results and reflect a number of known and unknown risks. Please refer to our press release issued yesterday, along with other recent public filings with the Securities and Exchange Commission that outline those risks.I would also like to point out that our earnings release and today's conference call will contain discussion of non-GAAP financial measures, which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. Reconciliations to comparable GAAP measures are available in our earnings release.With that, I'll now turn the call over to our Chairman and CEO, Bill Zartler.

Thank you, Yvonne, and welcome, everyone. During the third quarter of 2019, we had 115 fully utilized systems deployed to customers, down approximately 7% from the second quarter and in line with our expectations and prior guidance.Overall frac activity during the quarter increased primarily as a result of frac efficiency gains and budget exhaustion as operators remain committed to producing positive cash flow. Solaris' activity to client match the overall industry trend with some offsets from winning increased share with certain customers as we continue to demonstrate the efficiency and value our systems and service provider.For the quarter, we generated approximately $60 million in revenue and adjusted EBITDA of $31.2 million, which were down 7% and 11%, respectively, from the second quarter. During the third quarter, we generated approximately $27 million in free cash flow as we continue to harvest cash from the capital investments that we made over the last few years.From an overall activity standpoint, the Permian Basin and Eagle Ford shale areas continue to be our most active areas. We have seen significant decreases in frac activity in the Haynesville, Marcellus and Mid-Con regions as continued low natural gas prices challenged well economics. Rig count in the gas basins is down nearly 30% over the last 6 months versus about 15% for the oil directed rig count.During the quarter, we also continued to make progress with our chemical system rollout. We have completed a few systems that incorporate our latest design enhancements, and we are very pleased with how the system modifications are working in the field. We plan to finish upgrading the remaining systems over the next couple of quarters and standby ready to manufacture additional systems based on market demand in 2020.We have several customers interested in our systems, and we continue to believe this…

Thanks, Bill, and good morning, everyone. As Bill mentioned, during the second quarter, we generated nearly $60 million of revenue, adjusted EBITDA of approximately $31 million and free cash flow of approximately $27 million. The 7% and 11% decrease in revenue and adjusted EBITDA, respectively, was primarily driven by a 7% sequential decrease in the average number of systems deployed to customers.Free cash flow increased approximately 3% versus the second quarter, as the decrease in EBITDA was offset by reduced capital spending. During the quarter, nearly 150 proppant systems worked with varying degrees of utilization. Our calculation of 115 fully utilized systems reflects the number of equivalent systems that generated revenue every day in the quarter, which we believe is the best measure for our business activity and for modeling purposes.Gross profit for the quarter was approximately $35 million, down 10% from the second quarter, primarily due to the decrease in fully utilized systems as well as reduced contribution from our transloading and software segments. Margins were also negatively impacted by higher fixed costs, such as insurance, flat field costs despite the decrease in activity and higher repair and maintenance costs, driven primarily by higher throughput through our systems.Total SG&A costs for the quarter were $5 million, in line with prior guidance. For the fourth quarter of 2019, we expect total SG&A and personnel costs to remain at approximately $5 million. Net income for the quarter was $19.1 million or $0.36 per share. This was net of approximately $250,000 or $0.01 per share in nonrecurring severance and asset disposal charges.Adjusted pro forma net income for the third quarter was $17.7 million or $0.37 per share versus $21.2 million or $0.44 per share in the second quarter. As a reminder, adjusted pro forma net income adjusts for nonrecurring items, and also…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Today's first question comes from Martin Malloy of Johnson Rice. Please go ahead.

Good morning.

Good morning, Marty.

My first question is on the revenue per system, it looks like it held up better than I would have expected, given some of the commentary from some of the other service companies involved in completion activity. Could you maybe talk about some of the factors there and how you expect that to trend going forward?

Yes, good question, Marty. The nature of the system and the nature of our revenue model where we're renting it on a monthly basis, allows the operator to – as they move more tonnage through the system, get greater and greater benefit and lower their absolute cost per ton, and then they look at it and evaluate it on a dollar per ton basis. So it's a real – effectively a sharing of the upside and a sharing of the efficiency gains between us. So our monthly charge has not changed significantly, but the benefit to the customer has throughout this time frame and the efficiency gains.

Okay. And then on the chemical management system side, I think you've got maybe one or two of the latest versions out there that reflect the customer feedback that you've gotten throughout the year. It sounds like you're getting some positive feedback on these newer systems. Could you maybe talk a little bit more about that?

Yes. I mean, one of the things that we noticed as we mentioned sort of last quarter is that it's hard to be public in this R&D process, but this is going probably faster than the sand system rollout did. One of the things that sort of happened was evaluating and using standards of six months ago on how quickly folks want to use chemicals and what rates you're pumping at, and so we had to do a revamp around the pumping capacity and around the air handling and vacuum protection mechanisms in the system.And those upgrades were relatively low-cost, they just needed to be done, and we needed to spec out some new materials and all feedback now is that they do allow significantly higher rates to be flowing through the system on the liquid side. And that's taking – doing exactly what customers want. So we see that – those fixes as being very positive.

And Marty, the only thing I would add is it's an education process. And so as we've had systems out working and as we continue to engage with pumpers as well as operators as a push and pull from both sides. Certainly, from the operator's perspective, there's real value in the HSC, cleaning up the well site from the pumper standpoint, it's all about getting stages down per day.And so anything that's going to bring reliability is a great opportunity for the pumpers. And so it's been a push-pull on both sides. And just from an education standpoint, we're being patient and spending a lot of time walking customers through the value proposition.

Great. Thank you.

Thanks, Marty.

Our next question today comes from John Watson of Simmons Energy. Please go ahead.

Thank you. Good morning.

Good morning, John.

Good morning. I appreciate the color on activity. I know it's early, but I was wondering if you could provide additional color regarding what you're hearing from customers for Q1. I would assume Q1 activity levels remain below where you were in Q3. Is that a reasonable assumption at this time? Or are you seeing something different from your customers?

It's really hard to tell. I mean, we have – depending on the region we've got folks who say they're going to be back above by, call it, February of the first quarter, back up above levels in the third quarter. We've got other regions where it probably takes longer to come back. So on average, I think we're moving back in that direction, but I think it scales itself through the first quarter.

Yes. I mean, there's operators that have completely shutdown for the fourth quarter that have telegraphed the need to get back going very early on in the first quarter. So I think we'll see some of that. There's a heavy amount of RFP processes going on right now, and so we're working through those as well.

Okay, great. And then as a follow-up on the Kingfisher comment. There are other customers at that site that I'm assuming could use your transload. Can you speak to what their contribution has been to your transloading profitability today and what that could mean into 2020?

The majority of the profitability has been through the long-term contract that we had signed in the facility. But I think we've had up to six different customers at the facility throughout 2019. I think the reality is, in the fourth quarter, when we look at the various basins where we're deploying the rental equipment that particular basin has really slowed down quite significantly.So I think as we look to the near-term, the revenue opportunity is probably pretty small there, but we're engaging with not only sand operators or sand customers but also other commodities, whether it's oilfield related or even outside of the industry. So we're casting a pretty wide net in terms of opportunities there. The local sand switching has obviously played an impact in the demand for this kind of facility.Today, we're using it for some forward staging. We think there's certainly opportunities to continue to do that as people look for storage and sort of an interim location rather than just at the mine. But the majority of the revenue has been through that dedicated contract. Now I will say that the capacity associated with that contract is now freed up. And so now we've got kind of additional value to offer to new customers.

Right. Okay. That's helpful. And one last one for me. I believe that there have been rollouts of higher payload pneumatics of late. Can you speak to how that benefits the Solaris value proposition?

I think there's multiple things that operators are trying to solve for. From a payload perspective, reducing the number of overall truckloads in the industry that are required to deliver sand volumes is a good thing. That's certainly a good thing from an HSE standpoint. Every time a truck cross the cattle guard, there's some level of risk there, and then from a cost perspective as well. Fewer trucks should result in fewer or lower costs.When we look at our value proposition, we're all about putting a large buffer at the well site. We've been able to maintain large buffers of sand in our silos throughout our development. And I think just putting more sand per truck should ultimately only increase our ability to maintain higher levels of inventory on-site. Fewer trucks ultimately reduce the volatility in the delivery of truckloads at the well site.And I think there's been a big debate about belly dump boxes, pneumatics, et cetera. Ultimately, we don't see a huge push from operators for one versus the other. They're looking at how do I reduce truckloads and how do I maintain inventory as high level as possible, and there's trade-offs in everything that you're looking at. And so from our perspective, higher capacity pneumatics are the best opportunity.You've got 24 offloading points. You got the reliability. We don't have one unload point, which is what you typically see in a belly dump system. So the ability to – things break out there and the ability to keep offloading trucks and not rely on one single point of unloading capacity has really resonated with our customers that are consistent users of the system.

Okay. Appreciate the answers. Thank you.

Our next question today comes from George O'Leary of Tudor, Pickering, Holt & Co. Please go ahead.

Good morning, Bill. Good morning, Kyle.

Good morning, George.

You guys mentioned cost cuts. I'm just curious, as you look across the various buckets that you might be able to take costs out of the system, how do you rank order where the lowest hanging fruit is? And then any color on the order of magnitude of cost that you might be able to pull out of the system in 2020 at this point? I realize it's probably preliminary, but just how are you thinking about that.

It's preliminary George. As you know we operate fairly lean to start with. We closely match and monitoring our maintenance spending. We monitor the field tech utilization rates and focus on maintaining a pretty rational and low G&A.So it's incremental stuff around the edges that we continue to focus on it. And our throttle from a cash perspective is really capital spending and how we manage our manufacturing operation, and right now we're very careful with what we're doing out there and look at it on a weekly basis in terms of what we spend and for what.

Yes. We don't have multiple districts and regions where we've got big overheads sitting outside of the well site or in Houston or in our manufacturing facility or Kingfisher. So we're pretty lean from that perspective. I don't know that there's a ton of low-hanging fruit, but there are opportunities just constantly challenging management pushing down accountability into the various management levels to make sure everyone's focusing on where are opportunities to cut some costs.

Great. That segues well into my next question. Just you provided the $20 million to $40 million CapEx budget for 2020 and you guys have had some kind of time under your belt now looking at these systems and what their repair and maintenance CapEx is associated with those. Is that $20 million number? Is that all maintenance CapEx? Or does even that contemplate some level of growth?

Yes. It just probably got a little bit of growth in there. The majority is what we would just call non-growth. So that's not only maintenance, but it's also improvements and enhancements to the fleet. So things like the auto hopper system those are all incremental capital that are required to continue to maintain the edge that we've been able to sustain over the last six years as the leader in this space.

Great. I'll sneak in one more if I could. You guys continue to generate very attractive free cash flow. The last two quarters really speak to that in particular. How do you kind of rank order priorities for cash it seems like market is fairly sluggish. So growth CapEx probably only comes with some really good line of sight to opportunities. Is there more of a potential that you guys look to return incremental cash to shareholders now or are there growth opportunities that I may not be thinking of?

I think where we are as we've proven very careful and cautious and thoughtful about what we do with the cash. I think we will at a minimum our dividend policy continues most likely. I think we will take a serious look at what's the best use of that cash. If we don't see a massive need for some neither inorganic nor organic CapEx on how we get that back in shareholders hands in the most effective way.

Great. Thanks for the color guys.

Thanks.

And our next question today comes from Stephen Gengaro of Stifel. Please go ahead.

Thanks. Good morning, everybody. I guess two things. One, can you help us frame the quarter a little bit in the fourth quarter? If we were to think about a 20% reduction in utilized assets in the quarter, how should we think about that margin impact? I mean it seems like pricing has been pretty stable. I know there's a lot of moving pieces on costs et cetera.But can you help us frame that at all? And I don't know if you'd want to go, so far as give us an EBITDA range if you were down 20% to 30% on the topline. But just anything you could do from a – to help us sort of understand that how the decrementals should look?

Sure Stephen. I think we're breaking down in a couple of different ways. When we look at the cost of rental, I would see that being pretty linear with activity that the majority of that cost is around maintenance. And so to the extent we've got less activity I would generally expect lower maintenance spend. There's a bit of fixed cost in that bucket with insurance property tax et cetera. But there should be some ability to flex that.When we go to the cost of service the biggest element of that is our field labor piece. And we have been looking at opportunities to rationalize some of that and we've done a little bit of that. But I think the real impact of that is probably a Q1 timing event, so for the most part the field services costs will remain in line. The one variance in that would be just our transportation cost, so moving the equipment around.That's effectively a pass-through but we will see that come down just through lower activity. So we're not going to get too prescriptive on a EBITDA range. It's not something we've really ever done and we really don't want to get into doing that. But I think we are very conscious of evaluating reduced activity load and where we have opportunities to get more efficient.

No great. That's very helpful. And then a second as you talk to your customers I mean it clearly seems like we've at least heard on a containerized solution side there's been pricing pressure. It seems like your prices have been holding up pretty well. As you look out past the very short-term, do you continue to see that trend? I mean I know someone asked question about competition, but do you continue to see customers being willing to extend contracts and continue to work equipment at or around current pricing?

Well it goes back to my earlier statement Stephen on volumetric base moving a box as a dollar per ton basis. Ours as an element of fixed cost that as our customers get more efficient by using the equipment actually their dollar per ton cost is dropping.And so we believe that we can continue to remain competitive on a total delivered cost basis especially factoring in reliability on top of that. So we do see pricing pressure. There's always pricing pressure right?Our operator customers are always looking for the best solution and have been for – since we started the company. So we continue that. And our goal is to maintain efficiencies help them get better at what they do and try to make a fair margin for us.

And as we said in the past we've had customers switch away for lower headline rates. But when you look at a $5,000 an hour NPT charge over the course of 30 days 24 hours a day $130,000 rental even if you're saving 30%, 40%, 50% on the headline rental just one incident of NPT over the course of a month eradicates all of those savings. So people test different solutions at different headline rates and they do the full economics and most of the customers have come back that have switched nearing our life cycle for headline pricing.

Great. That's helpful detail. Thank you.

And our next question today comes from Jon Hunter of Cowen. Please go ahead.

Thank you. Good morning. So I wanted to touch on the activity guide for the fourth quarter down 20% to 30% for overall U.S. frac activity. I'm wondering how your activity has trended so far in October? And what's expected for November and December? And more specifically, do you think that the December rate could exit somewhere in the 70s for fully utilized systems?

I don't know about getting into the exact exit rate on December. I don't think we've got that kind of a pen on it at this point. But when we look at September versus October or Q3 versus October, there was a step down. I alluded to one operator, as an example, had four frac crews running in the third quarter. They're now at zero. So those sort of anecdotes are popping up.But that being said, I think it's been very well telegraphed that overall service prices are coming down in the fourth quarter or continue to come down in the fourth quarter, and listening to one of the big Permian operators yesterday in their earnings call, they anticipated dropping a couple of frac crews in the fourth quarter, but pricing has come down to a point where they're going to keep pumping.So it's pretty hard at this point to get too prescriptive on it. We do know that. We did take a step down in October from Q3, not to the 20% to 30% level by any means, but it was – call it, 10% to 12%.

And then the second question I had is just with this large drop in activity in the fourth quarter, customers laying down frac crews. What's Solaris' strategy towards gaining market share? Does this give you an opportunity to go to the E&Ps while they're in kind of this lull of activity and say, “hey, here's our offering” and does that offer you an opportunity to gain more market share as customers prepare for 2020.

Well, I think there's a constant dialogue we have with our customers and when they're slow. I mean frankly, what it gives us an opportunity to do is work on some of our in-house stuff and do some tweaking because we're not fully utilizing all of our labor. So I think our relationships with our customers are there.We are trying to plan for the fourth quarter – I mean the first quarter of next year. They're trying to plan for next year, and we're in that dialogue with them every day about making sure that we can be ready for them going into next year, if they're slowed down.Like you said, Kyle, we have heard from anecdotally, others with sand prices down and completions cost down that there's folks that said they were going to drop, but haven't. So it's a mixed bag.

Yes. And it's not a totally inconsistent practice as operators and service companies play the constant game of supply and demand on frac capacity.

Great. Thanks, Bill and Kyle.

Thanks.

Our next question today comes from Chris Voie of Wells Fargo. Please go ahead.

Good morning, guys.

Good morning, Chris.

Good morning, Chris.

I just wanted to ask on pricing strategy. In the past, you guys have said that you're willing to sacrifice utilization versus price. Obviously, on a fully utilized basis, utilization is a bit weak, but you said you had 150 units work in the quarter. So it's not like there's that much slack in terms of the word potential.Just if you could give an update in terms of how you're approaching 2020 conversations? Would you still prefer to have a lower active unit count and maintain the current pricing level? And have you added enough new technologies on top of like Solaris Lens to maintain that kind of pricing or has that shifted at all?

Yes. I don't think we ever target not getting share. I think what we do is we remain disciplined to not chase price. And I mentioned a couple of questions ago about we've got customers that have left for pricing and many of them come back. And that's been a practice we're going to continue.I think when we look at utilization, we're in basically every basin, we look at the Delaware, Midland Basin, the Eagle Ford, our utilization rate is much higher than when we look at some of the gassier plays.So we're not really focused too hard on a utilization number. We're looking at how much share can we capture in each of those basins. So some of the gassier basins, we may be still at our third share. The pie is just much smaller and so that results in underutilized systems.We've got enough systems today in each of the basins to satisfy demand. If we had a smaller fleet, we would probably be moving equipment around to address some of those higher basins. But I think at this point, our asset base and our utilization is really going to be driven by the relative activity levels in each location.

Okay that's helpful. Thanks. And then to follow-up on chemicals, I don't think I caught these numbers, but if I have it right I think you have 14 total systems still you're retrofitting some of those. Did you call out how many systems you actually have on revenues currently?

We did not. We've got two of the new builds out in the field today and we are modifying several additional ones that we expect to have available by the end of the year.

Okay. And can you give an update in terms of the economics and how they compare to the proppant silos? Is it still in the neighborhood of kind of half the economics in terms of pricing that you're targeting?

At this point I think that's consistent. It's pretty early at this point to really update anyone on that given the relatively low levels of deployments.

Okay, thank you.

[Operator Instructions] Today's next question comes from J.B. Lowe of Citi. Please go ahead.

Okay. Good morning, guys.

Good morning.

So I'm not going to beat on the pricing dead horse here, but I'm kind of wondering on market share. I want to kind of ask John's question in a different way. You guys captured third of the market pretty quickly. Do you think that there's like a natural cap on the amount of share that you could potentially capture just given operator preferences between competing systems? How do you guys look at that?

Well I mean I think there is – our focus is in market share. We internally never really run any numbers. It's about who are the customers we have and who do we think we can help save money in their completions. And as we look at like that we see that we continue to penetrate new customers that have switched or had challenges with other solutions.And we believe we keep them after they get to use our system because of the additional features of reliability and the information with the lens. The whole package over a period of time in a completions program tends to be very value additive. And so we see that and continue to push that and focus on sort of one customer at a time.

Yes. And I think every customer is different. So whether it's an operator or pressure pump or, some of them own their own assets, some of them have economic interest in different systems, some of them have helped develop systems and so there's some piece of the market that is sort of focused on what they're doing today. And I think over time, we've shown the ability to capture that – some of that share as some of the other technologies haven't been able to keep up with the higher throughputs.

Okay, great. And then my other question was just given that M&A in the E&P space has been ongoing and could potentially continue going forward. What's your strategy if say, that you're working for one customer that merges with another that isn't using your system? Like, what's your strategy to try to gain more business that way or at least protect the business you have, if, let's say, one of the sides uses a containerized systems where another side uses silos kind of what's your strategy on potential M&A?

I wouldn't say it's anything special, and we approach every customer with a value proposition. And I'm trying to understand what they're trying to achieve and how we can align with that. One of the interesting things that has come up of late is on the ESG front.We've gotten two RFPs in the last week or so that have specifically asked vendors to describe what they're doing from an ESG standpoint. We recently launched our sustainability report on our website. That's something that we haven't done formally, but it's been done on an informal basis since sort of the beginning of the business. So I think it's just keeping up with customers and continue to articulate the value proposition.

Okay, great. I'm glad you touched on the ESG angle. Thank you, guys. Appreciate it.

And our next question today comes from Praveen Narra of Raymond James. Please go ahead.

Hey, good morning, guys. I guess on the silo pricing question, J.B. said it, we've talked about a lot, but I guess, I just had a question on what you're seeing from your competitors. Obviously, you guys are holding a line on pricing, and that's great. But how are your competitors approaching this soft year-end period? Are they offering strange discounts, giving away for free or doing anything odd given the lull in activity for the next couple of months?

Yes, it's hard for us to exactly answer what our competitors are doing. I mean, they've done things on and off for years. We focus on just what we can control and we can control, delivering a high-quality, reliable product at a fair price, and that's what we focus on.

Okay, perfect. And then I guess my next question just be on capital allocation decisions. When you guys talk about looking at acquisitions or kind of areas you want to pursue, are all of them oilfield related? Or is there any interest in kind of pursuing things outside of the oilfield?

We have focused on the oilfield. We have looked at a few other things, and especially where Kyle mentioned around the Kingfisher facility. There's some options in and around oil. It's a state-of-the-art rail facility in a nice location in Oklahoma, and great assets. So there's maybe other uses for that. But I think we are – our focus from an M&A if we find something that we think meets our attractive return desires will more than likely be in the oil and gas industry, there's a big – if there.

Yes. And I think what I would add to that is we've got a very lean structure here. To step outside of that, would probably bring a significant level of overhead that we don't currently have. So the most valuable thing for us to do is probably some sort of full and synergistic opportunity that touches the same customers that we're touching, touches the same locations, maybe at different points in the life cycle, maybe drilling, production side of things, not just completion. But I think we like to do things that are sort of in our fairway and keep us very lean and able to flex up and down with the cycles.

Right, that's great. Thanks very much guys.

Thanks.

Thanks.

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

Thanks, Rocco. I just want to close briefly with a thank you to all of our employees for the hard work in this time period, all of our customers for understanding the value proposition and all of our shareholders for hanging in there with us. I think the market is challenging.I think we continue to have a tremendous product line focus on its functionality and how it fits into the industry and continue to evolve it as well as the new product lines that we continue to develop. We're not completely reliant on the overall market, but we're clearly not immune to it. We have a culture that is highly focused on making sure that everything we do gets better every day, and we will continue that focus and that culture.Lastly, the cash flow generation capability of the business is strong and we continue to do that. We're evaluating options continuously about what's the best use of that cash. Right now, we've been very conservative, and we've held it on the balance sheet and think that there's value in that. We do see the continuation of the normal dividend, and we're evaluating other options to return money to shareholders over the course of the next several months.So thank you all, and have a nice day.

And thank you, sir. Today's conference has now concluded, and we thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.