Good day, and welcome to the Solaris First Quarter 2021 Earnings Teleconference and Webcast. Please note this event is being recorded. I would like to turn the conference over to Yvonne Fletcher, Senior Vice President of Finance and Investor Relations. Please go ahead.

Good morning and welcome to the Solaris first quarter 2021 earnings conference call. I'm joined today by our Chairman and CEO, Bill Zartler; and our President and CFO, Kyle Ramachandran. Before we begin, I would like to remind you of our standard cautionary remarks regarding the forward-looking nature of some of the statements that we will make today. Such forward-looking statements may include comments regarding future financial results and reflect a number of known and unknown risks.

Thank you, Yvonne, and thank you, everyone, for joining us today. I'm pleased to share another quarter of strong Solaris results with you today. During the first quarter of 2021, Solaris generated a 13% sequential increase in revenue to nearly $29 million, generated an adjusted EBITDA that increased 26% sequentially to over $6 million. We paid our 10th consecutive quarterly dividend. We ended the quarter with $55 million of cash and no debt on the balance sheet. The first quarter of 2021 showed continued economic and industry progress as oil demand continue to recover against a backdrop of disciplined U.S. and global supply. This improving outlook steadily drove oil prices back to the $60 a barrel range during the first quarter and prices have remained relatively stable in the $60 range so far in the second quarter. Natural gas prices have also remained steady in the $2.50 to $3 range. As a result, we saw continued increase in both completions and rig count activity that drove an increase in activity for Solaris as well. Our system count was up 24% sequentially in the first quarter, which reflected a stronger and quicker recovery than we anticipated. Many operators ramped up activity early in the quarter and have remained disciplined and steady. Looking into the second quarter, given the early surge we saw in activity during the first quarter, we expect a flattish activity level for Solaris in the second quarter. Our customers continue to focus on finding efficiency gains. We spoke about simul-fracs on last quarter's call and that continues to be a technique most operators with sizable programs are trying, because simul-fracs drive increased completion rates with delivery and management of raw materials on location required technologies that can meet the demand for logistics and footprint requirements to ensure that cost savings from the simul frac operations are actually realized.

Thanks, Bill. To recap some of the numbers, during the first quarter, we generated nearly $29 million of revenue, adjusted EBITDA of over $6 million and modestly positive free cash flow. We averaged 52 fully utilized systems deployed to customers, which represents a 24% sequential increase. Total revenue increased 13% sequentially, driven by an increase in activity as well as an increase in last-mile services, though profitability was modestly offset by the winter storms that impacted most of Texas-based operations in February. Absent the impact of the storm, our profitability on a per-system basis would have been closer to fourth quarter 2020 levels. Over the course of the quarter, we deployed a total 83 proppant systems, which worked to varying degrees of utilization in the first quarter. Our calculation of 52 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. Operating cash flow was approximately $2.8 million and was impacted by seasonal first quarter working capital cash requirements in addition to a buildup in accounts receivable as activity increased. Net of capital expenditures of approximately $2.6 million. Our free cash flow was slightly positive at $100,000. We returned a total of approximately $5 million to shareholders in the first quarter in dividends, which was flat with the prior quarter. Since initiating our dividend over 2 years ago, we have returned approximately $78 million in cash to shareholders in the form of dividends and share repurchases. We ended the first quarter with approximately $55 million in cash and $35 million available under our undrawn credit facility for a total of $90 million of liquidity. Turning to our outlook. Solaris systems deployed in the first quarter were up approximately 24% from fourth quarter of 2020 levels, as we began 2021 with a strong momentum and experienced a minimal impact on fully utilized systems from inclement weather in February. Due to the early activity gains we saw in the first quarter combined with continued public operators commitment to capital discipline, we anticipate our activity to be flattish in the second quarter from average first quarter levels.

Our first question will come from George O'Leary with Tudor, Pickering, Holt & Company.

On the simul-frac side, you guys said you're continuing to see larger customers pursue simul fracs and we continue to hear the same. I guess, it seems like water has been one of the main constraints there. Is that adding to the demand that you guys are seeing to convert those sand silos to water silos?

That's exactly what's happening. So the need for buffer with hydrostatic head right at the well site, there's a lot of localized pumping around between frac tanks and having the 3 -- a system with the 3-pack essentially for water makes that, provides us much more significant buffer at those high rates at they're pulling water off.

And then just one related question and then I'll have a follow-up. But what's the cost of a conversion to convert a sand silos to a water silo?

I don't think we're going to get into the details of the conversion costs at this point. But we really like the idea of converting assets that are already on our balance sheet. When we built 166 systems that were probably close to 400 factories running. So this allows us to redeploy those assets in a creative way.

And then just one more. As you look out to the second quarter, it seems like frac activity is off to a good start. I'm sure you ended last quarter at a much higher point than where you started it, so kind of 2 questions. And one how much do you think the silo count will be up in the second quarter? And then, just from a geographic perspective, it seems like additions have been more broad-based than just the Permian in recent months. So you've seen shots on goal across the board or is it more basin specific? Any color there would be great.

I'll address the first half and let Kyle into the second half. I think that we saw a ramp up a little earlier than we expected. And so, I don't know whether we've got momentum, kind of going out of the first quarter into the second quarter. But I don't think we're forecasting a massive leap and activity levels in the second quarter at this point. So I think that's why we were sort of indicating flattish for the quarter because we sort of thought we'd see a steady ramp through the quarter and really mid-January things ticked up pretty quickly.

The other comment I'd make is, obviously, when we look at the rig count has been a significant increase in a lot of the privates and that work -- it depends, private by private, but some of that work can be a little bit spottier with more white space in the calendar. So we've got to be careful when we just look at pure rig counts or pure quoted frac counts in different areas. I mean, the way we report our fully utilized systems, we're taking into account that potential white space in those sort of non-large public operators. And then, as you look at this sort of 80 plus systems we reported working in the quarter, that's really the effective number of required crews if you will to meet that demand.

Our next question will come from Jon Hunter with Cowen.

So on the last call, we discussed the potential for E&Ps to fall '22 spend activity into the second half of '21 if the commodity price remain constructive, which it has around the $60 level. So where we sit today, is there any indication that public E&Ps Maple '22 spend into the second half or do you see any potential activity increase in the second half really only driven by the privates?

No, I think that that theory still holds. I mean, I think we're seeing that it takes a little longer for the larger privates to get ramped up and I think we're seeing them getting ramped up in the sort of third, fourth quarter activity level. So and then obviously, once this -- once the ball gets rolling, it takes a while to get rolling, but it keeps rolling. And I think we're seeing that in their planning cycle for the fourth quarter probably activity mostly.

The only comment add to that is, if we look at M&A and the impact of consolidation and what that does, so what of our indirect customers has been a consolidator and they're looking at high-grading the pro forma portfolio. So they're not necessarily keeping all of the activity of the acquired companies. On a net basis that consolidator could show a reduction in activity if you look at A plus B. So that sort of a bit of headwind in that piece.

And then, my follow-up is on the margin. If I heard correctly, I think you said that margin would have been in line with the 1Q 20 level, absent the weather impact. So first, correct me if I'm wrong there. And then, secondly, that level would be around 1 million bucks of gross profit per system. So I'm curious if you see any upside to that level later this year or on a normalized basis going forward?

Yes, I'll kind of trying to address the first quarter. Obviously, we alluded to sold directly to the impact of the storms, which didn't necessarily impact our utilization but did impact a little bit on the profitability side. The first quarter always is going to have a bit of a step-up in costs as you resetting some of your annual cost set by the end of the year, you're no longer accruing. The other piece that I think would be addressed on the first -- the last call was we did have a bit of a lag in ramping up our high -- rehiring in the field in the fourth quarter relative to the activity pickup. So we did do that in the first quarter, so that had a little bit of a headwind. But yes, I think what we've provided so far this morning is guidance around expect in Q2 profitability to took more like Q4. And then, the other piece just when we look at on the net basis on a margin percentage basis, we've got to consider is last mile. And so, that will obviously drive the margin percentages up or down depending on the relative amount of activity there, but ultimately shouldn't impact negatively the contribution -- dollars of margin contribution.

Our next question will come from Ian MacPherson with Simmons.

First on the water system conversions. Is that something where your value sort of outside is really demonstrated when you're packaged together with your sand and water systems together. Do you need that combination to deliver value or can this be a discrete and separate service that that's sold separately to the customer from this enticements?

No, it can function completely independent. I think it does fit nicely when we have the new blending technology out there. But it's -- from a sand silo perspective, the water can be used into a traditional mixing system just like anything else. It actually did provides the same head benefits and the same simplicity and same buffer that it would either, with our sand equipment or somebody else's.

One small anecdote on that recently we got it from a customer, if they're using different water storage on location and it requires an individual to be at our own location 24 hours a day, running a manual pump depending on sort of the operations at the current time. So by using our system and by locating it right next to the blender, we're able to eliminate a full-time employee. So that's the value proposition whether somebody is using us on the sales side or not.

Now, it sounds like this is still fairly early. We're not seeing material accretion from it. In your second quarter guide, do you think that this is something an opportunity for EBITDA accretion on flat frac activity from Q2 into Q3?

We think we'll be deploying a few more of these throughout the quarter. We've got demand for more making conversions as we speak. So we do see that that beginning a ramp. I don't think it's going to be massively meaningful in the overall scheme of the EBITDA, but it's accretive.

And it's driving towards Solaris as the low pressure, the comprehensive low-pressure equipment supplier so that's water, sand, chemicals and the new blender.

And then last one from me, on the new blender, is the timeline there still development and trial throughout this year and then commercial next year? I mean, I thought that the comment you made about up to 80% personnel reduction sounds, obviously usually transformative. So I just want to get a sense of when that rollout is scheduled at this point?

We're scheduled to go on the first well site and we've done extensive testing at mines and in the facility. That could be on a well side here in the next couple of weeks and run that through the quarter. We have through all of our trials identified a few little tweaks that we're going to make. We have began to and looked at ordering some of the long lead items, if you think are consistent between Unit 1 and Unit 2. So I think it's still as a back half -- back half or fourth quarter of this year 2022 transformative event for us not really much this year.

Our next question will come from Stephen Gengaro with Stifel.

I had two things, I apologize if you addressed these earlier I joined a little bit late. But first, when you think about sort of the incremental profitability per fleet as we sort of model in activity changes going forward, on a gross profit basis, I think, sort of the target is probably close to annualized number of $900,000 to $1 million. Is that a reasonable way to think about it as we go forward here?

Yes, I think pricing has been consistent from a cost perspective. I think I'd described just few minutes back that we did have a lag in some pickup in costs from the fourth quarter, so we kind of cut up in the first quarter on that from a direct field technician standpoint. So I think those profitability targets remain.

Even I would add one more bit of color to that. I think because of seasonality, you may not necessarily see it in a quarter or 2. But you would see it on a full year basis, I think that's still the right target on a full year basis.

And then my second question just when you think about the competitive landscape on the -- sort of on the frac sand system side, I mean, if we go back a year and a half, people were talking a lot about competition and it seems to have died out. You guys seemed to kind of remained sort of the big leader on the silo side. Are you seeing any change in the competitive landscape? Are you seeing any, anything evolving recently over the last year and how do you think about just the competition as it pertains to your business on the sand side? And maybe if there is any commentary on price around that would be helpful.

I think price is consistent. I think one of the evolutions will be the payload capacity of trucking sand and the addition of using our non-pneumatic system or other ways of doing the silo. So I think we're seeing and some of this is driven by shortage of truck drivers and other issues that we're seeing continued maybe push for additional belly dump capabilities and really as a trend trying to increase payloads per truck up especially means when drivers are scarce. So we're seeing that continue. There's a little bit of wet sand here in their trials that are going on and we've worked on our R&D around some of that as well, so it's a competitive market. It always has been and our goal is to stay ahead of the competition, and with our R&D efforts in trying to maintain the net delivered cost to our customers over time, which means reliability is a key factor in that calculation that we deliver a product that helps our customers be more efficient.

Our next question will come from Samantha Hoh with Evercore ISI.

Question about this well right trials that you have lined up, is that for an integrated system combining your track sand, water silos with the hydrated delivery system? And if you could actually talk about how long the trial will run that would be helpful.

It is with the combo package if you will. We're targeting doing this on some smaller pads single wells, obviously it's a trial and trial sometimes don't go perfectly. So we don't want to be in a position, where we're risking much for our customer, but we have a lot of confidence in all of the testing we've done so far. But it will be a combo system and it's going to be a -- we're not going to do this on a massive pad simul frac operation for test one.

And the way we're looking at it is developing a queue of trials due with multiple operators and multiple base.

And is it just sort of like one system, one water system per, I mean, can you talk about maybe the pace of the conversion from the proppant fleet on the water system?

Yes and typically water system, we think of it as 3-silos. So when we convert a sand system, which is 6-silos that creates 2 water systems if you will. Now that being said, as the simul fracs is kind of continue to take share, we are seeing demand for a more water storage capacity on-site. So some of the work that we've got in the queue is contemplating 6 packs, where we actually put 5 water silos out and one either asset silo or one of our chemical compartments with our chemical silos with 2 separate compartments. And we're sort of referring those combo packs. And when we looked at the chem system in the early days, we were trying to optimize volumes with 3-silos and depending on the completion design and may make more sense for operators to want more storage and just a little bit of the Chem Storage. So we've been able to be flexible there and I think that's been helpful and proceed and received pretty well in the market. So those combo packs are an interesting way to put this together.

Quick question about the trends for transloading business. You highlighted providing transport for wind power installation in Oklahoma. I'm just kind of curious if this is sort of like early in the installation phase of the project because I think there's been some orders or some just like really massive projects out in that area, so curious if this is just sort of like a ramping up something that could be sort of a long project?

We hope you're correct. I mean, we believe that it's -- their customers there have said that they have a growing need for it. We've obviously got a significant rail capacity there and easy switches. And so we see it growing and it's not a large component of the business. But we do see using that facility that way is going to make the contribution.

Our next question will come from J.B. Lowe with Citi.

Just wanted to, so just clarify something. So you think activity will be up in 2Q, but some of the costs from 1Q should be rolling off. Does that mean that you think EBITDA 2Q will be up?

Yes. I will try to clarify. I think what we described activity was being flattish. I think we'll get a little bit of a pickup from not having this winter storm from a margin perspective. But now, I don't think we see any cost flowing off.

It is more of EBITDA also flattish?

I think that's probably right.

On the water system, is that kind of converting sand silos to water silos. Is that a way that you could potentially pick up some customers, I guess some new customers that potentially have been traditionally box users, if you'd offer them a silo system on the waterside, is that kind of a -- is that something that can open up I guess a new customer base that you haven't necessarily?

Yes, absolutely. Yes, the water silos were -- work in conjunction with any other system. So we're prioritizing the rollout of those with our sand silo customers. But because we're making them as quick as we're getting in the field. But certainly, they will function well and we have no problem expanding the market with them where they fit.

Kind of a follow-up to that. On kind of your market share on the sand systems, have you guys been, I mean, obviously, you track frac crews probably closer than anybody. Have you seen any significant shift in your market share of the sand system silos versus boxes have you guys versus some of your bigger competitors, has there been any major shifts kind of coming as the recovery has kind of picked up here, any significant shifts on that front?

I wouldn't say necessarily major shifts. I think consolidation both on the camper and operator side has had implications to market share for everyone. Some days you're benefiting from consolidation some days it's not helping.

I think as Kyle mentioned this earlier, but the way we run our full utilized crew count versus what was active in the quarter. It ends up being, when you have whitespace in activity becomes more dramatic than everyone steady. So if you look at the difference between the 50-ish and the 80, mid-80s, that would indicate that things there were some spottiness in the market today, that hopefully as we see the better, the major stepping back end things get a little bit more programmatic and little bit more stable, steady and you're -- you get a closer match between the fully utilized count and the actual systems used.

Last one, just on the wind project in Oklahoma. Is just using the old Kingfisher facility site?

Yes, that's correct. So using the rail facility and the land.

So is it more that are people actually bring in railcars in with suppliers for the project or is it just kind of using that land as a staging area or both?

Yes, it's more of the latter at this point.

Our next question will come from Chris Voie with Wells Fargo.

Just curious on the water silo systems. How it will get back turning to the count. Did the count is half of silo systems for next quarter, I think you said you've about 5 right now. So just curious how you're going to count them? And then, on the pricing side, is it kind of half the revenue of the sand silo? Just curious if you can help on that.

Yes. So if you look at frac tanks today, another couple of hundred bucks a day, they're very, very cheap, or maybe even cheaper than that. So the color count if you will, on the water side is going to be quite small relative to what we have in the sand system. So at this point, we're not really breaking it out, because of the small size of it and then from a go-forward system count, when we report systems, we're talking about sand systems. And at this point, the contribution from the water systems has not been significant enough to carve out from the revenue side.

But your assumption is correct. It is 3 silos for a water system that 6. So that is correct.

So in the near term, you just kind of be layered in a different bucket. And then, just curious to checking on chemicals, any traction there in terms of additional uptake tests, et cetera.

Yes. I think that again in the context of the blender that's driving demand, then, also in the context of these hybrid combo models of water and some mix of acid and chems. So the way we've kind of looked at that that is in Ala carte menu in sort of some of the parts from a pricing standpoint. So if you've got full chem systems, full chem system, you're using at x and if you're using 2/3 or 1/3 of the chem system and a little bit of a water, we come up with a hybrid rate.

On integrated last mile, is that growing or shrinking at this point?

I think every day, it's sort of in flux. I would call it in the quarter, it was probably flat quarter-over-quarter from a peer tonnage standpoint. But we may have run more jobs. So it just sort of, it depends on who you're working for how intense their jobs are. But I think from an inbound request standpoint, it continues to be very strong. And we continue to develop and enhanced our offering there. We've -- we haven't talked about it or we didn't talked about this morning. But we're continue to enhance our software offering around that. Historically, we have had a lot of the inventory piece and a lot of the supply chain and we're getting deeper into a full comprehensive solution there for a full last-mile software offering. So that sort of an edge and a differentiator that helps drive activity. And then, from a personnel standpoint, we've increased our internal capacity to handle that business as well.

Our next question will come from Sean Mitchell with Daniel Energy Partners.

Just a quick one from me. We -- as activities ramped in North America, we've heard some guys in the oilfield are facing some challenges with labor. I know Bill, you've mentioned truck drivers being somewhat tight. Is there any, are there any other issues you guys are seeing from the labor side or maybe can you continue on a little bit more on the dialog with the truck drivers in what you're seeing there?

I think labor is tight, tighter than people want to admit sometimes right now and we've done our best to recruit. We recruited, as Kyle mentioned in the fourth quarter of our system counts, sort of grew a little quicker than we had and we've been able to add and catch up in the first quarter not without its difficulties, that the labor rates are reasonable. At this point, we don't see massive inflation. Drivers have been attracted by lots of other industries and or not wanting to work. And so, the pneumatic drivers versus and non-pneumatic drivers were back. The cycle times can be shorter with the loads. And so, we've seen it, it get tight. It's -- I think we've seen that across every industry right now in the country.

Yes, I think kind of the tip of the hat to our team, both in field management standpoint, but certainly the guys in the front lines. Our average tenure in our field employees is over 3 years, that is significantly higher than any other oilfield services business I'm aware of at the sort of scale that we're at. So and I think that there is definitely some competitors out there that would say differently. But I think we especially look at sort of the trucking side of things, you're going to see much higher turnover. So we've been able to demonstrate a clear path for folks, widening skill sets. And also being around a business that's got continue, continuous new technology, new offerings, it's sort of an exciting place I think to work for people. And the other big piece on that is, obviously, everything we've done has been oriented around automation and where operation is required doing it remotely. So historically, you had an individual that would fit above the blender hopper and run the sand system. And today, a lot of those guys are running that system, using our auto hopper system and doing it through in the data band, taking somebody off the hard hat zone so to speak and they're sitting in a chair in a comfortable air conditioning environment. So those are some of the ways we're trying to help the industry address the inherent challenges around labor.

I would like to turn the conference back over to Bill Zartler for any closing remarks.

Thanks, Mac. I'd like to finish by thanking all of our employees and partners for your perseverance and adaptability. These results would not be possible without you. You help get Solaris off to a great start in 2021 and we are well positioned to continue helping our customers drive innovation and efficiencies on the well site. Thank you all and stay safe. Have a great day.

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