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Edited Transcript of SOI.N earnings conference call or presentation 28-Feb-19 1:30pm GMT

Q4 2018 Solaris Oilfield Infrastructure Inc Earnings Call

HOUSTON Apr 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Solaris Oilfield Infrastructure Inc earnings conference call or presentation Thursday, February 28, 2019 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Kyle S. Ramachandran

Solaris Oilfield Infrastructure, Inc. - CFO & President

* William A. Zartler

Solaris Oilfield Infrastructure, Inc. - Founder, CEO & Chairman

* Yvonne L. Fletcher

Solaris Oilfield Infrastructure, Inc. - SVP of Finance & IR

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Conference Call Participants

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* David Christopher Smith

Heikkinen Energy Advisors, LLC - Partner & Senior Oil Service Analyst

* George Michael O'Leary

Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - MD of Oil Service Research

* Jason Andrew Wangler

Imperial Capital, LLC, Research Division - MD & Senior Research Analyst

* John H. Watson

Simmons & Company International, Research Division - VP & Senior Research Analyst of Oil Service

* Jonathan James Hunter

Cowen and Company, LLC, Research Division - VP & Analyst

* Judson Edwin Bailey

Wells Fargo Securities, LLC, Research Division - MD and Senior Equity Research Analyst

* Kay Hoh

Evercore ISI Institutional Equities, Research Division - Research Analyst

* Martin Whittier Malloy

Johnson Rice & Company, L.L.C., Research Division - Director of Research

* Michael William Urban

Seaport Global Securities LLC, Research Division - MD & Senior Analyst

* Praveen Narra

Raymond James & Associates, Inc., Research Division - Analyst

* Scott Andrew Schneeberger

Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst

* Stephen David Gengaro

Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst

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Presentation

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Operator [1]

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Good morning, and welcome to the Solaris Fourth Quarter and Full Year 2018 Earnings Conference Call. (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.

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Yvonne L. Fletcher, Solaris Oilfield Infrastructure, Inc. - SVP of Finance & IR [2]

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Good morning, and welcome to the Solaris Fourth Quarter and Full Year 2018 Earnings Conference Call. I'm joined today by our Chairman and CEO, Bill Zartler; our President and CFO, Kyle Ramachandran; and our Chief Operating Officer, Kelly Price.

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.

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William A. Zartler, Solaris Oilfield Infrastructure, Inc. - Founder, CEO & Chairman [3]

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Thank you, Yvonne, and welcome, everyone. 2018 was a transformative year for Solaris across a number of fronts. First, we significantly expanded our Mobile Proppant Management System offering. We began 2018, with only 77 Mobile Proppant Management Systems in the fleet, which represented a market presence about on par with our next largest competitor. During the year, we outgrew the competition and demonstrated to customers that Solaris Solutions can reliably increase completion efficiency and enhance wellsite safety. As a result, we ended the year with a leading share of around 1/3 of the total market and 160 Mobile Proppant Management Systems in the fleet. Second, we diversified our product offering. In 2018, we completed the construction of our facility in Kingfisher Oklahoma and commenced transloading activity. In addition, we designed and manufactured and introduced our new silo-based patent-pending mobile chemical management system to the market.

Our mobile chemical system is a new product line for both Solaris and the industry and represents additional growth potential for the company as we look to 2019. Finally, in 2018, we introduced our last mile proppant management service offering, which we expect to grow in 2019. While many of our customers prefer to run our systems simply for the benefits of the wellsite in their own supply chain, a segment of the market is looking for a fully delivered solution that we expect to continue to service in 2019. The transformational business that we drove in 2018 is also evident in our financial results. Solaris' adjusted EBITDA was $123 million for 2018, an increase of over 200% versus the previous year and our fourth quarter adjusted EBITDA of $34.9 million was up over 100% year-over-year.

During the fourth quarter, a combination of seasonal upstream budget spending declines and a reaction to commodity price volatility resulted in industry activity decline, estimated to be over 10% versus the prior quarter. This market volatility manifested in our fourth quarter revenue days declining to 6% from third quarter and adjusted EBITDA decline of about 4%. During 2018, we also made several investments in new technology that we believe continue to enhance our offerings and keep us well ahead of the competition. It will set the company up for continued growth in the coming years. These investments not only include our new chemical management system but also included several step-change improvements to our fleet and Mobile Proppant Systems that we believe not only furthers our differentiation but will help drive continued wellsite efficiency gains and improved safety for our customers. These improvements will be made across our rental fleet so that every customer that rents equipment from us will benefit.

The first improvement we made was to automate how our system operates. With our new auto hopper technology, we have integrated our systems controls with the frac operators, blenders and control system to eliminate the need for the person that historically operated our system, by automating our system and eliminating the need for manual oversight, we are now able to enclose the transition point for our system delivered sand in the frac company's hopper and eliminate an additional person on the wellsite. We have deployed our auto hopper technology across approximately 25% of our fleet today and we expect to retrofit all of our systems with auto hopper over the next 12 months.

Additionally, we have begun to roll out our latest software offering Solaris Lens. Solaris Lens replaces our historical PropView offering and provides insight beyond just proppant at the wellsite. We've integrated Solaris Lens with Railtronix and several third-party trucking applications to now deliver a complete inventory tracking from mine to wellhead, a true vendor to blender supply chain management tool. Solaris Lens will also track chemical inventory levels and other metrics related to our chemical systems. This will provide real-time visibility that is not currently available in most traditional chemical handling equipment. With these automation and inventory monitoring upgrades, we were able to increase the value our customers receive with relatively flat pricing for 2019.

We also continue to work on our improving performance and reliability of our systems so that we can continue setting the bar for the highest reliability in the industry. During the fourth quarter, our Solaris caused non-productive time on the wellsite was 61 hours out of over 100,000, resulting in a downtime percentage of 0.6% of total operating hours. Our consistent reliability and uptime is key driver to our continued success. We were able to achieve this uptime performance due to our reliable system design combined with extensive field service training and our footprint and culture of continuous improvement.

Our most exciting new development in the fourth quarter was a delivery of our new mobile chemical management systems product line. For several years customers have asked us to apply our engineering and manufacturing know-how to develop better way to handle frac chemicals for today's hydraulic fracturing operations. During 2018, we finalize the design of our chemical system and in the fourth quarter, we built our first 3 systems. I'm pleased to report that is working great in the field. As planned, we have used initial customer field trials to make tweaks to our system design and based on the early success of our first chemical system, combined with the level of customer interest we are receiving, we're building 7 additional systems in the first quarter, which will bring our chemical fleet to 10 systems by the end of March. While we expect most of these systems to go out to customers on a trial basis initially, we are now generating revenue from our initial launch at full revenue rate.

In our Mobile Proppant Management business, we continue to see the same opportunities we laid-up during the last quarterly call. The broader pervasive industry trends of switching to regional and local sand use manufacturing type completion developments continue to support demand for our solutions and there are numerous company-specific growth opportunities for Solaris that include both growing share with existing customers and winning new customers, some of whom have never tried a Solaris system. Due to the recent commodity price volatility and delay in operator setting budget, Q1 is off to a slow start and there is some uncertainty around the ultimate size and trajectory of the completions market in 2019.

Initial 2019 upstream budgets are pointing towards approximately 10% less spending than the industry saw in 2018. However, we expect completions activity to hold up better than overall budgets would imply due to the cost savings and efficiency gains within operator development plans. While we continue to see opportunities to place new proppant systems both with existing and new customers and also grow our new product lines, we will limit our capital spend on new proppant systems until we have a better visibility on earnings for consistent return on incremental capital. Because we own our manufacturing, we can respond to the market fairly quickly and begin to build again when that visibility returns. As a result, our range of capital spend this year will be flexible, depending on market conditions.

The combination of entering the year with significant market foothold, several new product introductions and outlook for the reduced capital spending sets 2019 up for another transformative year when Solaris becomes a meaningful, free cash flow generative company. Due to our confidence in this free cash generation, we initiated a regular quarterly dividend of $0.10 per share in December of 2018. This dividend does not mean the growth opportunities over for Solaris with the new products to commercialize in 2019 and other new products in the works will continue to invest growth capital in our businesses, where we believe we can earn a high return on that capital. However, given our business has reached a critical enough mass, we're confident that we can both continue to grow the business and return capital to shareholders.

With that, I'll now turn over the call to Kyle.

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Kyle S. Ramachandran, Solaris Oilfield Infrastructure, Inc. - CFO & President [4]

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Thank you, Bill, and welcome, everyone. As highlighted by Bill's remarks, 2018 was an exciting year for Solaris. We generated significant growth in our financial results, highlighted by 40,526 revenue days, $197 million of revenue and adjusted EBITDA of $123 million. Revenue days and revenue were all up over 100% and adjusted EBITDA was up 209% compared to the prior year. During the fourth quarter, our financial results were impacted by the well-documented slowdown in industry activity with a 1/3 market share in wellsite proppant handling, we are not immune to changes in the overall market activity. However, we outperformed the market in the fourth quarter, generating 11,115 revenue days, $57 million of revenue and adjusted EBITDA of approximately $35 million. Revenue days decreased 6% sequentially against the backdrop of a completions market that we estimate was down over 10%. Revenue was up slightly due to a full quarter contribution of operations at our Kingfisher Transload Facility.

Adjusted EBITDA declined 4% sequentially due to lower revenue from fewer revenue days and higher service costs, as we maintained our service technician staffing levels to cross-train on our new chemical systems. 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 declined 4% to approximately $38 million compared to $40 million in the third quarter primarily due to lower revenues and operating activity combined with slightly higher service cost.

Selling, general and administrative costs and salaries, benefits and payroll taxes increased 6% sequentially to $4.1 million. Going forward, we expect total SG&A in personnel costs to run rate closer to $5 million per quarter. Net income for the quarter was $24.7 million, a decrease of approximately 6% versus the third quarter. Net income for the full year was $86 million, an increase of 280% versus the prior year. Adjusted pro forma net income for the fourth quarter was $21.6 million or $0.45 per share versus $24 million or $0.51 per share in the third quarter. Adjusted pro forma net income for the full year was $79.6 million or $1.69 per share versus $21.1 million or $0.48 per share in 2017.

Our presentation of adjusted pro forma net income, adjust for certain items that we believe were nonrecurring and also assumes the full exchange of all outstanding LLC units and Class B shares not held by Solaris Inc. for Class A shares. By assuming the full exchange of all outstanding Class B shares in Solaris LLC units, we've presented net income and earnings per share, that is more comparative with other companies that have different organizational and tax structures.

Total capital expenditures for the quarter were approximately $36 million, which was down from third quarter as expected due to the slowing manufacturing rate of our new proppant systems. During the fourth quarter, we added 14 proppant systems and 3 chemical systems to our fleet. For the full year, we deployed approximately $160 million into the business, adding 83 proppant systems and 3 chemical systems to our fleet, in addition to completing construction of our Kingfisher transloading facility in Oklahoma.

I'll now turn to our outlook on capital spending for 2019. We ended the year with 160 proppant and 3 chemical systems in the fleet in line with prior guidance. Due to the slow start in completions activity in Q1 and the uncertainty around operator spending pace for 2019, we've elected to pause building additional proppant systems, not currently in our queue until there is better clarity in demand. We have significantly reduced our prior outsourcing efforts and are reallocating our internal manufacturing resources to building out our chemical system fleet.

In general, it takes us about a quarter to start or stop building. So there are few [sensors] in progress that will be completed in the next couple of quarters. Given our early success with our initial chemical systems, we have decided to build 7 more in Q1. We expect to end the first quarter with 163 sand systems and 10 chemical systems. As Bill also mentioned, we expect most of these chemical systems to go to customers initially as field trials, but our first chemical unit has transitioned into a full revenue rate, which adds to our confidence in the commercial opportunity of its new product line. We expect to use operating cash flow to fund our capital needs in 2019. We currently forecast 2019 capital spending in the range of $40 million to $60 million. This is down considerably from the approximately $160 million we spent in 2018 and approximately $100 million we deployed in 2017, as we built out our fleet of Mobile Proppant Management Systems, as well as our Kingfisher facility.

If 2019 turns out to be a slower completions activity year, then bottom of the range would represent not building any additional proppant systems beyond the current queue, a smaller number of chemical and non-pneumatic systems, continued rollout of our auto hopper technology and other corporate capital expenditures. The upper end of the range would represent a stronger market and an increase in the number of proppant, chemical and non-pneumatic kits builds. Because we control our own manufacturing, our ability to flex up or down to react to market demand can happen relatively quickly, so we think this range is an appropriate way to think about 2019 CapEx given the current market uncertainties. We ended 2018 with approximately $82 million of liquidity, which consisted of $25 million of cash and $57 million of borrowings under our credit facility. Subsequent to year-end, we repaid the $13 million that was drawn under the facility at year-end and today we have nothing drawn on our credit facility.

Turning to our outlook for Q1. As Bill mentioned, Q1 got off to a slow start as many other service companies have already discussed. We have seen a pickup in activity from January levels and expect another pickup in activity in March, which on a net basis, we forecast will result in roughly 5% decline in the average number of proppant systems rented for Q1 relative to Q4. One modeling note I'd like to make relates to our amended contract at Kingfisher. As part of the amendment, we received approximately $26 million of cash in December, the appropriate accounting treatment dictates that we recognize that $26 million payment as deferred revenue, which will be recognized over the remaining life of the contract.

In other words, you should expect approximately $3 million of deferred revenue to be recognized each quarter, starting with the first quarter of 2019 through the fourth quarter of 2020. I'd like to wrap up my remarks by talking about cash flow. With adjusted EBITDA in the fourth quarter of approximately $35 million and CapEx of approximately $36 million, we were another step closer to breakeven free cash flow before changes in working capital. We believe the inflection in positive free cash flow will occur in the first quarter and we expect the meaningful free cash flow generation in 2019. In December 2018, we initiated a regular quarterly dividend of $0.10 per share, which combined with our CapEx plans, we expect will be the primary uses of cash in 2019, given that we have no debt on the balance sheet. We remain committed to deploying any excess cash where we think we can generate the highest rates of return for our shareholders.

With that, we'd be happy to take your questions.

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Questions and Answers

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Operator [1]

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We will now begin the question-and-answer session. (Operator Instructions) The first question will come from Martin Malloy with Johnson Rice.

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Martin Whittier Malloy, Johnson Rice & Company, L.L.C., Research Division - Director of Research [2]

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I was wondering if you like help us with the implied free cash flow range for '19, if we just take the midpoint of your CapEx, can you give us some idea of just how much free cash flow you might be generating?

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Kyle S. Ramachandran, Solaris Oilfield Infrastructure, Inc. - CFO & President [3]

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I think at this point, we've given the guidance on capital. We've given guidance around what the end of the quarter looks like from a system deployment. We haven't gone as far as describing EBITDA or cash flow from operations if you will -- if we look back at last year, it’s a good indicator of the baseline. I think we've got the added wedge of chemicals coming in, but we also if you look at the fourth quarter versus the first quarter, and we increased our fleet pretty significantly. So we think about fourth quarter moving forward. We've got opportunities to deploy more systems, which will obviously generate additional operating cash flow. But at this point from a free cash flow range for the year, we're not going to get too prescriptive there, but I think what’s critical is we are coming out and being very clear of around capital spending this year will be down significantly from where it has been the last 2 years.

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Martin Whittier Malloy, Johnson Rice & Company, L.L.C., Research Division - Director of Research [4]

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Okay. And then recently one of your competitors, who is kind of proppant storage offering came out on their call and talked about gaining market share. It doesn't appear that, that you are losing market share, but maybe if you could spend a moment talking about some of the competitive dynamics out there on the proppant side?

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William A. Zartler, Solaris Oilfield Infrastructure, Inc. - Founder, CEO & Chairman [5]

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Yes. Thanks, Martin. There is -- it's been a competitive market for years and we continue to see competitors and our customers and various other customers, operators trying different systems, and we believe we have a solution that continues to win, hold market share and even grow market share. So there's a lot of infighting among the other competitors and lots of litigation going on and we're staying out of the fray and trying to build a system that is highly reliable and gives our customers what they want.

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Operator [6]

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The next question will come from Jud Bailey of Wells Fargo.

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Judson Edwin Bailey, Wells Fargo Securities, LLC, Research Division - MD and Senior Equity Research Analyst [7]

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I wonder if I could get your thoughts on what you're seeing from a pricing perspective. Obviously, with more competitors, I'd be curious if you could share your thoughts on how kind of rental rates have kind of played out as you renegotiated pricing for 2019?

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Kyle S. Ramachandran, Solaris Oilfield Infrastructure, Inc. - CFO & President [8]

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Sure. I think we've -- really Q4 were effectively flat quarter-over-quarter, which is how we indicated, we expected it could have come out. When we look at 2019, you may comment around more competitors -- I'm not sure there's more -- there's more capital maybe being deployed by other competitors, but those competitors have been out there for a while. Their relative merits of different offerings are pretty well understood. When we looked at 2019 pricing, we actually looked at what can we do in 2019 to improve our offering to our customers and there's several things we've done. The most notable being the auto hopper system we are rolling out across our fleet.

This is going to eliminate multiple people from the wellsite for our customers. So that's real value that we can ascribe to our customers. while keeping pricing flat. So I think Bill mentioned in his prepared remarks, when we look at 2019 pricing in the negotiations we've had with our customers, for the most part, pricing is flat, but value proposition is going up. So it's all hopper and then also the Solaris Lens point we made in the call as well, that's -- there is more of that than I think we touched on, but this is now encapsulating mine to wellhead supply chain visibility, which really hasn't been done yet. There's been different components that one could piecemeal together, but we now have put it in a manner that our customers can look at 1 app on their mobile devices to see that full visibility and that all comes with a rental rates, which are flat year-over-year.

So long way of saying, pricing is flat for us, not sure how the competitors are out there. We do see them trying to compete our pricing, but when our customers do the full math, it's not about necessarily the headline rate of our equipment, it's about the total delivered cost of sand into their blender, and the total cost of their completion. So if they're down for NPT or any other challenges that other equipment may have, that actually nets out to a much higher all-in cost.

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Judson Edwin Bailey, Wells Fargo Securities, LLC, Research Division - MD and Senior Equity Research Analyst [9]

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Okay, I appreciate the color, that answer, Kyle. Could you maybe talk a bit more about the chemical silos and you will have 10 by the end of the first quarter. Are all of those accounted for by customers or are you building on for more trials? Or how much revenue do you expect to pick up from the incremental sand or -- excuse me chemical silos this quarter?

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Kyle S. Ramachandran, Solaris Oilfield Infrastructure, Inc. - CFO & President [10]

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Yes, this is uncharted territory for the industry. It's certainly uncharted territory for us, but the feedback so far has been incredibly robust. We are completely changing the way people are managing chemicals on site. Historically, you've got walkie talkies and you've got dozens of folks running around, opening up different valves and different tanks, depending on what people are seeing downhole. When we look at what we've been able to do today, we now have somebody in the data band precisely dosing how much friction reducer, how much acid, how much biocide is going downhole. So we completely transformed that concept and so it's not going to be overnight that people are going to jump into this, this is an industry that has a certain pace of adopting innovation. But the feedback from a very large group of folks today has been very compelling, that has allowed us to get comfortable with building out 7 additional systems. So are they exactly spoken for in a precise manner, not necessarily, but the queue is longer than the 7 that we're building, I guess is one way to frame it.

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Operator [11]

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

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John H. Watson, Simmons & Company International, Research Division - VP & Senior Research Analyst of Oil Service [12]

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Kyle, I think I heard you right on the guidance for number of proppant systems deployed down 5 on average quarter-over-quarter, but it sounds like completions activity is expected to improve throughout the quarter. Should we think about your March number systems deployed being higher than January? Just trying to get a full picture for what that number looks like for the quarter?

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Kyle S. Ramachandran, Solaris Oilfield Infrastructure, Inc. - CFO & President [13]

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Yes, that's right. I think the way we described it was, February is ahead of January and March looks to be ahead of February. So we're starting that to build momentum back up into the queue. As we saw into the end of the fourth quarter, we didn't necessarily have quite as big of a drop off as others. We had folks keep systems online, expecting to add frac crews. Not all of those frac crews have been added and so our customers have reacted in that manner.

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John H. Watson, Simmons & Company International, Research Division - VP & Senior Research Analyst of Oil Service [14]

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Okay, perfect. And then Bill mentioned the fully delivered system. Can you speak to how many of those might be deployed in the first quarter? What percentage of your systems might be fully delivered offering? And then is there any change in profitability that we should be thinking about for this systems versus your legacy offering within proppant?

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William A. Zartler, Solaris Oilfield Infrastructure, Inc. - Founder, CEO & Chairman [15]

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I think it's still from the relative percentage of our fleet pretty nascent, it's a small percentage, but we think it's a growing percentage. When we look at the RFQ -- RFQs that we're analyzing or the different proposals we're putting together. We're seeing more of those as the overall percentage of new business opportunity. And then when we look at the margin profile, you're spot on, it's likely going to increase our contribution margin from a nominal perspective, but on a margin percentage basis, we would expect to see margins come down and the reason for that is by last mile, we're talking about procuring trucking and then passing that on to our customers in a structured manner, in a way where our revenues will be a lot higher, but our costs will be a lot higher. But on a net basis, we expect to see more dollars of contribution margin than we would otherwise for providing that incremental service. And I think importantly, one of the ways we can -- couple of ways we can differentiate on that, Solaris Lens allows us to really drive down those trucking costs and drive efficiencies by being able to manage the volatility inherent in moving 400 to 500 truckloads per well. And then secondly, we do believe our system provides the most flexibility in unloading trucks and moving them off the wellsite quickly by having multiple unloading points that can be done in parallel.

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John H. Watson, Simmons & Company International, Research Division - VP & Senior Research Analyst of Oil Service [16]

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Right. Okay, makes sense. And then lastly for the 10 chemical systems, I know you don't have an exact breakdown as who the customers are, but can you speak broadly about renting to E&Ps versus pressure pumpers versus chemical companies?

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Kyle S. Ramachandran, Solaris Oilfield Infrastructure, Inc. - CFO & President [17]

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I think in the tenant, it will be all 3 and to your point in terms of exact numbers around who is going to be the bigger component, what I'll say is the operators really are excited about it, but a lot of them need some explanations and help around how this is actually going to work. So the integration with chemical companies is going to be paramount for us to continue to build this out.

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Operator [18]

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The next question will be from George O'Leary of Tudor, Pickering, Holt, & Company.

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George Michael O'Leary, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - MD of Oil Service Research [19]

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The auto hopper, what is interesting, remember back around that [DIPO], you guys had talked about bringing that service person ratio down from one to one person to system and maybe making that 2 systems for 1 service person. Did the auto hopper help bridge that gap and get you guys there or could you adjust that ratio even further?

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Kyle S. Ramachandran, Solaris Oilfield Infrastructure, Inc. - CFO & President [20]

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Auto hopper helps a little bit, but if you recall, we -- our personnel aren't the ones actually operating it on the wellsite, our customers that operator it or our customers’ frac operator runs it. So what we've done is given another additional value proposition to our customers by eliminating the person that was running the sand system, you can now combine that with the one running the blender. So with the control system for the silos integrated to the blender controls, you've eliminated the need for an independent sand -- sand handling individual on the wellsite. So that's really a value proposition more for our customers on the like.

We clearly see and have kept personnel little higher than we might have anticipated relative to meeting 1 person for every 2 systems. We've sort of kept at one to one, a little higher in the fourth quarter as we recognized the need to really get additional people trained on the chemical silo. It's a little more complicated than the sand side. You got 5 different containers of it, you've got pumps that you're running. You've got -- it's a little more complex and so we've spent a little bit of operating expense to make sure that we've got the individuals, trained at the high level of service that we want to provide to the customers with all of the troubleshooting and all the needs that we have for that system.

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George Michael O'Leary, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - MD of Oil Service Research [21]

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All right, that's super helpful. And then, as you guys have taken more of the manufacturing in-house, can you speak maybe just in percentage terms, the ability to lower the cost of your system? What -- how much less do it cost to you to build a system today, than it did -- than it cost 18 months ago?

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William A. Zartler, Solaris Oilfield Infrastructure, Inc. - Founder, CEO & Chairman [22]

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The learning curve is real. I mean, we've made 160 sets of 6 silos. So that -- we've made a lot of kit over the last 2 years. And so I think when we started, we're probably 30% to 40% lower, than when we started. Steel prices have been up, but that's a minor component as we've grown it. The outsourcing pieces we acknowledged was more expensive to have other people sub assemble for us, that is now out of the system as we slowed down the manufacturing pace and brought pretty much everything back in-house today from manufacturing perspective. So that the cost of the chemical system will be approximately half of that of a sand system at -- and our cost as opposed to with third-party components built into it.

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George Michael O'Leary, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - MD of Oil Service Research [23]

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If I can sneak one more if I could just to make sure I understood right. Kyle, I think you said 5 less systems active in Q1 or system equivalent, I'm just curious just from our revenue days perspective, what do you think that maybe translates to quarter-over-quarter?

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Kyle S. Ramachandran, Solaris Oilfield Infrastructure, Inc. - CFO & President [24]

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One of the challenges we're seeing in our reporting of revenue days is we create our own volatility by there being just different amount of actual days quarter-over-quarter. So we're trying to migrate more towards sort of the concept of 6 pack equivalent, because the other challenge we have is with the chem sales coming in, we can talk about revenue days for chem silo and sand system together, but the challenges, of course, the revenue for each of those revenue days is different. So I think as we look forward, George we'll probably going to be migrating towards talking about 6 pack equivalents. So I think the 5% was sort of in the notional around the number of 6 packs deployed.

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Operator [25]

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The next question will be from David Smith of Heikkinen Energy Advisors.

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David Christopher Smith, Heikkinen Energy Advisors, LLC - Partner & Senior Oil Service Analyst [26]

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I think your first chemical system went to the field -- was that in December?

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Kyle S. Ramachandran, Solaris Oilfield Infrastructure, Inc. - CFO & President [27]

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Correct. Yes.

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David Christopher Smith, Heikkinen Energy Advisors, LLC - Partner & Senior Oil Service Analyst [28]

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And now you're looking to have 10 systems at the end of March. Wanted to ask if you think Q1 represents a reasonable cadence for the rest of the year or if it's too early to say? (inaudible)

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William A. Zartler, Solaris Oilfield Infrastructure, Inc. - Founder, CEO & Chairman [29]

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Go ahead, Dave.

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Kyle S. Ramachandran, Solaris Oilfield Infrastructure, Inc. - CFO & President [30]

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Go ahead.

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David Christopher Smith, Heikkinen Energy Advisors, LLC - Partner & Senior Oil Service Analyst [31]

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Maybe sort of asked more specifically, if you can talk about the -- how many chem systems might be contemplated in the low versus high range of CapEx guidance?

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William A. Zartler, Solaris Oilfield Infrastructure, Inc. - Founder, CEO & Chairman [32]

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The -- let me start with, we haven't determined how many we're going to make, really watching the market really closely and have that flexibility built in. As we've said before, chemical system capital cost averages just under $1 million or so, $850,000 - $900,000 and so we can increment at those levels based on demand. And so I think, we've got infinite flexibility, the low end of the range as Kyle mentioned is effectively shutting down manufacturing of the proppant systems and maintaining the 163 systems that we'll have in the first quarter and maintaining that level until we see the need to make more and so that's sort of ends up in the lower end of the band. The higher end clearly, if the chemical systems, the adoption goes like it could, we will be turning up our internal manufacturing on that -- for that incremental call it to the $20 million number that the range has in it.

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David Christopher Smith, Heikkinen Energy Advisors, LLC - Partner & Senior Oil Service Analyst [33]

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Okay. Appreciate the color. And just wanted to double check something. With regards to the Q1 guidance of, let's call it 6 pack equivalent revenue days. I thought I heard down 5% in Q1, but I've also been hearing down 5 systems. I just wanted to double check and make sure I got that right?

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Kyle S. Ramachandran, Solaris Oilfield Infrastructure, Inc. - CFO & President [34]

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Yes. That's right, it's 5%. I mean just said, kind of provide some context here. The number of systems utilizing a period is the most conservative way we are going to look at this. When we look at different companies in the space, the utilization is very loosely defined term. We've used the most conservative method, which is the actual number of days, systems are generating revenue. But when we look back at Q4, the implied utilized systems is about 121. At varying points, we had as many as 140 working. And so I think, in order to service 121, we're going to need more than the 121 in the fleet. So I think as the business continues to evolve, that's just going to be a function of not being a 100% utilization as we get more and more of the market.

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Operator [35]

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The next question will come from Stephen Gengaro of Stifel.

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Stephen David Gengaro, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst [36]

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So 2 questions, if you don't mind. The first is, have you seen any change in the dynamics around 12 packs with the obvious enormous rise in basin sand? What's that dynamic been like over the last quarter or 2?

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William A. Zartler, Solaris Oilfield Infrastructure, Inc. - Founder, CEO & Chairman [37]

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It's still very fluid. We've seen cases where we've had 4 or 5 or 6, and 6 at one time,12 packs and we've seen times when we've had 2 or 3. It really ends up being fluid. I think that the notional move to in basin sand and the volatility of trucking across the basin, especially if you look at the Western Delaware Basin from the local sand mines on the eastern side of Delaware Basin, that's a pretty long haul with a lot of volatility there.

So we've seen those markets are gear toward 12 packing. I think it's a much better solution than trying to do intermediate storage at locations, if you've got enough wellsites -- enough wellsites you can keep sand flowing out of the mines as regular as possible into the wellsite. So it's still a fluid, I don't -- we haven't seen a massive switch toward 12 packs because our system is so efficient with 6, that we can unload near 24 trucks at a time and hold of that inventory to keep most frac supplied on a regular basis. But we, we still see some and we still see a few that really do like the additional storage capacity on the wellsite.

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Kyle S. Ramachandran, Solaris Oilfield Infrastructure, Inc. - CFO & President [38]

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I think the other -- the point there maybe on the trucking side and -- the local mines -- problems it has created is just the challenges around moving for longer distances in a truck. So with the transloads, you can typically get them closer to your wellsite, the mines to those point tend to be a longer pole. And so for every pound of sand, you don't carry it in a solution that doesn't have as higher payload. You do create challenges at the wellsite. So because our systems are able to use industry standard pneumatics as well as belly dump trucks, we're able to move more sand per truckload than maybe some of the container solutions. And so I think as far as the impacts of the local sand, that is one of the challenges that we see in some of the other solutions.

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Stephen David Gengaro, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst [39]

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Great. And then just as a second question, when you talk to customers now and obviously I know you've -- there's been competitive offerings out there in general, but as you, have you lost to your knowledge any meaningful been replaced on site by any other vertical solutions or is this really just a near-term activity issue that's causing the lower utilization? Can you speak to those dynamics a bit?

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Kyle S. Ramachandran, Solaris Oilfield Infrastructure, Inc. - CFO & President [40]

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Well, I think the reality is, we have very smart customers and they get called on by lots of different customers -- other competing solutions that are offering different rates, different economic propositions, whether it be fully delivered solution versus a rental model and so our customers are savvy and they're going to try everything. Our largest customer typically will go through a process every year where they give everyone also a fair shot at winning work and it's our job to continue to innovate and drive additional value as referred to earlier to our customers to ensure that they are happy. That's our job.

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William A. Zartler, Solaris Oilfield Infrastructure, Inc. - Founder, CEO & Chairman [41]

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Yes, and I think, there is a lots of movement around. I think we don't see we've lost any meaningful. There's places where we can say we may have lost a customer here temporarily and there are spaces where we know we want a customer who is temporary. I think we continue to believe that we can keep and grow our market share with the offering and with the evolution of our equipment.

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Kyle S. Ramachandran, Solaris Oilfield Infrastructure, Inc. - CFO & President [42]

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And as we see the intensity on wells go up, multifaceted to more wells per pad, longer laterals, more pounds per foot. We do see customers, operators coming to us, who have gone with other solutions and they're coming to us and saying, we're running out of sand on location, we just can't keep up with the other solutions.

The beauty of 2.5 million pounds available at the blender, just completely remove the challenge associated with delivering sand to the blender. It's already there. It's controlled today by the speed of the blender consuming sand. It's no longer even controlled by us delivering sand into the blender, the blender is really pulling sand directly into its hopper.

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Operator [43]

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So the next question is from Jon Hunter with Cowen.

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Jonathan James Hunter, Cowen and Company, LLC, Research Division - VP & Analyst [44]

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So I wanted to ask on gross margin dollars as we head from 4Q to 1Q. You mentioned some of the costs that were elevated in the fourth quarter. I'm wondering if those costs go away in the first quarter so that we could see gross profit up slightly in the first quarter and that's obviously with the understanding that activity will be down 5%.

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Kyle S. Ramachandran, Solaris Oilfield Infrastructure, Inc. - CFO & President [45]

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I'll kind of break that down in a couple ways. Our most important cost in our cost structure on a direct basis is personnel. We've talked about the importance of our people on the site. We've got 150 plus field technicians scattered throughout the country and there our front-line, then the phase to our customers at the wellsite and so those guys are really important to the success of this business. And so that's the biggest piece of it.

In the fourth quarter, we really did not move that headcount around despite a drop off in activity. We don't expect to do the same in the first quarter. We've got visibility into activity growing. We've got a new product being launched that requires training, as well as growth in that new product. The other piece that I'll touch on is, we talked a little bit about last mile. We did have a last mile, that's pretty material in the first -- in the fourth quarter and that created more dollars of costs, but there's also more dollars of revenue associated with that.

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Jonathan James Hunter, Cowen and Company, LLC, Research Division - VP & Analyst [46]

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Got it, okay. And then one on the chemical offering. Just thinking about the margin that you can earn on those systems over time. I think in the past, we've talked about the margin being about half of what your legacy proppant system could earn. So as you've converted some of these initial customers to full revenue, is that kind of the same range of margin you're expecting going forward or is that changed at all?

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Kyle S. Ramachandran, Solaris Oilfield Infrastructure, Inc. - CFO & President [47]

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I don't think there is any update there. The early days of this will require some more personnel on site from our perspective so that likely drives some lower relative margins. But over the long run, no, I think we expect it to be very comparable.

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Jonathan James Hunter, Cowen and Company, LLC, Research Division - VP & Analyst [48]

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Got it. Okay and last one for me is, how many belly dump systems do you have in the fleet currently? I think last update was around 4 and have you seen increased demand from customers for these types of systems, giving the faster unload times? And then last part of the question is, just, is there any way you can reconfigure how the unload process works at the wellsite, so that you could dump more than 1 or 2 at a time? Thank you.

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Kyle S. Ramachandran, Solaris Oilfield Infrastructure, Inc. - CFO & President [49]

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Sure. There's (inaudible) we will try and get all that. We've added a couple of the non-pneumatic to the fleet or continuing to build a couple of those additional in the remainder of the quarter as well. The fundamental concept is, operators want to ensure a couple of things. They want to ensure there's always sand available at the blender, they don't want to run out. And they want the lowest cost delivered to the wellsite. So, whether it's a belly dump solution or pneumatic solution or box solution, what's driving all this, what's the lowest cost option? And so we've got a fair amount of initiative, around driving down trucking costs on the pneumatic side through multiple levers that allow us to get to very similar economics as what you see in the belly dump.

And so, the concept of -- on a spreadsheet, I can unload the truck faster or may be able to pull more sand and belly dump truck is interesting, but it doesn't tell the whole story. The key to success in our opinion here is reliability. When you start to introduce these unloading mechanisms around belly dump, you do create single points of failure. We'll raise our hand and say, our belly dump solution has a single point, just like all the other belly dump solution out there. But what we benefit from is we can unload pneumatic trucks in parallel. And we've done that in the deployment of our belly dump solution. The belly dump is typically used in conjunction with pneumatics. We can run it completely with the belly dump, but the pneumatic flexibility just gives you added insurance if you will.

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Operator [50]

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The next question comes from Jason Wangler with Imperial Capital.

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Jason Andrew Wangler, Imperial Capital, LLC, Research Division - MD & Senior Research Analyst [51]

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Was curious as you kind of shift the manufacturing to 2 different systems, obviously the chemical and the sand. Kind of, how do you think your capacity looks, I guess just what you're doing in the first quarter or in general? As you think about, what would be full capacity or what you guys could do is the chemical systems kind of start to ramp up?

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William A. Zartler, Solaris Oilfield Infrastructure, Inc. - Founder, CEO & Chairman [52]

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We know, when we look at the capacity of our plant without significant -- work outsourcing at 4 to 5, 6 packs on a monthly basis and so -- and you consider chemical silos, about half of that or maybe at 60% 65% of that because there's some additional fixed components to that. So the capacity at any kind of reasonable pace was not an issue for us in-house and our manufacturing.

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Jason Andrew Wangler, Imperial Capital, LLC, Research Division - MD & Senior Research Analyst [53]

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Okay. And just curious as you think about the CapEx budget and then obviously you should be generating some pretty good free cash flow. How do you think about deploying that, I mean even if you hit the high end of the range, I think there'll still be some pretty significant cash flows, maybe you grow the dividend or are there any other things you guys are kind of looking at, as you look forward?

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William A. Zartler, Solaris Oilfield Infrastructure, Inc. - Founder, CEO & Chairman [54]

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As we've said repeatedly, we are shareholders and we're focused on making the right decision around what we do with the cash. We instituted a dividend in the fourth quarter and we've continually evaluated whether share buybacks makes sense. We've looked at opportunistic M&A activity and to this point, we've tried to maintain as much flexibility we have on behalf of our shareholders as possible.

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Operator [55]

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Next question will be from Scott Schneeberger of Oppenheimer.

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Scott Andrew Schneeberger, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [56]

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Kyle, you mentioned there is some discussion of margin. I'm just curious, thinking out longer term, with the retrofitting, I assume that's, if there is CapEx impact that's baked into that number, that you talked about, but how should we think about OpEx over a longer term with that activity and then kind of a follow-on? How about repair and maintenance as far as impacting margins upcoming?

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Kyle S. Ramachandran, Solaris Oilfield Infrastructure, Inc. - CFO & President [57]

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I think you're referring to retrofitting around potentially to auto hopper being installed in the rest of our systems. Yes, you're right that's a piece of capital. So that really shouldn't have any impact on margins, and I will go back to our biggest cost line today is field supervision. I think we have done a really good job of keeping great people, training them, making a great place for them to work and giving them a great career opportunity. So I think we've been able to manage the field costs from that perspective. As far as maintenance, it's clear we've got a relatively young fleet. Our oldest system has been running in the field 6-ish years without any major overhaul. It's probably time for a few of those to come back in. We'll be cautious with the spend on that. We will deploy the capital in other words until we're ready to deploy that system to the field. But as we look out over the next 5-ish years, there'll be some sort of maintenance cycle where we do bring things in to get refurbed, but notionally, I don't think it's material to the overall cash flow profile.

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Scott Andrew Schneeberger, Oppenheimer & Co. Inc., Research Division - MD and Senior Analyst [58]

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And then as a follow-up, just on the chemical management systems, it sounded like you now have one at full revenue run rate and 3 out on -- in the fleet at the end of the year and then anticipating 10 at the end of the first quarter. Any incremental color you can provide on with those incrementals be up and at full revenue run rate? How should we think about that?

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Kyle S. Ramachandran, Solaris Oilfield Infrastructure, Inc. - CFO & President [59]

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Sure, Scott. I think there's a couple of things that the customers that have gone through the trial period. Yes, incremental systems would result in incremental revenue out of the gate, but what we're also trying to manage is trying to get as many of these and do as many different customers as possible. We're taking the long-term outlook here. What's the market opportunity for us? How quickly can we get visibility into capturing a larger piece of that pie, rather than filling our first customer with as many systems as they want.

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Operator [60]

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The next question will be from Mike Urban with Seaport Global.

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Michael William Urban, Seaport Global Securities LLC, Research Division - MD & Senior Analyst [61]

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So I completely agree with the view to be disciplined on the CapEx front to have better clarity. I guess the question would be, what if your competitors are not, in fact, it seems like they kind of aren't right now and they are going full speed ahead with systems deployment. So you guys have clearly laid out your value prop and have the ability to deliver a lower cost customers. If you start to see that share position slipping, do you react to that? Is there some kind of a balance there between kind of achieving strong return? It has always been your focus in kind of maintaining or growing that share position like -- I guess just the bottom line is, how do you react to market of your competitors rather kind of get more aggressive on the share?

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William A. Zartler, Solaris Oilfield Infrastructure, Inc. - Founder, CEO & Chairman [62]

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There's been overcapacity in this market for the last 3 years and so this is not a new phenomenon. I think there are folks talking about going after it, but there's higher operating cost and there is a point at which because of our really light operating cost, relative to where our current return profile, they're losing money if they cut much and we have held pretty firm on pricing. We have a set of customers that look at the full package in the full numbers including the reliability and the cost of downtime, and embedded within our system is really an insurance policy that is, it comes along with it is free. And so I think we have in continue to focus with our customers on a long-term relationship basis with we're helping them be much more reliable. We're bringing them new tools and new tweaks to the system that they ask for and we're rolling it out to people that have asked for.

So I think our edge and our competitive edge is being there as a true value proposition and getting into a knife fight with somebody that want to lose money is not something that we're going to do. And I think we're focused on delivering something and having a set of customers that actually see the whole picture. And that means that there are some customers we won't have. I think that, that is still -- there is still market share beyond we have today to continue to the gain with customers that actually look at the whole picture. We mentioned the addition of sort of the re-bundling, if you will of the delivery, the whole last mile. I think that there is a bit of a trend and that also allows a little more of an apples to apples comparison on things, which I think is actually very helpful to us to go in and continue to do that as the market is unbundled between the delivery piece and the wellsite piece and then there's a few customers that will never rebundle it -- that do their own thing. And then there's a few that are asking for the package to be put together, which is what we're doing for them and I see some growth in that over the course of the next year.

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Michael William Urban, Seaport Global Securities LLC, Research Division - MD & Senior Analyst [63]

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Okay, great. That was really helpful. And speaking of the bundling as you roll out the chemicals systems, is that still at a point where it's -- it's not really kind of (inaudible) I guess you have a commercial model at this point, but you're just trying to kind of prove up the system itself. Have you seen any interest in bundling the chemical system with the rest of the offerings?

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Kyle S. Ramachandran, Solaris Oilfield Infrastructure, Inc. - CFO & President [64]

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As far as additional bundling with chemicals?

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Michael William Urban, Seaport Global Securities LLC, Research Division - MD & Senior Analyst [65]

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Yes, bundling the chemical systems in with the rest of your offerings?

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Kyle S. Ramachandran, Solaris Oilfield Infrastructure, Inc. - CFO & President [66]

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No, with our offerings absolutely. No, I think people are seeing this is the way to automate their frac to reduce personnel and footprint to improve HSE and to drive down costs. So, no, I think the idea of having 9 silos on location is exactly right. There is synergies. So by putting out our chem system, you significantly reduce the footprint traditionally associated with chemicals and that's actually going to likely to deliver more sand trucks because you've got more -- you got a bigger footprint. So I think there's compliments --.

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William A. Zartler, Solaris Oilfield Infrastructure, Inc. - Founder, CEO & Chairman [67]

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Yes, I think the addition to that is the Solaris Lens technology piece. So the inter -- the full integration of sand, supply chain and the chemical supply chain for one supply individual at the operator or at the frac company is a significant benefit to allow them to really better manage the supply. And I think ultimately the game for our ultimate customer, the operator is to get very efficient at making oil and gas. And as they get more efficient in their fractioning operations and plan better and do it that way, this is a tremendous tool that gets package together very effectively with the use of the software as well.

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Operator [68]

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Our next question comes from Praveen Narra of Raymond James.

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Praveen Narra, Raymond James & Associates, Inc., Research Division - Analyst [69]

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I just wanted to follow up on John's question earlier, just in terms of the January to March, if you could just clarify -- is March higher than the 4Q average for system -- for sand systems out?

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Kyle S. Ramachandran, Solaris Oilfield Infrastructure, Inc. - CFO & President [70]

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I'd say, it's probably pretty close to in line.

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Praveen Narra, Raymond James & Associates, Inc., Research Division - Analyst [71]

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Okay, perfect. And so, understanding that it's a little bit of a different dynamic going into 2019 than it was going into 2018. But, we going to 2018 we talked a lot about guys signing contracts for the year. Can you talk about how that has progressed or is this year likely more of a spot year or how do we think about it?

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Kyle S. Ramachandran, Solaris Oilfield Infrastructure, Inc. - CFO & President [72]

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Now, it's a great point. We probably didn't mentioned it. We kind of take it for granted internally, but we went through the same process we did last year. We sat down with all of our customers in the fourth quarter, beginning the first quarter. We talked through their plans for the year. We talked to the value proposition, we believe we're delivering this year. And so in -- during the pricing, there was an agreement to some sort of minimum number of systems by the vast majority of our customers. So it's the same dynamic that we had last year, as we said last year, the minimum volumes are set below where people are today, but there is a base load in here in what we have.

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Praveen Narra, Raymond James & Associates, Inc., Research Division - Analyst [73]

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Right, and I guess just to the earlier point, I assume then that the pricing number is flat for those contracts, generally, given your -- what you guys talked about is your viewpoint?

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Kyle S. Ramachandran, Solaris Oilfield Infrastructure, Inc. - CFO & President [74]

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Correct. We expect that pricing to be flattish.

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Praveen Narra, Raymond James & Associates, Inc., Research Division - Analyst [75]

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Right and then last one from me on the chemical silos. When we think about the test phase for the customers that have gone through it. You mentioned one getting up, can you talk about the length of time it took to get from trial to revenue? And if you could, how many customers have actually gone through some sort of trial thus far?

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Kyle S. Ramachandran, Solaris Oilfield Infrastructure, Inc. - CFO & President [76]

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I think in terms of the specifics of our commercial agreement around the trial, I don't think, I'll get into that, but there is multiple customers that are in the queue. There's multiple that are using them and we feel very good about the visibility.

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Operator [77]

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The next question will come from Samantha Hoh of Evercore.

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Kay Hoh, Evercore ISI Institutional Equities, Research Division - Research Analyst [78]

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So quick question just to stay on the chem systems. And I think it's all of the trials have taken place in the Permian, but is there any discussions with customers about potentially doing trials outside of the Permian? And then longer term, is there any reasons why the overall adoption and rollout when be similar to like to your proppant systems?

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Kyle S. Ramachandran, Solaris Oilfield Infrastructure, Inc. - CFO & President [79]

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I'll take the first part. In reality, we've actually been in multiple basins. We've got interest in a lot of basins for different reasons. If we look at the Northeast as we mentioned footprint and the chemical side is a big challenge. And so this cleans up a significant portion of footprint and a lot of these pads in the Northeast are very tight. And then we are actually moving into the DJ Basin. We've never had one of our sand systems in the DJ Basin, but we expect to have chem system in the DJ Basin shortly. So that's actually a new market for us, while we've grown pretty significantly in the Rockies broadly, on the sand side, we have actually not been in the DJ Basin. So I think from an opportunity perspective, there is nothing inherent to the Permian versus any other basin that would limit our opportunity.

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William A. Zartler, Solaris Oilfield Infrastructure, Inc. - Founder, CEO & Chairman [80]

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I think I have one more footprint. We were asked to move one of the early chemical systems up to the Northeast and we looked at the weather and said, we were to wait until it warms up a little bit fully, move fluids into an area where you saw the polar vortex and things looking at it. So, we will see more movement out there over the next couple of months that's been sorted out.

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Kyle S. Ramachandran, Solaris Oilfield Infrastructure, Inc. - CFO & President [81]

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Yes, as you think about launching new products, you want to give yourself the higher chance of success earlier on and no doubt we will be addressing the inherent challenges with cold weather, but as far as the first couple getting out there, we were -- we wanted to make sure we didn't create another challenge for ourselves.

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Operator [82]

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The next question is a follow-up from Martin Malloy of Johnson Rice.

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Martin Whittier Malloy, Johnson Rice & Company, L.L.C., Research Division - Director of Research [83]

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Just one follow-up, some of the integrates have recently talked about some pretty robust spending programs in the Permian going out 5 plus years. Could you maybe talk about the inroads that you've made with some of those integrates, and I seem to remember that, some of them have some arrangements with maybe some of your competitors that might be rolling off over the next year or 2?

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Kyle S. Ramachandran, Solaris Oilfield Infrastructure, Inc. - CFO & President [84]

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We -- there is some of that. There is some of the other big integrates work were closely with our customers and so we're on many of those wellsites through our good friends in Midland. And so I think we see this as a great solution for them as they roll out really heavy activity and heavy manufacturing mode and some blocky acreage, this makes a ton of sense. I think I got a picture from Eastern Carlsbad, a couple of days ago that has 3 different sets of silos in one picture from a drone that could have been more than 500 feet high. So that activity is busy and we're busy out there with them and believe that will continue.

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Operator [85]

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The next question is a follow-up from Stephen Gengaro of Stifel.

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Stephen David Gengaro, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst [86]

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Just a quick one, I think for Kyle. Kyle, the deferred revenue from the -- from the Kingfisher terminal, is that going to be realized with effectively 100% margin over the next 8 quarters?

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Kyle S. Ramachandran, Solaris Oilfield Infrastructure, Inc. - CFO & President [87]

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Stephen, though the way to think about is, it's recognized over the remaining term of the contracts that you think -- can think about it if you recognized ratably over the next 2 years. So we described that as about $1 million per month and it is revenue. There isn't any associated cost with that. It is non-cash, as we talked about, but there's current customers including our term customers, delivering volumes into that facility. The deferred revenue is related to the $26 million cash payment. So there is additional revenue that will be generated there beyond just that deferred revenue, that make sense.

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William A. Zartler, Solaris Oilfield Infrastructure, Inc. - Founder, CEO & Chairman [88]

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And we can follow up offline.

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Stephen David Gengaro, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst [89]

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Okay. Now that does make sense.

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Operator [90]

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

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William A. Zartler, Solaris Oilfield Infrastructure, Inc. - Founder, CEO & Chairman [91]

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Thanks, Gareth. Before we close out the call, I'd like to leave you all with a few final takeaways. Solaris continues to be in a unique position where we can grow with existing and new customers, with both our legacy and new products. We are completely reliant on the overall market conditions, but we are large enough to be subject to some of them. We built an innovative culture that continue to look for ways to both improve our product line as well as deploying new complementary products. And we continue to have in addition to we've talked about our robust pipeline of ideas and projects that we're working on in conjunction with several of our customers. Our free cash flow generation profile in 2019 provides us with a lot of options on top of already flexible capital budget and robust balance sheet. We demonstrated our willingness to return capital to shareholders with our recent dividend initiation and we will continue to consider all options that will maximize shareholder return. Thank you all for joining us and we look forward to updating you again next quarter. Gareth, you can close up your call.

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Operator [92]

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Thank you, the conference is now concluded. Thank you for attending today's presentation. You may disconnect your lines. Have a great day.