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Solaris Oilfield Infrastructure, Inc. (SOI) Q1 2019 Earnings Call Transcript


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Solaris Oilfield Infrastructure, Inc. (NYSE: SOI)
Q1 2019 Earnings Call
May. 01, 2019 , 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Solaris Oilfield Infrastructure First Quarter 2019 Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Yvonne Fletcher, Senior Vice President of Finance and Investor Relations. Please go ahead.

Yvonne Fletcher -- Senior Vice President, Finance and Investor Relations

Good morning, and welcome to the Solaris first quarter 2019 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'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.

William Zartler -- Founder, Chairman and Chief Executive Officer

Thank you, Yvonne. Good morning and welcome to everyone. During the first quarter of 2019, Solaris generated $55 million in revenue, which was down slightly from the fourth quarter of 2018 with adjusted EBITDA of $35 million, which was roughly flat with last quarter. The first quarter got off to a slow start across the industry as operators responded to a rapid decline in oil prices in late 2018 with increased capital discipline. While oil prices recovered back to the $60s late in the first quarter and continue at those levels today, our customers' budgets and activity continue to reflect the capital discipline that we saw in the fourth quarter. As a result, we have not seen a noticeable industry response to the oil price recovery and the overall US frac crew count has been relatively flat since December.

For Solaris, the quarter got off to a slow start as some of our customers that held on to our systems during Q4 with the original expectations of bringing frac fleets back during 2019 ended up keeping their frac counts relatively flat and thus returning systems back to us early in the first quarter. This resulted in an average of 114 fully utilized systems in the quarter or about a 6% decline relative to the fourth quarter, which was in line with our expectations.

However, as the first quarter progressed, we saw a pickup in our system activity and we deployed additional systems with both new and existing customers throughout the quarter. Today, our activity level is back at fourth quarter levels, all while maintaining our pricing. We believe the increase in our system deployments reflect the value our customers recognize throughout the efficiency and reliability that Solaris provides.

While we do not have a crystal ball into the future, we expect the working US frac crew count to remain roughly flat for the remainder of the year. However, we believe we can continue to deploy additional systems in a flat market. We continue to see opportunities to win work with new customers, particularly as operators' development plans shift more toward a manufacturing-type mode, the increasing use of zipper fracs and multi-well pads continue to drive efficiency gains for our customers. The focus on efficiency improvements and completions means that sand consumption drivers are more about pounds per hour than pounds per stage or pounds per lateral foot. This increase in hourly sand consumption combined with the loss of supply chain inventory that has historically been stored in transload facilities and rail cars has been driven by the switch to local and regional sand sourcing has dramatically shrunk storage in the market. We and our customers continue to believe Solaris offers the most reliable and efficient solution to solve these challenges.

Switching to our new mobile chemical management system, it continues to gain traction in the field. To-date we've had three systems working on trials with three different operators with multiple chemical and frac companies. We expect to add more systems to the field as we finalize the completion of additional systems. The feedback we've received so far has been positive and we have taken early learnings during the field trials to make some enhancements to the offering.

During the quarter, we made investments to add seven chemical systems to our fleet and taking into account making these minor modifications, we expect to have all seven systems available in the coming weeks. By the end of the second quarter, we anticipate having 12 to 14 chemical systems in our fleet. Our decision to build beyond that will be based on feedback from our customers and adoption rates.

We continue to be excited about the efficiency that this new equipment brings to the market. It significantly improves the organization and inventory control of delivering chemicals to the blender and reduces labor requirements across the supply chain. Feedback from our initial trials has been positive, so we remain confident in the broader market acceptance of this new product line.

Our R&D pipeline also does not stop there. We have a staff of talented engineers and software developers that continue to look for ways to both improve the offerings we currently have as well as ancillary offerings that will result in improved safety, efficiency, and cost savings for our customers. In addition, we have a diverse group of thought-leading customers that we are collaborating with to bring to market solutions that address operational and logistical pain points in completion activities.

We continue to make progress in our last mile business, which is a relatively new service offering for Solaris. Historically, we have primarily rented out our mobile proppant systems, but several customers have come to us and asked us to offer a bundled solution for last mile trucking with the well site rental equipment. We believe our last mile offering combines our extremely reliable system and the Solaris Lens technology software to provide a low cost delivery solution. Our sales pipeline for the last mile work is robust and we've added additional customers over the last few months that have contributed to the recent growth in system count and the activity has continued into the second quarter. Further success into this new service offering could continue to contribute to growth even in the context of a flat US frac count.

And lastly, I'd like to highlight another exciting accomplishment during the quarter. The resilience of our rental business combined with our slowdown in capital spending has resulted in the Company's first positive quarter of recurring positive free cash flow. Our visibility of this free cash inflection was what led Solaris and its Board to declare its first quarterly dividend during the fourth quarter and we paid our second dividend during the first quarter of 2019. As our capital spending rate slows further, we'd expect to continue to generate free cash flow for the remainder of the year without sacrificing our ability to grow.

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

Kyle Ramachandran -- President and Chief Financial Officer

Thanks, Bill, and good morning everyone. As Bill mentioned, during the first quarter, we generated $55 million of revenue and adjusted EBITDA of approximately $35 million, which was roughly flat with the prior quarter as lower activity was offset by higher contribution from our transloading segment. Our rental activity levels equated to 114 fully utilized mobile proppant management systems, which was a 6% decrease from our Q4 average of 121 systems and relatively in line with our expectations going into the quarter.

We previously used revenue days, which is the combined number of days that our systems earned revenue during the quarter as a measure of business activity. Going forward, we believe the fully utilized system count will be a more comparative metric to measure period-over-period changes in the Company's rental activity as it will normalize for varying calendar days from one quarter to the next.

I'd also like to highlight that this fully utilized system count is the most conservative way to present utilization. As an example, approximately 142 Solaris systems worked for customers during the first quarter. But given that we're operating in nearly all basins and jobs never line up perfectly, there will always be some white space in the calendar. The 114 fully utilized system count adjusts for that white space. As Bill mentioned, we saw a steady increase in systems deployed throughout Q1 and that continues today. For context, today we are back at the average of our fourth quarter fully utilized system count.

Gross profit was approximately $38 million and roughly flat compared to the fourth quarter, primarily as lower revenues and operating activity were offset by the recognition of deferred revenue in our transloading segment. During the quarter, we recognized approximately $3 million of deferred revenue related to our amended contract at Kingfisher, which will continue at the same level each quarter through the end of 2020.

SG&A costs and salaries, benefits and payroll taxes were also flat sequentially at $4 million, which was below our expectations, due mainly to one-time bonus accrual adjustments. Going forward, we expect total SG&A and personnel costs to run at or above $5 million per quarter as we've added additional headcount to support our new product initiatives and to take into account the full impact of restricted stock grants that were made in March 2019.

Net income for the quarter was $23.4 million, a decrease of approximately 5% versus the fourth quarter. We generated earnings per share of $0.43 for the fourth -- for the first quarter versus $0.47 in the fourth quarter. Adjusted pro forma net income for the quarter was $21.6 million or $0.46 per share versus $21.6 million or $0.45 per share in the fourth quarter. Our presentation of adjusted pro forma net income adjusts for certain items that we believe are non-recurring 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 and 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 $20 million, which was down significantly from $36 million in the fourth quarter, as expected, primarily due to the slowing of our manufacturing rate of new proppant systems. During the first quarter, we added two proppant systems to our fleet and also received additional components under prior purchase orders for proppant systems and spent the majority of capital required to complete seven additional chemical systems. We also continued to deploy our auto hopper systems and added additional non-pneumatic loading kits to our fleet.

We expect to end the second quarter with 164 mobile proppant management systems and 12 to 14 mobile chemical systems in the rental fleet. We continue to expect capital expenditures for the year to be in the range of $40 million to $60 million, which we expect will be funded by operating cash flows.

As highlighted by Bill, the first quarter played out as we expected, and importantly marked the turning point for free cash flow generation for the Company. Our free cash flow, as defined by cash flow from operations less capital expenditures, was a positive $2.6 million, and we currently have approximately $20 million of cash on the balance sheet, which over the course of the year, we expect to grow as our CapEx spend continues to slow.

Turning to the balance sheet, during the first quarter, we repaid all of the $13 million that was drawn under our credit facility as of December 31, leaving us with a zero debt balance today. We also amended our credit facility in late April to increase our revolver to $50 million with availability based on a total leverage covenant of 2.5 times total debt to EBITDA. The amendment increases the Company's revolver size by $30 million and includes an accordion feature, which could increase total availability under the facility to $75 million. We believe our amended credit facility better suits the needs of our business today as well as allowing us flexibility to grow. As of April 30th, 2019, we had approximately $70 million of liquidity, including approximately $20 million of cash and $50 million of availability under our undrawn credit facility.

Given our debt-free position, we continue to expect our primary uses of operating cash flow in 2019 will be our dividend and CapEx plans, which will be limited to investments where we believe we can earn an incremental return on investment. We expect the likely result to be a build of cash on the balance sheet in the near term, and we look forward to updating you on the intended use of that cash as the year unfolds.

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

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions) Our first question comes from Martin Malloy of . Please go ahead.

Martin Malloy -- Johnson Rice -- Analyst

Good morning.

Kyle Ramachandran -- President and Chief Financial Officer

Good morning, Marty.

William Zartler -- Founder, Chairman and Chief Executive Officer

Good morning, Marty.

Martin Malloy -- Johnson Rice -- Analyst

My first question is on the free cash flow generation. It looks like from your release that you all generated a fair amount of cash here in April, about $10 million after CapEx, but your CapEx looks like for the year it's probably front-end loaded and then there were some working capital moves. Could you just maybe help us with how you expect the free cash flow generation to ramp up and -- maybe with respect to the impact of CapEx and working capital changes?

Kyle Ramachandran -- President and Chief Financial Officer

Yeah. Sure thing, Marty. We've discussed over the last couple of quarters that this business is reaching an inflection point as to free cash flow generation. We certainly saw the beginnings of that in the first quarter. '17 and '18 were definitely large growth capital years for the business. '19, from a capital standpoint is really going to be around introducing a new product. So the pace of that will be measured.

We couple that with our large base load rental systems that today are driving significant operating cash flow, that slowdown in CapEx, we expect to result in significant free cash flow in the year. We saw that in April. So at the end of the first quarter, we did have a bit of a working capital build, but a bit of that unwound in April on. So we've effectively doubled our cash balance in the span of 30 days. That also was impacted by continued slowdown in CapEx. So you alluded to the pace of CapEx over the year. We do think it is front-end loaded. We're still very confident in our guidance of $40 million to $60 million over the course of the year, but we think, as we get through the first and second quarter, the bulk of that or a significant component of that will be spent in those two quarters.

And then the other thing is, Bill mentioned we had and the industry had a slow pickup in the beginning of the year. And as we added systems, we will start to generate more cash from those systems being deployed. So as we look to the second quarter and our guidance around activity, we expect to generate further operating cash flow through the incremental activity.

Martin Malloy -- Johnson Rice -- Analyst

Okay. And then my second question is about last mile solution and that offering. And could you help us with maybe the potential scope there, the impact on margins and kind of how that's flowing through -- we should look forward to flow through the income statement?

Kyle Ramachandran -- President and Chief Financial Officer

Sure. The scope of the opportunity, I think, is pretty significant. We look at our BD opportunities. A significant amount of them do involve putting together a broader offering. This is definitely something that we've been asked to do. We haven't put assets on balance sheet to provide this offering. We're really trying to pull together the lowest cost option for our customers. So that means working across the supply chain with multiple vendors. But ultimately we look at what we do for the majority of our business. We're renting equipment, we don't operate the equipment. We certainly maintain it. We provide service to our customers, but we're not providing a ton of pass-through like revenue.

And so when we look at the last mile offering, that is a significantly higher amount of revenue associated with trucking and so we haven't put that on balance sheet. We are working with third-party groups to help put that offering together, but we are effectively providing a packaged solution for operators and pressure pumpers who are interested in necessarily managing all those details. So what that's going to result in is significantly higher revenue on those systems that are involved in last mile. You can think of it as order of magnitude of, say, 8 to 10 times the revenue relative to our rental revenue. The incremental margin will not be obviously at the same level of our rental piece. The trucking piece is just generally going to have a much lower margin. So overall it's going to show lower gross margins for the business, but we think we actually will generate slightly higher cash flow contribution margin per system in that model, which ultimately should drive incremental returns.

Martin Malloy -- Johnson Rice -- Analyst

Great. Thank you.

Operator

Our next question comes from Jud Bailey of Wells Fargo. Please go ahead.

Jud Bailey -- Wells Fargo Securities -- Analyst

Thanks. Good morning. A question, you guys, it looks like you're adding systems again, all of the frac crew count has been flattish, as you noted. I'm curious, is that just existing customers who are adding systems back after a rocky start to the year or are you seeing new customers? I'd be curious to get any further color on the uptick here in silo count. And then any visibility in the next couple of months to add additional units?

Kyle Ramachandran -- President and Chief Financial Officer

Sure, Jud. I appreciate the question. I think as we answered this question consistently over the couple of years, it's a mix. In the first quarter, we added new customers. So we're excited about that. In one particular instance, there's been a large operator that we've been quoting for a long period of time. They actually owned on balance sheet their own sand handling equipment that was, call it, new technology, but not at the level of what we believe we provide. In the first quarter, we actually were able to deploy multiple systems to that customer and they are seeing higher stages per day at less cost associated with sand logistics, so certainly seeing growth with additional customers.

As far as existing customers, to be perfectly honest, we really have not seen an uptick in frac fleets deployed by our operating customers, but what we have seen is an expansion of our work with our customers across multiple basins. As an anecdote, we have close to 10 systems working in the broader Rockies basin, which, a year ago, we really didn't have any. So we are growing with our existing customers, we're adding new customers, and we're continuing to see folks switch away from other technologies, primarily quote-unquote new technologies, not necessarily sandkings. We have had some of our customers try various other solutions in the first quarter and most of them, if not all, are back using Solaris. So that's contributing to some of the uptick.

Jud Bailey -- Wells Fargo Securities -- Analyst

Okay. No, I appreciate the color. My second question is on the chemicals business. I believe you said you wanted to have 14 silos built by the end of the second quarter. I may have missed it, but did you say how many you have active and getting paid for today? And any visibility on how that may project over the next few months?

Kyle Ramachandran -- President and Chief Financial Officer

Yes. Thanks, Jud. I think the context of this is, this isn't a new technology. As we indicated on the call, we are making some tweaks based on some learnings in the field. We're getting them out to multiple customers. We have, call it, half a dozen in the field today with multiple operators and as far as our revenue mix, we've talked about this being a mix of blended trials, and in some of those trials, we're getting paid initially, and some of them, we're giving folks a few weeks or a pad to get their feet wet.

And so I think we have notionally talked about 2-ish on revenue and that sort of is where we are on average in the first quarter. And we see that progressing here going forward. As I mentioned, we've got multiple operators using them today that have visibility into adding more. And so as we look into the second quarter, we do have visibility in taking the systems that do come off the line here with some of the final tweaks that we've been making on a manufacturing basis that should contribute to incremental revenue. We did generate, as I mentioned, revenue in the first quarter from the chem systems, but the timing of the specific pickup here is going to be kind of chunky, if you will.

Jud Bailey -- Wells Fargo Securities -- Analyst

Okay. I appreciate that. And if I could just slip in one more just to clarify too, the 114 in -- average systems in 1Q, that was just for proppant, correct? That excluded the one or two chemical systems out, correct?

Kyle Ramachandran -- President and Chief Financial Officer

Correct.

William Zartler -- Founder, Chairman and Chief Executive Officer

Yeah, that's correct.

Jud Bailey -- Wells Fargo Securities -- Analyst

Just checking. Thanks. I'll turn it back.

Operator

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

John Watson -- Simmons Energy -- Analyst

Thank you. Good morning.

Kyle Ramachandran -- President and Chief Financial Officer

Good morning, John.

William Zartler -- Founder, Chairman and Chief Executive Officer

Good morning, John.

John Watson -- Simmons Energy -- Analyst

As a quick follow-up to one of Jud's questions, in the first quarter, can you help us with the revenue or gross profit contribution from chemical systems? And understand if you'd rather not share, but curious if you have that.

Kyle Ramachandran -- President and Chief Financial Officer

John, from a P&L standpoint, it's in the system rental and system services and cost of rental and services. They are blended with profit, and so at this point, I don't think we're planning to break that out and give that kind of clarity. But as -- sort of the numbers I just mentioned, they're pretty small relative to the overall profit system contribution in the first quarter.

John Watson -- Simmons Energy -- Analyst

Right. Okay, OK. Got it. On the first quarter -- or excuse me, on the fourth quarter call, you all mentioned a downtime percentage that, to me, screened really positively from this quarter's last mile system. Do you know what that number might look like for some of your peers? And when you have these customers to try another system, what their downtime percentage looks like?

Kyle Ramachandran -- President and Chief Financial Officer

We certainly don't track competitors. It's not -- our focus is what can we do every day to drive our numbers down and keep happy customers, but I will say, and I alluded to it earlier, we did have customers in the first quarter try other solutions and they, for the most part, were quickly back and the primary reason was just equipment reliability in the field. It doesn't take very long, $5,000 an hour to lose the benefit of, say, a 10% to 20% reduction in rental rate relative to Solaris. But we -- as a company, we're not sort of tracking it from alternative solutions. We -- again, we try to focus on what we can do to improve our offering.

William Zartler -- Founder, Chairman and Chief Executive Officer

Our goal is to get ourselves toward zero.

John Watson -- Simmons Energy -- Analyst

Right. Okay, OK. Great. Understood. For your legacy customers, what percentage are interested in the full service last mile offering that you mentioned versus the equipment rental offering?

Kyle Ramachandran -- President and Chief Financial Officer

I think on an overall basis, when you look at our business today, it's relatively small. It's more the incremental customers. We certainly have discussions with some of our current customers around last mile, but for the most part, this is about incremental share.

John Watson -- Simmons Energy -- Analyst

Okay, great. And one last one, if I can squeeze it in. Today you're back to your Q4 activity levels. It sounds like you're expecting some share gains. Should we expect that number to move higher as we move into later into May and into June?

William Zartler -- Founder, Chairman and Chief Executive Officer

Well, I mean, it's moving around. I mean, currently today, we've got 128 systems running in the field, and so it's going to bounce around. As Kyle said, there's a little spot work here and there as we move them to new basins, you don't get a full month out. And so there's some bouncing around, but we do expect it to continue to be growing with the new offerings and with sort of the enhanced visibility to some customers growing in new markets or other markets as well as growth in current locations. So we do see a bit of a steady ramp. It's a lot of three steps forward and one or two back occasionally, but we're moving -- it continues to be steady progression in deployments.

John Watson -- Simmons Energy -- Analyst

Okay. Perfect. Thanks very much, guys. I'll turn it back.

Operator

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

George O'Leary -- Tudor, Pickering, Holt & Co. -- Analyst

Good morning, guys.

Kyle Ramachandran -- President and Chief Financial Officer

Good morning, George.

George O'Leary -- Tudor, Pickering, Holt & Co. -- Analyst

Just curious, given you guys talked about some of the new solutions you guys are working on from a technology and an engineering standpoint, as you are in dialogue with your customers, I realize you're probably not going to give away exactly what you're working on, but what are the areas of inefficiency that they're most acutely focused on where you guys are analyzing newer solutions?

William Zartler -- Founder, Chairman and Chief Executive Officer

It might be a dead give away if I told you exactly what we're working on or what area of solutions, but if you've been to a completions crew lately, you can see where the bottlenecks are, you can see where equipment reliability issues come up and we're targeting all of those jointly with our customers in understanding what their needs are to make their fracs go quicker. I mean, the ultimate goal, as we mentioned on the -- in the call, was at sands per hour, stages per day, we're seeing a lot of discussion around that. In order to get there, you sort of hit one bottleneck at a time and we're working on ways to solve those bottlenecks with our customers.

Kyle Ramachandran -- President and Chief Financial Officer

Yeah. I think importantly, as far as with our customers, we've got 25 plus different customers today and these are some of the leading thought leaders, if you will, in the industry and so we're working hand in hand with them to develop solutions that make sense with their existing kit, understand that they make capital investments in that kit, understanding where the maintenance pinchpoints are and where it can make sense to incrementally have a rental piece of equipment.

William Zartler -- Founder, Chairman and Chief Executive Officer

And sometimes the software as well. So it's both hardware and steel as well as improving the software and data management processes around completions.

George O'Leary -- Tudor, Pickering, Holt & Co. -- Analyst

Fair enough. That's helpful. And then on the belly dump side, I know you guys kind of reworked that offering. I just wonder where we sit today on the belly dump front and as you talk to customers about the balance (ph) for the remainder of the year, does it feel like more of those systems trickle into your fleet or -- I mean, I understand the efficiency of the pneumatic fleet in having the 24 offload points onsite that a lot of your customers already like (ph). Could you just talk about the dynamic there and whether we see a growth in belly dump, but maybe frame where we are today as a percentage of your overall fleet.

Kyle Ramachandran -- President and Chief Financial Officer

Today, it's still pretty small. We have customers that are focused on maximizing payload, and in those instances, belly dump can sometimes screen as a really attractive solution. But I think as we dug into last mile, we've really uncovered a couple of points. One is we've been able to negotiate trucking rates for pneumatic trucks that are comparable, if not lower than belly dump rates. So a big driver of belly dumps is the perceived notion that the trucking rates are cheaper. So we've kind of been able to mitigate that.

And then number two, there's been a perception around belly dumps being able to haul more sand on a per truckload basis. And we've been able to drive increased payloads in the pneumatic trucks that we've been working with on the last mile. So we think it's definitely a part of our toolkit, but it's not something we believe is going to be required across our asset base and it'll be more specific to certain operators. To be perfectly honest, our belly dump solution and every other belly dump solution on the market takes a larger footprint. And so we're looking at a lot of pads that have production equipment on them where it's really constrained. And one of the benefits of the chem system with one of the customers that has it today is on footprint. And at $2 a square foot and we're saving 50,000 to 60,000 square feet on location, those are real important dollars. And so if you put a belly dump system out that takes a big footprint, you may be offsetting some of those savings by generating a larger pad. So it's a balance and you can't just look at one variable and solve for that variable because you're likely creating knock-on effects somewhere else.

George O'Leary -- Tudor, Pickering, Holt & Co. -- Analyst

Great. That's very helpful color and I'll sneak in one more, if I could. If you think about the drivers of what gets you to the upper and lower end of the CapEx band, I realize some of that will be how quickly adoption of the chem system is. Is that the biggest moving piece or is there anything else in there that gets you to the upper or lower end of that band?

Kyle Ramachandran -- President and Chief Financial Officer

I think that is the biggest lever. At this point, we've talked about completing a couple of more of the sand systems, but we're not queuing up the supply chain today to build a significant amount more the sand systems this year. So really alternative is the chem systems.

George O'Leary -- Tudor, Pickering, Holt & Co. -- Analyst

Great. Thanks for the color, guys.

Operator

Our next question comes from Jon Hunter of Cowen. Please go ahead.

Jonathan Hunter -- Cowen and Company -- Analyst

Hey, good morning Bill and Kyle.

Kyle Ramachandran -- President and Chief Financial Officer

Good morning.

William Zartler -- Founder, Chairman and Chief Executive Officer

Good morning, Jon.

Jonathan Hunter -- Cowen and Company -- Analyst

So your gross margin per fully utilized system improved in the first quarter from the fourth quarter despite fewer systems working. So I'm wondering how that looks as we go into the second quarter, assuming you continue off of the better March exit rate utilization. Is there opportunity to improve that gross margin per utilized system in the second quarter?

Kyle Ramachandran -- President and Chief Financial Officer

I wouldn't be modeling incrementally from where we are today. I think as I look back at sort of the last four quarters, it's bounced around in a very narrow range. Again, I go back to is there rental product business with relatively lower cost structure than other components of the completion phase, but I would say that as we increase last mile work, we will see that margin percentage likely contract nominally, but the overall contribution margin on a dollar basis will actually go up.

So the pace with which we win last mile work will dictate the magnitude with which that shifts, but we -- a couple of things. One is, we've talked about pricing in the last couple of quarters. We haven't actually talked about it this call, but clearly in the first quarter, we demonstrated that pricing was relatively flat versus 2018. So I think that's the biggest driver of our margin. And then from a cost standpoint, we have managed our costs with the notion of understanding that we would be picking backup activity. So we didn't do layoffs in our field force in Q4 or at the beginning of this year. For the most part, we kept our staff on. And as we put more systems to work, that cost gets absorbed over a larger base. But from a margin standpoint, I would kind of model where we are today.

Jonathan Hunter -- Cowen and Company -- Analyst

Got it. Thank you. One on your contract structure. We've heard from a lot of the frac service companies about lack of visibility into the second quarter. So I'm wondering if that changes the duration of the contracts you have with your customers now, does that mean that they're potentially going to shorter term contracts that might have better pricing aligned with it or just as -- are there any moving pieces there?

Kyle Ramachandran -- President and Chief Financial Officer

For the most part, our contracts are structured around activity, and it's pricing based on a certain volume of activity with the customer. And generally, those are set at levels pretty far below where, call it, current activities are. So we haven't really shifted our contracting structure. It's -- as I sort of mentioned, pricing has been set for the year for the majority of our customers and so we don't expect that to move at all. But ultimately this is about value add and we've got to demonstrate to our customers that this is the low cost solution that solves a lot of problems for them. As long as we do that, we believe we will continue to work for the customers that have used Solaris for a very long time and we will continue to win new business, but our work is around activity. And so if our customers are completing wells, we're on those well sites. So that's sort of at a high level.

William Zartler -- Founder, Chairman and Chief Executive Officer

Yeah. And I think I'll add a little bit to the low cost. It's a low all-in cost over time. There is a significant value for reliability and cost of being wrong or having a problem with it is extremely high. And so incremental and overall looking at making a decision over a period of time to make sure that you keep your sand flowing on a regular basis is where we really believe we differentiate ourselves.

Jonathan Hunter -- Cowen and Company -- Analyst

Got it. Thanks. Thanks, Bill. And then last one from me, just on the transloading side, I know you had the Devon contract amendment in the first quarter. As we move into the second quarter, do you expect to step down on the contribution you receive there or could you possibly get some spot work that could offset that contract change?

Kyle Ramachandran -- President and Chief Financial Officer

So just to clarify, the amendment resulted in a $26 million payment in December. That revenue is being recognized over the next two years. So you can call it $3 million a quarter and that will continue through the end of 2020. To be perfectly honest, April was probably our second highest month on record in the facility. We have not necessarily seen a significant slowdown in overall volumes, and some of that is being driven by additional customers beyond Devon. So we don't see a precipitous fall at all in that part of our business. The contract minimum volumes for Devon have been reduced, but as I mentioned, we do have the deferred revenue that is being amortized, and we've got a couple of other folks in the facility that have delivered significant volumes. So is it going to triple? Probably not, but is it going to be a steady asset for us over the near term? We think so.

Jonathan Hunter -- Cowen and Company -- Analyst

Understood.

William Zartler -- Founder, Chairman and Chief Executive Officer

Some of the local mines -- yeah, and some of the local mines, I think, have not ramped their production nearly as quickly as the West Texas mines. So that may be drive -- impacting some of this.

Jonathan Hunter -- Cowen and Company -- Analyst

Yeah. Okay. Great. Thanks. I'll turn it back.

Operator

Our next question comes from Praveen Narra of Raymond James. Please go ahead.

Praveen Narra -- Raymond James -- Analyst

Hi, good morning guys. I guess just a follow-up on the last mile bundle option. Could you give us kind of a ballpark for where we are over 1Q? And then I guess more importantly, how much of this can -- how large can this be as a percentage of your business before we actually do have to start putting assets on the balance sheet? And can we scale forever in this model?

Kyle Ramachandran -- President and Chief Financial Officer

I think as we mentioned, a significant proportion of our customers today are really not asking us to do this for them. So we look at our current fleet deployed to the customers, we can carve off a signature piece of them who aren't looking for this. And so we've notionally talked about it being anywhere from 5% to 20% of our overall activity in the first quarter. It was far below that, the bottom end of that range. So it's a 2019, 2020 new ways to win growth with -- work with customers that are looking for this solution. We're nowhere near that point in terms of percentage of overall business, but it's something that, from a development standpoint, has got a lot of growth to it.

Praveen Narra -- Raymond James -- Analyst

Right, perfect. And then on the chemical silo side, I guess I'd be curious to hear about some of the field trial learnings you guys have had since you -- from 1 to system 10. And then I guess has anything changed in terms of the expected cost per system?

Kyle Ramachandran -- President and Chief Financial Officer

Yeah. I mean, the learnings have been varied. From a manufacturing standpoint, we've had a couple of components that were, let's just say, not right size. So we've made those tweaks. One of the big things that we've been asked to do is blend some of the components that are being used in concentrate and so we're doing some additional kit to help deliver higher concentrations of chemicals and acid so that you can reduce your trucking costs. And so some of those things have been added.

From a learning -- from a customer standpoint, I mentioned it earlier, but one of the big drivers for one of the customers using it is footprint savings. We sort of took that for granted, but as the industry matures and the shale plays mature and we look at going back to pads that already have production facilities onsite, the chemical footprint is significant. And so we've, as we mentioned, condense that significantly. So that's a saving that we sort of honestly took a little bit for granted, but for some operators, it's critical.

And then from a capital standpoint, I think notionally it's in range with where we expected it to be. We're still probably not a point to provide updated guidance as capital costs per system and certainly the first few have been more expensive as we've had more labor hours and we're still figuring out the manufacturing process.

Praveen Narra -- Raymond James -- Analyst

Perfect. Thank you.

Operator

Our next question comes from David Smith of Heikkinen Energy Advisors. Please go ahead.

David Smith -- Heikkinen Energy Advisors -- Analyst

Thank you and good morning.

William Zartler -- Founder, Chairman and Chief Executive Officer

Good morning, David.

David Smith -- Heikkinen Energy Advisors -- Analyst

First is closely related to one of the last questions. Just recognizing that you've got a pretty long track record of consistent improvement with your proppant system, I wanted to ask how the trials and redesign process on the chem systems compares to your early experience with the proppant systems.

William Zartler -- Founder, Chairman and Chief Executive Officer

I think we bought the original technology from (inaudible) four years ago and so I think the tweaks of that system in the early days were more significant than where we are today. I think we got closer to 100% product and we've been working on metering, we've been working on telemetry, we've been working on some material selection, we've been working on pump sizing, I mean, accuracy. And so it's been minor tweaks. The overall system design and layout and concept of the way we're able to handle the number of chemicals we can handle in the system is all right and all working well. It's just been minor additions and some delays on getting some new pump designs in and some new metering and then that sort of held us back from releasing these next seven in the first quarter and we'll be rolling it in the second quarter, but I think it's going well. We are learning a lot in dealing with different viscosities in some of these new FRs and some of the various way of doing things and flows are all important pieces of the tweak, but I think we're -- we've got the right team on it.

David Smith -- Heikkinen Energy Advisors -- Analyst

Great color. Appreciate it. And the follow-up is, you've got a list of operators waiting to trial the chem systems when available to them. Do you think there is another list of customers that's waiting in the queue for version 2.0 or 3.0?

William Zartler -- Founder, Chairman and Chief Executive Officer

Yeah. I think it's going to be version 1.1. It's not really going to be a 2. And like I said, the core of the system, we think, we've got it correct. I think that all the little tweaks make it highly functional and make it a little bit more functional, but the rollout will be as it goes, we have people waiting and looking and watching and understanding the value it creates on the well site from pad size to shipping higher concentrated chemicals to better control and measurement of what you're moving into the well site. So all that combined is really going to dictate the pace of the rollout and various customers initially value various different things, and so sorting through all that is what we're doing now, but we do feel pretty good about where it is today and where it's headed.

David Smith -- Heikkinen Energy Advisors -- Analyst

Great. Thank you very much.

Operator

Our next question comes from Jason Wangler of Imperial Capital. Please go ahead.

Jason Wangler -- Imperial Capital -- Analyst

Hey, good morning, guys. Wanted to ask, you mentioned on the release about the rightsizing the manufacturing schedule. Does that change your capacity as you look forward in the manufacturing of things or just kind of how you're thinking about that as you go through the year with the lighter CapEx budget the next couple of quarters?

William Zartler -- Founder, Chairman and Chief Executive Officer

As we've said all along, our manufacturing facility is there to meet demand. We've got a higher level of contractor workforce combined with our employees. The 40 -- the range of outcomes of capital spending for the year, we believe we can meet with the existing workforce. We have geared up the plants last year, have been making eight sets of sand silos a month through the third quarter, and we were just beginning to peel that back in the first quarter, recognizing that the market had sort of -- had changed a little bit on overall demand. So we do not believe that we've made decisions in the manufacturing facility that will alter our ability to meet the chemical silo growth (ph) demand for the year.

Jason Wangler -- Imperial Capital -- Analyst

Okay. And I think at the beginning of the year, you guys kind of rolled out the combined software. Just was curious if there was an update on how that's kind of going as you push that to customers along with the systems whether it's chemical or the sand systems.

Kyle Ramachandran -- President and Chief Financial Officer

It's going well. We -- on the trucking piece, we're integrating across third-party trucking platforms, so we can steadily increase the number of folks that we're integrating with there. We've got additional customers that are taking our raw data feed and piping it into their data rooms and creating their own dashboards, which is really the most powerful use of the data. We certainly can create great dashboards for folks, but once customers start taking them to their own hands and showing the data in a way that makes most sense for how they're managing their business, it's really compelling. So so far so good.

Jason Wangler -- Imperial Capital -- Analyst

Great. I appreciate. I'll turn it back.

Operator

(Operator Instructions) Our next question comes from Ryan Pfingst of B. Riley FBR. Please go ahead.

Ryan Pfingst -- B. Riley FBR -- Analyst

Good morning, guys. Subbing in for Tom Curran this morning. A follow-up on the technology side. Is Solaris Lens running on mostly the utilized MPMS units right now and how has the customer feedback been?

Kyle Ramachandran -- President and Chief Financial Officer

This sort of system is available on all systems, if you will, the software. We're displaying that inventory remotely in all instances. And I think we've talked about this in the past, when we look at the paradigm of -- or the spectrum rather of different operators and different pressure pumpers, they all manage their sand supply chain differently. Some rely heavily on the data; some folks use it sometimes, and then there's folks that are still doing it very much in an old-school methodology. So that gives me that spectrum, but over -- in general we've seen more folks relying on the data to help better manage the well site, manage the trucking, dispatching and effectively drive down costs.

Ryan Pfingst -- B. Riley FBR -- Analyst

Got it. And just a quick second one. For the incoming chemical systems, are those going to be deployed across multiple basins or mostly in the Permian?

Kyle Ramachandran -- President and Chief Financial Officer

They're certainly able to go in any basins. We've had them in some areas with very cold weather and so we've designed our cold weather package, which obviously has to take into account liquids. So no, there won't be any basin limitation for that offering, and we have, as I mentioned, had them in some areas with cold temperatures.

Ryan Pfingst -- B. Riley FBR -- Analyst

Got it. Thanks for the color.

Operator

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

William Zartler -- Founder, Chairman and Chief Executive Officer

Thank you, Nicole. Before we close out the call, I'd like to summarize a few of the key points. We continue to be in a unique position where we can grow with our existing and new customers with both legacy and our new products. We are completely reliant on the overall market for growth. We built an innovative culture that continues to look for ways to both improve our existing products as well as develop new complementary products. Our free cash flow generation in 2019 will provide us with a lot of options on top of an already flexible capital -- balance sheet. We demonstrated our willingness to return capital to shareholders with our recent dividend initiations and we will continue to consider all options that maximize shareholder return.

Thank you for joining us today and we look forward to updating you again in the next quarter. Nicole, you can close out the call, please.

Operator

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

Duration: 47 minutes

Call participants:

Yvonne Fletcher -- Senior Vice President, Finance and Investor Relations

William Zartler -- Founder, Chairman and Chief Executive Officer

Kyle Ramachandran -- President and Chief Financial Officer

Martin Malloy -- Johnson Rice -- Analyst

Jud Bailey -- Wells Fargo Securities -- Analyst

John Watson -- Simmons Energy -- Analyst

George O'Leary -- Tudor, Pickering, Holt & Co. -- Analyst

Jonathan Hunter -- Cowen and Company -- Analyst

Praveen Narra -- Raymond James -- Analyst

David Smith -- Heikkinen Energy Advisors -- Analyst

Jason Wangler -- Imperial Capital -- Analyst

Ryan Pfingst -- B. Riley FBR -- Analyst

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This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

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This article appears in: Personal Finance , Stocks
Referenced Symbols: SOI



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