Solaris Energy Infrastructure, Inc. (SEI) Q1 2019 Earnings Report, Transcript and Summary

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] 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.

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.

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 slower start across the industry as operators responded to a rapid decline of 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 U.S. 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 onto our systems during Q4 with the original expectations of bring frac fleets back during 2019 ended up keeping the 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 U.S. 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 towards a manufacturing type mode and 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 railcars 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 a 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 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 bundled solutions 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 delivered 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 in the second quarter. Further success into this new service offering could continue to contribute to growth even in the context of a flat U.S. 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 goes 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.

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 a 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 are 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. The 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. Go-forward, we expect total SG&A and personnel costs to run at or above $5 million per quarter as we've added additional headcount for 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 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 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 AutoHopper 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 30, 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.

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

Good morning.

Good morning, Marty.

Good morning, Marty.

My first question is on the free cash flow generation. It looks like from your release date you all generated a fair amount of cash here in April about $10 million after CapEx. Your CapEx looks like for the year is probably front end loaded and there was 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?

Sure thing, Marty. We've discussed over the last couple quarters that this business has reached and inflection point as to free cash flow generation. We certainly saw the beginnings of that in the first quarter. 2017 and 2018 were definitely large growth capital years for the business. 2019 from a capital standpoint is really going to be around introducing a new product. So the pace of that will be measured. We coupled that with our large base load of 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 that unwound in April. And 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.

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.

Sure. The scope of the opportunity, I think is pretty significant. When 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 simply 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 the 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 aren't interested in necessarily managing all those details. And 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 an order of magnitude of say 8 times 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.

Great. Thank you.

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

Thanks. Good morning. A question to you guys. It looks like you're adding systems again, although 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.

Sure, Jud. I appreciate the question. I think, as we've 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 larger operator that we've been courting 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. And in the first quarter, we actually were able to deploy multiple systems to that customer and they are seeing higher stages per day and 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 uptake 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 'new technologies' not necessarily Sand Kings. 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.

Okay. 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?

Yes. Thanks, Jud. Yes, I think the context of this is, this is 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, a 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 pick up here is going to be kind of chunky, if you will.

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?

Correct.

Yes, that's correct.

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

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

Thank you. Good morning.

Good morning, John.

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 contributions from chemical systems? And I understand if you'd rather not share, but curious if you have that.

I guess, from a P&L standpoint it's in the system rental and system services and cost of rental and services. They are blended with proppant. 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 proppant system contribution in the first quarter.

Right. Okay, okay. 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 Solaris Last Mile System. Do you know what that number might look like for some of your peers? And when you have these customers that try another system, what their downtime percentage looks like?

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. Again, we try to focus on what we can do to improve our offering.

Our goal is to get ourselves towards zero.

Right. Okay. Okay, 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?

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.

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?

Well, 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 into new basins 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 it form 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.

Okay. Perfect. Thanks very guys. I’ll turn it back.

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

Good morning guys.

Good morning George.

Just curious given you guys talked about some of the new solutions you guys were working on from a technology and an engineering standpoint. As you're 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?

It might be a dead giveaway, if I told you exactly what we're working on or what are 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 and understanding what their needs are to make their fracs go quicker. And the ultimate goal, as we mentioned in the call was sand 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.

Yes. I think importantly as far as with our customers, we've got 25 plus different customers today, and these are some of the leading top 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, understanding that they made capital investments in that kit, understanding where the maintenance pinch points are, and where it can make sense to incrementally have a rental piece of equipment.

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

And that's helpful. And then on the belly dump side I know you guys kind of reworked to that offering. I'm just wondering where we sit today on the belly dump front and as you talk to customers about the balance for the remainder of the year, does it feel like more of those systems trickle into your fleet? Or I mean, I understand the efficiencies of the pneumatic fleet and having the 24 offload points on site that a lot of your customers already like. Could you just talk about the dynamic there and whether we see a growth in belly dump and maybe frame where we are today as a percentage of your overall fleet?

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've dug into the 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 part of our toolkit, but it's not something we believe is going to be required across our asset base. And it will be more specific to certain operators. To be perfectly honest, our belly dump solutions and every other belly dump solution on the market takes a larger footprint. And so we are 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 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.

Great. That's very helpful color. And I'll sneak in one more if I could. As 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 quick the 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?

I think that is the biggest lever. At this point, we've talked about completing a couple more of the sand systems, but we're not queuing up the supply chain today to build a significantly amount more of sand systems this year. So, really ultimately it is the chem systems. George O’Leary: Great. Thanks for the color guys.

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

Hey, good morning Bill and Kyle.

Good morning.

Good morning.

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?

I wouldn't be modeling incrementally from where we are today. I think as I look back at the last four quarters, it's bounced around in a very narrow range. Again I go back to -- is the 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 contracts nominally. But the overall contribution margin on the 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 things, one is we've talked about pricing the last couple 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 manage our costs with the notion of understanding that we would be picking back up activity. So we didn't do massive 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 model where we are today.

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?

For the most part, our contracts are structured around activity and its pricing based on a certain volume of activity with a 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. 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 problem 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.

Yeah, and I think I'll add a little bit to the low cost. It's a low all-in cost over time. There's 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.

Got it. 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 a step down in the contribution you receive there? Or could you possibly get some spot work that could offset that contract change?

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

Okay, great. Thanks. I will turn it back.

Our next question comes from Praveen Narra of Raymond James.

Good morning guys. Just to follow-up on the Last Mile bundled option, could you give us kind of ballpark for where we are, where we were in 1Q. And then I guess more importantly how much of this can -- how large can this be the percentage of your business before we actually do have to start putting assets from the balance sheet? And can we scale forever in this model?

I think as we mentioned a strategy proportion of our customers today are really not asking us to do this for them. So when we look at our current fleet deployed to customers we can carve off a significant 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 -- win 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.

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 -- from one to system 10. And then I guess has anything changed in terms of the expected cost per system?

The learnings have been varied. From a manufacturing standpoint, we've had a couple components that were let's just say not right sized. 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 acids 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 that the shale plays mature and we look at going back to pads that already have production facilities on-site, the chemical footprint is significant. And so we've -- as we mentioned condensed that significantly. So that's a savings that we sort of honestly took a little bit for granted. But 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 at 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.

Perfect. Thank you.

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

Thank you and good morning.

Good morning David.

This is -- first this 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 earlier experience with the proppant systems?

I think we bought the original technology from Loadcraft back 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 and 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 a 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 in that's sort of held us back from releasing these next seven in the first quarter and they'll be rolling into the second quarter. But I think it's going well. We are learning a lot and dealing with different viscosities and some of those new FRs and some of the various way of doing things in flows are all important pieces of the tweak. But I think we've got the right team on it.

And the follow-up is you've got a list of operators waiting to try out the chem systems when available to them. Do you think there's another list of customers that waiting in the queue for Version 2.0 or 3.0?

I think it's going to be Version 1.1. It's not really going to be a 2. I mean I can say the core of the system we think we 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 measure that once you move it 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.

Great. Thanks very much.

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

Hey, good morning, guys. Wanted to ask you mentioned on the release about the right sizing 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 move through the year with the lighter CapEx budget the next couple quarters?

As we've said all along, our manufacturing facility is there to meet demand. We've got a high level of contracted workforce and combined with our employees. The range of outcomes of capital spending for the year, we believe we can meet with the existing workforce. We had geared up the plants last year to be 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 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 side of demand.

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 chemical or the sand systems.

It's going well. We -- on the trucking piece, we're integrating across third-party trucking platforms. So we've steadily increased 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 into 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.

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

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

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

So, the 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 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 old school methodology. So, there continues to be 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.

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?

Yeah. They're certainly able to go in any basin. 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 that offering. And we have, as I mentioned, had them in some areas with cold temperatures.

Got it. Thanks for the color.

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

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 aren't completely relying on the overall market for growth. We've 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 may close out the call, please.

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