Solaris Energy Infrastructure, Inc. (SEI) Q3 2018 Earnings Report, Transcript and Summary

Good morning and welcome to the Solaris Oilfield Third Quarter 2018 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Yvonne Fletcher, Senior Vice President of Finance and Investor Relations. Please go ahead.

Good morning, and welcome to the Solaris Third Quarter 2018 Earnings Conference Call. I'm joined today by our Chairman and CEO, Bill Zartler; our President and Chief Financial Officer, Kyle Ramachandran; and our Chief Operating Officer, Kelly Price. Before we begin, I'd like to remind you of our standard cautionary remarks regarding the forward-looking nature of some of the statements that we will make today. Such forward-looking statements may include comments regarding future financial results and reflect a number of known and unknown risks. Please refer to our press release issued yesterday and the 10-Q filed yesterday along with other recent public filings with the Securities and Exchange Commission that outline those risks. I would like to point out that our earnings release and today's conference call will contain discussion of our non-GAAP financial measures, which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. Reconciliations to comparable GAAP measures are available in our earnings release. With that, I'll now turn the call over to our Chairman and CEO, Bill Zartler.

Thank you, Yvonne, and welcome, everyone. I'm pleased to share with you today another quarter of solid execution from the Solaris team. During the third quarter, we grew our adjusted EBITDA 21% sequentially to over $36 million by adding 24 systems to the fleet and growing revenue days by 20% quarter-over-quarter to 11,848 days. Our team was able to execute on this growth despite the industry backdrop of flattening frac market in the third quarter, which is a testament to the efficiency, reliability and value-add that our technology brings to our customers. Our growth in a flat market implies that we were able to gain market share in the quarter. We estimate we currently have roughly one-third share of the US market in our Mobile Proppant Management Systems business. While we can't predict where market share will ultimately end up, we continue to see opportunities to place systems, both with existing customers, where our share is underrepresented as well as new potential customers, some of which have not tried the Solaris system because they have legacy contracts with other solutions, have not yet switched away from buying bundled services or the other proppant solutions that have worked fine in the past, are starting to show shortcomings as the industry grows. We have systems deployed across the major US basins with exposure to both oil and gas production and recently mobilized two fleets to the Bakken. I'd like to highlight a few industry trends that should continue to support growth of our business. First, the industry continues to shift a meaningful amount of its sand procurement away from Northern White to in-basin sand, which lowers the absolute amount of in-transit inventory and focuses the management of that inventory around the trucking piece of the value supply chain, which can be highly unpredictable. We believe that variability drives an increased need for inventory buffer on the wellsite as well as our advanced software solutions to improve real-time dispatching of trucks. Second, we're also seeing a continued shift toward efficient and manufacturing-type development, including completion using, 2 or 3 well zipper fracs and multi-wellpad development, which speeds up the rate of sand consumption and drives the need for wellsite storage buffer and increase supply-chain visibility. The Solaris solution, which includes advanced software solutions and 12-pack configurations, are well suited to meet this growing industry trend. And third, the recent declines in sand pricing can incent operators to use more sand, which is positive for our business. Managing both the increased volume of sand and increased delivery rate to the blender become challenging for other systems that are not able to accept delivery of sand during fracking operations, requiring significant manual operations to maintain inventory at the blender or at footprint limitations. Reliability is also key to managing these higher-velocity operations as downtime is costly. The Solaris systems' built-in redundancies avoid single points of failure, which we believe results in superior operational uptime performance and provide significant value to our customers. Also, our monthly rental business model means as operators pump more sand, their cost per ton of sand using our system declines, which compares favorable to many other systems that are priced on $1 per ton basis and allows our customers to keep the economic upside from their efficiency gains. We also continue to develop new products and proppant enhancements, which include new software functionality, new automation developments and enhancements to fill our silos using belly dump trucks, and the introduction of our mobile chemical management system offering. For example, the latest evolution of our software offering now includes the ability to view a vendor-to-blender supply chain dashboard that integrates the Solaris PropView wellsite storage data with third-party trucking logistics applications to drive inventory balancing and trucking efficiencies. This integrated supply chain visibility recently enhanced Solaris' ability to provide last-mile proppant management service to a large dependent Permian operator that sources sand from a local mine. Our recently deployed auto hopper technology allows blender rate to automatically sync with and control the speed of the delivery valve from the sand silos, which will eliminate the need for personnel at the blender hopper, who typically visually monitor sand levels in the blender. This automation development allows us to enclose the area around the frac company's blender. The elimination of personnel at the hopper helps further mitigate any silica dust exposure by removing folks from that zone, where dust tends to be most prevalent at the wellsite. Also helping to alleviate labor tightness that's increasingly becoming a challenge for the industry. We are working with multiple customers to integrate this functionality across a variety of blender designs and operating systems. Our recently developed mobile chemical management system also has a potential to reduce additional wellsite labor by simplifying the way chemicals are delivered, stored, mixed and ordered at the wellsite. We are manufacturing and will deploy three chemical systems in the field by the end of the year. We expect the first one of those three to be in the field running the second half of November. We believe having three systems in initial field trials rather than one will help us accelerate our learnings during the first quarter of '19 and allow us to make design tweaks faster, so that we can accelerate broader market deployment during 2019. We've continued to enhance our belly dump capabilities and recently manufactured our fourth kit. We reduced off-loading time and increased reliability to that system. Our ongoing innovation demonstrates how Solaris continues to solve problems for our customers and can continue to grow our addressable market as we help them operate more efficiently. We see ourselves as a problem solver for the oilfield logistics and efficiency improvements. We started with sand, and while we believe we still have room to grow there, we're also turning our attention to addressing other inefficiencies we see on the well side in the supply chains. We continue to enhance our sand-related offerings, and we'll develop additional offerings that both continue to enhance our shareholder value and help our customers in the industry do the same. Now with that, I'll turn it over to Kyle for a more detailed financial review.

Thanks, Bill. As highlighted by Bill's remarks, we continue to grow the business significantly in the third quarter, which translated into continued operational and financial performance. We generated 11,848 revenue days, $56.7 million of revenue and adjusted EBITDA of 36.5 million. Relative to the second quarter of 2018, revenue days, revenue and adjusted EBITDA all increased by approximately 20%. This compares to an industry activity backdrop that was relatively flat in Q3 in terms of average rig count, stage count, and frac fleet count. Our business has outperformed the market, and we believe we will continue performing better than the market despite the impending short-term activity softness the industry expects to see later in Q4. During the third quarter, rental and service revenue grew a combined 20% versus the second quarter, which is in line with the growth in revenue days. Our growth in system revenue this year has been a function of both deploying additional systems with legacy customers as well as adding new customers. For example, we have seen more than 40% increase in the number of systems deployed to customers who are renting systems this time last year. In addition, the number of direct customers we serve has nearly doubled since October 2017. Transloading revenue in the Kingfisher facility in the third quarter was up 43% on a sequential basis. As a reminder, we completed phase 1 construction at the facility at the end of July. Gross profit, defined as total revenue less the cost of proppant system rental and services, transloading services and inventory software services, excluding depreciation and amortization expense, increased 21% to $40 million compared to $33.1 million in the second quarter, primarily due to higher revenues and operating activity discussed. Selling, general and administrative costs and salaries, benefits and payroll taxes decreased to $3.9 million from $4.3 million in the second quarter. Adjusting for noncash stock-based compensation, SG&A was up 5% quarter-over-quarter. Going forward, we expect a total SG&A run rate closer to $5 million per quarter. Net income for the quarter was 26.4 million, an increase of approximately 23% versus the second quarter. Adjusted pro forma in net income for the second quarter was $24 million or $0.51 per share versus $19.7 million or $0.42 per share in the second 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 a full exchange of all outstanding Class B shares and Solaris LLC units, we've presented net income and earnings per share that is more comparative with other companies that have different organizational and tax structures. Total capital expenditures for the quarter were approximately $38.8 million, which was down from second quarter, primarily due to the completion of the Kingfisher facility at the end of July. During the third quarter, we added 24 proppant systems to our fleet and began manufacturing our first chemical system. We believe these investments in our business will generate attractive long-term returns for our shareholders. I'd like to summarize our third quarter financial performance talking about cash flow. With adjusted EBITDA in the third quarter of more than $36 million and CapEx of approximately $39 million, we were close to breakeven free cash flow before changes in working capital. We believe the inflection to positive free cash flow will occur in the next couple of quarters, and we continue to expect meaningful free cash flow generation in 2019. We remain committed to deploying this excess cash where we think we can generate the highest rates of return for our shareholders, and we'll update you on our plans next year. Now turning to our outlook on the fourth quarter. We ended the third quarter with 146 systems in the fleet and currently have 152 systems in our fleet. We expect to end the year with between 160 and 162 sand systems and three chemical systems in the fleet. We expect to use operating cash flow to fund the remainder of capital expenditures in 2018. We ended September with approximately $64 million of liquidity, which consisted of $2 million of cash and $62 million of borrowings available under our $70 million credit facility. We drew $8 million on our credit facility in the third quarter, which was used to fund a portion of our capital expenditures during the quarter. In terms of our revenue days outlook, we expect October revenue days to be down slightly from September as we shuffle systems in response to whitespace and frac calendars. With a market share of around a third of the overall market, we are not immune to the softness expected in November and December that several of our industry peers and customers have already cited on their earnings calls. This industry pause will likely manifest for Solaris in a utilization rate that is lower than what we've seen over the last two years, resulting in potential softness in revenue days, which could be down in the fourth quarter relative to the third quarter as the working US frac fleet count declines. We've conducted an internal analysis of both our direct and indirect operator customers and their activity plans. We believe Solaris can continue to outperform the level of activity indicated by the overall frac market, which should translate into continuing to increase our market share and addressable market. And as others have also noted, many of our customers are indicating getting back to work in Q1 and are planning robust development plans for 2019. We are excited to support them in those efforts. With that, I'll now turn it back to Bill.

Thanks, Kyle. A few more thoughts about the outlook before we open the call to Q&A. The industry softness occurring right now is due to two temporary factors, budget exhaustion and takeaway constraints that most of you heard about. As Kyle mentioned, we are not immune to this near-term softness, but we expect to outperform the overall level of activity both in the near term and into recovery that is visible for next year. The pause also comes with some benefits as it has allowed us to shift our manufacturing capacity around to accelerate the build out of our chemical systems and to add further product enhancements and refurbish and upgrade systems that have been operating in the field for five straight years. As the industry moves past the current pipeline capacity constraints over the next year, other bottlenecks, such as labor, are likely to take place. We're positioning our company to help our customers alleviate those bottlenecks, just as we did when we founded the company to address the industry's sand logistics challenge. We remain excited about the many opportunities Solaris has now and in the future. Between continued opportunity on the sand management side, new product rollouts and potential to produce a significant amount of free cash flow in the coming year, we have a lot to work on and are not solely relying on the ebbs and flows of the short-term completions market for opportunities to create value. With that, we'll be happy to take your questions.

[Operator Instructions] The first question will come from James Wicklund of Crédit Suisse.

It's Jake on for Jim. Just a question first on competitive dynamics. So you have a competitor from the sand space that's been ramping up on their silos from a recent acquisition. Your margins as well as revenues per system continue to expand, so it doesn't seem like we're seeing any impact in 3Q so far. But are you seeing a heightened level of competition? Or kind of any early signs around price pressure? Could you just kind of touch on competitive dynamics in the market today?

Good question. I mean, the competitors that are there today, mostly have been around since we’ve formed the company. So there's always been that pressure. I think the evolving business model and packaging it up is there. We haven't seen any real pressure. I think that the issue about operational efficiency in our kit and the difference between what our system does and other silos may do, I think is significant in operations in the field. And we continue to see demand for our systems versus that solution as well as the new-box solutions, which really are highly labor-intensive on top of having some challenges on the speed of these superfast fracs.

I think that the continued commoditization of sand, particularly with the development of local sand, really drives the value proposition of having a rental piece of kit from an independent provider, such as Solaris. Really allows you to shop the commodity again, which is going to be on the same side in the trucking side.

Go it. That's helpful. And then on the chemicals offering, I guess, can you help us a bit with unit economics? I think on the last call, you talked about the capital cost being about half that of a sand silo system. Should we think about that -- about the chemical offering kind of driving similar returns? Or maybe help us with how to think about the margins or returns on the chemicals offering relative to the sand offering.

I think it's very safe to model and expect the profile look very similar. It's roughly half the capital, and we think roughly half of the cash flow, operating cash flow out of that operations. So I think that's a safe way model it.

I think it speaks to the trends around efficiencies, improving safety on site, reducing labor, improving the overall quality of the frac. So through our chemical system, we're going to be driving very precise delivery of the chemicals into the blender, and that's something that's not happening today. So the value proposition is really compelling. We have continued the commercial development of the product from a conversation standpoint with different participants in the industry. So we obviously have a pretty significant customer base today on the sand side with 30-plus different unique operators and pressure pumpers. We're talking to all of them. We're also talking to folks who have historically been using, let's just say, other sand solutions on site. So that sort of opens up a new piece of the market for us. And then the next piece is on the chemical distribution side. The chemical providers are actually showing a very significant amount of interest and this is really going to drive value, as they're the ones responsible for managing the supply chain and delivering those to the wellsite.

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

Just curious on the chem system side. You have three out, and it sounded like in your last response from a marketing perspective, as you go out and convince folks to give this a go or to utilize it, that you're going to a different subset of customers. Just curious who you're actually marketing to. And then if there's the opportunity to, let's say, you already have an E&P or a service provider hooked on your system, going to one of those incumbents and incentivizing them to -- or suggesting that they maybe push the chems guys or spec your systems in for the chemicals players. Just curious how that process works, and what the marketing strategy is.

Well, we spent a significant amount of time with our current customers, both operators and pumpers, discussing the system, helping -- getting input on the design, frankly, on how we roll this out. The new customer base really is the chemical guy for us, and so we've brought a few of those in and have visited with them about how it all fits. I think there's no forcing anyone to use this. I think the answer is, we've got a reputation on the well side of having extremely reliable equipment that works really well, that's low labor, that's got some great automation in it. And I think the chemical system is going to just add to that reputation, and we'll have it out there, both with current customers and then, frankly, some new customers that may be looking at chemicals differently. I think the difference in the chemical business and the sand business is, you have a wider variety of chemicals. It's a little more complicated from a supply chain. You've got the ability to mix and blend and move concentrates versus move dilutes. And so there is a different level of dynamic, would actually adds and demonstrates how much more value you can have by having a better set of equipment on the wellsite.

Great, very helpful color. And then on the 12 pack side, you guys mentioned seeing an increased prevalent -- more larger pads, potentially guys with cheaper sand contemplating ramping up their completion cocktail again. Just curious, how many 12 packs you have out there today? And what's the geographic distribution of that? And then as you look into 2019, are you seeing increased demand for 12 packs?

So the 12-pack number is very dynamic. We've got customers that will put a 12 pack on one pad, then moves it to the next pad, then they'll move to a 6 pack. So it's kind of constantly evolving. Today, we've got 5 or 6 running, I believe, and they're both in the Eagle Ford as well as the Permian with a couple of different customers. And I think in general, we're seeing the overall awareness of the need for more storage on site as folks talking about forward staging. But clearly, as we look at activity ramping up into next year with budgets resetting and in the Permian specifically, pipeline capacity opening up the pending difficulties and moving all that sand, the wellsite is going to drive, in our belief, more need for 12 packs. And so we think as we look out into the second half of next year, that's going to be one of the ways that our customers are able to drive efficiencies.

Yes. And we have some recent examples of all the rain out in West Texas and trucking issues and bridge issues and challenges there. We've had customers that had 12 packs, even with 6. But even enhances with 12 that have been able to work right through that -- those short-term dynamics that impact, if you don't have that storage on the wellsite.

And I think sort of on the periphery, there's a couple basins that aren't the Permian, aren't the Eagle Ford, aren't the larger focuses of activity overall for the industry, that have much longer pulls from transloads or mines. And in those circumstances, there's real need for storage because of the -- just like getting the long truck distances.

I'll sneak one more, if I could. You guys are so geographically dispersed at this point. Business continues to grow and take market share. From a regional perspective, where are you seeing the most pressure on rental days?

I think we've seen the slowdown in the Delaware, at least short term, more than we have any other place. And we've been seeing a pickup in the gas areas. Marcellus is growing. Like so we move to the Bakken for oil up there. The rig count is showing those upticks, and I think the completions as well. So the diversification, the ability to move the kit around pretty efficiently is very helpful for us.

The next question will come from John Watson of Simmons Energy.

I wanted to follow up on some of the guidance for 4Q. It sounds like utilization might be softer than it has been in previous quarters. And I just want to make sure I'm thinking about that the right way. Can you offer any further commentary on where we might see utilization in Q4? And then how it might rebound in Q1 as activity picks up again?

Yes. I mean, we really think about it is more revenue days than utilization, given we are a manufacturing kit, we control that supply chain, the ability to drive utilization is dynamic. It's both revenue days driven, but it's also the rate of our capital spend. So the sort of guidance we provide is, look, we look at October, it's probably flat overall relative to the third quarter. But there's certainly lots of discussions out there as late November, December hits and potential additional slowdown. So at this point, we don't have a crystal ball, but we think guidance of flat-to-down slightly in the fourth quarter is probably where we come out as far as revenue days. But that being said, we are in discussions with obviously our customers around '19, but we have multiple folks that have low concern around securing capacity as we turn the corner in '19, and budgets reset and securing capacity as far as frac crews, labor, et cetera. And several of our customers are indicating picking up activity in late November and December in order to avoid missing out as they reset their budgets. So it's definitely dynamic. We've obviously grew 20-ish percent in the third quarter. We're certainly not guiding to that today, but we are taking this opportunity, this pause, if you will, in the overall market to shift our manufacturing capacity. So by bringing in three system -- three chemical systems into the fleet by the end of the year, that's sort of new guidance for us. And so that's requiring us to shift some things around in our manufacturing facility. No additional capital, but that's certainly something that, as we look into '19, we'll continue to grow that as well.

That's perfect. In terms of full year 2018, can you speak to what percentage of the systems deployed have displaced competitors versus displacing a SandKing or a legacy storage system?

Well, I mean, it's hard to look back on the whole year and say that I think that over the last quarter or so, we've -- we believe that 20% of the growth has actually been replacing sited X generation systems because they work better. Obviously, the market is -- effectively replaced most of the old stuff. There's still a little bit around. But then I think there's still some old stuff that's new stuff that's going to continue to evolve and find its home. I think we just believe that our continued focus on making our stuff fit the current frac design, work very efficiently, save labor, and save our customers' money is a fundamental need that the industry has. And that the reliability that we've proven that we can have is going to keep us -- keep this equipment working and working, working in a fair price for us.

As we look into '19, there are folks -- I think we mentioned on the prepared remarks, who have been under contracts with other solutions. And we're obviously in active discussions with those folks around what their plans are. And there's certainly a significant amount interest in trying something else.

Okay. Perfect. That's helpful. One last one for me. Can you talk a little bit about the legacy method of storing chemicals on the wellsite? And why Solaris is an upgrade to that? You mentioned it in the prepared remarks, but I was hoping for some elaboration and just for my edification.

Well, I think if you were to go to average completion today, and I don't know -- can't say that there's one average completion. Everyone does it a little bit differently and adds a little bit of twist to it. But generally, you're going to have tanker trucks. If you've got acid, you're going to have ISO containers full of various other refrigerant, reducers and things. And you're going to have totes. And even sometimes, barrels of things like biocides and other agents. And so if you sort of try to clean that all up in an organized fashion and replace those kits with multiple-sized containers using our silo system, so the design, the general design of the system is, we'll have one -- it will be usually a three pack, which will have five different containers for the standard kit. So one silo will be a full container of one liquid; two of the silos each have two separate containers on them inside of the silo system. And so that gives us the ability to rent five or if we replace the one that's all with another double. So in all of that, embedded in our base unit with the blending and pumps and high-end equipment and ensure that we can accurately measure, accurately flow and control that automatically with the right safety features to eliminate hoses running everywhere, connected up with multiple ISO containers and multiple totes and things that are manually operated today, we believe, in all discussions with our customers, will really help the efficiency and the control of the dosing during the frac job.

And yes, one of the big themes we've tried to highlight over the last couple of years is we run these businesses around automation. And so the things we're doing around the proppant side, around auto hopper and controlling the speed of delivery of sand into the blender via the screw augers in the blender, the chemical piece is going to translate into the same manner. And so we really see all of this being operated from one central location, rather than folks running over to totes and opening valves a quarter turn, for example.

The next question will come from Mike Urban of Seaport Global.

So appreciate the detailed and thoughtful guidance. I was wondering if I can dig into that just a little bit more. I think it makes a lot of sense that whatever the market does, you guys will clearly do better than that. Embedded in that kind of flat-to-down forecast in terms of revenue days, is there an explicit view on activity levels in the form of frac spread, stage count, anything like that? So for instance, if the market -- if the market is down 5, mid-single digits, something like that, that gets you kind of flat to down. And if it's worse, we should think about it kind of in that same ratio. Just wondered if there's a way to kind of calibrate the magnitude there to the extent we do see things vary from a kind of a base forecast?

It's some measure of -- as you've kind of outlined, if the market's down X, we expect to be down less than X. What I would say is we've gone through a very granular buildup of our customers, based on conversations with them. And so we feel like there are opportunities actually to significantly outperform the market, again, per my earlier comments around folks getting ahead of the bottlenecks. And if we look at our customer base, we tend to think these are the forward thinkers. And so they're identifying, how do they make sure that they can hit their numbers as they roll into Q1 and so what that means is getting ahead of some of that stuff. And certainly they are identifying sand logistics as one of the big bottlenecks. And so we think we can benefit from that.

Okay, got you. And then as it pertains to the chemicals systems. Do you have kind of thoughts on a rollout schedule at this point? Or is it more, let's put these 3 out and see how it goes as, you said, kind of work up the learning curve more quickly? How should we think about the deployment schedule there?

I think we're -- it's too early to predict how quickly it goes. All feedback today on visiting what we have -- it's going to the field in a few weeks, today, is that it's going to be well accepted and be a piece of standard kit. But I think the rollout schedule is too early to say. It's effectively, from a manufacturing perspective, making a half -- a little over half a cent, because it's got a little bit more different valving and things on the bottom of it. We've looked into the supply chain on meters and pumps and things, and think we had a handle on exactly what it's going to take to accelerate manufacturing on that going into the first quarter next year. But we're not providing any details on how quick that goes.

Yes, and I think what we've demonstrated on the proppant side is an ability to significantly ramp our manufacturing capacity without putting incremental capital into manufacturing capacity. So when we went public, we talked about -- in May of '17, we talked about peak manufacturing capacity of 4 systems per month. We've expanded that to 8. So I think our manufacturing team has demonstrated -- and our supply chain team has demonstrated the ability to beat expectations there. So to summarize what Bill said, look, we think there's a tremendous opportunity. The commercial feedback has been great, and our team on the execution side has proven their ability to really ramp. But at this point, we're not prepared to outline what that looks like specifically.

[Operator Instructions] The next question will come from Jason Wangler of Imperial Capital.

Wanted to ask on -- appreciating the comments about fourth quarter and kind of -- looks like the system build's going to be a little bit slower. How do you think about CapEx kind of fourth quarter on a go-forward basis at that kind of run rate? As you mentioned, Kyle, kind of getting closer to the cash flow neutrality situation?

Yes, when I penciled out fourth quarter CapEx as to some of the guidance we provided, I think in the third quarter, we were close to $40 million of CapEx. And we kind of pencil out the fourth quarter, it looks look more like 30-ish. So I think when we look at operating cash flow from the third quarter relative to that $30 million of the fourth quarter CapEx, that's where we start to see that inflection point on cash flow. And so certainly, as activity picks up in '19, we expect that trend to continue. We haven't provided guidance on capital spend next year. The levers there are -- obviously, continued development on the proppant side but also on the chemical side. So there's an opportunity to generate pretty significant free cash flow here, but it is dependent on how much we're putting back into the business through the different growth initiatives that we are pursuing today.

And I think to add to that is we will watch that capital spending lever very closely, and we're going to build on customer demand. We're not going to just go out and spend the money because it's flowing in. And so I think we're very carefully watching that, and I do think that it's hard to predict what that looks like. And we -- because we control our manufacturing, we have the ability to turn that lever pretty quickly and, frankly, think that the majority of what we make next year may be the chemical silos not the sand silos.

I appreciate that. And then at the beginning of this year, you guys were able to kind of lock folks into 12-month contracts, I believe, for the system. So that's obviously starting to probably -- that discussion's probably starting to come back around given we're in November. Just curious how you feel like that's gone in the last year with -- under that kind of strategy. And your thoughts going into maybe those contract discussions again here in the next couple of months.

Yes. No, I think it's actually gone really well this year. One of the things that -- one specific feedback we've gotten back from customers recently is we're one of the very few vendors that they have that in '18, as things got tighter and tighter, we weren't going back constantly with pricing discussions. As we've discussed before, we set pricing at the beginning of '18 for the vast majority of our customers, and we stuck to that. And that actually I think, really differentiated us from a supplier standpoint, and I think we won some good relationships from that perspective. And as we look into '19, I think we're going to take the same approach or we are taking the same approach. Again, what is -- you, customer, what does your outlook look like? How does that compare to what you have today? How do we think about securing additional capacity for you? And then what is -- what are the new things that we've added to the system year-over-year? And so those are things like, the level hopper that we've talked about, continued automation, bringing in non-pneumatic capability. These are the ways that we look at pricing, and it's really about value proposition. And what are we doing differently year-over-year to demonstrate to our customers that what they're getting is improved, is enhanced. And so that's really where our pricing comes from. It's not really pricing driven by just shortness in supply. It's more about what have we done to improve the offering. And then secondly, what does their sand consumption look like? And our rental model, really, a lot of the value that's generated from continued efficiency enumerates to the operator and to the pressure pumper. And so that model really gives us the flexibility to be pretty dynamic there.

The next question will come from Chris Voie of Wells Fargo.

I just had a question. You recently mentioned that you were going to build to customer demand. With utilization potentially, let's say, mid- to low-80s next quarter, presumably rebounding over the course of next year, what's the level of utilization where you would begin to slow your build rate?

I think it's a great question, Chris. And if we look at the last two years, we've been anywhere from 96% to 98% effective utilization. This is a rental business. We do most of the maintenance and the field, but some of our systems have been operating for over 5 years and have never come in from a new paint job, clean up on some wells, et cetera. So there is a cycle of where we will be doing some maintenance on equipment. And so in order to run our business efficiently, we think we need to be doing that. And secondly, over the last couple of years, we have had to turn away business from lack of supply. And so we think something on the order of, call it, 90% over the long term is probably the right way to think about utilization. In the last two years, as one customer has dropped the system, we've able to immediately place it with somebody else. Over the long run, you're going to have a period of some whitespace, some shuffling where the next customer that's getting that system is a week to 2 to maybe 3 weeks away. So that timing is pretty dynamic as we become more and more of the installed base.

Okay, that's helpful. And just to follow up. On Kingfisher, do you expect any incremental contribution in 4Q in terms of revenues or gross profit?

Yes, I think the -- we talked about July -- end of July, we completed construction. And as we looked at August and September, we -- I wouldn't call that a full run rate on a blended basis. So as we look into the fourth quarter, there should be incremental contribution. We've talked, I think, about -- we've given guidance about the sort of run rate revenue opportunity there. And so I think, as we look at the fourth quarter, that's probably more likely. And then on Kingfisher, because we haven't really discussed anything about it. We actually are now moving chemicals in the facility. I think we've got 5 or 6 different customers in the facility throughout the month of October. And we're in discussions with a couple of folks on bringing other commodities into the facility. So it's turned out to have some pretty interesting non-sand and non-dedicated customer dynamics to it.

The next question will come from Praveen Narra of Raymond James.

I want to come back on the displacement of legacy versus next-gen solutions. Can you talk about how the sales process is differed, I guess, when you're displacing these containerized or van silo solutions. Is it roughly the same? Or is there any trial period? Any color you can give on the change.

Yes. Thanks, Praveen. Our sales -- the sales cycle and process is exactly the same. I mean, I think we've got a demonstrated product with lots of experience and lots of revenue days out there, and lots of customers that have used it. And several customers, the folks in different companies move around a little bit as well, and so they've got various experiences added. We're willing to show it, and some of our customers are willing to show it off on their wellsites with their frac fleet. So, I think as it demonstrates the fundamental nature of having the inventory, having the reliability and what that looks like in real life versus on a spreadsheet is an important element to closing the next sale. And so I don't think there's anything different -- fundamentally different in the value proposition to the customer. It's just them understanding what it's going to do for them going forward.

Okay, perfect. And so I guess as we think about -- it was Jason's question on contracts for 2019, and the fact that there is so much more to offer with these systems, is it fair that we should think of the monthly rental rate as increasing in 2019 over 2018? Or how should we think about that number?

Yes, I mean, at this point, we're -- as I said, we're in discussions with our customers. I think I outlined some of the value propositions that we believe we're continuing to add to the systems. But at this point, we're not really providing guidance on pricing. It's a bit of the secret sauce at this point in the sales cycle, so we're not going to disclose that this point. But I think as we look at the next quarter results, we'll probably have more clarity there.

Okay, that's fair. And then one question on the chemical side, just in terms of the manufacturing process. Does the ramp-up in manufacturing of chemicals, when we get to it, does that displace the manufacturing capacity of the sand silos? Is it one or the other? Or can we do both?

We can do both to a level. So if you think about what we've been able to do from a capacity perspective today is 8 sets of 6 packs a month. A chemical silo is really a 3 pack, and so it's probably, because of the manufacturing a little different, it's probably the equivalent of 8 sand silos. It's somewhere in the 12 to 15 silos and equipment for the chemical business. And so I think there will be some tradeoff between there. I don't think we'll be making 8 sand silos a month next year all year. And I don't know whether we're making 16 or 15 sets of chemical silos next month. And so it's going to be a balance, and we're going to really read the market and have conversations with our customers about how we balance that off.

The next question will come from Mike Breard of Hodges Capital.

Yes. On your chemical systems, how long will they have to stay in the field before the customer is satisfied with the reliability?

That's a great question, Mike. I mean, I think product acceptance in the oilfield is evolving. I think that there are customers, both operators and pumpers, today who are staffed with a new set of bright engineers that really do the math and are smart about what to do. And so I think that, that new group of customers we have today and, hopefully, with the chemical silos, will figure out fairly quickly what it does for them in savings and the adoptions pretty quickly. I don't know how long it will take. The sand silo adoption was sort of quicker than we all expected. And some of that was the fundamental nature of the business. Some of it was the system just saving a lot of money for our customers. And so I think that time will tell over the course of the next couple of months on how quickly the orders pour in or the feedback comes back in for more of them.

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

Thank you, Karen. Before we close out, I'd summarize a few of the main points because we had a lot of good questions. In the third quarter, we really demonstrated our ability to outperform the market. We've had a lot of tailwinds over the last year, but -- for everybody. And I think as things flattened, I think our value proposition continues to prove itself out and satisfy our customers. We've got a team that's focused on continuing to improve the system. Our customer service, our field technicians and folks out there touching our customers every day, are trained well, understand it and try to make sure that we provide the reliability and customer service that makes our customers satisfied and more money. We're continuing to focus on enhancing our offering and building new solutions around making our customers much more efficient and better at their jobs. And if we continue to do that, the prospects for this company are fantastic. And we look forward to the fourth quarter and updating you all in the New Year. Thanks.

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