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FTS International, Inc.  (NYSE:FTSI)
Q4 2019 Earnings Conference Call
Feb. 28, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Thank you and good morning, everyone. We appreciate you joining us for the FTS International conference call and webcast to review fourth quarter and full-year 2018 results. As a reminder, this conference is being recorded for replay purposes. Presenting today are Mike Doss, CEO; Lance Turner, CFO; and Buddy Petersen, COO. Before we begin, I would like to remind everyone that comments made on today's call that include management's plans, intentions, beliefs, expectations, anticipations, and predictions for the future are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward looking statements are subject to risks and uncertainties that could cause the Company's actual results to differ materially from those expressed in any forward-looking statement.

These risks and uncertainties are discussed in the Company's annual reports on Form 10-K and in other reports the Company files with the SEC. Except as required by law, the Company does not undertake any obligation to publicly update or revise any forward looking statements. The Company's SEC filings may be obtained by contacting the Company and are available on the Company's website ftsi.com and on the SEC's website sec.gov. This conference call also includes discussion of non-GAAP financial measures. Our earnings release includes further information about these non-GAAP financial measures as well as reconciliation of these non-GAAP measures to the most directly comparable GAAP measure.

I will now turn the conference over to Mike Doss, FTSI's CEO. Please go ahead.

Michael J. Doss -- Chief Executive Officer

Thank you and good morning, everyone. I'm pleased to report that we had solid results in the fourth quarter. Our adjusted EBITDA of $64 million and adjusted EBITDA per fleet of $13.2 million was higher than we initially expected despite lower pricing and typical slack in our operations calendar near year-end. We generated healthy free cash flow, allowing us to further continue reducing our debt to $330 million net debt by year-end. Fourth quarter also marks the end to a very productive year in which we had 13% higher adjusted EBITDA and 29% higher net income than we did in 2017. We also reduced our debt by a total of $622 million last year, $319 million above our IPO proceeds. When the market began to soften in mid-2018 and as several of our customers reduced their programs, we reacted with a disciplined approach by not attempting to redeploy idle fleets into a market with falling pricing.

Based on our prior experiences, we recognized the need to be nimble, flexible, and disciplined in our execution. As a result, we were able to protect profitability and cash flow to a much greater degree than if we had single-mindedly focused on maintaining market share. In terms of operating efficiency, the first and fourth quarters of each year are subject to normally recurring events such as customer budget exhaustion and resets, holidays, and weather. Efficiencies tend to be lower during the winter months and pricing also moves up or down as contracts are often renewed ahead of the New Year. In addition, the drop in oil prices in the fourth quarter of last year introduced greater uncertainty that caused customers to rethink their plans to work through the holidays as well as their programs for early 2019. Nonetheless, our overall efficiencies held up relatively well in the fourth quarter.

We completed 6,038 stages or 312 stages per fleet in the fourth quarter, that's down from 6,991 stages or 321 stages per fleet in the third quarter. The decline in total stage count was primarily driven by fewer active fleets as we averaged 19.3 in the fourth quarter compared to 21.8 in the third quarter. Compared to the fourth quarter of 2017, stages per fleet was essentially flat. We produced a significant amount of cash in 2018 and demonstrated the resiliency of our structural cost advantages. During the year, we generated $284 million of free cash flow or $15 million per active fleet. We believe our performance by this measure is the best in the industry and is a direct result of four key attributes. First, our cost advantaged in-house manufacturing and reefer capabilities; second, our constant focus on efficiency and innovation; third, our lean cost structure; and fourth, our favorable tax position.

These four factors have served us well in recent years and we believe they will allow us to continue generating industry-leading levels of cash flow in any environment we may face in the future. Our most unique attribute is our in-house manufacturing capability, which provides us with substantial cost savings in both OpEx and CapEx. In addition, doing things ourselves allow us -- allows us to scale up or down quickly as customer demand fluctuates. In 2017 we were able to quickly take advantage of growing demand for horsepower and routinely won work at leading edge pricing due to our ability to get to pad quicker than our competition. More recently in the second half of last year, we idled fleets while keeping the market ready with essentially zero carrying cost. Because we are the manufacturer, we also get to innovate in real-time by making improvements to our equipment based on feedback from the field.

As an example, over the last two years we have modified -- modified the design, metallurgy, and manufacturing process of our fluid ends. Because of this, in 2018 we were able to increase the useful life of our fluid ends by over 40%. Late last year we began additional design improvements on our fluid ends that we think could increase useful life by another 20% plus as well as lower our cost of manufacturing. I've previously spoken at length about how our team has embraced the use of vibration sensors to identify failures in mechanical components before they necessitate a major repair. We are now analyzing this vibration data along with data from each entire fleet and job site. This includes all operating data from engine temperature to treating pressure and everything in between. All of this information is uploaded to the cloud to allow for real-time analysis, predictive analytics, and improved decision making.

This data is seen not only by our service supervisors on location, but by our National Operation Center in Aledo. We're excited about the possibilities of our data driven approach in this area because it serves as the foundation for us to automate the operation of our pumps. We believe that up to 50% of consumables and equipment failure relate to avoidable operator error. With automated pump control, which we expect will be operational by year-end, we can further reduce those failures, extend the useful life of our equipment, and reduce costs. We believe our manufacturing capabilities and level of innovation is a competitive moat that none of our peers possess other than perhaps Halliburton and one that is not easily replicated. Turning to our business outlook. We expect E&Ps will prioritize flexibility in their spending as they strive to be more capital disciplined in this environment.

This gives us limited visibility for the full year at this time. However, we are beginning to see signs of stability as activity levels are improving and opportunities to redeploy fleets are increasing. We started the year with 19 fleets and currently have 20 working. Taking into account recently awarded work, we expect to be at 21 fleets by the end of next month. However, I want to be clear that we are taking a very measured approach to redeploying fleets requiring them each to generate annualized cash flow that exceeds by $2 million our current Company average cash flow per fleet. Pricing remains competitive due to an oversupply of horsepower in the market. Our revenue per fleet declined by 16% during the quarter, approximately half of which was due to pricing. Due to pricing concessions that we gave in order to retain existing work earlier this year, we expect net pricing will be down by about 10% in the first quarter.

In terms of profitability, we currently expect the lower pricing partially offset by increased efficiencies will lower our annualized adjusted EBITDA per fleet from the fourth quarter by approximately $5 million. That will put our annualized cash flow per fleet at around $6 million after accounting for $2.5 million of annual maintenance CapEx per fleet. That's less than what we would prefer and we will be vigilant about rationalizing underperforming fleets.

I'd now like to hand the call over to Lance to discuss our financial results in more detail.

Lance Turner -- Chief Financial Officer

Thank you, Mike. The fourth quarter marks the end of a very profitable year for FTS. We generated higher profitability and cash flow than all of our similarly situated peers. More importantly, we used this as an opportunity to transform our capital structure to be more durable than ever. With gross debt of approximately $500 million and a cash balance of over $175 million, we believe we are very well positioned for any environment the industry may experience. Revenue for the fourth quarter was $248.1 million, down 26% sequentially and $1.5 billion for the year, up 5% from 2017. The fourth quarter decline of 26% was driven by lower pricing and lower fleet count with each contributing equally to the decline. During the fourth quarter we provided approximately 40% of the sand used in our operations, down slightly from our full-year average of 45%. Net income for the fourth quarter was $26.5 million and $258.4 million for the full year.

Earnings per fully diluted share was $0.24 in the fourth quarter and approximately $2.36 in 2018 after adjusting for the impacts of the IPO as outlined in our press release. Adjusted EBITDA in the fourth quarter was $63.9 million or $13.2 million per active fleet. This level of profitability is near the top of our peer group as it has been for seven quarters in a row. Adjusted EBITDA for the year totaled $419.3 million and adjusted EBITDA per active fleet for the full year was $17.3 million, up $1.3 million from 2017. I would like to point out that our adjusted EBITDA in 2018 includes $19.2 million of supply commitment charges. Had we added these charges back, our adjusted EBITDA would have been $438.5 million or $18.1 million per fleet. Included in the fourth quarter results was $3.2 million of supply commitment charges. As a reminder, this is a result of having fixed volume contracts for sand, primarily northern white sand, at a time that we were pumping approximately 60% regional sand.

While we are working with our vendors to reallocate a portion of this tonnage to regional sand mines, we continue to work with them to minimize these charges. Selling, general, and administrative costs in the fourth quarter were $21.6 million including $7 million in stock-based compensation. As discussed on our last call, stock-based compensation was higher in the fourth quarter due to the departure of one of our executives. This was partially offset by lower personnel and incentive compensation costs in the fourth quarter. We expect stock-based compensation to run approximately $3 million for the first quarter of 2019. Total SG&A costs, including stock compensation, for the year totaled $87.9 million, slightly higher than our expected run rate of $20 million to $21 million per quarter for 2019. Capital expenditures in the fourth quarter were $15.6 million, down from $18.6 million in the third quarter driven by lower active fleets.

CapEx for the year was $100.5 million, slightly below our guidance of $105 million to $110 million also due to lower fleet count. Looking ahead to 2019, we currently expect capital expenditures to be in the range of $70 million to $80 million. This primarily includes fleet maintenance CapEx as well as a small amount of non-equipment projects and reactivation CapEx. This amount will depend on the number of active fleets we average throughout the year and we plan to manage this figure. Maintenance CapEx for 2018 came in at approximately $2.5 million per active fleet and is expected to remain at that level in 2019. As expected, cash taxes were minimal this year due to our tax attributes, which includes tax goodwill amortization and net operating loss carry-forwards or NOLs. In 2018, we were able to use over $190 million of our tax amortization in addition to approximately $85 million of NOLs.

Without these tax attributes, we estimate we would have had approximately $65 million of cash taxes in 2018. Despite the lower fleet count and pricing, cash generation remained strong in the fourth quarter. We generated $48.3 million of adjusted EBITDA less CapEx closing out the full year with $318.8 million of adjusted EBITDA less CapEx. In terms of free cash flow, we generated $66.6 million in the fourth quarter and $284.3 million for the full year. We benefited from the release of approximately $30 million of working capital during the fourth quarter, but we do not expect a significant use or release of working capital in the first quarter. To put our cash generation into full cycle perspective, over the last two years we have generated over $620 million in adjusted EBITDA less CapEx and over $400 million of free cash flow, including the net use of cash of $93 million for working capital purposes.

This level of cash generation stands us apart and although there is uncertainty in our cash flow in 2019, we expect to continue generating cash and remain an industry leader. The last thing I want to highlight is our debt. We repaid a significant amount of debt in 2018 and reduced our net debt to $330 million at year-end. In the fourth quarter, we repaid $57 million of debt to bring our total principal amount outstanding to $508 million. So far in the first quarter, we repaid an additional $12 million of debt and will continue to delever throughout 2019 with our free cash flow. Our cash balance and undrawn revolver assures us with the liquidity cushion to fund the business through a prolonged downturn or conversely to quickly fund the working capital associated with putting fleets back to work.

With that, I'll turn the call back over to Mike.

Michael J. Doss -- Chief Executive Officer

Thanks, Lance. Before we turn to questions, I'd like to spend a moment discussing what we believe is our value proposition to investors. We included a summary of this in the presentation that we prepared for the Credit Suisse Conference earlier this month. I'll be the first to admit that it's not management's place to opine on the stock price. The market determines that. However, it seems to us that a couple of important features of our story may be getting overlooked. The first is the value of our embedded manufacturing business. Equipment manufacturers currently trade at about 9 times EBITDA. If you apply that to our annualized cost savings of $70 million based on 20 fleets as a proxy for EBITDA, that amounts to over $600 million of value. One can use different assumptions or simply apply a higher multiple to our EBITDA, but the point is that there is significant value there. The other feature relates to our tax attributes. We estimate the net present value of our NOLs and remaining tax goodwill amortization is over $300 million. If you subtract the values of our manufacturing and tax attributes from our enterprise value, the remaining value attributable to our frac operations is extremely low at just over $300 per horsepower.

With that, we'll now open it up for questions. Kathy?

Questions and Answers:

Operator

Thank you. (Operator Instructions) And our first question comes from line of Connor Lynagh with Morgan Stanley. Please proceed with your question.

Connor Lynagh -- Morgan Stanley -- Analyst

Yes, thanks. Good morning, guys.

Michael J. Doss -- Chief Executive Officer

Good morning.

Connor Lynagh -- Morgan Stanley -- Analyst

Wondering if you could just clarify just off the bat here, the target of rolling out fleets at $2 million of cash flow greater than your average. That's a reference to the first quarter average, correct?

Michael J. Doss -- Chief Executive Officer

That's right. Current Company average.

Connor Lynagh -- Morgan Stanley -- Analyst

Yes, OK. And so I'm just wondering is that where the market is today? I mean are there a lot of opportunities to deploy fleets at that level of pricing or does that imply that you're waiting for higher pricing in the market?

Lance Turner -- Chief Financial Officer

Well, it implies that we're waiting for higher pricing and it's really select opportunities. There's not a lot of opportunities out there at that level. So -- but we're being very selective with customers that value our service quality and efficiency, we think we can achieve our profitability of that level. If we can come to terms on that, we're happy to deploy fleet.

Connor Lynagh -- Morgan Stanley -- Analyst

Got it, understood. And just in terms of your thinking about the market is --I think most people are expecting a seasonal rebound in activity. Would you agree with that and do you think that's enough to drive pricing to that level where you would deploy fleets or just any thoughts there?

Michael J. Doss -- Chief Executive Officer

Yes, probably not at the overall industry level. I think efficiencies will be up in the first quarter just because there was so much slack in the fourth quarter. In the second quarter we'll probably see an increase as well. But there's not a big surge of demand at this point that's enough to give pricing power to the pressure pumpers.

Connor Lynagh -- Morgan Stanley -- Analyst

Got it. So, could you frame maybe the margin expansion that you could expect from just efficiency or the uplift in EBITDA per fleet, however you want to frame it?

Michael J. Doss -- Chief Executive Officer

Well, it still would have to do because there are so many changes going on at same time. But other things being equal, we've talked about the first quarter mark which we think is our best estimate at this point. Second quarter, we'll see increased efficiencies just because of the seasonality, less weather, and so forth. That can add $1 million to $2 million per -- EBITDA per fleet just by itself.

Connor Lynagh -- Morgan Stanley -- Analyst

Got it. That's helpful. I'll turn it back.

Operator

And our next question comes from line of George O'Leary with TPH & Company. Please proceed with your question.

George O'Leary -- Tudor, Pickering, Holt & Company -- Analyst

Good morning, guys.

Michael J. Doss -- Chief Executive Officer

Good morning.

George O'Leary -- Tudor, Pickering, Holt & Company -- Analyst

You'll have just a clear repair and maintenance CapEx advantage and just CapEx advantage per fleet versus the competition that doesn't have in-house manufacturing. I wonder if there are further areas that you guys are -- incremental areas where you guys are working to widen that gap even further. Any new technology that you guys are mulling over? Just curious if there is any levers to pull on that side from a cash flow generation standpoint?

Michael J. Doss -- Chief Executive Officer

We have a number of initiatives going on just in the manufacturing business and so we've got fluid-end innovations, we've got vibration sensors, and other data analytics. As far as other initiatives, other technologies, nothing of significance. Our general approach is to be a fast follower. There are a lot of vendors out there that are providing goods and services to the oil field and so we've got great relationships with them to be able to adopt any technologies that our customers desire. So for example, diverters, dissolvable plugs, all of those things; we're just as competitive as everyone else, but we don't have a lot of in-house R&D around those efforts.

George O'Leary -- Tudor, Pickering, Holt & Company -- Analyst

Okay. And then on -- second question is just you guys have a pretty broad geographic footprint, notably a large presence in the Northeast and a big presence in the Permian Basin. I wonder just thinking through the different basins in which you play, if you could kind of compare and contrast what you're seeing from an activity standpoint in January and February versus December versus Q4 average. Any basins that standout as particularly strong or particularly weak? Any color there would be greatly appreciated.

Michael J. Doss -- Chief Executive Officer

I would say not a lot has changed from the fourth quarter. Overall activity is up. The Permian by far is the strongest area where we are. I think two-thirds of our fleet is currently working in the Permian and that includes a number of fleets that are working out of districts that are based in the Mid-Con and South Texas. And I would say the Mid-Con and South Texas and the Haynesville are softer markets and so there's not a lot of pricing power and not a lot of RFP activity. It's hanging in there. It's not declining, but it's not improving anything notable. And I would say the Northeast has improved for our situation a little bit better in the first quarter because of some recently awarded work and so we're pleased about that because that was an area that had experienced a lot of weakness for us in the second half of last year.

George O'Leary -- Tudor, Pickering, Holt & Company -- Analyst

And I'll sneak one more in if I could. E&P budgets are now starting to come out and I realize it's really hard to see very far out on the horizon, but one of the things I think investors and we're certainly mulling over is just the shape of completions activity and I know Connor just asked a question along these lines. But if you think about just sitting here today and you think about what you're hearing from your customers, in the back half of '19 do you think activity is actually up versus the first half like some of the E&Ps were actually budgeting for more activity in the front end of the year. And so, just looking for any color or elucidation you guys might be able to provide there because it's definitely a little bit opaque to us?

Michael J. Doss -- Chief Executive Officer

Yes. Well, it's a bit opaque to us as well. We do quiz our customers pretty extensively about what their plans are for the full year. A lot of things are still under consideration and I think at the corporate level, you are seeing announcements where a lot of companies are cutting by double digits their CapEx budget for 2018. I think they are demonstrating capital discipline, which long term is a good thing for the industry. I think in the second half if we see a continued support of commodity price environment, I think there was a bit of a panic in the fourth quarter of last year, things seem to be a bit more stable. If that hangs in there, I can see some E&P companies ramping up their budgets for the second half, including completing some of the DUC inventory that's been building.

George O'Leary -- Tudor, Pickering, Holt & Company -- Analyst

Great. I appreciate the color, Michael.

Operator

And our next question comes from the line of Marc Bianchi with Cowen. Please proceed with your question.

Marc Bianchi -- Cowen and Company -- Analyst

Thank you. I guess just working through the math here for first quarter, you'll be on like $165 million EBITDA run rate. If I take the midpoint of CapEx it's $75 million and interest of about $40 million, you're still generating about $50 million of free cash. Is there anything I'm missing with that or are there any other moving pieces in the cash calculation that we should be aware of for '19?

Lance Turner -- Chief Financial Officer

No, That's how we think about it. I think interest should be slightly above $30 million this year and certainly the Q1 run rate is a little lower. We like to see that increase throughout the year, but at this point I think that's accurate.

Marc Bianchi -- Cowen and Company -- Analyst

Okay. And then, Lance, all of that cash is going toward debt reduction at this point?

Lance Turner -- Chief Financial Officer

That is correct.

Marc Bianchi -- Cowen and Company -- Analyst

Right. Okay. And Mike, you offered some of the commentary about the value proposition and I think as we look at a lot of some of the parts stories or we look at companies where there is a lot of value that's apparent, investors struggle with what's the path to unlocking that value. So, maybe I'd be curious to hear what do you think is going to be required or what can you do from your seat to try to unlock that value that exists?

Michael J. Doss -- Chief Executive Officer

Well, I think a lot of it is we're obviously trying to highlight it in all of our discussions and presentations. And I think our track record, which I think is good, over time will demonstrate the superiority of the approach that we're taking. As far as trying to monetize it by selling the operation or doing business, providing equipment for third parties; we've considered those in the past and really have considered as just sub-optimal outcomes. I think third parties would be -- other frac companies, for example, would be a bit reluctant to purchase equipment that's manufactured by a competitor, it's just a bit unusual. And then as far as selling the operation, we did consider that and while I think we could get a good purchase price, a lot of the purchase price would be supported by a long-term contract that we would worry would reduce our flexibility and get us into a situation that's harder to navigate. This is a volatile industry and we're able to ramp that manufacturing up and down. If we sold it to a third party, there would be some kind of take-or-pay element to it that would hamstring us in addition to higher costs. And so, I think our best bet is to just optimize it what we have and just extract all the benefits and have it flow through our cash flow and get rewarded for it that way.

Marc Bianchi -- Cowen and Company -- Analyst

Sure. Okay,. Thanks for that. I'll turn it back.

Operator

(Operator Instructions) And our next question comes from line of Stephen Gengaro with Stifel. Please proceed with your question.

Stephen Gengaro -- Stifel Financial Corp -- Analyst

Thank you. Good morning, gentlemen. Just one question around your comments about redeploying fleets. You kind of talked about a price point effectively. How do you think about duration when you're talking about putting a fleet back into the market?

Michael J. Doss -- Chief Executive Officer

Well, our starting position is we prefer dedicated frac agreements, which almost all companies do these days. And so, we're trying to partner up with customers that have a long-term plan and so they've got a drilling and completion plan that's -- that has visibility around it. We're able to give a better price in those situations because it's a lot more efficient. We can get more stages done per month. There's more pumping days per month as opposed to the spot market and so we prefer that. I think at this point, it's unlikely for us to deploy a fleet for just a spot market opportunity. It would need to be a dedicated opportunity that would have say a duration of 12 months.

Stephen Gengaro -- Stifel Financial Corp -- Analyst

Great. And then just as a quick follow-up. The fleet you talked about deploying by the end of next month, I assume that's based on those parameters at $2 million above the cash flow levels of the current fleet?

Michael J. Doss -- Chief Executive Officer

Yes, it is.

Stephen Gengaro -- Stifel Financial Corp -- Analyst

Okay. Thank you.

Operator

And our next question comes from line of Harry Collins with Bank of America Merrill Lynch. Please proceed with your question.

Harry Collins -- Bank of America Merrill Lynch -- Analyst

Hey, guys. Thanks for taking my question. For your current fleet, what is the dedicated to spot mix and what would you say is the pricing delta and EBITDA per fleet basis between your spot and dedicated fleets currently?

Lance Turner -- Chief Financial Officer

So in terms of spot versus dedicated, we're probably up to about 70% dedicated. We were a little -- we were higher a year or so ago and I would expect that to increase as we progress through 2019 particularly if we add fleets. In terms of pricing, I wouldn't say with a reset that there's a noticeable difference. I mean we're staying on top of our spot customers as well as our dedicated customers. The difference is we typically have less white space for dedicated and so while there may not be a big pricing differential, the profitability differential could be significant if the spot fleet is not fully utilized.

Harry Collins -- Bank of America Merrill Lynch -- Analyst

Got it. And that's you're talking to your current fleet not like leading edge pricing. Is there a bigger delta there between the spot and dedicated?

Lance Turner -- Chief Financial Officer

That's correct. I'd say the leading edge certainly for us to put a fleet out, we need to see like Mike mentioned, a couple million in addition above the average. I wouldn't say that the -- that there's a lot of opportunities and that would be the leading edge of the market. But certainly the selective opportunities that we want to pursue are going to be at that leading edge if that makes sense.

Harry Collins -- Bank of America Merrill Lynch -- Analyst

Yes, that makes sense. Thank you. And just a quick one on the balance sheet. As you continue to pay down debt each quarter, you guys have a absolute debt level you're shooting for or is it a leverage ratio you're targeting and if so, what is it?

Michael J. Doss -- Chief Executive Officer

We had considered that in the past. I think during the IPO we talked about some debt level that we thought was very manageable for the business. I think our thinking has evolved since that time and I think at this point, we're just headed to zero debt would be a good outcome for us. We think that would be an easier story to explain and is comparable to some of our peers in the industry, which carry minimal if not zero net debt.

Harry Collins -- Bank of America Merrill Lynch -- Analyst

Awesome, I like it. Thanks, guys.

Operator

And the next question comes from the line of Scott Gruber with Citigroup. Please proceed with your question.

Scott Gruber -- Citigroup -- Analyst

Yes, good morning.

Michael J. Doss -- Chief Executive Officer

Good morning.

Scott Gruber -- Citigroup -- Analyst

What level of activity is your in-house repair and maintenance footprint scaled for? Can that handle the full 33 fleets if we saw an upcycle where your activity got back there?

Michael J. Doss -- Chief Executive Officer

Yes, absolutely. It's quite scalable and so we can even handle more than 33 fleets with some minor modifications and new hiring that we would need to do of mechanics and welders and other individuals involved in the manufacturing business. So, we've got all the core talent. It's very scalable and (inaudible) would not be an issue, tools would not be an issue. And so in fact, I think you just -- you get more benefits if you operate it with a larger fleet. I mean it works great on 20 to 22 fleets, but it works even better at 30 fleets and even beyond that.

Scott Gruber -- Citigroup -- Analyst

Got you. And I assume that the carrying cost is pretty low is basically just maintaining some facilities I would assume so there is no plan to scale that down in the near to medium term?

Michael J. Doss -- Chief Executive Officer

That's right. The facilities and the tools are not a substantial value. Most of the cost of the manufacturing is labor and then the parts that we use through inventory.

Scott Gruber -- Citigroup -- Analyst

Got you. And separate question, do you guys see -- if you're looking just at your dedicated spreads, is there a wide spread in cash generation per fleet and if so, is that something you can address the low end and try to bring it up through greater stage efficiency or cost reduction initiatives?

Michael J. Doss -- Chief Executive Officer

Absolutely. And so there is a spread. It's not a gigantic spread, but we do have some that are certainly below average. And I would say the spread between the high and the lows, I don't know maybe $5 million something like that. Those that -- we look at customer profitability pretty closely every month and analyze where we are on the account and a lot of times we need to go back to the customer and have a conversation that this just isn't working and so we either need some price relief or we need some additional pay that we can get through increased efficiency, work with them on managing the location, maybe there's something with logistics or how the location is designed that we can improve and become more efficient, reduce time between locations so that we can get more pumping days per month. All of those discussions we have with the customer to try to improve those fleets that are at the bottom. And if they go past a certain level, we will have to rationalize the customer, which means that we will give them notice and move on.

Scott Gruber -- Citigroup -- Analyst

And do you think the opportunity there at the low end is enough that we'll see it in the financials over the next few quarters? Without any pricing improvement, is there enough opportunity there on efficiency and cost that we'll see it?

Michael J. Doss -- Chief Executive Officer

As I mentioned earlier, there is a lot of factors that change over the course of the quarters in terms of efficiency, customer mix, and so forth. So, it's hard to really pinpoint it. But other things being equal, if we just apply the same discipline, it's a model of continual improvement where we just seek to move up those that are on the bottom. And also if there's opportunities for those in the middle and the higher end to do even better, we're going to pursue those as well.

Scott Gruber -- Citigroup -- Analyst

Got it. Appreciate the color.

Michael J. Doss -- Chief Executive Officer

Sure.

Operator

And Mr. Doss, there are no further questions at this time. I'll turn the call back over to you.

Michael J. Doss -- Chief Executive Officer

Okay. Well, thank you everyone for your continued interest in FTS International and we look forward to speaking with everyone next quarter.

Operator

Thank you. Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Have a great day.

Duration: 36 minutes

Call participants:

Michael J. Doss -- Chief Executive Officer

Lance Turner -- Chief Financial Officer

Connor Lynagh -- Morgan Stanley -- Analyst

George O'Leary -- Tudor, Pickering, Holt & Company -- Analyst

Marc Bianchi -- Cowen and Company -- Analyst

Stephen Gengaro -- Stifel Financial Corp -- Analyst

Harry Collins -- Bank of America Merrill Lynch -- Analyst

Scott Gruber -- Citigroup -- Analyst

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