Q3 2019 Earnings Call
Ladies and gentlemen, thank you for standing by welcome to the Smart Sands third quarter 2019 earnings call.
At this time, all participants are in listen only mode.
After the speakers presentation, there will be a question answer session.
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I would now like to hand, the conference over to your Speaker today, Josh Jane Finance manager. Thank you. Please go ahead Sir.
Good morning, and thank you for joining us for Smart Sands third quarter 2019 earnings call on the call today, we have chunky founder and Chief Executive Officer Leap that Coleman, Chief Financial Officer, and John Young Chief operating Officer.
Before we begin I would like to remind all participants that our comments made today will include forward looking statements, which are subject to certain risks and uncertainties that could cause actual results or events to materially differ from those anticipated for a complete discussion of such risks and uncertainties. Please refer to the company's press release and our dog.
Humans on file with the FCC.
Smarts and disclaims any intention or obligation to update or revise any financial projections or forward looking statements, whether because of new information future events or otherwise. This conference call contains time sensitive information and it's accurate only as of the live broadcast today November six 2019.
Additionally, we may refer to non-GAAP financial measures of adjusted EBITDA contribution margin during this call.
These measures when used in combination with GAAP results provide us and our investors with useful information to better understand our business.
Please refer to our most recent press release or our public filings for our reconciliations of adjusted EBITDA to net income and contribution margin to gross profit.
I'd now like to turn the call over to our CEO Chuck Young.
Thanks, Josh I'm happy to report to the third quarter produce both some good financial results and continued progress on our long term plans and objectives.
Smarts and remains on the move.
Let's start with some numbers.
In spite of a projected industry slowdown we posted sales volumes of 611000 tons.
Adjusted EBITDA of 28.8 million.
And net income of 10.8 million.
In addition, we generated 22.9 million in cash flows from operations.
We will take you through the rest of the key numbers and his report.
Now, let's look long term.
I'd like to start off by reiterating what we've said time and time again.
We're in the business for the long haul.
And we're always looking for customers that want to partner with us to create sustainable efficient long term frac sand supply chains.
We're committed to working with our customers to find mutually beneficial sand supply.
Logistics and last mile services.
Or any combination thereof that will ensure both their long term success and hours.
This quarter saw several positive developments.
For one we settled our law suit, we Schlumberger, we were able to find mutually beneficial terms.
Terms that allowed us to continue our long term relationship.
We pride ourselves on our ability to maintain long term relationships with our customers and Weve shown this once again with the new long term agreement with Schlumberger.
In this quarter, we also executed contracts with two new Smart depot customers that brings us to for fleets currently in the field.
We continue to see growing interest from both new and existing customers for our last mile solutions.
We're able to deploy our silos and have them operating the field as quickly as our customers need.
In addition, we've been busy developing new Transloading technology for use on the well site.
We'll have more to share on this in the future.
Another third quarter highlight was paying down or debt by approximately $16 million.
Another demonstration of our commitment to maintaining a strong balance sheet.
As a fully integrated frac sand supply and services company, we have all the infrastructure in place to provide sustainable logistics, all the way through the well site and ultimately into the blender.
And importantly at the rates our customers demand.
By partnering with the railroads, we can maintain cost at attractive levels, while offering fast turnarounds with very little demerge, and providing any size shipments desired. Thanks to our dual service railroad capabilities.
And we believe that bulk commodities belong on rail for safety and sustainability reasons.
Our strategy continues to prove itself a winter.
Time and time again.
And that light here's some key things we remain committed to.
Supporting or existing long term contracted customers.
Extending our spot market business being the lowest cost producer of high quality northern white sand.
Maintaining low debt levels and being one of the lowest leverage companies into proppant industry.
Delivering efficient and sustainable supply chain logistics from the mine so the well site.
And ramping up the utilization of our last mile Smart systems, including new technology to complement our smart depots.
Our commitment to quality and safety, our two more pillars of our success.
We know that the quality of our sand and the quality of our service are the key to our success.
The high quality sand that we're able to consistently deliver is what keeps our customers coming back to us over and over again.
Our sand is among the safest in the industry through its intrinsic properties, which is absolutely critical with a new oceans silicon standards.
Our sand paired with our smart systems technology, we believe we offer the safest frac sand product available in the market today.
In summary, it's been a positive quarter for smarts in.
We reported some solid financial numbers in the face of a slowing environment.
We settled an important lawsuit and we're already delivering sand under the resulting agreement.
We began to gain traction in the last mile market with our smart systems.
And we're demonstrating our ability to be a reliable last mile partner for MPS and pressure pumpers.
We remained and remain excited about the potential of our new Wellsite technology in 2020 and beyond.
And by paying down 16 million in debt in the quarter. We demonstrated our continued commitment to low debt levels and to a strong balance sheet to support the company for the long term.
I'll close today by saying, thank you to all the dedicated smarts and employees, who continue to believe in our mission and work who worked so tirelessly to help us achieve all that we do.
We couldn't do this without you.
And now I'll turn the call over to our CFO lead back on it.
Thanks Chuck.
Today I'll be going over the third quarter 2019 financial results and my comments, primarily will be focused on comparing them to the second quarter 2019 results as Chuck highlighted we had a very busy quarter, starting with sales volume we sold approximately 611000 tons in the third quarter sales volumes in the quarter were negatively impacted.
By weather related shipping delays in the Bakken and a slowdown in spot sales do a drop in the overall well completions activity in the third quarter.
In regards to revenues total revenues were 65.7 million in the third quarter.
Just below our second quarter revenues of 67.9 million.
Sand sales revenue, including reservation charges was 29.7 million in the third quarter down modestly from 31.4 million in the second quarter.
Logistics revenue, which includes freight for certain mine gate sand sales railcar usage and logistic services, including our smart system rentals was approximately 20.4 million, which was consistent with the second quarter logistics revenue of 20.3 million.
And the third quarter, we recognize 15.6 million in shortfall revenue compared to 16.3 million.
Shortfall revenue in the second quarter, as we've mentioned before our take or pay contracts with minimum quarterly and annual required volumes and payments provide smart sand with a stable source of revenue to help the company manage through the industry operating cycles.
14 million and 10.8 million of the shortfall revenue in the third and second quarter, respectively related to a contract currently in litigation.
Our cost of sales for the quarter were 38.6 million compared to $43.1 million the previous quarter.
The decrease in cost of sales is primarily due to lower our overall volumes disciplined cost management at our Odell facility and seasonal production efficiencies, we experienced as we begin the buildup of our winter stockpile.
For the third quarter 2019, our contribution margin per turn was $55.13.
Compared to $41.80 per ton last quarter.
The increase was primarily as a result of the high shortfall revenue coupled with lower total volumes sequentially and the seasonal call sufficiently efficiencies I just highlighted.
Gross profit was 27.1 million in the third quarter compared to 24.9 million in the second quarter.
The increase was also primarily due to the cost savings experience in the winter stockpile buildup.
Operating expenses for this quarter included a noncash expense of 7.6 million related to intangible assets for our existing Transload system that was acquired as part of the quick through acquisition in June 2018.
As Chuck stated, we are developing a new transload transload technology and since we have decided not to manufacture our existing transload technology. We are required to impair the intangible assets that have been allocated to that technology.
All of our other operating expenses, including salaries depreciation and SGN, a expenses were relatively consistent quarter over quarter.
For the quarter, we had income tax expense of 2.6 million compared to 4 million in the second quarter, we expect our effective rate to continue to be in the low 20% range.
We had net income of approximately 10.9 million and adjusted EBITDA of 28.8 million in the third quarter.
The strong results are primarily attributed to contractual shortfall revenue from customers that did not take their required volumes of San under our take or pay contracts, coupled with a seasonal cost savings from the build up of our winter inventory.
And third quarter, we generated 22.9 million of cash flow from operations. We use this cash flow to pay down our existing debt, which was reduced by 15.9 million during the third quarter and to pay for capital expenditures.
Our year to date cash flow from operations was $40.3 million.
And the third quarter, we spent 5.6 million on capital expenditures.
Year to date, our capital expenditures have been 19.5 million.
These expenditures have primarily been for the manufacturing of our smart These depo silos and efficiency upgrades at our Oakdale facility and our van Hook Transload terminal.
We currently anticipate total cap expenditures to be in the 25 million to $30 million range for the full year 2019, as we wrap up maintenance and efficiency projects, It Oakdale and van Hook and for the continued build out of additional smart systems equipment.
As of September 32019, we had approximately 2.1 million and cash on our balance sheet and 30 million in total undrawn availability under our credit facility.
Consistent with our long term goals. We currently expect that our cash flow from operations will exceed our anticipated capital expenditures for the full year 2019 and for 2020.
With our expected cash flows from operation current availability under our credit facility and other available sources of borrowings. We believe we have sufficient liquidity to support all of our ongoing activities.
Our board of directors initiated this stock purchase program in the fourth quarter of 2018, they authorized the repurchase of 2 million shares for a period of one year.
Under this authority we report we repurchased approximately 600000 shares the board Rich recently voted to extend the share repurchase program for period of one year and we currently have 1.4 million shares remaining under this authority.
There were no share repurchases in the third quarter.
[noise] inline with the overall North American oil field service sector. We do currently expect to see a slowdown in activity in the fourth quarter.
It is difficult what the volatility in the current market to give specific sales volume guidance, but currently we expect sales volumes to potentially be down 20% to 25% from third quarter levels.
However, we do currently expect activity to pick back up in the first quarter next year as the MPS ramp up activity in the first part of the year based on their 2020 budgets.
We currently expect adjusted EBITDA to be in the 10 million to 20 million range in the fourth quarter 2019.
This adjusted EBITDA range includes shortfall on contract termination payments, we expect a risk recognized in the fourth quarter.
This concludes our prepared comments and we will now open the call for questions.
Thank you ask a question you will need to press star one.
Withdraw your question comes to Pankey, please standby.
Ken a roster.
Our first question comes from John Watson with Simmons Energy. Your line is now open.
Thank you good morning.
Good morning.
Lee you mentioned, a 2020 operating cash flow exceeding Capex I was wondering if you could provide some updated color on where 2020 capex could fall.
Well, John we're not gonna give specific guidance on Capex for 2020, but I think as we've demonstrated in 2019 year to date and through our comments that we have flexibility in how we can manage our capital expenditures so depending on how activities going on our cash flows growing we have the ability to be able to.
Contract or expand our capital to kind of match up to that and we're committed to making sure that our capex will be spent the low what our cash flows.
Okay understood and appreciate if you can't specify this either but.
We've received a cash payment from a lawsuit and you also have a recent contract termination that will provide a cash payment could you provide any color on the cadence of this payments in Q4, and if they dip into 2020, what that might look like.
Okay, I guess the sick is on actual number amount of the payments, but in terms of the payments civil recognized in Q4, they likely will actually be generate cash.
In early first quarter 2020.
Okay, Okay understood and.
Lastly from me.
You gave the guidance for Q4, which is helpful and I think.
Well with what we're hearing from other completions players I was wondering if there's any weakness in northern white pricing baked into that guidance had that held up a as you expected or have we started to see pricing deteriorate, given where activities headed.
Yeah, So John John Young here.
Pricing is still in northern White still appears to have some strength, we've seen a little bit or deterioration, but you know in the in the spot business, we're kind of in the low to mid Twentys right now, which you're doesn't represent a huge deterioration from where we were in the last quarter.
Okay.
Understood and demand continues to remain strong for kind of a finer grades of sand the 47 100 mesh.
Okay. Thanks, John Congrats on that strong cash flow I'll turn it back.
Thanks.
Thank you. Our next question comes from George O'leary with Tudor Pickering Holt Your line is open.
Morning, guys.
Good morning.
Piggybacking on John's initial question, Mitch that slightly differently.
Remind us.
What you view as maintenance Capex for the business and then I realize you can throttle up or throttled down depending on how activity is but as we think about where what buckets you might spend growth capex.
And can you just kind of frame.
The opportunities that screen, most intriguing view for deployment of growth Capex at this point.
Well in terms of maintenance Capex again, it's kind of dependent on projects, including efficiency projects, but order of magnitude our maintenance Capex is probably in the 5 million to no more than $10 million a year range.
Probably be at the lower end of that on pure maintenance in terms of growth prospects and capital primarily most of our growth capital today continues to be in supporting building up our last mile storage system. The the smart systems in deploying those into the market and so the vast majority right now of.
Growth capital that we would plan in 2020 would be continuing the build out of though of those fleets.
With the intention of seeing a greater utilization and an implementation in the marketplace.
Great. That's helpful and then on on that point on the Smart Depot front, you think about just you just frame it from a customer dialogue.
Standpoint, I realize.
The outlook for 2020, spike fairly murky, but over the next three six months.
For type from customers to either test out new systems or display systems that they are not happy with how does that customer dialog going.
Yes, so John your again, so what I would comment on there is with the customers that we've deployed our silos to in general they seem to be very happy with.
The low dose levels.
That are inherent in the design.
All our silos already exceed the Osha standards that are due to come in I think in 2021.
Our where our focus is obviously on reducing the number of trucks, reducing the number of loads and so as we continue to deploy new technology in this space it will be focused on.
Increasing the use of bottom dump trailers, which increased throughput so chuck and kind of alluded to a new technology. We're working on that is that is along those lines. So we're excited about I.
I think your question was on the next 36 month, we're really excited about the next 36 months and quite frankly were next we're excited about the next 12 months in this space.
The other thing I would add is with these new Osha standards, we think theres a lot of solutions out there that wont work with that and we think we're perfectly positioned to pick up that market share.
Great. Thanks for the color guys I'll turn it back over.
Thanks.
Thank you.
Next question comes from Stephen Gengaro with Stifel. Your line is now open.
Hi, Thank you good morning, gentlemen.
Morning.
Can you help us.
I'm sure I'm trying to parse out a little bit and I was curious if you'd be willing to give a little bit or color around this so what I will kind of year over year, and I understand kind of the seasonal cost of goods sold benefit.
He is very any color or guidance you can you can help us with around gross margins.
On sand sales versus like it we're starting to strip out.
Short fall revenue I'm, just trying to get a kind of a picture of how we should think about the current margin levels as we look into 2020.
And maybe I'm not sure you can if there's any color on sort of contracted volumes.
Maybe just if youd be willing to add some color on the contracted volumes status as we look into 20 Duane.
Well again, we don't give specific guidance on contribution margins are gross profit, but what I think you can take from where we're at year to date.
And kind of look at that right now we think that will be.
Consistent with what we would see in 2020, so in terms of how you're looking at it with or without shortfall revenues. I think you can look at that and say right now we feel it's going be relatively consistent.
In terms of margin capabilities.
In terms of contracts right now we've got.
About 55% I believe that our capacity under contract for 2020, and and we continue to work on new contracts and new opportunities but.
We.
Continue to say those contracts playing out throughout the 2020 and as they have in 2019.
I think a big part of the picture right now is that most of our competitors pay more interest than we have in total debt and we think that that will become a big part of the future of Frac sand is this coming year, so either people need to start paying back their debt free cash flow in a little bit.
Or is going to be some severe problems from any of our competitors and we think we're in the best position.
Okay.
It's helpful as I as a point of restaurant every showstopper right.
Yeah, No I mean, the cash flow positive and things seem to be going well. So that's it's it's there's clearly differentiation I would agree with you.
When when you when you look at the first nine months in 2019, just all I can try to benchmark and a little bit.
The shortfall revenue basically.
Is it is largely just drop straight to the to the operating going or how we should think about it when I sort of cutting Stephen with you as late as you've asked this question before in the past, we don't give specific and we don't talk specifically about.
The shortfall revenues and how they drop through to the throughout the financials and we don't talk is specific about anything is under litigation so.
There's really nothing else, we're going to say about that.
That's fair thank you.
Thank you. Our next question comes from Lucas pipes with B. Riley FBR. Your line is now open.
Hey, good morning, everybody.
Good morning.
I wanted to ask a follow up on the contract position <unk> <unk> My sense is that the pricing adjustments W. T. I M. I wondered our current prices at the prices you get on to your contracts comparable to current.
Spot prices that we could we could see in for northern white or so may be discrepancy.
Well it depends specific they his contract by contract, but generally there where we out relative to FDI and how our contract structure works were relatively in line with spot prices.
Got it that's that's very helpful. I appreciate that and then can you remind us of the 10 year over year contract.
Currently our contract life on a weighted average basis is just about around 15 months.
Okay.
Appreciate that that's that's helpful. Thank you and then.
Bigger picture question on on the demand side in your prepared remarks, you referenced the potential for higher demand again in 2020 as budgets.
Kind of get a reset to two higher levels.
What's your degree of confidence in demand coming coming back on early next year.
I would appreciate your color and subjective subject to thoughts on this thank you.
Yes, sure though.
Lastly, we've got a good amount of experience now and kind of fourth quarter or what I'll call seasonality.
And you can't ignore some of the things that happen in the past years. It seems like seasonality takes over as we get into kind of Thanksgiving beyond vacations in both budget exhaustion, but the conversations we've been having with our customers indicate that we're going to be having a relatively strong first half of next year.
The real question that remains in our mind is to as to how quickly that picks up once we hit January right do we have any kind of hanging over from kind of the Christmas period or do we get started on January 1st and we've seen varying degrees of that over the years. So it's hard to predict with regard to kind of overall.
Volume demand I think it's very much tied to commodity price on the oil side and.
If oil continues to kind of on its trajectory kind of a march up into the sixties and 70 I think we'll continue to see robust demand from fan.
Got it okay, well I appreciate it and best of luck.
Thanks, Thank you.
Thank you.
Mandate to ask a question no need to press star one on your telephone the next question.
George Moss with Roth capital LLC Your line itself.
Good morning, guys.
Good morning, one and George.
Oh pardon me you answered this earlier, but last quarter, you mentioned that 30% of your volumes year to date.
We're into the Bakken can you refresh that number for us.
Yeah, well, we've actually been talking about different regions and year to date, our volumes into the western United States, which includes the back in Colorado in other markets is around 55%.
Okay.
Thank you.
Thank you.
Showing any further questions at this time I now like to turn the call back over to Chuck Young for any further remarks.
Thank you for joining us for Smarts and third quarter 2019 earnings call. We look forward to reporting to you again in the new year.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.