Q4 2019 Earnings Call

Good morning, and welcome to the high crush incorporated fourth quarter and full year 2019 conference call.

As a reminder, today's call is being recorded at this time all participants are in listen only mode.

Question answer session will follow the formal presentation at this time for opening remarks introductions I would like to turn the call over to Caldwell Bailey Investor Relations manager of Hi Crush. Please proceed sir. Thank you good morning, everyone and thanks for joining US today with me are Bob Rasmussen, Chairman and Chief Executive Officer of high crushing.

Bill Mccormack, Chief Financial Officer, and Alan Golar, Chief operating officer.

Before we provide our prepared remarks, I would like to remind all participants that our comments today will include forward looking statements, which are subject to certain risks and uncertainties.

Actual results could differ materially from those projected in any forward looking statements.

Additionally, we may refer to the non-GAAP measures of EBITDA, adjusted EBITDA free cash flow and contribution margin during the call.

Please refer to our public filings for definitions of our non-GAAP measures reconciliation to their most directly comparable GAAP measures as well as a discussion of risks and uncertainties.

With that I would now like to turn the call over to our CEO Bob Rasmussen.

Thanks, Caldwell and thank you the everyone for joining US. This morning, 2019 was a year of transformation in innovation for Hi, crush as we continue to evolve when they supplier of Roxanne to a fully integrated frac sand solutions provider with an emphasis on logistics.

I'd like to start by highlighting some of our key accomplishments from the year, we expanded our last mile capabilities and operational footprint with the acquisition and integration upon worn logistics, we advanced our technology platform and deepened our inventory management logistics optimization.

Data collection and analysis capabilities with the acquisition and integration of crop dispatch.

We advanced our strategy of partnering with E N P customers, achieving 70% of total frac sand sold directly to each of these during the fourth quarter up from 51% in the fourth quarter of 2018.

We achieved successful deployment of our next generation next stage silos system, we converted from an MLP do a C corp to best position, our business for the future and more effectively address the evolution of our industry, we maintained a strong and flexible balance sheet and exited the year with over $100 million.

Total liquidity.

And more recently in the last few weeks, we announced the development of our encore mobile processing solution.

Importantly, these accomplishments are fully aligned with our strategy of addressing each customer specific needs the way fully integrated frac sand and logistic solution offerings.

Carrying out this bad and he requires regular review and enhancement of high fresh is fully integrated platform.

We'll talk more about that platform in a minute, but first I would like to provide an update on our industry, it's competitive dynamics and executing on our strategy will impact the broader in his industry and benefit both our customers and investors.

The frac sand production and logistics industry currently face as several significant challenges, including low barriers to entry too much supply and a high level of fragmentation. This fragmentation. Despite strong demand has resulted in irrational pricing inconsistency service quality and disrupt.

And the value.

The problem stemming from poor service quality lack of available trucking and ineffective production operations that many but not hi crush experienced at year end. It into January are a direct result of this fragmentation low pricing curtailed investment and deferred maintenance.

Commoditization of Frac sand production and low barriers to entry haven't compounded the industry's challenges by the turn in capital investment the resulting a lack of access to the capital markets as reflected in public equity prices across the sector.

The cycle the industry require structural change, including supply and company rationalization.

So how does our fully integrated platform physician, hi, crush the breakout of the cycle and how does a differentiated position us to create value for our investors [noise].

It starts with our customers specifically, who they are in what they need the customers that most directly benefit from our integrated platform are those that are increasingly dominating the current phase of development the large in piece.

These customers demand and he fishing reliable high quality technology enabled solutions provider, one capable of increasing their drilling and completions efficiency as they transition to mass manufacturing style operations.

This helps reduce their cost and improve safety, while providing important environmental and sustainability benefits to the industry.

Hi, crush is the only company that offers a differentiated comprehensive in fully integrated solutions platform combined with execution expertise.

Our platform includes several key ingredients. Among these innovative technology a range of last mile and Wellsite equipment efficient production and operational excellence. This leads to increased efficiency better safety and had sustainability and better profitability.

Many in our industry I'm trying to compete on price versus equipment and service quality. This results in virtually all cost savings from efficiencies and other factors being passed along to the end users of sand our fully integrated platform is the only one resulting in a true win win lower customer costs.

And increasing high brush profitability. This will widen the gap between the habits like hi, crush and the have nots.

Our recently announced encore fully mobile processing unit is the next significant step in our chain of innovation and strategy of delivering differentiated customer solutions not just products.

Encore makes sense as part of a fully integrated platform combined with pronghorn logistics and trucking services next stage stylist storage of Frac sand and prop dispatch technology, integrating and coordinating all aspects of the operation.

Hi, crush can provide at all while very few of our competitors can provide more than one piece by incorporating encore into our offering hi, crush will unlock value, bringing frac sand production as near as possible to the well site increasing truck turns per day, increasing delivered truckload wages in some cases.

And being able to analyze all the collected data with our customers all in house.

Encore gives hikes, Russia first mover advantage in this emerging segment and creates further separation from our peers. The advantages of this next generation solution on numerous it gives operators the ability to move their sand supply point as close as possible to their areas and development.

It allows for optimization of logistics, including a significant reduction in trucking distances. It has significantly smaller footprint and investment requirement then for additional large scale fixed physician plants, it's mobile which means it can change locations and be ready to run again in as little as a week it requires.

It was substantially less manpower to operate and it can dramatically reduced truck traffic by an estimated 1.2 million miles per encore units per year, resulting in death tangible benefits to both safety and sustainability.

Encore is an important piece and hide crush the suite of offerings and is consistent with our strategy of providing the highest value to customers and simplifying their supply chain with the domestic development of the encore processing unit and integration into our broader solutions platform, we have enough that created Barry.

There's the entry.

Encore will make it even more critical that fixed asset facilities operated highly efficiently and that low cost attributes that hydrogen as a long track record of delivering.

Further we believe onto our will accelerate the speed with which inefficient plants and those companies without a clear strategy or capabilities outside the base exam production are forced to exit the market.

A critical enabler of integration across our platform is prop dispatch our logistic software dropped dispatched technology wraps around the entirety of our solutions offering and increases efficiency, while further integrating high crashed into the customer supply chain.

Having a single point of accountability with visibility into all aspects of operations also increased as reliability and efficiency.

And above all we hold ourselves accountable after listening to our customers early last year, we made the decision to pull our silo systems from the market.

Our goal was to translate customer feedback into a solution that was clearly best in class not just as good as the competition, but demonstrably better.

As difficult as that decision was I'm pleased to say we were successful in achieving our goals. Our rebranded next generation next stage silo systems with our innovative features are now being deployed in the market and the competition based on quality efficiency and reliability. This upgraded equipment is positioned to win.

Yeah.

As a result at the opportunity to deliver industry, leading innovation through the development of encore and the expansion of next stage silos, we will be investing in the future of hi crush in the near term this will be for free cash flow generation, while providing for greater long term benefit.

The market's emphasis on free cash flow recognized as the industry is weak competitive structure and a shortage of competitively advantaged investment opportunities.

We are confident that disruptive technologies, we've developed combined to a short payback periods would drive better performance than returns for investors and all stakeholders over the short intermediate and long term.

We are more focused than ever on positioning high crashed where the industry's evolving needs driving innovation to better address customer challenges and delivering value to shareholders to emphasize again, hi crush is the only company with a capability to deliver fully integrated expertise and production equip.

Managed services and logistics to oil and task customers.

We have this capability today and we've been working on a tirelessly while others in our space, they're trying to deemphasize their oil and gas market exposure.

The frac sand sector will look very different at the end of 2020 than it does today driven by integrated service providers partnering with large MP and oilfield service firms, providing flexible innovative and tech enabled solutions. This is an environment, where hi, crush can excel and best create value for.

For all stakeholders with that I'd like to turn things over to Alan to discuss our operational results for the quarter.

Thanks, Bob before I get into the results for the quarter I want to provide greater detail around encore processing and our thinking behind why this is the correct logistics optimization solution to add to our existing capabilities. One of the biggest challenges that the oil and gas industry as long sought to address has been a logistics.

Associated with delivering large quantities of consumables, whether you're talking about chemicals water equipment or sand. The industry has had to consistently improved the way in which it sources delivers and manages the multiple inputs that make oil and gas development possible.

Till now there have been many limits on how efficient delivering sand to the well side can be due to the fixed nature of supply.

Large capacity mines with sizable reserves or rail terminals near enough to activity. These are large fixed assets that require significant capital investment add to this additional factors such as weight restrictions on public roads traffic congestion and safety concerns that come with long distance trucking.

The result has been a cap on how much the supply chain was capable of being streamlined and efficient operations could become.

Various solutions to the logistics problems have been discussed in our view non went far enough toward addressing the underlying issue, whether conveying slurring or railing San long distances no alternatives fully resolve the issue associated with trying to optimize the delivery of sand from six points.

The supply the ever shifting areas of demand all other solutions by partially addressed these challenges they can't move location along with operator activity.

In contrast, encore processing units will allow the source of supply to follow activity.

Each encore unit is entirely mobile consisting of a wet and dry plants mounted separately on road legal Chelsea's each system will have approximately 750000 tons of annual production capacity and can run on a variety of power sources.

Integration of encore into our logistics offering means that hi, crush in partnership with our customers.

Can optimize the entire sand supply chain for individual well programs.

Taking a holistic view on how best to produce transport and manage sand in each case.

When activity moves on encore units can move as well redeploy and be processing wet sand in a new location in as little as a week and pronghorn services, a mixed aged equipment can move along with it.

The revolutionary nature of this equipment has garnered a lot of interest from customers and we expect delivery of the first unit in April.

Besides the excitement around the announcement of encore processing is additions hi, Chris Hi, crush this portfolio.

The fourth quarter saw significant milestones for our other business lines as well.

We were successful in expanding our pronghorn services customer base during the fourth quarter, signing for new logistics and service contracts with the Mt customers.

For work that has begun in late 2019 in early 2020.

It's important to note that all the new work is for customers activity outside of the Permian further diversifying high crushes operational footprint.

The pronghorn team was also intensely focused on executing on behalf of its existing customers.

The combination of the significant reduction in December activity paired with the Holidaybreak resulted in a shortage of available trucks and drivers leading to NPT for some operators as their service provider struggled secure the trucks necessary to keep adequate frac sand inventory on side.

The pronghorn team and contrast was able to keep drugs rolling and recorded no truck related MPT throughout December until today. This is a testament to how hard our team works and the effective methods, we employed to exceed customer expectations.

Truckloads delivered remain steady relative to the third quarter levels until a significant drop in activity. During the latter half of December drove a 19% reduction and overall truckloads delivered for the quarter.

We're pleased with the operational performance and growth pronghorn achieved through the full year 2019, including 264000 truckloads delivered of these 45% or third party halls, not hi crush sand.

We have seen activity picked up quickly in the new year and pleased with the start of 2020.

As Bob discussed a minute ago.

Development of the next stage business was not without its challenges with the team choosing to pullback deployed silos for retrofits and upgrades during the pullback, we committed ourselves to designing engineering and manufacturing a market leading innovative design.

Today I can tell you that we've done that and the positive response and adoption has been immediate with next stage deploying silos late in 2019 customers looking to expand those deployments and displacing competitors to do so.

With the changes that we've made we're able to accurately meter stand deployed into the lender at rates up to 21000 pounds a minute from a single silo.

Meeting the demands of the most intense job designs in the U.S.. We can also continue to Phil I saw low while the stages pumping.

From that same silo something competitors could not do.

These are features that matter to customers and differentiate us from competitors.

Our frac sand production business also had a successful quarter in the face of challenges that accelerated into year end.

During the fourth quarter, we continue to optimize plant utilization and sell to customers from our current complex as well as our active facilities in Wisconsin.

While the backdrop as challenging.

We did see tightening in the Frac sand market due to mine curtailments in idlings across the industry. This is a positive sign and one in which benefits companies that the most efficiently serve the frac sand customers through leading production cost and efficiency.

Hi, crush with our the mining in facility operations experience is clearly positioned to win in this environment.

During the fourth quarter. We also continued to expand the capabilities of prop dispatch.

This round of software updates were primarily focused on process automation and improve system integration.

Updating and upgrading of from this bad is a continual process like with all software and our team finding new ways to make operations leaner and more efficient everyday through the technology.

From an operational perspective, we have never been in a better place to take advantage of our capabilities are integrated solution with the addition of encore further complements our lifecycle of Frac sand bundled offering we can now minus close to the customers activity is acceptable sand deposits will allow.

No.

We can move the sand and provide onside support with from Horn.

We had the best in class will side storage equipment to deploy the sand into the blender and prop. This that's allows all of this to be measured monitored and analyze throughout the the frac sand lifecycle.

I'll now turn it over to feel for more detailed discussion on our financial performance of strategy.

Thanks, Alan I'd like to start by highlighting how our financial position supports the operational and strategic initiatives that both Bob and Alan have discussed and then review our financial results.

We have consistently spoken about the flexibility that our financial position affords our team alongside the board has been focused on maintaining cash and liquidity at approach, which has served us well through the cycles over the past few years. This period is no different and the approach has positioned us to invest in encore processing units and further deploy next generation next stage.

Silos, two pillars of our logistics strategy.

We are confident this financial discipline as a correct approach given the industry outlook and what it will take for companies to succeed in our industry going forward.

In combination with our operational strategy, our financial approach will allow hi crush to break out of the current Oh fs industry Malays differentiate ourselves admits undifferentiated companies that might at harder and harder to survive and continue to be a leader investing in innovation.

At the same time, we continue to evaluate and strive to further reduce cost in all areas of our business to align with current market realities and the structure of our industry long term.

With that context, I will now discuss our results for the fourth quarter and full year 2019.

San sales volumes for the full year 2019 were 9.9 million tons down slightly from 10.4 million tons sold for the full year 2018.

And sales volume for the fourth quarter of 2019, or 2.1 million tons compared to 2.7 million tons sold in the third quarter 2019, the reduction sales volumes. During the fourth quarter was primarily the result of activity declines due to operator, but exhaustion and the seasonal factors previously discussed.

Average sales price was $37 per ton in the fourth quarter down from $43 and third quarter of 2019 as sales mix has shifted more and more to in basin sand from northern White sand.

Total revenues for the full year and fourth quarter 2019 were $636.4 million at $125.5 million respectively.

Revenues from sales of Frac sand were $77.3 million for the fourth quarter of 2019 compared to $114.2 million in the third quarter, reflecting the decrease in activity quarter over quarter combined with the decreased average pricing I mentioned largely as a result of mix shift.

Revenues associated with logistics services were $47.8 million in the fourth quarter of 2019 compared to $57.4 million in the third quarter the.

The reduction was primarily a result of reduced activity in the second half of December which affected the number of delivered truckloads for the full year 2019 logistics revenue was $194.6 million logistics services revenue accounted for 31% and 38% of consolidated revenue for the full year and fourth.

Quarter of 2019, respectively.

Revenues also included $9.3 million at $400000 and sales of logistics equipment by our next stage business during the full year 2019, and fourth quarter respectively.

Adjusted EBITDA for the fourth quarter of 2019 totaled $7.2 million compared to $17.9 million in the third quarter for the full year 2019, adjusted EBITDA totaled $67.4 million.

Contribution margin per ton was $9 in two sets in the fourth quarter 2019 down from $10, a 99 cents in the third quarter.

For the full year 2019 contribution margin was $11.62.

DNA was $11.6 million in the fourth quarter of 2019, excluding nonrecurring expenses of $100000 associated with business development compared to third quarter 2019, DNA of $11.5 million, excluding similar nonrecurring business development expenses of $500000.

Total depreciation depletion and amortization was $13.3 billion for the fourth quarter of 2019 compared to $16.1 million in the third quarter.

Full year 2019, DDNA was $58.1 million as compared to 42.1 million for the full year 2018, reflecting the increased asset base with the growth of our logistics and well site operations.

Interest expense was relatively flat quarter over quarter at $11.6 million for the fourth quarter.

On February Threerd, we made our semiannual interest payment of $21.4 million on our senior notes. Our next interest payment is due in August of 2020.

Total capital expenditures for the fourth quarter of 2019 told a $5.4 million below the guidance provided at the end of the third quarter of $7 million to $10 million growth Capex was $3.5 million to support logistics operations and maintenance Capex was $1.9 million.

We exited the fourth quarter of 2019, with total liquidity of $101.5 million, including $57.6 million in cash and $43.9 million of availability under our ABL, we have no balances drawn under our ABL facility.

We paid no U.S. cash income taxes during the fourth quarter of 2019, and do not expect to pay any significant cash income taxes over the next few years due to net operating loss carry forwards.

Our annual effective tax rate for 2019 is 22.2% inline with our previous guidance.

Fourth quarter and full year 2019 results reflect a tax benefit of $3.8 million and $84.9 billion, respectively, including the tax effect of a noncash impairment charges.

In terms of activity in the first quarter 2020, we expect that early year dynamics and the restart and activity will mirror the trends over the last two years ramping early in the year as the NP capex budgets, our refreshed and seasonal factors abate.

We have experienced a good start to the first quarter with the strongest January and truckloads and sand sales volumes. We've ever had we expect truckloads to increase more than 25% from fourth quarter levels has worked for new pronghorn customers began and overall activity increases.

We forecast Frac sand sales volumes will increase to a range of 2.4 to 2.6 million tons, an increase of approximately 15% to 25% from the 2.1 million tons sold in the fourth quarter.

We are updating our capital expenditure guidance for 2020 to support the development and deployment of innovative equipment as we take advantage of improving service demand.

We now expect total capex for 2020 to range between 45, and $60 million, including maintenance Capex of between 10 and $15 million with remaining growth Capex spent incrementally along with explicit customer demand for equipment and services.

At the same time, we continue to look to reduce our overall cost portfolio.

We anticipate DNA will continue to be around $11 million per quarter in the first quarter of 2020.

DDNA will be in the range of $12 million to $14 million for the first quarter.

Interest expense will remain at about 11, and a half million dollars each quarter.

With the payment of our semiannual interest payment on February Threerd other routine quarterly payments and a typical slow December as previously described cash now stands at $20.1 million, we will focus on maintaining liquidity during all of 2020 and forecast ending the first quarter with $25 million to $30 million in cash we do not anticipate any borrowings.

Under our ABL facility in 2020.

We believe that our disciplined approach to growth our unique fully integrated offering and our customer focus will make us truly differentiated in the marketplace, where smaller competitors are less and less able to compete and deliver the products and services demanded by large NPS. We're excited about where we are and where we're headed.

Now lets turn it back to Bob for some closing remarks, thanks, Bill our ability to differentiate our company based on service quality and integrated solutions is more critical than ever we remain focused on doing that by providing efficient high quality technology enabled solutions that simplify our customers.

Supply chain, driving increased drilling and completion efficiency and lower costs.

The addition of encore processing into our portfolio of solutions further sets hi, crush apart from the competition leveraging all of our capabilities will allow hi, crush to deliver unmatched customer service deliver increased profitability and increased value creation for our shareholders.

I am excited about what 2020 has in store for Hi, crush now I'd like to turn it back to the operator for Q when a.

Thank you at this time, we will conduct a question answer session. Thank.

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Once again that star one to ask a question at this time.

One moment why we pull for first question.

Our first question comes from Tommy Mall with Stephens. Please proceed with your question.

Hey, good morning, Thanks for taking my questions there should Cameron on for Tommy.

Okay. Good morning, Cameron morning.

I was hoping we could talk a little bit more about the Oh encore offering it sounds like you guys really excited about it there's some tremendous benefits which is great.

Okay. So you could talk a little bit about customer appetite I know you guys are so you're deploying a couple this year maybe maybe.

First.

Where we see that growing over time and then from the customers perspective, you know maybe talk about.

With the cost or associated with the planning something like this versus your traditional.

Processing units you can give us on that would be helpful.

Yeah, we've seen tremendous demand from the customer discussions, which we've already taken place and just to reiterate the target market for this is the major super majors. The a the large independents in the large caps and really that target market is that those.

We have reserves on their acreage or adjacent land is operations there otherwise economically disadvantaged from other sand pull points and we think the savings I really substantial for them. Both in terms of quantitative dollars saved an efficiency as well as the substantial.

Yes, GE benefits that the encore solution can provide in terms of reduced truck traffic on public roads and reduce greenhouse gas emissions. So it's a combination of both quantitative and qualitative factors that provides savings.

Great. Thank you it that's super helpful. Appreciate it.

And then if we could just moved to pronghorn.

With the logistics a little bit.

90% decline in the quarter, which is pretty much in line with volumes. Those hoping you guys can talk about some of the benefits if you're in now it looks like five or six basins. What are the benefits of having a wide for Brent like that versus.

That being concentrated in just one or two basins you can look for that.

No I think the the a the benefits are substantial and what customers want is a bundled offering what really the customers have requested is efficiency reliability repeatability E.S.G. savings as I mentioned are E.S.G. benefits.

And reduce cost and that's something that our footprint. Both in terms of pronghorn operating across all major basins and being integrated into our bundled platform provides the customer. It provides a single point of accountability, a single point of efficiency, a single point, a focus and what the customers I really enjoy.

Yesterday, and is that repeatability reliability and cost savings and so they're very much interested in a partnership with a provider like high crashing. We're the only once you can provide that entire platform a under one bundled offering.

Right got it okay, well, thank you I'll turn it back appreciate it.

Thanks Devin.

Once again, ladies and gentlemen to ask a question at this time. Please press star one on your telephone keypad. Our next question comes from John Watson with Simmons and company. Please proceed with your question.

Thank you good morning.

Morning, John one John.

Bob I was hoping you could speak to some of the tightness that we've heard about in the Permian and how that might impact contribution margin per ton and Q1 and also any thoughts more generally as as we head into Q2.

Oh sure that the there has been some tightness in the marketplace, we have seen a rise in spot prices for both the.

The in basins sand and northern White I think these DAP prices have plateaued, a where they are right now they are above certainly is a fourth quarter levels and fourth quarter exit levels and as I mentioned in the prepared remarks. Some of that tightness is driven by an increase in activity and some of it is driven.

By some of the supply coming off the market and some of the existing supply guest and that being able to meet that demand because they havent maintain their equipment and haven't been able to provide the efficiencies that the customer's demand.

Okay got it and then I wanted to follow up on on core as well when that first facility comes online I think we now have a decent framework for what the volume contribution might be it can you help us think about the profitability of that site as well as and how that site fits into your prior.

Folio and if it might cannibalize volumes from some of your other mines.

Yeah. John This is Alan I think.

You know when you when you think about this a as far as the cost savings Bob discussed the majority of it has always been in transportation of sand, whether you're in a long distance in a truck or by rail and that's why we believe it fits so well with the other the other service lines as Bob mentioned endeavor.

We bought is focused on.

You know if they're going to unbundle in and trust one company. They want everything under they want one one source of supply and that kind of feeds right into the pronghorn and the delivery and all the storage.

Offerings that we have so when we when we look at it is more in how do we reduce a the the long distance calls on trucks than kind of targeting early on these areas that have a.

You know that are challenged with those distances truck was so the basins that we're focused on are primarily a you know where they have logistics challenges, that's where the customer focus will be initially but in addition to that we don't see there'll be any early cannibalization.

Okay. Thanks, Thanks for that Alan maybe as a a quick follow up.

That specific site. The first on Coresite is there a return threshold or a contribution margin per tonne contribution that youre contemplating internally with increasing capex I'm just trying to think through what type of return you're you're expecting from that investment.

Finally turned a has to be substantial all because when you look at the the emphasis on the industry on free cash flow right now and this is clearly an alternative to returning money to investors and our shareholders and the reason there's been such a focus on free.

Cash flow is that there's a dearth of competitively advantaged are differentiated investment opportunities and we think the development of encore I really is present, an opportunity to deliver industry, leading a innovation and disruption of the current status quo. So how does this all play into the.

The return matters in their return hurdles well it has to compete against alternative uses and it has to be a substantial benefit relative to alternative uses and we think that the encore definitely means that threshold and exceeds that.

Alright, Thanks for that Bob I will turn it back thank you.

At this time I would like to turn the call back over to Mr., Bob Rasmus for closing comments.

Hi, Thanks, Latania from an operational perspective, we've never been in a better place to take full advantage of our capabilities are fully integrated solution with the addition of encore further compliments our bundled offering we can now mine as close to the customers activity is acceptable San deposits will allow we can move.

All of the sand and provide onsite support through pronghorn, we have best in class well sites storage equipment to deploy the sand into the blender with next stage and prop dispatch allows all of this to be measured monitored and analyzed our business plan is to utilize our platform to develop partnerships with our customers to capture.

Cost savings that benefit both out of customers and hi crush. Thank you for your time today, and we look forward to talking with you on our next call.

This concludes todays teleconference. You may disconnect your lines at this time and have a great day.