Q4 2019 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Smarts and incorporated fourth quarter 2019 earnings Conference call.
At this time, all participants I know listen only mode. After the speaker presentation, there will be a question and answer session.
Ask a question during the session you'll need to press star one on your telephone.
He said buys that today's conference is being recorded.
If you acquire any further assistance. Please press star Zero I would now like turn the conference your Speaker today, Josh James Finance manager. Please go ahead Sir.
Good morning, and thank you for joining us for Smart Sands fourth quarter 2019 earnings call.
On the call today, we have CHMP young founder and Chief Executive Officer.
Beckelman, 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 documents 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 February 26 2020.
Additionally, we will refer to non-GAAP financial measure some adjusted EBITDA contribution margin during this call.
Measures when used in combination with our GAAP results provide us and our investors with useful information to better understand or business.
Please refer to our most recent press release or public filings for a reconciliation of adjusted EBITDA net income and contribution margin gross profit I.
I would now let's turn the call over to our CEO Shaquille.
Thanks, Josh in spite of challenging market conditions, smarts and delivered another solid quarter to finish out an impressive year Lee will give you specifics on the fourth quarter financial results later in the call.
But first I want to touched on some of the important highlights that I think differentiates smarts and from our peers.
A lot as happened since we went public in 2016.
We've increased revenue every year, we've had positive net income every year, we generated positive operating cash flows adjusted EBITDA and contribution margin every year.
And our S reached new Heights, it's 79 cents a share for the year just add it.
In every measurable way smarts and has continued to deliver positive results through the ups and downs in the industry cycle.
We take a measured approach to our spending in the ups focusing our capital on projects and access to provide good long term returns on investment.
So we can manage through the downs.
This strategy, we're positioned to operate in any environment.
Here are the key highlights of 29 C.
We generated a record adjusted EBITDA over $87 million for the year.
That came on sales volume of approximately two and a half million times.
Sales volume through our van Hook terminal in the Bakken increased over the previous year by a solid 46%.
We began rolling out our smart systems in the first quarter of the year and we already have nine fleets rented to customers. We see interest continuing to increase in our smart systems product offering and we're ready to meet the demands.
We reduced our net debt by $15 million, even while investing capital to continue to build our smart system fleets.
We improved our capital structure, we did it by refinancing our credit facility and putting in place of five your $20 million secured revolver and a five year equipment financing.
This financing provides smart Sam with the long term capital we need to support our operations.
We continued to be one of the lowest levered companies in the profit industry and oilfield service sector.
Our leverage ratio at 2019 year end was 0.3.
As we've often said one of our major goals is to maintain prudent that levels, we believe that maintaining a strong balance sheet and low debt levels are essential to remain successful and competitive in this commodity business.
We settled or lawsuit, we Schlumberger, we're able to find mutually beneficial terms that allowed us to continue our long term bright relationship.
We pride ourselves on our ability to maintain such long term relationships with our customers and Weve shown this once again with the new agreement with Schlumberger.
In sum, we racked up another impressive year in 29 C and weve laid the groundwork for a great year end twentytwenty.
Our focus this year will lead to provide strong returns for our shareholders.
We'll do that by continuing to execute on our long term strategy, while taking advantage of the market we're operating in today.
We plan to broaden our customer base and how through expanded offerings of sand logistics and last mile.
Our strategy starts with increasing the utilization of our Odell facility.
What new volumes, either through long term contracts or the spot market.
And well pair that with our ability to provide logistic services for our products anywhere in the country.
We're able to front load inventory each word terminal in the Bakken to meet growing demand there over the years, we've developed strong relationships with our railroad partners that allows us to offer our customers lower prices and fast turnaround with very little demerge.
Also we can provide any size shipment desired thanks to our dual service railroad capabilities.
We will continue the deployment of our smart system, well site prop and storage offering we've been deploying silos as fast as we can build them.
Our pipeline for smart systems in 2020 is growing.
Any interest in our smart systems is that an all time high.
We continue to sign up operators that wants to move away from outdated and on safe box technology to our safer and more efficient to operate silos are silos are engineered to operate efficiently with minimal silicate that they have both active and passive das suppression.
That creates a safer environment on the well pad. In addition, the allow for loading from both nomadic and gravity dump trailers.
And they offer the smallest footprint on the well site that we've seen while maximizing storage capabilities.
As in the past, we often host ambrish durations for potential customers.
And we partner with new customers under the flexible contract terms terms that are custom tailored to meet each customer's individual needs.
In addition, we'll soon be offering a new transloading technology for the USANA well site. The complements our smart depot silos it increases the efficiency of loading our silos through gravity dump trailer operations.
We'll continue to build out the smart systems fleet to meet the ever growing demand, while ensuring that we live within our cash flows.
Our core operating philosophy is to be a cash flow positive profitable business, while maintaining a strong balance sheet.
We believe as we always have.
That offering the highest quality products and highest quality service will ultimately prevail in any market.
We probably produce high quality northern white sand, we're convinced that by using our sand our customers will ultimately have better long term well results.
As we said time and time again quality matters.
We believe finer mesh northern white sand outperforms regional sand in every measurable way and most importantly in crush strength in turbidity.
As lateral length continue to grow so the need for northern white sand.
In the Bakken Marcellus and Utica basin, Northern White sand remains the propping up choice.
Well, we believe there is also a value proposition and the other operating basins.
Regional sand presents many problems. They include trucking congestion and safety concerns lower production decline curves lower E U ours.
And long term supply chain sustainability questions.
We're convinced that over the long term MPS will come to further appreciate the benefits of high quality northern white sand they'll see how it can help them achieve better long term well results and ultimately higher cash flows plus higher returns on their invested capital.
In 2019, we demonstrated that our long term strategy works.
It continues to produce results in 2020, we'll keep executing on that winning strategy a strategy that will enable us to continue delivering positive long term operating results.
And with that I'll turn the call over to our CFO Lieberman.
Thanks, Chuck as Chuck mentioned, we were able to finish the challenging 2019 with many record breaking metrics and a lot to be proud of I'll start with the fourth quarter results before highlighting a few key full year point, starting with sales volume.
We sold approximately 462000 tons in the fourth quarter declining volumes from the third quarter 2019 was primarily due to a seasonal slowdown in completions activity in the fourth quarter.
We had anticipated this decline and responded with reductions in our operations to limit any negative financial impact.
Total revenues for the fourth quarter 2019 were 47.7 million, a 27% decrease compared to third quarter 2019 revenues of 65.7 million.
San sales revenues, which includes reservation charges decreased to 23 million from 29.7 million in the third quarter 2019, primarily due to lower sales volumes sold in the quarter. The average sales price per ton in the fourth quarter was marginally higher at $49.70 per ton.
Versus $48.53 per tonne last quarter.
In the fourth quarter, we recognized 11.6 million a shortfall revenue from customers, who did not take their contractually obligated minimum volumes.
Currently some of our contracted customers will likely not take their minimum volumes in the first quarter 2020, and we expect to have shortfall revenues in that period as well.
Logistics revenues, which includes freight for certain mine gate sales railcars usage and our smart systems rentals was approximately 13.1 million for the fourth quarter 2019, compared to 20.4 million for the third quarter 2019.
The decrease in logistics revenue was primarily due to a decrease in volumes quarter over quarter through our van Hook terminal.
Our cost of sales for the quarter was 29.8 million a decrease of 8.8 million from the third quarters 38.6 million.
The decrease in cost was primary due to lower sales volumes, particularly the freight costs associated with the decline in logistics revenues I just spoke to.
For the fourth quarter 2019, our contribution margin per ton was $53.53 per ton.
Marginally lower than the $55.13 per tonne last quarter.
Hi, shortfall revenues on lower total volumes was the largest driver of the contribution margin and the current and prior quarters.
Gross profit was 17.9 million in the fourth quarter compared to 27.1 million and the third quarter.
The decreases again due to lower sales volumes quarter over quarter, partially offset by lower production costs as we responded to the anticipated slowdown.
Our operating expenses in the quarter were 14 million compared to 12.7 million in the previous quarter.
Salaries benefits and payroll taxes, and other GNS expenses were relatively consistent quarter over quarter.
The current quarter includes a noncash impairment charge of 7.9 million related to our hickson property.
The next in property as a fully permitted mine site and Jackson County, Wisconsin, with approximately 100 million tons and proven recoverable reserves.
In prior years, we invested in capitalize improvements at Exton.
Because we have no immediate plans to further develop this site, we determined that we needed to impair some of its value.
And the prior quarter, we recorded an intangible asset impairment charge of 7.6 million related to the quick low technology. As we are are working on a new transload technology that we hope to roll out to the markets.
For the quarter, we had income tax expense a point threemillion.
We expect our effective tax rate to continue to be in the low 20% range.
We had net income of approximately 2.4 million in the current quarter compared to 10.9 million in the previous quarter.
GAAP net income was negatively impacted by the impairment losses recorded in each period.
We had adjusted EBITDA of 19.6 million this quarter compared to 28.8 million last quarter. The lower adjusted EBITDA was primary due to lower shortfall revenue and lower total volumes sold which was partially mitigated by lower cost of goods.
Now turning to the full 2019 results.
We had total volumes of approximately 2.5 million tons in 2019 compared to 3 million tons in 2018.
Despite the lower overall volumes were still generated net income of 31.6 million in 2019 compared to 18.7 million in 2018.
We generated a record 87.1 million of adjusted EBITDA in 2019, an increase of 21.1 million compared to the 66 million in 2018.
The improvement adjusted EBITDA for 2019 over 2018 was primarily due to higher shortfall revenue from customers that did not take their contractually obligated volumes incremental increases realized from delivering sand farther down the supply chain through our van Hook terminal and deployment of our smart systems rental equipment.
In 2019, we generated 44.6 million operating cash flows.
Spent 25.4 million on capital investments in 2019.
Which approximately half was spent on the build out of our smart system fleets and half was spent on expansion project at van Hook and efficiency projects. It okay.
We continue to expect to live within our cash flows we expect full year 2020 capital expenditures to be between 20 million to 25 million, excluding any additional acquisitions with the majority of this capital currently allocated to support incremental growth in our smart systems offerings.
We currently expect to find these capital expenditures were cash from operations and available cash.
As of December 30, Onest 2019, we had approximately 2.6 million cash on hand on our balance sheet.
Currently we have approximately 5 million in cash on hand, and expect to be at this level or higher by the end of the first quarter.
In terms of guidance for the first quarter 2020, we current expect sales volumes to be up approximately 40% over fourth quarter 2019 results and we expect adjusted EBITDA to be in the 5 million to 10 million range for the quarter.
Adjusted EBITDA I suspect to be lower than fourth quarter 2019 results due to lower shortfall revenue and higher seasonal production costs that we typically have in the first quarter of each year.
During the fourth quarter 2019, we refinanced our existing debt under a 23 million five year amortizing equipment financing secured by our Oakdale assets.
We used the proceeds primarily a payoff in close our former credit facility.
We also closed on a five year 20 million a b L revolving credit facility. This facility secured by our accounts receivable in inventory as of December 31st 2019, We had 2.5 million drawn on the ABL facility and 17.5 million of remaining availability as of today, we have no bar.
These initiatives under this facility.
We continue to be focused on maintaining a strong balance sheet and prudent debt levels as Chuck stated earlier in 2019, we reduced our net debt, which includes available cash and total debt by 15.5 million.
We currently have one of the lowest levels of debt and the wholesale service industry.
We expect to continue to generate positive cash flow from operations and to limit our capital expenditure spending to those cash flows.
With our current expected cash flows from operations current availability under our credit facility.
And other available sources of borrowings we believe we have sufficient liquidity support all of our ongoing activities.
This concludes our prepared comments and we will now open the call for questions.
Thank you.
I might ask a question you will need to press star one on your telephone.
A question past the punky please standby, while we come out of the Candy roster. Our first question comes from John Watson with Simmons Energy. Your line is now open.
Thank you good morning.
Good morning, John.
Hi, guys I wanted to start on the smart systems impressive sequential improvement in terms of systems deployed I was hoping you could speak too.
[laughter].
Different tiny correcting the systems that have been deployed over the past quarter as well as your expectation for incremental deployments and at the end of Q wander into Q2.
Yes. This is John here.
So yeah, we got some good uptake in our smart systems with Smart systems, one of the things that we're working on last year was getting a critical mass of equipment available that we can rent out and then actively going in selling it and the customer basis using it clearly likes it it's got to your industry, leading does controls and as a.
Those osha requirements, the PDL limits from Osha start to come more and more into.
Yeah into effect.
Folks are are concentrating more on that as to what the dust levels. Our on site. So we're seeing a bit of transformation from some of the other technologies into silo technology and with our silos, you'll customers understand that it's very simple as no moving parts to empty directly into the been.
Or into the blender and so that helps with regard to what our outlook is so we've got nine systems rented we've got 12 available for rent. So obviously, we're going to be looking to get the remaining sets a under under lease and then we're going to continue to build approximately one cents per month through the end of the year.
As we are also loading out our building out our new smart path system, which is a a it's a unique and we think market changing technology that will allow for bottomed dump and dramatic operation.
For customers looking for that so we're excited about that yeah. Our whole goal around this product is not having san limit the amount of stages, you can do on a well per day.
I think we're we're actually getting pretty close to where we're seeing that we're making a big impact.
Great. Thank you for that secondly, a the volume guidance for Q1 is an impressive increase I was hoping you could speak to the pricing environment for northern White and how that impacts Q1 results and also looking into Q2 as well.
Yes, so in northern White continues to be it a challenge pricing environment. However, it is and depending on the grade it's basically in the mid Twentys Fob mine.
There is still significant demand for northern white, particularly northern White is it's delivered with efficient logistics, which is obviously a big focus.
You know of our customer base out there so right now when cues looking pretty good the rest of the year is certainly Q twos, probably looking okay do and then we kind of lose visibility into three and four so.
We're excited the volume increased.
In general was expected.
Budget exhaustion, you'll hit pretty hard towards the end of last year. So were you were people have gotten off the mark in the got off the more quickly.
In one Q at the beginning January.
Perfect last one for me. The Q1 guidance provided is helpful. I was wondering if you could comment on your free cash flow expectations for the quarter I would think your EBITDA free cash flow conversion and Q1 improves from Q4 levels am I thinking through that correctly.
Yes, that's correct.
We expect to generate positive cash flow in the first quarter.
Okay. Thanks, Lee Thanks, guys I'll turn it back.
Thanks, John Yes.
Our next question comes from Lucas pipes with B. Riley FBR. Your line is now open.
Yeah, Hey, good morning, guys. This is actually Dan on for Lucas I, just had a modeling question here.
Good to see that you've settled this lawsuit with Schlumberger from a working capital perspective, you've had this big accounts receivable build in 2019.
From you know a as far as like cash flow collection, what can we expect from that in the coming quarters.
Well the builds primarily been from the one contract we haven't dispute and so until that gets resolved that we'll continue to be part of the accounts receivable.
In terms of of cash flow generation, though we expect a as we highlighted in our comments, we expect to be cash flow positive for the year and so we expect to generate positive cash flow over our capital spending for fall 2009 2020.
Got it got it I just I guess, specifically it was like you guys had a big working capital draw in 2019, and the expectation that that will reverse in 2020.
A question basically it might not necessarily with reverse split because again part of that receivable is related to the speeded litigation. So until that gets resolved that receivables stay on our balance sheet, but it should basically not build this year. So we should have a relatively a you know our working capital should be relatively balanced and we won't.
Have the the same bill we had in 2019, because we're not going to have.
Then as much incremental shortfall revenues related to that disputed contract.
Great. Thanks, just that help.
God.
Is that helpful. Yeah, Yeah. That's helpful. Thanks, and then just one from a higher level you know perspective that we heard yesterday from competitor that.
Demand out of the Marcellus has been pretty strong this foreign despite kind of lower prices natural gas and some of the financial challenges that those guys are facing there I'm. Just wondering if you guys are seeing is the same thing so far in 2020.
Yes, so I would say, we're seeing across the board relatively strong demand, particularly from the traditional markets that we serve which includes the Marcellus.
Great. Thank you appreciate it I'll hop back.
Thank you.
Next question comes from George O'leary, with Tudor, Pickering, Holt and company. Your line is now open.
Morning, guys.
Hi, George George.
Notice that the the language in the 10-K just around contracting.
Maureen teaser buying on a spot basis and buying on shorter duration contracts wondered if you could speak to that a little bit more just kind of what duration or most DMP is contemplating as anyone still contemplating long term contracts to try to lock in these lower prices.
I'm just kind of what you guys are seeing on that contracting environment, how that's evolved over the last year.
Yes. So you so I think it's a combination I mean certainly.
You know MPS and pressure Pumpers for that matter you understand that they are you in certain circumstances. There is some oversupply in the San market. So they are taking advantage right now, but the ones that are really focused on.
Thinking about this business not in the next three to six months, but thinking about it from the next six to 10 years.
You are interested in having that long term sustainable sustainability discussion with us and that includes everything from.
On the mine gate, all the way to the wellhead and making sure that you're operating that supply chain in a sustainable fashion and those folks are engaged in conversations with us on to the long term you'd I don't know that will ever see the days of.
The five and six year deals that you could typically get way back when but long term sustainable logistics will yield long term sticky sales for us and it'll be the mechanism of the contracting on that maybe a little bit different than it was before.
I would add to that I think what we're doing into the Bakken with our 150 car unit trains.
Kind to differentiates the way that sand moves and I think to every basin I think that's what people are going to have to look at the long term logistics and what people are doing to make it more efficient.
Okay. That's very helpful color and then just could you provided a little more color one on the geographic split in volume that you guys have contracted for 2020, and then from a smart systems perspective, where they.
Where they sit today again from a geographic perspective, and then what.
Are you targeting any basins in particular are not targeting certain basins burberry a strategic reasons just.
Those two questions the bulk sale.
I'll take the smart system as far as smart systems that works very well and every basin. So we don't have one basin targeted we will go to wherever.
We find business and it makes sense.
Yeah in terms of our current geographic mix for 2019, roughly 70% of our volumes went to the back in the Marcellus and roughly 30% went to other markets every quarter that really changes depending on kind of you know supply and demand in different factors in the strength of our logistics. So.
From our Oakdale facility, we can deliver to any bases in the country efficiently. So while 70% is where we are today that doesn't mean that we're not trying to continue to sell volumes in every basin and back to Chuck's point in terms of our long term logistics focus and are focused on really driving the rail costs down through having very efficient operations in larger unit trains we.
I think we can continue to to grow and other basins as well, but right now we're about 70% in those two basins Marcellus and the Bakken in terms of contract mix. You know the route is as John alluded to the contracts are changing and so we're not going to really get into discussion at how much we have contracted or not contracting is our volumes are being sold on a spot.
Basis, some to are taking their contracted volume some of our customer to take an excess of the contracted volume. So it really depends on activity levels and working with our customers and were very flexible in terms of how we're working with I think one thing to focus on as we have the lowest cost structure in the industry. When you factor in not only our cost of production, but our debt cost as well.
So we have this flexibility be very competitive on both the contracted bases and a spot basis and the other thing that gives us some stickiness is one where supply and San through our last mile equipment, we really get into a place where we've got a steady pool on that sandwiches very good for our business long term.
Great. Thanks, very much for the color guys.
Thank you.
Thank you next question comes from Steven Madden Girl with Stifel. Your line is now open.
Thank you good morning, gentlemen.
Good morning.
You mentioned on the in the prepared remarks about smart systems, and and I think you mentioned sort of taking share from containers are you're are you seeing are our most of your system displacing containers or are you displacing other silo systems I think along with the when you talk about your Sandvine are you.
Oh, you're smart systems, only handling your sand or not necessarily.
Our smart systems handle anybody's fan, but they preferred northern white.
[laughter].
[laughter].
It is for taking market share, we do see a big push back on box system, just because of the work that has to be done in the wellhead and like lift in the boxes over top of People's heads and just in that factor and as far as the U.S.G. goals and things like that we think that our system kind of has a better way there.
And then in addition, our ability to unload trucks.
With some of our other technology, which involves gravity dump trailers.
Differentiates over the traditional pneumatic silo. So we do see people anyone to look into pump a lot of sand in a day.
Pneumatic trucks make it more difficult, but if you can gravity dump and you're going to unload the trucks quickly I.
I think you've got to undergo a leg up on everyone. So again people are talking about that market slowing down we've never seen more interest in what we're doing and we've got some new stuff is coming up and hopefully we get that.
Working very very shortly and we feel like we're going to have a lot of business coming our way.
Okay. Thank you and then.
Two other ones one quick one on the.
Tax.
Herman charge.
Is there a tax benefit can be impairment charge, we should be thinking about for kind of adjusted EPS purposes.
No.
Okay. So there's no tax impact from the charge okay.
And then just just finally.
When we think about me.
The logistics revenue numbers and.
I think you mentioned that the sequential drop was up just largely volume related.
With that as we think about modeling that number going forward, that's driven off of the smart systems and the Transload facility right. Those are the two primary drivers.
Well, yes, the smart systems is going to be a growing component of that and then as we sell sand in basin, which primarily that goes through our transload facility in van Hook a share of those revenues depending on how the contract is structured would go through that as well, but we also part of our logistics revenue is that some.
With that is pass through that basically we held the line up then logistics for our customer and the revenue in the cost kind of pass through consistently so it's a mix of three different drivers to that number Steve.
Okay and.
And based on your strong volume guidance from first quarter I'd imagine that.
I would move at least Directionally, yes.
Yes, directionally should be fairly consistent so as our volumes go up that's going to kind of move a consistently with the increase volumes.
Great. Thank you.
Thank you.
Thank you.
Im not showing any further questions at this time I'd now like to turn the call back over to Chuck Young for closing remarks.
Thank you for joining us for Smart Sands fourth quarter 2019 earnings call.
We're excited about how 2020 has kicked off and we look forward to reporting our progress again in may.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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