Q1 2020 Earnings Call
Greetings and welcome to the U.S. silica first quarter 2020 earnings conference call all lines will be in listen only mode.
When you went to require operator assistance during the call. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host Mr.. Our June Shriek, Mark manager of Treasury and Investor Relations for U.S. silica. Thank you you may begin.
Thanks, Good morning, everyone. Good. Thank you for joining us for U.S. Silicas first quarter 2020 earnings conference call.
With me on the call today, our branch and Chief Executive Officer, and Don Merril Executive Vice President and Chief Financial Officer.
Before we begin I would like to remind all participants that our comments today will include forward looking statements, which are subject to certain risks and uncertainties.
For a complete discussion of these risks and uncertainties. We encourage you to read the company's press release and our documents on file with the FCC.
Additionally, we may refer to the non-GAAP measures of adjusted EBITDA and segment contribution margin during this call.
Please refer to today's press release or how are public filings for a full reconciliation of adjusted EBITDA. The net income and the definition of segment contribution margin.
Finally during today's question and answer session. We would ask that you limit your questions to one club to follow up to ensure that all who wish to ask a question may do so.
With that I would now like to turn the call over to our CEO Mr. Bryan Shinn Bryan.
Thanks, Oregon, and good morning, everyone.
I'll begin today's call with an update on our response to the Kobin 19, pandemic, which was focused on ensuring the safety and help our employees, while minimizing disruptions to our operations and financial performance.
I'll then discuss how we're responding to the current oil macro environment.
Next I'll review, our solid first quarter performance in detail and finally, I'll conclude with market outlook, but.
Both of our operating segments and discuss the numerous cost reduction measures that we have instituted.
I'll, then turn the call over to Don Merril, who were you review key financial metrics before opening the call for questions.
I'm pleased to report that we've experienced minimal operational disruptions as far as a result of the cobot 19 pandemic.
Following the guidance provided by the C. D C in federal state and local authority. The majority of our corporate employees started to work remotely in late March and we probably implemented numerous social distancing best practices throughout our entire operations network to protect the health and safety of our colleagues.
Also formed a cobot 19 action team that provides employees with regular communications, including industry specific best practices proper cleaning disinfecting and hygiene practices and operational modifications to minimize exposure risk.
I'd like to express my deep gratitude to all of our colleagues for their unbelievable dedication during these challenging times.
We will continue to closely monitor the situation and make decisions based on guidelines from relevant authorities.
Looking ahead, we expect that I S. P segment sales volumes will generally follow GDP trends.
You end use markets for industrial San such as building products and automotive will likely experienced weaker customer demand while demand for other I.S.P. products, including dice measures Earth and specialty clays use for the filtration of food and beverages and specialty sand used in container glass production is expected to <unk>.
Remain robust.
Energy segment, the oil demand decline, resulting from the cobot 19, coupled with an inadequate supply response, and then exacerbated by the lack of global storage capacity has resulted in a sharp decline in crude oil prices accordingly expectations are for at least 50% decline in North American.
Upstream spending this year at a similar decline in completions activity.
We expected volumes and loads and our oil and gas segment will directionally track completions activity, but as with the 2015 oilfield downturn, we expect to gain market share this year due to our attractive low cost offerings.
In response to the excepted expected a sharp contraction in well completions, we've taken swift and aggressive actions to rightsize, our cost and oil and gas supply chain footprint.
For the past few quarters, we've idled seven production facilities and we do shifts at six other mines, thereby reducing our stat annual oil and gas production capacity 24 million tons to 6 million tons.
Also warm stack, some sandbox equipment and moved other equipment to areas of higher demand.
[noise], drawing on our roots and continuous improvement and lean manufacturing operations teams are pursuing approximately $25 million an asset in additional plant cost savings and supplier contract renegotiations.
In addition, we've taken significant actions to reduce SGN expenses.
Over the last five months, we've eliminated approximately 250 positions across the company and reduced other costs, resulting in an expected 40% decrease in her as she in a run rate going forward.
We are said to lose so many of our valued collie, but took a difficult step for the overall health of the company.
Now, let's move onto our solid first quarter results.
For the total company first quarter revenue of $269.6 million decreased 20% sequentially.
However, excluding the onetime customer shortfall penalty recognized in the fourth quarter total company revenue declined approximately 5% driven by lower load and volumes and our oil and gas segment.
Adjusted EBITDA for the first quarter up $48.2 million were down 34% sequentially. However, excluding that same customer shortfall penalty adjusted EBITDA more than doubled sequentially driven by substantial increase in our oil and gas segment contribution margin dollars.
Our industrial and specialty products segment had a great quarter revenue up 9% sequentially and total segment contribution margin of 11% driven by higher sales volumes and increased sales of higher margin specialty products.
Any minerals product portfolio continues to perform well despite the challenging macro environment demand for filtration from food and beverage producers were strong in the first quarter.
It is expected to remain robust in the near term.
And our oil and gas segment, we sold 3.2 million tons of sand in the first quarter, a 5% decline sequentially.
Box loads decreased by about 14% from Q4, but we still had almost 70 crews generating revenue during the quarter.
For the oil and gas segment contribution margin dollars actually doubled sequentially when excluding the fourth quarter shortfall penalty. Thanks to the aforementioned cost cutting efforts.
Our negotiated settlement acquisition of ours up also closed in the first quarter and integration has been seamless.
We're very excited to have the Arizona team join us silica and to have another dynamic offering in our portfolio.
Closing out my commentary on Q1, I'd like say again, how proud I am of the work that our team did and the results that we delivered an unprecedented and challenging macro environment.
I'd also like to take the opportunity today to remind everyone that well we're up in painted with an oilfield services brush our business is increasingly levered to industrial end markets that are largely unaffected by the turbulence in the energy space.
In fact, the recent volatility in crude oil prices illustrates precisely why we diversified our operations by investing in and growing our industrial businesses, which have higher barriers to entry stickier customer relationships higher margins and strong growth prospects.
Even within our industrial segment, our focus is exclusively on silicon products anymore. We also produce databases or specialty plate and perlite, all higher margin offerings with different end users and demand drivers compared to some of our silicon products.
In 2020 for example, we expect that more than 40% of our company contribution margin will come from non sand products.
This diversification isn't by accident, it's by design and in difficult times like these when the U.S. shale market and our Frac sand peers are retrenching.
Our investment Tonight, you are really paying off by providing less volatility and more reliable cash flow.
In 2019, our industrial segment accounted for nearly 50% of our total contribution margin dollars when backing out the onetime customer shortfall penalty from for Q2 thousand 19.
In 2028, we expect IP to constitute about 70% of our company contribution margin dollars.
And finally today, let's discuss the market outlook for our operating segments.
Our underlying assumption for the remainder of 2020 is that we will operate in an environment of high uncertainty driven by the cobot 19 virus and lower highly volatile oil prices.
Given that we will continue to focus on what we can control and ensure that our cost stay aligned with business affordability.
We expect that our IP business will hold up well and that sales volumes will align with you as GDP given the nature of our end use markets diverse customer base and numerous specialty and niche products.
Our energy business, we believe that well completions and sand demand will decline in the coming quarters, and many customers may slow or pause activity in response to load WT pricing.
However, our costs in the segment are highly variable and we'll continue to rightsize operations Accordingly.
Unfortunately, what we're not in a position today to provide specific EBITDA guidance given all the moving parts I do believe that the current 2020 street consensus of less than $80 million of EBITDA is very conservative given our solid first quarter results and the stability of our industrial business.
And finally, we're very focused on cash flow as you might imagine and our goal is to end 2020 with approximately the same amount of cash on our balance sheet as compared to the fourth quarter of 2019.
Don will discuss cash flow in more detail in just a minute during his remarks.
For me the bottom line is that I believe we have the right plan and a committed team to maximize our business results in 2020 and to also be ready to capitalize when the inevitable rebound occurs in the coming quarters.
That I'll now turn the call over to Don Don.
Thanks, Brian and good morning, everyone.
First I'd like to reiterate Brian's comments on the company delivering a strong first quarter and generating $48.2 million of adjusted EBITDA, Despite the obvious and well known macro challenges.
Moving out of the results of our two operating segment.
First quarter revenue for the industrial specialty products segment was $113.9 million up 9% in the fourth quarter of 2019.
Oil and gas segment revenue was $155.7 million down 34% from the fourth quarter of 2019, due primarily to the recognition of a customer shortfall penalty in the fourth quarter.
As well as a 5% sequential decrease in tons sold.
On a per ton basis contribution margin for the IP segment of $45.20 represents an approximate 3% decrease for the fourth quarter. The decrease was due primarily to a change in mix.
Sales of overhead silica increased at a faster pace than our higher margin specialty products.
As Brian stated, we anticipate that our IP business will prove resilient and filed the GDP curve as our customers navigate the coming quarters.
The oil and gas segment contribution margin on a per ton basis was $10.27 compared to $20.22 for the fourth quarter of 2019, largely due to the aforementioned customer shortfall penalty recognized in the fourth quarter. However, it is important to mention the cost focus of the company, resulting in a decline of cost to goods sold.
Driven by the idling of facility continued efficiencies at our West, Texas operation and the decline in our logistics costs and a result of the optimization of our Transload network.
Unfortunately, we expect the oil and gas segment volumes to decline in the second quarter inline with expectations for severe reduction in completions activity. We will continue to challenge our team to deliver the lowest cost possible, while providing the best service in the industry.
Let's now look at total company results.
Selling general and administrative expenses in the first quarter totaled $30.1 million, representing a decrease of 19% from the fourth quarter 2019. This substantial decrease was driven largely by reduced employee costs and associated spending with the previously announced an unfortunate reductions in force.
We now expect SGN expense in 2020 to decrease to a run rate of approximately $85 million by the end of the year.
Depreciation depletion and amortization expense in the first quarter totaled $34 million, a reduction of 10% compared with fourth quarter 2017.
The reduction is driven by a decrease in total depreciated assets due to the idle plant and the subsequent asset impairment.
Our effective tax rate for the quarter ended March 30, Onest 2020, with the benefit of 33%.
Moving on to balance sheet cash and cash equivalents as of March 30, Onest 2020 was $144.7 million and liquidity, including the revolving credit facility was $213.2 million.
During the fourth first quarter, we drew $25 million on a revolving credit facility as precautionary measure in response to the economic uncertainty caused by Cobot 19.
The reduction in cash was expected and was largely driven by front end loaded capital expenditures and working capital.
Capital expenditures during the quarter totaled $16.1 million and were primarily related to the payment of Capex accrued 2019 and improvements in expansions that are high margin industrial facility, and Millen, Georgia, and Columbia South Carolina.
We are now anticipating our 2020 capital expenditures to be approximately $30 million at the low end of our previous guidance of $30 million to $40 million and down approximately 75% from last year.
Of that $30 million approximately 15 million is earmarked for maintenance spend while the remaining 15 million will be allocated towards growth projects in our industrial business.
I'd like to focus on our cash and liquidity position.
As a reminder, we have no near term obligations coming due as our term loan doesn't mature until 2025 and a revolving credit facility expires in 2023.
Further we expect to our term loan interest in spot payments to decline significantly in 2020 due to the recent reduction in LIBOR rates in the termination of our interest swap agreement.
Additionally, we have identified refunds of $16 million of alternative minimum tax credits and $39 million related to net operating loss carrybacks attributable to the care that provision that we expect to recover in 2020.
$55 million cash will certainly help support our cash flow goals for 2020, and with that I'll turn the call back over to Brian.
Thanks, Don Operator would you please open the lines for questions.
Okay.
Thank you at this time will be conducting a question and answer session.
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Our first question comes from the line Stephen Gengaro with Stifel. Please proceed with your question.
Thanks, Good morning, gentlemen.
Hi, Good morning, Stephen How're you doing today.
Sure well.
So I guess two things.
What I'd start with on the on the oil and gas contract in certain markets are all right. So we can get a sense looking ahead.
It was up contribute much in the first quarter you mentioned it was accretive I. Just curious are you could quantify that at all.
Yes, it was accretive.
I would do it was it was minimal dollars.
Here in Q1, but it was accretive for sure we will close that's pretty look pretty late in the quarter. So it really didn't have much much runway to contribute Steven.
Great and then as you think about the oil and gas contribution margin per cost as we look ahead.
Are you, giving the cost cutting that has been in place.
Thus far.
Great contribution margin oil and gas stays.
Slightly positive over the next quarter two or do you think you go negative given how sharply we're seeing in volumes contract just it's hard to gauge kind of your ability to remove costs relative to that.
Yes, I'll, maybe give you.
Give you the start of an answer and I think Don product can can articulate some more details up one of the things that I think is misunderstood a bit about our oil and gas sand business is that the costs are highly variable. So weve been able to take out quite quite a lot of costs, particularly as it relates to.
The local mines those that don't need rail. So we do have a bit of an overhang from railcars associated with our northern white business, but.
I wouldn't say the local sand is 100% variable in terms of cost, but it's pretty close has done a what would you add to that I would agree look at we've proven that we're able to take out cost as volumes and demand drop on our side.
And Thats why you saw at such a good quarter.
We've been able to save on the cost side Weve able to save significantly on freight side as we've been Rightsizing, our Transload network and look we're going to continue to do that we're going to continue to challenge our folks to keep contribution margin positive the rest of the year.
Thank you are just one final on the balance sheet receivables.
Jumped in the quarter I, just wanted to get a handle on the drivers of that and do we should we think about that as being a source of cash as we go through 2020 from here.
Yes.
The big jump in receivables is it's not only trade receivable that other receivables as well.
And.
In my remarks, we talked about tax refunds, and there's $44 million worth of tax refunds that are sitting in that number. So yes, I anticipate that to be a big source of cash by the end of year.
Great. Thank you.
You bet. Thanks, David.
Thank you. Our next question comes from the line of Kurt Hallead with RBC capital markets. Please proceed with your question.
Hey, good morning.
Hi, Good morning, Kurt I hope everybody in your family is healthy.
Let's say view. Thank you. Thank you thanks and.
Absolutely phenomenal job here for further contribution margin than oil and gas segment in the first quarter. So kudos to the efforts you guys got going on there.
Thank you.
Yes, sure. So I think the first question I have then would would be on the industrial side of the business right and Brian indicated that.
That will track GDP pretty closely you got a couple of but your businesses that are hold up really really well.
But when you look at some of the GDP data Kevin to the four here for the second quarter, especially and potentially kind of down spilling over the third quarter.
Theres some data points out there that suggest GDP could be dropping 10 15, 20%.
Paul.
You're on your annualized run rate.
Should we should we use that as our marker we kind of think about the volume dynamics on high ASP or are there.
Enough offsets with.
The diet summation.
First and the clay products that may be kind of damages that dynamic.
Sure occurred so very good question and I think as I mentioned in my prepared remarks that the industrial business is perhaps a bit underappreciated and I think it's exactly in times like these were the industrial business will will certainly shine our expectation in general as you said a moment ago that we'll see further weakness across the economy.
In Q2, and Q3 for sure and probably part for US specifically, where we'll see that weaknesses in customers in the building products and.
Last manufacturing sector. So for example glass for automobiles, there's not much of that happening right now and some of the building products and definitely gone saw the good news is we have the offsets in the things that you mentioned food and beverage and other specialty products. So when you look at all that in total I think we'll do better than than the GDP number.
It is and the current a base forecast that we have for the year would have us.
Down only about 10% to 15% in contribution margin in the industrial business for the year versus the kind of GDP numbers that you were talking about being down 30, or 40%. So bigger team has done a really good job constructing that business and.
We are doing a lot of work with customers right now to try and figure out.
What they're seeing out there and we do have a number of customers that are telling us that they're anticipating somewhere around mid third quarter to be able to restart. The couple of their closed plants that are big customers consumers of our product. So we're somewhat hopeful that as we get a few months out here, we might start to see some rebound there but the overall.
Our current forecast is down about 10% to 15% in contribution margin dollars for 2020 in the industrial business.
Okay, that's great color I appreciate that.
And just as my follow up would come back around to the the oil and gas side of the business. We think about the potential declined and volumes that are again, becoming here, especially in the second quarter.
You talked about high variable cost components. So when they tend to think about these dynamics trying to think about the decremental margin on on the dollar and.
With that decremental margin going to be like 20, 25% or could the decremental margin be like.
40% to 50% I'm, just trying to gauge kind of relative magnitude is any help on that be great.
Yes look I think it's the latter part of that I think you know your decrementals are probably in the 40% to 50% range as we go through the second quarter. We've done a lot of heavy lifting going into this quarter and as Brian mentioned look April was was it was a bit month rights, we've got a little bit more work to do here as we right size the organization through May and June but.
Look at whether it's going to be in that range, but like you said earlier.
End of the day from an oil and gas perspective, I do believe contribution margins going to remain positive.
All right that's awesome. Thanks for that color guys. Appreciate it. Thank you. Thanks Kurt.
Thank you. Our next question comes from the line of Cameron Lockridge with Stephens Inc. Please proceed with your question.
Hey, good morning, Thanks for taking my question Cameron.
I just had one quick one on the oil and gas segment I was hoping just kind of qualitatively can maybe talk about your strategy once the downturn talked about taking market share.
Where maybe you. Thank you best position to gain some share.
And then to the extent you can you have any visibility into it.
As we come out of the downturn that we think we think contribution margin per ton can get back to that.
Mid to high teens level.
And as we come out of this.
So throat so.
Thank you.
Thanks for the question that Cameron and very very important items that you brought up so in terms of of the share first I guess maybe to start with wood.
The things, we're not going to do to to gain share and thats reduced pricing. So this isn't about taking pricing down to get share I think our shares going to come because of our attractive position on a cost curve a favorable logistics that we have and the reputation that we have in the market, what we're seeing and.
We've already started to see this in Q1 and we're seeing it more as we get into Q2 here the customers who are still working out there. They're still completing wells are looking for high quality partners to work with people who were going to be around long term and we've seen some of our customers actually consolidate all their demand to us silica.
So I think that speaks to how we're positioned in the market not just in terms of our costs, but also the reputation and the quality in the service that we provide so I feel like that's that's one way that we're going to gain share. The other way is just a financial strength that we have I feel really good about our liquidity.
We're not worried like others are about restructuring at this point and having to take some of those actions and creating a lot of doubt in our customers mine. So I feel like will be one of the ones out there standing up throughout this and I think that that certainly helps us in terms of how things recover here.
I would go back in and look at some of the previous downturns 2008, 2915, 16, what we typically see coming out of that is that there's a few folks like us who can turn up capacity very quickly we've been running the whole time and we're going to be the initial beneficiaries of that upturn.
I would expect that margins would would surge as they have in previous recoveries. So so exactly what number gets too I'm not sure, but I can remember some of the past recoveries the margins double triple that went up a lot at least initially obviously that that will settle down a bit over time, but I think there are some up to.
Actually very large gains that we can have as as things turnaround here.
Great.
She had the color and I'll turn it back.
Okay. Thanks Cameron.
Thank you, ladies and gentlemen, as a reminder, if you'd like to join the question could you. Please press star one on your telephone keypad.
Our next question comes from line of Taylor's Archer with Tudor Pickering Holt. Please proceed with your question.
Hi, Thank you and good morning, Brian Thanks Kelly.
Hey.
Clearly completions activity in Q2 is getting pretty ugly and.
As you said customers are slow and if not outright pause and some of their planned completion programs and Tom cares for for customers you have it that have contracted volumes during this period, let's say.
Through 2020, what kind of conversations are you, having with end today or any of them come to you look into it to blend and extend some of their volumes further out to the right or how those kind of conversations going today.
So we have a number of contracts so over 20 contracts out in the in oilfield area right now and I think it customer conversations are all over the map. The good news is that a lot of those contracts are nexgen contract, where a customer it basically paid us up fees up.
Front for capacity reservation, and we get to earn those those fees on a pro rata basis.
On a quarterly over the life of the contract so.
We have the rights within the contract to do that and we already have that cash on our balance sheet. So that gives us a pretty good negotiating position with that said, we want to be a supplier long term to our customers and we recognize that this is an unusual situation. It's not like the customers are choosing to go buy from someone.
Else instead of US silica for example, they just don't need the sand at the 10 seconds given that many of them. As you said our are turning down a completion activities for for a while.
So we'll be smart and sensible about how we do that but I like the fact that we're in a much better position just by the nature of the contracts that we've been in previous downturns.
Okay understood and.
Again, I realize this is a fluid environment, but from a.
Pricing perspective could you maybe frame where pricing in oil and gas peaked in Q1 and on a leading edge basis or are we already back below the low is that we saw in Q4 last year or or or maybe somewhere around that.
So I would say that pricing in Q1 kind of the peak was in the mid Twentys in terms of dollars per tonne.
April has held up okay, it's probably closer to $20 a ton I would say, but I would expect that things will fall off here in may and June as as activity goes down I don't have a specific number for you for May and June because it's still as you said a pretty fluid.
Situation, but.
I think it's been pretty widely reported that upstream spending is going to be down 50% or more.
As we as we get into Q2 here and we're also hearing from for some customers that.
They are making choices as to whether they.
Whether they drill and complete whether they just drill or whether they stop everything altogether. So we're waiting to see how some of those things play out but that said, we do expect a pretty dramatic.
Decreases in the in May and June in terms of completions activity.
Okay, well thanks for the answers guys appreciate it.
Okay. Thanks Taylor.
Thank you. This concludes our question and answer session I'll turn the floor back to Mr. Wilson for any final comments.
Okay. Thank you very much operator, I'd like to close todays call by Reemphasizing that we have a diversified business portfolio with numerous industrial markets outside of energy that are holding up well in the current economic conditions and also we continue our strong focused on controlling.
Costs, and maximizing profitability and free cash flow, but bottom line for me is that I believe we have the right plan and a committed team to maximize our business results here in 2020, and we're also ready to capitalize when the inevitable rebound occurs in the coming quarters.
Thanks for dialing into our call and have a great day everyone.
Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.