Q2 2020 Smart Sand Inc Earnings Call

Ladies and gentlemen, Thank you said in prior calls. It's also begin momentarily again thinking if any by your called Gosh I think your momentarily. Thank you.

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Standing by and welcome to the Smart fan second quarter 2020 earnings Conference call. At this time all participant lines are not listen only mode. After the speakers presentation. There will be a question answer session.

The question during the session. They will need to press star one on your telephone please be advised that todays conference is being recorded.

Pardon you further assistance. Please press star Zero I went out like the conference over to your Speaker today, Josh JD Finance manager. Thank you. Please go ahead Sir.

Good morning, Thank you for joining us for smart since second quarter 2020 earnings call.

On the call today, we have jumped young founder and Chief Executive Officer.

We 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.

A complete discussion of such risks and uncertainties. Please refer to the company's press release and our documents on file with the FCC.

Smartside 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 as.

Only as of the live broadcast today August 2020.

Additionally, we will refer to the non-GAAP financial measures of adjusted EBITDA contribution margin during this call.

These measures when used in combination with our GAAP results provide us and our investors with useful information to better understand our business.

Please refer to our most recent press release, where our public filings for reconciliations of adjusted EBITDA to net income and contribution margin gross profit I would now like turn the call over to our CEO jump young.

Thanks, Josh Good morning, this was a quarter that nobody want it and many had not fully proceed as we all know the cobot 19 pandemic devastated the worldwide will industry. As a result, we saw an unprecedented drop in drilling and completions activity in this country.

For our industry the situation provider real task of long term planning.

Financial Prudence and operating efficiency.

I'm pleased to tell you this more sand was not caught unprepared.

We've always positioned ourselves to survive downturns and the benefit from the recoveries.

As expected this is a period of both oversupply and low demand.

As a result, we had historic low sales volume of 208000 tons and revenue of 26.1 million.

As we discussed on our last earnings call, we anticipated that slowdown and responded effectively we moved quickly to reduce our cost structure to be in line with a lower market activity.

Due to these efforts, we're able to reduce debt, while maintaining our cash balances.

Orders, and we had approximately $25 million and liquidity from cash and availability under the credit facility.

Before moving on I'd like to take a moment. Thank all our employees for their commitment and sacrifice the sports smarts and during these difficult time, they've been great their loyalty and dedication have been critical though the market is still reeling. It looks like we may be coming off the bottom.

We've kept in close contact with our customers were partners with them. So we're always working with them to ensure that we're ready to move forward together.

We also continue reaching out to potential new customers, we especially seek out those they want to partner with a company that has proven to be a reliable source of high quality sand through any market.

We're a purpose built company one made to last.

The strategic assets at the core of our business are designed to weather the storms that we're facing in the market today.

We've managed our assets in expansions in a meaningful way from day. One we've built an acquired assets that are efficient and low cost operations and very importantly, we did it with very little debt.

As we demonstrated in previous downturns smarts and has the wherewithal to navigate through periods of market uncertainty and to come out stronger competitor when market activity returns.

We've made the hard decisions the right decisions will benefit from that in the recovery.

We believe that northern White will play a critical role in the coming recovery, we feel now more than ever that operators will be looking for ways to squeeze all the build the returns out of their wells northern white sand is fundamental to ensuring that as possible.

There continues to be increasing evidence that northern white sand outperforms regional sand and provides better long term well results.

Yes, it may require an incrementally higher investment upfront, but we believe well operators will generate better returns on their investments for years to come by using northern white instead of regional sand.

Looking ahead, we think consolidation should and will play a part and his recovery.

What would it take for us to be involved in any consolidation.

First we need to get access to assets that add long term value for our company and our shareholders will only consider consolidation with a purpose.

So what would be the key drivers for US there are four expanding our operating footprint is a new basins, gaining access to new and enhanced logistics options broadening our customer base and complementing our mind to wellsite supply and logistics capabilities.

But we won't risk our balance sheet.

We continue to be committed to our core principles of a strong balance sheet and low leverage levels.

In summary, smart sand is here for the long haul.

We built the company to perform through any operating exam cycle.

We positioned ourselves to come through this downturn and we expect to be a pivotal player in the upcoming recovery.

And with that I'll turn the call over to our CFO Lieberman.

Thanks, Chuck as expected second quarter was a tough one due to the historic slowdown in the oil and gas industry. There continues to be a lot of volatility in the market currently and that uncertainties makes it difficult for operators to commit to coming back online. However, as Chuck stated, we do see some signs of a pickup.

Okay and activity and the second quarter lows and we are preparing ourselves to be a big part of a recovery when it happens.

Here's how the second quarter ended up.

Starting with sales volume.

We sold approximately 208000 tons in the second quarter down significantly over any comparable quarter.

These reduced sales volumes are the primary driver for all results. We are reporting for this quarter I will point out a few nuances to some of the reported figures, but by and large the low sales volume are the driver for our results for the quarter, what can when compared to the first quarter 2020 results.

Total revenues for the second quarter, 2020, or 26.1 million.

Compared to 47.5 million in the first quarter.

Shortfall revenue in the quarter was approximately 14 million as we invoiced, our last invoice to the customer with whom we remain and pending litigation, we do not expect any shortfall revenue to be recognized under this contract going forward.

Cost of sales for the quarter were 11.9 million compared to 41.1 million last quarter.

We were able to cut some cost there were also some costs such as noncash depreciation real estate taxes and insurance that we cannot easily reduce.

For the second quarter 2020, our contribution margin was 19.3 million and adjusted EBITDA was 15.6 million compared to the first quarter contribution margin of 11.5 million, an adjusted EBITDA of 6.4 million.

The increase sequentially. It was primarily due to shortfall revenue recognized in the second quarter.

For the second quarter, we generated 13.8 million and operating cash flows and spent 2.2 million on capital investments here today, we have generated 25.8 million and operating cash flows and spent 6.4 million on capital investments, which has primarily been on the new smart system units.

We currently expect or cash flows from operations will continue to exceed our capital expenditures for 2020.

During the quarter, we pay down our revolver and full.

We ended the quarter with approximately 17 million in cash.

Between cash and our availability on our revolver, we had approximately 25 million in available liquidity at the ended the quarter.

Our capex budget remains reduced and currently we expect full year capital expenditures to be less than 10 million.

Outside of any acquisition activity.

We continue to actually manage our near term cash flows to try to be in line with expected cash receipts.

We have worked with our partner lessors and vendors to push payments from the near term and reduce overall contract prices to maintain sufficient liquidity to support our operations.

Due to the continuing volatility in the market and lack of clarity on our customer activity, we're not giving specific guidance for the third quarter.

This concludes our prepared comments and we will now open the call up for questions.

Thank you, ladies and gentlemen, who like asked a question. Please press Star then one when you touched on telephone again, if you like that's the question. Please press Star then one.

One on before first question.

Our first question controversy they do Merrell Stifel. Your line is open.

Good morning, gentlemen.

Hey, Steven or no.

Two questions in the first of all I'm going up.

Carefully we win where do you guys look at the second half a year and you look at contribution margin per ton and we get all sort of make our assumptions on it but do you think given what you've done on the cost side that you could see that number.

So on an adjusted basis be flat or higher in the back half of your versus the second quarter.

And I'm not asking for a number I'm sort of asking for sure direction on how we're thinking about the cost savings you're done versus pricing et cetera.

I would say that number for the second half the year I'm, assuming volumes are consistent or a little bit higher than the second quarter will probably be flat to maybe down a little bit.

Okay on an adjusted basis.

Yes, that's that's that makes sense okay.

You mentioned this little bit.

To be prepared remarks.

But when you think about the.

The volumes and then you've seen in the quarter and what's going on sort of in the north eastern and maybe Wes.

Are you seeing a missing trends we've seen recently that most of the northern white volumes are still going to those markets.

Yeah, I'd say that we do see most of the volumes go into those markets, John you might want to shed a little bit more insight there.

Yeah, I think that it's no secret in the markets that the northeast, it's kind of whether this hydrocarbon storm pretty well I mean natural gas projects continue to come online.

So we've seen a you know volumes were maintained relative consistency out there North Dakota interestingly it seems to be coming back a little bit I think a little bit sooner than maybe we expected and we hope that that continues although I think that.

Any kind of prediction as to what this recovery looks like right now I think it's a little bit premature.

Great well, if I could sneak one more in you we've seen some some bankruptcies in your space you guys are obviously in a great spot financially.

As as you as you think about how the recovery unfold here over the next couple of quarters.

We do you expect that you'll see you could start to see some positive pricing momentum as you get <unk> and I'm, a given I'm asking for specific timeframe, but as you get.

The recovery things here given.

Now some production, which has been shut in its a bankruptcies or by companies that don't have the financial strength you have.

I think it's difficult to say that on that until we really understand what the activity is going to be the back half of the year, which I think that's still out and we're still learning that so I.

I think it's pretty difficult to predict that I don't know as anybody else has any other thoughts on that.

No I think.

I think we start to see bankruptcies play out and restructurings and how those organizations come out as well as you know right now on a activity side I think it's still very kind of volatile and fluid and so I think it's hard to predict what kind of impact that's going to have price on pricing over the second half a year.

Okay, great. Thank you gentlemen.

Thank you yes.

Again, ladies and gentlemen, Washington's press Star then one on your Touchstone telephone.

Next question comes when you look at part B. Riley FBR. Your line is open.

Good morning.

Yes.

In the second quarter.

26.

Sure.

Hi.

How much that was.

Two logistics specifically.

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Works.

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Yeah in this second quarter, there wasn't a lot of logistics revenue is primarily a sand sales.

For a backing out the shortfall and just looking at San revenue, we know, it's probably generated from the sand sales we had in the quarter.

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Yes.

Sure.

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Yes.

Right.

In terms of the quarter.

Well, we're talking about logistics, yes.

It would actually be a little bit higher than that.

Okay.

That's.

Not more than 20%.

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Yeah, I think a 10% to 20% range based on the second quarter is as a fair number.

I appreciate.

And then I noticed it it's a small small.

Looking at the cash flow statement.

Yeah.

Second quarter.

Gosh.

It's cash gain there.

And.

What you'd be able to.

Two.

What assets.

During the quarter.

Yes.

Before there are opportunities.

Obviously, it's a tough.

I'm curious.

Well the gain on sales is Turner $75000 is very minor wasn't anything specific some minor equipment and as relates to.

Right now, we're not really looking to have any significant sales from assets it'll be just more can opportunistic if it's a piece of equipment or something that's a we're not using our idle et cetera. So I wouldn't look to be for that to be anything significant in the future.

Very helpful.

I have more but I'll jump back in queue. Thank you very much.

Alright, thank you.

Thank you.

Our next question from Stephens and girls before your line is open.

Hi, Thanks, just just a quick follow up gentlemen, deep.

Looking at your receivables and I.

I understand that there's a large receivable in there for one customer as we look at the second half a year.

Thank you talk a little bit about this on and be prepared remarks.

In general.

Except receivable and how that plays out there working capitals pretty neutral.

Well as sales increased in the second half year in the second quarter receivables are gonna grow absent a the the one under dispute so that would be a little.

Build up of assets, so that would probably be a negative working capital potentially depending on how cells board, but it's not going to you you know sales activity say similar to the second quarter little higher it's not going to be significant.

Okay. Okay. Great. Thanks, you know just one other quick follow up you mentioned, our prepared remarks or your Capex Guide Ics as you mentioned, excluding any acquisitions is that.

Sure what should we be thinking about that there could be something out there or is that just a general.

General Kinda caveat to Capex.

Well I think if you look at all the bankruptcy is going on there's a lot of stuff out there right. So.

We definitely you know as opportunities will come around we will look at them.

Okay and is is there a along those lines is there a.

Are you.

Would you get involved and you may not be fair to address but would you be would you get involved in basin side, where do you think you'll you'll be staying with northern white as your azure sort of soul.

She product given its given its inherent benefits going forward.

Well as it's tough it's our personal belief is that it's a very difficult business to run.

But.

Obviously, if the prices right. Then then we will look at that well I think as we outlined in our prepared remarks, we're looking for four different attributes to to basically drive any consolidation there and our acquisition we might participate in and so part of that is getting access to new customers in new markets. So if there isn't in basin opportunity that provides us.

The expansion of our business and gives us access that makes sense to new markets and new customers will look at but again that doesn't.

Change the fact that we have a very strong belief in northern white and thing North Mike's going to continue to be have a strong place in the market long term and so we're looking to you know we would look at opportunities against increases the value for that as well.

Very good no. Thank you gentlemen, that's very helpful.

Thank you. Our next question comes from look as parts of B. Riley FBR. Your line is open.

Good morning. Thanks.

It's too.

<unk> industry questions.

Uh huh.

Perspective.

Of mines out there.

No.

Kind of specific operator.

What you say that.

Do you run down.

And so the mine supply.

Market.

Would you say its.

Kind of gone for good or.

Could it come back.

Oh gosh infusion.

Restructuring and such.

That's that's question number one and then number two.

Forward curves for.

Oh gosh, you have a sense.

Could look like.

2021.

Would you expect that to translate to in terms of.

Oh gosh, specifically thank you.

Well the question on the state of mines and what they look like because of just my two cents on that is that you know sands, one thing, but the logistics around that sand is super important. So that's kind of my Oh My thing that I focus in on John you might want to share some of your thoughts on on what's going on there and what you're saying.

Yeah, what I would add I mean, I would kind of just turnaround talk a little bit about smarts and with regard to how we operate as you know we have a single site.

Wisconsin, where we have a five and a half million tons of capacity and it that allows us to do a number of things one it allows us to run one management team out there and to bring on and take off capacity as needed, but also to maintain a those assets that are idled should they need to be idled to be able to bring them back quickly when you have.

Multiple mines around.

Your various areas and each have smaller amounts capacity, whether you've kept that management maintenance team on to keep those things up and running does kind of limit your ability to bring those asset back online quickly with a minimum amount of cash and we haven't gone out and really surveyed many of the.

Many of our competitors out there as to what's going on but we do keep our year to the ground and we think some of the assets out there.

Particularly the ones that are logistics constrain may have a tough time coming back the other than the ones that have been idled. The longest they are the highest cost of operation and so we think when the market turns around here I think we're in good shape to be able to meet that incoming market demand because our plants are ready to go we're not sure kind of how our compare.

Look at that.

But certainly one one thing like any pieces.

And then if it's not being maintained it becomes extensive and and time.

It takes a long time to bring this stuff back up and running.

Very helpful. Thank you.

Second question on in terms of kind of demand.

Yeah, I think Lucas itself is a very hard to predict demand in 2021 based on kind of current activity levels, but I think what we can say is it production drops or continues to drop a in the U.S. as expected our predicted over the next six months going in 2021, assuming a.

Demand gets back to more normal levels or if it's a pandemic gets under control and back to normal levels. You would see I think an opportunity for activity to pick back up in 2021, because producers will be well they'll be managing their cash flows and trying to live within free cashflow, they're also going to try to get the production back up and so we think that would be.

The an opportunity for activity to to potentially increase in 2021, assuming again market demand gets back to levels pretty pandemic and what the drop in production and producers are trying to.

Bring their production back up to a pre pad tend to make levels as well.

Thank you and then.

Just one final one.

Hi piece it together.

<unk> <unk>.

I thought I'd just ask.

At the proceeds from asset sales was it just <unk> 265.

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This could also be in excess of book value and such so kind of in terms of total cash proceeds.

Anything it was it was minor Lucas I wouldn't focus on that number it was a very minor events in the core.

Okay great.

I really appreciate it.

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Thank you.

Thank you.

I'm showing no further questions at this time I was trying to call back over to check for any closing remarks.

Great. Thank you for joining us for Smarts and second quarter 2020 earnings call. We hope to have good news, where you soon stay safe.

Ladies and gentlemen, just that concludes today's conference. Thank you participate email disconnect have a breakout.

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