Q3 2020 Smart Sand Inc Earnings Call
Ladies and gentlemen, todays conference is scheduled to begin shortly please continue to standby. Thank you for your patience.
[music].
Ladies and gentlemen, thank you for standing by and welcome to Smart <unk> third quarter earnings call.
This time, all participants are in listen only mode.
Thank you speakers presentation, there will be a question and answer.
To participate in that portion of the call you will need to press star one on your telephone please be advised that today's conference maybe recorded.
Required any personal systems. Please press star two.
I will now hand, the conference over to your Speaker today, Josh chain Finance manager.
Good morning, and thank you for joining us for Smart Sands third quarter 2020 earnings call on the call today, we have Chuck Young founder and Chief Executive Officer, Lieberman, Chief Financial Officer and John.
<unk> 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.
For a complete discussion of such risks and uncertainties. Please refer to the company's press release and our documents on file with the SEC.
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 is accurate only as of the live broadcast today November 10 2020.
Additionally, we will refer to the non-GAAP financial measures of adjusted EBITDA in 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 or our public filings for reconciliations of adjusted EBITDA to net income contribution margin the gross profit.
I would now like to turn the call over to our CEO, Jeff Young.
Thanks, Josh and good morning.
We all know the market continued to be challenging third quarter, even so smart Sam was able to deliver improved operating results over the second quarter lows.
We were also able to keep pursuing our long term strategy.
It'd be the premier supplier of northern White Frac sand from the mine to the well site.
And we did it by acquiring strategic assets at a very attractive valuations.
The Frac sand market did show some signs of improvement in the third quarter sales.
Sales volume increased from 208000 tons to 309000.
Yes were still below pre past pandemics activity levels, but were encouraged by the recent pickup in activity.
Barring a dramatic drop in the oil and gas prices, we expect fourth quarter activity to be consistent with third quarter or perhaps even a little better.
As always we're very focused on managing our cost and operating efficiently even.
Even in this low volume environment, our cost initiatives and reductions in capital expenditure have paid off.
Great we've been able to generate cash flow from operations and Weve maintained good cash balances and liquidity.
We now have 15 million in cash and a total of 28 million in available liquidity.
We couldn't have manage through these difficult times without the effort of our employees I want to thank all of our employees once again for their continued commitment to smart thing.
We've managed to weather today's volatile operating cycles in the industry.
Better than most of our peers and how well.
Our prudent capital structure and operating philosophy I.
As a result, we're able to continue pursuing strategic opportunities that will allow us to capitalize on the recovery when it finally occurs.
In September we acquired the oil and gas profit segments of Eagle materials.
It was an all stock no cash no debt deal.
I'm excited about the long term potential of this acquisition for smart, saying this was a unique opportunity.
Added a significant amount of high quality sand mining and logistics assets to our company and.
And we did it at very little cost.
As a result, our sales have already started growing.
We've begun moving sand through our Peru, Transload facility and we expect the mining operations at Utica to resumed during the fourth quarter.
This acquisition broadens, our mind to well site capabilities in three ways.
It adds high quality sand mining and processing assets.
We gain access to enhanced logistics options.
That includes direct access to an additional class one rail line be an asset.
And we can expand our service offerings to existing customers, while providing opportunities to broaden our customer base.
This acquisition gives us a greater access into the western operating bases of the United States.
That not only increases our geographic coverage. It also opens the door to new customers in these markets.
These additional mining a logistics resources help secure our ability to be the preferred provider of northern white sand in the profit margin.
Basketball, we did it without risking our balance sheet, we remain committed to our core principles with a strong balance sheet and low leverage levels.
We believe consolidation will continue to play a part in the inevitable recovery.
We're open to considering more acquisition opportunities like Eagle.
This transaction demonstrates we're looking for strategic opportunities at attractive valuations.
For us to play in any consolidation will lead that assets increase long term value for our company and our shareholders. We will only consider consolidation with a purpose.
Touching on our smart kind of Transload or has been completed we now have two fleets equipped with it and ready for deployment. This.
Smartass transload or is unlike anything in the industry itself can paint system designed to work with bottom dump trailers. It.
It features that drive over conveyor surge been and dust collection system. So.
So it's well suited to perform any frac job.
It's more system offerings give our customers the capability to unload store and deliver profit at the well site plus the ability to rapidly set up take down and transport the entire system.
Here's what this capability means to customers.
Better efficiencies more flexibility enhanced safety and greater reliability.
We've also developed a proprietary software program the smart system tracker. It allows our smart system customers the monitors silo specific information.
Here's what that information includes location profit type and profit inventory.
Our smart path Transload are perfectly complements our smart depot style system.
It's a great addition to our Arsenal of smart products products that are designed to help ease in oilfield service companies get the most out of every dollar they spend it.
It stays in time without sacrificing efficiency or safety.
Well the market is still depressed it looks like we may be coming off the bottom well.
We will continue to stay in close contact with our customers were partners with our customers we work with them to ensure that we're ready to move forward together.
We'll continue to maintain our strong balance sheet, we're paying down debt and maintaining surplus liquidity.
We're excited about our future and for a number of reasons sales volume or on the men are new mining operations in Illinois complement our existing high quality assets in Wisconsin.
And we've expanded our last mile offering was a smart power translator.
So we're poised to capture more market share than ever before.
In sum, we will continue to keep an eye on our future and we'll always keep our employee and shareholder interests in mind in everything we do.
And with that I'll turn the call over to our CFO leave at Goldman.
Thanks, Chuck as to.
I stated it looks like we may have hit the bottom late in the second quarter, that's a third quarter starting to see modest improvements in sales volumes. We are excited about the opportunities that come along with our acquisition of the Eagle materials profit systems. We acquired this business, we did a cash free and debt free launch.
Along with the acquisitions, we executed let's put it in some support facility whereby we may draw on the facility to support working capital needs for up to one year and then repay that over the subsequent three years or anytime before this ensures that this acquisition will not be a burden on our cash flows as we get it back online and start generating revenues as.
Chuck discussed we believe there may be additional opportunities for consolidation in our industry.
We are interested in playing a part in this consolidation.
As we have demonstrated with this acquisition, we are committed to low leverage prudent.
Prudent capital structure generating positive cash flow from operations and maintaining adequate liquidity levels. So we will not risk our balance sheet to pursue growth opportunities.
Any acquisition, we might consider it will need to provide us with strategic long term assets at a reasonable valuation that will not risk our strong balance sheet and liquidity.
Now I'll go through some of the highlights of the third quarter.
Starting with sales volume.
We sold approximately 309000 tons in the third quarter, a 49% increase over the second quarter volumes of churn in 8000, but still well below pre 10 pandemic activity levels although.
While the volumes during the third quarter were still low activity levels did pick up during the quarter from the low point reached in June never.
Nevertheless, nivo volumes remain the primary driver behind much of our results for the quarter.
Total revenues for the third quarter, 2020, or 23.4 million compared to 26.1 million in the second quarter.
Revenues were lower in the third quarter due primarily to lower shortfall revenue.
Partially offset by higher sales volumes.
Our cost of sales for the quarter were 18.2 million compared to 11.9 million last quarter.
The increase in cost of sales is primarily attributable to higher freight cost. It's more volumes are delivered and base.
Total operating expenses were 6.4 million.
Paired the 5.5 million last quarter yeah.
Increase in operating expenses was primarily attributable to 875000 and incremental costs related to the acquisition, partially offset by other reductions in SDMA due to ongoing cost containment measures.
Included in net income for the quarter is a noncash bargain purchase gain of $40 million. This was a gain related to our acquisition of Eagle materials profit business.
We retained outside valuation experts to help us determine the fair value of the assets acquired.
Fair value for accounting purposes, and based on the highest and best use of the assets required.
Ultimately the fair value of the net assets required was approximately 42 million, which exceeds our purchase price of 2 million and results in US recording this gain on a bargain purchase this.
This is a non taxable gain.
We removed this gain from our non-GAAP reporting metrics.
Our expected tax rate for the full year 2020 is 100% a pre tax net income excluding the nontaxable gain on bargain purchase.
This full year tax rate varies from our normal 20% guidance as a result of the bargain purchase gain and a well push backs allowed by the cares Act.
Net income was 36.3 million in the quarter, which includes 39.9 million and bargain purchase gain income tax expense of 1.9 million and operating loss of 1.2 million.
For the third quarter 2020 contribution margin was 10.4 million and adjusted EBITDA was 6.1 million compared.
Compared to the second quarter contribution margin of 19.3 million and adjusted EBITDA to 15.6 million.
<unk>.
They did decrease sequentially was primarily due to shortfall revenue recognized in the second quarter.
For the third quarter, we spent 1 million in capital investments.
Year to date, we have generated 22.2 million operating cash flows and spent 7.4 million on capital investments, which have primarily been on new smart system units.
We currently expect our cash flow from operations will continue to exceed our capital expenditures for the full year 2020.
During the quarter, we didn't use our revolver and still have no outstanding outstanding borrowings.
We ended the quarter with 11 million of cash our current cash balances 15 million as we receive cash payments from some of our contract customers for use on for future volumes.
Between cash and our availability on our credit facilities.
We currently have approximately 28 million and available liquidity.
Our capex budget remains reduced and currently we expect full year capital expenditures to be less than 10 million.
We continue to actively manage our near term cash flows to try to be in line with our expected cash receipts.
We do not expect to have any borrowings on our ABL revolver in the fourth quarter.
In terms of guidance for the fourth quarter, we expect sales volumes to be up 15% to 20% from the third quarter levels and at these levels. We expect to have positive adjusted EBITDA in the fourth quarter.
This concludes our prepared comments and we will now open the call for questions.
Thank you as a reminder to ask a question you will need to press star one on your telephone to withdraw your question press. The pound key please standby will be compiled Mcewen day roster.
Our first question comes from Stephen Gengaro with Stifel. Your line is now open.
Oh, Thanks, good morning, gentlemen.
Sure sure two questions about I believe [laughter].
The first being.
The purchase of the truck one assets like you see how that might.
Got you and then second we see Eagle transaction I'm.
I'm, just sort of thinking about it.
In between penetration I believe should be pretty small and what kind of opportunities.
You see there for growth over.
Over the next year or two.
So I'll, let John start that one.
Okay. So Stephen Yeah, so on Q T very strong relationship there so as we see their growth. So we view that as positive for us.
You probably saw in the quarter that we did renew our agreement with the Q tea.
And he does.
So were relatively confident that that will benefit smart sand down the road as they integrate those assets with regard to the Appalachian and and really I think your question was on regional sand.
Yeah, one of the challenges that Appalachian has is in developing regional sand is the generally there's.
Not a lot of assets that can be developed easily yeah, there's a lot of geography geographical concerns.
Near the near these basins Appalachian It's your named after the Appalachian Mountains. So a lot of mountains in and around there. So we think that it will be more difficult to develop sand mines.
In comparison to say.
Permian Basin, where the sand is everywhere and it's really there's a relatively easy.
[noise] permitting regime in place down there. So we think Appalachian the good growth prospect for US, we think that by adding the eagle materials assets that does give us additional ways to get our sand in there competitively and we're excited about the opportunity to continue growing Appalachian.
Thank you and then just one follow up.
How about the accounts receivable balance at the show.
Sure for the quarter.
I think that's sort of normal shortfall revenue and.
Hello.
Normal schedule is that reasonable.
[noise], yes, the the shortfall revenues are from contracts that are.
Currently enforced and would be processed in their normal due course.
We recognize thank you Mike.
Thank you.
Thank you as a reminder to ask a question you would need to press star one on your telephone.
Our next question comes from Lucas pipes with B. Riley Securities. Your line is now open.
Hey, Good morning, guys. This is actually Dan day on from Lukas just wanted to get some color around or maybe what we could be thinking about for an uptick in sales volumes with these new mines. You know you you said in the prepared remarks that there's sort of ramping up now and then for Q.
Look back the last couple of years, you know like in a good year you seem to be around 3 million tons annually in sort of a weaker year more like two and a half million tons. Obviously 2020, you know put that to decide but like going forward sort of what could we sort of think about for like a you know a good year sales volumes.
New mines unfold. Thanks.
Well, we're not giving guidance for 2021, yet, but as you can see in the fourth quarter, we guided a that's a 15% to 20% increase.
And so we feel good about the fourth quarter, and where it's going I think we need to get into early 2021 to see activities level pick back up again, but I think it's not unreasonable things that we could not we could get back to a free pandemic levels.
Or better then you know on a run rate in the second half of 2021 and going into 2022, but that's depending on oil prices.
You know the color current political environment and many other factors, it's really kind of how well the economy responds post pandemic and a lot of factors that it's.
Really too early to to the factor in to give you good guidance into 2021 and beyond that.
Yep, Yeah, I understand and the anything to think about as far as like differences in cost structure between Oh.
I would add on on the logistics, just the Eagle materials mines.
Add add access to rail that we didnt have before which helps us into different basins Super Bowl.
Well I think in Christian in terms your cost structure and John you can and can add to this as well, but I think our goal would be to again, we see a lot of opportunity for that mine to be able to operate is operating the same fashion. We do is oakdale and a large opportunity there and so our goal would be to kind of drive it to be a very low cost very efficient production.
A lack of tell we do most of our activity all in a single location, we're able to manage our wet plant with our Dri plant pretty efficiently. We believe over time. So we think that's going to be we're going to be able to achieve our.
Our goal would be able to achieve kind of similar cost per tonne and Utica that we are are being able to achieve the head of bill.
Oh, yeah. The only thing I would add to that is is the asset that we did buy there much of the equipment is very similar to what we're used to working at Oakdale. So we think we'll be able to drive.
The efficiencies up in Utica, the same way, we've been able to drive them up and oakdale because of our familiarity with that equipment.
Awesome. Thanks for taking my questions Good luck and I'll turn it over.
Thank you. Our next question comes from Stephen Gengaro with Stifel. Your line is now open.
Hi, Thanks, just two quick ones.
Worn out I'm not sure I know you can't give a lot of color, but is there any update on the timing of the litigation.
<unk>.
Yes, you can say on timing yeah.
Not going to give updates.
Yes.
Okay.
Okay, I, just I figured out, but I wanted to check.
Second is as we think about Capex.
Into next.
Next year, we should we just sort of think about it relative to where our activity assumptions are for now is that a reasonable approach.
Yeah I agree that's regional approach.
I think.
In 2021, we're going to continue to be focused on really managing our capital efficiently and our goal is to live within our cash flow and so we're looking to you know basically you know from our cash flow from operations less our capex to continue to be positive in 2021 like we managed in 2020.
[noise]. Thank you and then maybe just one final one.
Yeah.
I know, it's hard to it's hard to.
Sure. So when you think about spot pricing.
In the market right now are you seeing any direction in the market yet.
I shouldn't you have heard us stabilize it maybe slightly positive as well just curious what your view was on.
Matt maybe.
Any sense for what activity.
James we might need to see on the Frac side to see some more positive momentum.
Yeah. So John here. So I think that you know from our view a spot pricing I think it depends on the product right 40, 70, certainly there's still high demand for 40 70.
You know depending on the market 100 mesh yeah. The fine grade sands are still in demand with regard to the spot pricing. Yeah. I think that you you get to a point where.
It's difficult for long term players and folks who are.
We are concerned about their balance sheet to sell.
You know in those in the teens, where we are seeing that before and so from a standpoint of seeing some stabilization. Yeah. We haven't seen a huge amount of requests for irrational pricing like we were seeing at the beginning of the pandemic I think that that utilize some of our peers.
Come out of bankruptcy or or are still working through that process at some point there has to be some rationality around the pricing and so from that respect we've seen kind of spot pricing you know in the low Twentys you know for for the in demand products and you know there's still not a huge market for some of the courts are products and.
Yes, the real question is whether or not you you end up selling them at the at the low pricing or not.
We don't make a lot of course products. So it's not something we've really had to to think about.
Great. Thank you I appreciate the color.
Thank you. Our next question comes from Samantha Hoh with Evercore ISI. Your line is now open.
Thank you maybe Lee just to go back to your guidance on for Q volumes to be up.
Are you anticipating any shortfall revenue for next quarter.
Currently, we're not expect and anticipating that but it really depends on which customers take volumes and how that manages through but right now we're not expecting any significant shortfall volumes or revenues in the quarter.
So does that kind of implied but I mean, if you strip out the three kids Oh that to you, but on maybe apples to apples basis with volumes trending higher or do you think maybe the contribution margin on a per ton basis has bottomed.
No I think that's fair I think right now again, you know pricing I think kind of bottom out at you know kind of what John was talking about on spot prices et cetera, I think we could at current activity levels stay consistent or improving to 2021, yes, I would say that contribution margin Uh huh.
Spot.
Okay, and then just one last one I think I might have missed some of this in your prepared remarks, but in Utica.
It sounds like you're you're resuming mining operations there on that kind of strikes against this might be one of the first northern white mines to be Oh, we activated is that the case as far as you know and then also what's the.
I'm training in terms of you know getting operations back up.
At that mine.
Yes, I mean, I would say and John and Chuck can chime in but I think we are probably one of the.
The first ones to bring back on a other northern my production one of the as Chuck alluded to earlier one of the advantage of the Utica. It's on the assets on the BNSF and that gives us access into other markets.
That and we may not be able to get a sufficiently out okay. So its very complimentary to our oakdale business and yes, we have actually started staffing up and building up to be able to start producing sand at you at Utica This quarter.
So we might actually see sale contribution this quarter.
Late in the quarter Baby, and then well into next year.
Yes, and I think going forward I don't think were necessary going to ever report, where our volumes are coming from whether its Utica, our oakdale, but yes, we do expect to have to have sales in Utica add to our volumes this quarter and going forward into 2021, its one thing, making the sand, but a huge part of making this and is also finding inefficient.
Moving to the basis has got to get to in.
In the Utica gives us some great options there you can plan.
Okay. Thanks, guys congrats on the quarter.
Thank you.
Thank you. Our next question comes from Jonathan Chaplin Caplan Capital Management. Your line is now open.
Thank you and congratulations on a good quarter and a two managing through this difficult time.
The one thing I I Love This story about.
That's more sand in it but you guys are doing the one thing that really concerns me or or I I find really troubling is the continued increases in accounts receivable I'd I'd actually never come across the company that had accounts receivable, that's equal or almost equal to its market cap I'm, just trying to get an understanding of.
How that's going to resolve itself I mean, why keeps increasing and how is it how it's going to get resolved over time and when it's going to start trending downward.
Well, you've got to remember and it's fully disclose in our financials that I believe 54 million of that account receivable balances related to our receipt armed our litigation with.
With one of our customers so that balance built up based on what they owe us contractually under the contract and that's under dispute in under litigation. So and so that is part of that build up over the last 12 months, what you see from the second quarter and third quarter and the build up of receivables is really just from the increase in activity and a lot of that.
Activity increase actually 40% of our volumes in the third quarter and were sold in September. So a lot of that activity got built up and receivable in September which we would see on a normal current course to turn into cash in the fourth quarter. So as sales start to build back up we will see some build up in receivables that we got a bigger.
BOP in the at the end of the third quarter, because our volumes started picking up in the third quarter and.
In September, but again 54 million of those receivables are based on the Anda litigation. We currently have.
And there's no timeframe on when that litigation will get resolved correct.
No. We don't give any comments just in terms of where that litigation is.
Got it thank you very much.
Okay. Thank you.
Thank you I'm not showing any further questions at this time I would now like to turn the call back over to Chuck Young for closing remarks.
Thank you for joining smart Sands third quarter 2020 earnings call Stacy.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
[music].