Q4 2020 Smart Sand Inc Earnings Call
Ladies and gentlemen, thank you for standing borrowing books for the smart chance for quarter 2020 earnings call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question.
And answer session to ask a question during the session need to press star one on your telephone if you require any further assistance. Please press Star then zero I would now like to discuss release conference call. Mr. Josh Jain director of Finance and assistant Treasurer, you may begin.
Okay.
Good morning, and thank you for joining us for smart sand fourth quarter 2020 earnings call.
On the call today.
Young.
<unk> and Chief Executive Officer.
Lee <unk>, 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 <unk>.
Complete discussion of such risks and uncertainties. Please refer to the company's press release and our documents on file with the SEC.
Smart sand 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.
Third 2021.
Additionally, we will refer to the non-GAAP financial measures of adjusted EBITDA contribution margin and free cash flow 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 for our public filings for our reconciliations of adjusted EBITDA to net income.
Contribution margin to gross profit and free cash flow to cash flow provided by operating activities.
I'd now like to turn the call over to our CEO Chuck Young.
Thanks, Josh and good morning as.
As we're all aware 2020 was a challenging year for the energy industry.
However, thanks to several factors, including actions, we took we were able to stay well positioned to achieve our long term strategy.
That strategy is this to be the premium supplier of northern White Frac sand from the mine to the well site.
The key success factors included our low leverage.
Decisive actions to manage costs and on.
Our opportunistic acquisition of Eagle materials proppant business.
As the Frac sand market recovered in the fourth quarter, our sales volume increased by 98%.
Went from 309000 tons in the third quarter.
For the 612000 tons in the for.
However, the most recent winter storms impacted activity in February which may push some activity into the second quarter.
We're encouraged by recent sales trends and customer inquiries for.
On a dramatic drop in oil and gas prices first quarter activity to be consistent with the fourth quarter or perhaps even a little better.
Last year, we generated free cash flow of $17 million. Despite a challenging environment. We did it by controlling our operating costs and Capex. Our focus for 2021 is to keep generating free cash flow by continuing to operate efficiently.
Right now we have 12 million in cash on our balance sheet.
Approximately $31 million and liquidity.
We couldnt have managed through these difficult times without the efforts of our employees I want to thank all of our employees once again for their continued commitment to smart sand.
As we've demonstrated we're built to manage through the volatile operating cycles in the industry better than most of our peers are prudent capital structure and operating philosophy provides smart sand the wherewithal to not only survive the industry's volatility but to be stronger coming out of the downturn.
As a result, smart sand is well positioned to take advantage of improving market conditions, while also being able to pursue strategic opportunities that will allow us to capitalize on the recovery.
Our acquisition of the Eagle materials Frac sand business last September was a success, we added new sand capacity plus an additional class one railroad to our portfolio of assets and we did it without taking on debt.
For significantly impacting our liquidity.
Even though eagle's Utica assets were idle at closing, we started mining operations and began selling sand from there into fourth quarter.
With startup cost behind US, we look forward to this asset generating solid cash flow for years to come.
This acquisition expands our footprint by allowing us to serve new markets and new customers.
We believe there will be more consolidation opportunities in the sand space and we wanted to play a part in that.
But we will not risk our balance sheet, we will only consider consolidation with a purpose and will remain committed to work for principles of a strong balance sheet and low leverage.
In regards to smart systems last mile product offering we've completed testing on the smart pad translated we now have for fleets equipped with it and ready for deployment.
By the end of this year, we expect to have 12 fleets equipped with smart path.
We continue to believe smart pass translator is unlike anything in the industry.
It's a self contained system designed to work with bottom dump trailers and features that drive over conveyer surge bin.
For <unk> system.
So it's well suited to perform any frac job.
With market conditions, improving and increased focus by E&ps on the environmental impact of their fracking operations, we foresee increased industry interest in our smart systems product offerings.
A number of E&ps have discussed a preference for silos with both built in dust control and better dust control throughout the completion process.
Smart sand suite of products is built Olympic exposure to dust for all employees in and around the well site.
We're excited to have more scale with our products in 2021.
As you know the market is still operating at lower levels than at this time last year, but we've seen a nice uptick in volumes from the bottom we hit the second quarter of 2020.
Our policy of all we're staying in close contact with our customers ensures that we'll move forward together.
We're going to continue the policies that are paid off for smart sand.
Maintaining our strong balance sheet general.
Generating free cash flow paying.
Paying down debt and always having surplus liquidity.
We're excited about our future.
And for a number of reasons, we've seen a meaningful increase in sales volume over the last 12 months, we've expanded both our customer base and operating basins, we serve with.
With startup costs for our new Illinois mining operation now in the rearview mirror, we can focus on execution.
At our Oakdale mine, we continue to improve efficiencies and cost structure to make it one of the most efficient frac sand mines and processing plants in the industry.
And we're ready to take market share with our last mile offering with the smart pad translate.
As always we will be keeping our eye on the future.
And our employee and shareholder interest will continue to be in mind in everything we do.
And with that I'll turn the call over to our CFO Lee back on it.
Thanks Chuck.
2000.
'twenty was a challenging year for the oilfield service industry, we witnessed a sharp sequential decline in our volumes from the first quarter for the second quarter.
Swiftly moved to cut Capex and operating costs to manage through the downturn in the market.
All these moves for painful at the time, they provided us flexibility to take advantage of opportunities as the market began to recover.
Williams continued to improve from the second quarter lows, increasing by 98% in the fourth quarter from the third quarter.
We continue to be excited about the opportunities that come along with our acquisition of the Eagle materials proppant business, which.
Which began operations at the Utica plant during the fourth quarter. We continue to believe there will be additional opportunities for consolidation in our industry and we are interested in playing a part in this consolidation.
However, as we demonstrated with the Eagle acquisition, we are committed to low leverage levels on a pro.
Capital structure generating positive free cash flow and maintaining adequate liquidity levels, we will not risk our balance sheet to pursue growth opportunities.
Any acquisition, we may consider 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 we'll go through some other highlights for the fourth quarter compared to our third quarter 2020 results.
Starting with sales volumes, we sold approximately 612000 tons in the fourth quarter.
Our 98% increase over third quarter volumes of 309000.
We expanded our customer base during the fourth quarter and believe a more diverse customer base will be will strengthen our opportunities for growth in 2021.
Total revenues for the fourth quarter, 2020, or $25 3 million.
Compared to $23 4 million in the third quarter.
Sand revenues were higher in the fourth quarter, primarily due to higher sand sales, which were offset by lower shortfall in logistics revenues.
Our cost of sales for the quarter were $33 million compared to $18 2 million last quarter.
The increase in cost of sales is primarily attributable to higher freight expense.
Negative impact from inventory adjustment as inventory was depleted from our winter stockpile and startup cost at the Utica point.
Total operating expenses were $13 3 million compared to $6 4 million last quarter.
The increase in operating expenses was primarily due to a five point.
1 million impairment charge on our Permian basin long lived assets and a 1.3 million one time sales tax audit settlement expense.
Income tax benefit for the fourth quarter was $18 6 million.
During the quarter, we evaluated our depletion deduction and determined we were eligible for and more and then pages deduction.
This change will result in approximately $8 2 million of cash benefit from prior return amendments as well as a decreased effective rate on a go forward basis.
Due to IRS processing delays as a result of Covid, we are unable to predict the timing as to when we will receive these funds.
Without the impacts of the non taxable gain on bargain purchase depletion deduction and other NOL carry back benefits allowed by the cares Act our 2020 effective tax rate would have been approximately 21%.
Which is on the higher end of our normal range.
Going forward, we expect our annual effective tax rate to be in the mid to upper teens.
In the fourth quarter, we had a loss of $2 9 million, which includes an impairment charge of $5 1 million on our Permian Basin long lived assets of 1.3 million sales tax audit settlement charge and an income tax benefit of $18 6 million.
For the fourth quarter of 2020 contribution margin was a loss of $5 2 million and.
And adjusted EBITDA was a loss of $7 7 million.
Compared to the third quarter contribution margin of $10 4 million and adjusted EBITDA of $6 1 million.
The decrease sequentially was driven by lower shortfall revenues enough and higher freight expense of negative impact from inventory adjustment as inventory was depleted for my winter stockpile and startup costs at the Utica Utica plant.
For the full year 2020, we sold approximately $1 9 million tonnes of sand compared to 2.5 10 million tons in 2019.
Contribution margin in 2020 was $39 1 million and adjusted EBITDA was $20 5 million.
Compared to 2019 contribution margin of $106 5 million and adjusted EBITDA of $87 1 million.
Net income in 2020 was $37 9 million compared to $31 6 million in 2019.
Contribution margin on adjusted EBITDA decreased year over year, due primarily to lower sales volume and lower shortfall revenues.
For the fourth quarter 2020, we had $2 1 million in free cash flow generating.
Generating $3 3 million on operating cash flows while spending one 1.2 million on capital investments for.
For the for year 2020, we generated $16 99 and free cash flow.
From $25 5 million in operating cash flows less.
<unk> 8.6 million spent on capital investments.
Capital investments in the quarter and for the full year 2020 has primarily been on new smart systems units.
During the quarter, we didn't use our revolver and still have no outstanding borrowings other than one 3 million in letters of credit.
Our current unused availability on our revolver is $14 million.
Additionally, we have $5 million in unused availability from the acquisition liquidity support facility, we put in place for the Eagle proppant business acquisition.
We ended the year with approximately $11 7 million of cash.
Our current cash balance is approximately $12 million.
Between cash and availability on our facilities. We currently have approximately 31 million in available liquidity.
We do not expect to have any borrowings on our ABL revolver in the first quarter.
In terms of guidance for the first quarter, we expect sales volumes to be flat to up 10% from fourth quarter levels.
We currently anticipate capital expenditures for 2021 to be in the $10 million to $15 million range and currently expect free cash flow for the year to exceed $10 million.
This concludes our prepared comments and we will now open the call for questions.
Ladies and gentlemen, if you have a question or a comment at this time. Please press. The Star then the one key on your Touchtone telephone.
For your question has been answered he wished remove yourself from the queue. Please press the pound key.
Our first question comes from John Daniel with Daniel Energy Partners.
Hey, guys. Good morning, Thank you for letting me ask a question.
Good morning, John on <unk>.
On my question relates to you know you guys have made a lot of comments about the net.
Need for acquisitions consolidation et cetera, and obviously.
We all know you can't get specific but can you just elaborate a little bit more about other parties interest and willingness to talk and just how active discussions might be on that front today versus you know 12 to 24 months ago.
Was it weather you don't whether you guys play in that process or not just your thoughts about the.
The likelihood of a broader consolidation unfolding this year and the sand business.
And so I'll start with that and I believe you can chime in but.
Our main thing is whatever we do we have to keep our balance sheet similar to the way. It is today. So we're not going to take on debt to do it. So again that makes the amount of people out there that we can consolidate with it makes it more difficult.
I don't know if you could touch base, a little bit on what we're seeing.
Yeah, I think yeah, I think as we've highlighted John on this call on than in previous calls, we're open to consolidation and but we're not going to let the rest of our balance sheet and we're not going to consolidate just to consolidate it has to have a purpose and that purpose is really driven like like Eagle I think Eagle is a great example, you can look at it and and the benefits that we.
Believed we were going to receive from Eagle and we think that we believe theyre going to play out and be true and that is really getting the opportunity to expand our sales through new customers and new operating bases basins really improving our logistics capabilities and Eagle, we had the and it gives us the access to additional new class One railroad and also looking through.
Sure to be able to potentially rationalize and improve our operational efficiencies and cost and so I think we're open to any and we're open to larger transactions as well as bolt ons like eagle, but they have to fit those goals and they have to fit within the framework that we're not going to go out and rest of our balance sheet.
Do it so sure and in terms of your question about I think there is a general level of dialogue, but I think a lot of our peers have gone through restructurings and and I think we're just coming out with their new managements and understanding their business. So I think I think we need a little time for those businesses to kind of figure out where they want to be and who they believe makes sense dipped.
Partner with and for US to then have I think more fruitful dialogue. So I think over the next six to 12 months. There is an opportunity to have these dialogues, but I think you know our objectives and from the people on the other side I think they have to be realistic about what they believe the value of their assets are.
And John one other thing I would add on that we picked up assets last year and the pandemic and.
And we have more assets than we ever had at the same time, we paid down debt. So that's kind of the way. We're looking at this business. It's not a business you want to have a lot of debt in <unk>.
Does the cycles are so for us.
No no I get all that and appreciate it and by the way the volumes in Q4 were great I just.
I'm trying to get a sense or are people willing to do the dance, if you will or or is everyone. Just kind of waiting to see that's Australia essentially.
On the interested parties are out there.
Okay.
Let me turn for I think there's parties interested but a lot of times they come with a lot of debt that's out there, especially on the private companies and the private equity that's involved in them they want to bring that data to the table instead of it being equity. So I think once they realize that no one's crazy about paying out cash and taking on.
On debt.
And they've got to build the business together with people I think you'll see more activity.
Okay.
Guys I appreciate you, giving me a chance to ask questions. Thank you.
Our next question comes from Lucas pipes with B Riley's Securities.
Hey, good morning, everyone I hope for.
On the M&A landscape out there in and specifically kind of what if you have a preference in regards to.
Fee is it now did you want to kind of stay close to your current operating platform or would you be willing to venture out a little bit further thank you.
So Lucas you you broke up a little bit I think your question was about our M&A activity and whether we want to stay close to you know kind of our focus on northern white.
Was that the question.
That's correct, yes, yeah, okay. So yeah, our view on this as it's pretty simple I mean I thank everybody for.
Solid smart sand for any length of time knows that we are biased towards northern white, where we're long term believers in northern white.
So as we kind of continue that focus.
We want to we want a bolt on you know potentially assets that are complementary to what we have however, having said that it doesn't mean that if the if there's other opportunities that are.
Would be acquisition or a merger opportunities that come with regional sand plays or different types of quote unquote northern white plays that we wouldn't be open to those what we're what we're interested in companies that would fit with our overall goal which is to grow.
Yeah without without acquiring quite a incurring lots of new debt and things that are complementary to what we have in addition.
Some of those opportunities you may involve.
Assets that would be idled.
You know to reduce if there is ever any oversupply things like that so yeah. We look at a number of things, but ultimately we are focused on keeping our balance sheet clean and and when we think about deals that's kind of the overarching principles that we look at these things for.
Not only in sand, but logistics as well.
Very helpful very helpful on and.
On the balance sheet.
I wanted to confirm I think you said in your prepared remarks that you wouldn't have any.
Borrowings outstanding against your a b all at the end of Q1 could you confirm that and then as it relates to a be Allen and that liquidity.
Would you be able to remind us kind of what what are what sort of a fixed charge coverage ratios there might be EBITDA covenants and whether you expect to be in compliance with all of those at the end of Q on Q2. Thank you will.
We will direct that to Lee.
Yes currently we expect no borrowings we do have some L. Cheese are under the facility day about $1 3 million and there might be some additional on seeds, but there will be now on borrowings under the facility in the first quarter. We don't expect to have any in terms of our covenants.
Currently we're in a b L. So we're governed by our borrowing base against receivables and inventory and as long as we keep our borrowing levels below a certain level, which is around 85% of the stated borrowing base any given period, we don't have any covenants that we have to.
Basically comply to on a quarterly basis, but if we were to move into a borrowing level, which we don't expect to anytime soon at that 85% level. The only covenant, we would have would be a fixed charge coverage and it's at a one to one coverage and it'll be something that we'd be able to very easily manage so we don't have any concerns or issues.
In terms of you know.
Adequate liquidity access to the borrowing base again, we expect to have no borrowings on our first quarter and we don't have any covenants that are debt anyway causes any issues.
That's very helpful.
Hi.
<unk> you said you wouldn't consider.
Using debt for acquisition would that include the a b L. A swallow or which is what would you consider borrowing on the a b all for an acquisition for example.
Well, what we said is we want to keep low low low leverage levels. So I'll never say, absolutely. They will never take on some debt, but we want to keep those levels very low and manageable and if we were to use an ABL would only be for a temporary basis.
If it all but our goal would be not to have any debt debt or very little debt and our goal would be to maintain the a b L to maximize liquidity to support the ongoing operations. I think you can look at our Eagle acquisition is a good example.
As part of that negotiation, we negotiated a separate $5 million facility to provide liquidity for the Eagle acquisition to make sure we protected our a b L and kept that legwork liquidity fully available for the existing operation. So any acquisition, we do we want to make sure.
We don't risks for long term.
Strength of the balance sheet, but also that we ensure that we have more than adequate liquidity to support our existing business as well as any acquisition of new assets, we take on.
Very helpful. I appreciate all the color and best of luck.
Thank you.
Again, ladies and gentlemen, if you have a question or a comment at this time. Please press. The Star then the one key on your Touchtone telephone.
Our next question comes from Stephen <unk> with Stifel.
Yeah.
Thanks, Good morning, everybody.
Good morning.
A couple of things if you don't mind.
What I'd like to start with.
On the fourth quarter and sort of a cost of sales and contribution margin itself.
Understand the moving pieces can you give us a little more color on on a sort of the seasonality.
Of the cost and just sort of refresh our memory. The key drivers of that and then second is there is there any way to break down the different pieces, the startup cost of freight and the inventory adjustments as far as the impact in the quarter.
Yeah. This is Lee Oh, I'll take that question Steven and.
And I don't think Mike give you as probably as many specifics if you'd like but.
I think there was a lot of going back first of all the seasonality as it should go back and historically you can see this consistently in our numbers the fourth quarter and the first quarter is always our lowest our typically our lowest contribution margin and EBITDA because we do consistently have larger inventory cost that we bring in and to our report.
Costs in those quarters as we pull down inventory during the winter months to support our sales activity.
And so that can have a pretty big swing in terms of our reported contribution on the origin and EBITDA numbers quarter to quarter and I think he can consistently see that on the fourth for the first quarter, where you were substantially below what we can report in the second and third quarter, one where we're running our operations in either consistently using our.
The mining tons that we mine and are actually capitalizing costs as we build up our inventory for the winter stockpile for the next year and.
You know that's weighing on you know on a.
On a dollar per ton basis can affect our contribution margin try from anywhere for three to five bucks a ton.
And so and so to give you some context that can be kind of a swing quarter to quarter, just from that inventory adjustment affecting our numbers as we pull inventory down during the winter months, and we either add inventory or just kind of run with the the the mining that we have during the summer months. So does that does that help in that regard desk.
That does help that helps a lot.
And then freight expense I think touched on CIT pick up but that was primarily driven by the volume. So I think we did have a pickup in freight expense in the fourth quarter and so we had a pretty low freight expense in the third quarter, but I think what you'll see is that you know if we stay at these consistent levels that is going to be relatively consistent going into the 2021, So I wouldn't expect a big.
Asian from there going forward, because that's much more a volume driven.
And then in terms of Utica.
You know basically we bought Utica and <unk>, Inc.
In mid September and really September and October were start up and then we really didn't start really getting sales from that and generating some cash flow. It's really mid to late November and order of magnitude, we probably had about $1 million on incremental cost.
From Utica start up and ramping up in the fourth quarter that you know I think going into the first quarter will be able to absorb that cost as we start getting consistent sales out of that mine.
Great that's great detail. Thank you.
Just two other quick ones one a follow up on that is does the does the Utica for <unk>.
So the Duluth, the seasonality impact at all.
Well, it's really too early to tell on that Stephen but I think it ultimately I think one of the challenges for us versus some of our other peers in the past is they had a lot more mines on they also had industrial sand and so the impact for the seasonality I think gets more muted and we've always just had mainly the one oakdale facility. So.
Kind of fully flow through and you see it more prominently in our numbers and maybe some of our peers in the past I think Utica will help with that because they have their operations or indoors like part of our facilities and so theres less of building of our winter stockpile. So I think over time, if we ramp Utica up to levels that we hope to that that may <unk>.
Impact that overall number.
But I think it's a little too early to see how that's going to play out until we get through a really a full you know.
We need a full year of operating cycle to see how that plays out into these reported numbers.
Thank you and then just a final question you mentioned I think in the 10-K about the.
Just kind of on the expectations for 'twenty 'twenty, one and I think he basically said volumes you know flat to up a bit year over year.
What are you seeing.
If anything right now on the pricing side and sort of the impact of some of the some of the competition going on by the wayside or go into bankruptcy.
Changes yet on the pricing side and do you expect anything as we move forward here in 'twenty one.
Yeah, So Stephen I mean, the volumes, obviously are improving we expect price to follow but as of now there's no material increase just yes on yet on it.
And although that we do believe that as activity continues to increase pricing increases will will likely come.
Okay, great. Thank you gentlemen.
Yeah.
And I'm not showing any further questions at this time I'd like to turn the call back over to our host for any closing remarks.
Thanks, everyone for joining us on our co for a quarterly call. We'll see you for the first quarter call soon.
Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.