Q4 2020 U.S. Silica Holdings Inc Earnings Call
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Good morning, and welcome to the U S silica fourth quarter conference call. At this time, all participants are in a listen only mode.
Question and answer session will follow the formal presentation.
And he would like to ask a question you may do so by pressing star one on your telephone keypad and.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host Mr. Don Merril Executive Vice President and Chief Financial Officer. Thank you. Sir. Please go ahead.
Thanks, Good morning, everyone and thank you for joining us for U S silica fourth quarter and year end 2020 earnings conference call with me on the call today is our Chief Executive Officer Bryan Shinn.
Before we begin I would like to remind you of our standard cautionary remarks regarding the forward looking nature of some of the statements that will be made today such forward. Looking statements may include comments, which are subject to certain risks and uncertainties for complete discussion of these risks and uncertainties. We encourage you to read the company's press release.
And our documents on file with the SEC and.
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 our public filings for a full reconciliation of adjusted EBITDA to net income and the definition of segment contribution margin and with that I would now like to turn the call over to <unk>.
Mr. Bryan Shinn Bryan.
Thanks, Don and good morning, everyone I hope that you and all your loved ones remain safe and healthy as the world continues to navigate the ongoing COVID-19 pandemic.
Also our thoughts and best wishes go out to all of the colleagues friends and family that we have that have been impacted by the cold weather that has recently swept the country too.
These uncertainties, we've continued to prioritize the health safety and wellbeing of our colleagues and have remained focused on following all appropriate health and safety guidelines.
I'm proud of how our company has successfully navigated 2020 and of our strong overall performance during the year in spite of the challenging macroeconomic environment. Some examples include achieving the best safety performance year that we've ever had and also delivering $200 million and adjusted EBITDA during two.
<unk> and 'twenty.
We ended the year with approximately $150 million of cash on our balance sheet, we generated over $45 million and cost savings to support overall profitability and we maintained fiscal discipline by limiting capital spending to $34 $5 million and.
And reducing SG&A by $25 million, that's down 18% from 2019.
We commercialized a number of critical industrial growth products, such as Covid, Diatomaceous Earth, Cristobalite and cool roof granules.
And so expanded our new product pipeline and advanced numerous key projects, such as blood plasma filtration organic pesticide and specialty silica additives.
And our team signed several new customer contracts during the year, we estimate that greater than 50% of our industrial revenue and 90% of our oil and gas profit revenue is now under long term contract.
And finally, we continue to improve manufacturing efficiencies plant costs are coming down and railcars and storage are 30% lower sequentially due to scheduled car returns and we're seeing increased capacity utilization of the cars as well.
Looking ahead to 2021 and beyond I see a minerals and technology company that is well positioned for sustainable long term growth and significant free cash flow generation.
Already serve numerous critical industries, such as food and beverage production housing automotive glass manufacturing Biopharma and energy and we have a pipeline of innovative products to serve other high growth sustainable markets, including solar energy wind power cleaner air and Green.
Diesel food safety and energy efficient buildings.
Let's move on now to specifics for Q4, starting with a company overview.
The us economy is recovering from recent lows and while the macro economic environment remained challenged in Q4, we delivered outstanding results during the quarter.
Quarterly volumes increased 26% sequentially and adjusted EBITDA was $63 6 million up 24% from Q3, driven by increased profits and oil and gas and a robust industrial segment, which performed better than expected in Q4.
Speaking of industrials, let's focus on that segment for a moment.
Volumes of 926000 tons increased 10% versus Q4, 2019, and we're only down 3% sequentially.
Average sales price was off about 7%, mostly due to seasonal product mix.
Contribution margin dollars were almost back to pre pandemic levels and just one 8% lower than Q4 2019.
As the economy continues to recover we increased staffing at key industrial manufacturing sites during the quarter as demand rebounded and important end markets, including corn wet milling edible oils polymer additives and housing.
From a geographic perspective demand was strongest in the us and Asia, While Europe Africa, and Latin America have been slower to recover.
And our energy segment, we experienced robust demand with proppant sales volume of $1 9 million tons up 48% sequentially on stronger West, Texas sales and increased northern white sand volumes.
The number of Frac crews operating in the US continued to increase and Q4 and we now estimate more than 165 active crews completing wells and the United States.
And response to customer requests, we successfully restarted our crane, Texas and Sparta, Wisconsin mines during the quarter per.
Proppant pricing was down 2% sequentially, primarily due to lower spot pricing and west Texas.
Sandbox loads jumped 71% versus Q3 as numerous customers increased activity.
As a result of overall strong performance segment revenue and contribution margin dollars increased 81% and 64% respectively.
I'll conclude my prepared remarks. This morning with market commentary. We currently believe that most sectors of the economy are recovering and expect that 2021 will be a good year generally for our customers and also for U S silica.
Our current outlook is for a robust recovery and energy sector proppant and last mile logistics demand and GDP plus growth and our industrial segment.
Let's look at the details starting with energy.
We're experiencing a strong start to 2021 with surging proppant demand in January.
February started strong as well, but has been negatively impacted by the recent unprecedented cold weather, causing disruptions last week, and West, Texas, South, Texas and the mid Con as a result of freezing conditions and electricity and natural gas curtailments.
We did not suffer any major damage and our operations and deliveries in these geographies are ramping back up.
It's too early to estimate the total impact, but I believe that we will lose several days of oil and gas sales in February to those basins and will occur and increased operating maintenance and startup costs as well.
Even with all the disruptions our current forecast us where proppant volumes increased 15% to 20% sequentially in Q1.
Regarding profitability impact, we expect to make up most of the lost profit later in 2021, as we believe that energy company completions spending will be redistributed throughout the year and also insurance claims will likely offset some of our increased expenses.
Further with some industry experts now forecasting $70 plus wty pricing later this year.
Potential upside from incremental completion spending, particularly from private energy companies.
Also off to a strong start and industrials, but did experience some weather related headwinds there, but to a lesser extent and Q1.
That said, we still expect Q1 industrial profit to increase 3% to 5% sequentially with several product lines growing nicely, including filtration cool roof granules cristobalite and ground silica.
For the year I believe that we will grow industrial segment profit at a GDP plus rate as expected.
And with that I'll now turn the call back over to Don Don.
Thanks, Brian and good morning, again, everyone. Let me begin with a review of our operating segment results.
Fourth quarter revenue for the industrial and specialty products segment of $106 $9 million decreased 3% versus the third quarter of this year, but increased 2% compared with the same quarter one year ago.
Fourth quarter revenue was driven by some economic recovery, but was offset by the anticipated seasonal declines.
The oil and gas segment revenue was $123 million for the fourth quarter and increase of 81% compared with the third quarter of 2020, and a decrease of 49% compared with the fourth quarter of 2019.
The sequential increase was mostly due to the recovery and the energy space during the quarter.
On a per ton basis contribution margin for the industrial and specialty products segment was $41 47 per ton for the fourth quarter, which is a decrease of 9% compared with third quarter results. This was expected and represents the typical seasonality and with the specialty and surprising after the strong third quarter performance of 2020.
The oil and gas segment contribution margin on a per ton basis was $27 10.
And increase of 64% when compared with the third quarter 2020, However, as mentioned in our earnings release, the oil and gas segment contribution margin includes $27 $2 million attributed to customer shortfall penalties.
Moving on to full year total company results for 2020.
Selling general and administrative expenses for the year of $124 2 million, representing an 18% decrease when compared to the full year 2019.
The decrease reflects the concerted effort by the team to reduce spending to better align the business conditions I.
And I should note that SG&A spending and the quarter was $27 $8 million and we expect Q1 of this year and to be roughly in line with us.
Depreciation depletion and amortization expense in the fourth quarter totaled $40 million, which was essentially flat compared to the third quarter, we expect depreciation depletion and amortization to be flat again in the first quarter of 2021.
Our full year effective tax rate was a benefit of 34, 3% for 'twenty and 'twenty and we currently estimate a tax benefit for the full year 2021, and the low 20% range.
Turning to the balance sheet, the company had $159 million and cash and cash equivalents and $52 million available under its credit facilities.
As previously discussed our third quarter conference call, we are anticipating and the additional tax refunds from the IRS related to the cares Act, we expect a refund to be approximately $37 million. However, the receipt of these funds remains delayed.
Finally, our net debt as of year and was approximately $1 1 billion.
Capital expenditures in 2020 remained inside our guidance at $34 $5 million and were mainly related to our growth projects and our ISP segment spending to expand our sandbox operations and other maintenance and cost improvement capital projects.
We also expect our 2021 capital spending to be and the range of $30 million to $40 million.
Finally, as we move into 2021, we remain keenly focused on cash and we are committed to keep capital spending within our operating cash flow.
Currently we expect to be free cash flow positive for the year. However, we will burn some cash in Q1 as we typically do.
Additionally, our cost cutting efforts in 2020 have made the company and more nimble and flexible, allowing us to react quickly to changes, which the market will inevitably throw at us and with that I'll turn the call back over to Bryan.
Thanks, Don Operator would you please open the lines for questions.
Ladies and gentlemen, the floor is now open for question and answer session and thank you.
Like to ask a question. Please press star one on your telephone keypad at this time.
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Our first question today is coming from Stephen <unk> of Stifel. Please go ahead.
Thanks, Good morning, gentlemen.
Hey, good morning, good morning.
So two things I think to start with if you look at the contribution margin and oil and gas and the fourth quarter you I think it's like and the like the low $12 range excluding the.
And the shortfalls, how should we think about that.
Sorry, there Steven.
Normalized.
Yes.
And it's Mike.
Okay.
Sir Please make sure your phone is close to your mouth.
Yeah.
And there Steven yes.
So and so I think your question is whats, what's normalized contribution margin look like and the oil and gas business is that right.
Exactly.
And I think we ended up a little over 12 bucks per quarter with excluding the shortfall revenues and I'm just trying to get a sense for that especially with maybe some pricing over the next year, but clearly some inc.
Issues on.
And the short term with the weather.
Yeah, So and Steve has done.
Youre right were in the 12 70 range once you take out the $27 million worth of shortfall penalties.
But we had some other kind of.
Run and the mill things that happen at the end of the year.
So and a lot of those yearend adjustments were favorable right. So we did have some really nice tailwind on that as well that probably accounted for roughly about $2 and Todd. So when you look from a normalized perspective, you're probably in that $10 range coming out of Q4, and and just to elaborate a little bit more going into Q1.
And.
We're seeing some really nice volume growth on the proppant side, but with growth come cost right. So we're starting up a couple of our plants specific lease BARDA and crane.
We also are pulling a lot of railcars out of storage and and that's pretty pricey, because youre, taking and railcars out of storage with no product and it right. So you are paying a little bit more for that so you probably have another buck 50 to $2 there going into Q1 before you always get the cost before you get the profit right. So youll see a little bit of drag on Q1 and then.
Getting getting better as the year goes on.
Great. Thank you and then that's good color and then the other question.
So from a bigger picture perspective, you guys did a really good job I thought with the ISP discussion and December.
As we look out and I know, it's early but if you look out to like 2023 24 is there a situation where the volumes may be up a bit but the contribution margin per ton and the pricing because of that.
Higher end products and IP will generate contribution margins that are materially higher.
Or is it there's enough volume.
And our contribution margin I'm trying to just get us.
For the big drivers of longer term profitability and ISP.
Yeah, It's a really interesting question, Stephen and I think if and you said kind of from a big picture standpoint, I feel like we're transitioning from more of a bulk material supplier, which has been kind of where we've been for us.
Century, plus to more of a specialty.
And a highly processed.
Our minerals and ingredient supplier and so as we make that transformation over the next several years here I think what youll see us.
And that revenues and profit will go up a lot faster than volume or said more plainly.
We'll probably be shipping less things and railcars and more things and smaller containers. So a lot of the new products that we have under development are much lower volumes, but.
For.
And 5100 times and price what we what we have today and one of the advantages of that is that these are truly specialty products, which go quick quite frankly, once once we get into and application and get specified in will be very hard to specify out and some of them are fairly unique products.
As well, so I think I think youll see.
Less volume growth per se and and more revenue and and.
And profit per ton and so if you'll get contribution margin for example.
We've got some products and the pipeline that have contribution margins of $500 a ton $1000 a ton and some of them, we actually are measuring in and.
Per pound, but now instead of $1 per ton.
So just kind of a flavor for the types of things that are coming through the pipeline.
Alright, thats good color. Thank you.
Thanks Steven.
Thank you. Our next question is coming from Connor Lynagh of Morgan Stanley. Please go ahead.
Yeah. Thanks, good morning.
Morning Connor.
Wondering if you could give us sort of a feel for the supply side out there and the oil and gas business and certain.
And my demand is picking up with what's.
Frac activity I guess, what I'm trying to get a feel for us.
Is there incremental pricing required to bring back idled mines do you think.
And there are substantial reactivation underway already.
And just give us a.
And sort of your feel and maybe compare and contrast, Texas and the northern regions.
It's a really interesting question and if you look at what happened in the and and the pandemic sort of downturn of 2020, you saw a lot of companies do exactly what we did which was take take some mines are almost completely offline and then others got got turned back and start.
Running at say less staffing levels and so if a mind could do a million tons. Maybe it was only staff for two or 300000 or something like that so what we've seen as demand has come back very strongly here. We've seen that that second category are the ones that quote unquote got just turned down.
Kind of get turned back up if you will and so we have re staffed for example, our Ottawa mine back to $24 seven operation.
So that's relatively easy to do and our west, Texas mines at Crane and Lamesa.
We were able to re staff those as well I think you will hit a point here pretty soon where you can't just sort of turned back up the mines that were turned down and and it'll come to actually reactivating mines that have been shuttered and what we've seen out there actually so far is surprisingly perhaps to summit.
A fair amount of discipline amongst the supplier base and I'm aware several examples where.
Customers have gone to.
Two.
And in to two competitors looking for additional capacity and and I think the competitors and and US are looking for long term contracts at reasonable prices to restart mines, we've already gotten a lot of those contracts are others, perhaps are to come so I feel like theres a bit of discipline out there right now and.
It certainly does take some incremental pricing to get those those minds reactivated as Don was saying earlier talking about our contribution margin per oil and gas and response to Stephen's question.
There is upfront cost to reactivate the mines and so you got to dig a bit of a cash hole. When you start those back up so I think most people and the industry are looking for some incremental pricing to be able to do that.
Got it and then specifically and that comment Don you were talking about are you guys contemplating any incremental price.
And in <unk> versus <unk> and.
And regardless of that should we expect more as we move into <unk>.
So I feel like things will get a bit more constructive out there.
You've already seen some opportunities too.
Net pricing.
It's a bit of a and interesting dynamic we had a lot of negotiations with our customers and Q2 and Q3 of last year and gave some pricing concessions and those quarters as needed to support the customers and and now I think we could quickly becoming too and environment and in the first couple of quarters here.
And of 2021, where things have flipped a bit and we're tightening up.
Pretty substantially we've seen some prices go up a bit already and certainly with W. T. I a screaming up into the 60, then and I know, we've all seen the forecast from some of the leading prognosticators out there, saying that the WTO I could get into the Seventy's by Summertime this year.
That happens and I feel like there'll be some reasonable opportunities to get price.
Got it thanks very much.
Thanks Connor.
Thank you once again, ladies and gentlemen, if you would like to ask a question. Please press star one on your telephone keypad.
Our next question is coming from J B Lowe of Citi. Please go ahead.
Hey morning, Brian Moore and done.
J B and good morning, good morning.
And kind of a question on the competitive landscape.
And some of your competitors and eggs.
And bankruptcy.
Were you guys able to take some market share and over the last couple of quarters and and how do you think that the competitive landscape just kind of set up now that you've seen some of your competitors kind of reemerge here.
So I think we have been able to gain share in oil and gas and in the industrial sector as well.
Had a number of customers approach us and.
It started in 2020 and quite frankly looking for additional supply and it's not just from the the competitors who went through bankruptcy but.
Like there was a just kind of a general concern around the health of our industry and customer saw us as the strongest player out there from a kind of a stability and strength standpoint, and so we've been able to sign a lot of new contracts.
And in this.
Previous quarter Q4, and that we're talking about here. This morning, we signed and the industrial business. For example, 2014, new contracts from from customers and we're continuing to increase the amount of.
Contracted volume that we have out there.
Well over 50% of our industrial business, that's under long term contract and we're typically somewhere between depending on the greater product and the base and et cetera at 80% to 90% and in oil and gas so.
I think that has.
And it certainly has helped us to just the kind of disruption that was created in the industry with the bankruptcies. There if you kind of step back and look at it at three of our largest competitors and in the oilfield anyway and went through bankruptcy last year and so.
Feel like customers were sort of fleeing to safety and quality win when they would choose us.
Our teams have done a really nice job of getting additional additional volumes locked up under contract here over the last 12 months or so.
Okay, great and.
Just a follow up do you guys expect us getting the shortfall payments and <unk>.
No right now.
And we don't know us the answer but right now I would say that we're not anticipating anything of a material nature and Q1, and we would we would hope that especially in this environment that our customers are going to buy all of the contracted tons.
Things are pretty tight out there and then there's days where.
Especially with some of the recent weather issues and we know our customers are scrambling looking for for product out there and to the question earlier that came from counter around around pricing all of that feels like it's constructive for a pretty pretty positive environment for oil and gas demand for sure as we go into 'twenty and 'twenty one here.
Sure.
Yeah, I guess, just a follow up on that and I'm kind of I mean, I understand the costs and the ramp up side are going to hit Q1, but do you think <unk> contribution margin on the on the LNG side, given those dynamics could get back to the <unk> adjusted level of up near 13.
I would expect that we'll see a rebound in Q2.
I think theres a couple of things there as Don said, what will will be through some of the cost issues from Q1, we didn't.
Talk about the whole sort of weather thing yet I've mentioned it in my prepared remarks, but I think that will definitely be a bit of and impact or force and Q1, but my expectation is that.
Especially as volumes continue to ramp we should be able to have some tailwind on our cost I think we will have opportunity to get some some pricing so I'm feeling pretty positive about margins and increasing from Q1 to Q2. It at this point, obviously still a lot of unknowns, but.
Given given that a lot of the operators out there.
Werent able to to finish their completions or had to stop their completions and February because of weather I feel like some of that work is going to push into Q2, and it's going to put even further strain on what it looks like a pretty a pretty tight market right now for sand proppant into the oilfield sector.
Alright, great. Thanks, guys.
Thanks.
Thank you. Our next question is coming from Lucas pipes of B Riley Securities. Please go ahead.
Hey, good morning, everyone.
My first question is on the specialty materials side and I'm wondering if you can give us a little bit of a sense of how.
How large the addressable market is.
You mentioned the revenue price per ton potential is very.
Very attractive so I'm wondering if you could maybe frame up the kind of total market opportunity and then also kind of who would you be competing with in that and that segment. Thank you.
So.
It's really fascinating Lucas and it's one of the things that I don't.
And I really get excited about when I think about air and industrial business. If you look at.
How we've defined the business over the last and a more than a century.
And it tended to be pretty focused on the sand dynamics and a lot of the same and uses that we traditionally been and glass manufacturing foundry et cetera.
One of the really cool things about what we see as the future of our industrial business is we're going beyond the markets that we sold into and looking at a completely new markets and and and use it and then.
I see our competitive set now is not just sand, but a lot of other specialty minerals and and products and so up and.
And when you start thinking about what that opens up I mean literally it it's billions of dollars worth of market space that we can go after.
There was.
Some information that we've put together some of you might have seen our presentation and in December when we had our industrial focused investor call and checkout that presentation and I find it on our website. Obviously you can see some of the markets there and.
Some of the markets range addressable size from 100 per $150 million in summary, and literally in the billions and so.
And its core what we're trying to do is take one of the minerals that we have our mineral that we can get access to perhaps do some processing to it and coated heated.
Do a variety of things to it and transform it into something that can compete in completely different market sectors and in many cases do it with either an advantage and performance or an advantage and manufactured cost. So I think that's a really really exciting as we are and we look at that and a potential for the future.
Very helpful. I appreciate that thank you and then.
Turning back to the.
Energy side.
And then a fair bit of consolidation among service providers, but then also among.
Uh huh.
And producers.
How do you think this is impacting the competitive dynamics kind of as you are.
And we emerge from this downturn.
And I think that that dynamic actually it's one of the most beneficial thing that's happened for us.
My experience and and <unk>.
Selling and a lot of industry over more than three decades is that big customers like to do business with big suppliers and so the larger the customers get I think the more they're looking for.
Companies like us, who can supply them across multiple basins multiple locations and.
Have the wherewithal to.
And to match up with those companies and be able to respond quickly to meet their needs. So you see the largest folks and the industry now coming to us and.
And there are some of the customers and some cases ones that maybe we didn't do business with at the two or three entities that were kind of small to midsized companies and as they were separate but us are coming together now.
They're rethinking their sourcing strategy and there and kind of vendor our partnership strategy and we've really been the beneficiary of that I mentioned earlier and the call about all the new contracts that we've signed and I think several of those have been as a result of some of these larger entities, forming and and going out and really rethinking.
And how they want to how they want to partner with our suppliers.
I appreciate it. Thank you. Thank you Paul the color and best of luck.
Thank you very much.
Thank you at this time I'd like to turn the floor back over to Mr. Shinn for closing comments.
Thanks, operator, I'd like to close today's call by reenter reiterating a few of the key points that we talked about first I'm very proud of how our company has successfully navigated 2020 and of our overall strong performance during the year in spite of the challenging macroeconomic environment.
And we started the new year, well and both of our business units and I believe we are positioned for a really good success in 2021 and beyond with numerous growth opportunities and our pipeline as we discussed a bit this morning and of course those are across a diverse set of markets and and uses.
And then finally with improving profitability and continued capex discipline, we expect to be cash flow positive. This year as Don mentioned in his remarks.
So thanks, everyone for dialing into our call today, and we look forward to speaking with you all again next quarter.
Ladies and gentlemen, thank you for your participation and interest in US silica. This concludes today's event you may.
Disconnect your lines at log off the webcast at this time. Thank you.
You.
Moving on.
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