Q1 2021 U.S. Silica Holdings Inc Earnings Call

Good morning, and welcome to the U S silica first quarter 2020 One conference call. At this time all participants are in a listen only mode of question and answer session will follow the formal presentation. 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.

And the 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 is the first quarter 2021 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 a complete discussion of these risks and uncertainties. We encourage you to read the company's press release.

And our documents on file with the SEC.

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 filing 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 our CEO, Mr. Bryan Shinn Bryan.

Thanks, Don and good morning, everyone.

And I'm very pleased with our strong operational and financial performance during the quarter we.

We delivered impressive results, which exceeded both revenue and adjusted EBITDA expectations and March was our best month of the year across the company with key records set and our industrial business.

The second quarter looks very strong as well and both segments and I believe that we're on track for a substantial rebound and profit and cash generation from 2020.

I'm also very grateful to all of our employees for their continued focus dedication and perseverance and societal and economic norms are returning.

While I'm excited to see the company rebounding financially safety is also a top priority and I am proud of how our team has continued to manage the numerous challenges associated with a rapidly expanding business.

During 2020, we achieved our best safety results and recent history and.

Happy to report that 2021 is off to a great start as we work to continuously improve our performance.

And our team's discipline ingenuity and determination are truly energizing and inspiring.

Looking at the first quarter and a bit more detail volumes increased an impressive 26% sequentially.

Adjusted EBITDA of $38 3 million was down 40% versus Q4, however, if we exclude the $27 $2 million benefit and the oil and gas segment related to customer shortfall penalty last quarter.

The EBITDA was actually up sequentially.

During the quarter, we generated positive free cash flow and closed the period with $154 $4 million of cash on our balance sheet.

We maintain fiscal discipline by limiting capital expense to $3 $5 million during the quarter and by continuing to reduce SG&A expenses.

Yeah.

Looking forward, we expect that our business segments will continue to benefit from the ongoing macroeconomic rebound and unprecedented economic stimulus and rising energy commodity prices.

Our current outlook points towards strong customer demand and both our industrial and oil and gas segments with an improving pricing and margin environment.

Good morning, I'd like to cover three topics and a bit more detail first I'll start by discussing our growing industrial portfolio and how we will continue to strengthen it next I'll turn to the market and our outlook for the remainder of the year and finally I'll close with the steps, we're taking to maximize cash flow.

Yeah.

We are of a strong portfolio of industrial and specialty products rooted in a rich 120 year history.

We've made strategic investments and new technologies and solutions and we're clearly a leader and the industrial minerals market, serving critical industries, such as housing food and beverage production Biopharma glass and energy, including a focus on clean energy.

Speaking of clean energy, we believe that our low iron and silica sands are currently and 15% to 20% of the newly installed solar panels and the us and we estimate that our products are now use and approximately 50% of U S solar glass production.

Also we are the sole supplier to most of the facilities of the largest U S producers of composite fiberglass for wind turbine blades.

And we estimate that our products are used and greater than 80% of us produce fiberglass composites for wind turbine blades today.

Current and forecast project that wind energy production will grow to over 10% of use of electricity generation in 2021, and we are extremely proud to help support the growth and these environmentally and very important value chains.

More broadly, we expect to differentiate ourselves through our diverse and high quality reserve base.

And our geographically advantaged footprint best in class manufacturing assets and low cost operations.

What matters and the end, though is whether we are winning and the market and I can confirm that we are an example of this is the breadth of industrial customer contracts that we signed during the quarter.

We inked nine contracts and Q1, representing more than $25 million of annual revenue and the $8 million of annual contribution margins.

The contracts are for up to five years in length, and further strengthening relationships and positioning us as the trusted business partner.

This also illustrates the confidence the customers place and the strength and breadth of our portfolio.

These contracts are just one of many examples of major successes during the quarter.

Last December we outlined our compelling product development pipeline with more than $200 million and estimated annual contribution margin from new innovative products under development for targeted markets.

The quarter I'm happy to report that we made significant advancement on several of those projects.

We delivered record sales of ever wide cristobalite, and white armor cool roof granules from our new facility in Georgia.

We earned full product approval forever white at multiple leading quartz countertop manufacturers and we've begun production shipments.

We move to the final approval stage with the major blood plasma company for our new purified day filtration products and.

And we completed the first commercial customer trial with our new ultra fine filler products.

Regarding financials during the quarter industrial and specialty products volumes of 984000 tons increased 3% versus Q1, 2020 and were up 6% sequentially.

Contribution margin dollars were up 4% sequentially and down 8% year over year as we've not quite fully recovered to pre pandemic levels.

In November of 2020, we announced and industrial is price increase effective January one of this year and more recently, we announced and additional price increase of up to 15% effective may one on selected products.

Further during the quarter because of the inflationary pressures surrounding supply chain and shipping costs, we implemented temporary freight surcharges to offset increased expenses.

We continue to actively monitor logistics cost headwinds and expect to work with customers to ensure that we protect our profitability.

And our oil and gas segment, we experienced robust demand with proppant volume of $2 6 million tons up 36% sequentially on stronger U S completions activity as the number of Frac crews operating in the US continued to increase.

Sandbox delivered loads jumped 19% versus Q4 as numerous customers began to increase activity given rising commodity prices.

Segment revenue was flat sequentially and contribution margin dollars decreased nearly 60%.

The decline in revenue and contribution margin dollars was expected and largely due to the $27 2 million dollar benefit in the oil and gas segment related to customer shortfall penalty as last quarter.

In addition, first quarter results were negatively impacted by cost headwinds associated with the winter weather event as well as empty railcar moves and trucking inflation, which is consistent with our fourth quarter earnings call commentary.

The positive impact of the robust activity was a substantial increase and railcar utilization.

Given that we have reduced railcars and storage meaningfully and expect to go from 2004 hundred stored cars and Q4 to 750 cars and storage by the end of Q2 2021.

Let me now turn to the market and our outlook.

Looking forward, we're very excited about the many opportunities that we have the can benefit from of recovering U S economy with unprecedented unprecedented stimulus and rising energy commodity prices.

Macro concerns have eased and I would like to provide a commentary on how we expect the business to progress for the rest of 2021 and into 2022.

And I'm optimistic about how 2021 is shaping up our current outlook points towards robust customer demand ahead, and both our industrial and oil and gas segments.

Strong energy commodity price performance this quarter drove a recovery and proppant volumes and we believe that our Q2 proppant volumes will increase sequentially approximately 20% to 25%, while sandbox delivered loads should rise 5% to 10%.

Given that and a constructive pricing environment, we believe that Q2 oil and gas segment profitability should increase 30% to 35% sequentially.

Based on customer input, we expect continued strength and energy sales through the remainder of 2021 and assuming at least today's level of WTO pricing, we expect 2022 to be and even stronger year for proppant and last mile logistics demand.

And our industrial and specialty products segment recent commercial wins, coupled with strong execution and increased pricing set the stage for continued growth.

And we expect Q2 industrial profit to increase 5% to 10% sequentially.

For the year I believe that will grow underlying industrial segment profit at a GDP plus rate as expected.

Longer term, we're very well positioned for growth and industrials with the combination of three powerful advantages.

First we have a strong base business through numerous long term relationships with blue chip customers and diverse industries.

Second is our strong and growing portfolio of products, serving sustainable industries, including solar energy wind power cleaner Air Green diesel food quality and energy efficient buildings and third we have an exciting pipeline of new products and white space markets and hold step change growth.

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We believe that the combination of these powerful advantages should provide strong momentum for growth into 2022 and beyond.

As we execute our growth strategy, we're committed to capital efficiency efficiency, which is expected to support solid free cash flow generation and net debt reduction.

2021, we're committed to keeping our capital spending within our operating cash flow and expect to be free cash flow positive for the year.

We've had a busy start to 2021, making solid progress on each of our three strategic priorities. We believe that the key actions that we're taking today will further boost our earnings potential and free cash flow generation ability as we power into the market recovery.

We believe that our size and scale combined with our demonstrated ability to execute and quickly respond to changing market conditions are unique advantages for us.

In addition to cost efficiencies and margin expansion actions, we continue to focus on portfolio positioning and we're taking bold action to ensure business resilience and sustainability all aimed at continuing to best position our company for the future.

We also look forward to sharing of more detailed progress report on our new product pipeline and ESG objectives over the coming quarters outside of our scheduled earning calls.

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

Thanks, and good morning, again, everyone as Bryan stated, we delivered better than expected quarterly results, both financially and operationally and addition, this quarter was mostly absent of charges related to asset impairments facility closures restructuring and other expenses.

Moving into 2021, we expect to deliver the results with minimal adjustments to EBITDA.

Now let me begin with a review of our operating segment results first quarter revenue for the industrial and specialty products segment of $112 $7 million increased 5% versus the fourth quarter of this year and was virtually flat compared with the same quarter one year ago.

The first quarter revenue growth was driven mostly by the economic recovery is volumes and contribution margin expanded versus the prior quarter.

The oil and gas segment revenue was $121 7 million for the first quarter up 31% as compared to the fourth quarter of 2020, excluding the $27 2 million benefit related to customer shortfall penalties recorded in the fourth quarter and a decrease of 22% versus the first quarter of 2020.

Sequentially volumes were up 36%, However segment contribution margin fell nearly 60% as expected primarily due to the absence of the $27 2 million benefit related to the customer shortfall penalty recorded in the fourth quarter of last year. Additionally cost headwinds associated with.

The winter weather event as well as empty railcar moves and trucking inflation negatively impacted the current quarter consistent with our fourth quarter earnings call commentary.

On a per ton basis, the contribution margin for the industrial and specialty products segment was $40 69 per ton for the first quarter, which represents a modest decrease of 2% compared with the fourth quarter results and what we estimate to be the low point for the year.

The oil and gas segment contribution margin on a per ton basis was $8 36 of <unk>.

Decrease of nearly 70% when compared to the fourth quarter 2020, due to the reasons discussed earlier and again consistent with our comments last quarter.

Adjusted EBITDA and the quarter was $38 $3 million, which should represent a bottom for this cycle and a low point for the year adjusted EBITDA was down 40% sequentially and down 20% year over year. However, again, excluding the $27 $2 million benefit and the oil and gas segment related to customer store.

Paul penalties last quarter, adjusted EBITDA increased 5% sequentially.

Additionally, as discussed earlier, we faced inclement weather conditions empty railcar moves and trucking inflationary headwinds during the quarter.

Selling general and administrative expenses for the quarter of $26 2 million represent a 13% decrease when compared to the first quarter 2020 and of 6% decrease sequentially. The.

The decrease reflects the aggressive and proactive actions taken by the team to reduce spending to better align with market conditions for.

For the year, we expect to remain disciplined around SG&A and forecast of single digit percent decrease year over year.

Depreciation depletion and amortization expense and the first quarter totaled $41 3 million, which is a slight increase when compared to the fourth quarter, we expect depreciation depletion and amortization to be up slightly for the full year compared to 2020.

Our effective tax rate for the quarter ended March 31, 2021 was the benefit of 17%, including discrete items. We believe our full year effective tax rate will be of benefit of about 24%.

Turning to the cash flow statement I am pleased to report and with the eight of the $16 million tax refund, we delivered positive free cash flow during the first quarter, which historically has been a quarter and which we burn cash.

Looking at the balance sheet, the company had $154 4 million cash and cash equivalents at quarter and.

We have of $100 million revolver with $25 million drawn and $23 $3 million allocated for letters of credit as of March 31, 2021, leaving approximately $52 million available under our credit facility.

As mentioned, we received $16 million and tax refunds from the IRS during the quarter related to the cares Act, we anticipate receiving additional IRS refunds related to the cares act of approximately $21 million and the coming months.

Our net debt stands at $1 1 billion and capital expenditures and the first quarter of $3 5 million for the year. We continue to expect 2021 capital spending to be in the range of $30 million to $40 million.

Finally, our playbook is clear we have a relentless focus on capital discipline for the year, we continue to expect to be free cash flow positive and to reduce net debt by year end and in addition, with the absence of onetime cash charges, coupled with the expanding EBITDA driven by our increased product offerings and value added capabilities.

<unk>, along with the reliable execution and a recovering market, we should have the ability to strengthen our balance sheet and sustainably generate positive free cash flow and with that I'll turn the call back over to Bryan.

Thanks, Don Operator would you please open the lines for questions.

And ladies and gentlemen, the floor is now open for the questions and answer session. If you'd like to ask the question. Please press star one on your telephone keypad. The confirmation tone will indicate your line is and the question queue. You may price start to if you would like to remove your question from the queue for participants using speaker equipment and may be necessary.

And pick up your handset before pressing the star keys.

One moment, please and while we pull for questions.

And again as a reminder, if you have any questions you May press star one on your telephone keypad.

Our first question is from Steven.

Gangrel with stifle the Stifel I'm sorry. Please proceed with your question.

Hi, Thanks, good morning, everybody.

Hey, good morning, how are you doing.

Good thanks.

Okay.

So a couple of things that I wanted to ask about and.

I think the first us when we think about.

And I'm thinking on the oil and gas side of the contribution margin per ton and looking at volumes and then thinking about some of the pricing trends we have seen.

I'm trying to get a sense for how you think what do.

And you think they will look like over the next couple of quarters and and maybe is there is there any incremental color on sort of what the winter weather issues cost you and the.

And the quarter the just concluded.

So.

Great questions maybe on.

I'll take the first part of that and just give us a little bit of color commentary and then maybe ask Don to to dive in a bit further to the winter weather and some of the things that we saw there. If you recall back to the conference call last quarter, We said that we thought normalized contribution margin per ton for the oil and gas segment was.

Around the $10 and we highlighted that with some of the headwinds that we thought we'd see weather being one of them that we'd probably be somewhere between eight and $8 $8 50.

And we actually landed right in the middle of that at I think $8.36. So that's kind of where.

And where we got to in Q1 with that math, Steven and I think what Youll see going forward is that we'll start to trend closer back to that $10 per ton range. So I would expect that as we go forward say in Q2 with the demand activity, we're seeing out there and some pricing tailwind that will be up somewhere and.

And the mid nines, probably plus.

Plus or minus and that feels like a reasonable place that I think we can we can stay for the remainder of the year, obviously still of lot of puts and takes us out there Don maybe you could take to take the second question around the weather and some of the other things that we saw on the quarter. Yeah. So we mentioned a couple of times in our prepared remarks that.

And the quarter was hindered by three things.

Whether the.

The railcars and when we pull railcars out of storage, Unfortunately, thats and empty railcar pool. So its very expensive to move and empty car, where you need it and then we also saw inflation that was really highlighted by trucking inflation and.

And all told if you add all of that up it's roughly $8 million of the headwind that we had in Q1.

And looking forward some of that is going to go away hopefully fingers crossed we don't have a weather event in Q2, but we are going to pull more railcars out of storage as Bryan said in his prepared remarks, and we also we have of price increase coming in our ISP business, but it really doesn't hit until may one so we're going to have.

The more inflation pressure hitting us in the first part of the quarter. So I would say a little less and then half.

Of that $8 million will still be a headwind for us and in Q2.

Great. Thank you that's helpful and.

And when we think about and you mentioned a couple of examples.

Of your exposure to solar and wind.

Can you any sense for what that makes up of sort of the.

Current mix and how you think debt evolves as we go forward here and.

We've done some work on the Windsor recently and clearly there is.

The strong demand for these <unk>.

Turbines and blades going forward and so I'm just curious have you of a sense for the curve.

Makeup.

Of your ISP business and how that evolves.

And.

And another really really timely question, Steven and when we think about the clean energy market and our exposure to it today.

We have three kind of clear areas that they were currently and so we talked about.

Solar panels and how the products that we sell go into the the glass that Ria. The allows us to the amount of the right amount of solar energy to come and into the panels. So that's one second.

Helping out with the suppliers of fiberglass composites for the.

The wind turbine blades and and the third is.

With diesel particulate filters, which in many parts of the world, particularly Europe, and and China, Japan.

As of being mandated and in new cars to cut emissions down so when I think about that aspect of clean energy today, that's probably 8% to 10% of our total industrial portfolio.

And then if you think about things that are the things, we do in and around helping efficient energy generation we're on.

Also starting to get into the Green diesel value chain, we have some really interesting products that we acquired from EP minerals that are very effective at.

Sort of being process filtration AIDS in the whole green diesel process. So we haven't sold a lot into that yet so I think that will be additive to that 8% to 10% and then.

And I also look at our cool roof granules and kind of.

In the energy space, because what those products do as they reflect a lot of the solar energy that comes into commercial buildings from.

From the roof and so.

So essentially used less and less energy to heat and cool those buildings. So that's not in that 8% to 10% either so you can see that over time here as we grow, particularly the green diesel and the.

The cool roof granules as well as the other product lines. So I think that all of that sort of energy related set of offerings will become a pretty significant part of our overall industrial enterprise.

Great. Thanks, if I can throw and one more you did.

Presentation I think it was December when you talked about new product introductions and the laundry list of of.

Sort of incremental growth drivers you have gone forward.

Is there as we think about how those opportunities materialize.

Will we see you think of an inflection point of of sort of growth and contribution margin changing or is this sort of a gradual process over over the next sort of two to three years as products fall and I'm just trying to get a sense first of all of how to think about.

When the when these products are hitting the market and how that kind of flow through the income statement.

I think that what youll see us just the continual increase and this is like a wall of.

Of water like a big wave that is kind of building up of.

All of the different programs and projects and <unk>.

One of the things that I really like about that is none of this is sort of boom or bust theres not one or two big projects that we're hanging our hat on is its several different projects across a number of different industries. So I think you'll just see a continuing build quarter on quarter and one of the things that we want to do obviously us highlight.

<unk> kind of opportunities and successes as we did on the on this call and also outside of this call. I think we will have at least a few times of year kind of highlighted meetings like we had back in December of last year, where we really shine a spotlight on these opportunities and dive in and a bit more detail Stephen.

Great. Thank you.

Thank you.

And again as a reminder, if you have any questions you May press star one on your telephone keypad doing so will ensure that you join the question and then you said Q.

And our next question is from Samantha Hoh with Evercore ISI. Please proceed with your question.

Hey, guys and thanks for taking my question.

Just maybe to stick on the call.

The key topics first of all day long ago and.

And this is Tim the question to fiberglass shortage is that something that any day.

And being impacted by cash.

Curious how about on <unk>.

Western Europe.

Your piece of the supply chain.

Okay. So so with that piece of the supply chain the sectors that we supply and to we haven't we haven't seen that but what we have seen across some of the industrial supply chain.

It is of raw materials. So for example on one of the teams that we sell into the paint and coatings and pain.

Paint manufacturers that proxy red and manufacturers are having problems getting some of the base chemicals and resins that they need to make their formulations. So I think there is a bit of general disruption still out and the economy. Many supply chains were seriously impacted with the pandemic and then.

Some got very specifically impacted with the harsh weather in February but across the country. So I know some some chains are experiencing big problems. There, it's not really impacting us very much and.

And even things like the kind of widely reported chip shortage that seems to be impacting a lot of change. We just haven't seen much of that at this point.

Okay, Great and then my other question could you on the.

Oil and gas side and it seems like you guys are accelerating some of the dose.

The railcar.

And moving on that of story.

Can you maybe help us understand how the progress is with some of your mines. The starting and then maybe just what the mix is in terms of your sales right now between now and then.

And.

And the Permian products.

And if you can share anything on in terms of like how pricing difference between those two products.

Hey, Greg.

Sure sure so.

And the.

Products split last quarter, we were about 24, 25% northern.

And northern White sand, and let's say last quarter and Q4.

In Q1 that went up to almost a third of our products sales of the definitely.

Accelerating demand for northern White sand as some of the the basins outside of the Permian of recover obviously most of the basins outside of the Permian or not using local sand and so the preponderance of those basins us northern white sand and that's why we've been pulling the the railcars out of store.

<unk>, we also restarted during Q1, and our Sparta, Wisconsin facility, which is of great low cost northern White site and we've been doing very well at at that mine. We also took our crane mine up to $24 seven of its crane, Texas and the kind of.

The southern part of the Midland and we also took our flagship northern White facility and Ottawa, Illinois back the $24 seven operation as well so.

Most of that quite honestly has been.

Due to surging oil and gas demand and.

I think we will see a pretty substantial inc.

The increases in demand continuing here we project.

A robust Q2 in terms of of.

Demand for sure and certainly will be of big big participant and that I would guess debt.

Proppant demand in Q2 for us is probably up at least 20% to 25% I think sandbox delivered loads will be up probably at least 5% to 10% and.

And in both of those.

Delivery both of the delivery of sandbox and the the sand supply I think we'll see a relatively constructive.

Pricing environment to your question.

We've seen.

On pricing improvement on a customer by customer basis, we're positioned a little differently than some of our competitors and that.

Nearly 80% to 85% of our.

Our sales on any given month of the proppant us to contract customers and in many cases those contracts have.

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Escalators or.

Sort of alignment clauses, so as the.

The price of oil continues to go up I think we will get some almost automatic entitlement of pricing that goes with that would be with the contracts.

The the downside of that of course is when things get really tight like.

Like we've seen some point at some point in Q1, we don't have the ability to participate on the spot market as much but.

And we've kind of made that trade off and I think it's the right one to build.

Bigger and more stable customers big contracts and.

That way, we don't have the sort of ups and downs that perhaps we have had and the past or some of our competitors of hat.

Yeah.

Okay.

And anything else the Samantha.

And no that was it. Thank you Bryan Okay, Yeah, no worries.

Okay.

Thank you at this time I would like to turn the floor back over to Mr. Shinn for closing remarks or closing comments.

Thanks, operator.

During the call to of closed today I thought I'd leave you with the three key thoughts.

First we are of a strong diverse portfolio that we're strategically enhancing with a robust pipeline of new innovative products and our industrial business. The some of those that we talked about this morning.

Second we are poised to benefit I believe from a recovering U S economy, which I think most everyone expects to drive increased industrial and energy related demand as well as increased profitability for us silica.

I think we're well positioned and a variety of environmentally important value chains that support cleaner energy and cleaner air and again, we've talked about many of those this morning.

And finally, the continued capital discipline.

Optimizing our product mix and further developing value added capabilities, coupled with the reliable execution should provide us the ability to strengthen our balance sheet and sustainably generate positive free cash flow.

Thank you again for dialing into our call today, and we look forward to speaking with you all again next quarter stay safe and be well.

Ladies and gentlemen, thank you for your participation and interest in the U S. Silica. This concludes today's the day you may disconnect your lines and log off the webcast and at this time.

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