Q3 2021 Smart Sand Inc Earnings Call
Ladies and gentlemen. This is your operator your conference is about to begin please continue to standby.
Once again this is your operator your conference is about to begin in one minute. Please continue to standby.
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Yeah.
Good day and thank you for spending by welcome to the third where 2021 smart sand incorporated earnings conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question during the session you will need to.
Press Star one on your telephone if you require any further assistance. Please press star zero and now I would like to hand, the conference over to your first speaker today, Josh Jayne Director of Finance. Thank you. Please go ahead.
Yeah.
Good morning, and thank you for joining us for Smart Sand's third quarter 2021 earnings call on the call today, we have Chuck Young founder and Chief Executive Officer, Lee Beckman, 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 a complete discussion of such risks and uncertainties. Please refer to the company's press release and our documents on file with the SEC smart.
<unk> 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 10th 2021 <unk>.
Additionally, we may refer to the non-GAAP financial measures of contribution margin EBITDA, adjusted EBITDA and free cash flow during this call.
We believe that these measures when used in combination with our GAAP results provide us and our investors with useful information to better understand our business. Please.
Please refer to our most recent press release or our public filings for our reconciliations of contribution margin to gross profit EBITDA and adjusted EBITDA to net income 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.
Another good quarter volume, both Utica and <unk>.
Third quarter volumes of 790000 tons are up 156% from third quarter 2020 levels and up 3% from last quarter.
Current run rate, we expect 2021 sales volumes will be a new record for tons sold by sparkling.
And given the current outlook for commodity prices and spending by our customers. We believe 2022 volumes will exceed this year's levels.
Underinvested over the last couple of years, both in the U S and abroad.
Particularly impacted the supply for oil and natural gas.
But with demand surging back to pre pandemic levels commodity prices now exceed 2019 levels and we could be in the early stages of a multiyear up cycle of energy capital spent.
We continue to expect E&ps spend within their cash flows, but as a result of higher commodity prices, we expect spending to increase in 2022.
As we end 2021 and move into 2022, we're continuing to look for opportunities to lower our cost structure and increase our asset utilization.
Pricing, we expect this to improve going forward, because northern white sand supply constraints.
Rolling demand.
We believe the industry needs further consolidation and we continue to pursue opportunities to expand our business, but we will not risk our balance sheet and we will only acquire assets that broaden our access to key operating basis through new logistics sources.
<unk> markets and customer base that we serve.
During the third quarter, we announced a new three year agreement to supply stands to EQT, which demonstrates our continued commitment to provide long term sustainable same supply and logistics services to our customers.
We've been working on building out the terminal and we remain on track to have an operational by the end of this year the new terminal.
Citing for us not only because it will expand our presence in the Appalachian basin, but will also provide ESG benefits to our customers in the region by reducing trucking mileage and associated carbon emissions related to sand delivery.
Our terminal in van Hook, North Dakota, which was acquired in the spring of 2018 has been a great success for smart.
It has helped us to substantially increase our sales volumes into this key northern white sand market.
Similarly, we believe our invested into new ways for Pennsylvania terminal will be a key driver to help drive incremental sales for smartphone into the Appalachian Basin.
We continue to believe that shipping sand on a bulk basis by rail terminals that are well positioned to serve long term trailing activity within an operating basin is the right long term supply solution for sourcing product in a cost efficient and environmentally responsible manner.
While we are optimistic about the outlook for Frac sand.
We're also committed to diversifying our business away from the cyclical nature of oil and gas and.
In the third quarter, we announced the hiring of Rick Shearer to lead our industrial product effort.
Rick has held multiple executive leadership positions. Most recently with the emerge energy services as CEO 2012 to 2020 before that he was the president and COO of U S silica and founder of the industrial Minerals Association.
Rick experience knowledge will be incredibly valuable as we diversify our business. He is currently in the process of building a team and we expect contributions from this business to begin in 2022.
Yeah.
Our balance sheet remains in great shape today, we have $35 million in cash and approximately $50 million of liquidity.
Even though we have a strong balance sheet, we will remain disciplined with respect to capital spending and focus on maximizing cash.
We remain committed to the last mile market with our smart systems, including our smart pad trans load or which we believe is unlike anything in the industry.
During the third quarter, we had another successful deployment of smart pad and we look forward to announcing more deployments in the coming months.
Using our smart systems, we estimate that the number of trucks needed to deliver sand to the well site will be reduced by more than 30% versus our competitors' offerings.
By taking trucks off the road accident to reduce carbon emissions are reduced and noises reduced smart systems are also uniquely designed to reduce debt.
By reducing accidents carbon emission noise and.
We are keeping people safer and striving to meet the ESG gold smart sand and our customers, while providing a reliable efficient last mile solution for the industry.
We're excited about our future for a number of reasons.
Our balance sheet remains in great shape, and we had the significant net cash position.
High commodity prices and strong demand should lead to a multiyear up cycle in E&P spending.
We are well positioned to take advantage of any increased market activity with our available capacity ample liquidity and strong balance sheet.
Having operated smart pad successfully for three quarters, we look forward to expanding our last mile share market share.
We will be diversifying our business beginning in 2022 with other avenues to reduce the volatility of our cash flow.
As always we will continue to keep an eye on the future and we will always keep our employees and shareholders interest in mind in everything we do.
That I will turn the call over to our CFO Lee <unk>.
Thanks, Chuck we're encouraged by the pickup in activity, we have seen thus far in 2021.
As Chuck indicated third quarter, 2021 volumes were slightly higher than second quarter levels.
We continue to expand our customer base during the third quarter and believe a more diverse customer base will strengthen our business going forward.
We are also taking steps to diversify our business into industrial sands products.
Which is expected to reduce the volatility of our business going forward.
We remain committed to low leverage levels.
Prudent capital structure generating positive free cash flow for the year and maintaining adequate liquidity levels now.
Now I will go through some of the highlights for the third quarter compared to our second quarter 2021 results.
Starting with sales volume.
We sold 790000 tons in the third quarter 2021.
A slight increase over the second quarter 2021 sales volumes of 767000.
We have sold approximately $2 3 million tons for the first nine months of 2021.
And are currently on track to achieve the highest sales volumes in company history.
Total revenues for the third quarter 2021 were $34 5 million compared to $29 6 million in the second quarter 2021.
<unk> revenues were $2 5 million higher sequentially, which.
Which helped offset a slight decline in logistics revenue.
We recorded $2 7 million of shortfall is in the third quarter compared to no shortfalls in the second quarter.
Our cost of sales for the quarter were $36 5 million compared to $32 million last quarter.
Production costs were slightly higher sequentially due primarily to higher utility costs driven by increased natural gas prices.
We also had increased logistics logistics costs due to a higher mix of in basin sales in the third quarter.
Total operating expenses were $6 7 million compared to $26 3 million last quarter.
The decrease from the second quarter is primarily driven by the $19 6 million recorded as a noncash bad debt expense in the prior period, which is the difference between the $54 6 million accounts receivable balance that was subject to the company's litigation with U S well services and the $35 million.
Cash received in settlement of that litigation.
For the third quarter of 2021, the company had a net loss of $7 3 million or a negative <unk> 17 cents per basic and diluted share.
This compares to a net loss of $23 7 million or negative <unk> 65 per basic and diluted share for the second quarter of 2021.
The lower net loss sequentially is primarily due to the previously mentioned $19 6 million recorded as a noncash bad debt expense in the prior period.
For the third quarter of 2021 contribution margin was $4 1 million and we had negative adjusted EBITDA of $1 million.
Compared to second quarter contribution margin of $3 5 million and negative adjusted EBITDA of $21 5 million.
For the third quarter 2021, we had negative 900000 in free cash flow as we generated $1 1 million in operating cash flows while spending $1 9 million on capital investments.
Year to date, we had $30 6 million in free cash flow generating $37 5 million in operating cash flows while spending $7 million on capital investments.
The majority of our capital investments year to date have been on new smart systems units.
During the quarter, we didn't use our revolver and still had no outstanding borrowings borrowings other than one 2 million in letters of credit.
Our current unused availability under the revolver is $15 million.
We paid down $1 $7 million against our notes payables and equipment financings in the quarter and have paid down approximately five 1 million year to date, we expect to pay down approximately $1 7 million in the fourth quarter as well.
We ended the third quarter with approximately $37 million in cash and our current cash balance is approximately $35 million.
Between cash and our availability on our facilities. We currently have approximately $50 million in available liquidity.
We do not expect to have any borrowings on our ABL for the remainder of the year other than letters of credit.
In terms of guidance for the fourth quarter, we expect sales volumes to be basically flat with third quarter levels, assuming no major weather issues.
While commodity prices have strengthened throughout the year and October volumes were strong.
Anticipate holidays and weather will have an impact on activity levels as they do every year in the fourth quarter.
However, indications from customers combined with a strong commodity price backdrop gives us confidence that activity will be strong to start 2022.
Should activity pick up in 2022, we expect northern white supply and demand fundamentals to improve which should lead to opportunities for pricing and margin improvement over the course of next year.
However, typically the first quarter of the year as our lowest contribution margin quarter due to higher inventory adjustment expense as we normally draw what sand from inventory to meet sales demand through the winter months.
So while we anticipate improving margins in 2022, we don't expect to see that improvement to start to materialize until the second quarter of next year.
Again, assuming demand picks up as currently anticipated.
We are currently building, our Waynesboro terminal and expect it to be completed and operational late in the fourth quarter.
With a terminal capital, we now expect capital expenditures for the year to be in the $14 million to $16 million range and expect to be free cash flow positive for the full year.
This concludes our prepared comments and we will now open the call for questions.
Thank you Sir we will now begin the question answer session. As a reminder, if you would like to ask a question. Please do so by pressing star one on your phone again Thats star one on your telephone keypad.
Standby will compile the Q&A roster.
Your first question is from the line of Stephen <unk> with Stifel. Your line is open.
Yeah.
Thanks, Good morning.
David.
Hugh.
You talk you talked a bit about the.
The higher production costs.
The logistics costs in the quarter, which which.
Which impact I think contribution margin per ton basis.
Can you shed more light on sort of the impacts from both in and how we should think about.
Those issues as we go through the fourth quarter.
Yes.
Just trying to get a handle on how we should be thinking about profitability.
Yes.
Yeah, I mean I think.
Everyone. We are seeing some increased cost pressure, particularly on our utilities.
Utilities with our natural gas pricing not surprise prices have doubled over the last year and so that's having impact on us we see that kind of staying at current levels, but flattening out so I don't necessarily see and then logistics is really kind of timing and getting rail in and out and so thats somewhat of a management costs.
It being maybe a slightly higher costs going into the fourth quarter, but relatively flat to where we are today.
And when you when you talk about the higher logistics costs.
Just so I understand a little bit better.
If you saw the mind you, that's it's pretty straightforward, but when you incur those logistics costs.
Theyre not ultimately borne by the customer I'm, just trying to figure out how the.
How the higher logistics cost impacts.
Our profitability.
Well as we've kind of highlighted in the past, even we've moved to more in basin sales nearly all of our volumes that go through in van Hook for example, or in basin, a lot of our volumes in the Marcellus today or in basin sales with Waynesboro.
And that terminal will be moving to more invasive sales when you sell sand in basin basis, you basically price the sand into the truck in the term at the terminal in that basin. So we have a higher price for the sand, but we're now directly responsible for the freight for the railcar.
For the trans loading.
Of that sand into the truck at the terminal. So those costs now get built up in our freight cost and you see that higher freight costs and it's also we recognize the benefit of that incremental value by adding those services through selling that sand at a higher price and that flows through into our sand revenue. So.
That's how you basically that's how the in basin pricing works versus Fob mine, where we put the sand into the railcar at the mine and typically the customer is responsible for the freight for the railcar.
Potentially and also for any trans loading that's done in the basin.
Understood that's very helpful.
Okay.
Expectation is hopefully.
Demand rises and supply is tight U U U.
Ultimately receive better pricing for product, which offsets that in 2022.
That's correct. So we hope through having control of an effect, having waynesboro like van hook and having more terminals under our control we can reduce that translating costs by managing that yourself versus going through third party secondly by having more outlets and more railroads, we can try to efficiently and get more efficient cost of rail into those terms.
<unk> and then third by having that access point closer to the customers we can be.
Opportunistic and grow our base in those markets and have a chance for pricing improvement as well as get incremental sales volume and get a higher activity level through our plan, which allows us to hopefully get a higher utilization and bring down our cost of production.
Got it understood and one final one from me when you think about the evolution of the Frac sand market over the last couple of years.
Your volumes have been very strong.
There seems to be share gain underlying that I think based on.
Your success versus some of the peers are you seeing that like do you feel like you're you've had share gain and what's sort of the competitive landscape look like to you currently.
And Stephen I'm going to let John answer. This question for the most part, but we definitely see a lot of our competitors have kind of fallen down a little bit with a lot of their plants.
Some of those plants have been.
Taken apart to support other plants and there hasnt been a lot of investment in this space. So we do think northern white sand supply could be tight going into next year with that I'll turn it over to John Yes, I would echo those comments from Chuck what we're seeing is folks coming to us.
Previously been customers of ours, but maybe have been we've been kind of a second choice with them and the one thing that you learn when you've been in the sand business for a while if you arent keeping up on your maintenance in <unk>.
Capital spending to make sure that you are reliable when you want a demand production from your plant, sometimes you have a little bit of an issue with that so we're definitely seeing a little bit of that we're certainly seeing a little bit of.
The uptick in what we would consider to be activity in our in our core basins in the Marcellus.
Out in the Midwest.
And down into kind of Oklahoma also so it's a combination of things and one of the things that I would just like to add on to that because I think Stephen you were asking about whether we can pass on some of those logistics.
Expenses onto our customers typically we can but there's usually a lag involved in that for example, if our natural gas price goes up usually we will see the benefit.
Not the benefit, but we'll be able to.
Extract that additional revenue from the customer in the following quarter, it's kind of a back looking things. So we do have a few mechanism. The same goes for kind of rail rail fuel surcharges and things like that so there are there are mechanisms built into our pricing.
They just tend to lag behind a little bit of where our pricing is today.
One other add to that on the rail side. There is no one move in sand more efficiently to North Dakota.
Than we do into our terminal there because of the way it's built on both ends and likewise in the Marcellus we feel we're going to be very Williamsburg comes up we'll be in the same situation.
Yes, no that's good color.
I should have asked the question a little more eloquently about the recovery of costs. So that's very helpful. Thank you.
Your next question is from the line of John Daniel with Daniel Energy Partners. Your line is open.
Alright, Thank you and good morning.
Chuck.
Perfect.
Hey.
Perfect World what percent of your volumes would be industrial versus Frac sand.
And how long would it take to get there.
So and so we do like some of the pricing points in the industrial sand space.
We haven't really put a target on that the one thing. We do know is that we don't know industrial sands like Rick shared does.
He is the Guy who founded the industrial standard dose Joe minerals organization used to be.
U S. Silica so we feel like we're in really good hands, there and he's got a lot of energy needs building the team and we're super excited because we feel we're going to have lots of offerings in that area.
And we definitely like the.
The margins in that business, a little bit better than the oil and gas currently so we're excited to get that going.
Hey.
Got it.
Logistics.
We hear a lot about supply supply chain issues I'm. Just curious are you haven't are there any issues with the rails in terms of getting.
Moving stuff these days just walk.
I'm not as close to the rail side, just your thoughts on that market right now.
Yes, so Jonathan as you know kind of redesigned our entire logistics model for the most part around unit train service and kind of.
Given the railroads good notice as to when these trains are going to leave we don't do a heck of a lot of manifest.
Rail service, so we're not reliant on.
Day to day problems with the railroad, we're having we have a we have a forecast in our schedule with them and so.
So far we haven't seen a huge impact on our business.
If we do it's a train leaving 10 hours late versus leaving 10 hours early but.
But so far the railroads have responded really well, they're good partners of ours.
We have the ability to escalate with our relationships internal to them. We don't ask them for things that are that are unreasonable.
Do you have in that that comes from.
Well thought out on how our logistics operate so so far no.
We see what's going on out there but.
In general if there's power available and it's and it's a relatively easy move the railroads tend to tend to favor that and Thats kind of how unit trains thats kind of our unit train model.
I'd add to that John is that with our investment over time.
We believe in the giant rail yard in the basement and giant rail yard on the origination side. So that helps you buffer the any any hiccups that might be there.
Okay.
That's all I had guys. Thank you.
Thank you Sean.
Yeah.
Your next question is from the line of Samantha Hoh with Evercore ISI. Your line is open.
Hey, guys.
Any questions about this new Appalachian terminal.
And is this one that's dedicated to our exclusive to us.
Yes. It is I'd say, it's a facility that we're building and have exclusive rights to.
Okay great.
And is there.
Could you be potentially.
Using it.
You may access to other non oil and gas customers lately.
This is jody.
Yeah.
Are you, referring to kind of our industrial products business.
Well that or maybe just other sources.
Materials that needs to be imported in.
I think there's been pockets like others.
Well based material.
Yes, it could be transported via rail.
Yes.
At the moment, our focus is going to be on.
The efficient transport of sand and then obviously the site will become.
A place to stage our last mile equipment.
Given that it's a large rail yard and all those types of things theres other commodities or anything that makes sense to come in there.
We'll look at that in the future, but right now we're primarily focused on supporting the sand requirements of E&P and that area E&ps and pressure pumper is in that area. So.
If something comes up we will be opportunistic, but this is being set up as a fan trend both of them are very similar to our operation out in the.
North Dakota.
Okay great.
With regard to the build out of the industrial products business.
And is there a need for capex.
And then assuming that you don't need like a whole separate mine maybe.
Maybe just like extra.
Extra equipment to grind up the product and things like that can you give us a sense of what your capex needs to be for next year to build out that business.
Yes.
There will be some need for capex, but we're kind of going through our budgeting process and looking at that as we speak and so we'll give more guidance overall on our total capex on our March call, including what.
We would be investing in ISP for the most part though we are at least initially focusing on our initial asset base at Utica in Oakdale, and there'll be incremental investments, but I wouldnt say theyre going to be significant.
Overall relative to our overall budget and.
And so, but we will give more clarity on that as we go through and kind of develop our plan as we move into next year on some of the incremental investment we plan to make an industrial sales as part of our budget.
Okay excellent.
And then maybe just one last one Keith.
Can you talk about maybe how conversations about contracts.
Ongoing with them with your customers.
Yes, I mean, it seems to me like that ended the year, where theres people looking at their demand for next year and thinking about how they want to.
Contract out going forward.
You guys have always kind of given year end.
How many contracts you have and things like that I was wondering if you could just kind of update.
Like those type of quite smart combinations.
Yes, certainly.
Particularly with some of the hiccups that some of our customers are seeing these days.
There is renewed interest in getting.
Contracts out there I think from our perspective, we're being.
We're being conservative on what we want to contract versus what we want to put out into the spot space. One of the things that we've gotten very comfortable with over the last 18 months or so is operating in the spot world effectively.
<unk>.
At the end of the day.
As we're seeing kind of the writing on the wall as these price points are improving we're seeing improvement we expect improvement to continue.
Got to be careful about wanting to contract that you've kind of lower pricing versus what may be available in the future, but certainly.
There's a lot more.
Interest in contracts from our customers today, we're evaluating those on a case by case basis, but we're going to do things that make sense for the business long term.
Okay, great. Thanks, Scott.
Thanks.
Once again, if you have a question. Please press star one now we have an additional question from the line of Stephen King Carter with Stifel. Your line is open.
Thanks.
Two quick ones gentlemen, first.
On the potential on the industrial front, you mentioned I believe you mentioned sort of.
Utilization of existing mines.
Are there specific.
<unk> that are conducive to your mines <unk> customers better.
Relatively easy to access from those locations, but should we be thinking about any specific customer.
Any specific product mix or end markets, you are targeting or is it too early to comment.
So we've had rigged onboard for just about a month. So we're letting us put all that stuff together, but preliminary indications is that we will be making some products out of both our mines.
And Additionally, we will explore other opportunities as they come along.
Okay. Thanks, and then the other quick one I wanted to ask you about.
Any thoughts on the on the prop ex acquisition.
By Liberty in any kind of impact do you think that has on the <unk>.
Last mile business in general.
I would just say in general it points to the fact that moving sand to the wellhead is a very difficult job.
And people need to be investing in that space. So I think for us it just points out that from our last mile side, we need to continue to get that business going up and up and running because it's a needed service and there's lots of opportunity in that space.
Okay, great. Thank you.
Yes.
I'm showing no further questions at this time I will now hand, the conference over to Chuck Young CEO for closing remarks, Sir.
Thank you for joining us for our Q3 call. We look forward to speaking with you in March.
This concludes today's conference call. Thank you for joining you may now disconnect.
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