Q4 2021 Smart Sand Inc Earnings Call
Good morning, ladies and gentlemen, thank you for standing by.
Welcome to smart Sand's fourth quarter, 2021 earnings conference call.
At this time all participants are in a listen only mode.
The speaker's presentation, there will be a question and answer session to ask a question. During this session you will need to press. The Star then the one key on your touch it on telephone.
He would go offer assistance. Please press Star then zero.
I would now like turn the conference over to your speaker host.
<unk> Jain director of finance and Treasurer.
Good morning, and thank you for joining us for Smart Sand's fourth quarter 2021 earnings call on.
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.
<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 March nine 2022.
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 would now like to turn the call over to our CEO Chuck Young.
Thanks, Josh and good morning, we enjoyed another good quarter for volume out of both Utica and Oakdale fourth quarter volumes of 872000 tons are up 43% from fourth quarter 2020 levels and up 10% from last quarter.
For the full year, we sold just under $3 2 million tons, which was a record for smart thing given the current outlook for commodity pricing and spending by our customers. We believe we will achieve record volumes in 2022.
While we enjoyed strong sales volumes in 2021 sand prices remained low however, the San market in 2022 we're shaping up to be one of both strong demand and higher prices in particular coming out of winter seasonality issues and production of weather related rail delays in January and February March volumes for smart sand looks strong.
Long pricing improved in Q1, and we expect to continue moving higher in the second quarter and with less than 20% of our capacity signed up under long term contracts, we will benefit from this improved demand and pricing environment.
We believe industry consolidation will continue and our recent acquisition of the Blair, Wisconsin, Frac sand mine from Hi, crush highlights our desire to add high quality assets at a reasonable price.
This facility provides direct CN rail access and has estimated reserves of 110 million tonnes over 43000 feet of track and 20000 tons of silo storage capacity.
<unk> provides an additional source of 40 70 sand, which is currently in high demand in the energy market and has annual capacity of $2 8 million tonnes.
Blair meets our requirements of logistics and operational efficiency with multi unit train capability and ample reserves since the beginning of the downturn. We have added 4.4 million tons of nameplate capacity for less than $9 million, we haven't taken on any debt to pursue those acquisitions and have funded them with.
Cash and equity.
As we announced in January our newly constructed unit train capable trans loading terminal in Waynesboro is up and running the.
The terminal has more than four miles of track is located on Norfolk Southern's class One rail line and services the Marcellus shale in southwestern Pennsylvania, West, Virginia, and Eastern Ohio.
Williamsburg can trans load in excess of 1 million tons of Frac sand per year, and there are opportunities to expand that facility as we grow our market share in this area.
The terminal will also serve as the new northeastern hubs for our smart system last mile well site storage solution.
We look forward to our Waynesboro terminal driving incremental opportunities to grow our business, including our smart system utilization as we did with our van Hook terminal in the Bakken.
Yes.
The new terminal is exciting for us not only because it expands our presence in the Appalachian basin, but it also provides ESG benefits to our customers in the region by reducing trucking mileage and associated carbon emissions related to sand delivery.
We believe that bulk commodities belong on rail and that's sustainable logistics must include terminals close to our customers drilling activity.
Our mine to well site rail and terminal approach yields is safer cost efficient and more reliable supply chain.
While the outlook has improved for oil and gas we are equally excited about our traction we are seeing in our industrial product solutions Division, we have hit the ground running and had our first industrial product sales in the fourth quarter. Our customer list is growing rapidly and by the end of the first quarter, we will have shipped industrial products to <unk> customers.
We believe this is only the beginning and are excited about the opportunity to diversify our business into the industrial products segment.
We.
So have been busy deploying smart systems by the end of the first quarter, we expect to have two smart pad fleets.
And six smart depot silos only fleets operating in the field.
With our fast start in 2022 we expect smart systems to generate positive contribution margin this year.
By using our smart systems, our customers can reduce the number of trucks needed to deliver since the well site by more than 30% versus our competitors' offerings, providing our customers with substantial delivered to the wellhead cost savings. Additionally, by taking trucks off the road, we benefit our communities by reducing accidents carbon emission.
<unk> noise and dust.
E. S. G goals are important to smart sand and its customers and smarts and helps achieve those goals by improving the efficiency and reducing impact.
Our balance sheet remains strong today, we have 11 million in cash on our balance sheet and approximately 30 million in liquidity.
We will continue to remain disciplined with the capital spending while pursuing projects that will generate returns in the future.
We remain excited about our future for a number of reasons.
Our balance sheet remains in great shape, and we have the assets in place to generate significant free cash flow during an up cycle.
With mine situated on four class one railroads, we now have the logistics in place to more efficiently deliver sand to our customers wherever they are operating.
The market for sand has tightened significantly which should allow us to generate strong returns going forward.
We operated the smart pad successfully for four quarters, we look forward to expanding our last mile market share.
Industrial product solutions will diversify our business at margins that should exceed oil and gas margins and provide more stability to our earnings profile.
As always we will continue to keep our eye in the future and we will always keep our employee and shareholders' interests in mind in everything we do and with that I'll turn the call over to our CFO Lee <unk>.
Thanks, Chuck we're excited about the volume pick up we witnessed both in the fourth quarter and throughout 2021.
As Chuck indicated fourth quarter, 2021 volumes were 10% higher than third quarter levels.
The opening of our Waynesboro terminal combined with a tight market for proppant and strong commodity prices should lead to increased sales volume in 2022.
The addition of the Blair mine in Wisconsin.
It gives us direct access on the C N, which will provide additional markets in Canada to expand our customer base.
As Chuck highlighted we had been able to expand our operations and logistics footprint over the last two years with the additions of the Utica and Blair facilities and the Wang sport terminal without adding any debt to our balance sheet and 2021, we reduced our debt levels by $7 million.
We remain committed to low leverage levels, a prudent capital structure, maintaining adequate liquidity levels and improving our shareholder returns.
Now we'll go through some of the highlights of the fourth quarter compared to our third quarter 2021 results.
Starting with sales volume, we sold 870000 tons in the fourth quarter 2021, a 10% increase over the third quarter 2021 volumes of 790000.
We sold approximately $3 2 million tonnes for the full year 2021.
Which represents the highest sales volumes in company history.
Total revenues for the fourth quarter 2021 were $35 1 million compared to $34 5 million in the third quarter 2021.
San revenues were $34 1 million up 9% sequentially.
And logistics revenues was up slightly.
No shortfalls in the fourth quarter and had $2 7 million of shortfalls in the third quarter.
Our cost of sales for the quarter were $39 4 million compared to $36 5 million last quarter <unk>.
Production costs were higher sequentially due to higher utility costs, driven by increased natural gas prices higher freight expense from increased shipments increased maintenance expense to increase activity and weather related issues as well as increased labor costs, primarily related to higher incentive compensation related to year end bonus payments.
Profit was also negatively impacted in the fourth quarter by $2 2 million inventory impairment due to the estimated waste products and our inventory at year end.
Total operating expenses were $8 5 million compared to $6 7 million last quarter.
In the fourth quarter, we restored variable compensation programs that had been suspended in 2020 due to the pandemic, which led to higher salary and wages sequentially. We also had higher consulting and legal fees in the quarter.
For the fourth quarter of 2021, the company had a net loss of $12 2 million or a negative 29 cents per basic and diluted share.
Compared to net loss of $7 3 million or a negative <unk> 17 cents per basic and diluted share for the third quarter 2021.
The net loss for the fourth quarter was driven by higher freight expense increased utility and maintenance expenses restoration of certain variable compensation programs and a $2 2 million inventory impairment due to the estimated waste product in inventory at year end.
For the fourth quarter of 2021 contribution margin was $1 9 million and we had a negative adjusted EBITDA of $4 5 million.
Compared to third quarter contribution margin of $4 1 million and negative adjusted EBITDA of $1 million.
For the fourth quarter of 2021, we had negative $9 3 million and free cash flow.
Generating negative $5 one.
$1 million in operating cash flows while spending $4 2 million on capital investments.
Fourth quarter cash flows was negatively impacted by the higher expenses I had discussed and increased capital expenditures primarily related to the construction of the Waynesboro terminal.
For the full year 2021, we had $21 2 million of free cash flow.
Are they generating $32 4 million in operating cash flows while spending $11 2 million on capital investments.
During the quarter, we didn't use our revolver and still have no outstanding borrowings other than $1 million in letters of credit.
Our unused availability under revolver is COVID-19 million we'd.
We paid down $1 7 million against our notes payables and equipment financings in the fourth quarter and pay down approximately $7 million in 2021.
We paid approximately $6 5 million to acquire the Blair facility after.
After closing the acquisition, our current cash balances approximately $11 million.
Between cash and our availability on our revolver. We currently have approximately $30 million in available liquidity.
In terms of guidance for the first quarter.
Currently we expect first quarter 2022 sales volumes to be flat with fourth quarter 2021 results.
January and February activity were negatively impacted by weather and logistics issues that market activity is expected to be strong in March.
We currently expect the month of March to represent approximately 40% of our sales volumes for the first quarter.
As a reminder, the first quarter a year is typically our lowest contribution margin quarter due to higher inventory adjustment expense as we normally draw wet sand from inventory to meet sales demand during the winter months.
So while we anticipate improving margins in 2022, we don't expect to see that improvement to start to materialize in our margins until the second quarter of this year.
We completed our initial phase of the Williamsburg terminal in January .
Capital expenditures that we had projected to be spent in 2021 ended up being pushed into the beginning of 2022.
This year, we expect capital expenditures for the year to be in the 25 million to $30 million range, including the $6 5 million. We recently spent acquiring Blair.
This concludes our prepared comments and we will now open the call for questions.
Thank you, ladies and gentlemen, if you'd like to ask a question at this time you will need to press the Star then.
The one key on your touched on telephone.
To withdraw your question you May press the pound key please standby, while we compile the Q&A roster.
Now first question coming from the line of Stephen <unk> from.
From Stifel. Your line is open.
Thank you and good morning, gentlemen.
Good morning.
A couple of things for me if you don't mind just to start with.
So you mentioned you mentioned sort of the seasonality in contribution margin of <unk>.
Can you give us any.
Guidance on how to think about the magnitude of price moves that youre seeing.
Relative to the input costs that you referenced that were a headwind in the fourth quarter.
Yeah sure. It's Steven So I'll talk about pricing, a little bit and Lee might be able to give a bit more color, but pricing is definitely higher today than it was last year.
We're seeing F O b mind pricing.
Into the into the 30 plus range right now and last year.
F O b mind pricing ranged anywhere from call. It you know 15 Bucks to 20 or so so we're seeing a pretty good price increase right now and we expect that to continue for the foreseeable future demand is strong. So we're in a ramp up mode right now.
Or are you seeing any Paul we've been hearing more more northern white getting pulled out in Texas I use are you seeing that trend as well.
Well, we're certainly being asked about it.
Typically our strong markets are the Midwest and the northeast, but we get calls every single day on I'm moving sand down to the <unk>.
Down to West, Texas, one of the things that's happening Stephen right now is that obviously, we've been servicing the northern markets mostly.
And our rail fleet is sized mainly for that so we're having to add additional cars.
For some of these other markets that are coming on strong so.
All indications is theres going to be a lot more sand being taken out of our mine sites, which we're pretty excited about.
Great. Thank you.
The second thing I wanted to ask you about is and I think just probably tie two things together. One is I was curious about the acquisition and one that the.
Blair facility is operational.
If you could tie that in I mean, you mentioned, 40% of your first quarter volumes in March.
Is that kind of run rate on a monthly basis sustainable.
I think that gets to like 340 or 50000 tons in March.
Yeah, Steve in terms of the volumes for March Yes, you know we had you know we had some operational and weather issues that led.
Led to delays in January and February were done a little bit of a catch up in March but that level is sustainable going into the second quarter and throughout the rest of the year. We believe we can support that we're adding additional railcars or ramping up activity at Oakdale, our mining season.
<unk> as well, so being able to run at that level of activity in the second quarter and beyond is something we are we believe we will be able to do and deliver this year. So we're not including a blur in there.
So the nameplate capacity at Oakdale is nameplate five and a half.
And obviously our utilization of that has been nowhere near that so we've got room to grow there, but we've had to do things like add additional railcars. There and then Blair just Don Blair player has been idle since June 2020, so we.
Need to go in and do kind of a full assessment of what needs to be done to bring that back online and we need to also line that up with we now have an asset on the sand that we can go out and market to customers.
Primarily in U S markets, but also really gives us an opportunity to get into the Canadian market on that rail lines. So we need to go out and start really assessing the market appetite and line that up with kind of the expectation of what it's going to take us to bring that plant online and so it's too early to kind of give you guidance on when that plant could start coming on but we aren't doing that evaluation.
In the second quarter or in the first quarter and by the call in May we should be able to give you an update at that point it should provide us a pretty decent supply of 40 70 out of that mine.
Excellent just a quick a quick follow on to that is the Capex you expect around Blair part of that 25 to 30 million number.
Well that that 25 to 30 million includes a $6 5 million for Blair also includes about three to 4 million of Capex carryover from last year for Waynesboro and so if you back those two out you get to kind of a $15 billion number on the low end, which is in line with what we spent in terms of our guidance for 2021.
So yes to get to that higher number. The 20 30 million that does include some room for discretionary investment potentially at Blair.
Our investments around other terminals et cetera to kind of help support incremental sales.
Okay, great. Thank you gentlemen.
Thank you.
And our next question coming from the line of.
Evercore ISI your line is open.
Hey, guys congrats on the Blair acquisition.
Thank you.
Just I mean I realize it's still very very early days, but is there an opportunity for you to maybe reach out to them for my employees at that plant.
I'm just kind of wondering like how quickly you could ramp that plant up if you needed to.
I think we potentially see volumes by year end from there.
Yes, so samantha.
Yeah, I mean, the answer is yes, we'll be reaching out to former employees of that plant.
It's been a relatively rural place in Wisconsin, and Blair in there, but our anticipation is that we'll be able to staff that plant when we're ready to start operating it.
We've gone out yeah, we know we know what we bought there we're excited about it it's got a fantastic logistical situation massive rail yard it brings up for a class one railroad into the smart band.
Into our into our portfolio here, so it's super exciting to us from that perspective.
Aware of staffing issues and everything that are.
Every industry is dealing with right now, but in that particular area. We think we'll be able to utilize some of our oakdale employees to help get it up and running and we think we will be able to.
Youll get folks who used to work at that mine back.
Okay, great maybe sticking with the rail topic.
Are you seeing in terms of you know opportunities ASEAN scar is there also constraints in that area as well.
We haven't seen any so far I've got I've got plenty of.
Plenty of railcar.
Railcar offers some proposals in place to handle our requirements.
I think that one of the things that you have to remember about railcars is at the height of the northern White sand space. There was 70 to 80 million tons of northern White capacity that was moving on rail and so rail assets were built for that railcars were built for that and although some of them did go to the scrap or theres still a lot of what we call small cube covered hopper railcar.
Cars out there and we don't anticipate that that'll be a drag on our ability to meet our volumes and one other add to that I think with all the trucking issues that we're seeing out there.
What we've been preaching for years is that you need to do this stuff of bulk commodities by rail and get as close as you can to the activity I think people are starting to come around to that just because of the truck use kind of unmanageable when youre doing it long distance. So we think rail is going to pick up activity on railroads are going to pick up.
As it relates to Frac sand.
Maybe I'm just a little housekeeping.
Historically.
Sure It makes sense to take or pay versus spot sales in your 10-K I couldn't find that this released yesterday.
But yeah. It was just kind of curious if you could update on that like I know you said less than 20% of your capacity is fine.
They're long term contracts.
What does that mean in terms of it makes sense take or pays.
There's a spot sales.
Well, our long term contracts typically have some form of take or pay in them and so when we say long term contract. That's typically a contract that will have some kind of base take or pay it's really dependent on the customer.
What's negotiated so.
The take or pay long term contracts really kind of.
For us are typically synonymous currently today are under longer term contracts, we have probably about 20, 25% of our activity currently is contracted.
Okay.
With the way the markets move in is a good thing because you know over the last year or two the price hasn't been at points, where we would be interested in doing a long term now I will say a fair amount of that spot businesses with long term customers. So when we say we got we do have a lot of room for upside in terms of being able to move pricing.
As pricing moves on a spot basis, but also we're working that with existing long term relationships that we've had.
<unk> previously been contracted with us or been good spot customers for a long period of time.
And are you seeing customers approach you with interest in signing long term contracts and I take it the pricing would be higher than what it was like ethylene mine last year, but maybe not.
It's where it is currently at or maybe it is higher.
Yes, certainly there is there is more interest in signing long term contracts and typically you do see that as as the spot pricing gets higher folks want to you don't want to mitigate the risk there and take advantage of potentially getting into long term. So we are having those discussions today.
The I would term the contracting environment to be healthy today and something that we are interested in as opposed to last year, where the where the long term contract pricing was not something we'd want to tie two for a long period of time and that's your people were having trouble getting their sand now, which as you know.
It definitely is a pause.
Positive for us.
We're definitely excited about that.
Excellent.
Another question I had was just with regard.
Or smart system. It sounds like you know it probably impacted margins on a negative basis last year and can you give us a sense of just how how how much that is like I mean, I know you said it like to be.
Right.
Our contribution margin positive this year.
I'm kind of wondering what sort of a negative impact it had last year.
Well, Yeah last year I think you can say that it had a negative impact probably again on contribution margins in let's say the $2 million to $3 million range. Okay.
Not too much.
On the industrial initiative, you know what end markets are you targeting.
Yeah, So we're targeting a foundry glass.
<unk>.
Industrial.
Which includes kind of turf and things like that basically we're not limiting ourselves onto Hoover targeting industrial.
Industrial is a.
Has been a bright spot for us.
As we look to diversify the business the team that's come in as you know.
Has it come in and made a real impact there and as we're growing that business. We expect to have more to talk about over the next kind of few quarters. Yeah. I think that the team that we have is pretty experienced in the industry kind of.
They're well known and they're really excited that they are able to originate industrial sand on four different class one railroads.
Which I think is pretty unique.
And you can service these products directly from your two existing mines do you foresee having to put in more cancer.
I'm, sorry, I didn't catch that.
Page it outright if you're in there yeah, sorry, Keith service this business out of your existing production.
Alright there.
To put some capex here, maybe next year if not this year.
Yeah, we have a little bit we have a small amount of capex in the budget to handle things like bagging and other stuff like that but ultimately yes, we're supporting these out of our existing mining assets.
Okay that does it mean for me thanks, guys.
Alright, thank you.
Okay.
And our next question coming from the line of Jonathan Chaplin of Caplan capital. Your line is open.
Hi, good morning, gentlemen.
Two questions.
Is that Oh, Yeah, you had record volumes here.
When I look back at your history, when you're kind of operating at record volumes you were.
Making a fair amount of money and right now we are still losing money and I'm wondering whether this is a if you consider this a a.
Smart sand specific issue or is there an industry issue.
And what are the what are the factors that you think.
You didn't need to be a need to change here in order for you to to grow profitably going forward.
Well, yes, I think this is more of an industry, particularly for northern White I think you'd go back to our previous high volumes of 2018, we had a pricing well north of what we had in 2021 and what we currently have and so because of the switch from regional in 18 and 19 in <unk>.
Moving some of the demand there it led to pressure on northern white pricing over the last three years. It has brought down our margins are relative to sales activity. So and as you got in 2021 as you can see our volumes are improving and we and because there has been supply taken off the market for northern why we do believe the supply demand balances are getting back in.
Line and as we go into 2022, and we're already seeing that in the pricing proven that we're getting.
We're starting to get a tier in the light of the latter half of the first quarter. So we do see that that's going to start leading desk, having improvement in margins through improved pricing.
As you've seen our volumes pick up is now because of the supply and demand are getting back in balance activities continuing improve we don't see a lot of new incremental supply coming on and that should lead us to start getting a permanent pricing and getting our profitability and margins back to where it was previously at these types of volume levels.
Okay and do you see.
It's things are going this direction do you see yourself as.
Cash flow positive.
And this year.
Yeah.
I'm not going to give a prediction as to when we'll be cash flow positive, but I will say, we're definitely focused on improving our margins improving our cash flow and as prices improve.
And we get a higher utilization of our asset that should lead to a better unit cost for us over time and that should drive improving margins and improving cash flow.
Great. Thank you very much.
Thank you.
And we have a follow up question from Stephen <unk> from Stifel. Your line is open.
Thanks, Thanks for taking the follow up.
The overall market just curious on sort of your take I mean, we get asked a lot about frac sand supply and demand, especially given what we're seeing right now as far as tightness in prices rising.
What is your take kind of on the current market the capacity the sum of these shuttered mines potentially coming back on stream I'm just curious how you guys evaluate.
The current supply and demand side of.
Your your business over the next year.
Well I think theres, a north a lot of northern white capacity has been taken out of the marketplace.
And one thing we've done during the period as we've basically taken our capacity and almost doubled it over the last year by picking up some other assets getting us onto other rail lines.
And now it looks like the utilization of those assets is picking up so we feel pretty good about that.
John If you have anything to add yeah, and I would just add just add with regard to <unk>.
Frac sand demand in the market conditions, I mean, I think that you know.
Everybody is aware of some of the challenges that some of the regional mines are under right now.
And a lot of that is has to do with plants not being maintained properly and things like that but ultimately.
What's happening in northern White is is as Chuck mentioned, a lot of supply has been taken off the market.
The supply that maybe people were relying on in these regional mines is not exactly what we thought and when you look at the entire supply chain.
When youre trucking when youre, having trouble finding truckers to to move that sand it kind of leads to bottlenecks all over the place and certainly we think we've got a pretty good solution with our commitment to rail.
Rail to terminals that are close to the acreage that folks want to operate in and when you shorten those truck rides on the last mile Youre able to be more efficient and eventually.
Folks folks will recognize that as theyre, having kind of these supply bottlenecks all over the place. We think the market is going to be strong. This year, certainly high oil price why natural gas price helps with that but.
But ultimately we're expecting to continue growing this year and as we had mentioned before we think pricing is going to be.
The March up and generally it looks pretty good.
There definitely is a panic out there from a lot of the consumers of sand.
Where theyre going to get it from and how theyre going to be able to support it logistically.
And a lot of that points back to having to utilize rail.
It's just the trucking long distances is too difficult.
Okay. Thank you and just.
One final.
And I know, you're not going to want to give me a specific answer but when we when we look at the last couple of years.
It can be a little bit foggy based on some moving pieces, but the quarterly the first quarter change in contribution margin per ton rate.
Obviously that tends to go.
To be impacted by the inventory adjustments et cetera.
Is that kind of a move.
Like should we be thinking about sort of three to $7 type impact in the first quarter I'm, just trying to get a sense for the moving pieces again.
I'm not sure if you can add a little more clarity or not.
Well again, there's been a lot of moving pieces in the past, but I think.
If you look at kind of last year's results first quarter to second quarter.
There was about a two to $3 difference per ton in contribution margin from first quarter second quarter, driven by you know us.
I was having a higher expenses in the first quarter related to inventory adjustment et cetera.
Okay. Okay. Yeah, that's why we can all work through it but thanks for the color I appreciate it.
Thank you and I'm showing no further questions at this time I would now like to turn the call back over to Mr. Chuck Young for any closing remarks.
Thank you for joining us for our Q4 call. We look forward to speaking with you in May.
Ladies and gentlemen that does conclude our conference for today. Thank you for your participation you may now disconnect.
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