Q1 2022 Smart Sand Inc Earnings Call

May 12, 2022

Good morning, ladies and gentlemen, thank you for standing by and welcome to the Smart Sand's first quarter 2022 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 this session you will need your questions starting the one key on your Touchtone telephone.

If you recall offer assistance at any time. Please press Star then zero.

I would now like to turn the conference over to your Speaker host, Josh <unk> director of Finance and Treasurer. Please go ahead.

Good morning, and thank you for joining us for Smart Sand's first quarter 2022 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.

Art sand disclaims any intention or obligation to update or revise any financial projections or forward looking statements, whether because of new information future events or otherwise.

This conference call contains time sensitive information and is accurate only as of the live broadcast today May 12 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 refer to our most recent press release and 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 <unk>.

First quarter volumes of 852000 tons are up 12% from first quarter 2021 levels and trending up in March but overall, we were essentially flat with last quarter due to logistics and weather issues in January and February .

However sales were strong in March and March volumes represented 43% of our tons sold during the first quarter.

Being up what we believe will be a strong run rate for the second quarter and balance of 2022.

Commodity prices have remained strong and we expect to achieve record volumes in 2022. Additionally, we completed the purchase of a sand mining and processing facility in Blair, Wisconsin with the nameplate processing capacity of $2 9 million tons of Frac sand per year.

That remains idle and we are currently evaluating whether the equivalent from that facility will have its best economic use at the Blair site or another of our locations. We expect to have more to report on this subject in later 2022.

Pricing continues to improve as a result of strong market demand as mentioned on our last call first quarter results generally reflected pricing that was put into place in the fourth quarter of 2021, so far our second quarter pricing is showing substantial improvement similar to others. We are experienced.

The increased costs due to inflation logistical constraints and labor shortages. However, we are prepared to meet these challenges and expect to see improved operating and financial results starting in the second quarter with less than 15% of our capacity signed up under long term contracts, we have the opportunity to take advantage.

The improved market fundamentals, which should lead to higher prices and higher volumes sold.

We are very pleased with the initial results we have seen at our newly constructed unit train capable trans loading terminal in Waynesboro, Pennsylvania more than half of those tons shipped through this terminal in the first quarter. We shipped in March we expect a larger percentage of our volumes will be shipped through this terminal going forward, which will drive.

Our margins higher.

The new terminal is exciting for us not only because it expands our presence in the Appalachian basin, but also because it provides ESG benefits to customers in the region by reducing trucking modes and associated carbon emissions related to sand delivery.

As we have said many times independence, we believe the bulk commodities belong on rail and the sustainable logistics must include terminals close to our customers drilling activity.

Ill remind to well site rail and terminal approach yields is safer cost efficient and more reliable supply chain.

We were pleased with the traction, we're seeing or industrial product solutions Division our product list.

<unk> customers and geographical reach are all expanding quickly.

We are working towards penetrating the glass building products foundry filtration recreation and other markets throughout North America.

Further we plan to broaden our service capabilities with blending packaging as well as finer grade products in the second half of 2022.

We have seen an uptick in interest in our smart systems. We currently have eight smart depot Siloed fleets operating in the field two of which are equipped with our smart pass trans loading system. We continue to expect positive contribution margin from this business in 2022.

By using our smart systems equipped with the smart pad our customers can reduce the number of trucks needed to deliver sand to the well site by more than 30% versus our competitors' offerings, providing our customers with the substantial delivered to the wellhead cost savings. Additionally, by taking trucks off the road, we benefit our communities by reduced.

Accidents carbon emissions noise and dust.

<unk> goals are important to smart sand and its customers and smart systems helps to achieve these goals by improving efficiencies and reducing impact.

Our balance sheet remains strong today, we had $5 million in cash on our balance sheet and approximately $24 million in liquidity.

We will continue to remain disciplined with capital spending while pursuing projects that will generate long term value.

We're 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 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 improved operating and financial results beginning in the second quarter.

<unk> operated the smart pad successfully for more than a year, we look forward to expanding our last mile market share.

Industrial product solutions is growing quickly and is diversifying our business at margins that exceed oil and gas margins and provide more stability to our earnings profile.

As always we will continue to keep our eye on the future and we will always keep our employee and shareholders' interest in mind in everything we do and with that I'll turn the call over to our CFO Lee <unk>.

Thanks, Chuck now I'll go through some of the highlights of the first quarter compared to our fourth quarter 2021 results starting with sales volumes. We sold 852000 tons in the first quarter of 2022, 2% decrease from the fourth quarter 2021 volumes of 872000 tons.

Chuck discussed weather and logistical issues impacted shipments in January and February sales volumes were strong in March and we expect that trend to continue.

Total revenues for the first quarter of 2022, or $41 6 million compared to $35 1 million in the fourth quarter of 2021.

Sand revenues were $38 3 million up 12% sequentially due primarily to higher pricing and $1 9 million in shortfall revenue revenue recognized in the quarter.

Cost of sales for the quarter was $43 6 million compared to $39 4 million last quarter production costs were higher sequentially due to higher utility costs, driven by increased natural gas prices increased equipment and maintenance expenses and higher freight expense due to higher end based on sales in the quarter.

Total operating expenses were $7 9 million compared to $8 5 million last quarter. The decrease was mainly a result of bonuses that were paid in the fourth quarter of 2021.

For the first quarter of 2022, the company had a net loss of $5 9 million or <unk> 14 per basic share and diluted share.

Impaired to a net loss of $12 2 million or 29 per basic and diluted share for the fourth quarter of 2021.

For the first quarter 2020 to contribution margin was $4 3 million and we had a negative adjusted EBITDA of $1 9 million compared to the fourth quarter contribution margin of $1 9 million and a negative adjusted EBITDA of $4 5 million.

For the first quarter of 2022, we had negative $19 million in free cash flow due to a negative $8 7 million in operating cash flows $3 8 million on capital expenditures and six.

$5 million spent too.

To acquire that Blair assets during the quarter, the $3 8 million in capital expenditures in the quarter was primarily related to the completion of our Waynesboro, Pennsylvania Trans loading terminal.

Operating cash flow was negatively impacted by an increase in working capital late in the quarter due to the increased sales activity in March which we expect to be a benefit in the second half of the year.

During the quarter, we didn't use our revolver and we still have no <unk> outstanding borrowings other than $1 million in letters of credit.

Our unused availability under the revolver is currently approximately $19 million.

We paid down $1 8 million against our notes payable and equipment financings in the first quarter.

Our current cash balance is approximately $5 million.

Between cash and our availability in our facilities. We currently have approximately $24 million available liquidity.

In terms of guidance for the second quarter. We currently expect sales volumes to increase by more than 25% from first quarter levels March volumes represented 43% of our total volumes in the first quarter.

St March activity levels continue into April and have strong visibility for the balance of the second quarter.

Pricing continues to improve which combined with higher sales volumes should lead to higher contribution margins in the second quarter.

We spent $10 3 million in capital expenditures in the first quarter, including $6 $5 million related to the acquisition of the Blair facility.

We continue to expect capital expenditures for the year to be in the $25 million to $30 million range with the additional capital capital over the remainder of 2022 currently planned to be spent on efficiency projects at Oakdale, and Utica and investments to support our growing Ips business.

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 Touchtone telephone.

We will be compile the Q&A roster.

No first question coming from the line of John Daniel with Dania Energy. Your line is open.

Hey, good morning, gentlemen, thanks for.

Put me in the queue.

I guess my first question is really just tied to sort of current pricing.

Trends Youre seeing there and then willingness on your part.

Other customers part to start locking up some of those volumes and what could be a duration of that.

Yeah, sure Hey, John Yes.

So in the early first quarter, we saw or what we call our fob equivalent the mine gate pricing kind of low to mid twenties.

Now were.

As we exit and into the second quarter were well into the <unk> now and those pricing our.

Our pricing.

We're able to increase our pricing.

Regularly here right now the market is still pretty tight for sand.

As far as outlook for the rest of the year.

Yes.

Again, assuming strong commodity price oil and natural gas.

And relatively low amounts of contracted volume most of our volume right. Now is spot we should we should be able to keep moving the price up okay.

I know you don't want to put an exact price on this chocolate.

Directionally when would you want to start contracting.

Well, we're always interested in in contracting when it makes sense for both us and the customer and so we're kind of at that one.

Dan was in the teens right, we weren't really interested in price and pricing.

Don't need to be we don't need the C sand.

Much higher than we are right now to start to be interested in long term contracts.

As you guys know, we take a long term view of this business. We believe that we run best when we have <unk>.

<unk> that we can count on over time.

And so our goal is to be kind of 60%, 70% contracted overtime.

Got a ways to go to get there so John .

That was John just to clarify but.

We're also seeing customers.

It's one part, making this and its another part move in.

To handle the kind of volumes are in the marketplace now people actually have to have a plan in place with the rails. So we actually think there is more appetite for contracts because of that.

Got it and then just a final one for me is I think you'd noted.

Smart pass systems.

If everything went perfectly throughout the balance of this year, where do you think you could exit 'twenty two.

Okay.

Yes.

Smart systems and we're currently at eight I think we could probably increase our utilization 10% to 20% in terms of additional units.

Starting kind of in the third and fourth quarter. This year, okay great.

That's it for me guys. Thank you very much.

Thanks, John .

And our next question coming from the line of Stephen <unk> with Stifel. Your line is open.

Thanks, Good morning, gentlemen.

Good morning.

So thanks for taking the questions.

Two things from me.

The first would be when I when I think about the.

The quarter and I sort of think about the year.

Profitability of contribution margin per ton.

I mean, it looked like it was it was up a little bit on the apples to apples basis sequentially.

What I would think given the pricing.

It would be up more and I'm just thinking about if you could give us any color on sort of how it evolved throughout the quarter and I mean, the kind of.

Okay.

How we should be thinking about.

Levels of contribution margin per ton you can you can reasonably get to over the next several quarters.

Yes in terms of the quarter again as we highlighted.

Because of weather and some operational issues January and February were impacted not impacted by that and then pricing as well didn't really start to pick up until later in the quarter in March.

So we were kind of impacted negatively on an operating expense basis or in the quarter and start to really come out of that with the higher volumes and improved pricing and to March and also as we've always highlighted in the past typically in the first quarter is our highest expense quarter, because typically we are drawing down inventory and that gets record.

<unk> expense. So we typically have higher operating expenses in the first quarter as we draw down on inventory from our our wert Paul to meet self <unk>.

Volumes in the quarter, so that combination of factors led to probably higher expenses in the quarter versus how we expect to see expenses going into the rest of the year and then coupling that with what we're already seeing improved pricing.

That should lead to our margins starting to improve in the second the second quarter and picking up from there and I think at the.

Where we're at today, assuming we can get to the volumes that we're guiding to our better and maintain or improve on those levels for the rest of the year that we believe our contribution margin should be approaching $10 per ton in.

In the second half of this year.

Okay, No that's great color. Thank you.

Helpful.

When we think about your volume potential given.

Given the acquisitions I know given some of the constraints on the rails et cetera.

And you're obviously your volume guidance for the second quarter is very healthy right you had a great great March.

In this type of market.

I mean it.

It seems like Youll do $4 million ish tons, this year, but but what sort of a level set us.

Sustainable.

Volumes that you can do given what you see in the market from rails and demand et cetera.

So I would just say that with what we're doing right now and we've actually had to really gear up to the plant with both employees and additionally, with logistics.

We feel like there is more there's more demand right now than we have supply as we scale as we scale up the plants, but we see there's pretty good runway ahead.

I don't know leave you have something else to add to that.

Yes, I think in terms of.

I think what Youre asking is seamless.

Can we go and kind of if we assume this market stays consistent or better what kind of run rate we could be at.

And right now.

There are several drivers to getting our begin right now we're guiding to 25% up from the second quarter from first quarter.

That gets you north of 1 million tons, a quarter can we do better than that going into the second half of the year. The answer to that is yes, but it's going to be a combination of three factors, making sure. We sell we can sell the product mix at our mine production Max make sure we and we still have constraints in terms of labor and getting fully staffed at Oakdale like everyone has today to get that staffing up and then five.

As Chuck alluded to and we talk about we are about a bulk commodity business moving very large unit trains and that has to be done very efficiently and thats a combination of us having the railcars and the and the right mix of sand, coupled with the railroads being able to deliver those efficiently and the right landing spot actually we're having conversations with with.

Our rail our main railroad out of Oakdale right now about lengthening trains from the standard 100 cars to trying to get up as large as 200 cars.

Now, we actually have the bookends both in the Marcellus and the Bakken to do that so I think youre seeing the railroads theyre, having staffing issues too, but if we make these trains locker we can ship the same amount of sand with.

With the same amount of people from them, yes. So.

So if you look at our current effective capacity between Oakdale and Utica, we have about $7 1 million tons of annual capacity.

And so if these things continue to line up.

And this market stays where it is or and consistent or better we should be able to get up to a 70% to 80% utilization of that.

As we start getting into the second half of this year.

Great.

Very helpful.

Two other quick ones. The one was on the balance sheet.

Obviously in a lot of a lot of oil service companies have seen this in the first quarter working capital was whereas it drained.

Especially on the receivable side, how should we think about sort of the different pieces of working capital and working capital as the year unfolds.

Yes.

Well the way working cap I mean, right now we had a big buildup in receivables in March that should.

We are expecting continued increasing sales in the second quarter, so actually our receivable balance should be increasing but won't increase at the same rate. So we should get some cash conversion from that typically in the second and third quarter actually our working capital we do build inventory because we are building our wet poly inventory over the summer months, so that'll be a kind of a.

Build of inventory and working capital over the course of the second and third quarter, which then would kind of turn starting in the fourth quarter and first quarter. So.

You also you will see some increased buildup in working capital based on sales activity in the traditional wet summer build of inventory over the next two quarters.

But then I think youll start to see that to really break and generate positive.

Benefit from working capital probably in the fourth quarter.

Great. Thank you and then just one final one I don't know this is.

Probably a little farther out when we think about the some of the efforts youre, making on the industrial side.

What would that sort of start to really impact kind of volumes and contribution margin per ton et cetera is that sort of a 23 plus event or it could it be before that.

Yes, I think right now what we've seen is.

The industrial sand cycle has pretty much a long sales cycle. So you've got to really build in and kind of build up the relationships and then from that you can really start driving those volumes and revenues. We did actually have a positive impact industrial sales in the first quarter, but it's a pretty small number but I would based on our current kind of activity. We can start really.

Trading that market more significantly over the next couple of quarters that.

Industrial sales could start delivering a more meaningful number kind of in the fourth quarter or early 2023.

Great Rick.

We've done a great job on that and we actually penetrated a lot of different customers.

They're getting they're getting used to what we can do and we think it's going to grow significantly over the next year or two.

Great that will all be around or shrinking this year.

Okay. Okay that makes that makes sense because it's very helpful. Thank you.

Thank you.

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 first quarter conference call. We look forward to speaking with you in August .

Yes.

Ladies and gentlemen that does conclude our conference for today. Thank you for your participation you may now disconnect.

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