Smart Sand Inc. Q1 2023 Earnings Call

Good morning, and thank you for standing by welcome to Smart sand incorporated first quarter 2023 earnings conference call.

Time, all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.

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To withdraw your question simply press Star one again.

As a reminder, today's conference is being recorded.

And I would now like to hand, the conference over to your host today, Chris Greene VP of accounting Chris. Please go ahead.

Good morning, and thank you for joining us for Smart Sand's first quarter 2023 earnings call on the call today, we have Chuck Young founder and Chief Executive Officer, Lee <unk>, 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.

Could cause actual results or events to materially differ from those anticipated.

Fleet discussion of such risks and uncertainties. Please refer to the Companys 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 may nine 2023.

Additionally, we will refer to the non-GAAP financial measures of contribution margin adjusted EBITDA and free cash flows during this call.

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 or our public filings for our reconciliations of gross profit to contribution margin net income to adjusted EBITDA and cash flow provided by operating activities to free cash flow.

I would now like to turn the call over to our CEO Chuck Kelly.

Thanks, Chris and good morning.

Smart sand delivered another quarter of strong operational and financial results in the first quarter. We sold approximately $1 2 million tons. This is our fourth consecutive quarter of sales volume of $1 1 million tons or more we generated $17 $8 million of contribution margin in the quarter, our third consecutive quarter of contribution margin in excess of <unk>.

$17 million.

Additionally, we generated $1 1 million in free cash flow in the quarter. This is our third consecutive quarter of positive free cash flow.

Adjusted EBITDA for the quarter was $8 1 million a substantial improvement over the first quarter of 2022, and a strong number for a quarter that is typically impacted by higher reported seasonal production cost and Lee will discuss in more detail during his presentation.

We could not have achieved these results without the dedication and hard work of our employees I want to thank our employees for their efforts and continued commitment to smart channel.

We saw solid market demand in the first quarter market demand was strong in the Appalachian basin in this quarter, while we may see some short term moderation in demand due to current low natural gas prices. We believe long term natural gas fundamentals remain strong with increased LNG export activity coming online in North America over the next 24 months.

With our Waynesboro terminal and our strong logistics network in the northeast United States, including our ability to originate sand on four class one rail lines.

We are uniquely positioned to continue to be the leading supplier of high quality northern white frac sand into this market.

We're seeing strong continued demand in the Bakken.

The first quarter is typically our weakest quarter for Bakken activity due primarily to winter weather issues. The trend continue this year was accompanied by some real slowdown and unique customer operational issues. However, those issues are resolving and we're seeing a strong pickup in activity in may in the Bakken and currently expect that increased activity to continue over there.

The next several quarters.

We continue to demonstrate the value of our business model to deliver high quality, northern white sand sustainably and efficiently from the mine so well site northern White sand continues to be the primary source of frac sand in the eastern and western patients.

States and in Canada.

Canada being a major northern white sand market was an important driver for our investment last year and the player mining processing facility in Wisconsin.

May and Duvernay shale basins in northwest, Alberta, and the Montney shale in northeast British Columbia continued to have strong activity to support growing LNG export demand for British Columbia into the Asian markets that Canadian market today, its approximately 80% supplied by northern White sand with limited potential for additional regional sand capacity.

Should lead to continued long term growth and demand for northern white sand into this market. Additionally.

Additionally, <unk> is a new class one origination point on the Canadian National CN origination gives us not only the ability to take advantage of new Canadian markets, but also to provide additional access to the northeast United States and different parts of the Bakken We began investing in the first quarter to bring Blair online and we started shipping.

And this month, we are excited about entering new markets and being able to reach our existing markets and new and competitive ways with respect to the Canadian market. We are bullish on the prospects for strong demand and believe <unk> is the best one that best in class asset we are well positioned to compete in this important northern white market both in the immediate future.

And for years to come.

Blair coming online, we now have direct access to four class one rail lines.

U P. The BNS App and at CN. We also have great connections with VNS and <unk> rail lines with this access to all class one realize combined with our direct control terminals in van Hook, North Dakota in Waynesboro, Pennsylvania, and our network of third party terminals, we can now offer our customers sustainable and efficient.

The effective solutions to all operating basins in North America, we are committed sitting in the northern white sand market. We have made the strategic investments over the last few years to establish <unk> as the premier provider of northern White sand and logistics services in the markets and those investments are all contributing to our improved financial performance.

Frac sand sales remained strong we are continuing to look to grow our other business segments utilization of our smart system last mile offering continues to improve we're gaining momentum as we start to penetrate the market with our smart systems technology. We have added Dell technologies to our service offering which allows us to handle greater volumes of sand at the well site, while reducing our.

Ongoing maintenance requirements are smart systems generate positive contribution in the first quarter and we expect continued improvement in the operational profitability of our last mile offering.

Still small a small part of our overall business. We continued to see good growth potential for our industrial product solution Division industrial product solutions as a long term committed to diversify our business beyond oil and gas and to more effectively utilize our asset base. We are taking the time to build this business for long term success, we expect to see the business segment continue.

To grow in 2023 and beyond.

As always we will continue to keep our eye on the future. We are focused on generating high returns from our existing quality asset base and logistics capabilities, while maintaining prudent leverage levels that allow us to operate through operating cycles in our industry.

And we will always keep our employee and shareholder interests in mind in everything we do and with that I'll turn the call over to our CFO Lee <unk>.

Thanks Chuck.

I'll go through some of the highlights of the first quarter starting.

Starting with sales volume, we sold $1 195 million tons in the first quarter 2023, a slight increase over the fourth quarter sales volumes of one 175 million tons.

However, compared to first quarter of 2022 volumes increased by 40%.

Total revenues for the first quarter 2023 were $82 4 million comp.

Compared to $73 8 million in the fourth quarter 2022.

Total revenues were higher in the first quarter due primarily to continued improvement in average sales prices of our sand and $1 $9 million in contractual shortfall revenue recognized in the quarter.

Our cost of sales for the quarter were $70 7 million compared to $62 7 million last quarter.

The increase was primarily due to higher production costs and higher freight cost in the first quarter. We typically have higher seasonal production cost as we draw down inventory to meet sales demand during the winter months.

We expect production costs to moderate in the second and third quarters as we build inventory over the summer months to support sales demand later in the year as we enter the winter.

Additionally, we had higher freight costs this quarter due to higher in basin sales of sand.

Total operating expenses increased to $13 2 million in the first quarter compared to $9 5 million in the fourth quarter 2022, due to a $1 9 million net loss on the disposal of fixed assets as we reconfigured one of our wet plants to increase the efficiency of its operations and upgraded some of our mine.

Equipment.

We also had higher compensation expense in the quarter due to year end 2022 bonuses being paid in the first quarter and additional management administrative staffing to support our Blair operations.

Okay.

For the first quarter 2023 contribution margin was $17 8 million and adjusted EBITDA was $8 4 million compared to the fourth quarter contribution margin of $17 4 million and adjusted EBITDA of $10 7 million.

While we had increased revenues from higher average sales prices in shortfall revenue in the first quarter. This.

This was offset by the increased seasonal production cost and higher freight expenses.

Leading to flat contribution margin sequentially is.

As highlighted previously we do expect production costs to moderate in the second quarter.

Adjusted EBITDA was lower in the quarter due primarily to the increased compensation expense related to bonus payments and increased staffing in preparation for the startup of the Blair facility.

For the first quarter of 2023 contribution margin per ton was 14 89 per ton compared to $14 77 per ton in the fourth quarter 2022.

For the first quarter of 2023, we generated $5 1 million in net cash provided by operating activities, leading to a $1 1 million in free cash flow. After we spent $4 million on capital expenditures.

During the first quarter, we drew on our revolver and ended the quarter was $7 million outstanding on our facility.

We had approximately $7 6 million in cash and cash equivalents at the end of the first quarter.

Recently paid off the outstanding balance on our revolver.

Between cash and availability on our facilities. We currently have available liquidity in excess of $25 million.

As Chuck highlighted in his comments, but the current low natural gas prices, we anticipate sales volumes into the Appalachian basin to moderate in the second quarter.

But starting this month, we are seeing strong demand in the Bakken Basin, North Dakota, and we have started shipping sand out of our Blair facility this quarter.

Currently we expect sales volumes to be in the $1 million to $1 $2 million range in the second quarter.

While we expect demand to be strong in the Bakken in the quarter April sales were impacted by weather issues, some delivery rail delivery issues and customer operational issues, which may lead us to be in the lower end of this range for the second quarter.

We believe second quarter contribution margin per ton will remain in the mid double digit range consistent with the last two quarters.

<unk> revenue will be less in the second quarter.

As the majority of the reported shortfall revenue in the first quarter was related to one contract that recognizes shortfall revenues in the first and third quarter of each year.

This contract expires in the third quarter of this year.

We still expect capital expenditures for the year to be in the $20 million to $25 million range.

Which includes the capital expenditures related to the startup of the Blair facility, which is now operational.

We do expect capital expenditures to be higher in the second quarter from bringing Blair online and completing some efficiency projects at our other facilities.

We currently expect free cash flow to be positive for the full year.

This concludes our prepared comments and we will now open the call up for questions.

Thank you at this time, we will conduct a question and answer session.

As a reminder to ask a question press Star one one on your telephone and wait for your name to be announced to withdraw your question simply press Star one again.

Please standby, while we compile the Q&A roster.

Our first question comes from Patrick <unk> with Stifel. Patrick Your line is open. Please go ahead.

Hey, good morning, everyone. This is Pat on for Stephen J, Garo gentlemen, thanks for taking my questions today.

Hey, guys. Good morning, good morning.

So just to start I know you talked about current supply demand fundamentals for proppant in the prepared remarks.

I was wondering if you could elaborate on the current price environment you're seeing.

The current Frac sand price environment.

Yes. Please.

Yes, so we haven't seen.

Any deterioration in Frac sand pricing.

To date, I mean were definitely a little bit concerned about nat gas, but we seem to have a good runway as to kind of Nat gas demand. We've got good contracted customers in that.

In that respect and.

It depending again.

Seasonal thing if we get a hot summer Nat gas pricing could come up but we.

We haven't seen any real deterioration in frac sand pricing and with the.

The Bakken coming on strong.

We're seeing the ability to move that sand elsewhere.

Great. Thanks, and I guess kind of just to go along with that.

On the Nat gas side and I may have missed this but we were curious if you've seen any slowdown in demand from the Marcellus region.

Okay.

We're seeing a little bit of moderation in the Marcellus.

But again, we've got good long term contracted customers up there we've got an excellent facility in waynesboro.

And some third party facilities that we move a good amount of sand and so.

I don't know that we're going to see huge growth in the Marcellus with what we ship out there, but we still feel pretty good about the volumes, we're shipping out there and logistical advantages we have.

Great Alright, Thanks, gentlemen, thats, good to hear and I will turn it back.

Okay.

Okay. At this time there are no further questions I would like to now turn it back to Chuck Young founder and CEO for closing remarks.

Thanks for joining our call today, we look forward to talking to you again in August .

That concludes our Q&A.

You may now disconnect.

Okay.

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