Q2 2023 Smart Sand Inc Earnings Call
Morning, and welcome to the Smart Sand's second quarter Investor Conference call.
All participants will be in listen only mode.
Need assistance, please signal a conference specialist by pressing the star followed by zero.
After todays presentation, there will be an opportunity to ask questions.
I asked a question you May press Star then one on your telephone keypad.
To withdraw your question. Please press Star then two.
Please note. This event is being recorded I would now like to turn the conference over to Chris.
Corporate controller. Please go ahead.
Good morning, and thank you for joining us for Smart Sand's second 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 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.
Documents on file with the SEC.
Smart 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 that's accurate only as of the live broadcast today August nine 2023.
Additionally, we will refer to the non-GAAP financial measures that contribution margin adjusted EBITDA and free cash flow 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 public filings for a reconciliation of gross profit 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 Young.
Thanks, Chris and good morning, Smart sand delivered another quarter of strong operating and financial results in the second quarter, we sold approximately $1 1 million tons, we generated $19 million contribution margin and $11 4 million and adjusted EBITDA in the quarter, both solid improvements over second quarter 2012.
Two results in the first quarter 2023 results. Additionally, in the first half of the year, we generated approximately $12 million in free cash flow, including approximately $11 million in the quarter, we expect to remain free cash flow positive for 2023.
In the quarter, we paid down approximately $13 million in debt, we're committed to maintaining a strong balance sheet to allow us to continue to successfully manage through the operating cycles in the oil and gas industry.
Our focused business strategy of providing high quality, northern white sand in an efficient and sustainable fashion to our customers throughout North America continues to deliver strong financial results and long term value for our shareholders.
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 smartphone.
In the second quarter, we saw continued strong demand for northern White Frac sand activity in the Bakken increased substantially from the first quarter. We currently expect to see strong demand in this space and through the end of the third quarter typically the second and third quarters of the year are the strongest demand periods for sand in the Bakken as most producers plan the majority of their comp.
<unk> activity in the summer months, we currently expect activity to moderate in the fourth quarter due to normal seasonal slowdown in completion activity in this basin with our van Hook terminal in North Dakota, We believe we have the most efficient movement of northern White Frac sand into the Bakken, which allows us to continue to be a market leader in this key nor.
White market.
As we highlighted on our first quarter call activity did moderate in the Marcellus in the second quarter due to lower gas prices and sales volume into this space and we're still at healthy levels tons sold in the Marcellus were lower than the first quarter shipments were slightly higher than the same period a year ago. Currently we expect activity in the Marcellus to be lower in the third quarter.
Well, we're seeing signs that sales volumes at the Marcellus should pick up in the fourth quarter. We believe long term natural gas fundamentals are strong and completion activity in the Marcellus will grow over time.
Currently expanding our ways for terminal in southwestern Pennsylvania to allow us to take advantage of the expected increase activity in the Marcellus in the future and to increase our market share in this key northern white market.
This expansion is expected to be completed before year end.
Our Blair facility in Wisconsin is operational and we made our first shipments into Canada this quarter whilst.
While still a small portion of our overall sales we expect sales volumes to continue to grow in this market.
We're being directly on the CN rail line, we are well positioned to compete in the Canadian Frac sand market.
Currently expect sales volumes into Canada to be 10% to 15% of tons sold in the second half of this year.
Our focus on cost effective efficient and sustainable delivery of Frac sand from the mine to the well site is established smart sand as a market leader of Frac sand in the Bakken and Marcellus markets. We believe the Blair facility now provides us an opportunity to become a market leader of northern white sand in the Canadian market as well.
We believe northern White sand is undeniably a superior proppant to regional sand alternatives, while our primary focus will continue to be on growing our market share in primary northern white markets. We believe northern white sand leads to better long term well results and E&P companies in the Permian and Eagle Ford and other markets regional sand can improve their law.
Long term well performance by using northern white sand and well completion designs.
We commissioned a white paper that you can read on our website to builds on a study done by Reits that energy, a leading energy consulting firm that evaluated well results in the Delaware and Midland Midland Basin since 2018.
The performance of wells completed with northern White sand wells completed with regions in the.
The results of these studies are striking.
Clearly demonstrated the potential for producers to achieve improved well results using northern white sand as the proppant and their completion designs.
Choosing northern white sand versus regional sand producers have the potential to significantly improve long term well results, which should lead to higher production higher free cash flow and ultimately lower capital spend over time as producers will have to drill less wells to deliver the same or higher production levels.
Also regional sands find the Permian basin is potentially facing a threat as the dune sagebrush lizard is now scheduled to be listed as an endangered species in the next 12 to 18 months.
Listening could impact sand mining operations and supply that is based in the Permian It could lead to increased demand for northern white sand in this space.
It is too early to tell how big of an impact the listing of the dune sagebrush lizard may have on regional sand mines in the Permian, where potential increased demand for northern white, but this is something we're keeping a close watch on.
To be clear smart sand does not have to sell sand into the operating basins of the southwestern United States that are currently primarily supplied by regional sand to be successful as demonstrated by our strong financial results. We will continue to deliver solid operating and financial performance by serving the current key northern white markets.
However, we believe we can deliver a high quality northern white sand sufficiently and sustainably into the Permian and Eagle Ford basins in particular, which we can be a win win for smart sand in the MPS. We can expand sales volume to these markets and e&ps can benefit from better long term well results, which over time should lead them to be able to generate higher <unk>.
Cash flow as they generate more production from every well they drill.
While our Frac sand sales remained strong we're continuing to look for to grow our other business lines with.
The performance of Smart systems last mile offering continues to improve we added our smart belt technology to our service offerings, which allows us to handle greater volumes of sand at the well site, while reducing our ongoing maintenance requirements. We operated two smart system fleets with our smarts belt system in the second quarter and saw substantial improvement in.
Our operating results due to lower maintenance costs. Additionally, with a new belt technology, our smart systems can support higher volumes directly into the blender of their pressure pumping equipment.
The more efficient last mile delivery for producers and pressure offers compared to others and delivery options at the well site.
We are investing in additional smart belts to add to our existing fleet to further extend these savings we expect to have nine fully functional smart systems with this new technology available to serve the market starting in 2024, we expect to see continued improvement in the operational profitability over a last mile offering going forward.
Our industrial product solution business also continues to grow industrial product solutions sales volume this quarter increased 70% over first quarter results and represented approximately 5% of our overall sales volume in the quarter.
We are investing in cooling and blending capabilities at our Utica, Illinois facility, which should allow us to more aggressively market to the foundry markets and other industrial applications. This investment is expected to be completed by year end, we expect sales volumes to be in the 5% range or better for the remainder of 'twenty 'twenty four and grow from there where commit.
Is it to the industrial product solutions market to help diversify our business beyond oil and gas into more effectively utilize our asset base.
We have taken the time to build this business for the long term success.
As always we will continue to keep our eye on the future. We are focused on generating higher returns from our existing quality asset base and logistics capabilities, while maintaining prudent leverage levels that allow us to successfully manage our business through the operating cycles in the oil and gas industry.
Our goal is to consistently deliver free cash flow and to be a market leader delivering high quality, northern white sand to frac and industrial sand markets.
And we will always keep our employees and shareholders interests in mind in everything we do and with that I'll turn the call over to our CFO Lee Beckman.
Thanks, Chuck now I'll go through some of the highlights of the second quarter we.
We saw 1.1 million tons in the second quarter, 2023, which is relatively consistent with first quarter sales volumes of 1.2 million tonnes.
Total revenues for the second quarter, 2003 were $74 8 million compared to $82 4 million in the first quarter 2023.
Total revenues were slightly lower in the second quarter of 2023, primarily due to lower tons sold and contractual shortfall revenue recognized in the first quarter of 2023.
Our cost of sales for the quarter were $62 1 million compared to $70 7 million last quarter.
The decrease was primarily due to lower seasonal production costs production costs are typically lower in the second and third quarters of the year as we build inventory over the warmer months to support sales demand later in the year as we enter the winter months. Additionally, we had lower freight expenses sequentially due to a shift in our in basin sales.
Next.
Total operating expenses decreased $9 6 million in second quarter compared to $13 2 million in the first quarter 2023, due primarily to a $1 9 million net loss on disposable disposal of fixed assets included in the previous quarter as well as year end 2022 bonuses that were paid in the first.
2023.
But the second quarter of 2020 contribution margin was $19 million and adjusted EBITDA was $11 4 million compared to the first quarter contribution margin of $17 8 million and adjusted EBITDA of $8 4 million.
The increase in contribution margin was due primarily to lower production costs and improve margins for our smart system place adjusted EBITDA was higher sequentially due to the higher contribution margin and lower operating expenses.
For the second quarter 2023 contribution margin per ton was $17 37.
Seven cents per ton.
<unk> to $14 89 per ton in the first quarter 2023.
For the second quarter of 2023, we generated $16 1 million in net cash provided by operating activities, leading to $10 8 million free cash flow. After we spent $5 2 million in capital expenditures year to date through the end of June we have generated $11 9 million in free cash flow.
We ended the second quarter with no outstanding borrowings on our credit facility.
Approximately $5 5 million in cash and cash equivalents at the end of the second quarter.
Between cash and availability from our credit facility. We currently have available liquidity in excess of $24 million.
Currently we expect sales volumes to be in the 1 million to $1 $10 million range in the third quarter.
We believe third quarter contribution margin per ton will remain in the mid double digit range of $14 to $17 per ton consistent with the last three quarters.
Shortfall revenue in the third quarter will be similar to the first quarter.
Short fall Rodney.
The majority of the reported shortfall revenue being recorded in the 2023 is related to one contract that recognized the shortfall revenue in the first and third quarter of each year.
I'll check 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 plant facility, which is now operational as well as the expansion of the Waynesboro terminal.
And the cooling and blending capabilities.
Utica that Chuck mentioned in his comments.
We'll expect free cash flow to be positive for the year.
This concludes our prepared comments and we will now open the call up for questions.
We will now begin the question.
To ask a question.
Star then one on your telephone keypad.
If you are using.
Pick up your handset before pressing.
If you withdraw your question. Please press Star then.
Okay.
Once again that one star then one.
A quick question.
Time, we will pause momentarily to assemble the roster.
And our first question comes from Patrick.
Please go ahead.
Hey, this is Pat on for Steven Gerrard and say, thanks for taking the time to answer the questions.
Sure.
So.
Could you give us an update on industry supply and demand for Frac sand and what it looks like specifically for northern White.
And maybe how you expect them to play out in the second half of the year and into 2024.
Yeah. So.
Chuck and kind of said in his comments.
Spect some moderation in demand in the in the fourth quarter, it's hard to say, what that's going to be the fourth quarter is always kind of a little bit of a shot in the dark at this time of the year.
But certainly the fundamentals look good on northern White right now the market has been relatively in supply and demand balance and so we think that.
It's promising for the rest of this year from a volume perspective, and we also think that Canada is going to be a nice bright spot for us kind of going into the third and fourth quarter. This year.
Great. Okay. Thanks, and then just building off talking about Canada.
Gross profit you noted improvements sequentially based on sales mix. Other basins you were delivering too so is any of that.
Margin improvement coming from the deliveries to Canada.
Well again as we highlighted in our press release and comments I'm part of the margin improvement was lower production cost in the second quarter, because we capitalized inventory cost and typically we have lower production costs in the second and third quarter and then we'll see a little higher in the fourth and the first quarter as we draw down inventory so that was.
Basically a driver of that pricing was relatively flat in the second quarter versus the first quarter in Canada, we do expect that to help overall sales.
But most of our sales in Canada right now on a F O B mind basis, so that actually will lead our pricing to be a little lower on an average sales price, even though we will have less freight expense associated with it. So the margins in Canada right now seem to be fairly similar to what we're seeing in the U S.
Okay, Great. That's very helpful I'll turn it back.
Yeah.
Oh.
Our next question comes from Jim Barrett.
Please go ahead.
Good morning, everyone.
When we look maybe for you your current level of capital spending for the fear is that the new normal given the additional Blair and growth plans for smart systems.
Oh do you expect spending to <unk>.
Subside in 'twenty four 'twenty 'twenty four 'twenty five.
Well this year, we're expecting to spend about 20 to 25 million, which included specific growth initiatives at Blair. The expansion at Williamsburg, we highlighted as well as the Ips expansion.
So every year, we evaluate but I can say generally that you know our maintenance type and efficiency capital is probably going to be typically in the $10 million to $15 million a year and then depending on growth initiatives, we might see another $5 million to $10 million so well.
Well I think we will continue to range under our current operating structure with our three mines and probably a 15 to 25 million capex per year, depending on growth initiatives each year.
And on a separate note can you tell us how much of your volumes currently are under long term contracts.
Well roughly today about 50% of our volumes are under some term proportion of contract.
That goes our contract structure today go anywhere from kind of six to 18 months for maybe half of those volumes and we do have a few long term contracts that go out multiple multiyear.
I see.
And Chuck could you the Canadian market.
Can you tell us.
Who are your sand competitors to service those customers and just give us sort of a.
A sense of what the competitive framework is.
And that Oh.
Yes, so basically the Canadian market for the most part we see it.
It's Canadian National origination, so sores badger companies like that.
Our existing companies, but we see that market and the activity that's going on with the E&ps there it looks to be very very strong and the pipeline infrastructure is being put in place.
We're feeling really good about that market.
Okay. Good and my last question is that the white paper that was on your website.
Yeah, the highlight would be the.
The superior economics of using northern white sand in markets like the Permian and Eagle Ford.
Any.
Hum reception from the customers.
Customers in Texas.
As to the.
Is that generating any additional interest or are you still in the very early innings of.
Educating customers as to the relative merits of the different types of sand.
I think in general right now you're seeing a lot of the E&ps are really looking at their production their wells.
In the Permian and looking for.
Ways to impact that so we definitely think it's on the radar. Additionally.
The students age fresh lizard thing has a way of not not only impacting the sand mining down into the Permian basin, but also.
Could could have potential impact on people and their acreage holdings on drilling down there. So I think in general there is kind of a concern.
And what's going on down there again, we're not spending capital on this right now down there, but we are.
Very much watching this.
Okay, well, thank you both very much.
Thank you.
The next question comes from Jonathan Catlin.
Management please.
Go ahead.
Hi, good morning, gentlemen, and congratulations on a terrific quarter.
Just had two questions you say that you're going to be cash flow positive for the year.
You're already I think substantially cash flow positive for the year does that mean, the second half we're gonna see negative cash flow and number two is just more of a general question.
Yeah. This quarter. It was kind of the performance seems a bit surprising you know analysts estimates were estimated loss you did a you had a substantial gain.
It looks like your business is evolving and there. It looks like you are moving into more profitable areas of the market can you just kind of give some color on where those are.
Areas area, which markets are you seeing better profitability, and then and how sustainable they are.
Well I'll answer the first question, we did have strong free cash flow first half of the year, we will see a potential.
Potential a little higher capex in the second half of the year, we spent about $9 2 million in the first half we've guided 20 to 25 million as we complete these are projects that Chuck highlighted in his comments. So we could see a little higher capex in the second half of the year and typically will have a little bigger build of working capital for inventory in the third quarter that should moderate some in the fourth quarter. So I would.
Spect us to not be as positive free cash on a second half of the year, but I do expect to generate some positive free cash on the second half of the year and B you know have strong overall free cash flow for the full year.
And then in terms of markets, John and Chuck can join in but I think again.
We believe because of our logistics advantages in and what we've invested in the van Hook terminal in the Waynesboro Carnival in particular continue to lead us to be market leaders in the in the Bakken and the Marcellus in particular, and we continue to expect to still be a strong leaders in those markets and we believe going forward that we.
We can do the same thing in Canada, so the real upside potential for US is continue to.
To grow our market shares in the Marcellus and the Bakken based on our low cost production as well as our very efficient movement, assuming the railroads continue to be good partners with us and look to expand that and build that same model into Canada.
And so we don't necessarily talk about our individual profitability by basin, but those three basins continue to be we still see good long term prospects and in those in all three of those basins in terms of being primary northern White and then additionally, while it's still small part of our business our smart systems.
You need to get traction as we improve their operational efficiencies and so we expect it to continue to be additive to overall contribution margin going forward and we are starting to make inroads in the industrial product solutions. As we said, it's 5% of our sales issue this quarter substantial improvement quarter over quarter. So we see those two as being additive on top of.
The Frac sand business. This should help us a potentially positive as well as we go forth yeah, and the only thing I'd add to that is that over the years, we've made some investments capital investments in operational efficiency.
<unk> sites and those are starting to pay some dividends so.
That's certainly something that's providing a little bit of a tailwind on.
Operating results here so.
Hopefully that continues.
These investments have been made where you were something that we've been looking at doing and.
Seeing some advantage for them.
Thank you very much that's very helpful.
Thank you.
Next question comes from Stephen Chin.
With Stifel. Please go ahead.
Hi, Thanks, good morning, gentlemen.
Good morning.
I was wondering so we hear a lot a lot we definitely heard about spot pricing softness in Texas.
And I was curious given the different supply demand drivers for northern white and in the destination for your product, but what are you seeing.
And in sort of the spot market and how does that kind of impact any existing contracts.
Yes, so you know.
Obviously, we keep an eye on what's happening down in Texas, and there has been some moderation in the pricing there I'm not entirely sure what's driving that I think theres a lot of supply down there and any hiccups and demand can can impact that market pretty dramatically.
Why.
We in certain cases, we see pricing moderating depending on grade of sand sizes and green.
And those types of things, but.
It's hard to pin down exactly in individual market and it's something softening.
We keep a close eye on it we work closely with our customers. We work closely with the railroads to make sure that we're continuing to offer a competitive product in there, but given that northern white is been in relatively good.
Supply and demand balance over you'll call since since the downturn of Covid.
And some of the mines are no longer in existence, we've seen that supply demand to remain in balance and so you know.
I don't know Stephen if that continues I don't I haven't heard of any additional supply coming on board.
Coming online in northern White to any great degree, so any kind of demand upset either on the upside or the downside has potential to two.
The fact that but mostly what we see when prices are moderating as more seasonality or rig rigs moving and things like that but right now it seems like the market is in relative balance.
Great. Thank you and then and then one other for me have you.
See much change and you might have mentioned this and I got cut off but did you see much change on the cost side as far as I know you've done a lot of work you've done a good job managing the cost side, but on the on the on the street basically basically on the Cogs line has there been any.
Positive movements, we should be thinking about as we go forward from here.
Well I think there's really highlight and John talked about earlier, we have made investments to improve our efficiency, particularly around mining at.
At our Oakdale facility and we're actually just kind of starting those processes. So we would expect that to really start helping.
Margins and costs as we go into 2024 and again, that's also driven by higher volumes, except we get higher volumes and increase our utilization. We do have kind of high fixed operating leverage so as we can sell more volumes and spread our fixed costs that helps drive our cost per ton out there as well down as well so assuming we can maintain a.
Increasing our volumes and and and keep improving our mining efficiencies in particular on these new initiatives I would expect the help of a on a cost per ton basis bring down our costs down going into 'twenty four.
Thank you and if I can just slip one more in when we think about.
The kind of evolution of our frac sand demand or usage per stage now that's obviously improved over the years where does that.
Now is it stabilizing do you still see.
<unk> growth, how should we think about that.
Well I think and work that we are seeing growth Friday of the stages are the laterals continue to get longer folks want to pump.
More sand per stage, they wanted to do the stages faster and really.
When we think about.
This growth in the amount of sand that we are forcing down the well.
Any given basin that we're operating in it really comes back to kind of logistics costs that we talk about often on these calls which is making sure that you've got the ability to deliver the quantities of sand reliably sustainably and get them down the hole. So you have to you have to be thinking about this from the mine to the well site Chuck had mentioned.
We've launched this new smart belt technology for our well site solutions and that was driven primarily by the requirement for forcing huge amounts of sand down the well in a short amount of time and we think that we've got a good mouse trap on that and the ability to support these longer lateral we certainly have the reserve base.
We have over 500 million tons and we certainly have the production capacity, we have about 10 million tons of annual capacity available and we have the right mix that.
Imports with what these guys are looking to do the fine grain sand. So we feel like we are and we have the logistics infrastructure with rail to go to make that sand delivery into the market that we play.
We've put our system our last mile system up against anybody system on how much that can be pumped down whole attack.
People are starting to really recognize that.
Okay, great. Thank you for all the detail gentlemen.
Thanks Steven.
Once again I'd like to ask a question. Please press Star then one.
Yes.
This concludes our question and answer session I would like to turn the conference back over to Chuck Young for any closing remarks.
Thanks for joining us on our second quarter call look forward to speaking to you again in November .
Yes.
Conference has now concluded. Thank you for attending today's presentation and you may now.
Connect.
[music].