Q3 2024 Smart Sand Inc Earnings Call
Speaker Change: Good morning, ladies and gentlemen, and welcome to the SMART 7Q3 2024 earnings call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session.
Speaker Change: If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Wednesday, November 13, 2024. I would now like to turn the conference over to Chris Green, Principal Accounting Officer. Please go ahead.
Chris Green: Good morning, and thank you for joining us for SmartSAN's third quarter 2024 earnings call. On the call today, we have Chuck Young, Founder and Chief Executive Officer, Lee Beckelman, Chief Financial Officer, and John Young, Chief Operating Officer.
Chris Green: 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.
Chris Green: 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.
Chris Green: SmartSAN disclaims any intention or obligation to update or revise the financial projections or forward-looking statements, whether because of new information, future events, or otherwise.
Chris Green: This conference call contains time-sensitive information and is accurate only as of the live broadcast today, November 13, 2024.
Chris Green: Additionally, we will refer to the non-GAAP financial measures of 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.
Speaker Change: Please refer to our most recent press release or our public filings for our reconciliations of gross profit to contribution margin, net income to adjust the dividend, 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.
Chuck Young: We are pleased to report that our continued focus on proactively managing our cost structure and capital expenditures led to positive free cash flow for the quarter.
Chuck Young: We remain cash flow positive for 2024 and in keeping with our stated goal of returning capital to our shareholders this year We recently paid a special dividend of 10 cents per share Outstanding and we additionally announced a share buyback plan of up to 10 million dollars
Chuck Young: We remain committed to remaining financially disciplined and returning value to our shareholders.
Chuck Young: Importantly, during the quarter, we put in place a new five-year, $30 million ABL credit facility with our new lender, First Citizens Bank.
Chuck Young: This facility provides us with an efficient and flexible source of funding that allows us to manage our business going forward, as well as the ability to act quickly on emerging opportunities.
Chuck Young: In the third quarter, Smart Sand delivered sales volumes of just under 1.2 million tons, adjusted EBITDA of $5.7 million, and positive free cash flow of $3.7 million.
Chuck Young: Our sales volume this year have increased 9% over 2023, while our cost of goods sold has decreased by $6.7 million, or 3.4% for the same period.
Chuck Young: Our capital expenditures are down $11 million year-to-date through September, having spent $5.1 million through September 2024, in comparison to $16.1 million for the same period in 2023.
Chuck Young: We expect total capital expenditures for 2024 to be at or under $10 million compared to $23 million in 2023.
Chuck Young: We continue to believe in long-term fundamentals of the oil and gas business.
Chuck Young: And although volumes decreased modestly quarter over quarter, demand remained strong through the fourth quarter. As for 2025, we are particularly excited about growing demand for natural gas in both the U.S. and Canadian markets, coupled with oil activity that is expected to increase in the Utica.
Chuck Young: In the third quarter, several new initiatives started to contribute to the business.
Chuck Young: We began delivering sand to our two new terminals in Denison and Minerva, Ohio in the quarter. These terminals opened up the growing Utica shale basin for smart sand. In the quarter, approximately 18% of our volumes were sold through these terminals.
Chuck Young: In addition to establishing a new market for us, delivery stands for our own terminals reduces our logistics costs and provides competitive advantage to serve this market going forward.
Chuck Young: We continue to grow our volumes from our player mountain. This facility allows us not only to compete in the growing Canadian sand market, it also provides an additional supply route into the Marcellus and Utica basins in the Northeast United States. In the third quarter, Canadian volumes represented about 11% of our sales.
Chuck Young: We continue to grow our industrial product solutions franchise. Our IPS sales volumes increased by 38 percent sequentially. We are positioning ourselves to compete for new contracts in 2025, particularly with glass and foundry customers.
Chuck Young: We could see IPS grow from under 5% of our revenue base to the 10% range of total sales volumes in 2025.
Chuck Young: We secured a new revolving credit facility. We closed on the new $30 million, five-year revolving credit facility in the third quarter, and we look forward to working with our new lending partner, First Citizens Bank.
Chuck Young: We remain committed to being the premier provider of Northern White Sand in North America and we are confident that the foundation of Northern White Sand demand is strong and will be durable over time.
Chuck Young: We expect pick-up activity in the fourth quarter as demand remains strong in the basins we serve. As demand remains robust, we are optimistic the pricing environment will improve in 2025.
Chuck Young: The trends for natural gas demand are positive due to the increasing demand for LNG and natural gas-fed power plants to support growing demand from AI data centers.
Chuck Young: The Marsalison Canadian Basins that we support are primarily natural gas basins. We expect activities in these markets will grow in 2025.
Chuck Young: We also see growing demand in the oil markets we serve in the Bakken and the Utica Basins.
Chuck Young: All these markets will continue to be primarily supplied by northern white sand.
Chuck Young: As demand for northern white sand continues to grow in these markets we serve, we believe incremental supply will be limited due to increasing demand for fine mesh sands.
Chuck Young: Fine mesh sands represent about 90% of current frac sand demand. Many of our competition's reserves are heavily weighted towards producing coarser product that is not in favor. Our reserves are over 75% fine mesh sand, making us uniquely positioned to seize on our customers' growing appetite for fine mesh frac sand.
Chuck Young: Limited investment in new northern white capacity. Currently there is limited capital available to support new northern white sand development or restart idle mines.
Chuck Young: Startup costs for idle mines are significant, and the logistical, market, and reserve-based challenges that have led to these mines to be shut down during the downturn remain. Thus, we do not expect to see significant additional Northern White capacity entering the marketplace.
Speaker Change: With our three facilities' efficient and sustainable access to all class-run rail lines, coupled with our low-cost operations and large, fine-mesh reserves, SmartSand is uniquely situated to take advantage of expected growth in northern white sand demand in 2025 and beyond.
Speaker Change: While current activity levels and pricing are challenging, we continue to demonstrate the smart tank can operate effectively through the operating cycles and is well positioned to take advantage of expected improved market fundamentals starting in 2025.
Speaker Change: I want to thank all of the employees for their continued dedication to SmartSand. As always, we will 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 Beckelman.
Lee Beckelman: Thanks Chuck. Now I'll go through some of the highlights of the third quarter 2024 compared to our second quarter 2024 results. We sold 1.19 million tons in the quarter, a seven percent decrease from second quarter sales volumes of 1.27 million tons.
Lee Beckelman: Total revenues were lower in the third quarter due primarily to lower sand sales volumes, lower average sales prices, and lower smart system revenues from reduced utilization of our fleet.
Lee Beckelman: Our cost of sales for the third quarter were $56.7 million compared to $60.7 million in the second quarter, a 7% decrease. The decrease was due primarily to lower sales volumes in the current quarter coupled with ongoing cost and efficiency initiatives to reduce production costs.
Lee Beckelman: Total operating expenses were $11.4 million in the third quarter, compared to $9.5 million in the second quarter.
Lee Beckelman: In the quarter we had a 1.1 million non-cash charge related to the closing of our fabrication facility in Canada. This facility was part of our acquisition of Quick 3 Technologies in 2018 and provided support for our smart systems last-mile storage service business.
Lee Beckelman: We decided to close this facility in the third quarter and to relocate our fabrication support to our Oakdale facility. Additionally, in the third quarter, we had approximately $1.3 million in expenses related to the process of refinancing our ABL revolving credit facility.
Lee Beckelman: Other expenses was $1.3 million lower sequentially. During the second quarter we had a $1.3 million loss on the extinguishment of debt. This expense was related to the payoff of some equipment leases that were part of the refinancing that we completed in June.
Lee Beckelman: Contribution margin was $13.2 million or $11.09 per ton sold in the third quarter. Second quarter contribution margin was $19.8 million or $15.53 per ton sold.
Lee Beckelman: Adjusted EBITDA in the third quarter dropped to $5.7 million, compared to $11.9 million in the second quarter.
Lee Beckelman: Contribution margin and adjusted EBIT hours, lower sequentially, due primarily to lower sales volumes and lower average selling prices.
Lee Beckelman: For the third quarter 2024, we had $5.8 million in cash provided by operating activities.
Lee Beckelman: which led to $3.7 million in free cash flow after we spent $2.1 million on capital expenditures.
Lee Beckelman: Year to date, we have generated $11.7 million in free cash flow.
Lee Beckelman: In September, we closed on a new $30 million, five-year revolving credit facility with First Citizens Bank.
Lee Beckelman: Availability under this facility is governed by a borrowing base supported by our accounts receivables and inventory. Our current borrowing base is $30 million. We ended the third quarter with no borrowings on our credit facility.
Currently we have approximately 8 million drawn on this facility.
Lee Beckelman: Between cash and availability from our credit facility, we currently have available liquidity in excess of $28 million.
SmartState is committed to returning capital to our shareholders.
Lee Beckelman: In 2023, we purchased approximately 11% of our outstanding shares when we bought back Clear Lake Capital's ownership in the company.
Lee Beckelman: In September we announced our first special dividend of 10 cents per share that was paid in October. Additionally, we have announced a new share buyback program of up to $10 million.
Lee Beckelman: While we expect our industry to continue to have a lot of variability quarter-to-quarter due to changes in commodity prices, supply-demand dynamics, seasonal weather impact, and political uncertainties, we have shown our ability to manage through these operating cycles.
Lee Beckelman: Through our focus on cost management and operational efficiency, coupled with improved financial flexibility and liquidity, we believe we will be able to generate positive free cash flow more consistently and will continue to look for ways to return capital to our shareholders going forward.
Lee Beckelman: Currently, we expect fourth quarter sand cells volumes to be in the 1.1 million to 1.4 million ton range.
Speaker Change: We are seeing an increase in activity currently in the Marcellus. As Chuck highlighted, we expect to see a pickup in activity in 2025 due to increased demand, particularly for natural gas development.
Speaker Change: We currently expect to see demand in the first quarter 2025 to be consistent to potentially higher than our first quarter 2024 results.
Speaker Change: In the fourth quarter, we will be completing most of our capital projects that we started early in the year. This will lead to higher capital expenditures this quarter.
Speaker Change: We currently expect total capital expenditures for the year to be in the $8 million to $10 million range.
Speaker Change: We currently expect to generate positive free cash flow for the full year. However, we do expect lower free cash flow in the fourth quarter due to higher capital expenditures in the quarter and an increase in working capital to support sales activities and the seasonal buildup of wet sand inventory to support sales volumes over the winter.
Speaker Change: This concludes our prepared comments and we will now open the call for questions.
Speaker Change: Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by the one on your touchtone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press star followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys.
One moment, please, for your first question.
Speaker Change: Your first question comes from Alec Scheibelhofer with Cecil. Your line is now open.
Alec Scheibelhofer: Great. Thanks, everyone. Thanks. And thanks for taking my question this morning.
Good morning.
Speaker Change: Good morning. Just to start us off here, I was wondering, so just given what the efficiency gains we've seen regarding completion and the rise in
Speaker Change: Proper demand per well. I was just curious like how you see that evolving going forward. Should we start to see a plateau around current levels or continue to rise maybe at a more moderate pace and just kind of overlaying that with your positive outlook for demand heading into 25
Speaker Change: Yeah, well, so, you know, it's a good question. Obviously, we've seen, you know, prop and per foot, you know, kind of go almost hockey stick-like on the grass over the last few years.
Speaker Change: You probably could see a little bit of moderation, but what we are seeing is, you know, when you have these multi-well pads,
Speaker Change: We're seeing the demand for large amounts of sand to be on-site on a consistent basis, which is driving demand across the board, so if you have a pad that's got five or six wells on it.
Speaker Change: You tend to have to have the ability to have that sand there quicker, and they're putting it down the hole faster. So you might see some moderation on problem per foot, but certainly problem per weld pad is getting it there and doing more weld in a particular month. That seems to be the focus of our customer base.
Speaker Change: They're also extending their laterals too, so laterals are getting longer per well, which is leading to more sand per well as you get to the longer laterals that they're drilling.
Speaker Change: Yeah, the other thing I would add too is some of the other basins that we operate in. So certainly the Marcellus has always been a relatively high profit per foot market, but we're seeing other basins, the Bakken, certainly with our new experience up in Canada, we're starting to see those markets.
expand their profit per foot also.
Speaker Change: Got it. Got it. That makes sense. Excellent color there. And then maybe shifting gears a little bit to pricing. So I was just curious if you could provide any kind of color or guidance on how we should think about pricing dynamics in relation to contribution margins as we look out to 2024, but more so into 2025, if you have any color there.
Speaker Change: Yeah, I think as we've talked about on previous calls, pricing has kind of moderated over the last couple of quarters and been relatively flat. So we haven't seen a lot of pricing improvement.
Speaker Change: But as we go into 2025, and particularly what we expect to be growing demand driven by the natural gas demand in particular.
Speaker Change: and the fact that the market continues to move to finer mesh sand, of which we're very well positioned in the northern white market to produce and provide finer mesh sand. We think that should hopefully lead to some pricing improvement.
Speaker Change: throughout 2025. So we haven't really seen it yet, but we are seeing, you know, volume starting to pick up.
Speaker Change: and we're seeing that, you know, carry into, you know, what looks like to be, you know, good activity going into the first part of 2025, and with that...
Speaker Change: We think that's going to kind of constrain some of the northern white supply because of their other competitors' ability to provide hunter mesh sand in particular, and that should lead to pricing improvement over time.
Speaker Change: Got it. Thanks again for the call there. And that's all from me, so I'll turn it back.
Speaker Change: Your next question comes from Josh Jones with Daniel Energy Partners. Your line is now open.
Thanks, good morning. Good morning, Josh.
Speaker Change: The first question is on IPS. I think in your prepared remarks, you noted that it could go from 5% of volumes to 10% of volumes in 2025, which would be significant. Is that based on orders you already have today or things you're still bidding on and what markets potentially would be driving this? Just a little more color there would be great.
Speaker Change: Yeah, sure. It's business we're working on, Josh, and it, you know, consists of, you know, kind of some of the traditional environments, glass sand being the one that drives the most volume in that space, right? So, it's not track sand volumes, right? Glass is the only one that even, you know,
Speaker Change: yeah has any kind of volumes that kind of move the needle from that perspective but there's a lot of recreational there's foundry and those types of things and so that business
Speaker Change: You know, we're excited about, but, you know, we think that as we grow from five, kind of, to ten percent.
Speaker Change: You know, I don't know that it'll get particularly bigger than that over time, but, you know, it is a market I'm kind of bullish on, but at the same time FRAC is going to be the one that drives our, you know, the bulk of our volumes going forward.
Speaker Change: Okay, thanks. And then I want to touch on shareholder returns a little bit. Obviously, you mentioned the special dividend that was paid.
Speaker Change: Just curious how you were thinking about shareholder returns going forward and they buy back as well, but Why was the special dividend sort of the optimal way to return cash to shareholders? And how are you thinking about this going forward? Will you sort of assess?
Speaker Change: You know how cash builds over the course of a year and then potentially pay it out or I'm just curious you're you're thinking there
Speaker Change: Yeah, Josh, I think it's really going to be driven by, as we kind of stated in the comments today and, you know, when we did the special dividend.
Speaker Change: It's really going to be driven by our, we're getting more comfortable in feeling like we're going to be able to more consistently deliver free cash flow. We also have a stronger capital structure with our new credit facility in place.
Speaker Change: So I think that's going to give us flexibility to be opportunistic and at times when we feel like we're generating excess cash and the best use of that cash is a return to our shareholders, we'll kind of evaluate whether it makes sense to do a dividend versus potentially buy back shares. And so I think we're going to be opportunistic about it and look at the return kind of equation in terms of giving money directly to our shareholders or looking to buy shares and our view of what the return on buying those shares back into the company are.
Speaker Change: Okay, thanks. And one more if I may. You talked about the Canadian market being 11% of your sales and Blair continuing to ramp. Can you just update us on your thoughts on the Canadian market, how you see that going forward in 2025 and beyond and what you're seeing?
Speaker Change: Yeah, look, the Canadian market, I think, Josh, you know our Blair facility there, we're very excited about it, it's a 3 million ton a year facility, it's got fantastic logistics.
Speaker Change: You know, the Canadian market, you know, our customer base up there has a lot of their own logistics capabilities. We're going to be adding our own up there, and we think that that market is logistically constrained, but they've got pipelines in place to the West Coast that require an awful lot of natural gas to be produced. And so we're cautiously optimistic on the Canadian market, and I'm spending a good amount of time up there working on it.
Yeah, we're very excited about that market, Josh.
Speaker Change: And at the LNG facilities and coming online, we think that's going to be a great place to be. They need a lot of sand.
Okay, thanks. I'll turn it back.
Speaker Change: There are no further questions at this time. I will now turn the call over to Mr. Chuck Young for closing remarks.
Chuck Young: Thanks for joining our third quarter earnings call. Look forward to speaking with you again in March.