Q2 2019 Earnings Call
[noise].
Good day, ladies gentlemen, and welcome to Smart Finance second quarter 2019 earnings Conference call.
At this time all participants are in a listen only mode. Later, there will be a question answer session and instructions will follow at that time.
If you require assistance during todays call. Please press Star then Sir you touched on telephone as a reminder, this call is being recorded.
I would now like turn the conference over to Josh Jane.
Finance manager, Sir you may begin.
Good morning, and thank you for joining us for Smart Sands second quarter 2019 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.
Before we begin I would like to remind all participants that our comments made today will include forward looking statements which are subs.
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.
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 and is accurate only as of the live broadcast today August seven 2019.
Additionally, we may refer to the non-GAAP financial measures of adjusted EBITDA and contribution margin during this call.
These measures when used in combination with 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 adjusted EBITDA to net income and contribution margin to gross profit.
I would now like to turn the call over to our CEO Chuck Young.
Thanks, Josh.
I'm pleased to report that smart sand had another solid quarter, we enjoyed sequential increasing sales volume as the market continues its recovery.
We sold approximately 741000 tons of sand.
And we generated $26.2 million in adjusted EBITDA.
How did we do this.
By executing our long term strategy.
Here's what it includes.
Supporting our existing long term contracted customers.
Extending our spot market business being one of the lowest cost producers of high quality northern white sand.
Maintaining low debt levels and being one of the lowest leverage companies in the proppant industry.
Delivering efficient and sustainable supply chain logistics.
On the mind.
The well site.
And ramping up the utilization.
Of our last mile Smart systems.
Weve rebranded our Wellsite storage solutions.
As smart systems. It includes our storage side, those smart depot and Smart depot XL, we encourage everyone to check out the additional information on our website at www Dot smart sand dotcom.
During the second quarter, we extended our long term contract with E Cuti.
And our volume weighted average contract life is now almost two years.
We know that quality and consistency of sand supply is critical to our customers.
Therefore, we will continue to work to find mutually beneficial terms with customers.
To meet their long term sand supply and logistics needs.
As we've said time and again.
We're willing to work with our long term contract customers defined terms that work for both of us.
But we must also defend our contracts in the interest of our company our employees.
Our other customers.
And our shareholders.
Even as we keep signing new long term contracts, we continue to extend our spot market penetration to new customers as we meet growing demand in the Bakken.
Our salus.
And Utica basins.
Spot volumes represented 19%.
Of our total volumes in the second quarter.
We know that by increasing total market share and focusing on being a low cost producer.
We're able to ultimately provide the best returns for our shareholders.
Bringing our debt down.
In watching our capital spending.
Our fundamental to our continued success.
We've reduced our total debt from $52.6 million at the end of March.
The 46.6 million.
At the end of June .
We were able to lower our debt by continued focus on managing our cash operating expenses.
And our capital expenditures.
Yeah.
We've continued to cut costs.
By focusing on logistics.
As a fully integrated sand supply and services company, we have the infrastructure in place to provide sustainable logistics.
All the way to the well site and ultimately into the blender at the rates that our customers require.
Another smart sand advantage is our partnering with the railroads.
This offers many dividends for example.
We were able to maintain costs at attractive levels, we can offer fast turnarounds with very little to merge.
And we can provide any size shipment desired.
Thanks to our dual service railroad capabilities.
And.
While we're focused on being a low cost efficient and sustainable supplier of Frac sand.
Smart sand is also in the quality business.
We proudly produce high quality northern white sand.
We strongly believe.
Our using our sand our customers will ultimately have better long term well results.
Our 100 mesh northern White sand has many desirable qualities, it's known for its 12000 pounds crush strength.
Its model Crystal in structure.
Its high conductivity.
Low turbidity.
And exceptional purity.
Our sand is delivered perfectly washed and ready to use.
That's why our customers keep coming back.
It was.
Over and over again.
Our San creates less dust.
That's going to become more of an important in light of recent calls for adoption of new standards by Amp ship.
Following osha's new silica standards.
We're proud that our sand is already among the safest in the industry.
Even though our sand crazed last us than regional sand.
We go an extra step our smart depot silos have both passive and active dust suppression systems to keep our employees.
And our customers employees safe.
[laughter].
We now have three smart depot fleets operating in the field.
We're finding ever growing interest from both new and existing customers that want to expand the size of their fleets.
We're able to deploy our silos and have them operating the field as quickly as our customers need.
Yeah.
So in summary, the second quarter was another good one for smart sand.
Our continued focus on logistics quality.
And fostering relationships with both our customers and our suppliers.
Is showing in our posted results.
Simply put.
Our long term strategy is working.
And with that.
Ill turn the call over to our CFO .
Lee back on that.
Thanks Chuck.
Today I'll be going over the second quarter 2019 financial results in my comments, primarily will be focused on comparing to the first quarter 2019 results as Chuck highlighted we had strong results as we capitalized on the increase in activity in the second quarter, starting with sales volumes, we sold approximately 741000 tons in the second quarter, a 14% increase over the first quarter.
The increase in volumes was attributable to increases in both spot and contract sales volumes as Chuck indicated.
Our spots volumes for the quarter were approximately 19% of our total sales volumes in regards to revenues.
Okay.
Total revenues were $67.9 million in the second quarter, an increase of 16.1 million when compared to our first quarter sales of $51.8 million.
Sand sales revenue, including reservation charges.
Was up $5.8 million in the second quarter.
To $31.4 million from the first quarter results of $25.6 million.
Logistics revenue.
This includes freight for certain mine gate and sales.
Railcar usage and logistic services was approximately 20.3 million consistent with the first quarter results of $20.4 million.
In the second quarter, we recognized $16.3 million in shortfall revenue.
Compared to $5.8 million of shortfall revenue in the first quarter.
As we've mentioned before our take or pay contracts with minimum quarterly and annual required volumes and payments provide smart sand with a stable source of revenue to help the company managed through the operating cycles in the industry.
14.5 million and $3.8 million of the shortfall revenue in the second quarter and first quarter, respectively were related to contracts and litigation.
Our cost of sales for the quarter were 40.
$43.1 million.
Compared to $40.6 million for the previous quarter.
The increase in cost of sales is primarily due to a higher sales volume sold in the second quarter compared to the previous quarter.
For the second quarter 2019, our contribution margin was per ton was $41.80 compared to $26.35.
Our time last quarter.
The increase was primarily a result of an increase in shortfall revenue.
Gross profit was $24.9 million in the second quarter.
Compared to 11.2 million in the first quarter.
The increase was primarily due to higher sales volume and the additional shortfall revenue in the second quarter.
Our operating expense expenses, including salaries, depreciation and SGN expenses were relatively consistent quarter over quarter.
[laughter].
For the quarter, we had income tax of $4 million compared to $1 million in the first quarter.
We expect our effective tax rate to continue to be in the low 20% range.
We had net income of approximately $14.3 million and adjusted EBITDA of $26.2 million in the second quarter.
The increase over the prior quarter was primarily due to additional volume sold during the.
Current quarter as well as additional contractual shortfall revenue from customers that did not take the required volumes of sand under our long term take or pay contract.
Thanks.
In the second quarter, we spent $5.4 million on capital expenditures.
This brings our year to date spent on capital expenditures to $13.9 million.
Which was primarily for the manufacturing of our smart depot silos and efficiency upgrades at our Hopedale facility.
We currently anticipate capital expenditures to be in the $25 million to $35 million range for 2019.
[noise].
Of which approximately $10 million to $15 million allocated to maintenance and efficiency projects at Oakdale and van Hook.
And $15 million to $20 million for the build out of additional smart systems equipment.
In the second quarter, we generated 11.1 million cash flow from operations and as of June 32019, we had approximately $1.3 million of cash on our balance sheet.
And $16 million in total undrawn availability under our credit facility.
As Chuck highlighted earlier, we paid down approximately $6 million in debt during the second quarter.
Consistent with our long term goals, we expect to continue to generate positive cash flow from operations and manage our capital spending to minimize borrowings under our credit facility.
In order to provide the best possible return for our shareholders with our current expected cash flows from operations current availability on our credit facility and other available sources of borrowing.
We believe we have sufficient liquidity to support.
All of our ongoing activities.
In terms of guidance for the third quarter 2019, we expect sales volumes to be in the 625 to 725000 tons range and adjusted EBITDA to be in the 25 million to $30 million range.
Included in the range for adjusted EBITDA is approximately $14 million and shortfall payments, which have already been built in the third quarter for previously deferred tons under one contract and litigation that are now do.
This concludes our prepared comments and we will now open the call for questions.
Thank you, ladies and gentlemen, if you wish to ask a question at this time please press.
Our than one are you touched on telephone.
[noise].
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<unk> prevent any background noise, we ask that you. Please.
Your line on mute what's your question has.
It it our first.
Question comes from George O'leary, with Tudor, Pickering, Holt and company.
The line is.
Hey, guys.
Good morning, George.
Yeah.
Northern white sand prices improved notably during the first five ish months of the of the year off some lows in December .
And our understanding is that leading edge pricing has started to retrench, a little bit I wondered if you could talk about.
Pricing that you guys are seeing in July relative to the second quarter on on spot volumes.
And maybe bifurcate between.
Hundred mesh 40 70.
Yeah, George So from a standpoint, you are right to separate the products right. So 100 mesh and 47 may continue to be a very strong demand 30 50.
Moving to certain basins.
In decent volumes and of course 2040.
We're not moving a lot of I don't think anybody's moving a lot of that but.
Our view on Frac sand pricing right now is.
From a spot perspective, it's flat to down a little bit but.
Depending on what the product is and what the year.
Immediate demand is.
We haven't seen a lot of price degradation recently.
Okay. That's helpful. And then just second question given that the comments you guys made in proving that the Q. This morning.
The shortfall payments associated with customers with whom you guys are in in ongoing litigation at the moment.
Are those customers.
Paying their bills or is that a part of their receivables billed and just kind of how how did the dialog going there with.
For those customers and and collecting the actual cash on those shortfall payments.
Well in terms of the question on the revenues or they are going into the receivables that's fully disclosed in our 10-Q in terms of the revenues recognized.
For those so shortfall payments in litigation and the receivables associated with it and so no. They aren't you coming into cash flow today in terms of any comments or discussions.
In regards to those contracts under litigation, we don't really comment on current litigation other than that than to say that we still believe in our contracts and will continue to defend them and expect to get paid on them.
Ultimately in due course.
Right and I will sneak in.
One more if I could I apologize if I if I missed this but.
Could you just kind of break down the volumes that are going to the Bakken and the northeast versus volumes that are going elsewhere, and then maybe frame.
What level of volumes you guys are also selling into the.
Permian Basin if any.
Well, we've actually I mean, the ground as we get volumes have gone beyond just the Bakken, we've actually increased volumes in the western United States and so we think about it in terms of our volume is going to the western United States, It's roughly about 50% of our volumes today roughly about a third of our volumes are going into the northeast and around 10% or so are going into what we call. The southern regions, which includes the Permian the midcon in the Eagle Ford.
Yes.
Very helpful. Thank you guys.
Yes.
Thank you.
Our next question comes from Stephen Gengaro with Stifel. Your line is open.
Thanks, Good morning, gentlemen.
Well two things.
Yes.
Two things if you don't mind.
First is.
And this is just a clarification on my part.
When you think about.
Shortfall revenue should I think about that is it.
Basically dropping straight to the EBITDA line.
Again, we don't comment directly on the litigation and the impact of those financials on financially. It's a contractual obligation that theyre due to pay to us and ultimately get paid but in terms of how you think about it going through quarter to quarter again, we don't want to get into any comment or specific discussions around linked contracts under litigation.
I'm just speaking with.
Just say for the second quarter that you reported you looked at a $9 million uptick sequentially in shortfall revenue is that.
Shortfall revenue.
There is no costs associated with that so thats pure EBITDA.
Uh huh.
Is that is that a reasonable way to think about it.
Yes.
Even the way to think about it is contractual payments owed to us from our customer in recovery of cost and basically they.
Oh, yes, the obligation of either.
Take the sand or provide or provide the take or pay payment in regards to how that relates to our financials again, we're not going to make any direct comments on that.
That's on something it's in litigation Okay.
Okay.
[laughter].
The.
Thank you and then as I as I think about.
Your contribution margin per ton going forward.
Is.
Okay.
If I was just without you guiding meet any numbers, if I was to sort of.
Back out.
We would estimate.
How the shortfall.
[noise].
Revenues.
The impact that.
Excluding that.
Should we be thinking it.
Is flattish.
In the third quarter sequentially.
Yes.
Yeah in terms of looking at contribution margin. Excluding the shortfall revenues you can say that are you know, we expect that to be relatively flat quarter to quarter again, we don't give specific guidance on contribution margins. So.
I understand that yep.
Thank you I appreciate the clarification.
Okay.
Thank you. Our next question comes from John .
And with Simmons Energy your line is open.
[noise].
Thank you good morning.
Right.
Yes.
Guys I was hoping you could comment on your view of completions activity in the back half.
I think on the.
The one Q call, we talked about it could.
Instructive view.
Good activity.
Occasions from your customers.
Theres still hold and I am trying to foot.
Your view of completions activity with your.
<unk> guidance.
Our three Q, so any color there would be great.
Yes, sure so I'll take that.
So we've guided to 625 to 725 for the third quarter and will your we're kind of hearing which I am sure you are too you across the board we have.
Differences amongst customers as to what they're expecting in the back half right. Some are saying, we're going to be very busy and others is going to say, we might see a little bit of a slowdown so our best view on it right now is that we're going to be generally conservative in our guidance.
Obviously, there is some potential upside there and if you take it into a combination with what we did in Q2, where we had about 14% increase.
Yes, we had a pretty good quarter to guiding kind of flat to down a little bit I think is still reasonable given a little bit of the uncertainty that's out there.
<unk>.
In.
Appreciate if you'd rather not comment.
<unk> Q T contract congrats on getting that extended.
Yeah.
How does that.
Profitability for that contract.
Compare to some of your.
Legacy contracts is it.
In line.
That are worse any.
Any color there would be awesome.
Yes, well, so we don't disclose individual contract details or pricing or anything in that suffice to say that it's consistent with the.
Existing agreement that we have in place with Ecotec.
Yes.
And then lastly, the.
Systems.
They are now.
Working.
Are those.
Operating under a contractual agreement or is it more of a.
Month by month or.
Pad by pad.
I've arrangement and.
Of the smart.
Hymns.
Yes. So we're again, we're not going to get into the specifics of the contractual arrangements that they are under.
Suffice to say that we do have three in the field and the good news is we're getting very positive feedback from the customers using them and we continue to.
Be optimistic and are going to be aggressive with our deployment of the solutions out there.
Yeah.
Great.
Thanks for the color.
Turn it back.
Yes.
Thank you and I'm showing no further questions.
This time I would like to turn the call back over to Chuck Young for closing remarks.
Yes.
Thank you for joining us for smart sand second quarter 2019 earnings call.
The third quarter is already shaping up to be another great one for smarts and as we continue to see the positive results of executing on our long term strategy.
We look forward to reporting again in November .
With our results for the third quarter.
Okay.
Yeah.
Ladies and gentlemen, this concludes today's conference.
And for joining and have a wonderful day.