Smart Sand Q3 2023 Earnings Call Transcript

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Provided by Quartr
November 8, 2023

There are 8 speakers on the call.

Operator

Good morning, and welcome to the Smart Sands Inc. Third Quarter 2023 Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded.

Operator

And now I would like to turn the conference over to Christopher Green, Vice President of Accounting. Please go ahead.

Speaker 1

Good morning, and thank you for joining us for Smart Sand's 3rd quarter 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 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. Marcin disclaims any intention or obligation to update or revise any financial projections or forward looking statements This conference call contains time sensitive information That is accurate only as of the live broadcast today, November 8, 2023. Additionally, we will refer to the non GAAP financial measures of These measures, when used in combination with our GAAP results, provide us and our investors with useful information to better understand our business.

Speaker 1

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 Young.

Speaker 2

Thanks, Chris, and good morning. Smart Sand delivered another quarter of strong operating and financial results. In the Q3, we sold approximately 1,200,000 tons. We generated $21,000,000 in contribution margin and $13,300,000 in adjusted EBITDA, Both solid improvements over Q3 2022 results and Q2 2023 results. Additionally, in the quarter, We continue to generate positive free cash flow.

Speaker 2

For the 1st 9 months of 2023, we've generated $17,500,000 in free cash flow, And I'm pleased to report that Smart Sand will be cash flow positive for 2023. We have used our free cash flow this year to Continue to delever our balance sheet. We paid off over $9,000,000 in debt through the 1st 9 months of 2023. Return value to shareholders. Earlier this year, we bought back approximately 11% of our common shares outstanding.

Speaker 2

Smart Sand will continue to focus on generating free cash flow, maintaining balance sheet discipline and returning value to our shareholders. We plan to remain true to our core business principles and operating philosophy. Our goal is simple, to be the premier provider of Northern White Sand and Logistics Services In North America, we strive to not only be a supplier of sand to our customer, but to be their partner in efficiently providing high quality, Efficient, environmentally friendly and sustainable long term sand supply. We did not have achieved these results The dedication and hard work of our employees. I want to thank our employees for their efforts and continued commitment to Smart Sand.

Speaker 2

Demand for Northern White frac sand continues to be strong. We had consistent demand at the Bakken and Appalachian Basins during the quarter. Our sales in Canada increased as well. This was our Q1 fully operating our Blair facility. Canadian sales Represented approximately 10% of 3rd quarter sales volume.

Speaker 2

We are excited about the Blair Mine's growth potential as part of our continuing effort With respect to our industrial product solutions, we're constructing improvements at our Utica facility in the 4th quarter to add Cooling and Blending Capabilities. The expansion of our industrial products capabilities will allow us to serve our broader market segment. Industrial sand sales volumes have been approximately 5% of our sales volume over the last few quarters, and we expect those sales to grow in 2024. We continue to make progress penetrating the last mile market. With the introduction of our Smart Belt direct to blender technology, we're delivering the customers what they want, Faster fracs and less trucking through maximizing payload per truck and minimizing unload times.

Speaker 2

In response to customer demand, Our Smart Systems fleet offering now includes our Smart Belt conveyor system and our proprietary SmartPath Transloader. During the quarter, we operated 4 smart system fleets and 4 silo only fleets. Based on customer feedback and demand, we're excited about the See normal seasonal slowdown in the Bakken as we move into the winter months. Additionally, we are seeing some budget exhaustion from customers who accelerated spending in the first in the Appalachian Basin starting in November. We expect industrial sales in the 4th quarter to be in line with 3rd quarter results.

Speaker 2

We are excited about our prospects in 2024. In October, we signed 3 new contracts. We currently have approximately 50% of our expected sales volumes contracted for 2024. 2 of these new contracts are Customers in the Appalachian Basins and one is for a customer in the Bakken. Based on the current market conditions and commodity prices, We expect volumes in these two key markets for Svartsand to be strong in 2024.

Speaker 2

Natural gas fundamentals continue to be positive with continued growth in natural gas To support the expected long term positive market fundamentals in the Marcellus, we have expanded our Waynesburg, Pennsylvania terminal. We now have the capability to handle multiple products at this location and increased volumes. With our improvements completed, We are anticipating higher industrial sales volume in 2024. Our new cooling and blending capabilities allow us to compete more effectively in the foundry and glass We are still in our budgeting process for 2024, so we'll have more details for our expectations for 2024 on our 2024 year end call. However, based on current market conditions, we expect overall sand sales volumes for 2024 To be at least 10% higher than 2023 sales levels.

Speaker 2

For our last mile business, by year end, we will have TAN Smart Systems with SmartPath and Smart Belt Technology ready to deploy in the field. Going into 2024, We expect to have increase in our utilization of our Smart Systems fleet over the course of the year. Building our Northern White Sand franchise will continue to be our primary focus. Our goal is to increase the utilization of our 3 operating mines, Oakdale, Utica and Blair and to expand our market share in every basin we serve. We have approximately 10,000,000 tons of high quality Northern White Sand capacity available to serve the frac sand and industrial markets.

Speaker 2

This capacity is tied directly into 4 Class 1 railroads. We have the best in class terminals serving the key Bakken and Appalachian Basins and a network of high quality well positioned third party terminal partners. We can serve every market in North America through our efficient low cost logistics footprint. With our smart systems technology, We can meet increasing demand of customers looking for higher volume of sand delivered to the well site in a safe and efficient manner. We also have a well tenured management team that are owners in the business and are focusing on delivering long term value for our employees and shareholders.

Speaker 2

Most of the current executive team has been with Smart Sand for over 10 years and are committed to the company's long term success. We will continue to look for ways to increase shareholder value. We have a strong balance sheet with 1 of the lowest leverage levels in the industry, which allows us to manage through cycles in the Energy business and provides us the ability to move quickly to take advantage of new opportunities in the market. Our goal is to continue to deliver positive free cash flow. While taking advantage of opportunities to grow the business, we will also continue to look for ways to We believe the Northern White Sand will continue to be a key product for both the energy and industrial sand markets.

Speaker 2

And Smart Sand is committed to being a leading provider of Northern White Sand. As always, we'll keep our employee and shareholders' interest in mind in everything we do. We continue to evaluate ways we can return value to our shareholders. We have bought back approximately 11% of our shares this year And there will be more to come on our year end earnings call in early 2024. And with that, I'll turn the call over to our CFO, Lee Beckelman.

Speaker 3

Thanks, Chuck. Now I'll go through some of the highlights of the Q3 2023 compared to our Q2 2023 results. We sold 1,200,000 tons in the 3rd quarter, a 12% increase over 2nd quarter sales volumes of 1,100,000 tons. Total revenues for the Q3 were $76,900,000 compared to $74,800,000 in the 2nd quarter. Total revenues were higher in the Q3, primarily due to contractual shortfall revenue recognized in the quarter.

Speaker 3

Our cost of sales for the quarter were $62,500,000 basically flat with 2nd quarter results. Total operating expenses of 9 point $5,000,000 in the 3rd quarter were marginally lower than 2nd quarter operating expenses of 9,600,000 Contribution margin was $21,000,000 or $17.20 per ton in the 3rd quarter. 2nd quarter contribution margin was $19,000,000 or $17.57 per ton. Adjusted EBITDA in the 3rd quarter was $13,300,000 compared to $11,400,000 in the 2nd quarter. The sequential increase in contribution margin and adjusted EBITDA The Q3 was primarily due to the shortfall revenue recognized in the quarter and relatively flat cost of goods sold and operating expenses.

Speaker 3

For the Q3 of 2023, we generated $12,500,000 in net cash provided by operating activities, Leading to $5,600,000 in free cash flow after we spent $6,900,000 on capital expenditures. Year to date through the end of September, we have generated $17,500,000 in free cash flow from $33,600,000 in net cash provided by operating Activities less $16,100,000 in capital expenditures. We ended the 3rd quarter with no outstanding borrowings on our credit facility. We had approximately $9,300,000 in cash and cash equivalents at the end of the 3rd quarter. And between cash and availability From our credit facility, we currently have available liquidity in excess of $28,000,000 As Chuck highlighted, we do expect demand to moderate some in the 4th Due to normal seasonal slowdown in the Bakken and budget exhaustion from customers at the end of the year.

Speaker 3

Currently, we expect 4th quarter sales volumes to be in the 900,000 ton to 1,100,000 ton range. Normally the 4th quarter and 1st quarters of the calendar year, We have higher reported production costs due to drawing down inventory that we have capitalized in the summer months to meet our winter sales volumes. Currently for the Q4, we believe contribution margin per ton will be in the mid double digit range of $12 to $16 per ton. We expect capital expenditures for the year to be in the $20,000,000 to $23,000,000 range, which includes the capital expenditures related to the startup of the Blair facility, The expansion of the Waynesburg terminal and investment in the cooling and blending capabilities at our Utica facility. Chuck highlighted, we expect to be free cash flow positive for the year.

Speaker 3

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

Operator

Thank you. We will now begin the question and answer session. Our first question comes from John Daniel from Daniel Energy Partners. John, please go ahead.

Speaker 4

Thank you. Good morning, guys. Just one question for me, If I may, the commentary about 24 volumes being up 10%, do you see your sense is that 10% rise in activity, is it completions design completion designs are changing so it's more volume per well, is it a new customer? Just Any incremental color would be appreciated.

Speaker 3

Yes, I'll start with that, John. I think some of it is actually We have actually signed a couple of new customers and increased some volumes with some existing customers. So some of that is increased activity Related to that. And then I think we continue to see trends with the longer laterals and more stages per lateral. We continue to Trends were more sand per well, which I think is helping driving even if you see kind of flat spending, more sand per well is the trends we've been seeing.

Speaker 1

And what

Speaker 5

I would add to that is just also as we continue to see our Canadian market ramp up, that's a new market that we haven't participated in Prior. So our Blair facility is positioned really well for attacking that market.

Speaker 4

Got it. Okay. And then I'll

Speaker 2

add John is that In the Appalachian Basin and some of the other basins that we're servicing, there's a higher demand for fine sand. A lot of the existing Northern White infrastructure We feel like we're in a good space to service.

Speaker 4

Perfect. Thank you all very much for including me.

Operator

Thank you. And our next question comes from Patrick Ulet from Stifel. Patrick, you may proceed.

Speaker 6

Hey, it's Pat on for Steven Jagera today. Thanks for taking the questions.

Speaker 7

Yes.

Speaker 6

So in regards to the Canadian market, Obviously, part of the increased volumes attributable to Blair there. We're curious if you could provide any insight on how to think about margin there. It was kind of the same as other regions or if the quarter over quarter step up in margin Attributable to Canadian market at all?

Speaker 3

Well, margins are relatively consistent with other regions. I think It depends on the product. And so we're seeing maybe a little higher pricing in Canada, but it's not dramatically different than what we're seeing in the U. S.

Speaker 6

Currently?

Speaker 5

Yes. And the other thing I would add to that from an operational standpoint, as we continue to ramp up operations at Blair, Production costs should come down at the level similar to Oakdale. I mean it's a very similarly logistically situated plant Mine, wet and dry processing, lowdown all on-site. So we have I think from driving Margin out of that plant, we should be able to drive down production cost too as we get more utilization.

Speaker 2

We can utilize that plant. That's actually Referring to the CN plant that we have in Blair, Wisconsin, that plant can send sand to the U. S. As well for the Appalachian Basin, but we're Super excited to be able to get this up to a Canadian market that we never had before on our other rail providers, so which looks to have some pretty good growth

Speaker 3

Sure. Got it.

Speaker 6

Okay. Thanks. That's great color there. That's all for me. I'll turn it back.

Speaker 4

Thank you.

Operator

And our next question comes from William Bremer from Vanquish Capital Partners. William, please go ahead.

Speaker 7

Good morning, gentlemen.

Speaker 1

Good morning, William.

Speaker 3

Hey, Chuck. Well, 1st and

Speaker 7

foremost, the balance sheet is looking fantastic. You guys have done a fantastic job Capital allocation, and I might give you a lot of credit on that and echo the Comments you made regarding your leverage compared to your peers, so well done there. My question is on the Industrial side. And I was wondering if you could provide us a little more granularity in terms of what end markets you're supplying? And secondly, Have you been able to penetrate the Canadian industrial market at this time?

Speaker 2

So John has kind of been the focus on the industrial sands part. We're along with our shares, so I'll let him answer that question. But yes, we're definitely focused on Canada well from the industrial sands just from my standpoint.

Speaker 5

Yes, William. So yes, I mean, we're focused on the traditional industrial markets. And in order of kind of volume, It would be glass, foundry and then kind of falls off there recreational and other types of things. With the addition of our blending and cooling capability out of our Utica plant there, we expect to continue to grow

Speaker 7

that industrial market. Having blending and cooling capability gets

Speaker 5

us into markets that we're incapable of And cooling capability gets us into markets that we're incapable of pursuing prior to having that capability. Again, industrial is always going to be a lag from volume compared to frac. Frac Joe is the big dog in the volume world, but our expectation is that in some industrial applications you can have Relatively high margin specialized products and that's really what we're focused on out of our industrial base.

Speaker 7

Well said, John. Thank you.

Speaker 2

Thanks for the question.

Operator

Thank you very much. And this concludes our question and answer session. I would like to turn the conference back over to Chuck Young for some closing remarks.

Speaker 2

Thank you for joining us on the call today. We look forward to speaking to you again on our Q4 call early next year.

Operator

And this concludes the conference. Thank you very much for attending today's presentation.

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Smart Sand Q3 2023
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