Smart Sand Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 10, 2023

There are 6 speakers on the call.

Operator

Good morning and thank you for standing by. Welcome to Smart Sand Incorporated First Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer As a reminder, today's conference is being recorded. And I would now like to hand the conference over to your host today, Chris Green, VP of Accounting.

Operator

Chris, please go ahead.

Speaker 1

Good morning, and thank you for joining us for Smart Sand's Q1 2023 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 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. 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.

Speaker 1

This conference call contains time sensitive information and is accurate only as of the live broadcast today, May 9, 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 Young.

Speaker 2

Thanks, Chris, and good morning. Smart Sand delivered another quarter of strong operational and financial results. In the Q1, we sold approximately 1,200,000 tons. This is our 4th consecutive quarter of sales volume of 1,100,000 tons or more. We generated $17,800,000 in contribution margin in the quarter, our 3rd consecutive quarter of contribution margin in excess of $17,000,000 Additionally, we generated $1,100,000 in free cash flow in the quarter.

Speaker 2

This is our 3rd consecutive quarter of positive free cash flow. Adjusted EBITDA for the quarter was $8,100,000 A substantial improvement over the Q1 of 2022 and a strong number for a quarter that is typically impacted by higher reported seasonal production costs that 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 of our employees for their efforts and continued commitment to Smart Sand. We saw solid market demand in the Q1.

Speaker 2

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 will remain strong with increased LNG export activity coming online in North America over the next 24 months. With our Waynesburg terminal and our strong logistics network in the Northeast United States, including our ability to originate sand on 4 Class 1 rail lines, We are uniquely positioned to continue to be the leading supplier of high quality Northern White frac sand into this market. We are seeing strong continued demand in the Bakken. The Q1 is typically our weakest quarter for Bakken activity due primarily to winter weather issues.

Speaker 2

The trend continued this year and was accompanied by some rail slowdowns and unique customer operational issues. However, those issues are resolving We are seeing strong pickup in activity in May in the Bakken and currently expect that increased activity to continue over 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 mines to the well site. Northern White Sand continues to be the primary source of frac sand in the Eastern and Western Basins of the United States and in Canada. Canada being a major Northern White sand market was an important driver for our investment last year in the Blair Mine and Processing Facility in Wisconsin.

Speaker 2

The Montney and Duvernay Shale Basement in Northwest Alberta and the Montney Shale in Northeast British Columbia continue to have strong activity to growing LNG export demand for British Columbia into the Asian markets. The Canadian market today is approximately 80% supplied by Northern White Sand with limited potential for additional regional sand capacity, which should lead to continued long term growth and demand for Northern White sand into this market. Additionally, Blair gives us a new Class 1 origination point on the Canadian National. The CN origination gives us not only the ability to take advantage of new Canadian but also to provide additional access to the Northeast United States and different parts of the Bakken. We began investing in the Q1 to bring Blair online and we started shipping sand this month.

Speaker 2

We are excited about entering new markets and being able to reach our existing markets in new and competitive ways. With respect to the Canadian market, we are bullish on the prospects for strong demand and believe our Belair mine is the 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. With Blair coming online, We now have direct access to 4 Class 1 rail lines, the CP, UP, the BNSF and the CN. We also have great connections to the NS and CSX rail lines.

Speaker 2

With this access to all Class 1 rail lines combined with our direct control terminals in Van Hook, North Dakota and Waynesburg, Pennsylvania and our network of 3rd party terminals, we can now offer our customers sustainable and efficient cost effective solutions to all operating basins in North America. We are committed to the Northern White Sand market. We have made Investments over the last 2 years to establish Smart Sand as the premier provider of Northern White sand and logistics services in the market and those investments are all contributing to our improved financial performance. While our frac sand sales remain strong, we are continuing to look to grow our other business segments. Utilization of our Smart Systems Last Mile offering continues to improve.

Speaker 2

We're gaining momentum as we start to penetrate the market with our Smart Systems technology. We have added Bell technology to our service offering, which allows us to handle greater volumes of sand at the well site, while reducing our ongoing maintenance requirements. Our smart systems generated positive contribution in the Q1 and we expect continued improvement in the operational profitability of our Last Mile offering. While still a small part of our overall business, we continue to see good growth potential for our Industrial Product Solutions division. Industrial Product Solutions is a long term committed to diversify our business beyond oil and gas and to more effectively utilize our asset base.

Speaker 2

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'll 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 shareholders' Interest in mind in everything we do.

Speaker 2

And with that, I'll turn the call over to our CFO, Lee Bekleman.

Speaker 3

Thanks, Chuck. Now I'll go through some of the highlights of the Q1. Starting with sales volume, we sold 1,195,000 tons in the Q1 2023, A slight increase over the 4th quarter sales volumes of 1,175,000 tons. However, compared to Q1 of 2022, volumes increased by 40%. Total revenues for the Q1 of 2023 were $82,400,000 compared to $73,800,000 in the Q4 of 2022.

Speaker 3

Total revenues were higher in the Q1 due primarily Our cost of sales for the quarter were $70,700,000 compared to $62,700,000 last quarter. The increase was primarily due to higher production cost and higher freight cost. In the Q1, 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.

Speaker 3

Total operating expenses increased to $13,200,000 in the 1st quarter compared to $9,500,000 in the Q4 2022 due to a $1,900,000 net loss on disposal of fixed assets as we reconfigured 1 of our wet plants to increase the efficiency of its operations and upgraded some of our mining equipment. We also had higher compensation expense in the quarter due to year end 2022 bonuses being paid in the Q1 and additional management and administrative staffing to support our Blair operations. For the Q1 2023, contribution margin was $17,800,000 and adjusted EBITDA was $8,400,000 compared to the 4th quarter contribution margin of $17,400,000 and adjusted EBITDA of 10,700,000 While we had increased revenues from higher average sales prices and shortfall revenue in the Q1, this was offset by the increased seasonal production cost and higher freight expenses, leading to flat contribution margin sequentially. As highlighted previously, we do expect production cost to moderate in the second 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 start up of the Blair facility. For the Q1 of 2023, contribution margin per ton was 14 dollars 89 per ton compared to $14.77 per ton in the Q4 2022.

Speaker 3

For the Q1 of 2023, We generated $5,100,000 in net cash provided by operating activities, leading to $1,100,000 in free cash flow, after we spent $4,000,000 on capital expenditures. During the Q1, we drew on our revolver and ended the quarter with $7,000,000 in outstanding on our facility. We had approximately $7,600,000 in cash and cash equivalents at the end of the Q1. We recently paid off the outstanding balance on our revolver. Between cash and availability on our facilities, we currently have available liquidity in excess of 25,000,000 As Chuck highlighted in his comments, with the current low natural gas prices, we anticipate sales volumes into the Appalachian Basin to moderate in the Q2.

Speaker 3

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 $1,000,000 to $1,200,000 range in the second quarter. While expected 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 2nd quarter. We believe 2nd quarter contribution margin per ton will remain in the mid double digit range, consistent with the last two quarters. Shortfall revenue will be less in the 2nd quarter, as the majority of the reported shortfall revenue in the Q1 was related to one contract that recognizes shortfall revenues in the 1st and third quarter of each year.

Speaker 3

This contract expires in the Q3 of this year. We still expect capital expenditures for the year to be in the $20,000,000 to $25,000,000 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.

Operator

Thank you. At this time, we will conduct the question and answer session. Please standby while we compile the Q and A roster. Our first question comes from Patrick Wallet with Stifel. Patrick, your line is open.

Operator

Please go ahead.

Speaker 4

Hey, good morning, everyone. This is Pat on for Steven Jagaro. Gentlemen, thanks for taking the questions today.

Speaker 2

Hey, Seth. Good morning. Good morning.

Speaker 4

Hey, 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?

Speaker 5

The current frac sand price environment?

Speaker 1

Yes, please.

Speaker 5

Yes. So we haven't seen Any deterioration in frac sand pricing to date, I mean, we're definitely a little bit concerned about nat gas, but we seem to have a good Runway is to kind of nat gas demand. We've got good contracted customers in that respect. And Depending again, it's a seasonal thing. If we get a hot summer, nat gas pricing could come up.

Speaker 5

But we haven't seen any real deterioration in frac sand pricing. And with The Bakken coming on strong, we're seeing the ability to move that sand elsewhere.

Speaker 3

Great.

Speaker 4

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?

Speaker 5

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 Waynesburg and And some third party facilities that we move a good amount of sand in. 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 the logistical advantages we have.

Speaker 4

Great. All right. Thanks, gentlemen. That's good to hear and I'll turn it back.

Operator

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.

Speaker 2

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

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Earnings Conference Call
Smart Sand Q1 2023
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