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spk11: Good day, and thank you for standing by, and welcome to the Smart Fan, Inc. Second Quarter 2021 Earnings Conference Call. At this time, our participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. To ask a question during the session, you'll need to press star 1 on your telephone. If you require any further assistance, please press star zero. I would now like to hand the conference over to Josh Jane, Director of Finance and Assistant Treasurer. Please go ahead.
spk04: Good morning, and thank you for joining us for SmartSend's second quarter 2021 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. SmartSAN 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 4, 2021. Additionally, we may refer to the non-GAAP financial measures of contribution margin, EBITDA, adjusted EBITDA, and free cash flow during this call. We believe that 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 contribution margin to gross profit, EBITDA and adjusted EBITDA to net income, and free cash flow to cash flow provided by operating activities. I would now like to turn the call over to our CEO, Chuck Young.
spk07: Thanks, Josh, and good morning. We enjoyed another good quarter for volume with similar tonnage to the first quarter. Second quarter volumes of 767,000 tons are up 269% from the second quarter 2020 levels when the pandemic began to negatively impact our business. Additionally, sand sales volumes in the first half of 2020 were approximately 10% higher than the first six months of 2019. So while our activity was flat quarter to quarter, our overall activity is trending higher this year than before the pandemic severely impacted our activity. This upcycle so far is different than previous upcycles in the oil and gas industry. While market activity is much stronger today than it was a year ago, EMPs continue to focus on spending within their cash flow. This spending discipline has led to a slower recovery for sand demand in our core markets. We are committed to living within our cash flow. while still pursuing opportunities to expand our business. We are managing our operating costs in line with current activity levels, but have the incremental capacity to sell more sand with minimal additional investment. So we can quickly respond should market activity begin to increase. We are actively pursuing opportunities to expand our customer base and logistics capabilities in key long-term markets. This week, we announced a new three-year agreement to supply sand to EQT, including at a new trans-loading terminal that we intend to have operational by the end of this year. This new contract demonstrates our continued commitment to provide long-term, sustainable sand supply and logistics solutions to our customers. The Appalachian Basin is a key market for SmartSand, and as we move towards adding a new terminal there, we expect to offer even greater efficiency to our customers while also providing ESG benefit by reducing trucking mileage and associated carbon emissions related to sand delivery. With our diversified asset base and very strong balance sheet, we remain uniquely positioned to keep pursuing our long-term strategy to be the premium supplier of northern white frac sand from the mine to the well site. We are pleased that we reached a settlement with U.S. Well Services during the second quarter The $35 million cash payment we received in June further strengthened our balance sheet and increased our liquidity. In addition to the cash, U.S. Wealth Services has entered into a two-year right-of-first refusal agreement with SmartSan, covering all purchases of northern white frac sand by U.S. Wealth Services and its affiliates in the continental United States from January 1, 2022 through December 31, 2023. We look forward to having you as well as a customer again soon. Today, we have 37 million in cash on our balance sheet and approximately 55 million in liquidity. Even though we have a strong balance sheet, we will remain disciplined with respect to capital spending and focused on maximizing cash flow. We remain committed to the last mile market with our smart systems, including our SmartPath Translator, which we believe is unlike anything in the industry. SmartPath was successfully deployed for the first time during the first quarter and continued to work through the second quarter. We anticipate additional deployments in the back half of the year. Using our smart systems, we estimate that the number of trucks needed to deliver sand to the well site will be reduced by more than 30% versus our competitors' offerings. By taking trucks off the road, accidents are reduced, carbon emissions are reduced, and noise is reduced. Smart systems are also uniquely designed to reduce dust. By reducing accidents, carbon emissions, noise, and dust, we are keeping people safer and striving to meet the ESG goals of SmartSand and our customers while providing a reliable, efficient, last-mile solution for the industry. We're excited about our future for a number of reasons. We have more cash on the balance sheet today than at any other point over the last three years. Sales volumes are up. They remain far above 2020 levels and are trending higher than 2019 volumes. Strong commodity prices should yield higher spending in 2022 and beyond. We are well positioned to take advantage of any increased market activity with our available capacity, ample liquidity, and strong balance sheet. Having operated SmartPath successfully for two quarters, we look forward to expanding our last mile market share. As always, we'll continue to keep our eye on the future and we'll 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 Beckelman.
spk01: Thanks, Chuck. While we are encouraged by the pickup and activity we have seen thus far in 2021, E&Ps have stayed disciplined with respect to spending within their cash flow. As Chuck indicated, Second quarter 2021 volumes were slightly higher than first quarter 2021 volumes. We continue to expand our customer base during the second quarter and believe a more diverse customer base will strengthen our business going forward. We remain committed to low leverage levels, a prudent capital structure, generating positive free cash flow for the year, and maintaining adequate liquidity levels. Now we'll go through some of the highlights of the second quarter compared to our first quarter 2021 results. Starting with sales volumes, we sold 767,000 tons in the second quarter 2021, a slight increase over the first quarter 2021 volumes of 760,000 tons. Total revenues for the second quarter 2021 were $29.6 million compared to $27.5 million in the first quarter 2021. The revenue increase was driven by higher in-basin sales in the second quarter compared to the first quarter. Sand revenues were higher by $5.7 million, which more than offset the decline in logistics revenue of $1.7 million. Our cost of sales for the quarter were $32 million, compared to $32.4 million last quarter. Despite a slight increase in revenues in tons sold, we actually saw a decline in our cash production costs quarter over quarter by approximately 5%. Total operating expenses were $26.3 million, compared to 6.1 million last quarter. The increase from the first quarter is primarily driven by 19.6 million recorded as non-cash bad debt expense in the current period, which is the difference between the 54.6 million accounts receivable balance that was subject to the company's litigation with U.S. Wealth Services and the $35 million cash received in the settlement of such litigation. While the company wrote down a portion of the receivables that it had previously recorded related to the disputed contract with US Well, it increased its cash position by $35 million as a result of the proceeds received in the settlement. Second quarter 2021, contribution margin was $3.5 million, and we had negative adjusted EBITDA of $21.5 million compared to first quarter contribution margin of $1 million and negative adjusted EBITDA of $3.5 million. Although we generated a higher contribution margin from improved average selling prices and lower cash production cost, adjusted EBITDA declined in the second quarter of 2021 compared to the first quarter of 2021, primarily as a result of the $19.6 million bad debt expense recorded in the second quarter of 2021 related to the settlement of litigation with U.S. Well. For the second quarter of 2021, we had $29.7 million in free cash flow. generating 32.6 million in operating cash flows while spending 2.8 million on capital investments. Year-to-date, we had 31.4 million in free cash flow, generating 36.5 million in operating cash flows while spending 5 million on capital investments. The majority of capital investments year-to-date have been on new smart systems units. During the quarter, we didn't use our revolver and still have no outstanding borrowings other than 1.2 million in letters of credit. Our current unused availability under the revolver is $13 million. Additionally, we have $5 million in unused availability from the acquisition liquidity support facility we put in place with the Eagle Province business acquisition. We paid $1.7 million against our notes payable and equipment financing in the quarter and have paid down approximately $3.4 million year-to-date. We expect to pay down a similar amount in the second half of the year, and therefore, we'll reduce our debt by approximately $6.9 million this year. We ended the second quarter with approximately $39 million in cash. Our current cash balance is approximately $37 million. Between cash and our availability in our facilities, we currently have approximately $55 million in available liquidity. We do not expect to have any borrowings on our ABL revolver for the remainder of the year other than letters of credit. In terms of guidance for the third quarter, we expect sales volumes to decline by 10 to 15 percent from second quarter levels. The anticipated drop in sales volumes is due primarily to timing of well programs from our current customers, particularly in the Bakken. We're seeing some white space and activity in this region between wells completed in the second quarter and start up a new well pads. Anticipate capital expenditures for 2021 to be in the 10 to 12 million range and expect to be a free cash flow positive for the full year. This concludes our prepared comments and we will now open the call for questions.
spk11: As a reminder, to ask a question, you'll need to press star one on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. And our first question comes from Bill Austin from Daniel Energy Partners. Your line is now open.
spk08: Hey, guys.
spk01: Hey, Bill.
spk08: Hey, I just wanted to start with a little on, you know, If you wouldn't mind just characterizing the competitive landscape that you're seeing in the Northern White market today?
spk09: Yeah, sure, Bill. So, what we're seeing out there is we've got, you know, the traditional providers of Northern White up in, you know, servicing kind of Midwest and Northeast, and then a little bit down south into, you know, some opportunities in Oklahoma. You know, the northern white sand market is relatively healthy. We are seeing, as Lee mentioned in his comments, you know, with our deliveries into North Dakota, we're seeing a little bit of white space as our customers out there retool for a push towards the end of the year. With regard to, you know, who our main competitors are up there, you know, it's primarily U.S. Silica and Covia. There's a couple of smaller operators that provide sand there, but With our asset diversity on rail, both UP, CP, and now BN origination, we're competing pretty well up there as opposed to where we were when we only had a single railroad. So we feel pretty good about it. Great.
spk08: Thanks. And then one more, you know, touch on it a little bit, but have you guys seen any logistics challenges with all these simulfracs that are happening? You know, is this going to create problems down the road with the, with the amount of sample practice that we're kind of seeing in the market?
spk09: Well, I think what you're touching on there is kind of trucking, right? And certainly we've heard anecdotal evidence that trucks are a problem. Our view on trucking is that you've got your supply chain is only as strong as your weakest link, and trucking traditionally has been difficult. Last mile is always difficult in that respect. And so our view on that is what you've got to do is you've got to make truckers more efficient. You've got to make their load times shorter. So when we build transloads out there, we're focused on keeping those load times as short as possible, keeping the time that a trucker waits in line to be loaded as short as possible. We want our transloads to be strategically located so the truck distance is shorter. And then when we get to the well site, we want to offload those trucks as quick as possible. And so When we think about trucking, we look to other bulk commodity businesses for what they've done in trucking. And one of the things that's obvious to us is the use of bottom dump hopper trucks. They load very quickly. They unload very quickly. And what they also do is they have a heck of a lot more throughput than a traditional pneumatic truck or a box system because they don't weigh as much. So you're able to get that advantage translates into more throughput. So our focus is really helping those truckers out, making them more efficient, and thinking about in the long term how we encourage truckers to come into this business and kind of alleviate some of that supply chain. And we think with kind of our smart systems that are capable of doing bottom dump trucks, we've got a leg up on the competition there.
spk08: Okay. Thanks. And my last one, I know you touched on it again real briefly at the end. You know, any of the budget shortfall that you guys are seeing from the operators, how do you guys think about that in terms of Q4, you know, potential seasonality in terms of what you guys are seeing out there? I know you briefly hit it, but, like, anything more on how you guys are seeing that in the fourth quarter? Or is it too early to tell?
spk01: Yeah, I think, Bill, it's a little too early to tell. I mean, we are seeing a little slowdown in the Balkan on timing issues, and I think that could pick back up. And we do expect some pickup in activity in the northeast in the fourth quarter, but it will really be dependent on how our volumes go quarter to quarter on really that western United States activity. And does it pick back up at the end of the year in weather, and also are the EMPs going to continue their budget spending into the fourth quarter or basically look to move some of that into the first half of next year? It's a little hard to say, but I do think we do expect pickup in the northeast, but it's a little early to see how the planning is going for fourth quarter in the Bakken and some of the other western basins we're now competing in.
spk09: Yeah, and the only thing I would add to that, Bill, is as we kind of look at commodity pricing out there, both on oil and natural gas and with the new terminal we're building up in the Northeast, we think we could blunt some of that seasonality that we've seen in past years with the ability to get throughput if the weather is difficult or we see kind of any of the seasonality associated with flooding or whatever in the Northeast.
spk08: Okay. Well, I appreciate it, guys, and thanks a lot. I'll turn it back over.
spk11: And thank you. And our next question comes from Stephen Gingaro from Stiefel. Your line is now open.
spk06: Thanks. Good morning, gentlemen. Good morning, Stephen. A couple of things for me, if you don't mind, and one is I think following up on the prior question. You mentioned in your prepared comments about Smart systems and sort of the 30% drop you see in trucks to the well site. I'm just curious, is that a silo versus container benefit, or is that something within your systems relative to the market?
spk09: So, yeah, Stephen, what we're specifically referring to there is the amount of throughput you get through a truck. So to give you an example, up in North Dakota, we see throughputs as high as 35 tons per truck, right? North Dakota has – not to get too technical, but North Dakota has 106,000-pound gross weight trucks up there. And so when you have a 35-ton throughput – which is brought about as a result of them using what is effectively a relatively light grain trailer or grain-type trailer versus a box, right, a box you've got steel that makes up the box that cuts down on the throughput of that. So 30% is an estimate of the difference between how much throughput you can get on a box or a traditional pneumatic trailer versus some of these grain trailers that are out there now that you're able to bring this huge amount of throughput. So if you're increasing your throughput by, you know, call it 10 tons per load, that's where you kind of get to that 30%.
spk06: Got it. Thank you. I think Lee touched on this a bit in the prepared comments as well, but the average revenue per ton in the quarter, it was up sequentially, and I think it was – related to the in-basin sales side, and I was just curious, is there any price there, and what are you seeing kind of on the pricing backdrop?
spk01: I think right now we're seeing pricing being kind of stable to having some improvement, and overall opportunities for improvement and margin by delivering in-basin and managing our logistics costs there, so I think it's been relatively stable, and we see some opportunity for a little improvement, but right now we don't see I think we're basically viewing it as a relatively stable market for pricing right now.
spk06: And then can you tie that in at all to the, like as we think about contribution margin for ton in the current environment, I mean, we, we tend to think about it as probably around mid single digits kind of where, where you came in in the quarter. Is that, is that reasonable if you, I guess it blends depending on sort of cost of goods sold because of the seasonality, but is that a, a reasonable sort of starting point?
spk01: Yeah, I think at our current kind of volumes and what we're looking at, that we would be in that mid-single digits level and be consistent, you know, in the range of what we ended up did in the second quarter.
spk06: Great, thanks. And then if you don't mind, one final one on my end. You know, you got this U.S. World Services issue behind you. You have a lot of cash. the balance sheet's in great shape. I know you have some capex. How do you think the use of cash evolves over time? And so I'm sort of just thinking about how much cash you'd like to have on the balance sheet to run a business and maybe using it in some ways to return to shareholders over time.
spk01: Well, I'll start, and maybe Chuck can chime in as well. But I think it's a little early. I mean, we definitely like our liquidity position. We like having that cash, and it is a strategic asset to us that we can look to utilize in terms of how we see incremental growth opportunities to help increase our utilization of our existing assets. I think that's a key focus. Can we use some investment to, whether it be in terminals or improving the utilization of smart systems, how do we get more utilization and throughput through our existing asset base? And then, you know, I think once we have, you know, kind of see where the business is stabilized and where our cash is, we can consider, you know, other uses of cash on our balance sheet, albeit from some type of return to shareholders.
spk07: And one other thing I would add is the 14% shareholder of SmartSand. We don't like that. And, you know, we're going to try to abide by that.
spk06: Okay. Great. Thank you, gentlemen.
spk11: Thank you. And our next question comes from Samantha Ho from Evercore ISI. Your line is now open.
spk03: Hey, guys. Just a real quick one for me. I think I heard that CapEx guidance was reduced on the upper end from $15 to $12 million. But meanwhile, you're building out this new transload facility. Can you kind of walk me through the movement there in terms of your CapEx guidance?
spk01: Yeah, the CapEx guidance is really separate from anything for that transload, and we have some other sources to help kind of pay for that transload. So the CapEx guidance is separate of that, and we're still finalizing what that number is, but from the guidance we gave from the 10 to the 15, under our normal business and discretionary capital we were using for smart systems, we are pulling that back to a tighter range of 10 to 12 million based on that spending.
spk03: So are you still thinking you'll have 10 smart systems deployed by year-end, or is that lower now?
spk01: Well, we've never said we'd have 10 deployed, but we said we'd have 10 that could be available. And we'll probably be in the 8 to potentially 10 range.
spk03: Okay. And what's the opportunity of maybe expanding your customer base using this new transload in Appalachia? Is there discussion going on with potential new customers now?
spk09: Yes, Samantha, there are, and the transload where it's going to be is in a really, really good spot. One of the interesting things about Appalachia, and one of the reasons we're so excited about this new transload, is it's relatively mountainous terrain around there, and finding a spot that has a The ability to build a large enough rail yard to be significant and provide the logistics advantages that we provide out of our Van Hook, North Dakota terminal is difficult, and we've managed to find a spot that is, I would suggest, is unique and at a fantastic location, kind of in the heart of where multiple operators are currently fracking. So, yeah, we're really excited. We're having conversations actively right now. with others, you know, in addition to EQT. So we're really, really excited about this new terminal.
spk03: Okay, great. And if I could just sneak one more. You know, I was curious about the trend in logistics with just, you know, shift to InBasin. Is that something that you think is going to be a trend, you know, through the second half? Or, I mean, can you maybe speak a little bit in terms of, you know, what's going on from the operator perspective there?
spk10: Are you referring to in-basin sales?
spk03: Yeah, I'm just kind of curious about the mix, you know, being more on in-basin this last quarter than prior.
spk01: No, I think in general, and John and Chuck can chime in, but in general we have seen a pickup and more of our movements going into in-basin pricing and delivery versus spot what I'd call FOB mine pricing.
spk09: Yeah, I would agree with that. And certainly, you know, as we look to get this new transload up and running, I think, you know, we'll probably see, you know, a bit more movement to pricing in-basin versus FOB the mine. Although, you know, we still do sell FOB the mine, and we've got a number of customers that take there. But ultimately, if you can prove out the logistics on the, you know, you know, customers want to take advantage of that. You know, they don't necessarily have entire groups spun up anymore to handle that kind of logistics management.
spk02: Okay, great. Thanks, guys.
spk11: And thank you. And we have a follow-up from Steve and Gengaru from Stifel. Your line is now open.
spk06: Thanks. Thanks for taking the follow-up. So two quick ones that I think are related, but the On the long-term agreement you announced yesterday with EQT, is that a – is it a kind of an index to a spot price? Is that how sort of the pricing dynamic works on that contract?
spk01: Yeah, we don't get specifically into contract pricing with customers, Stephen, so we're not going to comment on that.
spk06: Okay, okay. And in general terms, the – the transload terminal that you're building in Pennsylvania, will that tend to help – I believe it tends to help pricing and contribution margin per ton over time. Is that an accurate statement?
spk01: In general, yes, that's an accurate – particularly as we look to – with the terminal – we'll have more opportunity to not only work with EQT, but others that have in-basing pricing and provide that full value and hopefully capture margin through that.
spk07: It also helps us drive efficiency with the railroads. So we're able to, you know, demonstrate to the railroads that we can move large trains, you know, smoothly, effectively. We have on both sides ability to take the larger size trains in and out, which drives the efficiencies to the railroads. which should help in pricing.
spk09: Yeah, and then the last thing I would add to that is it provides a good firm base for us to continue marketing our last mile products into that market. So with the new terminal, we've got a home base for smart systems and kind of tying all those things together in a unified supply chain for customers.
spk05: Great. I appreciate the call. Thank you. Thank you.
spk11: Thank you. And I am showing no further questions. I would now like to turn the call back over to CEO Chuck Young for closing remarks.
spk07: Thank you for joining us on SmartSAN's second quarter's earnings call. We look forward to talking to you again in November.
spk11: Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you.
spk00: Thank you.
spk11: Good day, and thank you for standing by, and welcome to the SmartSAN, Inc. Second Quarter 2021 Earnings Conference Call. At this time, our participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. To ask a question during the session, you'll need to press star 1 on your telephone. If you require any further assistance, please press star zero. I would now like to hand the conference over to Josh Jane, Director of Finance and Assistant Treasurer. Please go ahead.
spk04: Good morning, and thank you for joining us for SmartSend's second quarter 2021 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. SmartSAN 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 4, 2021. Additionally, we may refer to the non-GAAP financial measures of contribution margin, EBITDA, adjusted EBITDA, and free cash flow during this call. We believe that 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 contribution margin to gross profit, EBITDA and adjusted EBITDA to net income, and free cash flow to cash flow provided by operating activities. I would now like to turn the call over to our CEO, Chuck Young.
spk07: Thanks, Josh, and good morning. We enjoyed another good quarter for volume with similar tonnage to the first quarter. Second quarter volumes of 767,000 tons are up 269% from the second quarter 2020 levels when the pandemic began to negatively impact our business. Additionally, sand sales volumes in the first half of 2020 were approximately 10% higher than the first six months of 2019. So while our activity was flat quarter to quarter, our overall activity is trending higher this year than before the pandemic severely impacted our activity. This upcycle so far is different than previous upcycles in the oil and gas industry. While market activity is much stronger today than it was a year ago, EMPs continue to focus on spending within their cash flow. This spending discipline has led to a slower recovery for sand demand in our core markets. We are committed to living within our cash flow. while still pursuing opportunities to expand our business. We are managing our operating costs in line with current activity levels, but have the incremental capacity to sell more sand with minimal additional investment. So we can quickly respond should market activity begin to increase. We are actively pursuing opportunities to expand our customer base and logistics capabilities in key long-term markets. This week, we announced a new three-year agreement to supply sand to EQT, including at a new trans-loading terminal that we intend to have operational by the end of this year. This new contract demonstrates our continued commitment to provide long-term, sustainable sand supply and logistics solutions to our customers. The Appalachian Basin is a key market for SmartSand, and as we move towards adding a new terminal there, we expect to offer even greater efficiency to our customers while also providing ESG benefit by reducing trucking mileage and associated carbon emissions related to sand delivery. With our diversified asset base and very strong balance sheet, we remain uniquely positioned to keep pursuing our long-term strategy to be the premium supplier of northern white frac sand from the mine to the well site. We are pleased that we reached a settlement with U.S. Well Services during the second quarter The $35 million cash payment we received in June further strengthened our balance sheet and increased our liquidity. In addition to the cash, U.S. Well Services has entered into a two-year right-of-first refusal agreement with Spartan covering all purchases of northern white frac sand by U.S. Well Services and its affiliates in the continental United States from January 1st, 2022 through December 31st, 2023. We look forward to having US Well as a customer again soon. Today, we have $37 million in cash on our balance sheet and approximately $55 million in liquidity. Even though we have a strong balance sheet, we will remain disciplined with respect to capital spending and focused on maximizing cash flow. We remain committed to the last mile market with our smart systems, including our SmartPath Translator, which we believe is unlike anything in the industry. SmartPath was successfully deployed for the first time during the first quarter and continued to work through the second quarter. We anticipate additional deployments in the back half of the year. Using our smart systems, we estimate that the number of trucks needed to deliver sand to the well site will be reduced by more than 30% versus our competitors' offerings. By taking trucks off the road, accidents are reduced, carbon emissions are reduced, and noise is reduced. Smart systems are also uniquely designed to reduce dust. By reducing accidents, carbon emissions, noise, and dust, we are keeping people safer and striving to meet the ESG goals of SmartSand and our customers while providing a reliable, efficient, last-mile solution for the industry. We're excited about our future for a number of reasons. We have more cash on the balance sheet today than at any other point over the last three years. Sales volumes are up. They remain far above 2020 levels and are trending higher than 2019 volumes. Strong commodity prices should yield higher spending in 2022 and beyond. We are well positioned to take advantage of any increased market activity with our available capacity, ample liquidity, and strong balance sheet. Having operated SmartPath successfully for two quarters, we look forward to expanding our last mile market share. As always, we'll continue to keep our eye on the future and we'll 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 Beckelman.
spk01: Thanks, Chuck. While we are encouraged by the pickup and activity we have seen thus far in 2021, E&Ps have stayed disciplined with respect to spending within their cash flow. As Chuck indicated, Second quarter 2021 volumes were slightly higher than first quarter 2021 volumes. We continue to expand our customer base during the second quarter and believe a more diverse customer base will strengthen our business going forward. We remain committed to low leverage levels, a prudent capital structure, generating positive free cash flow for the year, and maintaining adequate liquidity levels. Now we'll go through some of the highlights of the second quarter compared to our first quarter 2021 results. Starting with sales volumes, we sold 767,000 tons in the second quarter of 2021, a slight increase over the first quarter of 2021 volumes of 760,000 tons. Total revenues for the second quarter of 2021 were $29.6 million compared to $27.5 million in the first quarter of 2021. The revenue increase was driven by higher in-basin sales in the second quarter compared to the first quarter. Sand revenues were higher by $5.7 million, which more than offset the decline in logistics revenue of $1.7 million. Our cost of sales for the quarter were $32 million compared to $32.4 million last quarter. Despite a slight increase in revenues in tons sold, we actually saw a decline in our cash production costs quarter over quarter by approximately 5%. Total operating expenses were $26.3 million, compared to 6.1 million last quarter. The increase from the first quarter is primarily driven by 19.6 million recorded as non-cash bad debt expense in the current period, which is the difference between the 54.6 million accounts receivable balance that was subject to the company's litigation with U.S. Wealth Services and the $35 million cash received in the settlement of such litigation. While the company wrote down a portion of the receivables that it had previously recorded related to the disputed contract with US Well, it increased its cash position by $35 million as a result of the proceeds received in the settlement. Second quarter 2021, contribution margin was $3.5 million, and we had negative adjusted EBITDA of $21.5 million compared to first quarter contribution margin of $1 million and negative adjusted EBITDA of $3.5 million. Although we generated a higher contribution margin from improved average selling prices and lower cash production cost, adjusted EBITDA declined in the second quarter of 2021 compared to the first quarter of 2021, primarily as a result of the $19.6 million bad debt expense recorded in the second quarter of 2021 related to the settlement of litigation with U.S. Well. For the second quarter of 2021, we had $29.7 million in free cash flow. generating $32.6 million in operating cash flows while spending $2.8 million on capital investments. Year-to-date, we had $31.4 million in free cash flow, generating $36.5 million in operating cash flows while spending $5 million on capital investments. The majority of capital investments year-to-date have been on new smart systems units. During the quarter, we didn't use our revolver and still have no outstanding borrowings other than $1.2 million in letters of credit. Our current unused availability under the revolver is $13 million. Additionally, we have $5 million in unused availability from the acquisition liquidity support facility we put in place with the Eagle Province business acquisition. We paid $1.7 million against our notes payable and equipment financing in the quarter, and have paid down approximately $3.4 million year to date. We expect to pay down a similar amount in the second half of the year, and therefore, we'll reduce our debt by approximately $6.9 million this year. We ended the second quarter with approximately $39 million in cash. Our current cash balance is approximately $37 million. Between cash and our availability in our facilities, we currently have approximately $55 million in available liquidity. We do not expect to have any borrowings on our ABL revolver for the remainder of the year, other than letters of credit. In terms of guidance for the third quarter, we expect sales volumes to decline by 10 to 15 percent from second quarter levels. The anticipated drop in sales volumes is due primarily to timing of well programs from our current customers, particularly in the Bakken. We're seeing some white space and activity in this region between wells completed in the second quarter and start up a new well pads. Anticipate capital expenditures for 2021 to be in the 10 to 12 million range and expect to be a free cash flow positive for the full year. This concludes our prepared comments and we will now open the call for questions.
spk11: As a reminder, to ask a question, you'll need to press star one on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. And our first question comes from Bill Austin from Daniel Energy Partners. Your line is now open.
spk08: Hey, guys. Hey, Bill. Hey, Bill. Hey, I just wanted to start with a little on, you know, If you wouldn't mind just characterizing the competitive landscape that you're seeing in the Northern White market today?
spk09: Yeah, sure, Bill. So, what we're seeing out there is we've got, you know, the traditional providers of Northern White up in, you know, servicing kind of Midwest and Northeast, and then a little bit down south into, you know, some opportunities in Oklahoma. The northern white sand market is relatively healthy. We are seeing, as Lee mentioned in his comments, with our deliveries into North Dakota, we're seeing a little bit of white space as our customers out there retool for a push towards the end of the year. With regard to who our main competitors are up there, it's primarily U.S. Silica and Covia. There's a couple of smaller operators that provide sand there, but With our asset diversity on rail, both UP, CP, and now BN origination, we're competing pretty well up there as opposed to where we were when we only had a single railroad. So we feel pretty good about it. Great.
spk08: Thanks. And then one more, you know, touch on it a little bit, but have you guys seen any logistics challenges with all these simulfracs that are happening? You know, is this going to create problems down the road with the amount of silo tracks that we're kind of seeing in the market?
spk09: Well, I think what you're touching on there is, you know, kind of trucking, right? And, you know, certainly, you know, we've heard anecdotal evidence that, you know, trucks are a problem. Our view on trucking is that you've got, you know, your supply chain is only as strong as your weakest link, and trucking traditionally has been difficult. Last mile is always difficult in that respect. And so our view on that is what you've got to do is you've got to make truckers more efficient. You've got to make their load times shorter. So, you know, when we build transloads out there, We're focused on keeping those load times as short as possible, keeping the time that a trucker waits in line to be loaded as short as possible. We want our transloads to be strategically located so the truck distance is shorter. And then when we get to the well site, we want to offload those trucks as quick as possible. And so... When we think about trucking, you know, we look to other bulk commodity businesses for what they've done in trucking. And one of the things that's obvious to us is the use of bottom dump hopper trucks, right? They load very quickly. They unload very quickly. And what they also do is they have a heck of a lot more throughput than a traditional pneumatic truck or a box system because they don't weigh as much. So you're able to get that, you know, that advantage translates into more throughput, right? So our focus is really helping those truckers out, making them more efficient, and thinking about in the long term how we encourage truckers to come into this business and kind of alleviate some of that supply chain. And we think with kind of our smart systems that are capable of doing bottom dump trucks, you know, we've got a leg up on the competition there.
spk08: Okay. Thanks. And my last one, I know you touched on it, again, real briefly at the end. You know, any of the budget shortfall that you guys are seeing from the operators, how do you guys think about that in terms of Q4, you know, potential seasonality in terms of what you guys are seeing out there? I know you briefly hit it, but, like, anything more on how you guys are seeing that in the fourth quarter? Or is it too early to tell?
spk01: Yeah, I think, Bill, it's a little too early to tell. I mean, we are seeing a little slowdown in the Bakken on timing issues, and I think that could pick back up. And we do expect some pickup in activity in the northeast in the fourth quarter, but it will really be dependent on how our volumes go quarter to quarter on really that western United States activity. And does it pick back up at the end of the year in weather? And also, are the EMPs going to continue their budget spending into the fourth quarter or basically look to move some of that into the first half of next year? It's a little hard to say, but I do think we do expect pickup in the northeast, but it's a little early to see how the planning is going for fourth quarter in the Bakken and some of the other western basins we're now competing in.
spk09: Yeah, and the only thing I would add to that, Bill, is as we kind of look at commodity pricing out there, both on oil and natural gas and with the new terminal we're building up in the Northeast, we think we could blunt some of that seasonality that we've seen in past years with the ability to get throughput if the weather is difficult or we see kind of any of the seasonality associated with flooding or whatever in the Northeast.
spk08: Okay. Well, good. Well, I appreciate it, guys, and thanks a lot. I'll turn it back over.
spk11: And thank you. And our next question comes from Stephen Gingaro from Steve Thiefel. Your line is now open.
spk06: Thanks. Good morning, gentlemen. Good morning, Stephen. A couple of things from me, if you don't mind, and one is I think following up on the prior question. You mentioned in your prepared comments about, Smart systems and sort of the 30% drop you see in trucks to the well site. I'm just curious, is that a silo versus container benefit, or is that something within your systems relative to the market?
spk09: So, yeah, Stephen, what we're specifically referring to there is the amount of throughput you get through a truck. So to give you an example, up in North Dakota, we see throughputs as high as 35 tons per truck, right? North Dakota has – not to get too technical, but North Dakota has 106,000-pound gross weight trucks up there. And so when you have a 35-ton throughput – which is brought about as a result of them using what is effectively a relatively light grain trailer or grain-type trailer versus a box, right, a box you've got steel that makes up the box that cuts down on the throughput of that. So 30% is an estimate of the difference between how much throughput you can get on a box or a traditional pneumatic trailer versus some of these grain trailers that are out there now that you're able to bring this huge amount of throughput. So if you're increasing your throughput by, you know, call it 10 tons per load, that's where you kind of get to that 30%.
spk06: Got it. Thank you. I think Lee touched on this a bit in the prepared comments as well, but the average revenue per ton in the quarter, it was up sequentially, and I think it was – related to the in-basin sales side, and I was just curious, is there any price there, and what are you seeing kind of on the pricing backdrop?
spk01: I think right now we're seeing pricing being kind of stable to having some improvement, and overall opportunities for improvement and margin by delivering in-basin and managing our logistics costs there, so I think it's been relatively stable, and we see some opportunity for a little improvement, but right now we don't see I think we're basically viewing it as a relatively stable market for pricing right now.
spk06: And can you tie that in at all to the, as we think about contribution margin per ton in the current environment, I mean, we tend to think about it as probably around mid-single digits, kind of where you came in in the quarter. Is that reasonable if you, I guess it blends depending on sort of cost of goods sold because of the seasonality, but is that a, a reasonable sort of starting point?
spk01: Yeah, I think at our current kind of volumes and what we're looking at, that we would be in that mid-single digits level and be consistent, you know, in the range of what we ended up did in the second quarter.
spk06: Great, thanks. And then if you don't mind, one final one on my end. You know, you got this U.S. World Services issue behind you. You have a lot of cash. the balance sheet's in great shape. I know you have some capex. How do you think the use of cash evolves over time? And so I'm sort of just thinking about how much cash you'd like to have on the balance sheet to run a business and maybe using it in some ways to return to shareholders over time.
spk01: Well, I'll start and maybe Chuck can chime in as well, but I think it's a little early. I mean, we definitely like our liquidity position. We like having that cash and it is a strategic asset to us that we can look to utilize in terms of how we see incremental growth opportunities to help increase our utilization of our existing assets. I think that's a key focus. Can we use some investment to, whether it be in terminals or improving the utilization of smart systems, how do we get more utilization and throughput through our existing asset base? And then, you know, I think once we have, you know, kind of see where the business is stabilized and where our cash is, we can consider, you know, other uses of cash on our balance sheet, albeit from some type of return to shareholders.
spk07: And one other thing I would add is a 14% shareholder of SmartSand. We don't like that. And, you know, we're going to try to abide by that.
spk06: Okay. Great. Thank you, gentlemen.
spk11: Thank you. And our next question comes from Samantha Ho from Evercore ISI. Your line is now open.
spk03: Hey, guys. Just a real quick one for me. I think I heard that CapEx guidance was reduced on the upper end from $15 to $12 million. But meanwhile, you're building out this new transload facility. Can you kind of walk me through the movement there in terms of your CapEx guidance?
spk01: Yeah, the CapEx guidance is really separate from anything for that transload, and we have some other sources to help kind of pay for that transload. So the CapEx guidance is separate of that, and we're still finalizing what that number is, but from the guidance we gave from the 10 to the 15, under our normal business and the discretionary capital we were using for smart systems, we are pulling that back to a tighter range of 10 to 12 million based on that spending.
spk03: So are you still thinking you'll have 10 smart systems deployed by year-end, or is that lower now?
spk01: Well, we've never said we'd have 10 deployed, but we said we'd have 10 that could be available, and we'll probably be in the 8 to potentially 10 range.
spk03: Okay. What's the opportunity of maybe expanding your customer base using this new transload in Appalachia? Is there discussion going on with potential new customers now?
spk09: Yes, Samantha, there are, and the transload where it's going to be is in a really, really good spot. One of the interesting things about Appalachia, and one of the reasons we're so excited about this new transload, is it's relatively mountainous terrain around there, and finding a spot that has a The ability to build a large enough rail yard to be significant and provide the logistics advantages that we provide out of our Van Hook, North Dakota terminal is difficult, and we've managed to find a spot that is, I would suggest, is unique and in a fantastic location, kind of in the heart of where multiple operators are currently fracking. So, yeah, we're really excited. We're having conversations actively right now. with others, you know, in addition to EQT. So we're really, really excited about this new terminal.
spk03: Okay, great. And if I could just sneak one more. You know, I was curious about the trend in logistics with just, you know, shift to InBasin. Is that something that you think is going to be a trend, you know, through the second half? Or, I mean, can you maybe speak a little bit in terms of, you know, what's going on from the operator perspective there?
spk10: Are you referring to in-basin sales?
spk03: Yeah, I'm just kind of curious about the mix, you know, being more on in-basin this last quarter than prior.
spk01: No, I think in general, and John and Chuck can chime in, but in general we have seen a pickup and more of our movements going into in-basin pricing and delivery versus spot what I'd call FOB mine pricing.
spk09: Yeah, I would agree with that. And certainly, you know, as we look to get this new transload up and running, I think, you know, we'll probably see, you know, a bit more movement to pricing in-basin versus FOB the mine. Although, you know, we still do sell FOB the mine, and we've got a number of customers that take there. But ultimately, if you can prove out the logistics on the, you know, you know, customers want to take advantage of that. You know, they don't necessarily have entire groups spun up anymore to handle that kind of logistics management.
spk02: Okay, great. Thanks, guys.
spk11: And thank you. And we have a follow-up from Steve and Gengaru from Stifel. Your line is now open.
spk06: Thanks. Thanks for taking the follow-up. So two quick ones that I think are related, but the On the long-term agreement you announced yesterday with EQT, is that a – is it a kind of an index to a spot price? Is that how sort of the pricing dynamic works on that contract?
spk01: Yeah, we don't get specifically into contract pricing with customers, Stephen, so we're not going to comment on that.
spk06: Okay, okay. And in general terms, the – the transload terminal that you're building in Pennsylvania, will that tend to help – I believe it tends to help pricing and contribution margin per ton over time. Is that an accurate statement?
spk01: In general, yes, that's an accurate – particularly as we look to – with the terminal – we'll have more opportunity to not only work with EQT, but others to have in-basin pricing and provide that full value and hopefully capture margin through that.
spk07: It also helps us drive efficiency with the railroads. So we're able to, you know, demonstrate to the railroads that we can move large trains, you know, smoothly, effectively. We have on both sides ability to take the larger size trains in and out, which drives the efficiencies to the railroads. which should help in pricing.
spk09: Yeah, and then the last thing I would add to that is it provides a good firm base for us to continue marketing our last mile products into that market. So with the new terminal, we've got a home base for smart systems and kind of tying all those things together in a unified supply chain for customers.
spk05: Great. I appreciate the call. Thank you. Thank you.
spk11: Thank you. And I am showing no further questions. I would now like to turn the call back over to CEO Chuck Young for closing remarks.
spk07: Thank you for joining us on SmartSAN's second quarter's earnings call. We look forward to talking to you again in November.
spk11: Thank you. This concludes today's conference call.
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