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spk00: Morning, ladies and gentlemen. Thank you for standing by, and welcome to SmartSense First Quarter 2022 Endings Conference Call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press the star, then the one key on your touch-tone telephone. If you require offer assistance at any time, please press star, then zero. I would now like to hand the conference over to your speaker host, Josh Jahn, Director of Finance and Treasurer. Please go ahead.
spk02: Good morning, and thank you for joining us for SmartSAN's first quarter 2022 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, May 12, 2022. 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 and 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.
spk05: Thanks, Josh, and good morning. We enjoyed another good quarter for volume out of both Utica and Oakdale. First quarter volumes of 852,000 tons are up 12% from first quarter 2021 levels and trending up in March. But overall, we were essentially flat with last quarter due to logistics and weather issues in January and February. However, sales were strong in March, and March volumes represented 43% of our tons sold during the first quarter, setting up what we believe will be a strong run rate for the second quarter and balance of 2022. Commodity prices have remained strong, and we expect to achieve record volumes in 2022. Additionally, we completed the purchase of a sand mining and processing facility in Blair, Wisconsin, with a nameplate processing capacity of 2.9 million tons of frac sand per year. The plant remains idle and we are currently evaluating whether the equipment from that facility will have its best economic use at the Blair site or another of our locations. We expect to have more to report on this subject in later 2022. Pricing continues to improve as a result of strong market demand. As mentioned on our last call, first quarter results generally reflected pricing that was put into place in the fourth quarter of 2021. So far, our second quarter pricing is showing substantial improvement. Similar to others, we are experiencing increased costs due to inflation, logistical constraints, and labor shortages. However, we are prepared to meet these challenges and expect to see improved operating and financial results starting in the second quarter. With less than 15% of our capacity signed up under long-term contracts, we have the opportunity to take advantage of the improved market fundamentals, which should lead to higher prices and higher volumes sold. We are very pleased with the initial results we have seen at our newly constructed unit train-capable transloading terminal in Waynesburg, Pennsylvania. More than half the tons shipped through this terminal in the first quarter were shipped in March. we expect a larger percentage of our volumes will be shipped through this terminal going forward, which will drive our margins higher. The new terminal is exciting for us not only because it expands our presence in the Appalachian Basin, but also because it provides ESG benefits to customers in the region by reducing trucking mileage and associated carbon emissions related to sand delivery. As we have said many times in the past, We believe that bulk commodities belong on rail, and that sustainable logistics must include terminals close to our customers' drilling activity. Our mine-to-well site rail and terminal approach yields a safer, cost-efficient, and more reliable supply chain. We are pleased with the traction we are seeing in our industrial product solutions division. Our product list, number of customers, and geographical reach are all expanding quickly. we are working towards penetrating the glass, building products, foundry, filtration, recreation, and other markets throughout North America. Further, we plan to broaden our service capabilities with blending packaging as well as finer-grade products in the second half of 2022. We have seen an uptick in interest in our smart systems. We currently have eight Smart Depot silo fleets operating in the field, two of which are equipped with our SmartPath transloading system. We continue to expect positive contribution margin from this business in 2022. By using our smart systems equipped with the SmartPath, our customers can reduce the number of trucks needed to deliver sand to the well site by more than 30% versus our competitors' offerings, providing our customers with a substantial delivered-to-the-wellhead cost savings. Additionally, by taking trucks off the road, we benefit our communities by reducing accidents, carbon emissions, noise and dust. ESG goals are important to SmartSand and its customers, and SmartSystems helps achieve these goals by improving efficiencies and reducing impact. Our balance sheet remains strong. Today, we have $5 million in cash on our balance sheet and approximately $24 million in liquidity. We will continue to remain disciplined with capital spending while pursuing projects that will generate long-term value. We are excited about our future for a number of reasons. Our balance sheet remains in great shape and we have the assets in place to generate free cash flow during an upcycle. With mines situated on four Class 1 railroads, we now have the logistics in place to more efficiently deliver sand to our customers wherever they are operating. The market for sand has tightened significantly, which should allow us to generate improved operating and financial results beginning in the second quarter. Having operated the SmartPath successfully for more than a year, we look forward to expanding our last mile market share. Industrial product solutions is growing quickly and is diversifying our business at margins that exceed oil and gas margins and provide more stability to our earnings profiles. As always, we'll continue to keep our eye on the future, and we'll always keep our employee and shareholders' interest in mind in everything we do. And with that, I'll turn the call over to our CFO, Lee Beckleman.
spk01: Thanks, Chuck. Now we'll go through some of the highlights of the first quarter compared to our fourth quarter 2021 results, starting with sales volumes. We sold 852,000 tons in the first quarter of 2022, a 2% decrease from the fourth quarter 2021 volumes. of 872,000 tons. Chuck discussed whether logistical issues impacted shipments in January and February. The sales volumes were strong in March, and we expect that trend to continue. Total revenues for the first quarter of 2022 were $41.6 million, compared to $35.1 million in the fourth quarter of 2021. Sand revenues were $38.3 million, up 12% sequentially, due primarily to higher pricing and $1.9 million in shortfall revenue recognized in the quarter. Cost of sales for the quarter were $43.6 million compared to $39.4 million last quarter. Production costs were higher sequentially due to higher utility costs driven by increased natural gas prices, increased equipment and maintenance expenses, and higher freight expense due to higher end basin sales in the quarter. Total operating expenses were $7.9 million compared to $8.5 million last quarter. The decrease was mainly a result of bonuses that were paid in the fourth quarter of 2021. For the first quarter of 2022, the company had a net loss of $5.9 million or 14 cents per basic share and diluted share compared to a net loss of $12.2 million or 29 cents per basic and diluted share for the fourth quarter of 2021. For the first quarter of 2022, contribution margin was $4.3 million, and we had a negative adjusted EBITDA of $1.9 million, compared to the fourth quarter contribution margin of $1.9 million and a negative adjusted EBITDA of $4.5 million. For the first quarter of 2022, we had negative $19 million in free cash flow due to a negative $8.7 million in operating cash flows, $3.8 million on capital expenditures, and $6.5 million spent to acquire the Blair assets during the quarter. The $3.8 million in capital expenditures in the quarter was primarily related to the completion of our Waynesburg, Pennsylvania, transloading terminal. Operating cash flow was negatively impacted by an increase in working capital late in the quarter due to the increased sales activity in March, which we expect to be a benefit in the second half of the year. During the quarter, we didn't use our revolver. We still have no outstanding borrowings other than $1 million in letters of credit. Our unused availability under the revolver is currently approximately $19 million. We paid down $1.8 million against our notes payable and equipment financings in the first quarter. Our current cash balance is approximately $5 million. Between cash and our availability in our facilities, we currently have approximately $24 million available liquidity. In terms of guidance for the second quarter, we currently expect sales volumes to increase by more than 25 percent from first quarter levels. March volumes represented 43 percent of our total volumes in the first quarter. We have seen March activity levels continue into April and have strong visibility for the balance of the second quarter. Pricing continues to improve, which combined with higher sales volumes should lead to higher contribution margins in the second quarter. We spent 10.3 million in capital expenditures in the first quarter, including 6.5 million related to the acquisition of the Blair facility. We continue to expect capital expenditures for the year to be in the 25 to 30 million range, with the additional capital over the remainder of 2022 currently planned to be spent on efficiency projects at Oakdale and Utica and investments to support our growing IPS business. This concludes our prepared comments, and we will now open the call for questions.
spk00: Thank you. Ladies and gentlemen, if you'd like to ask a question at this time, you will need to press the start and the one key on your touch-tone telephone. Please stand by. We'll be compiling the Q&A roster. Now, our first question coming from the line of John Daniel with Daniel Energy. Your line is open.
spk04: Hey, good morning, gentlemen. Thanks for putting me in the queue. I guess my first question is really just tied to sort of where the current pricing trends you're seeing there and then willingness on either your part or the customer's part to start locking up some of those volumes and what could be a duration of that.
spk03: Yeah, sure. Hey, John. Yeah, so in the early first quarter, you know, we saw our FOB, what we call our FOB equivalent, the mind gate pricing, kind of low to mid-20s. And now we're, you know, as we exit and into the second quarter, we're, you know, well into the 30s now. And, you know, those pricing, you know, that – Our pricing, we're able to increase our pricing regularly here right now. The market's still pretty tight for sand. You know, as far as outlook for the rest of the year, you know, again, assuming strong commodity price, oil and natural gas, and relatively low amounts of contractor volume, most of our volume right now is spot, we should be able to keep moving the price up.
spk04: Okay. I know you don't want to put an exact price on this, Chuck, but directionally, when would you want to start contracting?
spk03: Well, we're always interested in contracting when it makes sense for both us and the customer. And so we're kind of at that, you know, when Sand was in the teens, right, you know, we weren't really interested in pricing. You know, we don't need to see Sand, you know, much higher than we are right now to start to be interested in long-term contracts. As you guys know, we take a long-term view of this business. We believe that we run best when we have volumes that we can count on over time. Our goal is to be 60%, 70% contracted over time. We've got a ways to go to get there.
spk05: John, this is actually Chuck. That was John, just to clarify. We're also seeing customers. It's one part making the sand. It's another part moving it. You know, to handle the kind of volumes that are in the marketplace now, people actually have to have a plan in place with the rails. So we actually think there's more appetite for contracts now because of that.
spk04: Got it. And then just a final one for me is I think you noted eight smart path systems. You know, if everything went perfectly throughout the balance of this year, where do you think you could exit 22?
spk01: Yeah, I think on the smart systems side, And we're currently at eight. I think we could probably increase our utilization 10 to 20% in terms of additional units starting kind of in the third to fourth quarter this year.
spk04: Okay, good. That's it for me, guys. Thank you very much. Thanks, John. Thanks, John.
spk00: Our next question coming from the line of Steven Fingar with Stiefel. Your line is open.
spk06: Thanks. Good morning, gentlemen.
spk01: Morning.
spk06: So thanks for taking the question. So two things for me. I think the first would be when I think about the quarter and I sort of think about your profitability or contribution margin per ton, I mean, it looked like it was up a little bit on an apples-to-apples basis sequentially. But I would think given the pricing, it would be up more. And I'm just thinking about if you could give us any color on sort of how it evolve throughout the quarter and, I mean, the kind of – how we should be thinking about, you know, what levels of contribution margin per ton you can reasonably get to over the next several quarters?
spk01: Yeah, in terms of the quarter, again, as we highlighted, you know, because of weather and some operational issues, January and February were impacted by that. And then pricing as well didn't really start to pick up until later in the quarter in March. So we were kind of impacted negatively on an operating expense basis early in the quarter and started to really come out of that with the higher volumes and improved pricing into March. And also, as we've always highlighted in the past, typically the first quarter is our highest expense quarter because typically we're drawing down inventory and that gets recorded as expense. So we typically have higher operating expenses in the first quarter as we draw down on our inventory from our our wet pile to meet sales volumes in the quarter. So that combination of factors led to probably higher expenses in the quarter versus how we expect to see expenses going into the rest of the year. And then coupling that with what we're already seeing improved pricing, that should lead to our margins starting to improve in the second quarter and picking up from there. And I think where we're at today, as soon as we can get to the volumes that we're guiding to or better, and maintain or improve on those levels for the rest of the year that we believe our contribution margins should be approaching $10 per ton, you know, in the second half of this year.
spk06: Okay. That's great color. Thank you. That's helpful. When we think about your volume potential, given the acquisitions, I know given some of the constraints on the rails, et cetera, like what's, and obviously your volume guidance for the second quarter is very healthy, right, and you had a great march. In this type of market, I mean, it seems like you'll do 4 million-ish tons this year, but what's sort of the level of sort of sustainable volumes that you can do given what you see in the market from rails and demand, et cetera?
spk05: I would just say that with what we're doing right now and we've actually had to really gear up the plant with both employees and additionally with logistics, we feel like there's more demand right now than we have supply as we scale up the plants, but we see there's a pretty good runway ahead. I don't know, Lee, if you have something else to add to that.
spk01: Yeah, I think in terms of I think what you're asking, Stephen, is where could we go and kind of if we assume this market stays consistent or better, what kind of run rate we could be at? And right now, you know, there's several drivers to, you know, getting our – again, right now we're guiding to 25% up from the second quarter from first quarter. That, you know, gets you north of a million tons a quarter. Could we do better than that going into the second half of the year? The answer to that is yes, but it's going to be a combination of three factors, making sure we sell – We can sell the product mix that our mine and production makes. Make sure we still have constraints in terms of labor and getting fully staffed at Oakdale like everyone has today to get that staffing up. And then finally, as Chuck always alludes to and we talk about, we are about a bulk commodity business moving very large unit trains. And that has to be done very efficiently. And that's a combination of us having the rail cars and the and the right mix of sand coupled with the railroads being able to deliver those efficiently.
spk05: And the right landing spots. Actually, we're having conversations with our main railroad out of Oakdale right now about lengthening trains from, like, the standard 100 cars to trying to get up as large as 200 cars. And now we actually have the bookends both in the Marcellus and in the Bakken to do that, so... I think, you know, you're seeing the railroads, they're having staffing issues too, but if we make these trains locker, we can ship the same amount of sand with the same amount of people from them.
spk01: Yeah, and so if you look at our current effective capacity between Oakdale and Utica, we have about 7.1 million tons of annual capacity. And so if these things continue to line up, you know, and this market stays where it is and consistent or better, we should be able to get up to, you know, 70% to 80% utilization of that, you know, as we start getting into the second half of this year.
spk06: Great. Now, that's very helpful. And there's two other quick ones. The one was on the balance sheet. Obviously, and a lot of our service companies have seen this in the first quarter, working capital was drained, especially on the receivable side. How should we think about sort of the different pieces of working capital and working capital as the year unfolds?
spk01: Well, the way working cap, I mean, right now we had a big buildup in receivables in March that should, you know, we are expecting continued increasing sales in the second quarter. So actually our receivable balance should be increasing but won't increase at the same rate. So we should get some cash conversion from that. Typically in the second, third quarter, actually our working capital, we do build inventory because we're building our wet pile inventory over the summer months. So that'll be a kind of a build of inventory and working capital over the course of, the second and third quarter, which then would kind of turn starting in the fourth quarter and first quarter. So you will see some increased buildup in working capital based on sales activity and the traditional summer build of inventory over the next two quarters. But then I think you'll start to see that to really break and generate, you know, positive benefit from working capital probably in the fourth quarter.
spk06: Great. Thank you. And just one final – I know this is a – probably a little farther out, when we think about some of the efforts you're making on the industrial side, when would that sort of start to really impact kind of volumes and contribution margins per ton, et cetera? Is that sort of a 23-plus event, or could it be before that?
spk01: Yeah, I think right now what we've seen is – The industrial sand cycle has pretty much a long sell cycle, so you've got to really build in and kind of build up the relationships. And then from that, you can really start driving those volumes and revenues. We did actually have a positive impact industrial sales in the first quarter, but it was a pretty small number. But I would, based on our current kind of activity, if we can start, you know, really penetrating that market more significantly over the next couple of quarters, that you know, industrial sales could start delivering a more meaningful number kind of in the fourth quarter or early 2023.
spk05: Yeah, Rick and his team have done a great job on that. We actually, you know, we've penetrated a lot of different customers, and, you know, they're getting used to what we can do, and we think it's going to grow significantly over the next year or two.
spk01: It'll still be a relatively small portion for this year.
spk05: Okay.
spk06: Okay, that makes sense. But that's very helpful, Lee and Chuck. Thank you.
spk05: Thank you.
spk00: Thank you, and I am showing up for the questions at this time. I would now like to turn the call back over to Mr. Chokyong for any closing remarks.
spk05: Thank you for joining us for our first quarter conference call. We look forward to speaking with you in August.
spk00: Ladies and gentlemen, that's our conference for today. Thank you for your participation. You may now disconnect.
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