Smart Sand, Inc.

Q1 2023 Earnings Conference Call

5/10/2023

spk03: Good morning and thank you for standing by. Welcome to SmartSand Incorporated first quarter 2023 earnings conference call. At this time, all participants are in 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 star 1 1 on your telephone. You will then hear an automated message advising that your hand is raised. To withdraw your question, simply press star 1 1 again. 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.
spk04: Chris, please go ahead.
spk01: Good morning, and thank you for joining us for SmartSAN's first quarter 2023 earnings call. On the call today, we have Chuck Young, Founder and Chief Executive Officer, Lee Beckleman, 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 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.
spk00: Thanks, Chris, and good morning. SmartSAN delivered another quarter of strong operational and financial results. In the first quarter, we sold approximately 1.2 million tons. This is our fourth consecutive quarter of sales volume of 1.1 million tons or more. We generated 17.8 million in contribution margin in the quarter, our third consecutive quarter of contribution margin in excess of 17 million. Additionally, we generated 1.1 million in free cash flow in the quarter. This is our third consecutive quarter of positive free cash flow. Adjusted EBITDA for the quarter was 8.1 million, a substantial improvement over the first quarter 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 our employees for their efforts and continued commitment to SmartSand. We saw solid market demand in the first quarter. 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 four Class I 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 first quarter is typically our weakest quarter for Bakken activity due primarily to winter weather issues. The trend continued this year and was accompanied by some rail slowdowns and unique customer operational issues. However, those issues are resolving and we're seeing strong pickup 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 Sands 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 investment last year in the Blair Mine and processing facility in Wisconsin. The Montanay and Duvenay shale basins in northwest Alberta and the Montanay shale in northeast British Columbia continue to have strong activity to support 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 in demand for northern white sand into this market. Additionally, Blair gives us a new Class I origination point on the Canadian National. The CN origination gives us not only the ability to take advantage of new Canadian markets, but also to provide additional access to the Northeast United States and different parts of the Bakken. We began investing in the first quarter to bring Blair online, and we started shipping sand this month. 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 Blair 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 four class one rail lines, the CP, UP, the BNSF, and the CN. We also have great connections to the NS and CSX rail lines. 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 third-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 the strategic investments over the last few years to establish SmartSan as the premier provider of Northern White Sand and logistic services in the market, and those investments are all contributing to our improved financial performance. While our FraxSan sales remain strong, we are continuing to look to grow our other business segments. Utilization of our SmartSystems Last Mile offering continues to improve. We are gaining momentum as we start to penetrate the market with our SmartSystems technology. We have added belt 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 first quarter, 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 solution divisions. Industrial Product Solutions is a long-term commitment to diversify our business beyond oil and gas and to more effectively utilize our asset base. 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' interests in mind in everything we do. And with that, I'll turn the call over to our CFO, Lee Beckleman.
spk05: Thanks, Chuck. Now I'll go through some of the highlights of the first quarter. Starting with sales volume, we sold 1.195 million tons in the first quarter of 2023, a slight increase over the fourth quarter sales volumes of 1.175 million tons. However, compared to the first quarter of 2022, volumes increased by 40%. Total revenues for the first quarter of 2023 were $82.4 million compared to $73.8 million in the fourth quarter of 2022. Total revenues were higher in the first quarter due primarily to continued improvement in average sales prices of our sand and $1.9 million in contractual shortfall revenue recognized in the quarter. Our cost of sales for the quarter were $70.7 million compared to $62.7 million last quarter. The increase is primarily due to higher production cost and higher freight cost. In the first quarter, 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. Total operating expenses increased to $13.2 million in the first quarter, compared to $9.5 million in the fourth quarter of 2022, due to a $1.9 million net loss on disposable fixed assets as we reconfigured one 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 first quarter and additional management and administrative staffing to support our Blair operations. For the first quarter of 2023, contribution margin was $17.8 million and adjusted EBITDA was $8.4 million compared to the fourth quarter contribution margin of $17.4 million and adjusted EBITDA of $10.7 million. While we had increased revenues from higher average sales prices and shortfall revenue in the first quarter, this was offset by the increased seasonal production cost and higher freight expenses, leading to flat contribution margins sequentially. As highlighted previously, we do expect production costs to moderate in the second quarter. 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 startup of the Blair facility. For the first quarter of 2023, contribution margin per ton was $14.89 per ton compared to $14.77 per ton in the fourth quarter of 2022. For the first quarter of 2023, we generated $5.1 million in net cash provided by operating activities, leading to $1.1 million in free cash flow after we spent $4 million on capital expenditures. During the first quarter, we drew on our revolver and ended the quarter with $7 million in outstanding on our facility. We had approximately $7.6 million in cash and cash equivalents at the end of the first quarter. 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 million. 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 second quarter. But starting this month, we're 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 million to $1.2 million 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 rail delivery issues, and customer operation issues, which may lead us to be in the lower end of this range for the second quarter. We believe second 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 second quarter, as the majority of the reported shortfall revenue in the first quarter was related to one contract that recognizes shortfall revenues in the first and third quarter of each year. This contract expires in the third quarter of this year. We still expect capital expenditures for the year to be in the $20 million to $25 million 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.
spk04: This concludes our prepared comments, and we will now open the call up for questions. Thank you.
spk03: At this time, we will conduct the question and answer session. As a reminder, to ask a question, press star 11 on your telephone and wait for your name to be announced. To withdraw your question, simply press star 11 again. Please stand by while we compile the Q&A roster.
spk04: Our first question comes from Patrick Wollett with Stifel.
spk03: Patrick, your line is open. Please go ahead.
spk06: Hey, good morning, everyone. This is Pat on for Steven Gero. Gentlemen, thanks for taking questions today.
spk00: Good morning. Good morning.
spk06: Hey, good morning. So just to start, I know you talked about current supply demand fundamentals for profit in the prepared remarks. I was wondering if you could elaborate on the current price environment you're seeing.
spk02: The current Fraxan price environment?
spk06: Yes, please.
spk02: Yeah, so we haven't seen any deterioration in Fraxan pricing to date. I mean, we're definitely a little bit concerned about NatGas, but we seem to have a good runway as to kind of NatGas demand. We've got good contracted customers in that respect. And, you know, depending, again, you know, it's a seasonal thing. If we get a hot summer, NatGas pricing could come up, 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.
spk06: Great, thanks. And I guess kind of just to go along with that on the NatGas side, and I may have missed this, but we were curious if you've seen any slowdown in demand from the Marshalls region.
spk02: 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 some third-party facilities that we move a good amount of sand in. So, you know, 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.
spk06: Great. All right. Thanks, gentlemen. That's good to hear. And I'll turn it back.
spk03: 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.
spk00: Thanks for joining our call today. We look forward to talking to you again in August.
Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

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