U.S. Silica Holdings, Inc.

Good morning and welcome to the U.S. Silica first quarter 2021 conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Don Merritt, Executive Vice President and Chief Financial Officer.

Thank you, sir. Please go ahead. Thanks. Good morning, everyone. and thank you for joining us for USILICA's first quarter 2021 earnings conference call. With me on the call today is our Chief Executive Officer, Brian Shin. Before we begin, I would like to remind you of our standard cautionary remarks regarding the forward-looking nature of some of the statements that will be made today. Such forward-looking statements may include comments which are subject to certain risks and uncertainties. For a complete discussion of these risks and uncertainties, we encourage you to read the company's press release, and our documents on file with the SEC. Additionally, we may refer to the non-GAAP measures of adjusted EBITDA and segment contribution margin during this call. Please refer to today's press release or our public filing for a full reconciliation of adjusted EBITDA to net income and the definition of segment contribution margin. And with that, I would now like to turn the call over to our CEO, Mr. Brian Shin. Brian?

Thanks Don and good morning everyone. I'm very pleased with our strong operational and financial performance during the quarter. We delivered impressive results which exceeded both revenue and adjusted EBITDA expectations and March was our best month of the year across the company with key records set in our industrial business. The second quarter looks very strong as well in both segments and I believe that we're on track for a substantial rebound in profits and cash generation in 2020. I'm also very grateful to all of our employees for their continued focus, dedication, and perseverance as societal and economic norms are returning. While I'm excited to see the company rebounding financially, safety is also a top priority, and I'm proud of how our team has continued to manage the numerous challenges associated with our rapidly expanding business. During 2020, we achieved our best safety results in recent history, and I'm happy to report that 2021 is off to a great start as we work to continuously improve our performance. Our team's discipline, ingenuity, and determination are truly energizing and inspiring. Looking at the first quarter in a bit more detail, volumes increased an impressive 26% sequentially. Adjusted EBITDA of $38.3 million was down 40% versus Q4. However, if we exclude the $27.2 million benefit in the oil and gas segment related to customer shortfall penalties last quarter, adjusted EBITDA was actually up sequentially. During the quarter, we generated positive free cash flow and closed the period with $154.4 million of cash on our balance sheet. We maintain fiscal discipline by limiting capital expense to $3.5 million during the quarter and by continuing to reduce SG&A expenses. Looking forward, we expect that our business segments will continue to benefit from the ongoing macroeconomic rebound, unprecedented economic stimulus, and rising energy commodity prices. Our current outlook points toward strong customer demand in both our industrial and oil and gas segments with an improving pricing and margin environment. This morning, I'd like to cover three topics in a bit more detail. First, I'll start by discussing our growing industrial portfolio and how we will continue to strengthen it. Next, I'll turn to the market and our outlook for the remainder of the year. And finally, I'll close with the steps we're taking to maximize cash flow. We have a strong portfolio of industrial and specialty products rooted in a rich 120-year history. We've made strategic investments in new technologies and solutions, and we're clearly a leader in the industrial minerals market, serving critical industries such as housing, food and beverage production, biopharma, glass, and energy, including a focus on clean energy. Speaking of clean energy, we believe that our low-iron silica sands are currently in 15 to 20 percent of the newly installed solar panels in the U.S., and we estimate that our products are now used in approximately 50% of U.S. solar glass production. Also, we are the sole supplier to most of the facilities of the largest U.S. producers of composite fiberglass for wind turbine blades, and we estimate that our products are used in greater than 80% of U.S. produced fiberglass composites for wind turbine blades today. project that wind energy production will grow to over 10% of U.S. electricity generation in 2021, and we are extremely proud to help support the growth in these environmentally and very important value chains. More broadly, we expect to differentiate ourselves through our diverse and high-quality reserve base, also our geographically advantaged footprint, best-in-class manufacturing assets, and low-cost operations. What matters in the end, though, is whether we're winning in the market, and I can confirm that we are. An example of this is the breadth of industrial customer contracts that we signed during the quarter. We inked nine contracts in Q1 representing more than $25 million of annual revenue and $8 million of annual contribution margin. The contracts are for up to five years in length, further strengthening relationships and positioning us as a trusted business partner. This also illustrates the confidence that customers place in the strength and breadth of our portfolios. These contracts are just one of many examples of major successes during the quarter. Last December, we outlined our compelling product development pipeline with more than $200 million in estimated annual contribution margin from new innovative products under development for targeted markets. This quarter, I'm happy to report that we made significant advancement on several of those projects. We delivered record sales of Everwhite Cristobalite and White Armor Cool Roof Granules from our new facility in Georgia. We earned full product approval for Everwhite at multiple leading quartz countertop manufacturers, and we've begun production shipments. We moved to the final approval stage with a major blood plasma company for our new purified DE filtration product. And we completed the first commercial customer trial with our new ultra-fine filler product. Regarding financials, during the quarter, industrial and specialty product volumes of 984,000 tons increased 3% versus Q1 2020 and were up 6% sequentially. Contribution margin dollars were up 4% sequentially and down 8% year-over-year as we've not quite fully recovered to pre-pandemic levels. In November of 2020, we announced an industrial price increase effective January 1st of this year, and more recently, we announced an additional price increase of up to 15% effective May 1st on selected products. Further during the quarter, because of inflationary pressures surrounding supply chain and shipping costs, we implemented temporary freight surcharges to offset increased expenses. We continue to actively monitor logistics cost headwinds and expect to work with customers to ensure that we protect our profitability. In our oil and gas segment, we experienced robust demand with profit volume of 2.6 million tons, up 36% sequentially, on stronger U.S. completions activity as the number of frack crews operating in the U.S. continued to increase. Sandbox delivered loads jumped 19% versus Q4 as numerous customers began to increase activity given rising commodity prices. However, segment revenue was flat sequentially and contribution margin dollars decreased nearly 60%. The decline in revenue and contribution margin dollars was expected and largely due to the $27.2 million benefit in the oil and gas segment related to customer shortfall penalties last quarter. In addition, first quarter results were negatively impacted by cost headwinds associated with the winter weather event, as well as empty railcar moves and trucking inflation, which is consistent with our fourth quarter earnings call commentary. A positive impact of the robust activity was a substantial increase in railcar utilization. Given that, we have reduced railcars in storage meaningfully and expect to go from 2,400 stored cars in Q4 the 750 cars in storage by the end of Q2 2021. Let me now turn to the market and our outlook. Looking forward, we're very excited about the many opportunities that we have that can benefit from a recovering U.S. economy with unprecedented stimulus and rising energy commodity prices. Macro concerns have eased and I would like to provide a commentary on how we expect the business to progress for the rest of 2021 and into 2022. I'm optimistic about how 2021 is shaping up. Our current outlook points towards robust customer demand ahead in both our industrial and oil and gas segments. Strong energy commodity price performance this quarter drove a recovery in profit volumes, and we believe that our Q2 profit volumes will increase sequentially approximately 20 to 25%. while sandbox delivered loads should rise 5% to 10%. Given that, in a constructive pricing environment, we believe that Q2 oil and gas segment profitability should increase 30% to 35% sequentially. Based on customer input, we expect continued strength in energy sales through the remainder of 2021, and assuming at least today's level of WTI pricing, we expect 2022 to be an even stronger year for profit and last-mile logistics demands. In our industrial and specialty products segment, recent commercial wins coupled with strong execution and increased pricing set the stage for continued growth. We expect Q2 industrial profits to increase 5% to 10% sequentially. For the year, I believe that we'll grow underlying industrial segment profits at a GDP plus rate as expected. Longer term, we're very well positioned for growth in industrials with a combination of three powerful advantages. We have a strong base business through numerous long-term relationships with Blue Chip customers in diverse industries. Second is our strong and growing portfolio of products serving sustainable industries, including solar energy, wind power, cleaner air, green diesel, food quality, and energy-efficient buildings. And third, we have an exciting pipeline of new products in white space markets that hold step-change growth potential for the company. We believe that the combination of these powerful advantages should provide strong momentum for growth into 2022 and beyond. As we execute our growth strategy, we're committed to capital efficiency, which is expected to support solid free cash flow generation and net debt reduction. For 2021, we're committed to keeping our capital spending within our operating cash flow and expect to be free cash flow positive for the year. We've had a busy start to 2021, making solid progress on each of our three strategic priorities. We believe that the key actions that we're taking today will further boost our earnings potential and free cash flow generation ability as we power into the market recovery. We believe that our size and scale combined with our demonstrated ability to execute and quickly respond to changing market conditions are unique advantages for us. In addition to cost efficiencies and margin expansion actions, we continue to focus on portfolio positioning, and we're taking bold action to ensure business resilience and sustainability, all aimed at continuing to best position our company for the future. We also look forward to sharing a more detailed progress report on our new product pipeline and ESG objectives over the coming quarters outside of our scheduled earning calls. And with that, I'll turn the call over to our CFO, Don Merrill. Don?