Smart Sand, Inc. Q2 FY2022 Earnings Call

Hello. Thank you for standing by and welcome to the Second Quarter Smart Sand Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. Please be advised that today's conference may be recorded. I would now like to hand the conference over to your speaker today, Josh Jayne, Director of Finance and Treasurer. Please go ahead.

Good morning and thank you for joining us for Smart Sand's second 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. Smart Sand disclaims any intention or obligation to update or revise any financial projections or forward-looking statements, whether because of new information, future events, or otherwise. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, August 10, 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 or our public filings for our reconciliations of contribution margin to gross profit, EBITDA, and adjusted EBITDA to net income as well as free cash flow to cash flow provided by operating activities. I would now like to turn the call over to our CEO, Chuck Young.

Thanks, Josh, and good morning. We delivered a great second quarter with sales volume of 1.2 million tons and a return to positive adjusted EBITDA. Second quarter volumes are up 40% quarter-over-quarter and 1.2 million tons sold represent the most frac sand we have ever sold in a single quarter. Given strong commodity prices and our ability to continue to deliver sand to multiple basins across the US, we are confident we will sell record volumes in 2022. Our second quarter results reflected continued improved pricing in our business. Pricing remains strong, and we expect prices to remain at these levels for the foreseeable future. We have been able to overcome increased costs caused by the shortages of labor and inflation in the second quarter by increasing our sales volume and pricing. We are focused on being best-in-class in terms of our cost structure at our operating facilities, and we'll continue to look for ways to reduce our costs and maximize our profitability. We are very pleased with the results we have seen at our unit train capable transloading terminal in Waynesburg, Pennsylvania. Tons shipped through the terminal were up 26% from the first quarter, and we expect volumes to grow in the third quarter. We also saw substantial volume growth during the second quarter through our Van Hook terminal, where volumes more than doubled sequentially. As we have said many times in the past, we believe that bulk commodities belong on rail, and the sustainable logistics must include terminals close to our customers' drilling activity. Our mine-to-wellsite rail terminal and last mile approach provides our customers a safer, cost-efficient, and more reliable supply chain. We continue to see an acceleration in our Industrial Products division. We doubled our tons sold from the first quarter and expect volumes to grow each quarter for the balance of the year. We continue to add new customers and expand the product offerings we can provide. We are expanding our services and capabilities with blending and packaging as well as adding finer grade products in the second half of this year. We believe this sets us up for very strong growth in 2023 and beyond. Utilization of SmartSystems remains at an all-time high for the company. We saw utilization increase during the second quarter, and we're receiving increased momentum as we start to penetrate the market with our SmartPath technology. By using our SmartPath, our customers can reduce the number of trucks needed to deliver sand to the wellsite by more than 30% compared to our customers' equipment, providing our customers with substantial cost savings for sand delivered to the wellhead. Additionally, by taking trucks off the road, we benefit our communities by reducing accidents, carbon emissions, noise, and dust. ESG goals are important to Smart Sand and its customers, and SmartSystems help achieve these goals by improving efficiency and reducing impact. Our balance sheet remains strong. Today we have approximately $5 million in cash on our balance sheet and approximately $18 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 over time during an up cycle. With mines situated on four Class I railroads and access to all Class I railroads, we have the logistics in place to deliver sand to our customers more efficiently, wherever they are operating. The sand market remains tight, which will allow us to generate strong financial results in the third quarter and beyond. Having operated SmartPath successfully for more than a year, we look forward to expanding its deployment in the field and increasing our last mile market share. Industrial Product Solutions continues to grow rapidly, diversifying our business with strong margins that will provide diversification to our earnings profile. As always, we will 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.

Thanks, Chuck. Now, I'll go through some of the highlights of the second quarter compared to our first quarter results. Starting with sales volume. We sold 1,196,000 tons in the second quarter of 2022, a 40% increase from the first quarter 2022 volumes of 852,000. Volumes exceeded our guidance of a 25% increase as we saw strength across multiple basins and a tight market throughout the quarter. Total revenues for the second quarter of 2022 were $68.7 million compared to $41.6 million in the first quarter of 2022. Sand revenues were $67.1 million, up 75% sequentially due to both higher volumes and improved pricing. We did not recognize any shortfall revenue in the second quarter. Our cost of sales for the quarter were $59.7 million compared to $43.6 million last quarter. Production costs were up sequentially due to increased excavation costs and higher utility costs driven by increased natural gas prices and higher freight expenses due to higher in-basin sales in the quarter. Total operating expenses were $7.6 million compared to $7.9 million last quarter. The decrease was primarily a result of lower SG&A expenses. For the second quarter of 2022, the company had a net loss of $90,000, or $0.00 per basic and diluted share, compared to a net loss of $5.9 million, or a negative $0.14 per basic and diluted share for the first quarter of 2022. For the second quarter of 2022, contribution margin was $15.3 million and adjusted EBITDA was $9.2 million compared to the first quarter contribution margin of $4.3 million and negative adjusted EBITDA of $1.9 million. For the second quarter, contribution margin per ton was $12.75 per ton compared to $4.99 per ton last quarter. For the second quarter of 2022, we had negative $3.7 million in free cash flow due to a negative $2.3 million in operating cash flows and $1.4 million of capital expenditures. Operating cash flow was significantly impacted by an increase in working capital due to the increased sales activity in the second quarter. Not only did we sell more tons in the second quarter, but we also sold more tons in-basin, where we are paying the freight cost, which negatively impacts us in the short-term from a cash flow timing perspective. We expect the impact of working capital changes on our operating cash flow to moderate in the second half of the year. As a result of the working capital timing issues mentioned previously, we drew on our revolver in the second quarter and ended second quarter 2022 with $3 million outstanding on our facility. We also had $1 million outstanding in letters of credit. Since the end of the second quarter, we have drawn an additional $3 million on our facility, and today, we have availability under the revolver of approximately $13 million. We paid down $1.8 million against our notes payables and equipment financings in the second quarter. Our current cash balance is approximately $5 million. Between cash and our availability on our facilities, we currently have approximately $18 million in available liquidity. In terms of guidance for the third quarter, we currently expect sales volumes to be in the range between 1 million tons and 1.2 million tons. While market fundamentals remain strong, the timing of activity of some of our customers has shifted, leading to lower potential sales in the third quarter. Activity remains strong, and we still expect volumes to be up significantly from first quarter levels. While we expect slightly lower sales volumes in the third quarter, pricing fundamentals remain positive, and we currently expect contribution margin per ton to improve by 5% to 10% if we can maintain current pricing levels throughout the third quarter. We had previously discussed achieving low to mid double-digit contribution margin per ton results across our business at some point in 2022. We achieved that goal in the second quarter. We believe on a contribution margin per ton basis, we will remain in the double-digit contribution margin per ton range in the third quarter. The continued strong pricing environment combined with another strong quarter of sales should lead to strong financial results in the third quarter. Further, our working capital buildup should moderate in the second half of this year, which should help our free cash flow. We spent $1.4 million in capital expenditures in the second quarter and have spent $11.7 million in the first six months of the year. We currently expect capital expenditures for the year to be in the $20 million to $25 million range, excluding any additional acquisitions, but the additional capital over the remainder of 2022 is currently planned to be spent on planned 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.

Thank you. Our first question comes from Stephen Gengaro with Stifel. You may proceed.

Thank you. Good morning, gentlemen.

Good morning.

Good morning, Stephen.

So, a couple of things for me if you don't mind. The first was when we think about what some of the pressure pumpers are doing with more integration at the wellsite. Are there any changes to your strategy? And how does this impact your business, or does it not just based on the overall size of the addressable market? Just curious what you're seeing there.

Well, one of the things we're certainly seeing, Stephen, is that I think many of our customers, particularly on the E&P side, would be pumping more if there were fleets available, right? So, there's definitely a little bit of need there, I think, on that side. From our perspective, we continue to look at making it easier for customers to buy from us, and that includes delivering sand at the wellhead through our last mile equipment. We've found that there's been quite a bit of interest in that with our systems versus some of the other ones that are out there. And so we continue to look at that and really try to get those systems out there. We've had a really good success in deploying most of our equipment in this kind of first and second quarter of this year. So, we're pretty excited about that. Both pressure pumpers and E&Ps are interested in that.

Great. And you mentioned the strong sand fundamentals. Based on what we've seen, it doesn't feel like there's a whole lot of incremental capacity coming on stream. I mean, that's obviously been one of the concerns that we have generally had, but it seems like there's been discipline on additions of capacity that should help keep the market tight. What are you guys seeing as far as frac sand supply and demand and potential new capacity and how that impacts your expectations going forward?

Yes. I believe we can break this down into two areas. On the Northern White side, we don't see much fine mesh sand capacity available. This aspect doesn't seem to be widely acknowledged. Many of the 2040 mines are unable to meet the current market demand effectively.

Yes. And so one of the things we've seen as we tour our area of influence up there in the Northern White space is many of these mines that did exist years ago have been picked apart, picked over. A lot of the equipment has moved elsewhere. So, Northern White appears to have a pretty good runway here. One of the things that's interesting in this market is we're dealing with strong commodity prices, both on natural gas and oil. And we haven't seen that necessarily before. Our natural gas markets, where we deliver sand, are very strong. Our oil markets in the Bakken and out into the Powder River and DJ are strong also. So, it's one of these things where I don't anticipate a huge amount of Northern White capacity to come on, but we believe that the demand for Northern White will continue to be strong, particularly on the finer mesh sands.

Yes. And kind of an example of that Steve would be during the downturn we bought a few mines, two of which we have shut down. When we look at the economics around those mines, they're just not the same as our fine sand mines.

Great. And just one final one for me. We have heard more and more about E&P's concern about frac equipment in 2023 and even frac sand in 2023 a bit. Are you seeing any discussions that extend out further than normal based on customer needs?

There is definitely concern among our customers regarding the sustainability and reliability of frac sand supply. We have chosen not to discuss any of the conversations related to contracting during this call. However, there is considerable interest and clear concern as customers look ahead. This issue extends beyond pressure pumping and frac sand to include last mile equipment and other related items. The outlook appears positive. If commodity prices, including oil and natural gas, continue to remain high, we believe there is a strong opportunity ahead.

Okay. Great. Thank you.

Thank you. One moment for questions. I am not showing any further questions at this time. I would now like to turn the call back over to Chuck Young for any closing comments.

Thanks for joining us for our second quarter call. We look forward to speaking with you again in November.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.