Smart Sand Inc (SND) 2018 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q1 2018 Smart Sand Earnings Conference Call. (Operator Instructions) And as a reminder, today's conference call is being recorded.

I'd now like to turn the conference over to Phil Cerniglia, Investor Relations Manager. Please go ahead.

Good morning, and thank you for joining us for Smart Sand's First Quarter 2018 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 other 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, May 10, 2018. Additionally, we may refer to the non-GAAP financial measures of adjusted EBITDA and production costs during this call. These measures, when used in combination with 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 a full reconciliation of adjusted EBITDA to net income and production costs to cost of goods sold. (Operator Instructions)

I would now like to turn the call over to our CEO, Chuck Young.

Thanks, Phil. I'm pleased to report that Smart Sand has posted another positive quarter, and we're off to a good start for the year. Here are some highlights of the quarter.

We had our highest quarterly sales volume ever. Pricing trends continued to be positive. Our average selling price increased by 16% compared to last quarter. Demand was up. In fact, it exceeded supply. And we further expanded our logistics footprint.

Here are some headlines: a new terminal up and running in North Dakota, a deal to buy an innovative frac sand storage company, continuing strong product demand. If we can make it, we can sell it. And Smart Sand will be adding new sales capacity in the second quarter.

Is Smart Sand positioned to take advantage of this growing market? Absolutely. We have some big assets, including these: a solid portfolio of long-term take-or-pay contracts; a low-cost operating structure; strategic investments in logistics infrastructure; a strong balance sheet to support our long-term growth initiatives; and a dedicated workforce that consistently produces results.

We're gearing up to meet the continually increasing demand, especially for Northern White. Our expanded capacity should be fully operational in the second quarter. We're moving quickly toward our long-term goal, becoming a fully integrated mine-to-the-wellhead supplier.

Part of our plan is to have more direct exposure and sales opportunities in the operating basins, so we're primarily pursuing investments in 3 growth areas: transloads in the operating basins; last mile solutions for sand storage at the wellsite; and developing mine locations outside Oakdale. Here are some elements of that strategy.

In March, we acquired the rights to operate a unit train capable transloading terminal in Van Hook, North Dakota. It will serve the Bakken formation. We geared up quickly. It became operational in April. This transaction included a long-term agreement with the Canadian Pacific Railway. CP will service the Van Hook terminal directly as well as other key oil and gas exploration and production basins of North America. With this new terminal, we can expand our customer base and we'll be able to offer more efficient delivery options to customers in the Williston Basin.

We just entered into a definitive agreement to acquire Quickthree Solutions. Quickthree is a manufacturer of portable vertical frac sand storage solutions at the wellsite. This deal should close by the end of May. I'll give more detail on it later in my comments. But let me say upfront, we're excited about having Quickthree as part of the portfolio of sand products and logistic services we offer our customers.

As announced previously, we've signed 20-year leases on 2 locations in the Permian Basin. These long-term leases give us a very economical access to desirable acreage. The upfront cost was low, less than $5 million, and the minimum royalties are also low. These leases position us to provide sand directly to customers in the Permian in the future. We're already in the initial design and permitting phase to a potential facility at one of these locations. Due to the low cost of entry, time is on our side. We can carefully monitor market demand before committing to fully invest in a mine.

Now let's talk about our progress in Oakdale. Our top priority here is to get the new expanded capacity fully operational. The construction of the new drying facility is basically complete, and we're already producing sand from the new dryers. The full 5.5 million tons of annual nameplate capacity should be fully operational in the second quarter. I'm pleased with our progress in Oakdale.

Things are also moving along smartly on other growth initiatives. Let's start with Van Hook. Trucks loaded with sand started rolling out of that terminal in April. We've signed a long-term agreement with a large E&P operator as the anchor tenant there, and we'll soon be delivering sand to other customers out of Van Hook.

Why should we invest in transloads in the operating basins? There are 3 major long-term benefits. It's a chance to attract new contracted customers. Our own terminals will be able to market directly to companies wanting to source their sand needs locally. We'll have more opportunity for spot sales, we can forward deploy sand, so we can meet unanticipated customer needs fast. And we can capture incremental margin on the sale of our sand farther down the supply chain.

With our own in-basin terminal capacity, we can directly manage the cost of rail and terminal operations, and we can profitably sell our sand at an in-basin price. We keep looking at acquiring or developing transload opportunities in other basins such as the Marcellus and the Permian. We'll probably add at least one more terminal location this year.

We're always analyzing what sand customers want. We find that many want a company that not only provides high-quality sand, but can efficiently and cost-effectively deliver that sand all the way into the blender at the wellsite. With that in mind, we've entered into an agreement to buy an outstanding Canadian company, Quickthree Solutions. We expect to close this transaction by the end of the month.

Quickthree has developed, patented and deployed a breakthrough sand storage system at the wellhead. The company's unique and innovative technology addresses the shortcomings of other wellsite storage solutions now on the market. We'll integrate Quickthree into our plan to provide a total service solution to deliver sand to the wellhead of our customers.

Looking back, it was a busy quarter, but a good one, and a good start to the year. Looking ahead, I continue to see positive trends for our industry. They include increasing demand for frac sand and positive momentum in pricing. Smart Sand is well positioned to take advantage of these opportunities. We have the management and operations team to deliver long-term value for our customers, our employees and our shareholders. The industry is growing, and Smart Sand is poised to grow with it.

Now I'll turn the call over to our CFO, Lee Beckelman, for a closer look at Smart Sand's first quarter results.

Thanks, Chuck. As Chuck highlighted, we had record volumes in the first quarter, and we continue to progress on several of our stated initiatives to expand our logistics capabilities. I will be going over the first quarter 2018 financial results and my comments primarily will be focused on comparing to the fourth quarter 2017 results.

Starting with sales volumes. We sold approximately 723,000 tons in the first quarter, a 2% increase compared to the fourth quarter 2017. Our spot sales in the first quarter of 2018 were approximately 23% of our total sales volume, versus approximately 26% in the fourth quarter of last year. In the first quarter, approximately 81% of our sales were shipped via unit train compared to approximately 68% in the fourth quarter of 2017.

In regards to revenues. Total revenues for the first quarter were $42.6 million, a slight decrease over fourth quarter revenues of $43 million. Sand sales revenues increased to $28.9 million this quarter compared to $24.4 million last quarter, due primarily to higher average sales prices.

Average sales price per ton in the first quarter increased 16% to $39.98 per ton versus $34.49 per ton last quarter. The increase in average selling price sequentially was primarily due to higher contracted sales prices, which increased partially due to pricing adjustments and our contracted prices for changes in the price of oil and partially due to one contract with in-basin pricing, which ramped up sales volumes in the quarter.

Transportation revenue, which includes freight and rail car rental, was $13.7 million in the quarter compared to $18.7 million last quarter. The reduction in transportation revenue in the quarter was primarily due to the mix of sales with less shipments for customers with freight pass-throughs.

Our cost of sales for the quarter were $35.4 million compared to $32.9 million last quarter. As we highlighted on our last earnings call, we expected higher cost of sales in the first quarter due primarily to higher production cost. As discussed in the past, we have higher cost during the winter months as we reduce our wet plant operations due to the weather conditions, which leads to less cost being absorbed and capitalized into inventory during these periods and leads to higher overall reported expenses during these quarters.

Additionally, we had higher labor expense as we added plant personnel during the quarter in preparation for the startup of our expanded capacity in the second quarter; had higher utility expenses from colder weather, which leads to higher fuel usage; and higher contract labor that we have been utilizing to provide interim operation support.

During the quarter, we had some overlap in staffing as we needed to utilize contract labor, while we were training our new hires to be ready to take on this work directly.

Our production cost per ton in the quarter increased to $20.95 per ton compared to $14.79 per ton last quarter. The $20.95 per ton was higher than the range we had guided on our last earnings call of $18 to $20 per ton, primarily due to higher contract labor expense than anticipated during the quarter.

As our new staffing for the expansion is getting fully trained, we have been able to reduce our contract labor needs and we expect this expense to be reduced in the second quarter and going forward in 2018. With our wet plant operations now back online and our expanded capacity ramping up in the second quarter, this increased activity should lead to higher utilization and sales volume levels, so we still believe we can reach our guidance for the full year 2018 of average production cost in the $12 to $14 per ton range.

Gross profit was $7.2 million in the quarter, a 29% decrease from fourth quarter gross profit, due primarily to higher production cost. Our operating expense in the quarter was $5.9 million, a $400,000 increase over the fourth quarter, due primarily to higher royalty expenses. For the quarter, we had tax expense of $232,000 compared to a benefit of $6.2 million in the fourth quarter, which was primarily due to an $8.5 million benefit recognized in the fourth quarter 2017 due to the U.S. tax law changes that went into effect in the quarter.

This benefit last quarter was primarily due to the reduction in the U.S. federal corporate tax rate to 21% from 35% previously, which led to a remeasurement of our deferred tax assets and liabilities. We anticipate our effective tax rate to be in the 20% range going forward currently.

We had net income of approximately $975,000 and adjusted EBITDA of $5.9 million this quarter compared to net income of $10.9 million and adjusted EBITDA of $8.9 million last quarter. Net income was lower primarily due to higher production costs and the positive impact of the tax benefit booked in the fourth quarter.

Adjusted EBITDA decreased sequentially due primarily to the higher production costs we had in the quarter. In the first quarter, we spent approximately $46.9 million in capital expenditures. Most of the capital in the quarter was related to the expansion of our facilities. Additionally, we spent $15.5 million in the quarter to acquire the terminal in Van Hook, North Dakota.

Our capital budget for 2018 is currently still expected to be in the $85 million to $95 million range, excluding any additional acquisitions. As Chuck discussed, we are starting to -- we're starting up our expanded capacity as we speak. As with any startup of new facilities, it will take some time to get this capacity fully operational and to start getting the full benefit of the expanded production levels.

So while we do anticipate increased sales volumes in the second quarter, we do not expect to start getting the full benefit of our expansion until the third quarter, assuming market conditions and the demand for frac sand continue to remain at current levels or better.

For the second quarter, we currently expect sales volumes to be in the 800,000 to 850,000 range. As highlighted earlier, we expect our production cost to start to trend lower beginning in the second quarter, and we currently anticipate adjusted EBITDA to be in the $10 million to $18 million range for the second quarter of 2018.

For the full year 2018, our sales volume and adjusted EBITDA expectations have not changed. Assuming market conditions stay consistent with current activity throughout 2018, we should have sales volumes for 2018 in the 3.5 million to 4 million ton range and adjusted EBITDA for the year in the $70 million to $80 million range.

As announced yesterday and discussed by Chuck, we have signed a definitive agreement to acquire the assets of Quickthree Solutions, which we plan to develop to be our in-house last mile storage solution for our customer base. We currently expect to close this transaction by the end of the month. We are primarily acquiring the technology for this business, and we'll be formulating our business strategy for the deployment of Quickthree storage systems once we close this acquisition.

Therefore, it's too early for us to give any guidance as to how this acquisition will impact our operations over the remainder of 2018. We will provide more detail on Quickthree on our second quarter earnings call. The transaction provides for an aggregate purchase price of up to $42.75 million, consisting of $30 million payable at closing and up to $12.75 million in potential earnout payments as systems are built and made available for sale or lease over a 3-year period.

As of March 31, 2018, we had approximately $2 million of cash on our balance sheet compared to $35 million at year-end 2017. This reduction in cash was utilized to pay for the capital expenditures primarily related to our expansion of Oakdale.

Currently, we have approximately $6.5 million of cash.

In April, we expanded our credit facility to $60 million. We currently have $15 million drawn on this facility, with the remaining $45 million available to support our liquidity needs. We drew down on the facility in the first quarter to fund the purchase of the Van Hook terminal. We do currently expect to utilize the facility, along with available cash to fund the Quickthree acquisition in the second quarter.

This concludes our prepared comments, and we'll now open up the call for questions.

(Operator Instructions) And our first question comes from Martin Malloy of Johnson Rice.

Could you remind us how the pricing escalators work as an average -- on an average per ton basis across your tons that you're producing if your -- if the average price is $65 and at $75 for crude?

Well, again, it's not -- every little contract is a little different. But actually above $60 a barrel for the first quarter, we will be getting a pricing adjustment on our current contracted volumes of -- and then it will average out on a weighted average basis of about $6 a ton.

So we'll get an incremental $6 per ton on our contracted volumes in the second quarter for oil prices being above $60. The next (inaudible) would then be about $70 to $75. And that again will be roughly another $5 ton -- per ton adjustment on those current contracted volumes.

Okay, great. And then, on the -- and I appreciate that you'll give more information on the next call on the Quickthree acquisition. But just trying to get a better feel for the strategy here. Are these just for these units just going to be utilized by Smart Sand for their customers? And has this unit been deployed already -- already in what basin?

So Quickthree has been operational for some time now, and they have units pretty much across most of the basins, heavy concentration in Canada and the Marcellus. And our strategy with that is that we, first and foremost, would like to put our sand through that, but we will be open to utilizing this technology.

I think the true benefit of this is their ability to unload gravity dump trucks quickly. And as trucking gets more complicated, we feel that this technology really is -- has a step-up above what's out there today in the marketplace.

So we're going to deploy that. And we think that our customers don't only buy sand from us, they buy sand from other people. So if they want that to help bring down their trucking costs, we have no problem deploying it and not having Smart Sand go through it.

And our next question comes from John Watson of Simmons.

A few quick ones on Quickthree. And if you can't answer, feel free to tell me to move on. But was the legacy business model for Quickthree to sell these systems or to rent them? And could you maybe provide some color on the number of systems sold or rented currently?

Primarily, Quickthree was selling the systems. And I think, in total, they roughly have their number of about 90 silos out in place, and they'll -- what's happened in the marketplace, since we've gone from people doing 1,500 to 1,600 tons a well to 2,000 tons a day, the amount of silos you need per wellhead has gone up.

But our strategy with this is going to be to lease the systems. We're not -- and we're also looking to partner with -- we think that the -- again, nobody likes trucking or wants to invest in trucking but we feel those guys are critical in the marketplace and in what we're doing. And we're going to partner up with trucking companies and allow them to share in some of the benefit of doing the hard work, which every wellhead needs trucking. We hope not too much distance on trucking. It's kind of our strategy is a little bit different.

But we think that that's going to be a great way for us to: one, include the truckers into some of the share of profit in this business; but also, to be able to get the sand to the wellhead.

Okay, that's super helpful. And is it, 90 silos, is that a 1 silo per frac or per well?

No. So roughly, we -- in our model, it's going to be 4 to 5 silos per wellhead. We -- that's a good number.

Okay, perfect. And do you know the split, U.S. versus Canada, for the 90 silos, historically?

Are you aware -- it's probably...

Yes, it's north of 89% Canada.

Okay.

Okay, okay. Perfect. That's super helpful. And one more for me, if I can. Smart Sand historically hasn't sold a ton of sand into Canada. Does that strategy change with this acquisition?

So this is John here. Well, we've actually -- we have sold sand into Canada. It's just not a primary focus of our business at the moment. There are some indications that the plays are coming a bit further south in Canada, which opens up the market to -- our origin on Canadian Pacific rail, they have good destinations into there. So I think Canada will continue to be an opportunity that we evaluate.

Keep in mind, we also have our Hixton asset on Canadian National Rail, which is ready to develop at any time should the Canadian market heat up to the point where we want to get involved in a heavy state. Right now, all my sand is really spoken for in the lower 48, though, so we're pretty focused on that and producing for that market.

(Operator Instructions) And your next question comes from Akil Marsh of Janney.

Another one on Quickthree and I understand if you can't answer this. But is Quickthree, at the moment, generating EBITDA and/or free cash flow?

Yes, we're not going to get into numbers right now. As we said before, I think we're still evaluating how it's going to fit into our systems and into our business model. So we're not really going to give any real data on what they're generating today.

Also, the business model is really going to be changing. So in terms of how they were selling and promoting Quickthree is going to be a little bit different than what we're planning to do over the next 12 to 24 months with the business.

Okay. And regards to the leases in West Texas, it sounds like there's a little bit more activity there. So is the way to think about West Texas is that you're definitively moving forward? Or should we still kind of view it as an option to move forward if you do want to in the future?

Yes. So the strategy as it stands today with West Texas is to have our projects shovel-ready, and that's what we're working towards right now in the permitting and the design phase.

And additionally, our West Texas operation will come with a rail component. We believe sand mines belong on rail. And we think some of the challenges that are going to take place down in that area of Texas, as it relates to trucks, are going to require you to get the turns as short as possible on trucking.

And you got to remember, we really have 3 options to add additional capacity. We have Hixton, which is -- we can develop. We have additional ability to expand Oakdale and we now have the West Texas leases.

So we're going to basically -- when we look to add capacity, we're going to look where it makes the most sense and we can get the best value for that. And so we have a lot of options now we can look at and consider as it relates to where our next amount of capacity should be added to support our business.

And our next question comes from Martin Malloy of Johnson Rice.

Just had 2 follow-up questions. First one on liquidity and given the Quickthree acquisition, the remaining amount you have to spend on your -- with your CapEx guidance. Can you talk about how comfortable you are with the liquidity and funding?

So currently we're comfortable. Again, we've expanded our capacity to $60 million with Quickthree. We will -- we could be funding up to around $45 million to $50 million, which will give us additional million -- $10 million of liquidity under the facility. And we are ramping up our capacity in the second quarter and expect that to be at higher levels in the third and fourth.

So assuming our volumes start to pick up as expected, that's going to start generating a lot more cash flow from our Oakdale operations to help support our needs. But we're keeping a close eye on that. And if we need to, we have the ability to look at expanding our credit facility.

We also have some ability to tap some equipment financing and other sources of capital relatively quickly if we need to do. So we feel comfortable where we are today on liquidity.

Okay. And just thinking about the cost per ton, I appreciate your guidance for the full year. Would we -- should we look for the decline in the cost per ton to be back half-weighted?

Well, yes, it should. When you think about cost per ton, when you think about the first quarter, we had a lot of extra cost ramping up our labor to be ready for the expansion without having the volumes there to support that cost. So as we're going to be ramping up in the second quarter, our volumes will be increasing but they won't be to the full level of what that expanded capacity can support.

So as we get to the third and fourth quarter, when we get to higher utilizations of the total facility and fully utilize dryers 4 and 5, that should help us bring our cost per ton down. And that should moderate more in the third and fourth quarter as our volumes move up. And our overall costs don't move up as great because we've already borne a lot of that cost in the first quarter, getting ready for that expanded capacity.

And our next question comes from Jonathan Caplan of Caplan Management.

I started following this company about a year or so ago and I look at a company with a very strong balance sheet and with the fundamentals of the industry looking very good. And since then, I've seen the balance sheet deteriorate quite a bit. While there's higher production, profitability has plummeted. And your stock is underperforming your peers.

So I guess, I want to know, with all the investments you're making and kind of hitting up against those borrowing limits, where is the inflection point going to be in profitability? And what is it going to look like over the next few quarters?

Well, again, actually our balance sheet is still very strong. We only have $15 million of debt against a $250 million balance sheet, so the balance sheet is still strong. Our volumes have improved. Yes, our costs were high in the first quarter, but again, that was due to specific items that we had actually guided to. And that we built up that cost in anticipation of increased volumes in the second half of the year.

And frankly, we've basically been able to manage that capital spend to get up to our capacity expansion with very little debt to do it. So we've done that primarily from cash that we've generated from our equity offerings and cash flow. So I think we've done a pretty good job of managing that.

Yes, our cost structure isn't where we want to be. Yes, we want to improve our profitability. And we think as we start ramping up sales volumes through the second half of this year, assuming market conditions stay consistent, we should start showing improvements in our profitability over the course of the year.

Yes. One other thing I would add is that we essentially are almost doubling our capacity, and we have the people in place to run the 2 new plants. And as we can see how the sand is being made in the Permian, it's just not that easy to gear up and get started from a ground stop on new plants. And you have to bring these people in and train them.

So we've done that, and the first quarter reflects that cost. But we have to do that because we had to be ready for the plants 4 and 5, which are already making sand.

And that concludes our question-and-answer session for today. I'd like to turn the conference back over to Chuck Young for any closing remarks.

Thank you, again, to everyone for joining our earnings call today. We look forward to taking advantage of the strong demand for frac sand in 2018.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.