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Hi-Crush Partners LP (NYSE:HCLP)
Q1 2019 Earnings Call
May. 8, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to Hi-Crush First Quarter 2019 Conference Call. As a reminder, today's call is being recorded. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. At this time, for opening remarks and introductions, I would like to turn the call over to Mr. Caldwell Bailey, Lead Investor Relations Analyst of Hi-Crush. Thank you sir. You may begin.

Caldwell Bailey -- Lead Investor Relations Analyst

Thank you. Good morning, everyone and thanks for joining us today. With me are Bob Rasmus, Chief Chairman and Chief Executive Officer of Hi-Crush and Laura Fulton, Chief Financial Officer. Before we provide our prepared remarks, I would like to remind all participants that our comments today will include forward-looking statements, which are subject to certain risks and uncertainties. Actual results could differ materially from those projected in any forward-looking statements. Additionally, we may refer to the non-GAAP measures of EBITDA, adjusted EBITDA, distributable cash flow, and contribution margin during the call.

Please refer to our public filings for definitions of our non-GAAP measures and the reconciliation of these measures to their most directly comparable GAAP measures as well as a discussion of risks and uncertainties. With that, I would now like to turn the call over to our CEO, Bob Rasmus. Bob?

Bob Rasmus -- Chief Executive Officer

Thanks, Caldwell and thank you to everyone for joining us this morning. Macro conditions for the first quarter improved overall versus the end of 2018 as oil and gas prices climbed from their December lows and remain at constructive levels today. However, the completions' backdrop remain challenging as the restart of activity across much of our footprint came back slower than anticipated, and operators remained focused on capital discipline.

Regardless of near-term conditions, the first quarter was a crucial period for Hi-Crush, one in which we remained focused on what we could control within our plan. Our strategy has been consistent, providing sand and logistics services to the major end-users of sand, the E&Ps. During the first quarter, we continued our track record of completing major capital projects on time and under budget, quickly ramped production from our new capacity, extended our growth with E&Ps and now have also invested in technology that will better enable our operations in the last mile.

Execution here is critical, not just over the near term, but for years to come. Let me start with a quick summary of the two relatively small, but very important and strategic acquisitions we recently completed, the PropDispatch software and Pronghorn Logistics business. Technology has become an important part of our offering helping us and our customers work more efficiently and ultimately, facilitating lower drilling and completion costs and elimination of NPT. Said another way, technology is a key to success in our increasingly service-focused business.

During the first quarter, we acquired BulkTracer Holdings, the owner and developer of technology used in the field for trucking, dispatch and optimization called PropDispatch. This high-return investment further differentiates our last mile service offering. We have used PropDispatch for a couple of years and have become increasingly impressed with the technology as well as the consistent drive for improvements and added functionality. More importantly, we saw the value of what PropDispatch could be to us, our expanded logistics offering and our evolving customer base.

We are investing relatively modest dollars to enhance the software to bring to market an even better transportation optimization tool, while also adding more functionality that will assist us in the management of sand inventory at the well site. Data is critical in this business and not just the collection of that data, but the analysis of that data to enhance customer information flow, product tracking, operational efficiencies, and the overall customer experience.

The PropDispatch technology also helps our customers run their drilling and completion activities like a true assembly line process by offering real-time data and opportunities for continuous improvement. We are enthusiastic about the current software and look forward to deployment of the upgraded PropDispatch system to our customers over the remainder of 2019. We also announced yesterday the acquisition of the remaining ownership interest in Pronghorn Logistics for a combination of cash and common units.

Pronghorn is a Denver-based oilfield services company that provides their primarily E&P customer base with frac sand procurement, last mile trucking and dispatch services as well as coordinating well site operations and sand management. The acquisition of Pronghorn quickly expands our base of operations in several key shale basins where we have not had last mile crews, including the Eagle Ford, Powder River, Mid-Con and Bakken and is a natural extension of our logistics-focused strategy.

The Pronghorn organization is execution focused and has proven operational success. They are known across the industry for providing an innovative approach to cost-effective services through their coordination and partnership with trucking providers and especially for leveraging next-generation sand equipment systems and technology to provide their customers with the lowest total cost of delivered sand.

Our integration of Pronghorn will be aided by their extensive experience with and utilization of PropDispatch in their operations. This will create synergies as we expand and improve the software for use across our platform. We look forward to their leadership team playing an important role and continuing to build Hi-Crush into the market leader and last mile logistics and well site management of frac sand.

Also during the first quarter, we completed the ramp at our second Kermit facility contributing directly to the 22% sequential increase in sales volumes realized over the fourth quarter. I'd like to commend all of our personnel that helped make this project a success, including an on-time start-up. Production from our second Kermit facility will be available at its full nameplate capacity of 3 million tons per year during the entirety of the second quarter.

At the end of the first quarter, we also completed construction on our customer-backed expansion of our Wyeville facility. We are in the process of ramping production and anticipate additional contributions from the facilities expanded capabilities in the second quarter. Kermit and Wyeville are among the most efficient facilities in the industry offering low production cost and transportation advantages in the most active basin in the United States and will be critical as we further expand our relationships with E&P customers.

During the first quarter, we had continued success in growing our activity with E&Ps, which accounted for 63% of the 2.4 million tons of sales volumes. Our contracts with E&Ps represent about 60% of our contracted volumes and are the bedrock of our strategy as we continue our focus on meeting their dynamic needs with integrated mine to well site solutions. With the completion of these two construction projects, we now have a nearly eight-year track record of successfully completing major development projects, commissioning new business lines and integrating transformative acquisitions in a continual effort to best serve customers and stay at the forefront of the frac sand and logistics industry.

Once again, I'd like to thank the entire Hi-Crush team that helped make these projects a success contributing directly to our growth. We are excited about the contributions these acquisitions, projects and technologies are making and the impact they will continue to have. I'd also like to discuss further enhancements we're making in our last mile platform. When we acquired FB Industries in August 2018, we transitioned the business model from equipment sales to embedding it as a part of our PropStream Logistics solution through it and equipment utilization and lease model.

Having now operated our equipment for several months, we are completing low cost upgrades to provide for even better operations at the well site, while also investing in an enhanced technology to support the data needs of our customers. What we have said since we acquired FB is that our customers are looking for solutions not a one-size-fits-all approach. Our position in the market remains differentiated as the only provider of both silos and containers providing the flexibility our customers want and need in a partner and service offering.

Our customers see the value of the combination of our upgraded silos, our containers, the PropDispatch technology and the expanded reach we have with the addition of Pronghorn. We will continue to listen carefully to our customers' feedback as we meet their dynamic needs in the field. As I have said numerous times, we are not interested in market share for the sake of market share. Our goal is to serve our customers as efficiently and effectively as possible, helping create value for them Hi-Crush and our investors over the long term.

During the first quarter, our industry faced very harsh winter conditions, which caused congestion and slowdown to Class 1 rail service, due to block tracks and subzero temperatures. For us, the direct impacts were related to purchase of third-party sand to ensure we met our commitments for contracted customer deliveries in the Northeast at prices significantly above those of our own production. The higher cost sources of sand, combined with higher freight rates coming from non-Hi-Crush locations negatively impacted EBITDA in the first quarter by approximately $1 million. This bottleneck also affected operations at our Northern White facilities, which were unable to run at optimal rates due to slower rail service, contributing to decreased efficiency and some increased costs at our Wisconsin operations.

I also want to provide an update on our corporate conversion. We appreciate all of the unitholders who have cast their votes to date and are pleased with the results so far, which have been overwhelmingly in favor of the plan of conversion and the Hi-Crush long-term incentive plan. The special meeting has been scheduled to reconvene on May 22, and we remain on track to affect the conversion by the end of the second quarter of 2019.

Let me also emphasize that the conversion itself will be a non-taxable event for our unitholders. Our unitholders will receive their 2019 K1 in March 2020 for their share of any taxable income or loss up until the date of conversion. We are excited about the opportunities in front of us, especially as we integrate the Pronghorn team and further develop the PropDispatch technology to meet the needs of manufacturing-style frac operations. The relationships we have with our E&P customers are the catalysts for our development of innovative solutions with their increasingly complex needs, while our financial strength and flexibility allow us to ensure an efficient ongoing roll-out. Our actions in the quarter reflect our commitment to our long-term strategy built to provide long-term structural success and returns for our investors. With that, I'd like to turn it over to Laura to discuss our last mile evolution and provide a review of our financial performance and outlook. Laura?

Laura C. Fulton -- Chief Financial Officer

Thanks, Bob. The capital projects in the Pronghorn and PropDispatch software acquisitions Bob talked about a moment ago are not discrete accomplishments for us. They are part of an ongoing process for Hi-Crush as we continue to listen to, internalize and adapt to customer need. As we see it, we are entering the next stage of our own growth in the last mile and at each stage, we have provided more and more value to our customers. Deploying equipment to customers is one thing, but offering a diverse set of services, the options that you give them within that service, the efficiencies that you create and the data and operational recommendations you can provide are really the cornerstone of the current phase of development in the last mile and something that positions as apart from others. Optimization of operations is the name of the game and is what drove us to pursue and complete the significant project and acquisitions this year.

The acquisition of Pronghorn this month in tandem with the first quarter acquisition of the PropDispatch software provides new opportunities for optimization. Hi-Crush and our customers can more efficiently dispatch trucks, track truck movements in real time, track the status of containers at the well site and manage inventory in silos among other things, all accessible from an app on a smartphone. The software provides greater insight and ability to tweak operations based on digitally collected empirical data rather than often incomplete paper logs and will aid in real-time decision making. PropDispatch links our last mile assets and allows us better visibility into operations in ways that were not nearly as easy before.

As a leader in integrated mine well site frac sand logistics, we have consistently recognized and pursued the next steps in the industry, enabling professional data-driven operations for these of more efficient equipments and integration of technology will ultimately help our customers by giving them still more options that can help to reduce costs, reduce NPT and realize value in our partnership. Supplying last mile operations from efficient and well positioned frac sand facilities is also crucial. We're excited about the new ways our expansion projects and acquisitions will allow us to serve our customers. As Bob said earlier, the base of the assets we have assembled and the incremental steps we've taken recently gave us greater control over our future success and position us for the long term in the frac sand logistics market.

With that, I'd like to discuss our results for the quarter. Sales volumes in the first quarter of 2019 were 2.4 million tons, in line with but at the lower end of the range of guidance we previously provided. This represented an increase of approximately 22% over the fourth quarter of 2018, due primarily to the ramp-up of our second Kermit facility. Average sales price for the first quarter of 2019 was $48 per ton compared to $58 per ton in the fourth quarter of 2018. The 17% quarterly decrease in average sales price was driven by the previously announced contract pricing renegotiations for sand produced from this Kermit facility as well as by sales mix. About 46% of the volumes sold during the first quarter of 2019 were produced by the in-basin Kermit facilities, which carry lower sales prices than volumes sold at the terminals or at the well site as compared to 34% of the volumes sold in the fourth quarter of 2018.

Northern White pricing was flat sequentially although it did begin to strengthen late in the quarter. And I'll talk more about that in a moment when discussing our outlook. Total revenues for the first quarter of 2019 remained nearly flat totaling $160 million compared to $162 million in the fourth quarter of 2018. Revenues from sales of frac sand were largely unchanged at $115 million in the first quarter of 2019 and the fourth quarter 2018 as increased sales volumes were offset by the decline in the average sales price. Revenues associated with logistic services were up slightly sequentially totaling $38.2 million in the first quarter of 2019 compared with $37.2 million in the fourth quarter of 2018.

The improvement reflects changes in transportation mileage and customer well completions mix, offset by lower utilization of container crews and silo systems in the first quarter. Revenues also include $6.6 million in sales of logistics equipment in the first quarter of 2019 compared to $10.3 million in the prior quarter. Adjusted EBITDA for the first quarter of 2019 totaled $16.2 million compared to $10.2 million in the fourth quarter of 2018. As noted earlier, the first quarter adjusted EBITDA includes the negative impact of approximately $1 million from loss margin and higher freight associated with purchases of third-party sands.

In addition, first quarter adjusted EBITDA was negatively impacted by $1 million of expenses associated with the planned corporate conversion and other business development costs. Fourth quarter 2018 adjusted EBITDA included the impact of $4.7 million of non-recurring severance, business development and legal costs associated with the acquisition of our general partner and sponsor in October. Contribution margin for the first quarter of 2019 was $12.19 per ton of frac sand sold, compared to $14.35 in the fourth quarter of 2018. A 15% sequential decline was driven by the impact of renegotiated contract pricing at our current facilities that on average reduced our contribution margin per ton by about $4.00. This impact was offset somewhat by approximately $2.00 per ton improvement in our production costs, resulting from the increased sales volumes and efficiencies gained from the second Kermit facility ramp-up.

This quarter, we are presenting depreciation and amortization of intangibles as a separate line item from our G&A. G&A was $12.6 million for the first quarter of 2019, down from $17 million for the fourth quarter of 2018. As I noted before, first quarter 2019 G&A includes $1 million in non-recurring business development and legal costs associated with the conversion. In fourth quarter 2018, G&A included $3.8 million of business development and other costs associated primarily with the GP buyout. Absent these non-recurring expenses, G&A was $11.6 million in the first quarter, down from $13.2 million in the fourth quarter, a decrease of approximately $1.6 million or 12% as we continue to be focused on cost reduction.

Moving to total depreciation, depletion and amortization. DD&A was $12.9 million for the first quarter of 2019, compared with $11.2 million in the fourth quarter of 2018, increasing as a result of the start-up of the second Kermit facility in December 2018. Interest expense for the first quarter totaled $10.6 million, relatively flat compared to the fourth quarter of 2018 reflecting quarterly interest from our senior notes, no borrowings under our ABL facility and reduced by interest capitalized on our major capital projects.

Capital expenditures for the first quarter of 2019 totaled $40.3 million primarily associated with $25.2 million of carryover growth CapEx from 2018 projects associated with the completion of the Kermit 2 construction and Wyeville expansion. In addition, we spent $11.1 million on our 2019 growth CapEx primarily related to spending on logistics assets, including new Atlas topfill conveyor systems and trailers. Approximately $4 million were spent on our annual maintenance CapEx project.

We exited the first quarter with total liquidity of $115.6 million, including $60.4 million in cash and availability under our $200 million asset-backed revolving credit facility. As expected, our cash balance decreased from year-end, and as we paid our semi-annual interest payment on our senior notes in February 2019 of $21.4 million and we completed the majority of our 2018 carryover CapEx spending.

Borrowing base availability under our ABL facility fluctuates with accounts receivable and inventory level. And as of March 31, we had $55.2 million of availability after consideration of letters of credit under this facility. Total debt outstanding was $444 million, and we have no balances drawn under our ABL facility. For the first quarter, we reported distributable cash flow attributable to the limited partners of $2.9 million.

Turning to the second quarter. The second current facility is at full production capability and our Wyeville expansion is complete and ramping quickly. We are in the process of upgrading our silo equipment with the enhancements we and our customers require and has started deploying the upgraded silo systems in the field where we anticipate renewed growth. We expect sales volumes to be in the range of 2.5 million to 2.7 million tons for the second quarter, up from 2.4 million tons in the first quarter primarily due to the full quarter contribution from additional volumes produced by our second current facility.

Northern White Sands will contribute some increase in volumes from the Wyeville expansion related to the new E&P contracts we previously announced, but could be impacted based on our customers' current production plans and job timing. We expect sales prices remain flat in the second quarter along with a modest ramp in overall completions activity as E&P's managed spending over the course of the year.

While we expect normal holiday slowdowns in the fourth quarter, we expect the volatility in activity we saw around this period last year to be less pronounced than in 2018. We expect our contribution margin per ton to remain relatively flat in the second quarter. We expect a modest improvement in production costs although our wet plant start-up costs are crossing over into the second quarter due to the extended winter. Current production costs should remain at levels similar to first quarter. Pricing for Kermit and Northern White sand should be relatively stable at first quarter exit levels. And as I previously mentioned, our customers' current production plans and job timing could impact the overall sales volumes and mix, which then could impact overall contribution margin for the second quarter.

Over the next few quarters, we anticipate increasing the number of container crews in the field beyond what we and Pronghorn have deployed today. We also anticipate deploying more than 30 upgraded silo systems out of inventory, approximately half of which will be using Atlas topfill conveyors. We expect further growth of the PropStream service, and our guidance here takes into account timing related to customer contracts, start-up and overall activity. The deployment of silos and containers is expected to drive margin higher in the second quarter.

As I mentioned earlier, we have split out the non-cash depreciation and amortization largely of intangible assets from our cash spend on G&A. We have continued to watch costs in controlled spending where possible. We expect to average $12.5 million to $13.5 million of SG&A per quarter. We expect total DD&A to average $13.5 million to $14.5 million per quarter. I'd also like to update the CapEx guidance we gave on our fourth quarter call. Remaining carryover growth CapEx from 2018 associated with the completion of the Wyeville expansion is expected to be in the range of $5 million to $10 million to be spent in the second quarter of 2019 for an expected total of $30 million to $35 million in 2018 carryover growth CapEx to be spent in 2019.

For the full year 2019, maintenance CapEx is now expected to be lower than that previously guided in the range of $20 million to $25 million, including the $4 million we spent in the first quarter. Our 2019 growth CapEx relates to spending on logistics assets, including new Atlas topfill conveyors systems and trailers. For the full year 2019, growth CapEx, including upgrades to silo systems and the PropDispatch functionality enhancement and development is expected to range between $30 million and $40 million.

With that, I'd like to turn it back to Bob for our closing remarks before opening it up for Q&A. Bob?

Bob Rasmus -- Chief Executive Officer

Thanks, Laura. Again, I'd like to emphasize that the first quarter for Hi-Crush was about continuing to position the Company to meet the evolving needs of our customers. Our customers want a preferred provider of safe, flexible, full scale-and-scope profit logistics services. At Hi-Crush, as the only fully integrated profit and logistics platform, we will continue to pursue our differentiated strategy to meet customer needs and create long-term value for our investors.

Now, let's open up the lines for Q&A. Operator?

Questions and Answers:

Operator

Thank you. At this time, we'll be conducting a question-and-answer session. (Operator Instructions) Our first question comes from the line of John Watson with Simmons & Company. Please proceed with your question.

John Watson -- Simmons and Company -- Analyst

Thank you. Good morning.

Laura C. Fulton -- Chief Financial Officer

Good morning, John.

John Watson -- Simmons and Company -- Analyst

Laura and Bob, I want to dig into the Pronghorn acquisition. Could you give us some more color on how many crews Pronghorn has working today and how you expect the Pronghorn model to integrate with your legacy PropStream model?

Bob Rasmus -- Chief Executive Officer

Sure, that they currently have six crews operating actively in a variety of new basins. With the acquisition of Pronghorn, we now have active last mile logistics solutions in all the major oil and gas basins in the US. We also have line of sight to expand the Pronghorn crews and Pronghorn model throughout the course of the year. What we see with the Pronghorn acquisition is a complementary skill set and footprint. They provide sand procurement, last mile trucking, dispatch services, coordination of well site operations, sand logistics management, and what they really have is a long history of innovation, execution, experiences former members of service companies. And they've also been extensive users of PropDispatch with the knowledge and how to use that technology most effectively and to provide customers with the best experience and to help us further enhance the PropDispatch technology.

John Watson -- Simmons and Company -- Analyst

Okay. Great. That's helpful. I think at the end of the first quarter, you had nine PropStream container crews active. I believe all of the Pronghorn systems are also containers. Should we be modeling something in the neighborhood of 15 (ph) for the second quarter or their potential for that to move higher?

Laura C. Fulton -- Chief Financial Officer

I think there is potential for that to move higher, but I think that's a good starting point keeping in mind that we completed the acquisition of Pronghorn yesterday. So those three (ph) won't be a part of our financials for the full quarter, but certainly as Bob mentioned, we do expect to grow that business throughout the year and leverage the capabilities that they've established in the different basins where we traditionally have not had operations in the past. So really looking forward to seeing the growth trajectory on the container side because as you said, they have been end users of the proppant technology as well as the PropDispatch technology.

John Watson -- Simmons and Company -- Analyst

Perfect. Very helpful and one more if I can squeeze it in. The 30 silo comment I thought was interesting. Can you talk about your visibility toward deploying those? Is that based on conversations that you've had with customers today or is that more just a target for the Company moving forward?

Bob Rasmus -- Chief Executive Officer

It's based on conversations with customers that we have had and are having today that gives us confidence in reaching that target. We've already begun redeployment of the silo systems. The cadence of that redeployment will increase during the third and fourth quarter because we're already halfway through the second quarter.

John Watson -- Simmons and Company -- Analyst

Sure. Perfect. Thanks for the color guys. I'll turn it back.

Laura C. Fulton -- Chief Financial Officer

Thanks, John.

Operator

(Operator Instructions)

Bob Rasmus -- Chief Executive Officer

So thank you everyone for your time today. Our actions during the first quarter and the acquisition of PropDispatch and Pronghorn continue our focus on executing on our strategy of becoming a provider of full-scale proppant logistics solutions. We will continue to focus on executing on our strategy to create long-term value for our investors. Thanks again everyone. And we look forward to talking to you at the end of the next quarter.

Operator

This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation and have a wonderful day.

Duration: 30 minutes

Call participants:

Caldwell Bailey -- Lead Investor Relations Analyst

Bob Rasmus -- Chief Executive Officer

Laura C. Fulton -- Chief Financial Officer

John Watson -- Simmons and Company -- Analyst

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