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US Silica Holdings Inc (NYSE:SLCA)
Q1 2021 Earnings Call
Apr 30, 2021, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the U.S. Silica First Quarter 2021 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Don Merril, Executive Vice President and Chief Financial Officer. Thank you, sir. Please go ahead.

Don Merril -- Executive Vice President and Chief Financial Officer

Thanks. Good morning, everyone, and thank you for joining us for U.S. Silica's first quarter 2021 earnings conference call. With me on the call today is our Chief Executive Officer, Bryan Shinn.

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. Bryan Shinn.

Bryan Shinn -- Chief Executive Officer

Bryan? 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 record 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 a 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 penalty 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 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% 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.

Current forecast projects 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 a 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 operation. 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 portfolio. 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 advancements 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 move 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 ultrafine 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 proppant volume of 2.6 million tons, up 36% sequentially, on stronger U.S. completions activity as the number of frac crews operating in the U.S. continue 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. The 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 2400 stored cars in Q4 to 750 cars in storage by the end of Q2 2021. Let me now turn to the market and our outlook. Looking forward, we are 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 toward robust customer demand ahead in both our Industrial and Oil and Gas segments. Strong energy commodity price performance this quarter, drove a recovery in proppant volumes, and we believe that our Q2 proppant volumes will increase sequentially approximately 20% to 25%, while SandBox-delivered loads should rise 5% to 10%. Given that and 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 proppant and last mile logistics demand. 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: first, 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 whitespace 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 earnings calls. And with that, I'll turn the call over to our CFO, Don Merril. Don?

Don Merril -- Executive Vice President and Chief Financial Officer

Thanks. And good morning again, everyone. As Bryan stated, we delivered better-than-expected quarterly results, both financially and operationally. In addition, this quarter was mostly absent of charges related to asset impairments, facility closures, restructuring, and other expenses. Moving into 2021, we expect to deliver results with minimal adjustments to EBITDA. Now, let me begin with a review of our operating segment results. First quarter revenue for the Industrial and Specialty Products segment of $112.7 million increased 5% versus the fourth quarter of this year and was virtually flat compared with the same quarter one year ago. First quarter revenue growth was driven mostly by the economic recovery as volumes and contribution margin expanded versus the prior quarter. The Oil and Gas segment revenue was $121.7 million for the first quarter, up 31% as compared to the fourth quarter of 2020, excluding the $27.2 million benefit related to customer shortfall penalties recorded in the fourth quarter and a decrease of 22% versus the first quarter of 2020. Sequentially, volumes were up 36%. However, segment contribution margin fell nearly 60% as expected, primarily due to the absence of the $27.2 million benefit related to the customer shortfall penalties recorded in the fourth quarter of last year.

Additionally, cost headwinds associated with the winter weather event, as well as empty railcar moves and trucking inflation negatively impacted the current quarter, consistent with our fourth quarter earnings call commentary. On a per ton basis, the contribution margin for the Industrial and Specialty Products segment was $40.69 per ton for the first quarter, which represents a modest decrease of 2% compared with the fourth quarter result and what we estimate to be the low point for the year. The Oil and Gas segment contribution margin on a per ton basis was $8.36, a decrease of nearly 70% when compared to the fourth quarter 2020, due to the reasons discussed earlier and again, consistent with our comments last quarter. Adjusted EBITDA in the quarter was $38.3 million, which should represent a bottom for this cycle and a low point for the year. Adjusted EBITDA was down 40% sequentially and down 20% year-over-year. However, again, excluding the $27.2 million benefit in the Oil and Gas segment related to customer shortfall penalties last quarter, adjusted EBITDA increased 5% sequentially. Additionally, as discussed earlier, we faced inclement weather conditions, empty railcar moves and trucking inflationary headwinds during the quarter. Selling, general and administrative expenses for the quarter of $26.2 million, represent a 13% decrease when compared to the first quarter 2020 and a 6% decrease sequentially. The decrease reflects the aggressive and proactive actions taken by the team to reduce spending to better align with market conditions.

For the year, we expect to remain disciplined around SG&A and forecast a single-digit percent decrease year-over-year. Depreciation, depletion and amortization expense in the first quarter totaled $41.3 million, which is a slight increase when compared to the fourth quarter. We expect depreciation, depletion and amortization to be up slightly for the full year compared to 2020. Our effective tax rate for the quarter ended March 31st, 2021, was a benefit of 17%, including discrete items. We believe our full-year effective tax rate will be a benefit of about 24%. Turning to the cash flow statement. I am pleased to report that with the aid of a $16 million tax refund, we delivered positive free cash flow during the first quarter, which historically has been a quarter in which we burn cash. Looking at the balance sheet, the Company had $154.4 million cash and cash equivalents at quarter end. We have a $100 million revolver with $25 million drawn and $23.3 million allocated for letters of credit as of March 31st, 2021, leaving approximately $52 million available under our credit facility. As mentioned, we received $16 million in tax refunds from the IRS during the quarter related to the CARES Act.

We anticipate receiving additional IRS refunds related to the CARES Act of approximately $21 million in the coming months. Our net debt stands at $1.1 billion, and capital expenditures in the first quarter were $3.5 million. For the year, we continue to expect 2021 capital spending to be in the range of $30 million to $40 million. Finally, our playbook is clear. We have a relentless focus on capital discipline. For the year, we continue to expect to be free cash flow positive and to reduce net debt by year-end. In addition, with the absence of one-time cash charges, coupled with the expanding EBITDA driven by our increased product offerings and value-added capabilities, along with the reliable execution in a recovering market, we should have the ability to strengthen our balance sheet and sustainably generate positive free cash flow. And with that, I'll turn the call back over to Bryan.

Bryan Shinn -- Chief Executive Officer

Thanks, Don. Operator, would you please open the lines for questions.

Questions and Answers:

Operator

And ladies and gentlemen, the floor is now open for the questions-and-answer session. [Operator Instructions] Our first question is from Stephen Gengaro with Sdifel -- Stifel, I'm sorry. Please proceed with your question.

Stephen Gengaro -- Stifel -- Analyst

Thanks. Good morning, everybody.

Bryan Shinn -- Chief Executive Officer

Hey, good morning, how are you doing?

Stephen Gengaro -- Stifel -- Analyst

I'm good. Thanks. It's -- so a couple of things that I wanted to ask about. And I think the first is, when we think about -- and I'm thinking on the Oil and Gas side the contribution margin per ton and looking at volumes and then thinking about some of the pricing trends we've seen. I'm trying to get a sense for how you think, what you think they look like over the next couple of quarters? And maybe, is there any incremental color on, sort of, what the winter weather issues cost you in the quarter that just concluded?

Bryan Shinn -- Chief Executive Officer

So, great questions. Maybe I'll take the first part of that and just give a little bit of color commentary and then maybe ask Don to, to dive in a bit further to the winter weather and some of the things that we saw there.

If you recall back to conference call last quarter, we've said that we thought normalized contribution margin per ton for Oil and Gas segment was around $10 and we highlighted that with some of the headwinds that we thought we'd see, weather being one of them that we probably be somewhere between $8.00, $8.50. And we actually landed right in the middle of that at, I think, $8.36. So, that's kind of where we got to in Q1 with that math, Stephen.

And I think what you'll see going forward is that we'll start to trend closer back to that $10 a ton range. So, I would expect that as we go forward say in Q2 with the demand activity we're seeing out there and some pricing tailwinds that we'll be up somewhere in the mid-9s probably, plus or minus. And that feels like a reasonable place that I think we can stay for the remainder of the year. Obviously, still a lot of puts and takes out there.

Don, maybe you can take through -- take the second question around the weather and some of the other things that we saw in the quarter.

Don Merril -- Executive Vice President and Chief Financial Officer

Yes. We've mentioned a couple times in our prepared remarks that the quarter was hindered by three things; weather, the railcars, when we pulled railcars out of storage, unfortunately that's an empty railcar pool. So, it's very expensive to move an empty car where you need it. And then, we also saw inflation that was really highlighted by trucking inflation. And all told, if you add all that up, it's roughly $8 million of a headwind that we had in Q1.

And looking forward, some of that's going to go away. Hopefully, fingers crossed, we don't have a weather event in Q2, but we are going to pull more railcars out of storage, as Bryan said in his prepared remarks. And we also -- we have a price increase coming in our ISP business, but it really doesn't hit until May 1st, so we're going to have some more inflation pressure hitting us in the first part of the quarter. So, I would say a little less than half of that $8 million will still be a headwind for us in Q2.

Stephen Gengaro -- Stifel -- Analyst

Great, thank you. That's helpful. And when we think about, and you mentioned a couple of examples of your exposure to solar and wind. Can you -- any sense for what that makes up of sort of the the current mix and how you think that evolves as we go forward here? I mean, we've done some work on the wind side recently and clearly, there is very strong demand for these turbines and blades going forward. So, I'm just curious if you have a sense for the current makeup of your ISP business and how that evolves?

Bryan Shinn -- Chief Executive Officer

And another really timely question, Stephen. And when we think about the clean energy market and our exposure to it today, we have three kind of clear areas that we're currently in. So, we talked about solar panels and how the products that we sell go into the glass that really allows the amount of -- right amount of solar energy to come into the panel, so, that's one. Second, is helping out with the suppliers of fiberglass composites for the wind turbine blades. And then the third is, with diesel particulate filters, which in many parts of the world, particularly Europe and in China, Japan, these are being mandated in new cars to cut emissions down. So, when I think about that aspect of clean energy, today that's probably 8% to 10% of our total industrial portfolio.

And then, if you think about things that, that other things we do in and around helping efficient energy generation, we're also starting to get into the green diesel value chain. We have some really interesting products that we acquired from EP Minerals that are very effective at serving process filtration aids in the whole green diesel process. So, we haven't sold a lot into that yet. So, I think that will be additive to that 8% to 10%.

And then, I also look at our Cool Roof Granules, it kind of as in the energy space because what those products do is they reflect a lot of the solar energy that comes into commercial buildings from the roof. And so, essentially, use less energy to heat and cool those buildings. So, that's not in that 8% to 10% either. So, you can see that over time here as we grow, particularly the green diesel and the Cool Roof Granules, as well as the other product lines. So, I think that, all that sort of energy-related set of offerings will become pretty significant part of our overall industrial enterprise.

Stephen Gengaro -- Stifel -- Analyst

Great, thanks. If I could throw in one more. You did -- your presentation, I think it was December when you talked about new product introductions and the laundry list of, sort of, incremental growth drivers you had going forward. Is there -- as we think about how those opportunities materialize, would we see, you think, inflection point of, sort of, growth and contribution margin changing or just, sort of, a gradual process over the next, sort of, two to three years as products rollout. I'm just trying to get a sense for, sort of, how to think about when these products are hitting the market and how that kind of flows through the income statement?

Bryan Shinn -- Chief Executive Officer

I think that what you'll see is, it's just a continual increase on this. It's like a wall of water, like a big wave that's kind of building up of all these different programs and projects. And one of the things I really like about that is, none of this is sort of boom or bust. There is not one or two big projects that we're hanging our hat on, it's several different projects across a number of different industries. So, I think you'll just see a continuing build quarter-on-quarter. And one of the things that we want to do obviously is highlight these kinds of opportunities and successes as we did on this call. And also, outside of this call, I think, we'll have at least a few times a year highlighted meetings like we had back in December of last year where we really shine a spotlight on these opportunities and dive in a bit more detail, Stephen.

Stephen Gengaro -- Stifel -- Analyst

Great. Thank you.

Bryan Shinn -- Chief Executive Officer

Thank you.

Operator

[Operator Instructions] And our next question is from Samantha Hoh with Evercore ISI. Please, proceed with your question.

Samantha Hoh -- Evercore ISI -- Analyst

Hey guys, thanks for taking my question. Just maybe to stick on the clean energy topic for just a little bit longer. There has been some reference to fiberglass shortage. Is that something that you guys are being impacted by? I'm just kind of curious how that all works in terms of like your piece of the supply chain for that material?

Bryan Shinn -- Chief Executive Officer

So that piece of the supply chain that the sectors that we supply into, we haven't seen that. But what we have seen across some of the industrial supply chain are shortages of raw materials. So for example, one of the things that we sell into is paints and coatings. And the paint manufacturers, epoxy resin manufacturers are having problems getting some of the base chemicals and resins that they need to make their formulation. So, I think there is a bit of general disruption still out in the economy. Many supply chains were seriously impacted with the pandemic and then some got very specifically impacted with the harsh weather in February that crossed the country. So, I know some chains are experiencing big problems there, not really impacting us very much. But even things like the kind of, widely reported chip shortage that seems to be impacting a lot of chains, we just haven't seen much of that at this point.

Samantha Hoh -- Evercore ISI -- Analyst

Okay, great. And then my other question has to do on the Oil and Gas side. It seems like you guys are accelerating some of this railcar leaving amount of storage. Can you maybe help us understand how the progress is with some of your mines restarting? And then, maybe just what the mix is in terms of your sales right now between the Northern White and the Permian products? And if you can share anything in terms of like how pricing differs between those two products, that be great?

Bryan Shinn -- Chief Executive Officer

Sure, sure. So in the product split, last quarter, we were about 24%, 25%, Northern White Sand, let's say, last quarter in Q4. In Q1 that went up to almost a third of our product sales. So, there definitely is accelerating demand for Northern White Sand as some of the basins outside the Permian recover. Obviously, most of the basins outside of the Permian are not using local sand and so, preponderance of those basins use Northern White Sand and that's why we've been pulling the railcars out of storage.

We also restarted during Q1 our Sparta, Wisconsin facility, which is a great low cost Northern White site. And we've been doing very well at that mine. We also took our Crane mine up to 24/7, that's Crane Texas that's in the kind of Southern part of the Midland. And we also took our flagship Northern White facility in Ottawa, Illinois back to 24/7 operation as well. So, most of that, quite honestly has been due to surging Oil and Gas demand. And I think we'll see pretty substantial increases in demand continuing here. We project a robust Q2 in terms of demand for sure and certainly we will be a big participant in that. I would guess that proppant demand in Q2 for us is probably up at least 20% to 25%. I think SandBox-delivered loads will be up probably at least 5% to 10%. And in both of those delivery -- both the delivery at SandBox and the sand supply, I think we'll see a relatively constructive pricing environment to your question.

We've seen some pricing improvement on a customer-by-customer basis. We're positioned a little differently than some of our competitors. And that probably 80% to 85% of our sales in any given month the proppant is to contract customers and in many cases those contracts have WTI escalators or sort of alignment clauses. Those -- as the price of oil continues to go up, I think we'll some almost automatic entitlement of pricing that goes with that we'd be with the contracts. The downside of that of course is, when things get really tight like we've seen some points in Q1, we don't have the ability to participate in the spot market as much, but we've kind of made that trade off. And I think it's the right one to build bigger, more stable customers, big contracts and that we don't have the sort of ups and downs that perhaps we have had in the past or some of our competitors have had.

And anything else there Samantha?

Samantha Hoh -- Evercore ISI -- Analyst

No, that was it. Thank you, Bryan.

Bryan Shinn -- Chief Executive Officer

Okay. Yeah. No worries.

Operator

Thank you. At this time, I'd like to turn the floor back over to Mr. Shinn for closing remarks or closing comments.

Bryan Shinn -- Chief Executive Officer

Thanks, operator. As we bring the call to a close today, I thought I'd leave you with three key thoughts. First, we have a strong diverse portfolio that we're strategically enhancing with a robust pipeline of new innovative products in our industrial business, some of those that we talked about this morning. Second, we are poised to benefit, I believe, from a recovering U.S. economy, which I think most everyone expects to drive increased industrial and energy-related demand, as well as increased profitability for U.S. Silica. I think we're well positioned in a variety of environmentally important value chains that support cleaner energy and cleaner air, and again, we talked about many of those this morning. And finally, a continued capital discipline optimizing our product mix and further developing value-added capabilities coupled with reliable execution should provide us the ability to strengthen our balance sheet and sustainably generate positive free cash flow.

Thank you again for dialing into our call today and we look forward to speaking with you all again next quarter. Stay safe and be well.

Operator

[Operator Closing Remarks]

Duration: 35 minutes

Call participants:

Don Merril -- Executive Vice President and Chief Financial Officer

Bryan Shinn -- Chief Executive Officer

Stephen Gengaro -- Stifel -- Analyst

Samantha Hoh -- Evercore ISI -- Analyst

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