Smart Sand Inc (SND) Q2 2021 Earnings Call Transcript

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Smart Sand Inc (SND 1.01%)
Q2 2021 Earnings Call
Aug 4, 2021, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and thank you for standing by, and welcome to the Smart Sand Inc. Second Quarter 2021 Earnings Conference Call. [Operator Instructions] I would now like to hand the conference over to Josh Jayne, Director of Finance and Assistant Treasurer. Please go ahead.

Josh Jayne -- Finance Manager

Good morning, and thank you for joining us for Smart Sand's Second Quarter 2021 Earnings Call. On the call today, we have Chuck Young, Founder and Chief Executive Officer; Lee Beckeleman, 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 4, 2021. 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 and free cash flow to cash flow provided by operating activities. I would now like to turn the call over to our CEO, Chuck Young.

Charles E. Young -- Chief Executive Officer

Thanks, Josh, and good morning. We enjoyed another good quarter for volume with similar tonnage to the first quarter. Second quarter volumes of 767,000 tons are up 269% from the second quarter 2020 levels when the pandemic began to negatively impact our business. Additionally, Sand sales volumes in the first half of 2020 were approximately 10% higher than the first six months of 2019. So while our activity was flat quarter-to-quarter, our overall activity is trending higher this year than before the pandemic severely impacted our activity. This up cycle so far is different than previous up cycles in the oil and gas industry. While market activity is much stronger today than it was a year ago, E&Ps continue to focus on spending within their cash flow. This spending discipline has led to a slower recovery for sand demand in our core markets. We are committed to living within our cash flow while still pursuing opportunities to expand our business.

We are managing our operating costs in line with current activity levels, but have the incremental capacity to sell more sand with minimal additional investment. So we can quickly respond should market activity begin to increase. We are actively pursuing opportunities to expand our customer base and logistics capabilities in key long-term markets. This week, we announced a new three-year agreement to supply sand to EQT including at a new transloading terminal that we intend to have operational by the end of this year. This new contract demonstrates our continued commitment to provide long-term, sustainable sand supply and logistics solutions to our customers. The Appalachian Basin is a key market for Smart Sand. And as we move toward adding a new terminal there, we expect to offer even greater efficiency to our customers while also providing ESG benefit by reducing trucking mileage and associated carbon emissions related to sand delivery. With our diversified asset base and very strong balance sheet, we remain uniquely positioned to keep pursuing our long-term strategy to be the premium supplier of Northern White frac sand from the mine to the well site.

We are pleased that we reached a settlement with U.S. well services during the second quarter. The $35 million cash payment we received in June further strengthened our balance sheet and increased our liquidity. In addition to the cash, U.S. Well Services has entered into a two-year rider first refusal agreement with Smart Sand covering all purchases of Northern White frac sand by U.S. Well Services and its affiliates in the Continental United States from January 1, 2022, through December 31, 2023. We look forward to having U.S. Well as a customer again soon. Today, we have $37 million in cash on our balance sheet and approximately $55 million in liquidity. Even though we have a strong balance sheet, we will remain disciplined with respect to capital spending and focused on maximizing cash flow. We remain committed to the last mile market with our smart systems, including our SmartPath transloader which we believe is unlike anything in the industry. SmartPath was successfully deployed for the first time during the first quarter and continue to work through the second quarter.

We anticipate additional deployments in the back half of the year. Using our smart systems, we estimate that the number of trucks needed to deliver sand to the well site will be reduced by more than 30% versus our competitors' offerings. By taking trucks off the road, accidents are reduced carbon emissions are reduced and noise is reduced. Smart systems are also uniquely designed to reduce dust by reducing accidents, carbon emissions, noise and dust, we are keeping people safer and striving to meet the ESG goals of Smart Sand and our customers while providing a reliable, efficient last mile solution for the industry. We're excited about our future for a number of reasons. We have more cash on the balance sheet today than at any other point over the last three years. Sales volumes are up. They remain far above 2020 levels and are trending higher than 2019 volumes. Strong commodity prices should yield higher spending in 2022 and beyond. We are well positioned to take advantage of any increased market activity with our available capacity, ample liquidity and strong balance sheet.

Having operated SmartPath successfully for two quarters, we look forward to expanding our last mile market share. As always, we'll continue to keep our eye on the future, and we'll always keep our employees and shareholders' interest in mind in everything we do. And with that, I'll turn the call over to our CFO, Lee Beckelman.

Lee E. Beckelman -- Chief Financial Officer

Thanks, Chuck. While we are encouraged by the pickup in activity we have seen thus far in 2021, E&Ps have stayed disciplined with respect to spending within their cash flow. As Chuck indicated, second quarter 2021 volumes were slightly higher than first quarter 2021 volumes. We continue to expand our customer base during the second quarter and believe a more diverse customer base will strengthen our business going forward. We remain committed to low leverage levels, a prudent capital structure, generating positive free cash flow for the year and maintaining adequate liquidity levels. Now I'll go through some of the highlights of the second quarter compared to our first quarter 2021 results. Starting with sales volumes. We sold 767,000 tons in the second quarter of 2021, a slight increase over the first quarter 2021 volumes of 760,000 tons.

Total revenues for the second quarter 2021 were $29.6 million compared to $27.5 million in the first quarter 2021. The revenue increase was driven by higher in-basin sales in the second quarter compared to the first quarter. Sand revenues were higher by $5.7 million which more than offset the decline in logistics revenue of $1.7 million. Our cost of sales for the quarter were $32 million compared to $32.4 million last quarter. Despite a slight increase in revenues and tons sold, we actually saw a decline in our cash production cost quarter-over-quarter by approximately 5%. Total operating expenses were $26.3 million, compared to $6.1 million last quarter. The increase from the first quarter is primarily driven by $19.6 million recorded as non cash bad debt expense in the current period, which is the difference between the $54.6 million accounts receivable balance that was subject to the company's litigation with U.S. Well Services and the $35 million cash received in the settlement of such litigation.

While the company wrote down a portion of the receivables that had previously recorded related to the disputed contract with U.S. Well, it increased its cash position by $35 million as a result of the proceeds received in the settlement. Second quarter 2021 contribution margin was $3.5 million, and we had negative adjusted EBITDA of $21.5 million, compared to first quarter contribution margin of $1 million and negative adjusted EBITDA of $3.5 million. Although we generated higher contribution margin from improved average selling prices and lower cash production cost, adjusted EBITDA declined in the second quarter of 2021 compared to the first quarter of 2021, primarily as a result of the $19.6 million bad debt expense recorded in the second quarter of 2021 related to the settlement of litigation with U.S. Well. For the second quarter of 2021, we had $29.7 million of free cash flow, generating $32.6 million in operating cash flows, while spending $2.8 million on capital investments. Year-to-date, we had $31.4 million in free cash flow generating $36.5 million in operating cash flows, while spending $5 million on capital investments.

The majority of capital investments year-to-date have been on new SmartSystems units. During the quarter, we didn't use our revolver, and still have no outstanding borrowings other than $1.2 million in letters of credit. Our current unused availability under the revolver is $13 million. Additionally, we have $5 million in unused availability from the acquisition liquidity support facility we put in place with the Eagle Proppants business acquisition. We paid $1.7 million against our notes payable and equipment financing in the quarter and have paid down approximately $3.4 million year-to-date. We expect to pay down a similar amount in the second half of the year, and therefore, we'll reduce our debt by approximately $6.9 million this year.

We ended the second quarter with approximately $39 million in cash. Our current cash balance is approximately $37 million. Between cash and our availability on our facilities, we currently have approximately $55 million in available liquidity. We do not expect to have any borrowings on our ABL revolver for the remainder of the year other than letters of credit. In terms of guidance for the third quarter, we expect sales volumes to decline by 10% to 15% from second quarter levels. The anticipated drop in sales volumes is due primarily to timing of well programs from our current customers, particularly in the Bakken. We're seeing some white space and activity in this region between wells completed in the second quarter and start up a new well pads. Anticipate capital expenditures for 2021 to be in the $10 million to $12 million range. and expect to be free cash flow positive for the full year. This concludes our prepared comments, and we will now open the call for questions.

Questions and Answers:

Operator

[Operator Instructions] And our first question comes from Bill Austin from Daniel Energy Partners.

Bill Austin -- Daniel Energy Partners -- Analyst

Hi, guys. I just wanted to start with a little on, if you wouldn't mind just characterizing the competitive landscape that you're seeing in the Northern White market today?

Charles E. Young -- Chief Executive Officer

Yes. Sure, Bill. So what we're seeing out there is we've got the traditional providers of Northern White up in servicing kind of Midwest and Northeast, and then a little bit down south into some opportunities in Oklahoma. The northern market is -- the Northern White sand market is relatively healthy. We are seeing, as Lee mentioned in his comments -- with our deliveries into North Dakota, we're seeing a little bit of white space as our customers out there retool for a push toward the end of the year. With regard to who our main competitors are up there, it's primarily U.S Silica and Covia. There's a couple of smaller operators that provide sand there, but with our asset diversity on rail, both UP, CP and BN origination, we're competing pretty well up there as opposed to where we were when we only had a single railroad. So we feel pretty good about it.

Bill Austin -- Daniel Energy Partners -- Analyst

Great. Thanks. And then one more. You touched on it a little bit, but have you guys seen any logistics challenges with all these [Indecipherable] trucks that are happening? Is this going to create problems down the road with the amount of [Indecipherable] trucksthat we're kind of seeing in the market?

Charles E. Young -- Chief Executive Officer

Well, I think what you're touching on there is kind of trucking, right? And certainly, we've heard anecdotal evidence that trucks are a problem. Our view on trucking is that you've got the -- your supply chain is only as strong as your weakest link, and trucking traditionally has been difficult, last mile is always difficult in that respect. And so our view on that is what you've got to do is you've got to make truckers more efficient. You've got to make their load times shorter. So when we build transloads out there, we're focused on keeping those load times as short as possible, keeping the time that a trucker waits in line to be loaded as short as possible.

We want our transloads to be strategically located, so the truck distance is shorter. And then when we get to the well site, we want to offload those trucks as quick as possible. And so -- when we think about trucking, we look to other bulk commodity businesses for what they've done in trucking. And one of the things that's obvious to us is the use of bottom dump hopper trucks, right? They load very quickly, they unload very quickly. And what they also do is they have a heck of a lot more throughput than a traditional pneumatic truck or a box system because they don't weigh as much. So you're able to get that -- that advantage translates into more throughput. So our focus is really helping those truckers out, making them more efficient, and thinking about in the long term, how we encourage trucking truckers to come into this business and kind of alleviate some of that supply chain. And we think with kind of our smart systems that are capable of doing bottom dump trucks, we've got a leg up on the competition there.

Bill Austin -- Daniel Energy Partners -- Analyst

Okay. Thanks. And my last one, I know you touched on it again real briefly at the end. Any of the budget shortfall that you guys are seeing from the operators? How do you guys think about that in terms of Q4 potential seasonality in terms of what you guys are seeing out there? I know you briefly hit it, but like anything more on how you guys are seeing that in the fourth quarter or is it too early to tell?

Charles E. Young -- Chief Executive Officer

Yes. I think it's -- Bill, it's a little too early to tell. I mean we are seeing a little slowdown in the Bakken timing issues, and I think that could pick back up. And we do expect some pickup in activity in the Northeast in the fourth quarter. But it will really be dependent on how our volumes go quarter-to-quarter on really that Western United States activity. And as a pick back up at the end of the year and weather and also are the E&Ps going to continue their budget spending into the fourth quarter are basically look to move some of that into the first half of next year. So it's a little hard to say. But I do think we do expect pickup in the Northeast, but it's a little early to see how the planning is going for fourth quarter in the Bakken and some of the other Western basins we're now competing in.

Lee E. Beckelman -- Chief Financial Officer

Yes. And the only thing I would add to that, Bill, is as we kind of look at commodity pricing out there, both on oil and natural gas and with the new terminal we're building up in the Northeast, we think we could blunt some of that seasonality that we've seen in past years with the ability to get throughput if the weather is difficult or we see kind of any of the seasonality associated with flooding or whatever in the Northeast.

Operator

Okay. I appreciate it, guys. I'll turn it back over.

Charles E. Young -- Chief Executive Officer

So yes, Stephen, what we're specifically referring to there is the amount of throughput you get through a truck. So for -- to give you an example, up in North Dakota, we see throughputs as high as 35 tons per truck, right? North Dakota has -- not to get too technical, but North Dakota has 106,000 pound gross weight trucks up there. And so when you have a 35-ton throughput, which is brought about as a result of them using what is effectively a relatively light grain trailer or grain-type trailer versus a box, right? A box you've got steel that makes up the box that cuts down on the throughput of that. So 30% is an estimate of the difference between how much throughput you can get on a box or a traditional pneumatic trailer versus some of these grain trailers that are out there now that are -- you're able to bring this huge amount of throughput. So if you're increasing your throughput by, call it, 10 tons per load, that's where you kind of get to that 30%

Stephen Gengaro -- Stifel -- Analyst

Got it. Thank you. The -- I think Lee touched on this a bit in the prepared comments as well, but the average revenue per ton in the quarter it was up sequentially, and I think it was related to the in-basin sales side. And I was just curious, is there any price there? And what are you seeing kind of on the pricing backdrop?

Lee E. Beckelman -- Chief Financial Officer

I think right now, we're seeing pricing being kind of stable to having some improvement. And overall, opportunities for improvement in margin by delivering in basin and managing our logistics cost there. So I think it's been relatively stable, and when we see some opportunity for a little improvement, but right now, we don't see -- I think we're basically viewing it as a relatively stable market for pricing right now.

Stephen Gengaro -- Stifel -- Analyst

And then, can you tie that in at all to the touch like as we think about contribution margin per ton in the current environment, I mean we tend to think about it as probably around mid-single digits, kind of where you came in, in the quarter. Is that reasonable if you -- I guess it blends depending on sort of cost of goods sold because of the seasonality, but is that a reasonable sort of starting point?

Lee E. Beckelman -- Chief Financial Officer

Yes. I think at our current kind of volumes and what we're looking at, that we would be in that mid-single digits level and be consistent in the range of what we did in the second quarter.

Stephen Gengaro -- Stifel -- Analyst

Great. Thanks. And then if you my one final one on my end. The -- you got this U.S. well services issue behind you. You have a lot of cash, the balance sheet's in great shape, I know you have some capex. How do you think the use of cash evolves over time? And then so I'm sort of just thinking about how much cash you like to have on the balance sheet to run the business and maybe using it in some ways to return to shareholders over time?

Lee E. Beckelman -- Chief Financial Officer

Well, I'll start and maybe Chuck can chime in as well. But I think it's a little early. I mean we definitely like our liquidity position. We like having that cash and it is a strategic asset to us that we can look to utilize in terms of how we see incremental growth opportunities to help increase our utilization of our existing assets. I think that's a key focus. Can we use some investment to whether it be in terminals or improving the utilization of smarter systems, how do we get more utilization and throughput through our existing asset base. And then I think once we have kind of see where the business has stabilized and where our cash is, we can consider other uses of cash on our balance sheet, albeit from some type of return to shareholders.

Charles E. Young -- Chief Executive Officer

And one other thing I would add is the 14% shareholder of Smart Sand, like that. And we're going to try to abide by that.

Stephen Gengaro -- Stifel -- Analyst

Okay. Great. Thank you.

Operator

And our next question comes from Samantha Ho from Evercore ISI.

Samantha Ho -- Evercore ISI -- Analyst

Hi, guys. Just a real quick one for me. I think I heard that capex guidance was reduced on the upper end from $15 million to $12 million. But meanwhile, you're building out this new transload facility, can you kind of walk me through the movement there in terms of your capex guidance?

Lee E. Beckelman -- Chief Financial Officer

Yes, the capex guidance is really separate from anything for the transload. We have some other sources to help kind of pay for that transload the capex guide is separate of that, and we're still finalizing what that number is. But on the guidance we gave from the 10 to the 15under our normal business and the discretionary capital, you're using for smart systems, we are pulling that back. to a tighter range of $10 million to $12 million based on that spending.

Samantha Ho -- Evercore ISI -- Analyst

So are you still thinking you'll have 10 smart systems deployed by year-end? Or is that lower now?

Lee E. Beckelman -- Chief Financial Officer

Well, we've never said we'd have 10 deployed what we said we have 10 that could be available, and we'll probably be in the eight to, potentially, 10 range.

Samantha Ho -- Evercore ISI -- Analyst

Okay. What's the opportunity of maybe expanding your customer base using this new transload Appalachia? Is there discussions going on with potential new customers now?

Charles E. Young -- Chief Executive Officer

Yes, Samantha, there are. And the transload where it's going to be is in a really, really good spot. One of the interesting things about Appalachia -- one of the reasons we're so excited about this new transload is it's relatively mountainous terrain around there and finding a spot that has a -- the ability to build a large enough rail yard to be significant and provide the logistics advantages that we provide out of our Van Hook, North Dakota terminal is difficult, and we've managed to find a spot that is, I would suggest is, unique and in a fantastic location kind of in the heart of where multiple operators are currently fracking. So yes, we're really excited. We're having conversations actively right now with others in addition to EQT. So we're really, really excited about this new terminal.

Samantha Ho -- Evercore ISI -- Analyst

Okay. Great. And if I could just sneak one more. I was curious about the trend in logistics with just shift to in-basin. Is that something that you think is going to be a trend through the second half? Or I mean, can you maybe speak a little bit in terms of what's going on from the operator perspective there?

Charles E. Young -- Chief Executive Officer

Are you referring to in-basin sales?

Samantha Ho -- Evercore ISI -- Analyst

Yes. I'm just kind of curious about the mix being more on in-basin this last quarter than prior.

Lee E. Beckelman -- Chief Financial Officer

No, I think in general, and John and Chuck chime in. But in general, we have seen a pickup in more of our movements going into in-basin pricing and delivery versus spot, what I'd call, FOB mine pricing.

Charles E. Young -- Chief Executive Officer

Yes, I would agree with that. And certainly, as we look to get this new transload up and running, I think we'll probably see a bit more movement to pricing in-basin versus FOB the mine. Although we still sell the mine, and we've got a number of customers that take there. But ultimately, if you can prove out the logistics on the -- at least the rail side of the logistics, customers want to take advantage of that. They don't necessarily have entire group spun up anymore to handle that kind of logistics management.

Samantha Ho -- Evercore ISI -- Analyst

Okay. Great. Thanks, guys.

Operator

And we have a follow-up from Stephen Gengaro from Stifel.

Stephen Gengaro -- Stifel -- Analyst

Thanks for taking the follow-up. So two quick ones that I think are related. But the -- on the long-term agreement you announced yesterday with EQT, is that is it kind of an index to a spot price? Is that how sort of the pricing dynamic works on that contract?

Charles E. Young -- Chief Executive Officer

Yes, we don't get specifically into contract pricing with customers, Stephen. So we're not going to comment on that.

Stephen Gengaro -- Stifel -- Analyst

Okay. Okay. And in general terms, the transload terminal that you're building in Pennsylvania, will that tend to help that -- I believe it tends to help pricing and contribution margin per ton over time. Is that an accurate statement?

Charles E. Young -- Chief Executive Officer

In general, yes, that's inaccurate. It's particularly as we look to -- with the terminal, we'll have more opportunity to not only work with EQT, but others to have in-basin pricing and provide that full value and hopefully capture margin through that.

Lee E. Beckelman -- Chief Financial Officer

It also helps us drive efficiency with the railroads. So we're able to demonstrate to the railroads that we can move large trains smoothly, effectively, we have on both sides, ability to take the larger size trains in and out, which drives the efficiencies to the railroads, we should help in pricing.

Charles E. Young -- Chief Executive Officer

Yes. And then the last thing I would add to that is it provides a good firm base for us to continue marketing our last mile products into that market. So with the new terminal, we've got a home base for smart systems and kind of tying all those things together in a unified supply chain for customers.

Stephen Gengaro -- Stifel -- Analyst

Great. I appreciate the color. Thank you.

Operator

Thank you. And I am showing no further questions. I would now like to turn the call back over to CEO, Chuck Young for closing remarks.

Charles E. Young -- Chief Executive Officer

Thank you for joining us on Smart Sand's second quarter's earnings call. We look forward to talking to you again in November.

Operator

[Operator closing remarks]

Duration: 29 minutes

Call participants:

Josh Jayne -- Finance Manager

Charles E. Young -- Chief Executive Officer

Lee E. Beckelman -- Chief Financial Officer

Bill Austin -- Daniel Energy Partners -- Analyst

Stephen Gengaro -- Stifel -- Analyst

Samantha Ho -- Evercore ISI -- Analyst

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