Good day. And thank you for standing by. Welcome to the first quarter, 2021 Smart Sand Inc. earnings conference call. [Operator Instructions]. I would now like to hand the conference over to your speaker today, Josh Jayne Director of Finance and Assistant Treasurer. Please go ahead..

Good morning and thank you for joining us for Smart Sand's first quarter 2021 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 different 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 May 5th, 2021.

Additionally, we may refer to the non-gap 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 gap 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 cashflow to cash flow provided by operating activities. I would now like to turn the call over to our CEO, Chuck Young..

Thanks, Josh and good morning. After a challenging year in 2020, we are very encouraged by the recovery we have witnessed to begin 2021. We successfully managed the downturn and 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.

Our volumes in the first quarter were up on a quarter to quarter basis and a year over year basis. We increased volumes despite frack activity remaining well below last year's first quarter levels and rig counts being down 50% in Q1, 2021 from Q1, 2020 levels.

So we are gaining market share in the operating basins that we're targeting in addition to increasing activity in the Bakken and the Marcellus. With the addition of Utica, we are now competing very effectively in the Western basins in Colorado and Wyoming.

Despite weather challenges for the industry in February, the frac sand market continued to rebound as sales volumes increased by 25% from 612,000 tons in the fourth quarter of 2020 to 762,000 tons in the first quarter.

March volumes were up significantly following the February weather disruption and we expect volumes to continue to grow as the market is strengthening. We continue to focus on maintaining financial flexibility and generating free cash flow. Today we have 10 million in cash on our balance sheet and approximately 30 million in liquidity.

We couldn't manage through these difficult times without the effort of our employees. I want to thank all of our employees once again for their continued commitment to Smart Sand. As we discussed on last quarter's call, we believe the SmartPath transloader is unlike anything in the industry.

It's a self-contained system designed to work with bottoms on trailers. It features a drive over conveyor, surge bin, and dust collection system. So it's well-suited to perform any frack job. And we can now report, we have successfully deployed our first SmartPath during the first quarter.

The transloader completed several multi-well pads and continues to work into the second quarter. We are receiving incremental inquiries about this technology and believe we will have further deployments as we move through the rest of the year. By the end of this year we expect to have 10 fleets equipped with a smart path.

We continue to believe the focus on ESG by our customers will drive adoption of our smart systems product offerings. Built-in dust control on silos and improved dust controls throughout the completion process are vital to health, safety and regulatory compliance.

We also believe the smaller footprint that we offer on the well site with our Smart System Sand Storage systems compared to our peers will be well-received.

We estimate that by using our Smart Systems fleet equipped with a SmartPath, rather than competing silo and box options, we can reduce the number of trucks needed to deliver sand to the well site by more than 30%. This is a significant opportunity for our customers to reduce their VSG footprint and GHG emissions.

As we emerged from the downturn, we'll continue to work closely with our customers to deliver sand to the well site in a reliable, cost efficient, safe, and environmentally responsible fashion. We're excited about our future for a number of reasons. Sales volumes have increased meaningfully from the bottom and continue to trend positively.

We have expanded our customer base and the operating basins we are serving over the last 12 months. Our Utica plant has exceeded our expectations thus far and we remain excited about driving higher volumes from this location.

We continue to improve the efficiencies and cost structures that are Oakdale mine to make it one of the most efficient frac sand mines and processing plants in the industry. And with our first successful deployment of the SmartPath behind us, we're looking forward to building market share with our last mile solutions product offering.

As always, we'll continue to keep an eye on the future and we'll always keep our employee and shareholder's interests in mind in everything we do. And with that, I'll turn the call over to our CFO, Lee Beckelman..

Thanks Chuck. We are encouraged by the pickup and activity we have witnessed to begin the year. As Chuck indicated, first quarter 2021 volumes are up 25% from fourth quarter, 2020 levels, despite weather challenges for the industry in February.

March volumes were up 48% from February levels as there was catch-up from the weather impact, but overall activity also increased. We are seeing strong demand continue into the second quarter.

We remain committed to low leverage levels, a prudent capital structure, generating positive free cashflow for the year and maintaining adequate liquidity levels. Now I will go through some of the highlights of the first quarter compared to our fourth quarter, 2020 results.

Starting with sales volume, we sold 762,000 tons in the first quarter of 2021, a 25% increase over the fourth quarter, 2020 volumes of 612,000 tons. We continued to expand our customer base during the first quarter. We believe a more diverse customer base will strengthen our opportunities for growth.

Total revenues for the first quarter of 2021 were 27.5 million compared to 25.3 million in the fourth quarter, 2020. Sand revenues were higher in the first quarter due primarily to an increase in the number of tons sold from both Oakdale and Utica. Our cost of sales for the quarter were 32.4 million compared to three 33 million last quarter.

We were able to effectively keep our production costs flat quarter to quarter while increasing our sales volumes by 25% through increased utilization of our asset base and proactive management of our inventory levels. Total operating expenses were 6.1 million compared to 13.3 million last quarter.

Operating expenses were mainly lower as a fourth quarter, 2020 included a 5.1 million impairment charge on our Permian basin long lived assets. And at 1.3 million sales tax audit settlement charge. In the first quarter of 2021, we recognized a 7.5 million income tax benefit compared to an 18.6 million income tax benefit, last quarter.

The fourth quarter benefit included a 7.8 million benefit related to the anticipated benefit to be received from the carry back and net operating losses, including those related to depletion to tax years with a 35% corporate rate.

In the first quarter we had a net loss of 3.9 million or 9 cents per basic, and diluted share compared to a net loss of 2.9 million or $0.07 per basic and diluted share for the fourth quarter of 2020.

A higher net loss in the first quarter of 2021 as compared to the fourth quarter of 2020 is due to the higher income tax benefit recognized in the fourth quarter of last year.

For the first quarter, 2021 contribution margin was 1 million and we had negative adjusted EBITDA of 3.5 million compared to fourth quarter negative contribution margin of 2 million and negative budget adjusted EBITDA of 7.4 million. The increase sequentially was driven by an increase in tons sold while efficiently managing our operating costs.

For the first quarter, 2021, we had 1.7 million in free cashflow generating 3.9 million in operating cash flows while spending 2.2 million on capital investments. Capital investments in the first quarter have primarily been on new smart systems 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 is 15 million. We paid down 1.7 million against our notes payables and equipment financing's in the quarter.

Additionally, we have 5 million in unused availability from the acquisition liquidity support facility we put in place with the Eagle [indiscernible] business acquisition. We ended the first quarter with approximately 11.4 million cash and our current cash balance is approximately 10 million.

Between cash and our availability and our facilities we currently have approximately 30 million in available liquidity. We do not expect to have any borrowings on our ABL revolver in the second quarter. In terms of guidance for the second quarter, we expect sales volumes to be up five to 10% from first quarter levels.

We continue to anticipate capital expenditures for 2021 to be in the 10 to 15 million range and expect pre cashflow to be positive for the full year. This concludes our prepared comments, and we will now open the call for questions..

[Operator Instructions]. Our first question comes from the line of Stephen Gengaro with Stifel..

I jumped on a couple minutes late, but I might've missed this but I wanted to just ask you a little bit about, I guess it's two part question, but one is, as we look ahead and you look at sort of the dynamics within the frac sand business and pricing trends, how should we think about, without talking about specific quarter number, but how should we think about contribution margin per ton as we go forward? And I guess along with that, is there any difference in with the new facility online and the cost associated with that, et cetera, we should be contemplating in the short term?.

Yes Stephen for contribution margin issue, if you follow us sort of the past, you know in our fourth quarter and first quarter we typically have lower contribution margin because our costs are higher as we're bringing an inventory over the winter.

And typically we will have lower costs in the second and third quarter as we capitalize inventory during our mining season. So I think you'll see some improvements in the second and third quarter of our contribution margin. I'd say kind of in the mid single digits. So moving and kind of the $5 range give or take.

And then you might see that margin go down a little bit in the fourth quarter as we go through our seasonality as we typically do. So second and third quarter you should see some improving contribution margin.

It should moderate a little bit in the fourth quarter, depending on how we're managing our mining season this year and building inventory during the summer months and start pulling inventory again as you get into the winter..

Great. That's helpful. Good..

And what was your second question? I apologize..

I was curious about is with the new facility come online, the Utica facility, does that impact the short term cost structure at all? Is there any headwind from that we should think about?.

Well, as we've ramped up Utica actually their production costs are relatively in line with what we're seeing at Oakdale, but we do have a little higher trucking costs there because our terminal is not right at the location. So there's a little bit of friction there in terms of our trucking costs.

It makes Utica a little higher, but we're going to be getting that, as we ramp that volume up, we think we'll be able to moderate that and bring that down a little bit, but that is the one kind of major cost difference between the two..

And then just one other question I was just thinking about, and you guys have as good a perspective as any, when you think about just the dynamics of demand, which has been rising clearly, and then just sort of the frac sand supply demand situation. You have obviously had a lot of competitors that have financial problems.

Have you seen any shift in the dynamics there and your unique positioning in the market?.

Yeah. Stephen, thanks. The, so what we're seeing is there's definitely some idle assets out there that are, I think either will not, or having difficulty coming back online, particularly in the Northern white space. And that's a good thing for us, right.

As you mentioned, demand is going up and the supply, I don't think is coming on as it would have historically come on because of some of the financial difficulties that some of our competitors have been in, as you alluded to.

So, we do see demand rising, we're not entirely sure how high and how fast it's going to continue to rise, but we're certainly, in the first quarter of this year, we sold more sand than we did in the first quarter of last year, which was a decent quarter for us.

So we're seeing demand come up and with any luck with the volumes improving expect price to follow, but we're just not sure of when..

And our next question comes from the line of John Daniel from Daniel Energy Partners..

I guess, two questions this morning, you know, all of us here, the analyst community, we all have our view on frack crew counts. We all kind of make up some numbers to throw out there.

What are you guys seeing today in the Bakken and Marcellus in terms of activity and looking into the crystal ball, you know, how do you see crew counts progressing Q2, Q3, Q4. Just any wild ass guess would be appreciated..

Yeah. So, John, what we're seeing is we're seeing is relatively robust activity in both of the markets you mentioned Marcellus and Bakken. And with the commodity price in oil stabilize, and kind of in the 60's, we anticipate that this year could see some growth in additional spreads going out there.

But so far, we see good activity in those areas and we've got, from our perspective, we've got a good advantage logistics chain into both of them. So we feel pretty good about that. We think that it's been a while since we've seen both Nat gas and oil spreads operating kind of in sync with demand. So that's a good thing with Marcellus and Bakken.

And we're seeing obviously increased activity in other areas too, which our new Utica plant allows us to participate a bit more in some of the other Midwest opportunities out there with the BN rail. So we're feeling relatively good about activity in those two basins and elsewhere. We're hoping it continues.

And obviously with oil price headed in the right direction, we don't see any reason that won't continue..

Okay. Thank you. And then what the SmartPath rollout, I think you alluded to as many as potentially 10 systems later this year.

Is the initial focus in the Bakken or are you taking that across the US? Just walk us through the rollout strategy?.

Our first deployment has been in the Bakken. We're set up to support additional deployments there, but no, that system's available anywhere in the US and we're prepared to support it anywhere in the US. As you mentioned, we'll have 10 systems ready to go by the end of the year.

And the system is really kind of proven itself out in its first deployment out there. We've had a minimal issues with it and seem to be getting a lot of positive as the press and positive thoughts from customers and potential customers on it..

Okay. And then, I guess the final one for me, there is a little bit of chatter, some small invasive mines popping up in places like Wyoming.

Just your thoughts on opportunities there, whether you do something defensively, aggressively, I just any, what's your take on that?.

We are seeing a little bit of additional mind development out there. We've seen, I think there's been some activity in the Bakken and there's some in kind of Southeastern Wyoming. We keep an eye on it, John, but we don't anticipate it's going to be similar to what happened to the Permian with development outside of Kermit.

I don't think the capital markets are out there, impressed with the returns that they've seen in some of those other regional sand plays. So we keep an eye on it, but ultimately, our view is that eventually we're going to see EMP start to care about things like ESG and length in truck rides and things like that.

And we believe that bulk commodities like sand should be on rail and railed as close to the well site as they can, reducing those trucking distances. So ultimately, I don't think you'll see a Permian like development of sand mines, regional sand mines anywhere in kind of the Midwest or in the Northeast.

So I think the story for Northern white is still very positive in those markets and keeping an eye on the logistics of moving that sand is going to be increasingly critical as we continue to move more and more volume..

The one that I was thinking I'd add on that John, is the trucking is become even more difficult than it was previously. We see that even getting worse..

And is that primarily right now, the driver issue or just the road traffic?.

Sheer cost of it, and the other part about it, it's easy to put rail cars in storage but for these truckers have already gone through where this industry seems to go up and down in cycles and it's not a really great job to have for the truckers..

And our next question comes from the Samantha Hoh Evercore ISI..

Hey guys. Just a quick question on the cash flow. It sounds like there was a slight change in the language of the guidance.

I think you guys previously said at least 10 million previously, could you please just kind of address that please?.

In terms of cashflow here? We still anticipate being in the $10 million range for the year..

Okay, great. And then I noticed a really nice customer pickup that you had this past quarter.

Can you maybe elaborate a little bit more in how you're able to expand your customer base? You know, is that being driven by the new capacity from Utica or the ability to transport to this location? If you could maybe talk about if you're displacing a previous supplier that customer had, something like that would be helpful..

Yeah. So a couple of things. You had mentioned Utica, clearly getting an additional Class 1 railroad on the BN has been helpful in attracting customers that we were unable to attract prior because of having two line hauls and things like that.

So that's been a positive, but I think ultimately as we've been picking up market share over the last little while I think it's a result of number one we've been out there aggressively pursuing spot business, where in the past we've been more focused on contract business and by aggressively pursuing spot business, you tend to pick up more customers.

And so we're going to continue to do that. We're going to continue to seek both spot and contract customers. But then the final thing is I think that what we're seeing play out a little bit is hesitancy or inability for capacity to come back online.

One of the things having run sand mines now for quite a while, one of the things that sand mines don't like is being idle for lengthy periods of time. It's very difficult to get this equipment back into operating condition.

And we think that with the lack of potential capital partners out there for this space it's very difficult for mines that have been down for any length of time to really come back on. So we're seeing a little bit of a tailwind on that in our business. We expect that to continue to happen.

Our Oakdale plant, because it's a single operating entity with 5 and 1/2 million tons and 5 separate dryers out there. We've always had a crew out there keeping our maintenance and we've managed the capacity that we've produced there by turning plants on and off, but at the same time, always having a maintenance crew.

If you have a single mine out, say in Wisconsin somewhere that hasn't been maintained in several years, it's very very difficult to turn that back on. So again, we think that'll give us some tailwinds into the rest of this year and ultimately more customers is a good thing..

I'd also add Oakdale is 1 mine servicing 2 Class 1 rail lines, which is very efficient..

Do you have a sense of the mix and your volume right now from contract versus spot?.

Yeah, we don't give a breakout between contract and spot. A lot of times we've had customers that were on contract that have come off but they're still having very consistent volumes with them. So even though they maybe typically spot today, they're still from historical contractual relationships and management.

So we don't really split it up in terms of giving out the difference between spot and contract. And also when we say spot, I think a lot of times people think of spot just being one kind of individual sale.

A lot of our spot transactions today, where we may be supporting a customer for 3 to 6 months while they have a certain plan for delivering sand to that market.

So saying spot isn't that it's just individual sales, it may be, just not on longer-term contracts for versus kind of shorter term pricing arrangement contracts to meet a need for a specific development plan and an area over 3, 6 months, et cetera..

And our next question comes from Luke Gittemeier with Nokomis..

Hey guys, quick question. I was trying to figure out the fixed charge coverage ratio and it's kind of complicated because of the cash taxes and whatever, tax refunds in Q3 and Q4.

Where are you all on the fixed charge coverage ratio as it applies to the AVL right now?.

Well, first of all, the fixed charge coverage ratio doesn't apply. It only kicks in if we have 85% of our facility drawn. And so we don't have any covenants that we apply to currently under our borrowing base. And so it doesn't apply in terms of being any kind of compliance issue.

And then secondly, I don't have the number right in front of me, but we have, we consistently had a positive fixed charge coverage ratio. We've typically been very positive in that regard and we're positive today on that calculation..

Thank you. And I'm showing no further questions at this time, and I would like to turn the conference back over to CEO, Chuck Young, for any further remarks..

Thank you for joining us for Smart Sands first quarter 2021 earnings call. Stay safe, we'll talk soon..

This does conclude today's program. You may now disconnect. Everyone, have a great day..