Good morning, ladies and gentlemen, and welcome to the Smart Sand Q1 2024 Earnings Call. [Operator Instructions] This call is being recorded on Tuesday, May 14, 2024..

I would now like to turn the conference over to Christopher Green, Vice President of Accounting. Please go ahead. .

Good morning, and thank you for joining us for Smart Sand's First Quarter 2024 Earnings Call. On the call today, we have Chuck Young, Founder and Chief Executive Officer; Lee Beckelman, Chief Financial Officer; and John Young, Chief Operating Officer..

Before we begin, I would like to remind all participants that our comments made today will include forward-looking statements, which are subject to certain risks and uncertainties that could cause actual results or events to materially differ from those anticipated.

For a complete discussion of such risks and uncertainties, please refer to the company's press release and 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 14, 2024..

Additionally, we will refer to the non-GAAP financial measures of contribution margin, adjusted EBITDA and free cash flow during this call. 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 gross profit to contribution margin, net income to adjusted EBITDA and cash flow provided by operating activities to free cash flow..

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

Thanks, Chris, and good morning. As we guided on our last earnings call in March, we had strong sales volumes in the first quarter. Sales volumes increased by approximately 31% to 1.3 million tons, a quarterly record for Smart Sand.

With the increased sales volumes, contribution margin improved to $18.5 million and adjusted EBITDA increased to $9.3 million, both substantial improvements over fourth quarter 2023 results. Improved results in the first quarter demonstrate the long-term value of our strategic plan..

Our long-term vision for Smart Sand has 4 main components. First, we are focused on expanding our Northern White sand franchise. We believe Northern White sand is the premier sand for both energy and industrial applications.

The research clearly demonstrates that using Northern White sand instead of lower quality regional sand results in greater economic value to oil and gas producers. Additionally, the unique properties of our sand make it ideal for many industrial sand applications..

Second, we continue to look for opportunities to open new markets for our products and services. We have made investments in 2 new terminals in Northeast Ohio to expand our market presence in the Utica Shale Basin. Oil drilling activity is increasing in this basin.

These 2 new terminals provide us with great access to compete in this growing market for Northern White sand..

With our Blair facility being on the Canadian National rail line, we now have access to the growing demand for Northern White sand in the Montney, Duvernay and Horn River Shales of Northwest Alberta and Eastern British Columbia, combined with our access to the Cardium Basin from our Oakdale facility on the Canadian Pacific, we have unmatched access to Canada and expect it to be a growing market for our products going forward..

Our SmartSystems wellsite storage and delivery solutions continue to deliver sand into the blender of pressure pumping equipment efficiently and at high rates.

We have made investments last year in our Utica, Illinois facility to add cooling and blending capabilities to allow us to market our industrial product solutions to a broader base of customers.

We have 10 million tons of capacity of high-quality Northern White sand available today to serve the market, and we will continue to look for new ways to take advantage of our unique position to expand our market presence..

Third, we remain focused on organizational improvements to increase the efficiency and sustainability of our mining, processing and logistics operations. We are continually evaluating our operating and financial processes to enhance our business.

This year, we are making changes to our wet and dry plants processing to improve the yields and reduce overall costs. We are working on a more coordinated approach between our 3 main operating plants to match our consolidated production with our overall sales needs to reduce inefficiencies and waste in our operations.

We are investing in an ERP system that will allow us to automate more of our data entry and financial reporting and provide the information to management on a more timely basis to make operating decisions..

Fourth, we continue to focus on our cost structure to help manage our business throughout the operating cycles. In the first quarter, we were able to reduce staffing at both the administrative and operational levels as a result of operating efficiency gains and strategic restructuring.

We continue to extend the use of hydraulic mining at our Oakdale facility to reduce mining costs. We are committed to being the premier provider of Northern White sand in North America and we're confident that the foundation for Northern White sand demand is strong and will be durable over time..

However, we recognize the oil and gas demand for frac sand and it will continue to fluctuate based on current and expected prices for oil and natural gas. We recognize that the current lower natural gas prices may impact sales volume in the short term in the Marcellus market.

However, we had strong demand in the Marcellus in the first quarter, and while we have seen some drop-off in demand in this basin, it has not been significant to date.

We will continue to keep a close eye on this market for the remainder of 2024, but we believe the long-term demand fundamentals for natural gas supply in the United States and Canada is strong. We expect this market to be a growing part of our business as we look out to 2025 and beyond..

While pricing for natural gas is currently low, oil prices have remained at healthy levels. We serve the Bakken market in North Dakota, which is an oil basin, and demand remains consistent in this market. One of the reasons we invested in terminals in Ohio is this new activity in the Utica Basin is focused on oil opportunities.

Having these new terminals allows us to balance out our sales activity between oil and gas applications..

Gaining access to new markets has 2 additional benefits for Smart Sand. First, it provides the opportunity to market to existing customers in a new basin. Many of our customers operate in multiple basins and having logistics capabilities in the new basin allows us to expand our relationships and sales opportunities with existing long-term customers..

Second, it opens up marketing opportunities to new customers now that we can provide efficient and cost-effective logistics options into the market where they operate. We are committed to start returning value back to our shareholders in 2024.

We are still formalizing the right approach for Smart Sand and plan to communicate our plans to start returning value to our shareholders later this year. That being said, we remain committed to a strong balance sheet, low leverage levels and adequate liquidity levels to support our operating needs through any cycle..

Our primary objective is to deliver positive free cash flow consistently. In this first quarter, we had negative free cash flow. That was primarily due to the increased working capital investments required to support the ramp-up in sales. We expect our working capital needs to moderate over the remainder of 2024.

We still expect to be free cash flow positive for the year..

To be able to start returning value to shareholders, we have to be free cash flow positive. So delivering positive free cash flow consistently is a key objective for the company going forward. We believe Northern White sand will continue to be a key product for both the energy and industrial sand markets.

The first quarter was a strong start for the year for Smart Sand. While there are some short-term headwinds in natural gas basins due to current low natural gas prices, the long-term fundamentals for Northern White sand in general and Smart Sand in particular, continue to be strong.

We believe no other company is better positioned to take advantage of the market for Northern White sand than Smart Sand..

We couldn't have delivered these results without the hard work and dedication of our employees. I want to thank all our employees for their continued support and dedication to Smart Sand. As always, we'll keep our employee and shareholders' interest in mind in everything we do..

And with that, I'll turn the call over to our CFO, Lee Beckelman. .

Thanks, Chuck. Now I'll go through some of the highlights of the first quarter 2024 results compared to our fourth quarter 2023 results. We sold 1.3 million tons in the first quarter, a 31% increase over fourth quarter sales volumes of 1 million tons.

Total revenues for the first quarter were $83.1 million, compared to $61.9 million in the fourth quarter. Total revenues were higher in the first quarter due primarily to higher sand sales volumes and improved SmartSystems revenues from increased utilization of our fleet.

In the first quarter, we averaged 4 silo-only fleets and 5 complete SmartSystem fleets operating..

Our cost of sales for the quarter were $71.2 million, compared to fourth quarter of $59.1 million. The increase was primarily due to the higher sales volumes in the current quarter. Total operating expenses were $11 million in the first quarter, compared to $10.7 million in the fourth quarter.

The increase sequentially was primarily due to higher incentive compensation and higher royalties from increased sales volumes. Contribution margin was $18.5 million or $13.85 per ton in the first quarter. Fourth quarter contribution margin was $9.2 million or $9.07 per ton.

Adjusted EBITDA in the first quarter was $9.3 million, compared to $0.7 million in the fourth quarter. The sequential increase in contribution margin and adjusted EBITDA was primarily due to increased sales volume and higher utilization of our SmartSystems fleet..

For the first quarter 2024, we used $3.9 million in cash and operating activities, leading to negative $5.5 million in free cash flow after we spent $1.6 million on capital expenditures. The negative cash provided by operating activities was primarily due to increased working capital investment to support the growth in sales.

We expect our working capital investment to moderate beginning in the second quarter, which should lead to improved operating cash flow beginning in the second quarter..

We ended the first quarter with $14 million in borrowings on our credit facility. Today, our current outstanding on the credit facility are $9 million. We had approximately $4.6 million in cash and cash equivalents at the end of the first quarter.

We paid down $5 million on our credit facility since the quarter end and, between cash and availability from our credit facility, we currently have available liquidity of approximately $15 million..

As Chuck highlighted, sales volumes were strong in the first quarter as customers rebounded from lower activity in the fourth quarter last year due to budget exhaustion and seasonal weather issues, and hit the ground running in the first quarter of 2024 as they ramped up their budgeted activities for the year.

We do expect demand to moderate in the second quarter as we are seeing some pullback in activity in the Marcellus due to lower natural gas prices. This, however, will be mitigated partially by increased activity in the Bakken and Canada..

Currently, we expect second quarter sand sales volumes to be in the 1 million to 1.2 million ton range. Contribution margin per ton improved to $13.85 per ton in the first quarter, we expect the second quarter contribution margin per ton to be in the $13 to $16 per ton range.

We have made adjustments to our capital expenditures for the year and currently expect to be in the $15 million to $20 million range for 2024. While we had negative free cash flow in the first quarter due to the increased working capital investment to support the increased sales activity, we still expect to be free cash flow positive for the year..

This concludes our prepared comments, and we will now open the call for questions. .

Good morning. Thank you, ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question comes from Josh Jayne with Daniel Energy Partners. .

First question, Chuck, in his prepared remarks, talked about some capital improvements that you were doing to improve yield on your plans.

Could you talk about those capital investments and, ultimately, the return that you expect to see on this?.

Yes. So, Josh, it's John here. I'll take the first part of that and then Lee can talk about the dollars sense of it. So, yes, over the past few years, we've made significant investments into hydraulic mining. These are investments that reduce significantly the amount of yellow iron required in our process.

What it effectively does is tie our mining operation to our processing plants without hauling. And part of that is that -- so you gain a tremendous amount of efficiency in that you're not burning diesel fuel, you're not using up yellow iron equipment, haul trucks, excavators and things like that..

And then once you get into the plant, some of the things we've done is we've changed the way that we wash our sand to make sure that, where we can, we are cutting out the products or the size of grains of sand that are not really in demand anymore.

So if you think about it, it used to be that frac sand was considered to be [ 16 30, 20 40 ]coarse grains of sand. What we do is we tend to wash those out in the wet plant process which is a lot more efficient than putting the energy and drying that sand and then screening those grades out.

So making changes, incremental changes to our wash plants and the way we wash the sand out there has allowed us to remove that sand before it gets into the more expensive process of drying. So that's what Chuck's referring to both sides, the mining and the wet processing. .

And another one -- yes, go ahead, Lee. .

Josh, I think a lot of it is driven by volumes and scale, but to the extent we think these changes in the hydro mining helped us reduce yellow iron and the management of our cost of that piece. And then the wet plant changes helps improve our yield, and we think this could lead to maybe $1 to $2 per ton or more improved cost savings. .

Okay. And then one other one, just when you think about the business, another thing was alluded to in the prepared remarks was continuing to expand business. And as a Northern White player, you guys have been pretty acquisitive since 2020, adding both sand plants and terminals to your portfolio.

Could you just talk about how you're thinking about the asset base today? Are there still opportunities to grow your asset base or are the next few years sort of about more executing on the asset base that you have? Just maybe you could talk through that a bit. .

So, Josh, currently, we have 10 million tons of Northern White capacity on a very diversified rail portfolio. So, really, around that, we'll just build or get terminal access to enhance the ability of that sand to move into basins. I'll let John run through our asset base that we have currently and what we have in place and what we're looking for. .

Yes, Josh. So in addition to what Chuck said, I mean, we've spent our tenure here at Smart Sand building that diversified rail portfolio. We originate currently on 4 Class 1 railroads, we believe we have best-in-class logistics.

Our current markets where we're very strong in are the Marcellus, the Utica, the Bakken, and Canada would be primary markets we're targeting. And our assets include mines in Illinois and Wisconsin, 3 operating mines there, Oakdale, Blair and Utica, Illinois as opposed to Utica, the basin, in Ohio.

The railroads serving us are the CPKC, the Canadian National, the Burlington Northern, BNSF and the Union Pacific, UP..

And we have owned terminal assets in the Marcellus. We have 2 in the Utica Basin. We have an asset in the Bakken, a gigantic transload there. And then in Canada, we're in the process of duplicating an asset that looks similar to those assets that we've made in the Lower 48.

So we are pretty excited about our ability to not only deliver the sand that we're delivering today. But also, as Chuck had mentioned, get more of that 10 million tons of capacity out into the market and down the hole for our customers.

And a big part of that is our last mile and the ability for our last mile solutions to unload and deliver sand at the highest rates demanded by our most efficient operators. So we are putting that sand down the hole at rates that the best guys out there are demanding, which are super high. So we're pretty excited about kind of the asset base we have.

And I think Chuck will talk a little bit more about being opportunistic about additional opportunities out there. But so far, we're pretty pleased with where our asset base sits today. .

Yes, as that utilization, again, goes up, so does our cost of production goes down. So it's -- as we develop that, it's a great scenario for us long term. .

Maybe one just last question before I turn it back. The -- could you just talk about the differences that you see moving forward with the Canadian market versus the U.S. market? I know some softness a little bit here with what we've seen on the natural gas side domestically.

Could you just talk about those 2 markets and the differences you potentially see?.

So, in Canada, we see LNG terminals that are coming online, pipelines that have been put in place. So as the activities starts there, it's going to continue to feed those plants. So we feel really, really good about that. John, I don't know if you have some additional. .

Yes. I think, from a standpoint of when we look at the nat gas fundamentals out there, the majority of our gas customers are focused on the long-term fundamentals of nat gas, which all look pretty positive.

And what's interesting about that is we're seeing a consistent message, whether it's the Marcellus or in Canada, kind of the 2 primary nat gas market as we have, there's no question, as Chuck had mentioned, there's a tailwind provided by the Canadian takeaway capacity improvements, right? Those assets are there today, and they're in really good shape for having a place for that gas to go.

And the Marcellus is improving every day on that..

But the key message from our larger customers is that they believe long term in the fundamentals of nat gas. We're excited about it.

We're excited about that we also get to diversify our Northeast operations with the Utica, which is more of an oil play, right? And so that provides kind of a balanced market position up in the Northeast that, before bringing on what looks like it's going to be pretty attractive in Utica, we didn't have that. .

At the same time, let us be clear, the Marcellus were extremely positive about that market long term. We think that's going to be a great place. And we've got some great customers up there that are doing great things. So we're excited about that. .

Your next question comes from Stephen Gengaro with Stifel. .

A couple of things, but just one quick clarification.

On the income statement, the SmartSystems revenue you break out, is that purely just the wellsite sand storage or are there other pieces that go into that number?.

Now today, that is just purely the wellsite storage business going forward so that breakout will be just for that business line item. .

Okay. Great. Can you talk a little bit about the dynamics of the just supply/demand in the U.S.

sand market? And how you see that kind of impacting the pricing dynamic over the next couple of quarters?.

Yes, I can talk a little bit about that. So as I've said in the past on some of these calls, the Northern White market is in relative supply and demand balance.

Certainly, there is some -- we certainly have additional capacity to be responsive to increases in demand that may come about as we see some of these new opportunities, I mentioned the Utica before. We don't really focus too much on the regional sand stuff down in the Permian, for example.

We're not really a player there, such that we send sand into the Permian, it's for folks that are kind of looking at their well results and trying to test a little bit with some Northern White. So we see a little bit of uptake there. But that market doesn't impact us..

But the Northern White market has been through its consolidation with regard to supply, I think that there are some different numbers out there on what the actual supply is available. But so far, our view on it is that it remains in kind of relative supply-demand balance, which yields relatively stable pricing that we've seen now for a little while.

And I think there's potentially some tailwind to pricing being able to get some price moving forward as some of these markets like Canada for us and potentially some of these new markets in Ohio come to fruition. So I think it's generally a positive scenario, but I think the supply and demand are still in relative balance. .

And, yes, Stephen, to the extent that Northern White does pick up and we see with the Utica growing in oil and Canada, demand growing, and we still believe Northern White is a more superior product to regional sand and think some folks in the Permian and others may start looking at that harder.

To the extent there is an uptick or an increase in Northern White, we're probably the best positioned company to take advantage of that because of the available capacity we have in our logistics footprint. .

Yes. Lee, I was actually going to ask as a follow-up, when -- have you heard any incremental interest from [ E&P ] as far as we talk about Tier 1 to Tier 2 acreage and longer laterals, et cetera, and how they're kind of dealing with the client curves.

I'm just curious if there's been any kind of increase in kind of inquiries and/or Northern White demand from Texas. .

So there's definitely been an increase, Stephen, and it seems to be picking up.

I mean we sponsored a conference earlier -- or we sponsored a presentation earlier this year at the [ FE ] conference in the Woodlands, which did get a lot of attention on the basic economics of Northern White versus regional, right? And so I think that's going to take some time in the market to sort itself out.

As I mentioned before, we see a little bit of uptake on Northern White, but we're not blind in the fact that, that Northern White market down there is probably 5%, maybe 10% of the overall take-up in the Western Permian, but I think there are major E&Ps out there searching for answers on decline curves and in the past, we said it.

We think in the past, everyone has been focused on everything but sand, but there is a pretty strong correlation between when these changes were made to regional sand from Northern White that you -- that was kind of the start of these kind of unexplained decline curves. So we think there's a potential tailwind there.

But again, our business is very focused on what we do today and such that any sand comes back in the Permian, that will be a tremendous benefit for us. .

And then just one final.

On the industrial piece of the business, can you give us a rough idea of what percentage of the business it currently is and kind of how you see that evolving over the next year or 2?.

Yes, right now the business is kind of in the 5% range or so in terms of our total volumes. And I think we're still trying to establish ourselves. And we have a lot of potential contracts coming up in '25 and '26 that we're looking to try to line up for.

And we could hopefully see this business to be -- grow to at least 10% or more than that over the next 2 or 3 years. Our goal is to get industrial to at least 10% or better and have it consistently at those levels on a go-forward basis. .

There are no further questions at this time. I will now turn the call over to Chuck Young for closing remarks. .

Thanks for joining us for our earnings call. Look forward to speaking with you again in August. Thank you. .

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines..