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Edited Transcript of HCLP earnings conference call or presentation 7-Aug-19 12:30pm GMT

Q2 2019 Hi-Crush Inc Earnings Call

Houston, Aug 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Hi-Crush Inc earnings conference call or presentation Wednesday, August 7, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Caldwell Bailey

Hi-Crush Inc. - Lead IR Analyst

* Laura C. Fulton

Hi-Crush Inc. - CFO & CAO of Hi-Crush GP LLC

* Michael Alan Oehlert

Hi-Crush Inc. - COO of Hi-Crush GP LLC

* Robert E. Rasmus

Hi-Crush Inc. - Chairman & CEO of Hi-Crush GP LLC

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Conference Call Participants

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* John H. Watson

Simmons Energy | A Division of Piper Jaffray - VP & Sr. Research Analyst

* Michael William Urban

Seaport Global Securities LLC, Research Division - MD & Senior Analyst

* Praveen Narra

Raymond James & Associates, Inc., Research Division - Analyst

* Thomas Allen Moll

Stephens Inc., Research Division - Research Analyst

* Tim Monachello

AltaCorp Capital Inc., Research Division - Analyst of Institutional Research for Energy Services

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Presentation

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Operator [1]

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Good morning, and welcome to the Hi-Crush Second Quarter 2019 Conference Call. As a reminder, today's call is being recorded. (Operator Instructions) At that time, we will open for following remarks and introductions.

I would like to turn the call over to Caldwell Bailey, the Lead Investor Relations Analyst of Hi-Crush. Please proceed, sir.

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Caldwell Bailey, Hi-Crush Inc. - Lead IR Analyst [2]

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Thank you. Good morning, everyone, and thanks for joining us today. With me are Bob Rasmus, Chairman and Chief Executive Officer of Hi-Crush; Laura Fulton, Chief Financial Officer; and Alan Oehlert, Chief Operating Officer.

Before we provide our prepared remarks, I would like to remind all participants that our comments today will include forward-looking statements, which are subject to certain risks and uncertainties. Actual results could differ materially from those projected in any forward-looking statement. Additionally, we may refer to the non-GAAP measures of EBITDA, adjusted EBITDA, free cash flow and contribution margin during the call. Please refer to our public filings for definitions of our non-GAAP measures and reconciliation to their most directly comparable GAAP measures as well as a discussion of risks and uncertainties.

With that, I would now like to turn the call over to our CEO, Bob Rasmus.

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Robert E. Rasmus, Hi-Crush Inc. - Chairman & CEO of Hi-Crush GP LLC [3]

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Thanks, Caldwell, and thank you to everyone for joining us this morning. Second quarter financial and operational results came in ahead of expectations and reflect our team's ongoing ability to adapt to a dynamic market environment and align our business for structural long-term success. Our performance during the second quarter was driven by our operational flexibility, leading service offerings, strong customer relationships, geographically diverse footprint and great people.

I am proud of what our team accomplished this quarter. Their efforts resulted in a nearly 40% sequential increase in adjusted EBITDA, a more than 10% increase in contribution margin per ton and growth of 10% in sales volumes, including record volumes sold through our logistics and wellsite operation service. We accomplished this while maintaining a solid balance sheet, strong liquidity and also generating positive free cash flow for the quarter. This, combined with the ongoing belief in the value of our business and strategy, supported our ability to initiate a $25 million stock repurchase program on which we've already executed more than $3 million of repurchases.

On May 31, we completed our conversion to a C-Corp following a successful unitholder vote and began trading under our new name, Hi-Crush, Inc. on June 3. Under our structure, we have greater operating flexibility and are better positioned for success. With the conversion now completed, we are excited to embark on a new chapter in our evolution with a simplified corporate structure, diversified service offering and assets positioned for long-term success through all cycles. We have proactively embraced our new structure, reorganized our operations under 3 business lines and transitioned some of our reporting metrics to those which we believe are more forward-looking and useful as a C-Corp, all of which we'll discuss in greater detail later in our call.

We have been in constant communication with our customers regarding overall market conditions, the potential for E&P budget exhaustion and the outlook for the second half of 2019 and into 2020. Based on those discussions, we could see potential for a modest decline in activity late in the third quarter. In response, we are taking steps to further lower our cost structure and increase efficiency. The alignment of our assets and business structure is crucial for our continued success in a dynamic market environment.

As we look ahead to the remainder of 2019 and into 2020, let's start with what we know we can do. We will control what we can control. We will do this by utilizing the broad range of capabilities we have built to profit in any market environment. As we look into the future, there are 5 basic foundational factors which support the continued growth of our business.

First, North American shale is not going away. The U.S. has become one of the world's largest producers of oil and gas and soon will grow to be one of the largest exporters around the globe. Second, frac sand remains a vital input for unconventional well completions. Third, every single grain of sand will need to be transported from the point of supply to the wellsite by companies able to provide efficient and safe last-mile services and wellsite storage. Fourth, large producers will have an increasing share of market activity as they convert to mass manufacturing and assembly line completions activity. Fifth, technology that enables efficient operations and customer communication has quickly evolved to a must-have in the frac sand and logistics business. The fundamental landscape for our market is strong, growing and rooted in factors supportive of our business and our strategy.

Against this backdrop, there are also several questions that the market continues to ponder. How will the market come into balance? How quickly does the competitive landscape contract and supply rationalize? How will E&Ps manage their budgets going forward? And what is the long-term impact of the current stress facing the frac sand market?

Given the level of uncertainty, even with our strong cash liquidity and balance sheet position, we are taking all necessary actions to position ourselves and navigate through and succeed over the long term. For the overall market, we see demand increasing over the long term and very little new supply of sand or last-mile services being added to the market. We are far from the environment we were in several months ago when new plants were announced seemingly every other day. And as we said at the time, success in this market is dependent upon much more than simply announcing new production capacity.

While it won't happen immediately, we are seeing the beginnings of a process, which will lead to rationalization of supply. We have already seen supply being idled and shut down both in basin and Northern White sand. Single product or single service providers have struggled to meet multifaceted customer demands, and we have seen sand producers declare bankruptcy. Others have turned their priorities away from frac sand. The contraction has begun, but consolidation of the industry could be a slow process, and the competitive landscape won't change overnight.

The fully integrated technology-enabled platform we have built, along with our strong liquidity position and balance sheet flexibility, are key components of our strategy and have contributed and will continue to contribute to our success. Executing with our asset base is crucial, along with remaining laser-focused on serving our customers. We will do this through 3 key attributes that comprise the differentiated structure of our business.

First, we offer the only fully integrated mine-to-wellsite frac sand production, delivery and inventory management solution. This provides us with flexibility needed to run our business and most efficiently serve our customers. Second, we provide leading customer service centered around delivering reliability, safety, efficiency and technology. Third, our platform has been designed to provide for the lowest delivered cost of sand, which includes our portfolio of low-cost, highly efficient mines, network of owned and operated terminals and leading last mile and logistics service offering.

Now I'd like to turn it over to our Chief Operating Officer, Alan Oehlert, to give some additional thoughts on our strategy and our operations.

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Michael Alan Oehlert, Hi-Crush Inc. - COO of Hi-Crush GP LLC [4]

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Thanks, Bob. I've been in my new role for 3 months now. And during that time, we've been extremely busy executing on behalf of our customers while at the same time enhancing and expanding our service and equipment offering.

We're in a great position with the right assets, capabilities and resources on which to build and succeed. When I think of our business, I really think of 3 distinct yet highly integrated offerings: logistics and wellsite services, equipment rental and sales, and frac sand production. We have organized operationally along these same lines because we believe this is the most effective way to deliver to our customers the products and services they need and to help address the primary concerns.

We are focused on target group of customers in each service line, E&Ps for our integrated service from mine to wellsite, pressure pumpers in the equipment rental and providing any combination of logistics, equipment and sand supply to other players in the mining and last-mile space. We see mutual benefit in these relationships and continue focusing on providing products and services that meet their dynamic need. As part of the growth and further alignment of our business, we announced in our press release the new branding of our service lines. I'll briefly go over that here.

Logistics and wellsite services, which is a combination of PropStream and Pronghorn Logistics, has been renamed Pronghorn Energy Services, streamlining our combined capabilities and reflecting our broader service offering. Second, our equipment rental and sales business will operate as NexStage Equipment. And finally, our frac sand production and terminal operations will continue to operate under the Hi-Crush name.

While these can be offered as distinct businesses and services from the perspective of our customers, the value of what we created is the ability for all 3 to work seamlessly together. Our branding and organizational structure will make the integrated offering we have more identifiable to the market and customers and address the needs of those customers as their needs change. To this point, what we hear most from our customers currently is about the all-in delivered cost per ton of sand to the blender. Their desire to manage these projects with a targeted delivered cost per ton is in line with how we've designed and operate our business.

Throughout my career, I've made it a priority to listen to my customers. If you listen, they will tell you what issues are important to target. While varied, they typically revolve around the same core goals: improving efficiency, lowering cost or solving an industry problem. The silo upgrades we discussed last quarter are a perfect example of how we listen and respond to feedback.

I've been working in the oilfield for over 30 years and can confidently say that what we've built is truly unique. Until now, there have only been 3 times in my working life where I saw a product that immediately moved would change the way the game is played. The changes we've made to our silo equipment are now the fourth time. I'm excited about the enhancements, and I believe the investment will not just meet the needs of our customers but differentiate us in a way to support our success over the near and long term.

So we are continuously in that feedback loop with customers. We will control the things we can control, service quality, providing reliable sand handling equipment and a continued focus on innovation, all of which will drive efficiencies for our customers. This quarter, our results reflected the benefit of an all-time record for tons delivered via our last-mile services. These tons were delivered to the wellsite in the Bakken, Mid-Con, Eagle Ford, Permian, Powder River and Northeast. We are pleased with the results and are excited to expand our Pronghorn Energy Services business even more in the coming quarters.

Additionally, our NexStage Equipment business is also contributing to our financial performance with profitable sales and leases of our top fill conveyors and other equipment. As much as we emphasize the last mile, we are focused on continued excellence in sand production and distribution. Production costs per ton were reduced this quarter as we continue to deliver outstanding operational performance from our facilities, improving our reported contribution margin per ton.

I'd like to summarize by emphasizing 3 key points for our operational platform and strategy. First, we have assembled and built the platform of assets, services, equipment and sand production that ultimately addresses customers' current and future needs. Second, this platform will grow and evolve incrementally over time as we remain committed to staying at the forefront of the market while listening to and addressing customer feedback. And third, we remain focused on maintaining our industry-leading cost structure and efficiency to support profitable operations on a through-cycle basis.

Now I'd like to hand it over to Laura to discuss in greater detail our financial results for the quarter.

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Laura C. Fulton, Hi-Crush Inc. - CFO & CAO of Hi-Crush GP LLC [5]

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Thanks, Alan. First, I want to expand on Alan's remarks about growth we anticipate and what that means from a CapEx and liquidity perspective. Having invested in our platform of assets over the last several quarters, we're in a strong position to continue to meet the requirements of our customers without the need for significant additional capital investment.

That said, we do plan to continue opportunistically investing in the customer-driven, incremental enhancement of our service offering. This includes ongoing development of the PropDispatch software, continuous refinement of our equipment to create more efficiencies, and of course, a constant desire to add capabilities and further emphasize safety. With the goal of meeting customer needs on their time frame, these improvements can be achieved with small incremental investments of capital.

Overall, we are well positioned to more fully utilize our asset base to generate strong cash flow with minimal future capital investment. Should the market dictate otherwise, our financial position and liquidity provides the flexibility that allows us to respond.

Let me turn now to our second quarter results. Sand sales volumes came in at the high end of the guided range, totaling 2.66 million tons, an increase of 10% versus the first quarter of 2019. The increase in sales volumes resulted from stronger sales for both Northern White sand and sand sold through our logistics and wellsite operations business, Pronghorn Energy Services. Average sales price for the second quarter was $47 per ton, largely unchanged from $48 in the first quarter.

Total revenues for the second quarter of 2019 increased to $178 million compared to $160 million or an 11% increase in the first quarter of 2019. Revenues from sales of frac sand increased to $126 million, up 9% from $115 million in the first quarter of 2019, in line with our sales volume increase. Revenues associated with logistics services increased to $51.1 million, up 34% from $38.2 million in the first quarter of 2019. The improvement reflects the increase in last-mile crews deployed as well as the 36% increase in delivered truckloads over the first quarter. Revenues also include just under $1 million in sales of logistics equipment during the second quarter of 2019 compared to $6.6 million in the prior quarter.

We improved contribution margin per ton by $1.61 to $13.80 per ton of frac sand sold. Our ability to achieve this 13% sequential increase despite market pressures keeping pricing essentially flat was driven by several key areas, including the flexibility of our operations, improved sales mix by origin and destination, the diversity and range of products we offer and our advantage cost structure.

Excluding nonrecurring expenses of $3.1 million associated with business development and the conversion in the second quarter, G&A was $12.1 million compared to first quarter 2019 G&A of $11.6 million, after excluding $1 million of similar business development and conversion-related expenses.

Moving to total depreciation, depletion and amortization. It was $15.8 million for the second quarter of 2019 compared with $12.9 million in the first quarter of 2019, increasing as a result of the startup of the expanded Wyeville facility and additions of last-mile equipment with the acquisition of Pronghorn.

Interest expense for the second quarter totaled $11.8 million, up slightly from the first quarter as we are no longer capitalizing interest on our major capital projects. Interest expense is totally associated with our senior notes as we have had no borrowings under our ABL facility.

Capital expenditures for the second quarter of 2019 totaled $17.6 million, including $5.8 million of 2018 carryover growth CapEx as we finish the expansion at our Wyeville facility. We invested $8.1 million of growth CapEx in the second quarter, primarily related to spending on the logistics assets, including new top fill conveyor systems and trailers. In addition, maintenance CapEx for the second quarter of 2019 totaled $3.7 million.

We exited the second quarter with total liquidity of $112 million, including $52.8 million in cash. As expected, our cash balance decreased from the first quarter as we paid final bills on our capital projects that we fully funded in 2018 and also acquired the remaining interest in Pronghorn and invested $3 million on the share buybacks in June. We have no balances drawn under our $200 million ABL facility. And as of June 30, borrowing base availability after consideration of letters of credit was $59.2 million. After making our August 1 semi-annual interest payment last week, we had $35 million in cash on the balance sheet. We anticipate ending the year in a strong liquidity position with a similar cash balance and no borrowings under our ABL facility.

Following our conversion to a C-Corp structure, we are transitioning from discussing distributable cash flow to a more widely used measurement of free cash flow, which we simply define as cash flow from operations less total CapEx, comprised of our maintenance CapEx and our 2019 growth CapEx. For the second quarter, we reported positive free cash flow of $5.8 million.

Also, following our conversion to a C-Corp, we are now recording financial activity with regards to taxes. During the second quarter, we recorded a noncash deferred tax charge on the income statement and a provision on our balance sheet driven by the difference in the book basis and tax basis of our assets on the date of conversion. This provision results from having taken accelerated tax depreciation over the years we operated as a partnership, creating shield or benefit for our former unitholders. The noncash deferred tax provision does not impact the nontaxable treatment of the conversion for our former unitholders. We do not expect to pay any significant cash taxes in the next couple of years as we will still have available tax depreciation deductions.

Looking to guidance for the third quarter and beyond. We spent quite a bit of time this quarter looking hard at our CapEx plans and have again reduced our guidance for CapEx in 2019. We expect growth CapEx for the second half of 2019 will range from $10 million to $15 million with our maintenance CapEx being in the range of $6 million to $8 million for the same period.

Based on what we know from our relationships with our E&P customers and their plans for well completions, we expect our sales volumes for sand to be in the range of 2.4 million to 2.7 million tons in the third quarter.

G&A is expected to trend lower in the range of $11.5 million to $12.5 million as the conversion is behind us and we continue to simplify and reduce our cost structure. Total DD&A will be in the range of $14.5 million to $15.5 million, and interest expense should remain in line with the second quarter.

Our guidance for the third quarter is aligned with the outlook I described earlier for flat to potentially declining completions activity. We are moderating certain activities to minimize costs in our Northern White production facilities in response to these market conditions. We continue to build wet sand inventories at all operating locations.

At our Whitehall facility, we anticipate significantly reducing the hours of operation while continuing to meet our customers' needs through the winter while lowering our overall cost profile and fully utilizing other assets. In this environment, it becomes an even greater imperative to be efficient and provide the services our customers need. And we expect our logistics and wellsite operations under Pronghorn Energy Services to expand, dependent upon E&P budget management and market condition.

With our large capital projects completed and growth spending slowing, we are focused on cash generation for the remainder of the year with an outlook for positive free cash flow for the full year 2020.

I'd now like to turn it back to Bob for some closing remarks.

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Robert E. Rasmus, Hi-Crush Inc. - Chairman & CEO of Hi-Crush GP LLC [6]

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Thanks, Laura. In summary, our second quarter results reaffirmed our strategy and reflected our commitment to serving customers with our fully integrated solutions. We anticipate a meaningful reduction in our remaining 2019 capital spending. The changes we will be rolling out within our 3 business lines will help us communicate our capabilities more effectively, and the PropDispatch software will help customers understand, analyze and run their businesses with a greater degree of precision and situational awareness.

Our platform, as Alan said, is built for success in any environment. The second quarter was another step in the transition of our company and one that gave us further confidence in our strategy.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Praveen Narra with Raymond James.

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Praveen Narra, Raymond James & Associates, Inc., Research Division - Analyst [2]

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I guess I wanted to start on the last-mile side. Maybe could you talk about what you're seeing on the profitability of those last-mile fleets today and kind of how pricing has trended? And then also, can you talk about what other solutions you're displacing as you're kind of growing your market share?

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Laura C. Fulton, Hi-Crush Inc. - CFO & CAO of Hi-Crush GP LLC [3]

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Thanks, Praveen. I'll start with the comments about the profitability and then maybe turn it to Alan so he can talk about the competition that's out there and how we are displacing some of the other solutions. On the profitability, we've talked in the past about certain levels associated with the full integrated solution using our sand and our silos and last-mile services. What we're seeing now, and I think you see that in the way that we reorganized the business, is the ability to really focus on the specific customers that may want our fully integrated bundled service but may also want the different pieces.

And so depending upon how they're providing -- or how we are providing the service to them and what different parts and pieces and people that they're using in their last-mile logistics, the profitability may be different. What I will say is that we haven't really changed our pricing or any expectations on the profitability, but we will see it change over time. As for some customers, we're only leasing the equipment. Others, we're providing the fully deployed service.

Alan, you want to talk about the competition?

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Michael Alan Oehlert, Hi-Crush Inc. - COO of Hi-Crush GP LLC [4]

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Yes, on the enhancements that we've made with the equipment, again, we got feedback from the customer, what was important and trying to understand what added value to their operation. And part of it is on a container solution, they value the fact that you can -- at the end of the stage, you know what you've deployed and the accuracy of measurement. So when we set out with this NexStage Equipment, we talked about has an enhanced mechanical measuring device that's not affected by weather, calibration or maintenance on the equipment. So we're confident that the feedback we've gotten from our customers have been positive, and we'll be able to displace some other competitive silo solutions.

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Praveen Narra, Raymond James & Associates, Inc., Research Division - Analyst [5]

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Okay. Perfect. Super helpful. And then you mentioned for 2020 you're expecting free cash flow. I guess if you're willing to -- I understand you might not be willing to, but if you are, could you help us with the magnitude of free cash flow you might be expecting for 2020? And then also, as you think through the debt paydown versus stock buybacks, given where your debt is trading at, how do you weigh that decision? And what do you need to see between choosing between the 2?

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Laura C. Fulton, Hi-Crush Inc. - CFO & CAO of Hi-Crush GP LLC [6]

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Sure. Starting with the free cash flow question, I'm not sure we're ready quite to give a magnitude of free cash flow for 2020. It's obviously going to be very dependent upon market conditions and how quickly things rebound from maybe some of the flat to declining activity that we're expecting here in the back half of 2019. But I think the important point is that we are very focused on cash management and discipline in generating that free cash flow. We certainly turned the corner this quarter by posting a positive free cash flow number, expecting more or less flat kind of cash flow for the back half of the year since we just made an interest payment last week.

But going forward, our CapEx requirements will be much lower than they were, certainly, at the beginning of this year. And I think that, with our focus on cost reductions and cash management and discipline, will allow us to generate free cash flow.

So then moving to the second part of your question, when you talk about how we make the decisions about debt buybacks or stock buybacks to use that free cash flow, it really is dependent upon what's going on in that particular quarter. This last quarter, you saw our Board approving the $25 million stock repurchase program really in response to a lot of, I guess, dynamics around our conversion and other things that we thought were not helping the stock price and the stock repurchase program certainly did so. We are limited in the time frames in which we can exercise those stock repurchases given our quiet periods and the 10b-18 programs that we're operating under.

But going forward, we certainly do see that the debt is attractive. Is that the best use of cash? That's going to be a decision that we're going to make quarter-by-quarter depending upon really what the needs of the company are. Meaning, do we want to continue investing in growth that's demanded by our customers for new equipment? Or is it better to exercise a debt repurchase or a stock buyback at that point in time? It will definitely be a quarter-by-quarter decision.

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Operator [7]

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(Operator Instructions) Our next question comes from John Watson with Simmons Energy.

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John H. Watson, Simmons Energy | A Division of Piper Jaffray - VP & Sr. Research Analyst [8]

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Following up on one of Praveen's questions, could you give us some more color on the number of systems or number of loads we should be expecting in 3Q? I believe the number of active systems fell from 23 on June 10 to 21 by the end of the month. But it seems like the release is indicating that might increase in the back half of the year. So any additional color you could provide there would be great.

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Robert E. Rasmus, Hi-Crush Inc. - Chairman & CEO of Hi-Crush GP LLC [9]

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Sure. We would expect to see some increased deployment of last-mile systems through the quarter based on the customer feedback we received and the strong initial reception to the enhancements that we've made and that Alan has mentioned. We do expect to deploy additional systems despite the potential for slowdown in market activity during the second half of the year.

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John H. Watson, Simmons Energy | A Division of Piper Jaffray - VP & Sr. Research Analyst [10]

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Okay. That's helpful. Bob, you mentioned delivered cost in your prepared remarks. As frac fleets continue to get more efficient, does this lead Hi-Crush to what to pursue more jobs that are paid on a dollar per ton basis? And is that part of the reason that you're breaking out Pronghorn Energy Services as its own business line?

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Robert E. Rasmus, Hi-Crush Inc. - Chairman & CEO of Hi-Crush GP LLC [11]

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What we're interested in is what provides the best value trade-off for both ourselves and our customers. There has to be value that goes both ways. So it's not just how you're pricing, but it's ultimately what's the return that is provided to Hi-Crush by those particular jobs and how you price it. We believe that given the efficiencies, the reliability and the safety of our systems and the ability to provide a fully integrated solution that we can compete in any environment.

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John H. Watson, Simmons Energy | A Division of Piper Jaffray - VP & Sr. Research Analyst [12]

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Okay. Understood. And then lastly, you mentioned the possibility of West Texas mines shutting down and rationalizing supply. I was wondering if you could comment on your view on the trajectory of West Texas pricing and how that might influence contribution margin per ton in the back half of the year.

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Robert E. Rasmus, Hi-Crush Inc. - Chairman & CEO of Hi-Crush GP LLC [13]

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I think there's a couple of questions embedded in your question. Overall pricing for Northern White, I'll comment on that. It's essentially been flat. There's been some spot pricing pressure in West Texas. But since we sell mostly by contract in West Texas, we have some immunity as it relates to that.

As it relates to mines, mines going out of business, mines shutting down mines, mines reducing their hours of operations in West Texas, as we mentioned, single product and/or single service providers are struggling out there. We would expect that to continue to be the case. Customers have multifaceted and complicated needs, and they need and want someone like Hi-Crush who can provide fully integrated suite of products and services.

That's what we mean when we talk about our strategy of being built for long-term structural success that in today's completions environment, customers want efficiency, reliability, safety and repeatability. And all of this is what Hi-Crush provides, and all of this is to the detriment of single product or single service providers.

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Laura C. Fulton, Hi-Crush Inc. - CFO & CAO of Hi-Crush GP LLC [14]

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And Bob, if I can jump in and address the part of the question about the contribution margin per ton. John, I do think that there's going to be some pressure on our contribution margin per ton in the back half of the year because of where spot sales prices are going. They are still low. And we think they truly are unsustainable for many of the players, leading to what was Bob was talking about with respect to rationalization of the supply. Our contribution margin trend will also be dependent, obviously, on the volumes that we're selling but also how quickly we deploy some of those silos that our customers are so excited about with the precision of the measurement and the other features that it has.

So in this environment, we're going to continue to be very focused on those cost reductions and managing cash and being prudent with our spend to maintain as much profitability as we can going forward. But there is likely to be some pressure on our contribution margin trend for the third quarter and certainly the fourth quarter.

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Robert E. Rasmus, Hi-Crush Inc. - Chairman & CEO of Hi-Crush GP LLC [15]

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That being said, I will also add that we have not seen any current evidence of a slowdown. In fact, July was a very strong month. And as we talked, conversations with customers indicate the potential, and I stress potential, for a slowdown late in the third quarter. We would expect to see the normal seasonal slowdown and holiday-related slowdown in the fourth quarter.

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Operator [16]

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Our next question comes from Mike Urban with Seaport.

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Michael William Urban, Seaport Global Securities LLC, Research Division - MD & Senior Analyst [17]

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I got dropped, so I apologize if this has been asked. Wanted to talk a little bit about some of the enhancements you made on the silo equipment. Kind of what was the feedback? What are some of the changes that you made? And how does it enhance the equipment? And if there's any way you can kind of quantify that.

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Michael Alan Oehlert, Hi-Crush Inc. - COO of Hi-Crush GP LLC [18]

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Yes, sure. The big one was the mechanical device that I talked about for increasing the accuracy of measurement. That was one of the big things that we hear from the customers that, again, if they preferred a box solution, that was one of the reasons. Some of the other tweaks that we've made, another thing that we wanted to do. We wanted to make sure that not only this device was able to meter the sand accurately, but also, we were looking to get 21,000 pounds a minute from a single silo, which we've exceeded that as well.

Some of the other tweaks we've made have been more forward-looking and kind of anticipating where the market might go and automation of the equipment and other things. So the 2 big ones were the measurement, and we wanted to accomplish the volumes. And again, some of the incremental cost to tweaks to the equipment that kind of positions us for future enhancements have already been done and spent during this product development phase.

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Michael William Urban, Seaport Global Securities LLC, Research Division - MD & Senior Analyst [19]

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Great. And as you look at the way you're organizing the business now, so obviously, when you're kind of selling a last-mile solution separately, you're going to kind of price that separately when it's done on an integrated basis. How do you think about pricing that? Is it, okay, we kind of solve for -- here is the delivered cost for the customer plus margin and you kind of back solve that and it's roughly the same kind of margin you would get if you were selling the product? And are those the last mile and the sand individually? Or do you feel like kind of it's truly incremental to what you'd be selling sand volumes for? If you could give us a little color in terms of how you think about the business models and the different customer-facing approaches.

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Laura C. Fulton, Hi-Crush Inc. - CFO & CAO of Hi-Crush GP LLC [20]

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Mike, that's a great question. I think the real answer is it's going to depend upon the customer. Obviously, we want to make as much money as we can. And so if the customer may be more sensitive on one part of the cost metric, then maybe we adjust that a little bit. But in truth, we're looking for profitability across all the business lines. We want to make money on sales of the equipment or leases of the equipment. We want to make money when we're utilizing that equipment in our last-mile services. And we certainly want to make money on all the sand that we're selling.

And we've demonstrated in the past that we are more than willing to turn down opportunities because they were not going to be profitable for us. We have never been interested in capturing market share for the sake of capturing market share. It's always been about capturing profitable market share and making sure that we're doing the right things that really serve the customers in the way that they need to be served, meeting their needs and requirements for that particular wellsite.

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Operator [21]

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Our next question comes from Tim Monachello with AltaCorp Capital.

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Tim Monachello, AltaCorp Capital Inc., Research Division - Analyst of Institutional Research for Energy Services [22]

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My question is just around Northern White. It looks like you had some volume increases in the quarter, and some of the competitors have been talking about sort of resurgence in -- on the Northern White. So I'm wondering if you've seen any material change in the rate of adoption of in-basin sands versus Northern White. And what do you expect going forward?

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Robert E. Rasmus, Hi-Crush Inc. - Chairman & CEO of Hi-Crush GP LLC [23]

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I think a couple of things there. One, we did see volume increases in Northern White. A lot of that was driven through our owned and operated terminal network into the Northeast and also some out West and into the Rockies. As far as your question as it relates to adoption of in-basin sand, I think that in West Texas, the 100-mesh local is very well accepted by all the customer base. We have heard and seen some concerns about the capabilities relating to in-basin sand in the Eagle Ford and that it still is an area where Northern White remains strong despite the fact that in-basin sand is available.

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Operator [24]

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Our next question comes from Tommy Moll with Stephens.

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Thomas Allen Moll, Stephens Inc., Research Division - Research Analyst [25]

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You've referenced a couple of times the potential for activity to taper at the end of third quarter based on preliminary conversations with customers. So I was curious if you get the sense these are customers who are planning to taper as early as end of Q3 and that, that would then trail into the fourth quarter or if it's -- and if that's possible to generalize across the customer base. Or is this more idiosyncratic and not necessarily a signal that the year-end slowdown is potentially going to start a lot earlier this year?

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Robert E. Rasmus, Hi-Crush Inc. - Chairman & CEO of Hi-Crush GP LLC [26]

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I think from a generalized standpoint that I believe it's corporate policy now for virtually all of the E&Ps to live within budget and to generate free cash flow. So as a result, people are paying much more focused attention -- when I say people, I mean, the E&Ps, focused attention to their budget and their CapEx numbers. And so in the past, when they were short perhaps on production guidance or production results, they might increase CapEx. We don't expect that to be the case. We expect people in the E&Ps to live within their guided budgets for CapEx.

As a result, based on overall conversations, we would expect the normal seasonal slowdown typically experienced late in the fourth quarter associated with the holidays to begin a little bit earlier in that quarter. And as I said, as it relates to the late in the third quarter that there is the potential based on that. We don't think it will happen, but we want to be conservative in how we look at the marketplace.

And again, that being said as well, that July was very strong. The same conversations with our customers who say that there may be some slowdown or maybe pulling forward of this slowdown related to holidays into earlier the fourth quarter also indicates that we have strong rebound to the start of 2020 in terms of customer spending.

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Thomas Allen Moll, Stephens Inc., Research Division - Research Analyst [27]

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Understood. And as a follow-up, I wanted to ask about your free cash flow indication for next year being positive, which is good to hear. And while I understand it's likely preliminary to give us what a CapEx budget might be in terms of a range of dollar amount, just conceptually -- well, if you would like to give us that, that would be great. But if not, maybe conceptually, you could say, does your outlook contemplate any spend above your maintenance CapEx level and specifically what those buckets of spend might be for next year?

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Laura C. Fulton, Hi-Crush Inc. - CFO & CAO of Hi-Crush GP LLC [28]

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Sure. So I'll give you some precision but probably a lot more generalities on our CapEx for 2020 because it's obviously still just August of 2019 and we've got a ways to go through our budget process. But on our maintenance CapEx, we've been hovering around $4 million a quarter. So we'll call that $15 million to $16 million on an annualized basis, and that includes not only the maintenance that we do at our production facilities but also our terminal facilities and the equipment business. So I think that's a decent proxy for what we would spend on maintenance CapEx in 2020.

When you start looking at the growth CapEx, that is very dependent upon what the customer needs are. And I think I said in my opening remarks that our balance sheet and our liquidity position allows us to be very flexible to respond to their needs. And the good news is, of course, that those are relatively small dollar investments of capital on a very short-term time line, meaning that we can start to invest the capital and then within 3 months, we're actually deploying the equipment and starting to earn a return on that.

So we haven't given any sort of guidance for the growth CapEx. But I can imagine that it would be much more than annualizing what we're spending in the back half of this year. So call it, $20 million to $25 million or something like that for 2020. But it's going to be very dependent upon market conditions and also very dependent upon what our customer demand is.

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Operator [29]

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Thank you. At this time, I would like to turn the call back over to Mr. Bob Rasmus for closing comments.

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Robert E. Rasmus, Hi-Crush Inc. - Chairman & CEO of Hi-Crush GP LLC [30]

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Thank you, Latania. We had a strong quarter, which reaffirmed our strategy, our commitment to serving our customers with our fully integrated solutions and to creating long-term value for our investors. I want to thank our employees for their hard work. I also want to thank all of you listening to today's call and for your interest in Hi-Crush.

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Operator [31]

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Thank you. This does conclude today's teleconference. You may disconnect your lines at this time, and thank you for your participation.