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Edited Transcript of HCLP earnings conference call or presentation 6-Nov-19 2:00pm GMT

Q3 2019 Hi-Crush Inc Earnings Call

Houston, Nov 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Hi-Crush Inc earnings conference call or presentation Wednesday, November 6, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alan Oehlert; Chief Operating Officer

* Caldwell Bailey

Hi-Crush Inc. - Lead IR Analyst

* Laura C. Fulton

Hi-Crush Inc. - CFO & CAO 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 & Company International, Research Division - VP & Senior Research Analyst of Oil Service

* Lucas Nathaniel Pipes

B. Riley FBR, Inc., Research Division - Senior VP & Equity Analyst

* Thomas Allen Moll

Stephens Inc., Research Division - Research Analyst

* Tim Monachello

AltaCorp Capital Inc., Research Division - Analyst of Institutional Equity 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 Inc., Third Quarter 2019 Conference Call. As a reminder today's call is being recorded. (Operator Instructions) Now for opening remarks and introductions, I'd like to turn the call over to Caldwell Bailey, the Investor Relations Manager of Hi-Crush. Please go ahead.

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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 Inc., Alan Oehlert, Chief Operating Officer and Laura Fulton, Chief Financial 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 statements.

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 the 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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Thank Caldwell, and thank you to everyone for joining us this morning. The third quarter played out as anticipated with relatively strong activity in July and August, followed by a slowdown that began in September. For the quarter, we hit the high end of our previously issued guidance range for sales volumes and utilization of our last mile crews remains strong as evidenced by an increase in the total number of truckloads delivered. We achieved our operational and financial results in an environment that was, and remains, challenging as evidenced by decreased [REIT] count and well completions activity.

The non-cash impairments, which we recorded during the quarter, and which Laura will talk about later, reflect the reality that the industry is undergoing a drastic change. The market is over supplied and will be rationalized; whether through attrition and/or consolidation. As a result, we are acutely focused on remaining disciplined and controlling what we can control. Operational execution, cost takeout in both SG&A and supplier costs, reducing spending including capex, maintaining cash and free cash flow generation. Unlike some of our competitors, we prioritized profit over market share and shaping a business that will produce sustainable consistent returns for our investors.

Hi-Crush remains well positioned to succeed even during periods like we are seeing today due primarily to focusing on 3 key priorities; leveraging our integrated portfolio of assets to deliver high-quality customer service, improving profitability through operational optimization and cost reduction and combining those 2 with prudent capital allocation.

We have built Hi-Crush for the long-term and are uniquely positioned to come out the other side of this cycle stronger due to the knowledge we have gained as a long-time player and service provider in the frac sand industry. We have seen cycles before and we've proven our ability to remain flexible and ahead of the curve and responding to them.

Our strategic focus on logistics, last mile services and equipment, was the right strategy before and is the right strategy in this environment. I mentioned the market will be rationalized and in that regard we are seeing it happening in the form of mine closures, idling and curtailed hours of operation. We've seen these actions continually across the industry in the third quarter. We believe there will be additional supply taken off the market over the next several months as higher cost production is removed.

Despite the supply rationalization that we've seen to-date, oversupply persists which led to increased pricing pressure in the back half of the quarter ahead of what was originally expected. As I have said before, you have to deal with reality as it is, not as you want it to be. Many of the components of our strategy help us better align our business with market conditions. We're focused on maintaining our strong market position and as such, we will continue to reduce costs across our organization in 4 key areas.

First, optimizing our portfolio production facilities to ensure we're operating as cost efficiency as possible. This includes the idling of our Augusta plant in January 2019 and reducing the hours of operation at Whitehall this past August. We benefit from having a diverse portfolio production assets with purposely similar designs that make these efficiency efforts and cost reduction initiatives more achievable for us than for others.

Second, streamlining and simplifying our processes, automating additional functions, reducing our number of corporate entities and using technology to increase the efficiency with which we work which structurally reduces costs. Third, working with vendors to better align our cost structure with the market. We've been pleased with the support provided by many of our partners and appreciate their efforts in continuing to work with us.

And last, right sizing our workforce consistent with market realities in the frac sand and logistics industry. This is without a doubt the most challenging aspect of operating a cyclically exposed business. We take our responsibility to manage our dynamic personnel needs seriously and do our best to ensure the transition for impacted employees is as smooth as possible.

Looking ahead, we are aligned with the forecast recently laid out by others in the industry which calls for continuing headwinds for the remainder of 2019. As we progress through the fourth quarter, we've seen weakness in activity levels driven by typical seasonality and budgetary constraints for E&P's. Our focus on customer relationships, delivering reliable, safe and efficient services and maintaining a laser focus on cost will benefit the company and ultimately our investors over the near and long-term. We have also taken the time to review our environmental, sustainability and governance practices and results and will have our first annual [ESG] report available on our Website shortly.

An important part of our strategy is our approach to our capital position. We prioritize, maintaining a strong liquidity position and a solid balance sheet. We further curtailed spending to align with market conditions in the third quarter and remain completely undrawn on our asset-backed facility. While others have often been constrained by their commitments and covenants, we've maintained the balance sheet flexibility throughout our company's history. Our flexibility affords us the ability to act quickly and decisively as we navigate through the current cycle.

Given our current outlook and the dynamic conditions present in the market, our board is focused on capital discipline and preserving cash to maintain maximum flexibility. This will allow us to maintain our strong balance sheet position and the benefits that it affords us. Importantly, in this environment we continue to focus intensely on customers. The realignment of our business in the production, equipment sales and leasing, fully integrated last mile and well site management services and analytical technology allows us to proactively work with customers to meet their needs.

Our goal is to meet those needs now and as they evolve over time due to changes in geography, well design and other elements of their well programs. Being in constant contact with our customers and listening to their feedback helps us to anticipate their needs and change in requirements and better insulate ourselves from market pressures. If you've been following Hi-Crush for a while, you are aware that what I'm talking about is consistent with our long-held strategy. We remain committed to providing our customers, whether E&P's, service companies or even, in some cases, competitors, with solutions tailored to meet their needs. But strategy is only as good as its implementation and especially in this environment there is no substitute for execution.

Expansion of our customer base, increased deployment of last mile crews and legacy and new areas of operation and implementation of technology across our offerings will happen only if we continue to, as we have historically, improve our operations, gain efficiencies and provide value to customers everyday.

To talk about how we are accomplishing this, and to cover more detail on our operational performance during the third quarter, I'd now like to turn things over to our Chief Operating Officer, Alan Oehlert.

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Alan Oehlert; Chief Operating Officer, [4]

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Thanks, Bob. Last quarter I talked at length about our new business structure; distinguishing between frac sand production, equipment rental and leasing and last mile and well site services under the Hi-Crush next stage equipment and Pronghorn Energy Services business lines. As well as our technology with prop dispatch. We have had success building capabilities across each offering. For our Hi-Crush sand production and terminal operations in the third quarter we sold nearly 2.7 million tons of frac sand. Despite a dynamic market backdrop and challenging conditions in the second half of 2019, we've increased sales volumes in each of the first 3 quarters of 2019 which is a great achievement by our production and sales team in a challenging environment.

Now turning to our next stage equipment business, which includes our equipment leasing and sales operations; we were excited to recently deploy the first completely rebranded and [painted] set of silos reflecting the full next stage branding including our recent system upgrades. If you're out in the Permian, these silos are big and orange and they're hard to miss. With the upgrades we have made this year, we stand ready to serve new and existing customers equipment needs. Within our Pronghorn Energy last mile and well site services offering, we continue to achieve good utilization on our deployed crews.

As of today, we have crews deployed across the strong footprint including the Permian, Eagle Ford, Bakken, Mid-Con, Marcellus, Utica and Powder River basins. We assess our performance and manage activity within the business by tracking delivered truckloads. And as a result, that's how we report Pronghorn activity to the investors. We believe this is a helpful metric in describing crew utilization and how the business is performing. It is much less influenced by job timing, job duration or equipment type than other metrics. During the third quarter, our delivered truckload cap was up 7% from the second quarter and we also set a new record for total Hi-Crush sand volumes sold through our last mile services; emphasizing the synergies we can create by controlling the entire frac sand supply chain.

We remain in active dialogue with several customers about adding crews and deploying our solutions across additional basins. Also, we have made important upgrades with our prop dispatch software; a crucial piece of our offering. Our team continues to innovate and make improvements to the software as they receive feedback from our customers and our employees on tracking efficiencies and other key performance indicators. A major point of emphasis for our team is reducing the number of times that data is manually entered into the system, automating processes to reduce the chance for error. This means closer integration of our software with our terminal operations, our next stage silo measurement capabilities and with our trucking partners and our drivers. This is all part of the process Bob mentioned before. Simplifying and streamlining processes to drive cost savings for us and our customers while improving operational outcomes.

All of these businesses are focusing efforts and resources to reduce non-productive time, lower our customers drilling and completion costs and upholding our commitment to safety. With the markets backdrop that Bob described earlier, it is critical to appreciate the industry is slowing but it's certainly not shutting down. We still anticipate that overall demand for frac sand will increase over the mid to long-term as activity growth returns and programs will look more and more like manufacturing processes. In terms of 2020, customers are planning ahead and we believe conversations we're having with them regarding equipment deployments and last mile services and sand sales will bear fruit.

We are uniquely prepared for this environment because of the way we've built and evolved our business over the years. Our business offering is focused on meeting customers individual needs to help them succeed in the field. This is why I'm confident that no matter what challenges we face, we can continue to grow the businesses; businesses built on customers feedback, developing solutions to meet their needs and executing day-to-day.

We move into 2020 with a winning strategy, an optimistic outlook and a focus on execution ready to capitalize on opportunities. Now I'll hand things 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. Our disciplined financial strategy, just like the operational one Alan spoke to, is about more than managing through the weakness the industry is experiencing today. At its heart, it is meant to support our ability to execute in the field, meet our commitments to investors, enable us to take advantage of opportunities that present themselves and position ourselves well for the future. We believe our financial strategy accomplishes all of these goals and this sets us apart; not just in our ability to look beyond the immediate time period, but in the flexibility that our financial position gives us.

Our covenant free debt structure and overall liquidity position of nearly $100 million makes us able to contemplate multiple courses of action to confront near-term market weakness and meet long-term strategic goals. Our ability to pull multiple levers to reduce costs and adapt to market conditions is a vital asset to thriving in down markets.

Before I review the third quarter results, let me provide some color on the non-cash charges for asset impairments Bob mentioned earlier. The trend in operator frac sand sourcing continues to emphasize local frac sand delivery where available due to cost considerations. We do not see this trend reversing and as a result, our Northern White sand assets have been impacted. While we are well positioned in terms of costs and market access with all of our facilities, we have recorded non-cash impairments of the Augusta and Whitehall faculties and associated assets including our right of use assets, principally our leased rail cars which are under agreements entered into in prior years that are out of market in today's environment.

In addition to these asset impairments, we also recorded non-cash impairment charges for good will and certain intangibles. These charges are, again, non-cash and do not impact our ability to operate these facilities and continue to efficiently produce sand and deliver quality customer service now and in the future. With this context, let me turn now to our third quarter results. Sand sales volumes came in at the high end of the guided range totaling $2.7 million tons; slightly higher than the second quarter of 2019. Maintaining sales volumes in this environment, at this level, was made possible primarily through a 22% increase in Hi-Crush sand volumes sold through our Pronghorn Energy Services business. Average pricing was $43.00 per ton, down from $47.00 in the second quarter of 2019 and is impacted by customer mix and rapid deterioration in the market that occurred late in the quarter. Total revenues for the third quarter of 2019 decreased to $173 million, compared to $178 million in the second quarter of 2019. Revenues from sales of frac sand were $114.2 million, compared to $125.9 million in the second quarter of 2019 reflecting the essentially flat volumes quarter-over-quarter combined with the decreased average pricing I mentioned. Revenues associated with logistic services have continued to grow and are now a third of our total revenues increasing to $57.4 million, up 12% from $51.1 million in the second quarter of 2019.

The higher level of logistics services revenue is a result of the continued growth of the business; evidenced by the increase in delivered truckloads Alan mentioned. Revenues also include $1.4 million in sales of logistics equipment by our next stage equipment business during the third quarter of 2019 compared to about a million dollars in the prior quarter. Adjusted EBITDA for the third quarter of 2019 totals $17.9 million compared to $24.7 million in the second quarter.

Contribution margin per ton was $10.99, down from $13.80 per ton of frac sand sold in the second quarter of 2019. This decrease was larger than what we anticipated and reflects the competitive and quickly changing sales environment the industry is experiencing and the resulting impacts on spot volume pricing. Excluding non-recurring expenses of $500,000 associated with business development in the third quarter of 2019, G&A was $11.5 million compared to the second quarter 2019 G&A of $12.1 million, excluding $3.1 million of similar and conversion related expenses.

The decrease results from our continued focus on reducing our cost structure including head count. Total depreciation, depletion and amortization was $16.1 million for the third quarter of 2019 compared to $15.8 million in the second quarter of 2019, reflecting the increased asset base with the Pronghorn acquisition in May. Interest expense was flat quarter-over-quarter at $11.8 million. During the third quarter of 2019, on August 1, we made our semi-annual interest payment of $21.4 million on our senior note. Our next interest payment is due in February of 2020.

Capital expenditures for the third quarter of 2019 totaled $8.4 million including growth capex of $5.1 million to support logistics operations and maintenance capex of $3.3 million. As part of our focus on capital discipline, we have continued to reduce our capex spending focusing on the projects that create the most value for our investors.

We exited the third quarter of 2019 with total liquidity of $95.9 million, including $48.4 million in cash. As expected, our cash balance decreased slightly from the $52.8 million as of June 30 as we made our semi-annual interest payment on our senior notes on August 1. However, our focus on cash and working capital management, as well as cost and capex reductions has certainly benefited our cash position. We have no balances drawn under our $200 million ABL facility and as of September 30, borrowing base availability after consideration of letters of credit was nearly $50 million.

In the second quarter we started reporting free cash flow which we simply define as cash flow from operations less total capex, comprised of our maintenance capex and our growth capex. Due to the semiannual nature of our interest payments on the senior notes, our free cash flow will be [low] in the first and third quarters of any year and for the third quarter of 2019, we are reporting negative $5.1 million of free cash flow due to the outflow from making our semiannual interest payment of $21.4 million on August 1.

We paid no cash income taxes during the third quarter of 2019 and do not expect to pay any significant cash income taxes in the next couple of years as we will still have available tax depreciation deduction. Our annual effective tax rate for the 7 months of 2019, in which we are a corporation, is estimated to be in the range of 23% to 25% and the third quarter results reflect a tax benefit of $82 million including the tax effective to non-cash impairment charges.

Looking to the fourth quarter of 2019 and into 2020, after the significant reductions in capex we have made this year, and our anticipated low level of capex requirements going forward, we expect to be well within our prior guidance range of $7 million to $10 million of capex spending in the fourth quarter of 2019 with total capex for the year coming in around $75 million.

Capex in 2020 will be significantly reduced from 2019 levels as we minimize our maintenance capex and have already invested much of the capex in our plans for growth. We expect maintenance and growth capex in 2020 to be less than $25 million. Our forecast is for sales volumes to decline 10% or more in the fourth quarter from third quarter levels. This outlook is due to expectations of E&P budget exhaustion on top of the usual seasonal slowdown. We do expect to continue deployment of last mile and well site equipment and crews during the remainder of 2019 based on customer conversations. These factors will impact our contribution margin per ton and adjusted EBITDA, both of which we would expect to be lower in the fourth than what we earned in the third quarter. In light of this environment, we have been proactive. With the spending cuts we have implemented across the company and reduction [in force] that has affected corporate as well as field employees, G&A will be lower in the fourth quarter, in a range around $11 million.

Total DD&A reflecting the impact of the impairments taken, will be in the range around $13 million. Interest expense will remain at about $11.8 million each quarter and we anticipate ending the year in a strong liquidity position including maintaining cash in excess of $40 million and no borrowings under our ABL facility providing ample liquidity to execute on our plans in 2020.

Our guidance for the fourth quarter recognizes the changes the whole oilfield services sector faces as the year comes to a close. We are committed to remaining disciplined, looking at the situation in a realistic way, preparing for the worst but positioning ourselves for success now and in the future through cost management, efficiency, execution and flexibility. With this discipline and execution of our operational and financial strategy, we expect to be free cash flow positive in 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. As Laura, Alan and myself have just said, Hi-Crush is built for long-term success through careful management of all aspects of our company. Current industry dynamics are challenging but with our low cost structure and strong balance sheet position, operational optionality, focus on customers, commitment to safety and reliability and continued advancement in logistics and technology, we will succeed in this market as well as be prepared to take advantage of improved market conditions.

I'd now like to turn it back to the operator 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 the line of Tommy Moll with Stephens Inc.

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Thomas Allen Moll, Stephens Inc., Research Division - Research Analyst [2]

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So, fundamentals are still pretty challenged here as we go into year-end; no big surprise, I don't think to the investing community. I wanted to focus on next year where I think a lot of people will be focused on your expectation for positive free cash flow. Underneath that, could you give us any sense of what kind of logistics services, revenue cadence, you're expecting? It's the notable outperformer in Q3, I suppose, the expectation is that will continue to be so next year but anything you could do to size that for us would be helpful or even just speak qualitatively about what the outlook might be?

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

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Sure, Tommy, and that's a great question because that really has been the focus of our efforts over the past couple of years is to continue to expand and grow in our logistics business and you certainly have seen the revenues continue that trajectory of growth as we've gone through the year. I think the cadence of what we've seen in growth from first quarter to second quarter to third quarter will continue. They'll be somewhat of a slowdown here in the fourth quarter but I think as we continue to deploy more systems and crews and equipment out there, and certainly with the focus that we've had on the different business lines making sure that we're really targeting what our customers need for their logistics services or maybe just equipment on its own will help us to continue to grow there.

So I think the cadence that you've seen over 2019 should continue into 2020.

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Thomas Allen Moll, Stephens Inc., Research Division - Research Analyst [4]

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Okay, and then one follow-up on 2020, maybe more broadly than just focusing on logistics, if you think about the 3 components of -- 3 key components of profitability being average price, cost and margin, I don't expect you want to give us quantitative guidance on those 3 for next year but if you could even just point us directionally versus where you sit in Q3 or Q4, what the outlook is for next year? I know you called out -- there's been a lot of spot pricing pressure as of late. I would think some of that might abate early next year when activity ticks back higher, but as it pertains to your free cash flow outlook for next year, if you could talk about those 3 components it would be helpful? Thank you.

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

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Sure. And let me start with the easier aspect of that which is the cost side. We've always been very, very focused on costs that, I think, more intensely puts some efforts on that beginning in the second quarter of this year and those will continue. So, some of the cost reduction impacts that we have seen were occurring really kind of late in the third quarter; more will be felt and seen in our results in the fourth quarter and going into the year. And then some, of course, are really activity driven as they impact our variable costs. But certainly making sure that we continue that focus on cost reductions, controlling what we can control is very, very important. As far as the pricing, I think that's a little bit more difficult to predict and we're continuing to see pricing pressure here in the fourth quarter; particularly on our spot volumes. You would expect the trend in the first quarter to be a continuation of some of that pressure but it seems like we always are able to get a boost from some of the winter affects, particularly on Northern White sand as there's disruptions in the supply from the harsh winters that we've experienced in the past.

So there may be a little bit of boost to Northern White pricing in the first quarter and then we'll have to see what the impacts are from supply rationalization with our competitors because as many of our competitors have said, the pricing that we're seeing today really is not sustainable for a long period of time and that will put a lot of pressure on our competitors and should take some supply out of the market which will help to stabilize pricing and lead to potential improvements in 2020.

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

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And I want to amplify on something that Laura mentioned is that we will not chase price, that as other areas of the oilfield service sector have found out, that market share is a femoral. We're always going to prioritize profits over market share.

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Operator [7]

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Our next question comes from the line of John Watson with Simmons & Company.

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John H. Watson, Simmons & Company International, Research Division - VP & Senior Research Analyst of Oil Service [8]

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Bob, I agree with your comments that attrition and consolidation are necessary especially in West Texas. Can you provide further color regarding what you're seeing right now as well as your expectations for attrition and consolidation moving forward?

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

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I think a couple things, John. One, we have reviewed a number of different alternatives as it relates to consolidation and attrition and those number of conversations has increased recently as others are more willing to admit that they might not have a sustainable business model. In that environment and in this environment we will be extremely disciplined. We won't do a deal just to do a deal. Any potential deal must have clear benefits for Hi-Crush and our investors and it must be consistent with our strategy. It's got to be accretive, it's got to be a cultural fit and something that further improves our capabilities and abilities to serve our customers.

Against that backdrop, we've seen probably 4 or 5 plants in the Permian itself that have been idled, come offline or substantially reduced hours of operations. I would expect that the increase by at least 2 or 3 more plants. I think that the Permian, overall, in terms of capacity, is oversupplied by about 15 to 20 million tons that still needs to come offline in that. The Northern White sector, we've seen additional supply come offline, additional idling's and I still think that there's probably 10 or 15 million tons before some of today's announcement that needs to come offline in Northern White.

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John H. Watson, Simmons & Company International, Research Division - VP & Senior Research Analyst of Oil Service [10]

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Okay, great. Secondly, I apologize if I missed this but could you help us think through where contribution margin per ton could fall in Q4? I would assume it's [biased] lower given some of the pressures you've mentioned, but any specificity would be helpful.

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Laura C. Fulton, Hi-Crush Inc. - CFO & CAO of Hi-Crush GP LLC [11]

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Sure, John, I think it's a little bit difficult to predict at this point because a lot does depend just on the cadence of the volume throughout the quarter. We haven't seen much of a drop-off in October as compared to September but we'll see how the holidays play out in the normal seasonal drop-off but also the E&P budget exhaustion and how that impacts November and December as we're going through the quarter. And that, of course, can have a really big impact on our fixed cost leverage and all of that. The mix of the customers also has an impact. So we definitely are seeing the impacts on our profitability in the fourth quarter but it's hard to kind of quantify that because there's a lot of moving parts.

That said, we do expect to decline and I would say, it could be as much as a couple of bucks a ton per ton, it may be a little bit more than that, we'll just have to see how the quarter plays out.

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John H. Watson, Simmons & Company International, Research Division - VP & Senior Research Analyst of Oil Service [12]

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Okay, great. Understand the difficulties in forecasting there. A quick follow-up, I understand that there's pressure on your spot volumes in the Permian. Your contracted volumes in the Permian as well as your last mile profitability, is the expectation that that holds flat despite the pressures that Q4 might see?

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Laura C. Fulton, Hi-Crush Inc. - CFO & CAO of Hi-Crush GP LLC [13]

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I would say so. The contracts have continued to perform well. Our customers are taking the volumes. A lot does depend upon their activity levels and their plans for the fourth quarter but our contracts are performing well. On the last mile, I can let Alan speak to that a little bit more, but I think what we've seen there is that there is competition but the competition really is on the reliability of supply and the execution day-to-day, not so much on pricing.

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Alan Oehlert; Chief Operating Officer, [14]

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Yes, I think on the equipment side, the pricing has held up pretty well. We are in the middle of RFP season and on there's some desire on the customers to try to lock pricing in at the bottom of the cycle. As Bob mentioned, we're not going to play the market share game and ensure that the business that we engage in is profitable but, you know, that's' kind of what we've done on the equipment side to stabilize that pricing. As we're -- there's 2 ways to get market share and we know there's not any new market share out there. So you have to create some kind of value for the customer. You need to be more efficient, you need to solve some problems that they have and that's what we've tried to do with the prop dispatch software and innovation that we continue to work on there. And we've built equipment, we think, that is capable of going and taking some of that market share without playing the price game.

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Operator [15]

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Our next question comes from the line of Lucas Pipes with B. Riley FBR.

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Lucas Nathaniel Pipes, B. Riley FBR, Inc., Research Division - Senior VP & Equity Analyst [16]

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Matt Key here asking the question for Lucas. Hi-Crush is unique in the sense that it owns its own terminal facilities. Considering that Northern White sand volumes are down, would it make financial sense for you to sell a few of these terminal facilities in order to kind of increase the company's liquidity position? If so, what would be the price that these kind of facilities would potentially sell on the open market? Thank you.

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Robert E. Rasmus, Hi-Crush Inc. - Chairman & CEO of Hi-Crush GP LLC [17]

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We always look at what's the best way to create value for our investors; whether that's through selling certain assets or finding ways to leverage the assets which we currently have. And we're seeing that in our Pecos terminal and others in the Northeast where we're looking to push and transload other products and services to bring more value out of those. And it always be an evaluation is what's the best way to create value for our investors whether it's the sale of those assets or providing additional products and services and right now it's the latter.

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Lucas Nathaniel Pipes, B. Riley FBR, Inc., Research Division - Senior VP & Equity Analyst [18]

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Okay, that's helpful. And just one more for me. Hi-Crush realized contribution margin of $11.00 per ton in 3Q 2019, could you maybe help me kind of disaggregate that number a little bit and provide some color in the margins you're realizing for Northern White and versus the margins you're realizing in Texas? Thank you.

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Laura C. Fulton, Hi-Crush Inc. - CFO & CAO of Hi-Crush GP LLC [19]

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Sure, I think we've definitely noted in the past that our Northern White margins are typically lower than what we've been able to realize on our Kermit volumes because of the contracts that we have in place and the profitability there. Some of that margin is driven though by our last mile services and so it will depend on just how we kind of allocate between our sand, and the Northern White sand specifically, or the last mile services that we're providing. But I would say that our Kermit volumes and logistics would be bringing that number up in our Northern White sand volumes if you just look at the sands themselves and the pricing and the cost structure associated with it would be bringing that number down.

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Operator [20]

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(Operator Instructions) Our next question comes from the line of Tim Monachello with AltaCorp Capital.

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Tim Monachello, AltaCorp Capital Inc., Research Division - Analyst of Institutional Equity Research for Energy Services [21]

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Question here, just curious to know what the total capacity that you've taken offline in Wisconsin is, at this point, with Augusta offline and it sounds like curtailments in capacity at Whitehall now?

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Laura C. Fulton, Hi-Crush Inc. - CFO & CAO of Hi-Crush GP LLC [22]

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So the Augusta facility is a 2.86 million ton plant, annual capacity, so that has been offline since January of this past year. Whitehall continues to operate although at reduced rates really helping supplement our Blair facility for any deliveries that are best served off of a CN origin. And the rates can vary quite a bit but we've never found it profitable to operate the facility at much less than about 50% capacity. So I would say it's still running pretty well but we're just operating the dry plant. We did shutdown all of our wet plant operations at this point because we had built up sufficient sand inventories to ensure that we could meet our customer needs through the wintertime and we'll continue to just optimize as we go through time and make sure that we're doing the best for our customers but also for our investors through managing our cost structure.

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Tim Monachello, AltaCorp Capital Inc., Research Division - Analyst of Institutional Equity Research for Energy Services [23]

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Okay, that's helpful. The second one is just around the last mile logistics supply and demand. I think you mentioned on Tommy's question there that you expect to continue to deploy additional fleets through 2020, that should lead to some growth, but I would imagine with demand and the current dynamics that we see today, that the market must be tightening fairly rapidly for the last mile equipment supply in the market. Just wondering if you could help me rationalize those 2 aspects of the market?

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Alan Oehlert; Chief Operating Officer, [24]

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Yes, it's certainly -- there is -- everybody anticipates Q4 to be slow and I think that there is -- there's not going to be any new market share in 2020 so, like I stated before, we continue to talk to customers, find out what problems we can solve, try to create some value with the equipment we're providing, continue to innovate. You're not going to create any -- or there's not going to be any new market share created so we need to try to create value for the customers; be more efficient, lower their costs and I think we can do that with some things that we're working on both with the equipment and prop dispatch. And that's our strategy to -- you've got to displace a competitor in order to gain market share.

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Tim Monachello, AltaCorp Capital Inc., Research Division - Analyst of Institutional Equity Research for Energy Services [25]

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Okay, so in that light, have you seen returns on capital deployed in the last mile shrinking, if so, by how much?

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Laura C. Fulton, Hi-Crush Inc. - CFO & CAO of Hi-Crush GP LLC [26]

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I don't think that we've seen the returns shrink at all. As Alan had mentioned earlier, the pricing has held pretty well there and we don't believe that we're really competing on price for last mile, it's competing on that value-add from the quality of the equipment, the quality of the service, the people that we have out there in the field that are executing day in and day out; performing safely on the well sites and all of that. That's what's really generating the value for the customers but also the link with the prop dispatch technology that provides them a lot of insight into the vast amounts of sand that they're using on each one of these wells and the data that we can provide to help become even more efficient with truck turns, etc. So it's the combination of all that that has allowed us to continue to kind of hold our margins and see that profitability coming through from the last mile.

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Tim Monachello, AltaCorp Capital Inc., Research Division - Analyst of Institutional Equity Research for Energy Services [27]

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Okay, and then just last one for me. Just thinking about sort of pricing discipline and the commentary on the quarter in that respect, have you seen a lot of bids that you've had to turn away due to pricing being too low and based on sort of revenue per ton this quarter, can we think of that as a relative floor based on the fact that you're not willing to price below certain levels?

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Robert E. Rasmus, Hi-Crush Inc. - Chairman & CEO of Hi-Crush GP LLC [28]

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We have turned down business for price reasons. As I say, we aren't going to change or go after price. We've seen competitors bid jobs on pricing that we know for a fact is below their cost of production. That is unsustainable. That's a transfer of wealth to someone else's investor base and we are not going to participate in that activity; full stop.

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Operator [29]

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Thank you, ladies and gentlemen. That concludes our time for questions. I'll now turn the floor back to Mr. Rasmus for any final 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, Melissa. The current market dynamics are challenging. They are also unsustainable. At Hi-Crush, our emphasis is generating free cash flow and creating value for our investors. We will accomplish these goals by reducing cost, reducing spending, focusing on operational excellence, aligning with the right customers, continued development and deployment of our prop dispatch technology and last mile logistics and services. Thank you everyone for your interest today and we look forward to seeing you and talking with you on our next call.

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Operator [31]

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Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.