Smart Sand, Inc. (NASDAQ:SND) Q4 2023 Earnings Call Transcript
Smart Sand, Inc. (NASDAQ:SND) Q4 2023 Earnings Call Transcript March 12, 2024
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Operator: Good morning, ladies and gentlemen, and welcome to the Smart Sand, Inc. Q4 and Full-Year 2023 Earnings Call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions]. This call is being recorded on Tuesday, March 12, 2024. I would now like to turn the conference over to Chris Green. Please go ahead.
Christopher Green: Good morning, and thank you for joining us for Smart Sand's fourth quarter and full-year 2023 earnings call. On the call today, we have Chuck Young, Founder and Chief Executive Officer; Lee Beckelman, Chief Financial Officer; and John Young, Chief Operating Officer. Before we begin, I would like to remind all participants that our comments made today will include forward-looking statements, which are subject to certain risks and uncertainties that could cause actual results or events to materially differ from those anticipated. For a complete discussion of such risks and uncertainties, please refer to the company's press release and our documents on file with the SEC. Smart Sand disclaims any intention or obligation to update or revise any financial projections or forward-looking statements whether because of new information, future events or otherwise.
The conference call contains time-sensitive information and is accurate only as of the live broadcast today, March 12, 2024. Additionally, we will refer to the non-GAAP financial measures of contribution margin, adjusted EBITDA, and free cash flow during this call. These measures, when used in combination with our GAAP results provides us and our investors with useful information to better understand our business. Please refer to our most recent press release or our public filings for our reconciliations of gross profit to contribution margin, net income to adjusted EBITDA and cash flow provided by operating activities to free cash flow. I would now like to turn the call over to our CEO, Chuck Young.
Charles Young: Thanks, Chris, and good morning. Smart Sand delivered strong operating and financial results for 2023. In 2023, we achieved record levels of sales volume and revenues. We sold 4.5 million tons and had revenue of $296 million. We had $67 million in contribution margin and $34.1 million in adjusted EBITDA, both solid improvements over 2022 results. For the full-year 2023, we generated $8 million in free cash flow. While we had a great 2023 overall, our fourth quarter results were lower than expected, and the fourth quarter market activity dropped due to seasonal slowdowns and an overall general reduction in activity from customer budget exhaustion. However, we largely maintained our workforce and associated costs during the fourth quarter as part of our plan to take advantage of what we expect to be a record-setting first quarter.
And that planning is paying off. Activity in 2024, in fact started off at record levels. Demand has been strong in the first two months of the year, and we are seeing that strong demand continue into March. Currently, we expect first quarter sales volume to be at least 25% to 40% higher than fourth quarter 2023 results. We are continuing our commitment to being a low-cost producer. We understand that we need to be cost-effective and as efficient as possible to be able to deliver positive operating and financial results throughout the operating cycles. With this in mind, we have made adjustments to our administrative and operating staff levels to be more efficient, and we're implementing initiatives to improve our product yields and reduce waste sand in our processes to drive down our production costs.
While we continue to target strategic opportunities for growing our market share in key markets we serve, we remain focused on operating in a cost-effective and efficient manner. In 2024, we plan to remain true to our core business principles and operating philosophy. Our primary goal continues to be the premier provider of Northern White sand and logistics services in North America. We strive not only to be a supplier of sand for our customers but to be their partner in efficiently providing high-quality, efficient, environmentally-friendly and sustainable long-term sand supply. Our goal is to continue to increase the utilization of our three operating mines in Oakdale, Utica, and Blair and to expand our market share in every basin we serve.
We have approximately 10 million tons of high-quality Northern White capacity available to serve the frac sand and industrial sand markets. This capacity is tied directly into four Class I railroads. We have the best-in-class terminals serving the key Bakken and Appalachian Basins and a network of high-quality, well-positioned third-party terminal partners. We can serve every market in North America through our efficient low-cost logistics footprint. With our SmartSystems Technology, we can meet the increasing demands of customers looking for higher volume of sand delivered to the blender in a safe and efficient manner. We continue to invest strategically to expand our logistics capabilities to increase our market penetration in key Northern White Sand markets.
In late December 2023 and January of this year, we gained access to two idle terminals in Northeast Ohio, one in Minerva, Ohio and one in Denison, Ohio. We acquired the rights to these terminals for $1.25 million and are investing approximately $1 million in 2024 to bring these terminals online. We expect our Minerva location to be operational by the end of first quarter with Denison becoming available in the second quarter. These terminals not only increase our access to the Marcellus but also provide us entry into the Utica Shale basin. We are seeing increasing activity from E&Ps in the Utica, which is primarily an oil and liquids opportunity. We are excited about the prospects of expanding our market share sales volumes in the Appalachian basins through these new terminals.
These two new terminals, combined with our Waynesburg terminal in the Southwest Pennsylvania and our broad network of third-party terminals in the region will allow us to continue to be one of the leading suppliers of frac sand into the Northeast United States. Our Blair facility in Wisconsin is ramping up as well, and we expect volumes out of this facility to double quarter-over-quarter. We are excited about the progress at our Blair facility and expect it to be a significant contributor to our Northern White Sand franchise going forward. We are confident that the foundation for Northern White Sand demand is strong and will be durable over time. We believe the long-term demand fundamentals for natural gas supply in the United States and Canada continue to be positive, notwithstanding the current low pricing.
Thus, we expect to see continued demand in natural gas basins we serve, including the Marcellus. We do not expect to see any slowdown in activity in the Bakken. We also are seeing increasing activity in the Utica Shale Basin in Northeast Ohio. Both the Bakken and Utica are oil-driven basins. With a well-documented reduction in Permian well performance, we are seeing E&P starting to pick up their oil drilling and completions activity in other basins. We are well positioned to take advantage of the shift in oil market activity into basins outside of the Permian. We continue to move forward on expanding our industrial product solutions. The transitioning of our Utica, Illinois facility to compete more effectively in the industrial sand markets continues to make progress.
We completed the blending and cooler projects, and we are now installing a bagging system at the plant. In 2023, approximately 4% of our sales volumes were industrial sand. Currently, for 2024, we expect to increase our industrial sand sales by 50% over 2023 sales volume levels and to be in 5% range of our overall sales volume. We continue to make progress penetrating the last-mile market. With the introduction of our SmartBelt direct to blender technology, we are delivering to the customers what they want, faster fracs, less trucking through maximizing payload per truck, and minimizing on load times. In response to customer demand, our SmartSystems fleet offering now includes our SmartBelt conveyor system and our proprietary SmartPath transloader.
We are excited about the prospects of growing our last mile business in 2024. In 2023, we delivered our best operating results for last-mile service offering. We achieved positive contribution margin for the year. For 2024, we expect to continue to grow this business as we expand the utilization of our SmartSystems fleets. We consistently operate four silo-only fleets in Oklahoma and expect activity to remain at these levels in 2024. For our SmartSystems fleets, in 2023 we averaged two to three fleets operating on a monthly basis. With the addition of the SmartBelt and our ability to handle significantly higher sand volumes at the well site, demand for our systems is increasing. Currently, we expect to operate on an average of four to five SmartSystems fleets a month in 2024.
With this expected increase in utilization of SmartSystems, we currently expect our last-mile service revenues and contribution margins to increase by 50% or more over 2023 results. We will continue to look for ways to increase shareholder value. In 2023, we bought back approximately 11% of our shares. We have a strong balance sheet with one of the lowest leverage levels in the industry, which allows us to manage effectively throughout the cycles in the energy business and provides us the ability to move quickly to take advantage of new opportunities in the market. Our goal is to deliver positive free cash flow consistently while still taking advantage of opportunities to grow the business. We are focused on generating positive free cash flow.
We expect to have positive free cash flow in 2024 and are in the early stages of exploring ways to return value to our shareholders, potentially through dividends and stock buybacks, which we hope to discuss further on a future call. We believe the Northern White Sand will continue to be a key product for both the energy and industrial sand markets, and Smart Sand is committed to being a leading provider of Northern White Sand. 2023 was a strong year for Smart Sand. We couldn't have delivered these results without the hard work and dedication of our employees. I want to thank all of our employees for their continued support and dedication to Smart Sand. As always, we'll keep our employee and shareholders' interest in mind in everything we do.
And with that, I'll turn the call over to our CFO, Lee Beckelman.
Lee Beckelman: Thanks, Chuck. Now I'll go through some of the highlights of the fourth quarter and full-year. Starting on sales volumes. We sold approximately 1 million tons in the fourth quarter, a decline over third quarter volumes of 1.2 million tons as expected due to a seasonal slowdown and some weather-related delays in the Bakken. For the full-year 2023, total tons sold were 4.5 million compared to 4.3 million in 2022, a 4.2% increase year-over-year and a record year for Smart Sand. As Chuck highlighted, while we experienced a normal seasonal drop in market activity in the fourth quarter, activity has picked up considerably in the first quarter. Total revenues for the fourth quarter of 2023 were $61.9 million compared to $76.9 million in the third quarter, which reflects the lower volumes sequentially.
Total revenues for 2023 were $296 million compared to $255.7 million in 2022. Revenues in 2023 were a record for Smart Sand. Higher sales volumes and average pricing, IPS sales and higher utilization of our SmartSystems fleets were all contributing factors to the 16% increase in revenue year-over-year. Cost of sales for the quarter were $59.1 million compared to $62.5 million last quarter, a 5% reduction sequentially due to lower sales volumes. Cost of sales did not drop at the same rate as sales volumes due primarily to maintaining staffing in anticipation of the pickup in activity that we expected in the first quarter. Our cost of sales for the full-year of 2023 was $254.4 million compared to $226.1 million in 2022. The year-over-year increase was primarily due to higher volumes sold and the related increase in production and freight costs.
Total operating expenses were $10.7 million in the fourth quarter compared to $9.5 million last quarter. Operating expenses were higher sequentially, primarily due to noncash accounting adjustments with cash costs remaining fairly consistent. For the full-year, total operating expenses were $43.1 million for the year ended December 31, 2023 compared to $32.7 million for the year ended December 31, 2022. We had increases in royalties as well as salaries, benefits, and payroll taxes, primarily due to the beginning of operations at our Blair, Wisconsin facility. 2023 also included $1.8 million related to the noncash write-off of some assets as we reconfigured one of our plants. Net loss for the fourth quarter was $4.8 million compared to net income of $6.7 million for the third quarter of 2023.
The driver for the decline was primarily the reduced sales volumes along with higher operating expenses. In 2023, net income was $4.6 million compared to a net loss of $0.7 million in 2022. The increase in net income year-over-year was attributable to an increase in total volumes sold and higher average sales prices of our sand. This was partially offset by higher operating costs, primarily due to increased wages and benefits from additional management and administrative headcount to support the opening of Blair. In 2023, we also had higher IPS and SmartSystems activity. Additionally, 2023 operating expenses included the $1.8 million write-off previously discussed, along with a larger benefit from income taxes that was recorded in the current period.
For the fourth quarter of 2023, contribution margin was $9.2 million and adjusted EBITDA was $1 million compared to third quarter contribution margin of $21 million and adjusted EBITDA of $13.3 million. Third quarter 2023 results included higher shortfall revenues of approximately $2.4 million as well as higher sales volumes. For the full-year 2023, contribution margin was $67 million, and adjusted EBITDA was $34.1 million compared to the full-year 2022 contribution margin of $54.6 million and adjusted EBITDA of $29.3 million. The increase in contribution margin and adjusted EBITDA over the prior year was primarily due to higher sales volumes, higher average sales price, partially offset by higher cost of sales and operating expenses. For the fourth quarter 2023, we had negative free cash flow of $9.6 million due to the use of $2.7 million in operating cash and $6.9 million of capital expenditures.
The decline in sales volumes and working capital pressure led to the use of cash and operations in the quarter. We currently expect to have higher working capital requirements early in 2024 due to the increased sales volumes, which could lead to negative free cash flow in the first quarter. However, we expect cash from operating activities to improve over the course of the year and we currently expect to generate positive free cash flow for 2024. The full-year 2023 generated $31 million in net cash provided by operating activities, which ultimately supported our CapEx spend for the year of $23 million, resulting in positive free cash flow of $8 million for the year. We expect 2024 free cash flow to be equal or higher than 2023 results. We ended 2023 with approximately $6.1 million in cash and cash equivalents and $8 million drawn on our $20 million ABL facility.
In 2023, we repurchased 5.18 million shares of common stock, representing approximately 12% of our shares outstanding. We continue to be focused on how we can return value to our shareholders in 2024 and going forward. We currently expect sales volumes to be in the 1.25 million to 1.4 million range in the first quarter of 2024. As Chuck highlighted, market activity has been strong so far in the first quarter. We are keeping a close eye on natural gas prices and what impact that may have on drilling activities and gas basins later in the year. We currently expect activity to pick up in the Bakken in the second quarter. Our new terminals in northeast Ohio are opening up new opportunities for us in the Utica Basin, which is primarily an oil liquids play, and we continue to make inroads into the Canadian market.
For the full-year 2024, we currently expect sales volumes to be 5% to 10% higher than 2023 levels. We currently believe that our contribution margin per ton will be in the mid-teens range in the first quarter of 2024. We expect capital synergies for 2024 to be in the $18 million to $23 million range. This concludes our prepared comments, and we will now open the call for questions.
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