U.S. Silica Holdings, Inc.
Q1 2021 Earnings Call Transcript

Published: 30 Apr 2021

[Operator:]

Good morning, and welcome to the U.S. Silica First Quarter 2021 Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Don Merril, Executive Vice President and Chief Financial Officer. Thank you, sir. Please go ahead.

[Donald Merril:]

Thanks. Good morning, everyone, and thank you for joining us for U.S. Silica's first quarter 2021 earnings conference call. With me on the call today is our Chief Executive Officer, Bryan Shinn. Before we begin, I would like to remind you of our standard cautionary remarks regarding the forward-looking nature of some of the statements that will be made today. Such forward-looking statements may include comments which are subject to certain risks and uncertainties. For a complete discussion of these risks and uncertainties, we encourage you to read the company's press release and our documents on file with the SEC.

[Bryan Shinn:]

Thanks, Don, and good morning, everyone. I'm very pleased with our strong operational and financial performance during the quarter. We delivered impressive results which exceeded both revenue and adjusted EBITDA expectations and March was our best month of the year across the company with key record sets in our industrial business. The second quarter looks very strong as well in both segments, and I believe that we are on track for a substantial rebound in profits and cash generation in 2020. I'm also very grateful to all of our employees for their continued focus, dedication and perseverance as societal and economic norms are returning. While I'm excited to see the company rebounding financially, safety is also a top priority. And I'm proud of how our team has continued to manage the numerous challenges associated with our rapidly expanding business. During 2020, we achieved our best safety results in recent history. And I'm happy to report that 2021 is off to a great start as we work to continuously improve our performance. Our team's discipline, ingenuity and determination are truly energizing and inspiring. Looking at the first quarter in a bit more detail, volumes increased an impressive 26% sequentially. Adjusted EBITDA of $38.3 million was down 40% versus Q4. However, if we exclude the $27.2 million benefits in the oil and gas segment related to customer shortfall penalties last quarter, adjusted EBITDA was actually up sequentially. During the quarter we generated positive free cash flow and closed the period with $154.4 million of cash on our balance sheet. We maintain fiscal discipline by limiting capital expense to $3.5 million during the quarter and by continuing to reduce SG&A expenses. Looking forward, we expect that our business segments will continue to benefit from an ongoing macro economic rebound, unprecedented economic stimulus and rising energy commodity prices. Our current outlook points towards strong customer demand in both our industrial and oil and gas segments with an improving pricing and margin environment. This morning I would like to cover three topics in a bit more detail. First, I will start by discussing our growing industrial portfolio, and how we will continue to strengthen it. Next, I will turn to the market and our outlook for the remainder of the year. And finally, I will close with the steps we are taking to maximize cash flow.

[Donald Merril:]

Thanks and good morning again everyone. As Bryan stated we delivered better than expected quarterly results both financially and operationally. In addition, this quarter was mostly absent of charges related to asset impairments facility closures, restructuring and other expenses. Moving into 2021, we expect to deliver results with minimal adjustments to EBITDA. Now, let me begin with review of our operating segment results. First quarter revenue for the industrial specialty product segments of $112.7 million increased 5% versus the fourth quarter of this year and was virtually flat compared with the same quarter one year-ago. First quarter revenue growth was driven mostly by the economic recovery as volumes and contribution margin expanded versus the prior quarter. The oil and gas segment revenue was $121.7 million for the first quarter of 31% as compared to the fourth quarter of 2020, excluding the $27.2 million benefit related to customer shortfall penalties recorded in the fourth quarter, and a decrease of 22% versus the first quarter of 2020. Sequentially, volumes were up 36%. However, segment contribution margins fell nearly 60% as expected, primarily due to the absence of the $27.2 million benefit related to the customer shortfall penalties reported in the fourth quarter of last year. Additionally cost headwinds associated with the winter weather events, as well as empty railcar moves, and trucking inflation negatively impacted the current quarter consistent with our fourth quarter earnings call commentary. On a per ton basis, the contribution margin for the industrial and specialty product segment was $40.69 per ton for the first quarter, which represents a modest decrease of 2% compared with the fourth quarter results, and what we estimate to be the low point for the year. The oil and gas segment contribution margin on a per ton basis was $8.36, a decrease of nearly 70%, when compared to the fourth quarter 2020 due to the reasons discussed earlier and again consistent with our comments last quarter.

[Bryan Shinn:]

Thanks, Don. Operator, would you please open the lines for questions?

[Operator:]

Our first question is from Stephen Gengaro with Stifel. Please proceed with your questions.

[Stephen Gengaro:]

Thanks. Good morning, everybody.

[Bryan Shinn:]

Good morning. How you doing?

[Stephen Gengaro:]

I'm good. Thanks. So, a couple of things that I wanted to ask about and I think the first is when we think about the oil and gas side contribution margin proton, and you know looking at volumes and then thinking about some of the pricing trends we have seen. I'm trying to get a sense for how you think, what do you think they look like over the next couple quarters and maybe, is there any incremental color on sort of what the winter weather issues cost you in the quarter that just concluded?

[Bryan Shinn:]

So great questions, I will take the first part of that and just give a little bit of color commentary, and then maybe ask Don, to dive in a bit further to the winter weather and some of the things that we saw there. If you recall back to a conference call last quarter, we said that, we thought normalized contribution margin per ton for oil and gas segment was around $10. And we highlighted that with some of the headwinds that we thought we would see whether being one of them that we probably be somewhere between $8, $8.50 and we actually landed right in the middle of that at $38.36. So that is kind of where we got to in Q1 with that math, Steven. And I think what you will see going forward is that we will start to trend closer back to that $10 a ton range. So I would expect that, as we go forward, thank you to with the demand activity we are seeing out there and some pricing tailwinds. That will be up somewhere in the in the mid 90s, probably a plus or minus. And that feels like a reasonable place. But I think we can stay for the remainder of the year. Obviously, still, a lot of puts in takes out there. Don, maybe you could take the second question around the weather and some of the other things that we saw in the quarter.

[Donald Merril:]

Yes. As we have mentioned a couple times in our prepared remarks that the quarter was hindered by three things. Whether the railcars will we pull railcars out of stores, unfortunately, that is an empty railcar pull. So it is very expensive to move an empty car where you need it. And then we also saw inflation that was really highlighted by trucking inflation. And all fold; if you add all that up, it is roughly $8 million of the headwind that we had in Q1. And looking forward, some of that is going to go away. Hopefully, fingers crossed, we don't have a weather event in Q2. But we are going to pull more railcars out of storage, as Bryan said in his prepared remarks. And we have a price increase coming in our ISP business, but it really doesn't hit until May 1st. So we are going to have some more inflation pressure hitting us in the first part of the quarter. So I would say a little less than half of that eight million will still be a headwind for us in Q2.

[Stephen Gengaro:]

Great, thank you that is helpful. And when we think about and you mentioned a couple of examples of your exposure to solar and wind. Any sense for what that makes up of sort of the current mix and how you think that evolves as we go forward here? We have done some work on the wind side recently, and clearly there is a very strong demand for these turbines and blades going forward. So just curious if you have a sense for the current makeup of your ISP business and how that evolves?

[Bryan Shinn:]

Another really, really timely question, Steven. And we think about the clean energy market and our exposure to it today, we have sprit clear areas that we are currently in. So we talked about solar panels and how the products that we sell go into the glass that really allows the, the amount of the right amount of solar energy to come into the panel, the first one. Second is helping out with the suppliers of fiberglass composites for the wind turbine blades. And then the third is with diesel particulate filters, which in many parts of the world, particularly Europe and in China, Japan, these are being mandated in new cars to cut emissions down. So when I think about that aspect of clean energy, today that is probably 8% to 10% of our total industrial portfolio. And then if you think about things that other things we do in and around helping efficient energy generation, we are also starting to get into the green diesel value chain, we have some really interesting products that we acquired from EP Minerals that are very effective at serving process filtration aids, in the whole green diesel process, so we haven't sold a lot into that yes, I think that will be additive to that 8% to 10%. And then I also look at our cool roof granules, kind of in the energy space, because what those products do is they reflect a lot of the solar energy that comes into commercial buildings, from the roof. And so essentially use less energy to heat and cool those buildings. So about not in that 8% to 10%, either. So you can see that overtime here as we grow, particularly the green diesel, and the core granules, as well as the other product line. So I think that all that sort of energy related set of offerings will become pretty significant part of our overall industrial enterprise.

[Stephen Gengaro:]

Great, thanks. If I could throw in one more, you did your presentation. I think it was December when you talked about new product introductions in the laundry list of sort of incremental growth drivers you have going forward. As we think about how those opportunities materialized, will we see you think an inflection point of sort of growth and contribution margin changing are this sort of a gradual process over the next sort of two to three years as products roll out? Just trying to get a sense for sort of how to think about, when these products are hitting the market and how that kind of flows through the income statement?

[Bryan Shinn:]

I think that what you will see is that the continual increase in it and it is like a wall of water, like a big wave, that that is kind of building up of all these different programs and projects. And one of the things that I really like about that is, none of this is sort of boom or bust. There is not one or two big projects that we are hanging our hat on. It is several different projects across a number of different industries. But I think you will just see a continuing build a quarter-on-quarter and one of the things that we want to do obviously is highlight these kinds of opportunities and successes as we get on this call. And also outside of this call, I think we will have at least a few times a year highlighted meetings like we had back in December of last year where we really saw spot light on these opportunities and dive in a bit more detail Steven.

[Stephen Gengaro:]

Great. Thank you.

[Bryan Shinn:]

Thank you.

[Operator:]

And our next question is from Samantha Cahill with Evercore ISI. Please proceed with your questions.

[Samantha Cahill:]

Hey guys, thanks for taking my questions. Just maybe to stick on the Clean Energy topic for just a little bit longer. There has been some reference to cyber blood shortage, is that something that you guys are being impacted by, just I curious how that all works in terms of like your piece of the supply chain for that material?

[Bryan Shinn:]

So that piece of the supply chain that the sector that we supply into, we haven't seen that. But what we have seen across some of the industrial supply chain are shortages of raw materials. So for example, one of the things that we fell into is paints and coatings and paint manufacturers, epoxy, resin manufacturers are having problems of getting some of the basic chemicals and resins that they need to make their formulation. So I think there is a bit of general disruption still out in the economy many supply chains were seriously impacted with a pandemic and then some got very specifically impacted with the harsh weather in February that across the country. So I know some chains are experiencing big problems. Not really impacting us very much. Even things like the kind of why they reported a chip shortage that seems to be impacting a lot of change. We just haven't seen much of that at this point.

[Samantha Cahill:]

Okay, great and then my other question has to do on the oil and gas side, it seems like you guys are accelerating some of this railcar moving amount of storage. Can you maybe help us understand, how the progress is with some of your mind restarting and then maybe just what the mix is in terms of your sales right now, between the Northern White and the Permian products? And if you can share anything in terms of like how pricing differs between those two products? That'd be great.

[Bryan Shinn:]

Sure. So in the product split, last quarter, we were about 24%, 25% Northern White Sand with their last quarter in Q4. In Q1 that went up to almost a third of our product sales. So definitely accelerating demand for Northern White Sand as some of the basins outside the Permian are recover. Obviously, most of the basins outside of the Permian are not using local sand and so for punter both of those basins use Northern White Sand and that is why we have been pulling the railcars out of storage. We also restarted during Q1, our Sparta, Wisconsin facility, which is a great low cost Northern White site. And we have been doing very well at that mine. We also took our crane mine up to 24x7 Crane, Texas, in the Southern part of the Midlands. And we also took our flagship Northern Lights facility in Ottawa, Illinois, back to 24x7 operations as well. So most of that, quite honestly has been due to surging oil and gas demand and I think we will see a pretty substantial increases in demand continuing here. We project a robust Q2 in terms of demand procure and certainly will be a big participant in that. I would guess that profit demand in Q2 for us is probably up at least 20% to 25%. I think Sandbox delivered Lowe's will be up probably at least 5% to 10%. And in both of those deliveries but the delivery of sandbox and the sand supply I think we will see a relatively constructive pricing environment to your question. We have seen some pricing improvement on a customer by customer basis; we are positioned a little differently than some of our competitors in that probably 80% to 85% of sales in a given month, the profit is to contract customers. And in many cases, those contracts have WTI escalators or alignment clauses, those as the price of oil continues to go up, I think we will get some almost automatic entitlement of pricing that goes with that with contracts. The downside of that, of course, is when things get really tight, like we have seen some points in Q1, we don't have the ability to participate in a spot market as much, but we have kind of made that trade off. And I think it is the right one bigger, more stable customers big contracts. And that way, we don't have the sort of ups and downs that perhaps we have had in the past or some of our competitors have had. Anything else Samantha?

[Samantha Cahill:]

No that was it. Thank you Bryan.

[Bryan Shinn:]

Okay, no worries.

[Operator:]

At this time, I would like to turn the floor back over to Mr. Shinn for closing remarks or closing comments.

[Bryan Shinn:]

Thanks, operator. As we bring the policy to a close today, I thought I would leave you with three key thoughts. First, we have a strong, diverse portfolio that we are strategically enhancing, with a robust pipeline of new innovative products and our industrial business to some of those that we talked about this morning. Second, we are poised to benefit I believe from a recovering U.S. economy which most everyone expects to drive increased industrial and energy related demand, as well as increased profitability for U.S. Silica. I think we are well positioned in a variety of environmentally important value chains that support cleaner energy and cleaner air and again, we talked about many of those this morning. Finally, a continued capital discipline optimizing our product mix and further developing value added capabilities, coupled with reliable execution should provide us the ability to strengthen our balance sheet and sustainably generate positive free cash flow. Thank you again for dialing into our call today. And we look forward to speaking with you all again next quarter. Stay safe and be well.

[Operator:]

Ladies and gentlemen, thank you for your participation and interest in U.S. Silica. This concludes today's event. You may disconnect your line and log off the webcast at this time. Thank you.