U.S. Silica Holdings, Inc.
Q2 2021 Earnings Call Transcript

Published: 29 Jul 2021

[Operator:]

Good morning, and welcome to the U.S. Silica Second Quarter 2021 Earnings Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce one of your host, Mr. Don Merril, Executive Vice President and Chief Financial Officer.

[Don Merril:]

Thank you, operator. I'd like to take the opportunity this morning to announce the latest addition to our team. I'm very happy report that Patricia Gil has joined us as the new Vice President of Investor Relations at U.S. Silica. Patricia has over 15 years of financial experience, including Investor Relations and sale side equity research. She also brings ESG consulting experience and is a fundamental of sustainability accounting credential holder from FAS B, welcome to our company Patricia. And with that, I'll turn the call over to her.

[Patricia Gil:]

Thank you, Don, and good morning, everyone. I'd like to thank you for joining us today for U.S. Silica second quarter 2021 earnings conference call. Leading the call today are our Chief Executive Officer Bryan Shin, and Don Merrill, our Executive Vice President and Chief Financial Officer. 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. Additionally, we may refer to the non-GAAP measures of adjusted EBITDA and segment contribution margin during this call. Please refer to today's press release or our public filing for a full reconciliation of adjusted EBITDA to net income and the definition of segment contribution margin. And with that, I would now like to turn the call over to our CEO, Mr. Bryan Shinn.

[Bryan Shinn:]

Thanks, Patricia. Welcome to the U.S. Silica team. And good morning, everyone. I'm very pleased with our strong operational and financial performance during the second quarter. Our results exceeded expectations and were supported by the broader market recovery coupled with constructive commodity prices and outstanding execution by our team. Before discussing our operating results in detail, I want to give a bit of color on a recent agreement to settle a customer dispute. In late June, we came to an agreement with a customer regarding fees related to minimum purchase commitments that dated from 2014 to 2020. As a result of this resolution, we received approximately $120 million of consideration, including $90 million in cash. Half of the cash was received in the second quarter with the balance received in July. The settlement along with the organic free cash flow generated during the quarter has reduced our net debt by approximately 10%. Further last week, we use a portion of the settlement proceeds to pay off our $25 million outstanding revolver balance as we continue to deliver on our strategy to delever the balance sheet. Turning now the second quarter operating results. We reported strong performance across the company with sequential volumes and recurring adjusted EBITDA up 15% and 42%, respectively. In our industrial and specialty products segment, volumes of 1.1 million tons were up 10% versus Q1, while contribution margin dollars increased 15% sequentially due to pricing improvements, manufacturing efficiency gains and increased new product sales.

[Don Merril:]

Thanks and good morning, everyone. As Bryan stated, we delivered strong operational and financial results in the second quarter, which exceeded our guidance and were incrementally aided by the customer settlement. In addition, this quarter was impacted by charges due to weather and costs related to facility closures as discussed in our press release. During the second quarter, we reported adjusted EBITDA $103.3 million, or $54.4 million, excluding the customer settlement. Compared to the prior quarter our reported adjusted EBITDA increased to 170% sequentially or 42%, excluding the customer settlement. Our strong second quarter results for the product of the broader market recovery, constructive commodity prices, new products and increased pricing for in both of our segments.

[Bryan Shinn:]

Thanks, Don. We've had a strong year so far and have delivered on our commitments to strengthen our balance sheet, expand our industrial product portfolio and to sustainably grow bottom line profits across the enterprise. I believe that we are outperforming and executing our competition and we continue to have a laser focus on improving efficiencies and delighting our customers. Additionally, our demonstrated ability to quickly and effectively respond to changing market conditions has proven to be a unique advantage and positions us well to take advantage of future opportunities to create value for our stakeholders. And with that, operator, would you please open the lines for questions?

[Operator:]

Our first question is from Stephen Gengaro with Stifel.

[StephenGengaro:]

Thanks. Good morning. So a couple things if you don't mind. And I'd like to start just quickly with this settlement on the oil and gas front. And I was just curious if there was any additional color you could add or if there's anything else outstanding out there that you could potentially see settle on in coming quarters or months. Just I'm just trying to think about just making sure we're not missing anything else that might be out there.

[Bryan Shinn:]

Thanks for the question, Stephen. I think the first kind of comment I would make about this is that we certainly take our customer contracts very seriously. And our philosophy is that we always try to uphold our commitments and we expect that our customers will do the same. As we talked about in prepared remarks that we came to this agreement with a customer in late June, and has a resolution of $128 million of consideration with $90 million in cash. Unfortunately, the settlement is confidential. So I can't really share any further details. But what I can say is that we generally try to work with customers to resolve these kinds of differences. And if we can't reach agreement, though, we're certainly willing to assert our rights and seek a cash payment. As I think everyone on the call who's familiar with oil and gas knows that there's a lot of pushing and shoving that happens, as markets go up and down in terms of contracts. And I can't really comment on other pending similar disputes on the advice of counsel.

[StephenGengaro:]

Okay, thanks. And then when we look at the oil and gas contribution margin, I mean, if you strip out the settlement, I think it was a little bit north of $11. And you guys did I think $8.35 in the prior quarter, I think it's pricing and also sandbox that's driving that, how does that number evolve going forward? I was always thinking kind of close to $9 or $10 as a rule of thumb, but how do you think that looks in the second half and in 2022, given maybe a little bit of pricing and the strength in the market?

[Bryan Shinn:]

So I would say in general, we've given guidance that we think that contribution margin is probably in the $10 per ton range, plus or minus, and as you mentioned, that things may go up or down on a quarterly basis. I think all it takes is a few million dollars of cost or sort of issues one way or the other in a quarter and can move it to plus or minus a dollar fairly easily. So I feel like we'll oscillate around that. That $10 number, and perhaps Don might give us some more color on what's the second half and next year might look like?

[DonMerril:]

Yes, I would agree with Bryan, look, we've been pretty consistent here on the $10 per ton. And I would just agree with Bryan on a go forward basis. That's what we're planning. And again, it could move up and down. If you take Q1, Q2 added divide by two, you're right at that $10. So we've been pretty consistent.

[StephenGengaro:]

Thanks. And then, on the ISP side, you sort of highlighted the long-term growth opportunities in the success of some of the new product introductions as well as price increases. Are you seeing and I'm just thinking about sort of a similar contribution margin per ton number, but maybe, maybe I'll ask? Are you seeing the pricing that you're pushing for, are you getting net pricing improvements, or as most of this offsetting cost inflation? And I'm just trying to try to figure out that margin per ton creeps up a little bit as we go forward.

[Bryan Shinn:]

So we are working very hard to offset whatever sort of cost inflation we get, Steven, there are times where we add some extra margin out of that. And certainly that's an aspiration. But the prime reason for pushing the price increases right now is to offset the increased cost that we've seen in labor, materials, transportation, et cetera. And certainly I think our team is doing a very good job at that.

[Operator:]

Our next question is from JB Lowe with Citi.

[JBLowe:]

Hey, good morning, guys. First question is on my own gas side. I was just wondering like, we've heard that there's been some capacity that's been coming back online, definitely in the Permian, perhaps elsewhere. No, pricing may have been a little bit of a tailwind in 2Q. I'm just wondering if you've seen any pricing pressure now that you've seen some capacity coming back online. And that completion activity is going to be kind of flattish in 3Q from your commentary. What do you guys think about pricing in the 3Q?

[Bryan Shinn:]

So we have definitely seen some pricing come back online over the last month for some capacity come back online over the last month or so. I think what we're seeing at this point is that, in our case, in particular, we've had and have a number of really attractive contracts. And I think what will happen as we go through the rest of the year as those contracts finish, and what I mean by that is it we all know that everyone in terms of operators are going to stay within their budget, so when they finish their drilling and completions program for the year, those volumes that we've currently placing with them, we'll have to move those out into the spot market. So I think we'll probably see the mix of spot tons go up a little bit higher as we get further into the second half here. And given that capacity that you mentioned, the spot tons are going at the prices that are a little bit less than contract. So I think in sort of that vein, we'll see a bit of a reduction perhaps, and expect that will happen as the year goes on. We also talked about the fact that we're seeing a lot more drilling activity out there, I think everyone knows that the duck, number of duck wells has gone down substantially, I think, over 30% by our count in the first half of 2021 versus where we were at the end of 2020. And we're seeing operators ramp up drilling programs. Just looking the other day, I think drilling rigs are up about 40% now year-to-date. And so we're also watching carefully to see what the balance is between the drilling and a completion spending as the year goes forward. So we're looking at all those dynamics, net-net, when we look at it, I think will be sort of flattish second half to first half in terms of total volumes and total contribution margins, we do have the ability, if prices are a bit lower to go get more volume, we frequently turned down volumes and stayed very disciplined. But we have the capacity and the kind of cost footprint to do that. So I know it's kind of long winded explanation to your question. But there's a lot like -

[JBLowe:]

Yes, no, that's helpful, particularly about this spot, becoming a bigger percentage and the dynamics there. Other question was just on the clean tech side. I'm wondering if you guys can - between sand for solar panels and sand for turbine blades and maybe throwing in cool roof granules for energy efficiency, and whatever other products you think are relevant. What percentage of your, I guess of your total business? But if you want to just break it up, what percentage of the ISP business that stuff is today, that would be helpful.

[Bryan Shinn:]

So I think we're somewhere around 8% of the ISP business today, when you add all that in. And when you look at what's coming in the pipeline and the growth of those sectors that you mentioned, I think we can pretty easily double our profits in clean energy over the next few years, solar panels are growing like crazy, and wind turbine blade fabrication is going up, we really just started into the green diesel area. And that I think is going to become a major opportunity for us as well. So I feel really good about where we are today and the trajectory of all that JB.

[Operator:]

And our next question is from Dan Kutz with Morgan Stanley.

[DanKutz:]

Hey, thanks. Good morning. So I just wanted to ask in the ISP segment, you guys laid out some impressive organic growth targets. I am just wondering to the extent that you're looking, I'm wondering if you're seeing any attractive M&A opportunities and your interest level in any potential acquisitions, whether bolt-on or otherwise. But just any comments, there would be great.

[Bryan Shinn:]

Thanks for the question, Dan. I think our primary focus right now is in basically developing the new applications that we have, and making sure we have enough capacity to serve some of the growth that we talked about. So things like solar panels, Cristobalite, cool roof granules, et cetera. We're always looking at opportunities in terms of M&A. But I would say right now, it's probably less of a focus for us. And we have so many organic growth opportunities in front of us. I would say that's the primary focus of the team today.

[DanKutz:]

Yes, sure. That makes sense. And then on the oil and gas side, I just wanted to ask a question around market share, both for proppant and sandbox. And I just, at least on our industry level demand numbers, it looks like your proppant market share jumps, a decent bit in 2Q and just wondering if you guys think that's sustainable, and also if you could comment around market share and sandbox, if that still kind of in 33% range or if there's any upside to that number, but yes, just any comments around market share on proppant and sandbox would be great.

[Bryan Shinn:]

So numbers that you quoted are pretty consistent with what we believe as well, we think we're around 14% plus or minus for the sand market share into oil and gas. And we definitely did take care in Q2, no doubt about that. Sandbox has been pretty consistent in that sort of 30% to 35% market share range. So I feel like both of those are sustainable and just given our cost position in oil and gas, particularly in the proppant side. I feel like we'll hold that share and there may be quarters where we actually jump up to a higher share as well. As I was responding to one of the questions earlier, we certainly have the ability to go and get more product volume if we need to maintain or grow profitability as the markets ebb and flow.

[Operator:]

Our next question is from Samantha Hoh with Evercore ISI.

[SamanthaHoh:]

Hey, guys, thanks for taking my question. I wanted to dig a little bit more into the solar component of ISP. Bryan, you mentioned that it's growing like crazy. And I was just wondering if you guys are starting to see some of the impact of the Biden administration perhaps banning silicon imports from a Chinese company, or, for solar, talking about how they're going to increase domestic production, I realize is really not part of your overall business. But I was just wondering if some of those conversations are happening where you're expecting more of your domestic customer to be increasing demand for your products for the solar panels.

[Bryan Shinn:]

That's a really astute observation, Samantha, we're definitely seeing that. And if I look at our main solar panel customers, and at least one of them is looking at doubling their capacity potentially, and I think we'll see more investment coming behind that. As we said, in our prepared remarks, we think we're already in about 50% of North American solar glass production. And I think that will continue to grow. We have a great product, it's well positioned in terms of geography nearby the producers, and we've got a great contract there. And just sort of extending that you talked about the actions of Biden administration that we're also watching this whole infrastructure bill that might be coming through the first one and potentially the second one. And I think when you look at the opportunities there for U.S. Silica, they're there. They're really amazing. I was looking at the infrastructure bill, at least the proposal online the other day, and a couple of things caught my eye that they talked about fixing highways, rebuilding bridges, upgrading ports, airports, and transit systems, one and then two, things like building preserving or retrofitting more than 2 million homes and commercial buildings, modernizing schools, upgrading hospitals, et cetera. And if you look back in U.S. Silica's portfolio and that kind of end uses that we support. We're big in residential and commercial construction, which seems to be a primary focus of this bill. So things like roofing materials, insulation, paint, quartz surfaces, tile grout, window, glass, et cetera. We're also big in foundry, so cast metal parts that go into the construction itself, but also for the heavy mobile equipment that's necessary to do a lot of these proposed activities. Concrete, we have a lot of sand and high strength additives that go into that market. Got roads we mentioned today that we have a new limestone business that we're starting to grow. Limestone is underlayment for that. And then green diesel, we have to power all this heavy mobile equipment. And I think a lot of the diesel that does it will be the green diesel. So there's a lot for us as well in this whole infrastructure spending program, assuming that gets improved.

[SamanthaHoh:]

And I take it that once you're qualified like your material to qualify this is pretty sticky with the customers where they won't be going to the lowest price - on when.

[Bryan Shinn:]

Yes, we typically are number one or number two in all those markets domestically. And there's a lot of stickiness, as you said. So there's product qualification, there's geographic proximity typically we're relatively proximate to our customers. And there's a high switching costs for customers, the qualification period so it kind of once we are in, we're in. But with all those things that I just mentioned, for example, we're already supplying those end use markets, those are not new end uses for us. It's just a question of how much growth could come in those end uses.

[SamanthaHoh:]

Okay, great. And Don, a quick question on just your cash flow, is there an opportunity to actually take out a chunk of some of your debt? Are you guys look - is there an opportunity to maybe like retired in the open market? I think it is not very efficient to just keep letting the cash flow over time. So what sort of vehicles are you exploring to maybe attack some of the other debt that you have on your books there?

[DonMerril:]

Yes, we always look at that. And we're gaining more and more confidence in the overall cash flow for the company. So we did pay off the revolver as you saw. So we're looking at potentially doing some more of that as we roll through the year. And it'll depend on, what our forecast looks like. But that's definitely a use of cash that we're looking at.

[Operator:]

And our next question is from Stephen Gengaro with Stifel.

[StephenGengaro:]

Thanks. Just two quick ones. Would you - do you have any comments on sort of the second half '21 consensus of around $100 million in EBITDA?

[Bryan Shinn:]

Yes, I think, look, it's - we're not really giving guidance out there as you know. So I would say it's in the in the zip code. But other than that, we really don't comment a whole lot on as far as guidance concern.

[StephenGengaro:]

Okay, thanks. I did think so. But I figured I'd try. The other - just the other question I wanted to just hit on is when we think about the ISP volumes and the mix. And you've laid out sort of the roadmap here as we go forward. And I'm fairly certain it's sort of lower volume, but higher contribution margin per ton. But my question is around any material CapEx necessary? And does it - is this any of this sort of cannibalizes your ability to continue making what you're already making.

[Bryan Shinn:]

So there's no cannibalization, typically, we're talking about brand new sort of opportunities here, Steven. So a lot of this is white space. And I think we can fund the kind of growth - based growth that we've talked about at 10% to 15% per year, now plus or minus, within our existing capital spend. Now, we do have a fair amount of cash on the balance sheet now, and we've project to have somewhere between $275 million to $300 million on the balance sheet by the end of the year. So like if some of these applications hit in a bigger way than we thought, we certainly would have the opportunity to sort of supercharge that growth. But by and large, we're not talking about massive amounts of capital for the base plan of continuing to grow 10% to 15% per year.

[Operator:]

And thank you. At this time, I'd like to turn the floor back over to Mr. Shin for closing comments.

[Bryan Shinn:]

Thank you, operator. So as we bring the call to a close today, I'd like to leave you all with three key thoughts. First, we have a strong and diverse product portfolio that we're strategically enhancing the support of variety of rapidly growing environmentally important value chains that are driving the transition to cleaner energy. And we talked about a number of those today on the call. Second, we're poised to benefit from the ongoing recovery in the US economy, as well as the proposed additional US government infrastructure spending and highlighted several examples of the kind of products and end uses that are right in our sweet spot that could grow substantially with that additional spending. And finally, our continued capital disciplines provide us the ability to sustainably generate positive free cash flow and further strengthen our balance sheet. Thank you again for dialing into the call today and we look forward to speaking with all of you again next quarter. Stay safe and be well.

[Operator:]

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