Select Sands Corp
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Earnings Call Transcript
Earnings Call Recording
Other Earnings Calls
Good morning, and welcome to the Select Sands Second Quarter 2018 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Zig Vitols, President and CEO. Please go ahead, sir.
Thank you, and good morning, everyone. We appreciate you joining today's call. With me are Chief Operating Officer Rasool Mohammad; and Chief Financial Officer Darren Urquhart. Yesterday, we released our earnings results for the period ending June 30, 2018, which is available on our website at www.selectsands.com. Please note that any comments we make in today's call regarding projections or expectations for future events are forward-looking statements. Forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond our control. These risks and uncertainties may cause actual results to differ materially from our current expectations. We advise listeners to review our earnings release and the risk factors discussed in our SEDAR filing. In addition, during today's call, we will reference certain non-IFRS measures. Reconciliations of these non-IFRS measures to the most directly comparable IFRS measures are included in our earnings release. Finally, after our prepared remarks, we will answer any questions you may have. We're clearly pleased with our record results for the second quarter of 2018. Key financial highlights include revenues of $9.5 million, which was 68% higher than the 5.7% in revenues we reported for the first -- the year's first quarter. Quarter-over-quarter gross profit grew 130% from $1.3 million to $3 million. Gross margin was recorded at 32.1%. Second quarter net income was $1.6 million or $0.02 per basic and diluted common share. And finally, margin on an adjusted EBITDA of $2.9 million was 31%. Looking at our top line results, compared to first quarter, the second quarter benefited from approximately 3% in price increase on a mine gate basis, which excludes the impact of transportation revenue. The biggest driver of our higher revenues as compared to the first quarter was the 164,872 tons of frac and industrial sand we sold during the second quarter. This record quarterly level was significantly higher than what we had originally expected, heading into the period, and well in excess of our current capacity run rate of 150,000 tons per quarter or 600,000 tons per year. During the period, unimpeded delivery logistics combined with strong demand allowed shipments of our -- all of our second quarter production as well as product inventory coming into the quarter. In short, almost everything went right that could in a period as it relates to sales volume. Moving forward, we believe a more realistic range for quarterly sales volumes is 120,000 or 150,000 tons, until we complete our Independence Property expansion.Turning back to the second quarter, our gross margin of more than 32% was markedly driven by enhanced production and logistics capabilities, complemented by our outstanding execution by our operations team. As a reminder, our gross margin during the first quarter was 23.4%, so the sequential quarterly improvement we saw was very impressive. Over the last 18 months, we had put significant efforts into improving our ability to efficiently deliver products, including working closely with our railroad partners and increasing off-site leased railcar storage. To enter into markets not previously served, we also began utilizing barges late last year. During the second quarter, we barged as much as 40% of our monthly outbound volumes, although that percentage has come down recently in certain -- as certain locations along the Mississippi and Intracoastal system are expecting to experience congestion issues. Namely, construction at the Bayou Sorrel and Calcasieu Locks will cause delays and intermittent closures to traffic in 2019. We're working to overcome those anticipated future delays. In addition to enhancing our rail and barge capabilities, we significantly improved our interplant trucking logistics through completion of a new private road during the year's first quarter. The road provides for a shorter distance between our mine and processing facility, including direct access to a recently rebuilt multiLink federal highway. Results has been reduced congestion on local roads and lower transportation costs. As in the past, we will continue to evaluate and execute on additional opportunities to further improve our delivery offerings, broaden our product line to satisfy customer demand and drive additional cost efficiencies in our operations. I'll now turn it over to Darren to discuss our second quarter financial results in more detail. Darren?
Thanks, Zig. Consistent with the last 2 quarters, our financial statements are presented in US dollars to better reflect Select Sands operations and to improve investors' ability to compare our results with other publicly traded silica sand businesses in the United States. Prior to the fourth quarter of 2017, our financials were reported in Canadian dollars. Looking at the summarized consolidated interim statements of operations and comprehensive incremental loss table included in our second quarter press release, second quarter revenue grew 68% to $9.5 million from $5.7 million in this year's first quarter. As Zig discussed, driving the increase were higher sales volumes, and to a lesser extent, an increase in product plant gate pricing as compared to the preceding quarter. Cost of goods sold for the second quarter was $6.5 million as compared to $4.3 million in the first quarter with the increase primarily due to higher sales volumes period-over-period. Total operating expenses increased to approximately $900,000 in the second quarter from approximately $650,000 in the first quarter. This was primarily due to $426,000 of noncash share-based compensation being recognized in the second quarter. Partially offsetting this was a $270,000 second quarter recovery, a previously recorded bad debt expense. Net income for the 2018 second quarter was $1.6 million or $0.02 per basic and diluted common share as compared to approximately $600,000 or $0.01 per basic and diluted common share for the first quarter. Adjusted EBITDA, a non-IFRS measure, that is reconciled to net income in our press release, was $2.9 million for the second quarter versus approximately $800,000 for the first quarter. This was an impressive 255% sequential quarterly increase. Turning to the consolidated interim statements of financial position. As of June 30, 2018, we had cash and cash equivalents of $4.2 million, inventory on hand of $1.8 million, accounts receivable of $4 million and working capital of $7 million. I will now hand it back to Zig for his closing comments.
Thank you, Darren. As discussed in my opening comments, over the past month, we've executed on several initiatives designed to enhance our production and logistics capabilities. We believe our success in these strategic efforts is clearly evidenced by our record second quarter results. We're now actively pursuing expansion of our operations to further capitalize on the long-term opportunities provided by our high-quality product offering and strategic location near many of the key oil and gas basins in the U.S. We announced in April that our exercise of an option to purchase a 223-acre property located in Independence County, Arkansas. The Independence Property was acquired for approximately $1.6 million and will serve as a geographic platform to provide options not only for long-term growth but also for near-term enhancements of our current operations. During the second quarter, we secured a $3.9 million capital expenditure line of credit to help fund the expansion of the annual production capacity from 600,000 tons to 1 million tons, production increase of 67%. The stand-alone 400,000-ton facility will include both wet and dry processing capability. And we continue to anticipate a construction cost of $4 million to $4.5 million. Site work for ground stabilization and the building of settling ponds is underway as well as continued fabrication of components such as conveyors occurring at our shop location. Current milestones include tapping into the gas line that is less than 1,000 feet from the property and starting the installation of a transformer for access to 3-phase electricity. We continue to target completion in the fourth quarter as we work with the utilities of gas and electric and monitoring their progress through regulatory compliances. As we've discussed previously, the project is expected to reduce interplant transportation up to 30 miles, driving operating costs and saving more than $4 a ton for the stand-alone project. In addition, over the longer term, we expect the property will host our full 1 million tons of annual production capacity. The project is perfectly aligned with our strategy of low-cost investment and resulting strong returns on capital. As a result, we believe we are well positioned for continued long-term success and look forward to keeping everyone apprised of our progress. With that, we will now open it up for questions. Operator?
[Operator Instructions] And our first question will come from Catharine Sterritt of CIBC Asset Management.Apologies, I accidentally had my line on mute. I have introduced our first question as Catharine Sterritt of CIBC Asset Management. Okay. We will move on to the next question, Brent Buchanan of Wood Gundy.
Congratulations guys on a great quarter, particularly the margin expansion improvement that was pretty impressive. I'm just wondering, do you think you can continue to improve that on a cost per ton basis as you go through the rest of the year?
Yes, thanks, Brent. I think what you're seeing is some of the leveraging we get out of increasing the volume and then spreading our fixed cost basis over that volume. So there is a little bit of that. There are other improvements that happen, and we had a slight price increase of 3%. So some of that's going to come into play. But as we get back to, we really pushed the second quarter to see how far we could go as far as getting material out. And so the 165,000 we got to essentially was about 15,000 over our -- or 10% over what our production rate is. So I think we will be pulling back a little bit, so you'll see some of that coming back. We'll keep all the other pieces, but whatever that fixed cost component was that was spread over that's the part we will lose. But there's no other component that should draw back.
Okay. And on the pricing, you mentioned 3% increase in the second quarter, I'm curious what you're seeing now in this quarter. And if you can prognosticate a bit on the kind of the balance of the year for pricing.
I think when we kind of monitor the -- we haven't seen any changes in prices ourselves. But we're -- it seems like half of the market thinks that price is either stable or going down and the other half thinks it's stable or slightly going up. So we're not exactly sure where pricing is going. But what we are -- what we feel would be responsible is that considering that since the fourth quarter of last year, we're up 17%, I think we want to say that we're going to pretty well just hold steady where we are. We think that will be a good position for us.
Okay. And the Independence expansion, if I know you're talking about sort of the end of fourth quarter for completion of it. Can you get it up and running and be at your, let's say, 1 million ton run rate at the end of the year? Or is that going to take a bit of time into the new year?
Well, I think there's always a ramp-up period. We can have everything installed. We're somewhat contingent on the gas guys and electrical guys going through their regulatory requirements. We're not kind of privy to what they go through. But -- and it's not a matter of whether we're going to get it or not, it's just a matter of how long that bureaucracy takes, especially with the gas folks.
The next question will come from John Gregory of SJ Investments.
Really great quarter. You guys are really hitting all your milestones, which is really good to see. The one question I've got is, it looks like you're able to fund a lot of your growth with your own operating income and your own operating cash flow. You were talking about the expansion that you're going to do and how you've got a capital line of credit. Do you still think that with that as you get into the 1 million ton that you will be able to continue to fund all of your growth with your own operating cash flow?
Yes, we're in a very good position with regard to cash, it's a -- it's been growing actually beyond what our original projections were. I was just looking at cash on Monday and we're within $35,000 of having $6 million. So since the June 30, we've gone up almost a couple of million dollars. So we don't -- we're going to borrow that money to finish the project and that cash we're going to hold as kind of working capital to make sure that we can fund everything we got out. I think that as we go forward, we will probably be paying more for upfront for our barging and then billing the customer and that pretty well doubles the cost that we have or essentially the de facto cost of goods almost doubles. But we've got good paying customers. Our DSO is running, I think in June, we ran about 37 days -- 37.5 days. So that's extremely good, and hopefully, we can hold that through. So everything looks really good in funding the business with our own cash. As a matter of fact, it's quite exceptional, but to answer that question...
I mean that's really good, when you consider where you guys were about this time last year. It was kind of hard to see if you didn't hit all these milestones that you hit, how you would -- you would have gone to the secondary market, I think, to try to raise capital and that would've, obviously, diluted everybody. So it's good that you guys are able to do this with your own organic growth. The second question I've got is, and it dovetails off kind of that first question, but obviously, you guys -- it sounds like you were able to sell everything you could get your hands on this quarter, do you feel pretty confident that when you get up to 1 million ton rate, which, I guess, is going to be like 250,000 tons a quarter, do you feel pretty confident that with the customers that you have and the people that are looking at your sand that you're going to be able to sell all of that?
We don't see it as being an issue. We have not, of course, tested those waters. But when you think about it, our problem has always been not to overcommit to customers. And so what we've done is, we've kind of held that line and by doing 165,000, we basically just push it to the limit. If we could sweep up a pail of sand, we were selling it in that second quarter. So now we're more realistically, I think that we're -- we certainly can sell that million tons. I don't think it's a problem because we still hold it advantage over materials that come out of the North. So if anybody is buying any sand from Wisconsin, they certainly can buy it from us for less landed cost.
The next question will come from Catharine Sterritt of CIBC.
I've got a question for you on your plans with regards to the new facility that initially you'll be producing the targeted 400,000. You mentioned that you've got the ability to expand it and over time you intend to have all of your production and the entire million coming from there. Will that involve an incremental cost over the initial $4 million, $5 million CapEx estimate? And also at what -- what is your target timing to move all your production to that facility?
Well, the -- considering that we had announced that we see a savings of about $4, moving 600,000 tons of production to that facility certainly has got a very quick payback. There is an incremental cost. And the cost isn't moving equipment, there isn't particularly any new equipment that would be bought, but you have to lay foundations in such structures and then pare down and build up. So there is the cost of basically installing the equipment. But like I said, the payback is really quick on that investment. And also there will be efficiencies in labor where if you're running the entire million tons there, you won't need as many people as running facilities where you're running 400,000 tons and 600,000 tons.
And so what were you thinking for timing?
Well, it's -- we are totally focused on getting our 400,000-ton plant up. And we have not set a time goal. But I think what you'll find is that, that will become the next initiative for management to get that plant started to move over. The -- we've looked at logistics on how to do that without interrupting production. But it is possible actually to do that, even though that move will probably take 3 months or so. There is a way to do it, where you do a small investment where you basically phase your move. So I mean, next year is not out of the question, but we don't have anything to announce right now.
So would it be a reasonable way to think about forecasting for 2019 then that something like 600,000 tons at an $18 per ton EBITDA, if pricing holds, and then $22 per ton on the incremental 400,000? So that's a $4 pickup.
That will be one way to look at it, Catharine. I'm not sure that I would be quite that aggressive. I would tend to be a little more conservative than that. Not that, that isn't possible. But me personally, I think about -- one of the things that I will share with you is that one way I like to look at the business is from an EBITDA basis because it just tells -- it excludes all that, the noise from the -- whether you're paying for shipping or whether the customer is paying for shipping. The EBITDA per ton was somewhere around $17 -- over $17, $17.70 in the second quarter, our adjusted EBITDA per ton. But we have to make sure we understand that we recovered $270,000 in bad debt that we had taken a write-down on last year. So that kind of takes a real good way to look at the EBITDA per ton is probably in the $16 range right now. So $16 is kind of where we're at right now. And so if you use that as a basis, it's not a bad way to look at it.
And you've mentioned that 40% of your tonnage has been barging and you anticipate that coming down in the back half of the year and perhaps more so in 2019 because of work that's happening on the river. So how much do you think transportation costs are going to be higher overall, as you have to change that mixing away from barge for 2019?
The rail has been a fairly comparable to barging. So we're -- we don't see a lot of change there. Our customers have generally been -- well, they of course, they pay for the shipping. But a lot of them -- most of them actually pay directly the shipping part of it. So we haven't had a lot of concern there. We haven't had to deal with that. And we haven't seen any change in desires in what that cost will be. Our customer is taking the brunt of that.
Okay. And just one last question. Right now, your customer base is quite concentrated and you've got these very strong customer relationships, but you can count them on one hand. As you move up to the million tons, do you anticipate expanding your customer base? Or are you anticipating going deeper with your existing customers?
That -- it's going to be -- I think what we'll do is we'll probably end up expanding slightly. We'll probably start looking at longer-term relationships with each one of the customers. I mean, all of them would like to see more product from us. So I think we want to satisfy that demand. But at the same time, you're right, we would like to just have some customer diversity just to protect our positions in case anything changes.
The next question will come from [Len Klopp] of Altus Capital Partners.
I guess, for starters, just a couple of things. Wondering if any of your -- if management or the board has considered normal-course issuer bid as being a good source of value enhancement as you do trade at a discount to some of your peers. So I guess that's the first part of the question. The second is, do you have a poison pill in place or is this something that you've given any thought to?
I'll let Rasool take the first part of that question. Let me answer the second part of the question. I've been looking at -- we looked at poison pills and went through the whole thing and what you find out is they're fairly weak. They're basically delaying tactics, but they don't avoid the end result. But we do have some things in place that would protect us.
It's Rasool here. To answer your first question, the answer is, no. We haven't really considered looking into normal-course issuer bids.
Is that due to the capital requirements, Rasool, that you have, as you build out Independence? And at what point would you consider it? I just think that if you put together a couple of good quarters, I mean, you're trading at low single-digit multiple to earnings, which is a huge discount to some of your peers. And at what point would you look at it?
To be honest with you, I think it's a really good question for our board discussion. So I will certainly bring it up in our next board meeting. We haven't really discussed it. Certainly, we'll bring it up in our next board meeting, like I said.
The next we have a follow-up question from John Gregory of SJ Investments.
Yes, Zig, I guess, my question is, and I don't know if you can answer it or not, but it is kind of troubling to try to figure out why the stock trades so low. Because if you are able to do $16 a ton EBITDA, and if you do, do 1 million tons in 2019, you're talking about $16 million EBITDA, and the U.S. market cap is $32 million. I mean, that's like 2x EBITDA. It doesn't make any sense. I mean, is it because your stock is so small that the word isn't getting out? But it just seems like it trades at such a discount, I can't figure out why the stock isn't like double or triple from here.
I agree, John.
I mean, it doesn't make any sense. I mean, it's just hard to figure out. But...
I'm out on my soap box. Rasool and I do regular tours, and probably that is one of the biggest comments that we get back. Everybody is wondering what's going on. And my answer, and I answered this to the board this way, is that we will let our performance speak. And I've said that from day 1 and...
Well, I've realized that the sand sector per se seems to be trading low, and I don't totally understand that, to tell you the truth, but you guys seem to trade so low, I guess the thing that shocks me, to tell you the truth, if I was one of these other sand companies, with where you guys are guiding the potential, I'd be calling you up tomorrow making an offer to buy you. Even if I pay double or triple your stock, it's probably going to be accretive to their earnings. I mean, that's what I can't believe because you're trading so low on any of these multiples.
I don't know if the other guys are on the line or not. Maybe they're listening to you. Look, I appreciate your views and those are things that we think about. We focus mostly on adding value to this company. And when it gets recognized, I think that, that it will be recognized and we will just continue to perform.
And our next question comes from [ Howard Arden ].
It's [ Howard Arden ]. I just have a question about efficiency of maybe moving the company to America instead of being a Canadian company would be better recognized for its value.
Yes, that's a great question, [ Howard ]. It is one that is one of our projects, what we would like to see happen. I think the logical way to do it in -- we'd like to graduate to the main board in the TSX from the venture board. And as we grow in revenue and capital -- market cap, then we'll graduate to there. And eventually, I think there -- it's inevitable that it will become an American company. We don't see ourselves having a lot of business interest in Canada. We're very appreciative of being a part of that. I think the Venture Capital Exchange is what made this company possible, and we're extremely appreciative of that. But at the same time, we do primarily operate in the U.S. and anything that we're considering is going to be U.S.-based right now. So that's not entirely outside the realm of possibilities.
I mean you have an office in Houston, that would be a logical place because you're close to your customer base there also.
Yes, everybody is here. Essentially, Darren Urquhart, the CFO, has a skeleton staff there and they operate up there. We do -- all of our business dealings are essentially down here. Rasool and I reside here our controller and everything. So we have an office here and this is really the beachhead for us in the U.S. as well as our Arkansas operations, of course, but it's -- this is -- I mean Houston is oil central. I think that if I want to talk to 80% or 90% of the people that would buy our products, I can drive there for a lunch meeting with anybody. So it's a great place to do business.
[Operator Instructions] And our next question comes from [ Barry Schwartz ].
I'd like to know your thoughts on the Comstock share position that you have and apparently, you've increased that share position, if you could talk about it.
Sure. Yes, I think that while we own that stock, our duty is to make sure that we enhance the value where we can. Our official position is that we will monetize that stock. But at the same time, that we want to encourage the company to move towards areas that will increase the value, and the one area that we saw was they wanted to move from the gold and take some interest in lithium and cobalt and explore that area. Much as Select Sands did, it started as the gold company and moved over to energy. We saw the lithium move as a really good move for the company. We have to protect our position while we still own that stock. And we think we increase value by having them move towards the lithium. And that's evidenced by the joint venture they have now. They own 5% of a company called E3 Metals, who has a -- E3 Metals is an interesting company. They have access to a fairly higher concentration of lithium that is contained in brine in Alberta, and they have access to 1.3 million acres. So they're moving in kind of the direction we want to. We will not -- we don't see there's not going to be any further investment, but in this case, we supported them and a number of other investors to get into that business.
It must be a big plus for you to divert cash for Sand for your own operations to Comstock. So that obviously is a big plus for Comstock.
Well, it's a -- it's somewhat of a hedge that's getting into green energy, and we think that, that also has a future.
[Operator Instructions] And this concludes our question-and-answer session. I would like to turn the conference back over to Zig Vitols for any closing remarks.
Thanks, Laura. Well, once again, we appreciate everybody joining today's call and your continuous support of our company. We look forward to providing you with further updates on our third quarter earnings call in November and have a great day. And thanks again.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.