Hi-Crush Partners LP (NYSE:HCLP) Q1 2019 Earnings Conference Call May 8, 2019 8:30 AM ET
Caldwell Bailey - Investor Relations
Robert Rasmus - Chairman and Chief Executive Officer
Laura Fulton - Chief Financial Officer
Conference Call Participants
John Watson - Simmons & Company
Good morning and welcome to the Hi-Crush First Quarter 2019 Conference Call. As a reminder, today's call is being recorded. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation.
At this time for opening remarks and introductions, I would like to turn the call over to Mr. Caldwell Bailey, Lead Investor Relations Analysts of Hi-Crush. Thank you sir, you may begin.
Thank you. Good morning, everyone, and thanks for joining us today. With me are Bob Rasmus, Chairman and Chief Executive Officer of Hi-Crush, 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, distributable cash flow, and contribution margin during the call. Please refer to our public filings for definitions of our non-GAAP measures and the reconciliation of these measures 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. Bob?
Thanks, Caldwell. And thank you to everyone for joining us this morning. The macro conditions for the first quarter improved overall versus the end of 2018 as oil and gas prices climbed from their December lows and remain at constructive levels today.
However, the completions backdrop remain challenging as the restart of the activity across much of our footprint came back slower than anticipated and operators remain focused on capital discipline.
Regardless of near-term conditions, the first quarter was a crucial period for Hi-Crush, one in which we remain focused and what we could control within our plan. Our strategy has been consistent providing sand and logistics services to the major end users of sand the E&Ps.
During the first quarter, we continued our track record of completing major capital projects on time and under budget, quickly ramp production from our new capacity, extended our growth with E&Ps and now have also invested in technology that will better enable our operations in the last mile. Execution here is critical now sets over the near-term, but for years to come.
Let me start with a quick summary of the two relatively small, but very important and strategic acquisitions we recently completed PropDispatch software and Pronghorn Logistics business. Technology has become an important part of our offering, helping us and our customers work more efficiently and ultimately facilitating lower drilling and completion costs and elimination of [NPT] (Ph).
Said another way technology is a key to success in our increasingly service focused business. During the first quarter, we acquired both Frazier holdings, the owner and developer of technology used in the field for trucking dispatch and optimization called Prop dispatch.
This highly return investment further differentiates our last mile service offering. We have used Prop dispatch for a couple of years and have become increasingly impressed with the technology as well as the consistent drive for improvements in added functionality.
More importantly we saw the value of what Prop dispatch could be to us, our expanded logistics offering and our evolving customer base. We are investing relatively modest dollars to enhance the software to bring to market and even better transportation optimization tool while also adding more functionality that will assist us in the management of sand inventory at the wealth side.
Data is critical in this business and not just a collection of that data, but the analysis of that data to enhance customer information flow, product tracking, operational efficiencies and the overall customers experience.
The Prop dispatch technology also helps our customers run their drilling and completion activities like a true assembly line process by offering real-time data and opportunities for continuous improvement. We are enthusiastic about the current software and look forward to the deployment of the upgraded Prop dispatch system to our customers over the remainder of 2019.
We also announced yesterday, the acquisition of the remaining ownership interest in Pronghorn Logistics for a combination of cash and common units. Pronghorn is a Denver-based oilfield services company that provides the primarily E&P customer base with frac sand procurement, last mile trucking and dispatch services as well as coordinating well side operations in sand management.
The acquisition of Pronghorn quickly expands our base of operations in several key shale basins where we have not had last mile crews including the Eagleford, Powder River, Midtown and Bakken and is a natural extension of our logistics focused strategy.
The Pronghorns organization is execution focused and has proven operational success. They are known across the industry for providing an innovative approach to cost-effective services through there coordination and partnership with trucking providers and especially for leveraging next generations sand equipment systems and technology to provide their customers with the lower total cost of delivered sand.
Our integration of Pronghorns will be aided by their extensive experience with and utilization of Prop dispatch in their operations. This will create synergies as we expand and improve the software for use across our platform. We look forward to their leadership team playing an important role on continuing to build Hi-Crush into the market leader and last mile logistics and well site management of frac sand.
Also during the first quarter, we completed the ramp at our second Kermit facility contributing directly to the 22% sequential increase in sales volumes realized over the fourth quarter. I would like to commend all of our personnel that helped make this project a success, including an [indiscernible] startup. Production from our Second Kermit facility will be available at its full nameplate capacity of three million tonnes per year during the entirety of the second quarter.
At the end of the first quarter, we also completed construction on our customer backed expansion of our Wyeville facility. We are in the process of ramping production and anticipate additional contributions from the facilities expanded capabilities in the second quarter.
Kermit and Wytheville are among the most efficient facilities in the industry, offering low production costs and transportation advantages in the most active basin in the United States and will be critical as we further expand our relationships with E&P customers.
During the first quarter, we had continued success in growing our activity with E&Ps, which accounted for 63% of the 2.4 million tonnes of sales volumes. Our contracts with E&Ps represent about 60% of our contracted volumes and are the bedrock of our strategy. As we continue our focus on meeting their dynamic needs with integrated mines to well site solutions.
With the completion of these two construction projects we now have a nearly eight year track record of successfully completing major development projects, commissioning new business lines, and integrating transformative acquisitions in a continual effort to best serve customers and stay at the forefront of the frac sand and logistics industry.
Once again, I would like to thank the entire Hi-Crush team that helped make these projects a success, contributing directly to our growth. We are excited about the contributions these acquisitions, projects and technologies are making and the impact they will continue to have.
I would also like to discuss further enhancements we are making in our last mile platform. When we acquire SB Industries in August 2018, we transitioned the business model from equipment sales, to embedding it as a part of our [PlatStream] (Ph) Logistics Solution an equipment utilization and lease model.
Having now operated our equipment for several months, we are completing low cost upgrades to provide for even better operations at the well site, while also investing and enhance technology to support the data needs of our customers.
What we have said since we acquired SB is that our customers are looking for solutions now that one size fits all approach. Our position in the market remains differentiated as the only provider of both silos and containers, providing the flexibility our customers want and need in a partner and service offering.
Our customers see the value of the combination of our upgraded silos, our containers, the PropDispatch technology and the expanded reach we have with the addition of Pronghorn. We will continue to listen carefully to our customers feedback as we meet their dynamic needs in the field.
As I have said numerous times, we are not interested in market share for the sake of market share. Our goal is to serve our customers as efficiently and effectively as possible, helping create value for them Hi-Crush and our investors over the long-term.
During the first quarter, our industry faced very harsh winter conditions, which caused congestion and slowdown to Class one rail service due to blocked tracks in sub-zero temperatures. For us, the direct impacts were related to purchase and third-party sand to ensure we met our commitment for contract customer deliveries in the Northeast at prices significantly above those of our own production.
The higher cost sources of sand, combined with higher freight rates coming from non Hi-Crush locations negatively impacted EBITDA in the first quarter by approximately $1 million. This bottleneck also effected operations at our Northern White facilities which were unable to run at optimal late due to slower rail service contributing to decreased efficiently and some increased cost at our Wisconsin operations.
I also want to provide an update on our corporate conversion. We appreciate all the unit holders who have cast their votes to date and are pleased with the results so far which have been overwhelmingly in favor of the plan of conversion and the high crush long-term incentive plan.
The special meeting has been scheduled to reconvene on May 22nd and we remain on-track to effect the conversion by the end of the second quarter of 2019. Let me also emphasize, that the conversion itself will be a non cast able event for our unit holders. Our unit holders will receive their 2019 K1 in March 2020 for their share of any taxable income or loss up until the date of conversion.
We are excited about the opportunities in front of us, especially as we integrate the Pronghorn team and further develop the Prop dispatch technology to meet the needs of mass manufacturing style frac operations.
The relationship we have with our E&P customers are the catalyst for our development of innovative solutions for their increasingly complex needs while our financial strength and flexibility allow us to ensure an efficient ongoing rollout. Our actions in the quarter reflect our commitment to our long-term strategy built to provide long-term structural success and returns for our investors.
With that I would like to turn it over to Laura to discuss our last mile evolution and provide a review of our financial performance and outlook. Laura.
Thanks Bob. The capital project and the Pronghorn and the Prop dispatch software acquisition Bob talked about a moment ago, are not discreet accomplishments for us. They are part of an ongoing process for Hi-Crush as we continue to listen to, internalize and adapt to customer needs. As we see it, we are entering the next stage of our own growth in the last mile and at each stage we have provided more and more value to our customers.
Deploying equipment to customers is one thing, but offering a diverse set of services, the option that you give them within that service, the efficiencies that you create and the data and operational recommendation you can provide are really the corner stone of the current phase of development in the last mile and something that positions us apart from other.
Optimization of operations is the name of the game and it’s what drove us to pursue and complete the significant project and acquisitions this year. The acquisition of Pronghorn this month in tandem with the first quarter acquisition of the Prop dispatch software provides new opportunities to optimization.
Hi-Crush and our customers can more efficiently dispatch truck, track truck moment in real time, track the status containers at the well site and manage inventories and silos among other things all accessible from an App on a Smartphone.
The software provides greater insight and ability to tweak operations based on digitally collect empirical data rather than often incomplete paper logs and will aid in real time decision making. Prop dispatch links our last mile asset and allows us better visibility into operations in ways that were not nearly as easy before.
As a leader in integrated mine the well site frac sand logistics, we have consistently recognized and perceived the next step in the industry. Enabling professional data driven operations for the use of more efficient equipment and integration of technology will ultimately help our customers by giving them still more options that can help to reduce costs, reduce NPT, and realize value in our partnership.
Applying last mile operations from efficient and well positioned frac sand facilities is also crucial. We are excited about the new ways our expansion projects and acquisitions will allow us to serve our customers. As Bob said earlier, the base of the assets we have assembled and the incremental steps we've taken recently, give us greater control over our future success and position us for the long-term in the frac sand and logistics market.
With that, I would like to discuss our results for the quarter. Sales volumes in the first quarter of 2019 were 2.4 million tonnes, in line with that at the lower end of the range of guidance we previously provided. This represented an increase of approximately 22% over the fourth quarter of 2018 due primarily to the ramp up of Second Kermit facility.
Average sales price for the first quarter of 2019 was $48 per tonne, compared to $58 per tonne in the fourth quarter of 2018. The 17% quarterly decrease in average sales price was driven by the previously announced contract pricing renegotiations for sand produced from this Kermit facilities, as well as by sales mix.
About 46% of the volume sold during the first quarter of 2019 were produced by the in basin Kermit facilities, which carry lower sales prices and volume sold at the terminals or as well side as compared to 34% of the volume sold in the fourth quarter of 2018.
Northern White pricing was flat sequentially, although it did begin to strengthen late in the quarter, and I will talk more about that in a moment when discussing our outlook. Total revenues for the first quarter of 2019 remains nearly flat totaling $160 million compared to $162 million in the fourth quarter of 2018.
Revenues from sales of frac sands were largely unchanged to $115 million in the first quarter of 2019 and the fourth quarter 2018, as increased sales volumes were offset by the decline in the average sales price.
Revenues associated with logistic services were up slightly sequentially totaling $38.2 million in the first quarter of 2019. Compared with $37.2 million in the fourth quarter of 2018. The Improvement reflects changes in transportation mileage and customer well completions mix, offset by lower utilization of container crews and Silo systems in the first quarter.
Revenues also include $6.6 million in sales of logistics equipment in the first quarter of 2019 compared to $10.3 million in the prior quarter. Adjusted EBITDA for the first quarter of 2019 totaled $16.2 million, compared to $10.2 million in the fourth quarter 2018.
As noted earlier, the first quarter adjusted EBITDA includes the negative impact of approximately $1 million from loss margin and higher freight associated with purchasing the third-party sand.
In addition, first quarter adjusted EBITDA was negatively impacted by $1 million dollars of expenses associated with the planned corporate conversions and other business development costs.
Fourth quarter 2018 adjusted EBITDA included the impact of $4.7 million of non-recurring severance, business development and legal costs associated with the acquisition of our general partner and sponsor in October.
Contribution margin for the first quarter of 2019 was $12.19 per tonne of frac sand sold compared to $14.35 in the fourth quarter of 2018. The 15% sequential decline is driven by the impact of renegotiated contract pricing at our Kermit facilities that on average reduced our contribution margin per tonne by about $4.
This impact was offset somewhat by approximately $2 per tonne improvement in our production costs resulting from the increased sales volume and efficiencies gained from the Second Kermit facility ramp up.
This quarter we are presenting depreciation and amortization of intangibles as a separate line items from our G&A. G&A was $12.6 million for the first quarter of 2019 down from $17 million for the fourth quarter of 2018. As I noted before first quarter 2019 G&A includes $1 million dollars in non-recurring business development and legal cost associated with the conversation.
And fourth quarter 2018 G&A included $3.8 million of business development and other cost associated primarily with the GP buyout. Absent these non-recurring expenses G&A was $11.6 million in the first quarter down from $13.2 million in the fourth quarter a decrease of approximately $1.6 million or 12% as we continue to be focused on cost reduction.
Moving to total depreciation, depletion and amortization, DD&A was $12.9 million for the first quarter of 2019 compared with $11.2 million in the fourth quarter of 2018. Increasing is a result of the start up of the Second Kermit facility in December 2018.
Interest expense for the first quarter totaled $10.6 million relatively flat compared to the fourth quarter of 2018 reflecting quarterly interest from our senior notes, no borrowings under our ABL facility and reduced by interest capitalized on our major capital project.
Capital expenditures for the first quarter of 2019 totaled $40.3 primarily associated with $25.2 million of carry over growth CapEx in 2018 project associated with the completion of the second Kermit instruction and wider expansion.
In addition we spent $11.1 million on our 2019 growth CapEx primarily related to spending on logistics assets including new Atlas top-fill conveyor system and trailers. Approximately $4 million was spent on our annual maintenance CapEx project.
We exited the first quarter with total liquidity of $115.6 million, including $60.4 million in cash and availability and or $200 million asset-backed revolving credit facility. As expected our cash balance decrease from year end a we paid our semiannual interest payment on our senior note in February 2019 a $21.4 million and we completed the majority of our 2018 carry over CapEx spending.
Borrowing base availability under our ABL facility fluctuates with accounts receivable and inventory levels. And as of March 31st, we had $55.2 million of availability after consideration of letters of credit under this facility.
Total debt outstanding was $444 million and we have no balances drawn under our ABL facility. For the fourth quarter, we reported distributable cash flow attributable to the limited partners of $2.9 million.
Turning to the second quarter. The Second Kermit facility is at full production capability and our wider expansion is complete and ramping quickly. We are in the process of upgrading our Silo equipment with the enhancements we and our customers require and have started deploying the upgraded Silo systems in the field where we anticipate renewed growth.
We expect sales volumes to be in the range of 2.5 million to 2.7 million tonnes for the second quarter, up from 2.4 million tonnes in the first quarter, primarily due to full quarter contribution from additional volumes produced by our Second Kermit facility.
Northern White Sand will contribute some increase in volumes from the Wyeville extension related to the new E&P contract we previously announced, but could be impacted based on our customers current production plans and job timing.
We expect sales prices to remain flat in the second quarter, along with the modest ramp in overall completion activity as the E&P manage spending over the course of the year. While we expect normal holiday slowdown in the fourth quarter, we expect the volatility and activity we saw around this period last year to be less pronounced - in 2018.
We expect our contribution margin per tonne to remain relatively flat in the second quarter. We expect a modest improvement in production costs. Although our wet plant startup costs are costing over into the second quarter due to the extended winter.
Kermit production costs should remain at levels similar to first quarter pricing for Kermit and Northern White Sand should be relatively stable at first quarter exit levels. And as I previously mentioned, our customers current production plans and job timing could impact the overall sales volumes and mix, which then could impact overall contribution margin for the second quarter.
Over the next few quarters, we anticipate increasing the number of container crews in the field beyond what we and Pronghorn have deployed today. We also anticipate this will bring more than 30 upgraded Silo systems out of inventory, approximately half of which will be using Atlas top-fill conveyor. We expect further growth as a proxy - service and our guidance here takes into account timing related to customer contract startup and overall activity.
The deployment of silos and containers is expected to drive margin higher in the second quarter. As I mentioned earlier, we had split out the non-cash depreciation and amortization largely of intangible assets from our cash spend on G&A.
We have continue to watch cost and control spending where possible and we expect the average $12.5 million to $13.5 million of SG&A per quarter. We expect total DD&A to average $13.5million to $14.5 million per quarter.
I would also like to update the CapEx guidance we gave on our fourth quarter call. Remaining carryover growth CapEx from 2018 associated with the completion of the Wyeville expansion is expected to be in the range of $5 million to $10 million to be spent in the second quarter of 2019 for an expected total of $30 million to $35 million in 2018 carryover growth CapEx to be spent in 2019.
For the full-year 2019, maintenance CapEx is now expected to be lower than that previously guided in the range of $20 million to $25 million, including the $4 million we spent in the first quarter.
Our 2019 growth CapEx relates to spending on logistics assets, including new Atlas top-fill conveyor systems and trailers. For the full-year 2019 growth CapEx, including upgrades to silo systems and the Prop dispatch functionality enhancements, and development is expected to range between $30 and $40 million.
With that, I would like to turn it back to Bob for our closing remarks before opening it up for Q&A.
Thanks, Laura. Again, I would like to emphasize that the first quarter for Hi-Crush was about continuing to position the Company to meet the evolving needs of our customers. Our customers want a preferred provider of safe, flexible, full scale and full scope prop and logistics services.
At Hi-Crush as the only fully integrated profit and logistics platform, we will continue to pursue our differentiated strategy to meet customer needs and create long-term value for our investors.
Now, let's open up the lines for Q&A. Operator.
Thank you. At this time we will be conducting a question-and-answer session. [Operator Instructions] one moment please while we poll for questions. Our first question comes from the line of John Watson with Simmons & Company. Please proceed with your question.
Thank you. Good morning.
Good morning, John.
Laura and Bob, I want to dig into the Pronghorn acquisition. Could you give us some more color on how many crews Pronghorns has working today and how you expect the Pronghorn model to integrate with your legacy PropStream model.
Sure. They currently have six crews operating actively in a variety of new basins. With the acquisition of Pronghorn, we now have active last mile logistic solutions in all the major oil and gas spaces in the U.S.. We also have line up sight to expand the Pronghorn crews and Pronghorn model throughout the course of the year.
You know what we see with the Pronghorn acquisition is a complimentary skill set and footprint. They sand procurement, last mile trucking dispatch services, coordination of well site operations, sand logistics management.
And what they really have is a long history of innovation execution experiences former members of service companies, and they have also been extensive user of PropDispatch with the knowledge in how to use that technology most effectively to provide customers with the best experience and to help us further enhance the PropDispatch technology.
Okay great, helpful I think at the end of the first quarter you had nine PropStream container crews active, I believe all the Pronghorn systems are also containers should we be modeling something in the neighborhood of 15 for the second quarter or is there potential for that to move higher.
I think there is potential for that to move higher, but I think that is a good starting point keeping in mind that we completed the acquisition of Pronghorn yesterday. So their six won’t be a part of financials for the full quarter, but certainly as Bob mention we do expect to grow that business through the year and leverage the capabilities that they established in the different basins where we traditionally have not had operations in the past. So really looking forward to seeing the growth trajectory on the container sides, as you said they have been, new users of the [PropX] (Ph) technology as well as the Prop dispatch technology.
Perfect, very helpful one more if I can squeeze it in. The 30 silo comment, I thought was interesting. Can you talk about your visibility towards deploying, is that based on conversations that you have had with customers today or is that more just and target for the Company moving forward.
It's based on conversations with customers that we have had and are having today. That gives us confidence in reaching that target. We've already begun redeployment of the silo systems, the cadence of that redeployment will increase during the third and fourth, because we are already half we through the second quarter.
Sure, perfect. Thanks for the color guys. I will turn it back.
So thank you everyone for your time today. Our actions during the first quarter and the acquisition of Prop dispatch and Pronghorn continue our focus on executing on our strategy of becoming a provider of full scale prop and logistics solutions. We will continue to focus on executing on our strategy to create long-term value for our investors.
Thanks again everyone, and we look forward to talking to you at the e end of the next quarter.
This concludes today's teleconference. You may now disconnect your lines at this time. Thank you for your participation and have a wonderful day.