Good day and thank you for standing by and welcome to the Sand Inc. Second Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Josh Jayne, Director of Finance and Assistant Treasurer. Please go ahead.

Good morning and thank you for joining us for Smart Sand's second quarter 2021 earnings call. On the call today, we have Chuck Young, Founder and Chief Executive Officer; Lee Beckelman, Chief Financial Officer; and John Young, Chief Operating Officer. Before we begin, I would like to remind all participants that our comments made today will include forward-looking statements, which are subject to certain risks and uncertainties that could cause actual results or events to materially differ from those anticipated. For a complete discussion of such risks and uncertainties, please refer to the company's press release and our documents on file with the SEC. Smart Sand disclaims any intention or obligation to update or revise any financial projections or forward-looking statements, whether because of new information, future events, or otherwise. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, August 4th, 2021. Additionally, we may refer to the non-GAAP financial measures of contribution margin, EBITDA, adjusted EBITDA, and free cash flow during this call. We believe that these measures, when used in combination with our GAAP results, provide us and our investors with useful information to better understand our business. Please refer to our most recent press release or our public filings for our reconciliations of contribution margin to gross profit, EBITDA, and adjusted EBITDA to net income, and free cash flow to cash flow provided by operating activities. I would now like to turn the call over to our CEO, Chuck Young.

Thanks Josh, and good morning. We enjoyed another good quarter for volume with similar tonnage to the first quarter. Second quarter volumes of 767,000 tons are up 269% from the second quarter 2020 levels when the pandemic began to negatively impact our business. Additionally, sand sales volumes in the first half of 2020 were approximately 10% higher than the first six months of 2019. So, while our activity was flagged quarter-to-quarter, our overall activity is trending higher this year than before the pandemic severely impacted our activity. This upcycle so far is different than previous upcycles in the oil and gas industry. While market activity is much stronger today than it was a year ago, E&Ps continue to focus on spending within their cash flow. This spending discipline has led to a slower recovery for sand demand in our core markets. We are committed to living within our cash flow while still pursuing opportunities to expand our business. We're managing our operating costs in line with current activity levels but have the incremental capacity to sell more sand with minimal additional investment. So, we can quickly respond should market activity begin to increase. We're actively pursuing opportunities to expand our customer base and logistics capabilities in key long-term markets. This week, we announced the new three-year agreement to supply sand to EQT, including a new transloading terminal that we intend to have operational by the end of this year. This new contract demonstrates our continued commitment to provide long-term sustainable sand supply and logistics solutions to our customers. The Appalachian Basin is a key market for Smart Sand, and as we move towards adding a new terminal there, we expect to offer even greater efficiency to our customers while also providing ESG benefits by reducing trucking mileage and associated carbon emissions related to sand delivery. With our diversified asset base and very strong balance sheet, we remain uniquely positioned to keep pursuing our long-term strategy to be the premium supplier of Northern White Frac Sand from the mine to the well site. We are pleased that we reached a settlement with U.S. Well Services during the second quarter. The $35 million cash payment we received in June further strengthened our balance sheet and increased our liquidity. In addition to the cash, U.S. Well Services has entered into a two-year Right of First Refusal agreement with Smart Sand covering all purchases of Northern White Frac Sand by U.S. Well Services and its affiliates in the Continental United States from January 1st, 2022, through December 31st, 2023. We look forward to having U.S. Well as a customer again soon. Today, we have $37 million in cash on our balance sheet and approximately $55 million in liquidity. Even though we have a strong balance sheet, we will remain disciplined with respect to capital spending and focused on maximizing cash flow. We remain committed to the last-mile market with our smart systems, including our SmartPath transloader, which we believe is unlike anything in the industry. SmartPath was successfully deployed for the first time during the first quarter and continued to work through the second quarter. We anticipate additional deployments in the back half of the year. Using our smart systems, we estimate that the number of trucks needed to deliver sand to the well site will be reduced by more than 30% versus our competitors' offerings. By taking trucks off the road, accidents are reduced, carbon emissions are reduced, and noise is reduced. Smart systems are also uniquely designed to reduce dust. By reducing accidents, carbon emissions, noise, and dust, we're keeping people safer and striving to meet the ESG goals of Smart Sand and our customers while providing a reliable, efficient last-mile solution for the industry. We're excited about our future for a number of reasons. We have more cash on the balance sheet today than at any other point over the last three years. Sales volumes are up, they remain far above 2020 levels and are trending higher than 2019 volumes. Strong commodity prices should yield higher spending in 2022 and beyond. We are well-positioned to take advantage of any increased market activity with our available capacity, ample liquidity, and strong balance sheet. Having operated SmartPath successfully for two quarters, we look forward to expanding our last-mile market share. As always, we'll continue to keep our eye on the future and we'll always keep our employees' and shareholders' interests in mind in everything we do. And with that, I'll turn the call over to our CFO, Lee Beckelman.

Thanks, Chuck. While we are encouraged by the pickup in activity we have seen thus far in 2021, E&Ps have stayed disciplined with respect to spending within their cash flow. As Chuck indicated, second quarter 2021 volumes were slightly higher than first quarter 2021 volumes. We continue to expand our customer base during the second quarter and believe a more diverse customer base will strengthen our business going forward. We remain committed to low leverage levels, a prudent capital structure, generating positive free cash flow for the year, and maintaining adequate liquidity levels. Now, I'll go through some of the highlights of the second quarter compared to our first quarter 2021 results. Starting with sales volumes, we sold 767,000 tons in the second quarter 2021, a slight increase over the first quarter 2021 volumes of 760,000 tons. Total revenues for the second quarter 2021 were $29.6 million compared to $27.5 million in the first quarter 2021. The revenue increase was driven by higher in-basin sales in the second quarter compared to the first quarter. Sand revenues were higher by $5.7 million, which more than offset the decline in logistics revenue of $1.7 million. Our cost of sales for the quarter were $32 million compared to $32.4 million last quarter. Despite a slight increase in revenues in tons sold, we actually saw a decline in our cash production cost quarter-over-quarter by approximately 5%. Total operating expenses were $26.3 million compared to $6.1 million last quarter. The increase from the first quarter is primarily driven by $19.6 million recorded as non-cash bad debt expense in the current period, which is the difference between the $54.6 million accounts receivable balance that was subject to the company's litigation with U.S. Well Services and the $35 million cash received in the settlement of such litigation. While the company wrote down a portion of the receivables that it had previously recorded related to the disputed contract with U.S. Well, it increased its cash position by $35 million as a result of the proceeds received in the settlement. Second quarter 2021 contribution margin was $3.5 million and we had negative adjusted EBITDA of $21.5 million compared to first quarter contribution margin of $1 million and negative adjusted EBITDA of $3.5 million. Although we generate a higher contribution margin from improved average selling prices and lower cash production cost, adjusted EBITDA declined in the second quarter of 2021 compared to the first quarter of 2021, primarily as a result of the $19.6 million bad debt expense recorded in the second quarter of 2021 related to the settlement of litigation with U.S. Well. For the second quarter of 2021, we had $29.7 million of free cash flow, generating $32.6 million in operating cash flows while spending $2.8 million on capital investments. Year-to-date, we had $31.4 million in free cash flow, generating $36.5 million operating cash flows while spending $5 million on capital investments. The majority of capital investments year-to-date have been on new smart systems units. During the quarter, we didn't use a revolver and still have no outstanding borrowings other than $1.2 million in letters of credit. Our current unused availability under the revolver is $13 million. Additionally, we have $5 million in unused availability from the Acquisition Liquidity Support Facility we put in place with the Eagle Proppants business acquisition. We paid $1.7 million against our notes payable and equipment financing in the quarter and had paid down approximately $3.4 million year-to-date. We expect to pay down a similar amount in the second half of the year and therefore, we will reduce our debt by approximately $6.9 million this year. We ended the second quarter with approximately $39 million in cash. Our current cash balance is approximately $37 million. Between cash and our availability in our facilities, we currently have approximately $55 million in available liquidity. We do not expect to have any borrowings on our ABL revolver for the remainder of the year, other than letters of credit. In terms of guidance for the third quarter, we expect sales volumes to decline by 10% to 15% from second quarter levels. The anticipated drop in sales volumes is due primarily to the timing of well programs from our current customers, particularly in the Bakken. We're seeing some whitespace and activity in this region between wells completed in the second quarter and startups of new well pads. We anticipate capital expenditures for 2021 to be in the $10 million to $12 million range and expect to be free cash flow positive for the full year. This concludes our prepared comments, and we will now open the call for questions.

Our first question comes from Bill Austin from Daniel Energy Partners. Your line is now open.

Hey, guys.

Hey Bill.

Hey, Bill.

Hey, I just wanted to start with a little introduction. Could you provide an overview of the competitive landscape that you're observing in the Northern White market today?

Yes, Bill. What we're observing is that the traditional suppliers of Northern White sand are primarily operating in the Midwest and Northeast, with some expansion into Oklahoma. The market for Northern White sand is relatively strong. As Lee noted earlier, our deliveries to North Dakota indicate some opportunities as our customers prepare for the end of the year. The main competitors in that region are U.S. Silica and Covia, along with a few smaller companies. However, thanks to our diverse rail assets, including UP, CP, and now BN origination, we are performing well, especially compared to when we relied on a single railroad. Overall, we feel optimistic about our position.

Great. Thanks. And then one more, you touched on a little bit, but have you guys seen any logistics challenges with all these final fracs that are happening? Is this going to create problems down the road with the amount of final fracs that we're kind of seeing in the market?

Well, I think what you're touching on there is you're kind of trucking, right? And certainly, we've heard anecdotal evidence that your trucks are a problem. Our view on trucking is that your supply chain is only as strong as your weakest link and trucking traditionally has been difficult. Last-mile is always difficult in that respect. And so our view on that is, what you've got to do is you've got to make truckers more efficient. You've got to make their load times shorter. So, when we build transloads out there, we're focused on keeping those load times as short as possible and keeping the time that a trucker waits in line to be loaded as short as possible. We want our transloaders to be strategically located so that the truck distances are shorter. And then when we get to the well site, we want to offload those trucks as quickly as possible. And so when we think about trucking, we look to other bulk commodity businesses for what they've done in trucking. One of the things that's obvious to us is the use of bottom dump hopper trucks, right? They load very quickly, they unload very quickly, and they also have a lot more throughput than a traditional pneumatic truck or a box system because they don't weigh as much. So, you're able to get that advantage which translates into more throughput. So, our focus is really on helping those truckers out by making them more efficient and thinking about long-term how we encourage trucking or truckers to come into this business and alleviate some of that supply chain. We think with our smart systems that are capable of using bottom dump trucks, we've got a leg up on the competition there.

Okay. Thanks. And my last one, you touched on it, again, real briefly at the end. Any of the budget shortfall that you guys were seeing from the operators, how do you guys think about that in terms of Q4 potential seasonality? In terms of what you guys are seeing out there? I know you briefly hit it, but anything more on how you guys are seeing that in the fourth quarter? Or is it too early to tell?

Yes, I think it’s a little too early to tell. We are seeing some slowdown in the Bakken due to timing issues, but that may improve. We anticipate an increase in activity in the northeast in the fourth quarter, but this will largely depend on our volumes from quarter to quarter, especially regarding the Western United States and potential increases towards the year's end. Weather conditions and other exploration and production companies may continue their budget spending into the fourth quarter or push some of it into the first half of next year. So, it's difficult to predict. However, we do expect increased activity in the northeast, but it’s still early to assess the planning for the fourth quarter in the Bakken and other Western markets we are entering.

Yes, and the only thing I would add to that, Bill, is as we kind of look at commodity pricing out there, both on oil and natural gas and with the new terminal we're building up in the Northeast, we think we could blend some of that seasonality that we've seen in past years with the ability to get throughput if the weather is difficult or we see any of the seasonality associated with flooding or whatever in the Northeast.

Okay. Well, I appreciate it, guys, and thanks. I'll turn it back over.

And thank you. And our next question comes from Stephen Gengaro from Stifel. Your line is now open.

Thanks. Good morning, gentlemen.

Good morning, Stephen.

Good morning.

A couple of things to me, if you don't mind, and one is I think following up on the prior question. You mentioned in your prepared comments about smart systems and sort of the 30% drop you see in trucks to the well site. I'm just curious, is that a silo versus container benefit? Or is that something within your systems relative to the market?

So, yes, Stephen, what we’re specifically talking about is the amount of cargo a truck can carry. For instance, in North Dakota, we see loads as high as 35 tons per truck. North Dakota allows for trucks with a gross weight of up to 106,000 pounds. When you have a 35-ton load, this is achieved using relatively light grain trailers instead of traditional boxes. A box is made of steel, which reduces the volume it can carry. An estimate suggests that there’s a 30% difference in throughput between a box or a traditional pneumatic trailer and these newer grain trailers that can handle much larger loads. So, if you increase your cargo by, let's say, 10 tons per load, that leads you to that 30% difference.

Got it. Thank you. I think Lee touched on this a bit in the prepared comments as well, but the average revenue per ton in the quarter, it was up sequentially and I think it was related to the in-basin sales side and I was just curious, is there any price there? And what are you seeing kind of on the pricing backdrop?

I think right now we're seeing pricing being kind of stable to having some improvement and overall opportunities for improvement and margin by delivering in-basin and managing our logistics costs there. So, I think it's been relatively stable. We see some opportunity for a little improvement, but right now, we don't see. I think we're basically viewing it as a relatively stable market for pricing right now.

Can you relate that to the contribution margin per ton in the current environment? We typically consider it to be around mid-single-digits, similar to where you ended up last quarter. Does that sound reasonable? I assume it varies based on the cost of goods sold due to seasonality, but is that a reasonable starting point?

Yes, I believe that based on our current volumes and forecasts, we would expect to be at the mid-single-digits level, consistent with the range we achieved in the second quarter.

Great. Thanks. I have one final question. Now that you have resolved the U.S. Rail Services issue and your balance sheet is strong with plenty of cash, how do you envision the use of cash changing over time? Additionally, how much cash do you believe is necessary to maintain operations, and do you have plans to return some of it to shareholders in the future?

Well, I'll start, and maybe Chuck can chime in as well. But I think it's a little early. We definitely like our liquidity position. We like having that cash, and it is a strategic asset to us that we can look to utilize in terms of how we see incremental growth opportunities to help increase our utilization of our existing assets. I think that's a key focus, can we use some investment, whether it be in terminals or improving the utilization of smart systems? How do we get more utilization and throughput through our existing asset base? And then I think once we have kind of seen where the business has stabilized and where our cash is, we can consider other uses of cash on our balance sheet albeit from some type of return to shareholders.

And one other thing I would add is that as a 14% shareholder of Smart Sand, I am interested in that and we're going to try to abide by that.

Okay, great. Thank you, gentlemen.

And thank you. And our next question comes from Samantha Hoh from Evercore ISI. Your line is now open.

Hey guys. Just real quick on me. I think I heard that CapEx guidance was reduced on the upper end from $15 million to $12 million. But meanwhile, you're building out this new transload facility. Can you kind of walk me through the movement there in terms of your CapEx guidance?

Yes, CapEx guidance is really separate from anything that transload and we have some other sources to help kind of pay for that transload. So, the CapEx guidance is separate from that. And we're still finalizing what that number is, but from the guidance we gave from the $10 million to the $15 million under our normal business and discretionary capital we're using for smart systems, we are pulling that back to a tighter range of $10 million to $12 million based on that spending.

So, are you still thinking you'll have 10 smart systems deployed by year-end or is that lower?

No. We've never said we'd have 10 deployed. What we said, we have 10 that could be available and we'll probably be in the eight to potentially 10 range.

Okay. What's the opportunity of expanding your customer base using this new transload in Appalachia? Are there discussions going on with potential new customers?

Yes, Samantha, the transload location is in an excellent position. One of the intriguing aspects of Appalachia is the mountainous terrain, which makes it challenging to find a suitable site for a large rail yard that can provide the logistics advantages we offer from our Van Hook, North Dakota terminal. However, we have found a unique spot in a fantastic location, right in the heart of where multiple operators are currently fracking. We are excited about this new terminal and are actively having conversations with other potential customers alongside EQT.

Okay, great. And if I could just sneak one more. I was curious about the trends in logistics with just shift to in-basin. Is that something that you think is going to be a trend through the second half? Or I mean can you maybe speak a little bit in terms of what's going on from the operator perspective there?

Are you referring to in-basin sales?

Yes, I'm just kind of curious about the mix being more in-basin this last quarter than prior?

I think in general, and John and Chuck can chime in, but in general, we have seen a pickup and more of our movements going into in-basin pricing and delivery versus spot. Spot, what I'd call FOB mine pricing.

Yes, I would agree with that. And certainly, as we look to get this new transload up and running, I think we'll probably see a bit more movement to pricing in-basin versus FOB the mine. Although, we still do sell FOB the mine, and we've got a number of customers that take there. But ultimately, if you can prove out the logistics on the, at least on the rail side of the logistics, customers want to take advantage of that. They don't necessarily have entire groups spun up anymore to handle that kind of logistics management.

And we have a follow-up from Stephen Gengaro from Stifel. Your line is now open.

Thank you for the follow-up. I have two quick questions that I believe are related. Regarding the long-term agreement announced yesterday with EQT, how does the pricing dynamic of that contract work? Is it linked to a spot price index?

Yes, we don't get specifically into contract pricing with customers, Stephen. So, we're not going to comment on that.

Okay. In general terms, will the transload terminal you are building in Pennsylvania help improve pricing and contribution margin per ton over time? Is that an accurate statement?

In general, yes, that's accurate. Particularly as we look at the terminal, we'll have more opportunity to work with EQT and others that have in-basin pricing and provide that full value, and hopefully capture margin through that.

It also helps us drive efficiency with the railroads. So, we're able to demonstrate to the railroads that we can move large trains, smoothly, effectively, we have on both sides, the ability to take larger sized trains in and out, which drives efficiencies with the railroads, which should help in pricing.

Yes. And then the last thing I would add to that is it provides a good firm base for us to continue marketing our last-mile products into that market. So, with the new terminal, we've got a home base for smart systems and kind of tying all those things together in a unified supply chain for customers.

Great, I appreciate the color. Thank you.

Thank you for joining us on Smart Sand's second quarter earnings call. We look forward to talking to you again in November.

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.