Good day, and thank you for standing by. Welcome to the Third Quarter 2021 Smart Sand, Incorporated. 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. And now I would like to hand the conference over to your first speaker today, Josh Jayne, Director of Finance. Thank you. Please go ahead.

Good morning, and thank you for joining us for Smart Sand's third 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, November 10, 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 of volume out of both Utica and Oakdale. Third quarter volumes of 790,000 tons are up 156% from third quarter 2020 levels and up 3% from last quarter. At our current run rate, we expect 2021 sales volumes will be a new record for tons sold by Smart Sand. And given the current outlook for commodity prices and spending via our customers, we believe 2022 volumes will exceed this year's levels. Underinvestment over the last couple of years, both in the U.S. and abroad, has negatively impacted the supply for oil and natural gas. But with demand surging back to pre-pandemic levels, commodity prices now exceed 2019 levels, and we could be in the early stages of a multiyear upcycle of energy capital spending. We continue to expect E&Ps to spend within their cash flows, but as a result of higher commodity prices, we expect spending to increase in 2022. As we end 2021 and move into 2022, we are continuing to look for opportunities to lower our cost structure and increase our asset utilization. As to pricing, we expect it to improve going forward because of Northern White sand supply constraints and growing demand. We believe the industry needs further consolidation, and we continue to pursue opportunities to expand our business, but we will not risk our balance sheet, and we will only acquire assets to broaden our access to key operating bases through new logistics sources to expand the markets and customer base that we serve. During the third quarter, we announced a new three-year agreement to supply sand through EQT, which demonstrates our continued commitment to provide long-term sustainable sand supply and logistics services to our customers. We have been working on building out the terminal, and we remain on track to have it operational by the end of this year. The new terminal is exciting for us, not only because it will expand our presence in the Appalachian Basin, but will also provide ESG benefits to our customers in the region by reducing trucking mileage and associated carbon emissions related to sand delivery. Our terminal in Van Hook, North Dakota, which we acquired in the spring of 2018, has been a great success for Smart Sand, and has helped us to substantially increase our sales volume into this key Northern White sand market. Similarly, we believe our investment in the new Waynesburg, Pennsylvania terminal will be a key driver to help drive incremental sales for Smart Sand into the Appalachian Basin. We continue to believe that shipping sand on a bulk basis by rail to terminals that are well positioned to serve long-term drilling activity within an operating basin is the right long-term supply solution for sourcing frac sand in a cost-efficient and environmentally responsible manner. While we are optimistic about the outlook for frac sand, we are also committed to diversifying our business away from the cyclical nature of oil and gas. In the third quarter, we announced the hiring of Rick Shearer to lead our Industrial Product efforts. Rick has held multiple executive leadership positions, most recently with our Emerge Energy Services, as CEO from 2012 to 2020. Before that, he was the President and COO of U.S. Silica and Founder of the Industrial Minerals Association. Rick's experience and knowledge will be incredibly valuable as we diversify our business. He is currently in the process of building a team, and we expect contributions from this business to begin in 2022. Our balance sheet remains in great shape. Today, we have $35 million in cash and approximately $50 million in liquidity. Even though we have a strong balance sheet, we will remain disciplined with respect to capital spending and focus on maximizing cash flow. We remain committed to the last mile market with our SmartSystems, including our SmartPath transloader which we believe is unlike anything in the industry. During the third quarter, we had another successful deployment of SmartPath, and we look forward to announcing more deployments in the coming months. Using our SmartSystems, we estimate that the number of trucks needed to deliver sand to the well’s 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. SmartSystems are also uniquely designed to reduce dust. By reducing accidents, carbon emissions, noise, and dust, we are 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 are excited about our future for a number of reasons. Our balance sheet remains in great shape, and we have a significant net cash position. High commodity prices and strong demand should lead to a multiyear upcycle in E&P spending. 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 three quarters, we look forward to expanding our last mile market share. We will be diversifying our business beginning in 2022 with other avenues to reduce the volatility of our cash flow. As always, we'll continue to keep an eye on the future and we will 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. We are encouraged by the pickup in activity we have seen thus far in 2021. As Chuck indicated, third quarter 2021 volumes were slightly higher than second quarter levels. We continue to expand our customer base during the third quarter and believe a more diverse customer base will strengthen our business going forward. We are also taking steps to diversify our business into industrial sands products, which is expected to reduce the volatility of 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 for the third quarter compared to our second quarter 2021 results. Starting with sales volumes. We sold 790,000 tons in the third quarter 2021, a slight increase over the second quarter 2021 sales volumes of 767,000. We have sold approximately 2.3 million tons for the first nine months of 2021 and are currently on a track to achieve the highest sales volumes in company history. Total revenues for the third quarter 2021 were $34.5 million compared to $29.6 million in the second quarter 2021. Sand revenues were $2.5 million higher sequentially, which helped offset a slight decline in logistics revenue. We recorded $2.7 million of shortfalls in the third quarter compared to no shortfalls in the second quarter. Our cost of sales for the quarter were $36.5 million compared to $32 million last quarter. Production costs were slightly higher sequentially due primarily to higher utility costs driven by increased natural gas prices. We also had increased logistics costs due to a higher mix of in-basin sales in the third quarter. Total operating expenses were $6.7 million compared to $26.3 million last quarter. The decrease from the second quarter is primarily driven by the $19.6 million recorded as a non-cash bad debt expense in the prior 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 settlement of that litigation. For the third quarter of 2021, the company had a net loss of $7.3 million or a negative $0.17 per basic and diluted share. This compares to a net loss of $23.7 million or a negative $0.65 per basic and diluted share for the second quarter of 2021. The lower net loss sequentially is primarily due to the previously mentioned $19.6 million recorded as a non-cash bad debt expense in the prior period. For the third quarter 2021, contribution margin was $4.1 million, and we had negative adjusted EBITDA of $1 million compared to second quarter contribution margin of $3.5 million and negative adjusted EBITDA of $21.5 million. For the third quarter 2021, we had negative $900,000 in free cash flow as we generated $1.1 million in operating cash flows while spending $1.9 million on capital investments. Year-to-date, we had $30.6 million in free cash flow generating $37.5 million in operating cash flows while spending $7 million on capital investments. The majority of our capital investments year-to-date had been on new SmartSystems units. During the quarter, we didn't use our revolver and still had no outstanding borrowings other than $1.2 million in letters of credit. Our current unused availability under the revolver is $15 million. We paid down $1.7 million against our notes payables and equipment financings in the quarter and have paid down approximately $5.1 million year-to-date. We expect to pay down approximately $1.7 million in the fourth quarter as well. We ended the third quarter with approximately $37 million in cash and our current cash balance is approximately $35 million. Between cash and our availability on our facilities, we currently have approximately $50 million in available liquidity. We do not expect to have any borrowings on our ABL for the remainder of the year other than letters of credit. In terms of guidance for the fourth quarter, we expect sales volumes to be basically flat with third quarter levels, assuming no major weather issues. While commodity prices have strengthened throughout the year and October volumes were strong, we anticipate holidays and weather will have an impact on activity levels as they do every year in the fourth quarter. However, indications from customers combined with a strong commodity price backdrop give us confidence that activity will be strong to start 2022. Should activity pick up in 2022, we expect Northern White supply and demand fundamentals to improve, which should lead to opportunities for pricing and margin improvement over the course of next year. However, typically the first quarter of the year is our lowest contribution margin quarter due to higher inventory adjustment expense, as we normally draw wet sand from inventory to meet sales demand through the winter months. So while we anticipate improving margins in 2022, we don't expect to see that improvement to start to materialize until the second quarter of next year. Again, our sand demand picks up is currently anticipated. We are currently building our Waynesburg terminal and expect it to be completed and operational late in the fourth quarter. With the terminal capital, we now expect capital expenditures for the year to be in the $14 million to $16 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.

Thank you, sir. We will now begin the question-and-answer session. Your first question is from the line of Stephen Gengaro with Stifel. Your line is open.

Thanks. Good morning.

Good morning, Stephen.

You talked a bit about the higher product cost and the logistics cost in the quarter, which impacted, I think, contribution margin on a per ton basis. Can you shed more light on sort of the impacts from both and how we should think about those issues as we go through the fourth quarter? And just trying to get a handle on how we should be thinking about profitability?

Yes. I mean, I think like everyone, we are seeing some increased cost pressure particularly on our utilities. Utilities with our natural gas pricing, I am not surprised prices have doubled over the last year and so that's having impact on us. We see that kind of staying at current levels, but flattening out. So I don't necessarily see. And then logistics is really kind of timing and getting rail in and out, and so it's somewhat of a management cost. So I don't see it being maybe a slightly higher cost going into the fourth quarter, but relatively flat to where we are today.

And when you talk about the higher logistics costs – just so I understand a little bit better. So if you sell at the mine gate, it's pretty straightforward. But when you incur those logistics costs, they're not ultimately borne by the customer. I'm just trying to figure out how the higher logistics cost impacts your profitability?

Well, as we've kind of highlighted in the past, Stephen, we've moved to more in-basin sales, nearly all of our volumes that go through Van Hook, for example, are in-basin. A lot of our volumes in the Marcellus today are in-basin sales. With Waynesburg – in that terminal, we'll be moving to more in-basin sales. When you sell sand on an in-basin basis, you basically price the sand into the truck at the terminal in that basin. So we have a higher price for the sand, but we are now directly responsible for the freight, for the railcar, for the transloading of that sand into the truck at the terminal. So those costs now get built up in our freight costs, and you see that higher freight cost. And it's also – we recognize the benefit of that incremental value by adding those services through selling that sand at a higher price, and that flows through into our sand revenue. So that's how you basically – that's how the in-basin pricing works versus FOB mine, where we put the sand into the railcar at the mine and typically the customer is responsible for the freight, for the railcar potentially, and also for any transloading that's done in the basin.

Understand. That's very helpful. So the expectation is, hopefully, as demand rises and supply is tight, you will ultimately receive better pricing for product, which offsets that in 2022.

That's correct. So we hope through having control of – in effect, having Waynesburg, like Van Hook, and having more terminals under our control, we can reduce that transloading cost by managing that ourselves versus going through a third party. Secondly, by having more outlets and more railroads, we can try to efficiently get more efficient cost of rail into those terminals. And then third, by having that access point closer to the customers, we can be opportunistic and grow our base in those markets and have a chance for pricing improvement as well as get incremental sales volume and get a higher activity level through our plant, which allows us to hopefully get a higher utilization and bring down our cost of production.

Got it. Understand. And one final one for me. When you think about the evolution of the frac sand market over the last couple of years, your volumes have been very strong. I mean there seems to be share gain underlying that, I think, based on your success versus some of the peers. Are you seeing that? Like do you feel like you've had share gain? And what sort of that competitive landscape look like to you currently?

Stephen, I'm going to let John answer this question for the most part. But we definitely see a lot of our competitors have kind of fallen down a little bit with a lot of their plants. Some of those plants have been taken apart to support other plants, and there hasn't been a lot of investment in this space. So we do think Northern White sand supply could be tight going into next year. With that, I'll turn it over to John.

Yes. I would echo those comments from Chuck. What we're seeing is folks coming to us that have previously been customers of ours, who maybe have been – we've been kind of a second choice with them. And the one thing that you learn when you've been in the sand business for a while is if you aren't keeping up on your maintenance and capital spending to make sure that you're reliable, when you want to demand production from your plant, sometimes you have a little bit of an issue with that. So we're definitely seeing a little bit of that. We're certainly seeing a little bit of uptick in what we would consider to be activity in our core basins in the Marcellus out in the Midwest and down into kind of Oklahoma also. So it's a combination of things. And one of the things that I'd just like to add on to because I think, Stephen, you were asking about whether we can pass on some of those logistics expenses on to our customers. Typically, we can, but there's usually a lag involved in that. For example, if our natural gas price goes up, usually, we'll see the benefit – not the benefit, but we'll be able to extract that additional revenue from the customer in the following quarter. It's kind of a back-looking thing. So we do have a few mechanisms. Same goes for kind of rail fuel surcharges and things like that. So there are mechanisms built into our pricing. They just tend to lag behind a little bit of where our pricing is today.

And one other add to that. On the rail side, there's no one moving sand more efficiently to North Dakota than we do into our terminal there because of the way it's built on both ends. And likewise, in the Marcellus, we feel we're going to be very – Waynesburg comes up, we'll be in the same situation.

Good. That's good color. I should have asked the question a little more eloquently about the recovery of cost. So that's very helpful. Thank you.

Your next question is from the line of John Daniel with Daniel Energy Partners. Your line is open.

Hey. Thank you. Good morning.

Good morning, John.

Chuck, in a perfect world – hey, in a perfect world what percent of your volumes would be industrial versus frac sand? And how long would it take to get there?

Well, so we do like some of the pricing points in the industrial sand space. We haven't really put a target on that. The one thing we do know is that we don't know industrial sands like Rick Shearer does. He's a guy who founded the industrial sand or industrial minerals organization, used to be COO of U.S. Silica. So we feel like we're in really good hands there. And he's got a lot of energy, and he's building the team, and we're super excited because we feel we're going to have lots of offerings in that area. And we definitely like the margins in that business a little bit better than the oil and gas currently. So we're excited to get that going.

Okay. Got it. Logistics. We hear a lot about supply chain issues. I'm just curious, are you having – are there any issues with the rails in terms of getting moving stuff these days, I'm not as close to the rail side, just your thoughts on that market right now?

Yes. So John, as you know, kind of we designed our entire logistics model for the most part around unit train service and kind of giving the railroads good notice as to when these trains are going to leave. We don't do a heck of a lot of manifest rail service. So we're not kind of reliant on day-to-day problems that the railroads are having. We have a forecast and the schedule with them. And so far, we haven't seen a huge impact on our business. If we do, it's a train leaving 10 hours late versus leaving 10 hours early. But so far, the railroads have responded really well. They're good partners of ours. We have the ability to escalate with our relationships internal to them. We don't ask them for things that are unreasonable, we haven't. And that comes from just being well thought out on how our logistics operate. So far, no, we see what's going on out there. But in general, if there's power available and it's a relatively easy move, the railroads tend to favor that, and that's kind of how unit trains – that's kind of our unit train model.

I'd add to that, John, is that with our investment over time, we believe in the giant rail yard in the basin and giant rail yard on the originating side. So that helps you buffer the – any hiccups that might be there.

That's all I had guys. Thank you.

Thank you.

Thanks, John.

Your next question is from the line of Samantha Hoh with Evercore ISI.

Hey, guys. A quick question about this new Appalachian terminal. Is this one that's dedicated to you or exclusive to your use?

Yes, it is. It's a facility that we're building and have exclusive rights to.

Okay. Great. And could you be potentially using it for giving access to other non-oil and gas customers where you earn some sort of revenue on the feasibility?

Are you referring to kind of our Industrial Products business?

Well that or maybe just other sort of materials that needs to be imported in. I think there's been talk of like other types of well-based materials that could be transported via rail. I was kind of curious if you can...

Yes, well, I think, at the moment, our focus is going to be on efficient transport of sand. And then, obviously, this site will become a place to stage our last-mile equipment. Given that it's a large rail yard and all those types of things, if there's other commodities or anything that makes sense to come in there, we'll look at that in the future. But right now, we're primarily focused on sand, supporting the sand requirements of E&Ps in that area, E&Ps and pressure pumpers in that area. So if something comes up, we'll be opportunistic, but this is being set up as a sand transload terminal, very similar to our operation out in North Dakota.

Okay. Great. With regards to the build-out of the Industrial Products business, is there a need for CapEx? Or are you going to – and I'm assuming that you don't need like a whole separate mine, but maybe just like extra equipment to grind up the product and things like that. Like can you give us a sense of what your CapEx need could be for next year to build out that business?

Yes, Samantha, there will be some need for CapEx, but we're going to go through our budgeting process and looking at that as we speak. And so we'll give more guidance overall on our total CapEx on our March call, including what we would be investing in ISP. For the most part, though, we are at least initially focusing on our initial asset base at Utica and Oakdale, and there'll be incremental investments. But I wouldn't say they're going to be significant overall – relative to our overall budget. And but we'll give more clarity on that as we go through and kind of develop our plan as we move into next year on some of the incremental investment we plan to make on industrial sales as part of our budget.

Okay. Excellent. And then maybe just one last one. Can you talk about maybe how conversations about contracts are going with some of your customers? I mean it seems to be like that end of the year where there's people talk like – looking at their demand for next year and thinking about how they want to contract out going forward. You guys have always kind of given year-end summaries of how many contracts do you have and things like that. I was wondering if you could just kind of update just sort of like those type of customer conversations.

Yes. Certainly, particularly with the hiccups that some of our customers are seeing these days, there is renewed interest in getting contracts out there. I think from our perspective, we're being conservative on what we want to contract versus what we want to put out into the spot space. One of the things that's – we've gotten very comfortable with over the last 18 months or so is operating in the spot world effectively. And at the end of the day, as we're seeing kind of the writing on the wall, these price points are improving. We're seeing improvement. We expect improvement to continue, we've got to be careful about wanting to contract it kind of lower pricing versus what may be available in the future. But certainly, there's a lot more interesting contracts from our customers today. We're evaluating those on a case-by-case basis, but we're going to do things that make sense for the business long term.

Okay. Great. Thanks, guys.

Thanks.

We have an additional question from the line of Stephen Gengaro with Stifel. Your line is open.

Thanks. Two quick ones, gentlemen. First, on the potential on the industrial front, and you mentioned, I believe you mentioned sort of the utilization of existing mines. Are there specific products that are conducive to your mines and/or customers that are relatively easy to access from those locations? Should we be thinking about any specific customer – any specific product mix or end markets you're targeting? Or is it too early to comment?

So we've had Rick on board for just about a month. So we're letting him put all that stuff together, but preliminary indication is that we'll be making some products out of both our mines. And additionally, we'll explore other opportunities as they come along.

Okay. And then the other quick one I wanted to ask you about, any thoughts on the PropX acquisition by Liberty and any kind of impact you think that has on the last-mile business, in general?

I would just say, in general, it points to the fact that moving sand to the wellhead is a very difficult job and people need to be investing in that space. So I think for us, it just points out that from our last-mile side, we need to continue to get that business going up and running because it's a needed service. And there's lots of opportunities in that space.

Okay. Great. Thank you.

I'm showing no further questions at this time. I will now hand the conference over to Chuck Young, CEO, for closing remarks. Sir?

Thank you for joining us for our Q3 call. We look forward to speaking with you in March.

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