Good morning, ladies and gentlemen. Thank you for standing by and welcome to Smart Sand's Fourth 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. I would now like to hand the conference over to your speaker host, Josh Jayne, Director of Finance and Treasurer.

Good morning and thank you for joining us for Smart Sand's fourth 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, March 9, 2022. 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 out of both Utica and Oakdale. Fourth quarter volumes of 872,000 tons are up 43% from fourth quarter 2020 levels and up 10% from last quarter. For the full year, we sold just under 3.2 million tons which was a record for Smart Sand. Given the current outlook for commodity pricing and spending by our customers, we believe we will achieve record volumes in 2022. While we enjoyed strong sales volumes in 2021, sand prices remained low. However, the sand market in 2022 is shaping up to be one of both strong demand and higher prices. In particular, coming out of winter seasonality issues and production of weather-related rail delays in January and February, March volumes for Smart Sand look strong. Pricing improved in Q1 and we expect to continue moving higher in the second quarter and with less than 20% of our capacity signed up under long-term contracts, we will benefit from this improved demand and pricing environment. We believe industry consolidation will continue and our recent acquisition of the Blair, Wisconsin frac sand mine from Hi-Crush highlights our desire to add high-quality assets at a reasonable price. This facility provides direct CN rail access and has estimated reserves of 110 million tons, over 43,000 feet of track and 20,000 tons of silo storage capacity. Blair provides an additional source of 40/70 sand which is currently in high demand in the energy market and has annual capacity of 2.8 million tons. Blair meets our requirements of logistics and operational efficiency with multiunit train capability and ample reserves. Since the beginning of the downturn, we have added 4.4 million tons of nameplate capacity for less than $9 million. We haven't taken on any debt to pursue those acquisitions and have funded them with cash and equity. As we announced in January, our newly constructed unit train cable transloading terminal in Waynesburg is up and running. The terminal has more than four miles of track, is located on North Fork Southern's Class 1 rail line and services the Marcellus Shale in Southwestern Pennsylvania, West Virginia, and Eastern Ohio. Waynesburg can transload in excess of 1 million tons of frac sand per year and there are opportunities to expand the facility as we grow our market share in this area. The terminal will also serve as the new Northeastern hub for our Smart system last mile wellsite storage solution. We look forward to our Waynesburg terminal driving incremental opportunities to grow our business, including our smart system utilization as we did with our Van Hook terminal in the Bakken. The new terminal is exciting for us, not only because it expands our presence in the Appalachian Basin, but it also provides ESG benefits to our customers in the region by reducing trucking mileage and associated carbon emissions related to sand delivery. We believe that bulk commodities belong on rail and that sustainable logistics must include terminals close to our customers' drilling activity. Our mine to wellsite rail and terminal approach yields a safer, cost-efficient, and more reliable supply chain. While the outlook has improved for oil and gas, we are equally excited about our traction we are seeing in our Industrial Product Solutions division. We have hit the ground running and had our first industrial product sales in the fourth quarter. Our customer list is growing rapidly and by the end of the first quarter, we will have shipped industrial products to 10 customers. We believe this is only the beginning and are excited about the opportunity to diversify our business into the Industrial Products segment. We also have been busy deploying smart systems. By the end of the first quarter, we expect to have two SmartPath fleets and six SmartDepot silo only fleets operating in the field. With our fast start in 2022, we expect smart systems to generate positive contribution margin this year. By using our smart systems, our customers can reduce the number of trucks needed to deliver sand to the well site by more than 30% versus our competitors' offerings, providing our customers with substantial delivery to the wellhead cost savings. Additionally, by taking trucks off the road, we benefit our communities by reducing accidents, carbon emissions, noise, and dust. ESG goals are important to Smart Sand and its customers, and Smart Sand helps achieve those goals by improving efficiency and reducing impact. Our balance sheet remains strong. Today, we have $11 million in cash on our balance sheet and approximately $30 million in liquidity. We will continue to remain disciplined with capital spending while pursuing projects that will generate returns in the future. We remain excited about our future for a number of reasons. Our balance sheet remains in great shape and we have the assets in place to generate significant free cash flow during an up cycle. With mines situated on four Class 1 railroads, we now have the logistics in place to more efficiently deliver sand to our customers wherever they are operating. The market for sand has tightened significantly which should allow us to generate strong returns going forward. Having operated the SmartPath successfully for four quarters, we look forward to expanding our last-mile market share. Industrial Product Solutions will diversify our business at margins that should exceed oil and gas margins and provide more stability to our earnings profile. As always, we'll continue to keep our eye on the future and we'll always keep our employee 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 excited by the volume pickup we witnessed both in the fourth quarter and throughout 2021. As Chuck indicated, fourth quarter 2021 volumes were 10% higher than third quarter levels. The opening of our Waynesburg terminal, combined with a tight market for proppant and strong commodity prices should lead to increased sales volume in 2022. The addition of the Blair mine in Wisconsin gives us direct access on the CN which will provide additional markets in Canada to expand our customer base. As Chuck highlighted, we have been able to expand our operations and logistics footprint over the last two years with the additions of the Utica and Blair facilities and the Waynesburg terminal without adding any debt to our balance sheet. In 2021, we reduced our debt levels by $7 million. We remain committed to low leverage levels, a prudent capital structure, maintaining adequate liquidity levels, and improving our shareholder returns. Now, we'll go through some of the highlights of the fourth quarter compared to our third quarter 2021 results. Starting with sales volume. We sold 872,000 tons in the fourth quarter 2021, a 10% increase over the third quarter 2021 volumes of 790,000. We sold approximately 3.2 million tons for the full year 2021, which represents the highest sales volumes in company history. Total revenues for the fourth quarter of 2021 were $35.1 million compared to $34.5 million in the third quarter of 2021. Sand revenues were $34.1 million, up 9% sequentially and logistics revenues was up slightly. We recorded no shortfalls in the fourth quarter and had $2.7 million of shortfalls in the third quarter. Our cost of sales for the quarter were $39.4 million compared to $36.5 million last quarter. Production costs were higher sequentially due to higher utility costs driven by increased natural gas prices, higher freight expenses from increased shipments, increased maintenance expenses due to increased activity and weather-related issues, as well as increased labor costs, primarily related to higher incentive compensation related to year-end bonus payments. Gross profit was also negatively impacted in the fourth quarter by a $2.2 million inventory impairment due to the estimated waste products in our inventory at year-end. Total operating expenses were $8.5 million compared to $6.7 million last quarter. In the fourth quarter, we restored variable compensation programs that had been suspended in 2020 due to the pandemic which led to higher salaries and wages sequentially. We also had higher consulting and legal fees in the quarter. For the fourth quarter of 2021, the company had a net loss of $12.2 million or a negative $0.29 per basic and diluted share compared to a net loss of $7.3 million or a negative $0.17 per basic and diluted share for the third quarter 2021. The net loss for the fourth quarter was driven by higher freight expenses, increased utility and maintenance expenses, restoration of certain variable compensation programs, and a $2.2 million inventory impairment due to the estimated waste product in inventory at year-end. For the fourth quarter 2021, contribution margin was $1.9 million and we had a negative adjusted EBITDA of $4.5 million compared to third quarter contribution margin of $4.1 million and negative adjusted EBITDA of $1 million. For the fourth quarter 2021, we had negative $9.3 million in free cash flow, generating negative $5.1 million in operating cash flows while spending $4.2 million on capital investments. Fourth quarter cash flow was negatively impacted by the higher expenses I have discussed and increased capital expenditures primarily related to the construction of the Waynesburg terminal. For the full year 2021, we had $21.2 million of free cash flow, generating $32.4 million in operating cash flows while spending $11.2 million on capital investments. During the quarter, we didn't use our revolver and still have no outstanding borrowings other than $1 million in letters of credit. Our unused availability under the revolver is currently $19 million. We paid down $1.7 million against our notes payable and equipment financing in the fourth quarter and paid down approximately $7 million in 2021. We also paid approximately $6.5 million to acquire the Blair facility. After closing the acquisition, our current cash balance is approximately $11 million. Between cash and our availability under our revolver, we currently have approximately $30 million in available liquidity. In terms of guidance for the first quarter, currently, we expect first quarter 2022 sales volumes to be flat with fourth quarter 2021 results. January and February activity were negatively impacted by weather and logistics issues, but market activity is expected to be strong in March. We currently expect the month of March to represent approximately 40% of our sales volumes for the first quarter. As a reminder, the first quarter of the year is typically our lowest contribution margin quarter due to higher inventory adjustment expenses as we normally draw wet sand from inventory to meet sales demand during the winter months. So while we anticipate improving margins in 2022, we don't expect to see that improvement to start to materialize in our margins until the second quarter of this year. We completed our initial phase of the Waynesburg terminal in January. Some of the capital expenditures that we had projected to be spent in 2021 ended up being pushed into the beginning of 2022. This year, we expect capital expenditures for the year to be in the $25 million to $30 million range, including the $6.5 million we recently spent acquiring Blair. This concludes our prepared comments and we will now open the call for questions.

And our first question coming from the line of Stephen Gengaro from Stifel. Your line is open.

Thank you and good morning, gentlemen.

Good morning, Steve.

Could you provide any guidance on the extent of price changes that you're observing in relation to the input costs you mentioned, which were a challenge in the fourth quarter?

Yes, sure, Stephen, so I'll talk about pricing a little bit and Lee might be able to give a bit more color. But pricing is definitely higher today than it was last year. We're seeing FOB mine pricing into the 30-plus range right now. And last year, FOB mine pricing ranged anywhere from, call it, $15 to $20 or so. So we're seeing a pretty good price increase right now. We expect that to continue for the foreseeable future as demand is strong. So we're in a ramp-up mode right now.

Are you seeing any pull we'd be hearing more Northern White and pulled down to Texas? Are you seeing that trend as well?

Well, we're certainly being asked about it. Typically, our strong markets are the Midwest and the Northeast but we get calls every single day about moving sand down to West Texas.

One of the things that's happening, Stephen, right now is that, obviously, we've been servicing the Northern markets mostly. And our rail fleet is sized mainly for that. So we're having to add additional cars for some of these other markets that are coming on strong. So all indications are there's going to be a lot more sand being taken out of our mine sites which we're pretty excited about.

Great. I wanted to ask about the acquisition and when the Blair facility will be operational. You mentioned that 40% of your first quarter volumes came in March. Can you explain if that run rate on a monthly basis is sustainable? I believe that represents around 30,000 to 50,000 tons in March.

Yes, Stephen, in terms of the volumes for March, yes, we had some operational weather issues that led to delays in January and February. We're doing a little bit of catch-up in March but that level is sustainable going into the second quarter and throughout the rest of the year. We believe we can support that. We're adding additional railcars. We're ramping up activity at Oakdale. Our mining season starts as well. So being able to run at that level of activity in the second quarter and beyond is something we believe we'll be able to do and deliver this year.

Yes, we're not including Blair in that number. So the nameplate capacity at Oakdale is a nameplate 5.5%. And obviously, our utilization of that has been nowhere near that. So we've got room to grow there, but we've had to do things like add additional railcars there.

Blair has been inactive since June 2020, so we need to conduct a thorough assessment to determine what is required to bring it back into operation. Additionally, we now have an asset on the CN that we can market primarily to customers in the U.S., but it also provides an opportunity to enter the Canadian market along that rail line. We should begin evaluating the market demand and align it with the expectations for bringing that plant online. It is too soon to provide guidance on when we might start operations at that plant, but we are conducting this evaluation in the first quarter, and by the May call, we should have more information to share.

That probably should provide us a pretty decent supply of 40/70 out of that mine.

Just a quick follow-on to that, is the CapEx you expect around Blair part of that $25 million to $30 million number?

Well, that $25 million to $30 million includes $6.5 million for Blair; also includes about $3 million to $4 million of CapEx carryover from last year for Waynesburg. And so, if you back those two out, you get to kind of a $15 million number on the low end which is in line with what we spent in terms of our guidance for 2021. So yes, to get to that higher number, the $30 million does include some room for discretionary investment potentially at Blair, our investments around other terminals, etc., to kind of help support incremental sales.

Okay, great. Thank you, gentlemen.

Thank you.

Our next question comes from the line of Samantha from Evercore ISI. Your line is open.

Hey guys, congrats on the Blair acquisition.

Thank you.

I understand it's still early, but is there a chance to reach out to former employees of that plant? I'm curious about how quickly you could ramp that plant up if needed and whether we might see volumes from there by year-end.

Yes, we will be reaching out to former employees of that plant. It's located in a relatively rural area of Wisconsin, and Blair has never been there. However, we are confident that we will be able to staff the plant when we are ready to begin operations. We have assessed what we acquired and are enthusiastic about it. The logistical situation is excellent, featuring a large rail yard, which adds a fourth Class 1 railroad to our Smart Sand portfolio. This is very exciting for us. We are aware of the staffing challenges that every industry is currently facing, but in that specific region, we believe we can utilize some of our Oakdale employees to help get the plant operational. Additionally, we think we can bring back some individuals who previously worked at that mine.

Okay, great. Maybe sticking with the rail topic, what are you seeing in terms of opportunities to add railcar, is there also a constraint in that area as well?

We haven't seen any so far. We've got plenty of railcar offers and proposals in place to handle our requirements. I think that one of the things that you have to remember about railcars is at the height of the Northern White sand space, there were 70 million to 80 million tons of Northern White capacity that was moving on rail. And so, rail assets were built for that; railcars were built for that. And although some of them did go to the scrapper, there's still a lot of what we call small cube covered hopper railcars out there. And we don't anticipate that, that will be a drag on our ability to meet our volumes.

And one other add to that. I think with all the trucking issues that we're seeing out there, what we've been preaching for years is that you need to move this stuff of bulk commodities by rail and get as close as you can to the activity. I think people are starting to come around to that just because the trucking is kind of unmanageable when you're doing it long distance. So we think rail is going to pick up activity, and railroads are going to increase as it relates to frac sand.

Maybe just a little housekeeping, you've historically provided your mix of take-or-pay versus spot sales in your 10-K. I couldn't find that in this press release yesterday but I was just kind of curious if you could update on that? Like I know you said less than 20% of your capacity is signed under long-term contracts. What does that mean in terms of the mix of take-or-pay versus spot sales?

Our long-term contracts usually include some form of take-or-pay. When we refer to a long-term contract, we generally mean it includes a base take-or-pay component, which is based on negotiations with the customer. Currently, about 20% to 25% of our activity is under long-term contracts.

The way the market is moving is positive because over the past year or two, the prices have not been at levels where we would consider making long-term commitments.

Yes, I will say a fair amount of that spot business is with long-term customers. So when we say we do have a lot of room for upside in terms of being able to move pricing as pricing moves on a spot basis but also we're working that with the existing long-term relationships that we've had either previously been contracted with us or been good spot customers for a long period of time.

And are you seeing customers approach you with interest in signing long-term contracts? And I take it the pricing would be higher than what it was like FOB mine last year but maybe not as high as where it is currently or maybe it is higher?

Yes, certainly, there's more interest in signing long-term contracts. And typically, you do see that as the spot pricing gets higher, folks want to mitigate their risk there and take advantage of potentially getting into long-term. So we are having those discussions today. I would term the contracting environment to be healthy today and something that we are interested in as opposed to last year, where the long-term contract pricing was not something we'd want to tie to for a long period of time.

People are experiencing difficulties obtaining sand, which is certainly a positive development for us. We are quite excited about this situation.

Another question I have is regarding your Smart system. It seems that it likely had a negative impact on margins last year. Can you provide some information on the extent of that impact? I know you mentioned it should contribute positively to margins this year, but I'm curious about the negative effect it had last year.

Well yes, last year, I think you could say that it had a negative impact, probably, again, on contribution margins and let's say, in the $2 million to $3 million range.

Okay, not too much. On the industrial initiative, what end markets are you targeting?

Yes, so we're targeting foundry, glass, industrial, which includes kind of turf and things like that. Basically, we're not limiting ourselves in terms of who we're targeting. Industrial has been a bright spot for us as we look to diversify the business. The team that's come in has made a real impact there. And as we're growing that business, we expect to have more to talk about over the next kind of few quarters.

Yes, I think the team we have is quite experienced in the industry. They are well-known and enthusiastic about the fact that they can source industrial sand from four different Class 1 railroads, which is rather unique.

And you can service these products directly from your two existing lines, do you foresee having to put in more CapEx?

I'm sorry, Samantha, I didn't catch that. You fainted out right at the end there.

Yes, sorry. Can you service this business out of your existing production capacity or is there a need to put some CapEx here maybe next year, if not this year?

Yes, we have a small amount of CapEx in the budget to manage things like bagging and similar needs. Ultimately, we are supporting these initiatives through our existing mining assets.

Okay, that does it for me. Thanks, guys.

Thank you.

Our next question comes from the line of Jonathan Caplan of Caplan Capital. Your line is open.

Hi. Good morning. I have two questions. First, you're experiencing record volumes, and historically, when you've operated at those levels, you generated significant profits. However, currently, you are still incurring losses. Is this issue specific to Smart Sand or is it more of a general industry problem? Additionally, what changes do you believe are necessary for your company to achieve profitable growth moving forward?

I believe this is more of an industry issue, particularly concerning Northern White. If we look back at our previous high volumes in 2018, our pricing was significantly higher than in 2021 and what we have now. The shift in demand during 2018 and 2019 put pressure on Northern White pricing over the past three years, which has reduced our margins relative to sales activity. However, as we enter 2021, our volumes are improving. With some supply taken off the market for Northern White, we think supply and demand balances are starting to realign. As we move into 2022, we are already noticing pricing improvements in the latter half of the first quarter. This trend is likely to enhance our margins through better pricing, particularly as our volumes increase. Given that supply and demand are getting back into balance with continued improvement in activity, we do not anticipate significant new incremental supply coming online. This should help us improve pricing and restore our profitability and margins to previous levels at these volume levels.

Okay. Do you see yourself becoming cash flow positive later this year if things continue to go in the right direction?

I'm not going to give a prediction as to when we'll be cash flow positive but I will say we're definitely focused on improving our margins, improving our cash flow. And as prices improve and we get a higher utilization of our asset that should lead to a better unit cost for us over time and that should drive improving margins and improving cash flow.

Great. Thank you very much.

Thank you.

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

Thanks for the follow-up. I’m curious about your perspective on the overall market. We frequently receive questions regarding frac sand supply and demand, particularly in light of the current tightness and rising prices. How do you view the current market, the capacity, and the potential return of some closed mines? I’d like to know how you assess the current supply and demand situation in your business for the upcoming year.

Well, I think a lot of Northern White capacity has been taken out of the marketplace. One thing we've done during the period is we basically taken our capacity and almost doubled it over the last year by picking up some other assets getting us onto other rail lines. And now it looks like the utilization of those assets is picking up. So we feel pretty good about that. I don't know, John, if you have anything to add.

Yes, I would like to discuss frac sand demand and the current market conditions. It’s clear that many regional mines are facing challenges, largely due to insufficient maintenance of their plants. In Northern White, as Chuck mentioned, a significant amount of supply has been removed from the market. The supply that stakeholders expected from these regional mines has not met their expectations. When considering the entire supply chain, difficulties in securing truckers for transporting the sand create bottlenecks throughout the system. We believe our commitment to rail services near the areas where operations are needed will provide a strong solution. By reducing the distance for last-mile trucking, we can enhance efficiency, and this will become apparent as supply bottlenecks occur. We anticipate a robust market this year, supported by high oil and natural gas prices. Overall, we expect continued growth, with pricing likely on the rise, and the outlook appears positive.

Yes, there definitely is a panic out there from a lot of the consumers of sand on where they're going to get it from and how they're going to be able to support it logistically. And a lot of that points back to using rail. It's just that trucking long distances is too difficult.

Okay. Just one final question, and I know you may not want to provide a specific answer. Looking at the last couple of years, it might be a bit unclear due to various factors, but regarding the quarterly change in contribution margin per ton for the first quarter, it seems to be influenced by inventory adjustments. Should we expect an impact in the range of $3 to $7 for the first quarter? I'm trying to get a better understanding of the dynamics involved. Would you be able to provide any additional clarity?

Well, again, there's been a lot of moving pieces in the past. But I think if you look at kind of last year's results, first quarter to second quarter, there was about a $2 to $3 difference per ton in contribution margin from first quarter to second quarter, driven by us having higher expenses in the first quarter related to inventory adjustments, etc.

Okay, that's fine. I will work through it. Thank you for the clarification. I appreciate it.

Thank you. And I'm showing no further questions at this time. I would now like to turn the call back over to Mr. Chuck Young for any closing remarks.

Thank you for joining us for our Q4 call. We look forward to speaking with you in May.

Ladies and gentlemen, that does conclude the conference for today. Thank you for your participation. You may now disconnect.