Good day and thank you for standing by. Welcome to the Third Quarter 2022 Smart Sand Earnings Conference Call. At this time all participants are in a listen-only mode. After the speaker's 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 your speaker today, Chris Green, Corporate Controller. Please go ahead.

Good morning and thank you for joining us for Smart Sand's third quarter 2022 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 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 9, 2022. Additionally, we will refer to non-GAAP financial measures of contribution margin, adjusted EBITDA and free cash flows during this call. These measures when used in combination with our GAAP results provide us and investors with useful information to better understand our business. Please refer to our most recent press release and our public filings for our reconciliations of gross profit contribution margin, net income to adjusted EBITDA and cash flow provided by operating activities to free cash flow. I would now like to turn the call over to our CEO, Chuck Young.

Thanks, Chris, and good morning. In the third quarter, Smart Sand delivered sales volumes of 1.1 million tons, $17.8 million in contribution margin and $11 million in adjusted EBITDA. This is our highest contribution margin and adjusted EBITDA since the second quarter of 2020. Year-to-date, through September we have sold 3.2 million tons. We are on pace to sell record volumes in 2022. During the quarter, we generated positive free cash flow of $6.4 million. Our strong financial performance in the quarter continues to demonstrate the value of our business model to deliver high-quality Northern White sand sustainably and efficiently from the mine to the well site. We also remain committed to maintaining a strong balance sheet that will provide us with the long-term durability to operate successfully through any operating cycle. In the third quarter, we saw strong activity in all the operating basins that we currently serve. Pricing in the quarter improved, and we expect to maintain current pricing levels based on expected continued strong market supply and demand fundamentals. Our unit train capable transloading terminals in Waynesburg, Pennsylvania and Van Hook, North Dakota continue to demonstrate the value of our long-term focus of delivering bulk commodities on rail in a sustainable and efficient fashion to our customers. Sales volume into the Bakken Basin served by our Van Hook terminal increased by approximately 40% sequentially. We typically see a slowdown in activity in Van Hook in the fourth quarter due to weather and budget management by our clients. However, this seasonal slowdown looks to be balanced out this year with increased activity through our Waynesburg terminal into the Marcellus. Having multiple terminals allows us greater flexibility to switch supply to meet changing market demands. Utilization of our SmartSystems last mile offering continues to improve. We are gaining momentum as we start to penetrate the market with our SmartPath technology. Year-to-date through September, our SmartSystems have generated positive contribution margin. And going forward, we expect it to deliver improved financial performance. By using our SmartPath, our customers can reduce the number of trucks needed to deliver sand to the well site up to 30% versus our competitors' equipment, providing our customers with substantial cost savings for sand delivered to the wellhead. 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 SmartSystems helps achieve those goals by improving efficiency and reducing impact. Our mine to well site rail, terminal and last mile approach provides our customers a safer, cost-efficient and more reliable supply chain. We continue to see improvements in our Industrial Product Solutions division with our industrial sales volume increasing 28% in the quarter. Industrial Product Solutions is a long-term commitment to diversify our business beyond oil and gas and to more effectively utilize our asset base. It will take time to build this business, but we are taking steps needed now to set us for strong growth in this business segment in 2023 and beyond. Our balance sheet remains strong. Today, we have approximately $5 million in cash on our balance sheet and approximately $20 million in liquidity. We will continue to remain disciplined with capital spending, while pursuing projects that will generate long-term value. We are excited about our future for a number of reasons. Our high-quality asset base, we have over 400 million tons of Northern White sand reserves and current annual processing capacity of 7.1 million tons. Over the last 2 years with the acquisition of Utica in 2020 and Blair earlier this year, we have developed the capability to flex our annual Northern White capacity from 5.5 million tons to 10 million tons, thus adding 4.5 million tons of capacity for a very low acquisition cost of approximately $9 million. We brought 1.6 million tons of that flex capacity online in late 2020 when we opened our Utica facility. We are actively evaluating the timing of opening the Blair facility and expect to have additional information on this on our year-end earnings call in March. This incremental capacity strategically positions Smart Sand to take advantage of the growing market demand for Northern White sand. Our reserve base is primarily finer mesh sands that meet the long-term needs of the market. Our facilities are low-cost, efficient operations that allow us to operate effectively through all market cycles. Our strategically located in-basin terminals, our terminals in Van Hook, North Dakota and Waynesburg, Pennsylvania are located in the heart of the Bakken and Marcellus basins, which gives us a competitive advantage to effectively compete in these basins for years to come. Our superior last mile offering, we believe our SmartSystems technology provides a superior and sustainable well site sand storage management for our customers, and we expect this business to start delivering improved contribution margins going forward. Our growing industrial sand solutions business, this business segment continues to grow rapidly, diversifying our business with strong margins. As always, we'll continue to keep our eye on the future and we always keep our employee and shareholders' interest in mind in everything we do. And with that, I'll turn the call over to our CFO, Lee Beckelman.

Thanks, Chuck. Now I'll go through some of the highlights of the third quarter, starting with sales volume. We sold approximately 1,110,000 tons in the third quarter, a 7% decrease over the second quarter volumes of 1,196,000 tons. Volumes during the third quarter were slightly lower sequentially due primarily to the timing of well completions by some of our customers. Overall, activity levels continue to be at high levels. Revenues for the third quarter of 2022 were $71.6 million compared to $68.7 million in the second quarter. Total revenues were higher in the third quarter primarily due to continued improvement in average sales prices of our sand, increased utilization of our SmartSystems fleet and $2.7 million in contractual shortfall revenue. Our cost of sales for the quarter were $60.2 million compared to $59.7 million last quarter, remaining relatively consistent period-over-period with nothing significant to call out. Total operating expenses were basically flat at $7.7 million in the third quarter compared to $7.6 million last quarter. Net income was $2.7 million for the third quarter or $0.06 per basic and diluted share compared to a net loss of $90,000 or $0.00 per basic and diluted share for the second quarter 2022. For the third quarter 2022, contribution margin was $17.8 million and adjusted EBITDA was $11.3 million compared to second quarter contribution margin of $15.3 million and adjusted EBITDA of $9.2 million. The increase sequentially was primarily due to shortfall revenue recognized in the third quarter. For the third quarter, contribution margin per ton was $16.01 per ton compared to $12.75 per ton last quarter. For the third quarter of 2022, we generated $10.8 million in net cash provided by operating activities, leading to $6.4 million in free cash flow after we spent $4.4 million on capital expenditures. During the third quarter, we drew an additional $3 million on our revolver and ended with $6 million outstanding on our facility. We ended the quarter with approximately $10.4 million in cash and cash equivalents. Between cash and our availability on our facilities, we currently have approximately $23 million in available liquidity. In terms of guidance for the fourth quarter, we expect sales volumes to be in the $1 million to $1.2 million range. Our sales volumes in the fourth quarter can be impacted by weather and customers managing year-end budgets, leading to completions activity potentially being delayed into 2023 and could result in lower sales volumes sequentially due primarily to timing of completions activity shifting from this year into 2023. We expect adjusted EBITDA to be positive in the fourth quarter, but it will likely be lower than third quarter results as we will not recognize any shortfall revenue in the fourth quarter. For the full year 2022, we expect to have record sales volumes for the company. We believe our contribution margin per ton will remain in the double-digit range in the fourth quarter. We still expect capital expenditures for the year to be in the $20 million to $25 million range, which includes capital expenditures and the acquisition of the Blair facility earlier in the year. This concludes our prepared comments, and we will now open the call for questions.

Thank you. Our first question comes from Stephen Gengaro from Stifel. Your line is open.

Thanks. Good morning, everybody.

Good morning.

Two questions for me. The first, can you give us your perspective currently on the supply-demand fundamentals for frac sand as we look out into 2023?

Yes, currently the supply and demand fundamentals for Northern White sand are positive. We are seeing a slight increase in demand, especially in the Appalachian basins where gas drilling is prominent. We anticipate that the Bakken and Western basins will remain stable, aside from seasonal changes due to possible weather conditions in the fourth and first quarters. New supply of Northern White sand is not coming back online at a significant rate; there might be small pockets of additional supply, but with the current capital constraints and the condition of reserves at many idle mines, along with inefficient processing, we don’t expect much of that capacity to come back at current pricing and margin levels. It's worth noting that this year is unique because, for the first time in many years, we have seen high commodity prices for both natural gas and oil. This is driving activity in both types of basins, which is a departure from the past where typically one would be high while the other was low. This creates an interesting market demand that we’ve been discussing frequently.

Thank you. You mentioned a double-digit contribution margin per ton in the fourth quarter, which is a strong figure considering the typical winter cost increases. Can you clarify if this is primarily due to the efficiency of the system and the pricing dynamics you've experienced over the past year that enable you to maintain this level during a usually slower fourth quarter?

Yes, Stephen, there are a couple of factors contributing to that. We expect volumes to remain relatively stable in the fourth quarter instead of the usual decline, which helps us manage our fixed costs better than we typically do during this period. Additionally, pricing appears to be stabilizing at current levels, so we anticipate maintaining solid pricing. The combination of steady volumes in the fourth quarter, rather than the typical drop-off we have experienced in recent years, along with a favorable pricing environment, gives us confidence that our contribution margin per ton in the fourth quarter will be similar to what we achieved in the second and third quarters, even when accounting for the revenue shortfall in the third quarter.

Great. That’s helpful. Thank you for the color.

And we have a question from Bryan Shealy with Exploit Investing. Your line is open.

Hi there. Thank you for having me on. First question, do you still believe you can sell the same amount of sand in any given quarter? For example, do you feel like quarter four sand in quarter three?

Excuse me, do we sell what?

Next quarter, can you sell the same amount of sand in any given quarter? For example, do you sell quarter four sand in quarter three? And does it differ when you have contracts?

I'm not sure I understand your question. We sell sand based on the activity in each quarter and those volumes get booked in that quarter. So whatever sales we have in Q3 are from volumes we sold in Q3, whatever sales we have in Q4, et cetera, from volumes we sold in Q4.

Thanks. The question was essentially whether you actually sell the sand and if you have increased the number of people on contracts. Are you able to project how much volume you might have in the next quarter and have you increased the number of people on contract?

Yes, we have added a couple of smaller contracts. While we don't disclose the percentage of contracts we have outstanding, these new contracts will generate volumes starting in the fourth quarter and the first quarter of next year. We have our current contracts in place, and we also have good visibility with our spot customers regarding their expected volumes on a monthly and quarterly basis.

Okay. Thanks. Just one more. So your stock is currently trading at an enormous discount to net tangible asset value. Into next year are you looking at possibly implementing an aggressive shareholder return program?

We will continue to assess the situation. Currently, as reflected in our numbers, we achieved positive free cash flow this quarter, and we expect to maintain that trend. Once we are confident in the consistency and positivity of our cash flow, we will consider opportunities to return value to shareholders through dividends or other methods. However, it's still a bit premature for that decision. As we move into 2023, we will have further discussions on this based on overall activity and the free cash flow we are generating, along with its consistency.

All right. Thank you.

Thank you.

Thank you. And that's all the questions I've received. I would like to turn the call back over to Chuck Young for any closing remarks.

Thank you for joining us today. We look forward to talking with you again in March.

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