Good morning and welcome to the Smart Sand, Inc. Third quarter 2023 Earnings Conference Call. All participants will be in a listen-only mode. Please note this event is being recorded. And now, I would like to turn the conference over to Christopher Green, Vice President of Accounting. Please go ahead.

Good morning and thank you for joining us for Smart Sand's third quarter 2023 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 8th, 2023. Additionally, we will refer to the non-GAAP financial measures of contribution margin, adjusted EBITDA, and free cash flow during this call. 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 gross profit to 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. Smart Sand delivered another quarter of strong operating and financial results. In the third quarter, we sold approximately 1.2 million tons. We generated $21 million in contribution margin and $13.3 million in adjusted EBITDA, both solid improvements over third quarter 2022 results and second quarter 2023 results. Additionally, in the quarter, we continued to generate positive free cash flow. For the first nine months of 2023, we have generated $17.5 million in free cash flow, and I'm pleased to report that Smart Sand will be cash flow positive for 2023. We have used our free cash flow this year to continue deleveraging our balance sheet. We've paid off over $9 million in debt for the first nine months of 2023 and returned value to shareholders. Earlier this year, we bought back approximately 11% of our common shares outstanding. Smart Sand will continue to focus on generating free cash flow, maintaining balance sheet discipline, and returning value to our shareholders. Our goal is simple: to be the premium provider of Northern White Sand and Logistics Services in North America. We strive to not only be a supplier of sand to our customers but to be their partner in efficiently providing high-quality, environmentally friendly, and sustainable long-term sand supply. We could not have achieved these results without the dedication and hard work of our employees. I want to thank our employees for their efforts and continued commitment to Smart Sand. Demand for Northern White frac sand continues to be strong. We had consistent demand in the Bakken and Appalachian basins during the quarter. Our sales in Canada increased as well. This was our first quarter fully operating our Blair facility, and Canadian sales represented approximately 10% of third quarter sales volume. We are excited about the Blair mine's growth potential as part of our continuing effort to expand our Northern White sand franchise. With respect to our industrial product solutions, we're constructing improvements at our Utica facility in the fourth quarter to add cooling and blending capabilities. The expansion of our industrial products capabilities will allow us to serve a broader market segment. Industrial sand sales volumes have been approximately 5% of our sales volume over the last few quarters, and we expect those sales to grow in 2024. We continue to make progress penetrating the last-mile market. With the introduction of our Smart Belt direct-to-blender technology, we're delivering to customers what they want: faster fracs and less trucking through maximizing payload per truck and minimizing unload times. In response to customer demand, our SmartSystems fleet offering now includes our Smart Belt conveyor system and our proprietary SmartPath transloader. During the quarter, we operated four SmartSystems fleets and four silo-only fleets. Based on customer feedback and demand, we're excited about the prospects for growing our last-mile business in 2024. Looking at the fourth quarter, we currently expect to see a normal seasonal slowdown in the Bakken as we move into the winter months. Additionally, we are seeing some budget exhaustion from customers, who accelerated spending in the first nine months of the year. However, we do expect similar sales in Canada in the fourth quarter, and we're expecting increased activity in the Appalachian basin starting in November. We expect industrial sales in the fourth quarter to be in line with third quarter results, and we're excited about our prospects in 2024. In October, we signed three new contracts. We currently have approximately 50% of our expected sales volumes contracted for 2024. Two of these new contracts are for customers in the Appalachian basins, and one is for a customer in the Bakken. Based on the current market conditions and commodity prices, we expect volumes in these two key markets for Smart Sand to be strong in 2024. Natural gas fundamentals continue to be positive, with continued growth in natural gas plants for electricity generation and increased LNG demand as new capacity in North America comes online. To support the expected long-term positive market fundamentals in the Marcellus, we have expanded our Waynesburg, Pennsylvania terminal. We now have the capability to handle multiple products at this location and increased volumes. With our improvements completed, we are anticipating higher industrial sales volume in 2024. Our new cooling and blending capabilities allow us to compete more effectively in the foundry and glass industrial sand markets. We are still in our budgeting process for 2024, so we'll have more details for our expectations for 2024 on our 2024 year-end call. However, based on current market conditions, we expect overall sand sales volumes for 2024 to be at least 10% higher than 2023 sales levels. For our last-mile business, by year-end, we will have 10 SmartSystems with SmartPath and Smart Belt technology ready to deploy in the field. Going into 2024, we expect to have increased utilization of our Smart Systems fleet over the course of the year. Building our Northern White sand franchise will continue to be our primary focus. Our goal is to increase the utilization of our three operating mines: Oakdale, Utica, and Blair, and to expand our market share in every basin we serve. We have approximately 10 million tons of high-quality Northern white sand capacity available to serve the frac sand industrial markets. This capacity is tied directly into four Class 1 railroads. We have the best-in-class terminals serving the key Bakken and Appalachian basins and a network of high-quality well-positioned third-party terminal partners. We can serve every market in North America through our efficient low-cost logistics footprint. With our SmartSystems technology, we can meet increasing demand from customers looking for higher volumes of sand delivered to the well site in a safe and efficient manner. We also have a well-tenured management team that are owners in the business and are focusing on delivering long-term value for our employees and shareholders. Most of the current executive team has been with Smart Sand for over 10 years and are committed to the company's long-term success. We will continue to look for ways to increase shareholder value. We have a strong balance sheet with one of the lowest leverage levels in the industry, which allows us to manage effectively through the cycles in the energy business and provides us the ability to move quickly to take advantage of new opportunities in the market. Our goal is to continue to deliver positive free cash flow while taking advantage of opportunities to grow the business. We will also continue to look for ways to return value to our shareholders. We believe the Northern White sand will continue to be a key product for both the energy and industrial sand markets, and Smart Sand is committed to being a leading provider of Northern White sand. As always, we'll keep our employees' and shareholders' interests in mind in everything we do. We continue to evaluate ways we can return value to our shareholders. We have bought back approximately 11% of our shares this year, and there will be more to come on our year-end earnings call in early 2024.

Thanks, Chuck. Now, we'll go through some of the highlights of the third quarter 2023 compared to our second quarter 2023 results. We sold 1.2 million tons in the third quarter, a 12% increase over second quarter sales volumes of 1.1 million tons. Total revenues for the third quarter were $76.9 million, compared to $74.8 million in the second quarter. Total revenues were higher in the third quarter primarily due to contractual shortfall revenue recognized in the quarter. Our cost of sales for the quarter were $62.5 million, basically flat with second quarter results. Total operating expenses of $9.5 million in the third quarter were marginally lower than second quarter operating expenses of $9.6 million. Contribution margin was $21 million or $17.20 per ton in the third quarter. The second quarter contribution margin was $19 million or $17.57 per ton. Adjusted EBITDA in the third quarter was $13.3 million, compared to $11.4 million in the second quarter. The sequential increase in contribution margin and adjusted EBITDA in the third quarter was primarily due to the shortfall revenue recognized in the quarter and relatively flat cost of goods sold in operating expenses. For the third quarter 2023, we generated $12.5 million in net cash provided by operating activities, leading to $5.6 million of free cash flow after we spent $6.9 million on capital expenditures. Year-to-date through the end of September, we have generated $17.5 million in free cash flow from $33.6 million in net cash provided by operating activities, less $16.1 million in capital expenditures. We ended the third quarter with no outstanding borrowings on our credit facility. We had approximately $9.3 million in cash and cash equivalents at the end of the third quarter, and between cash and availability from our credit facility, we currently have available liquidity in excess of $28 million. As Chuck highlighted, we do expect demand to moderate some in the fourth quarter due to normal seasonal slowdown in the Bakken and budget exhaustion from customers at the end of the year. Currently, we expect fourth quarter sales volumes to be in the 900,000 to 1.1 million-ton range. Normally, in the fourth quarter and first quarters of the calendar year, we have higher reported production costs due to drawing down inventory that we have capitalized in the summer months to meet our winter sales volumes. Currently, for the fourth quarter, we believe contribution margin per ton will be in the mid-double-digit range of $12 to $16 per ton. We expect capital expenditures for the year to be in the $20 million to $23 million range, which includes the capital expenditures related to the startup of the Blair facility, the expansion of the Waynesburg terminal, and investment in the cooling and blending capabilities at our Utica facility. As Chuck highlighted, we expect to be free cash flow-positive for the year. This concludes our prepared comments and we will now open the call up for questions.

Thank you. Our first question comes from John Daniel from Daniel Energy Partners. John, please go ahead.

Thank you. Good morning, guys.

Good morning.

Good morning, John.

I have one question. Regarding the increase of 10% in 24 volumes, do you believe this reflects a 10% rise in activity? Are there changes in completion designs leading to more volume per well? Or is this related to a new customer? Any additional insights would be appreciated.

Sure, I'll begin with that, John. We have added a few new customers and increased volumes with some existing ones, which is contributing to the overall activity. Additionally, we are observing ongoing trends towards longer laterals and more stages per lateral. There is also an increase in the amount of sand used per well, which is driving activity. Even if spending remains flat, the trend of using more sand per well continues to be evident.

Yes. And what I would add to that is just, also, as we continue to see our Canadian market ramp up, that's a new market that we hadn't participated in prior. So, our Blair facility is positioned really well for attacking that market.

Got it. Okay.

And I'd also add to that, John, is that in the Appalachian basin and in some of the other basins that we're servicing, there's a higher demand for fine sand. A lot of the existing Northern White infrastructure doesn't have as much fine sand as we do have. So, we feel like we're really in a good space to service.

Perfect. Thank you all very much for including me.

Thank you.

And our next question comes from Patrick Ouellette from Stifel. Patrick, you may proceed.

Hey, it's Pat on for Stephen Gengaro today. Thanks for taking the questions.

Yes.

So, in regards to the Canadian market, obviously a part of the increased volumes attributable to Blair there, we're curious if you could provide any insight on how to think about margin there. Is it kind of the same as other regions, or is the quarter-over-quarter step-up in margin attributable to the Canadian market at all?

Margins are relatively consistent with other regions. It depends on the product. We're seeing slightly higher pricing in Canada, but it's not dramatically different from what we're seeing in the U.S. currently.

Yes, and the other thing I would add to that from an operational standpoint, as we continue to ramp up operations at Blair, production costs should come down to levels similar to Oakdale. I mean, it's a very similarly logistically situated plant, mine, wet and dry processing load out all on site. So, I think, from a driving margin out of that plant, we should be able to drive down production costs too as we get more utilization.

And we can utilize that plant that's actually referring to the CN plant that we have in Blair, Wisconsin. That plant can send sand to the U.S. as well to the Appalachian basin, but we're super excited because it gets us up to a Canadian market that we never had before on our other rail providers, which looks to have some pretty good growth next year.

Got it. Okay, thanks. That's great color there. That's all for me. I'll turn it back.

Thank you.

And our next question comes from William Bremer from Vanquish Capital Partners. William, please go ahead.

Good morning, gentlemen.

Good morning, William.

Good morning.

Hey, Chuck. Well, first and foremost, the balance sheet is looking fantastic. You guys have done a fantastic job in capital allocation, and I'll give you a lot of credit on that and echo the comment you made regarding your leverage compared to your peers. So, well done there. My question is on the industrial side, and I was wondering if you could provide us a little more granularity in terms of what end markets you're supplying, and secondly, have you been able to penetrate the Canadian industrial market at this time?

John has primarily been focused on the industrial sands segment along with Rick Shearer. I will let him address that question. However, we are definitely paying attention to Canada from the industrial sands perspective.

Yes, William. So yes, I mean, we're focused on the traditional industrial markets and in order of kind of volume, it'd be glass, foundry, and then it kind of falls off with recreational and other types of things. With the addition of our blending and cooling capability out of our Utica plant, we expect to continue to grow that industrial market, having blending and cooling capability gets us into markets that we're incapable of pursuing prior to having that capability. So again, industrial is always going to be a lag from volume compared to frac, frac is the big dog in the volume world. But our expectation is that in some industrial applications, you can have relatively high margin specialized products, and that's really what we're focused on out of our industrial base.

Well said. John, thank you.

Next question?

Thank you very much. And this concludes our question-and-answer session. I would like to turn the conference back over to Chuck Young for some closing remarks.

Thank you for joining us on the call today. We look forward to speaking to you again on our Q4 call early next year.

And this concludes the conference. Thank you very much for attending today's presentation. You may now disconnect.