Good morning, ladies and gentlemen, and welcome to the Smart Sand Q1 2024 Earnings Call. This call is being recorded on Tuesday, May 14, 2024. I would now 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 First Quarter 2024 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, May 14, 2024. 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. As we guided on our last earnings call in March, we had strong sales volumes in the first quarter. Sales volumes increased by approximately 31% to 1.3 million tons, a quarterly record for Smart Sand. With the increased sales volumes, contribution margin improved to $18.5 million and adjusted EBITDA increased to $9.3 million, both substantial improvements over fourth quarter 2023 results. Improved results in the first quarter demonstrate the long-term value of our strategic plan. Our long-term vision for Smart Sand has four main components. First, we are focused on expanding our Northern White sand franchise. We believe Northern White sand is the premier sand for both energy and industrial applications. The research clearly demonstrates that using Northern White sand instead of lower quality regional sand results in greater economic value to oil and gas producers. Additionally, the unique properties of our sand make it ideal for many industrial sand applications. Second, we continue to look for opportunities to open new markets for our products and services. We have made investments in two new terminals in Northeast Ohio to expand our market presence in the Utica Shale Basin. Oil drilling activity is increasing in this basin. These two new terminals provide us with great access to compete in this growing market for Northern White sand. With our Blair facility being on the Canadian National rail line, we now have access to the growing demand for Northern White sand in the Montney, Duvernay and Horn River Shales of Northwest Alberta and Eastern British Columbia, combined with our access to the Cardium Basin from our Oakdale facility on the Canadian Pacific, we have unmatched access to Canada and expect it to be a growing market for our products going forward. Our SmartSystems wellsite storage and delivery solutions continue to deliver sand into the blender of pressure pumping equipment efficiently and at high rates. We have made investments last year in our Utica, Illinois facility to add cooling and blending capabilities to allow us to market our industrial product solutions to a broader base of customers. We have 10 million tons of capacity of high-quality Northern White sand available today to serve the market, and we will continue to look for new ways to take advantage of our unique position to expand our market presence. Third, we remain focused on organizational improvements to increase the efficiency and sustainability of our mining, processing, and logistics operations. We are continually evaluating our operating and financial processes to enhance our business. This year, we are making changes to our wet and dry plants processing to improve the yields and reduce overall costs. We are working on a more coordinated approach between our three main operating plants to match our consolidated production with our overall sales needs to reduce inefficiencies and waste in our operations. We are investing in an ERP system that will allow us to automate more of our data entry and financial reporting and provide the information to management on a more timely basis to make operating decisions. Fourth, we continue to focus on our cost structure to help manage our business throughout the operating cycles. In the first quarter, we were able to reduce staffing at both the administrative and operational levels as a result of operating efficiency gains and strategic restructuring. We continue to extend the use of hydraulic mining at our Oakdale facility to reduce mining costs. We are committed to being the premier provider of Northern White sand in North America and we're confident that the foundation for Northern White sand demand is strong and will be durable over time. However, we recognize the oil and gas demand for frac sand and it will continue to fluctuate based on current and expected prices for oil and natural gas. We recognize that the current lower natural gas prices may impact sales volume in the short term in the Marcellus market. However, we had strong demand in the Marcellus in the first quarter, and while we have seen some drop-off in demand in this basin, it has not been significant to date. We will continue to keep a close eye on this market for the remainder of 2024, but we believe the long-term demand fundamentals for natural gas supply in the United States and Canada is strong. We expect this market to be a growing part of our business as we look out to 2025 and beyond. While pricing for natural gas is currently low, oil prices have remained at healthy levels. We serve the Bakken market in North Dakota, which is an oil basin, and demand remains consistent in this market. One of the reasons we invested in terminals in Ohio is this new activity in the Utica Basin is focused on oil opportunities. Having these new terminals allows us to balance out our sales activity between oil and gas applications. Gaining access to new markets has two additional benefits for Smart Sand. First, it provides the opportunity to market to existing customers in a new basin. Many of our customers operate in multiple basins, and having logistics capabilities in the new basin allows us to expand our relationships and sales opportunities with existing long-term customers. Second, it opens up marketing opportunities to new customers now that we can provide efficient and cost-effective logistics options into the market where they operate. We are committed to start returning value back to our shareholders in 2024. We are still formalizing the right approach for Smart Sand and plan to communicate our plans to start returning value to our shareholders later this year. That being said, we remain committed to a strong balance sheet, low leverage levels and adequate liquidity levels to support our operating needs through any cycle. Our primary objective is to deliver positive free cash flow consistently. In this first quarter, we had negative free cash flow. That was primarily due to the increased working capital investments required to support the ramp-up in sales. We expect our working capital needs to moderate over the remainder of 2024. We still expect to be free cash flow positive for the year. To be able to start returning value to shareholders, we have to be free cash flow positive. So delivering positive free cash flow consistently is a key objective for the company going forward. We believe Northern White sand will continue to be a key product for both the energy and industrial sand markets. The first quarter was a strong start for the year for Smart Sand. While there are some short-term headwinds in natural gas basins due to current low natural gas prices, the long-term fundamentals for Northern White sand in general and Smart Sand in particular continue to be strong. We believe no other company is better positioned to take advantage of the market for Northern White sand than Smart Sand. We couldn't have delivered these results without the hard work and dedication of our employees. I want to thank all our employees for their continued support and dedication to Smart Sand. As always, we'll 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 first quarter 2024 results compared to our fourth quarter 2023 results. We sold 1.3 million tons in the first quarter, a 31% increase over fourth quarter sales volumes of 1 million tons. Total revenues for the first quarter were $83.1 million, compared to $61.9 million in the fourth quarter. Total revenues were higher in the first quarter due primarily to higher sand sales volumes and improved SmartSystems revenues from increased utilization of our fleet. In the first quarter, we averaged four silo-only fleets and five complete SmartSystem fleets operating. Our cost of sales for the quarter were $71.2 million, compared to fourth quarter of $59.1 million. The increase was primarily due to the higher sales volumes in the current quarter. Total operating expenses were $11 million in the first quarter, compared to $10.7 million in the fourth quarter. The increase sequentially was primarily due to higher incentive compensation and higher royalties from increased sales volumes. Contribution margin was $18.5 million or $13.85 per ton in the first quarter. Fourth quarter contribution margin was $9.2 million or $9.07 per ton. Adjusted EBITDA in the first quarter was $9.3 million, compared to $0.7 million in the fourth quarter. The sequential increase in contribution margin and adjusted EBITDA was primarily due to increased sales volume and higher utilization of our SmartSystems fleet. For the first quarter 2024, we used $3.9 million in cash and operating activities, leading to negative $5.5 million in free cash flow after we spent $1.6 million on capital expenditures. The negative cash provided by operating activities was primarily due to increased working capital investment to support the growth in sales. We expect our working capital investment to moderate beginning in the second quarter, which should lead to improved operating cash flow beginning in the second quarter. We ended the first quarter with $14 million in borrowings on our credit facility. Today, our current outstanding on the credit facility are $9 million. We had approximately $4.6 million in cash and cash equivalents at the end of the first quarter. We paid down $5 million on our credit facility since the quarter end and, between cash and availability from our credit facility, we currently have available liquidity of approximately $15 million. As Chuck highlighted, sales volumes were strong in the first quarter as customers rebounded from lower activity in the fourth quarter last year due to budget exhaustion and seasonal weather issues, and hit the ground running in the first quarter of 2024 as they ramped up their budgeted activities for the year. We do expect demand to moderate in the second quarter as we are seeing some pullback in activity in the Marcellus due to lower natural gas prices. This, however, will be mitigated partially by increased activity in the Bakken and Canada. Currently, we expect second quarter sand sales volumes to be in the 1 million to 1.2 million ton range. Contribution margin per ton improved to $13.85 per ton in the first quarter, we expect the second quarter contribution margin per ton to be in the $13 to $16 per ton range. We have made adjustments to our capital expenditures for the year and currently expect to be in the $15 million to $20 million range for 2024. While we had negative free cash flow in the first quarter due to the increased working capital investment to support the increased sales activity, we still expect to be free cash flow positive for the year. This concludes our prepared comments, and we will now open the call for questions.

Good morning. Thank you, ladies and gentlemen, we will now begin the question-and-answer session. Your first question comes from Josh Jayne with Daniel Energy Partners.

First question, Chuck, in his prepared remarks, talked about some capital improvements that you were doing to improve yield on your plants. Could you talk about those capital investments and, ultimately, the return that you expect to see on this?

Yes. So, Josh, it's John here. I'll take the first part of that and then Lee can talk about the dollar sense of it. So, yes, over the past few years, we've made significant investments into hydraulic mining. These are investments that significantly reduce the amount of equipment needed in our process. What it effectively does is tie our mining operation to our processing plants without the need for trucking. Part of that is that it improves efficiency because you're not burning diesel fuel, and you're not using large equipment such as haul trucks and excavators. Once you get into the plant, we’ve made changes on how we wash our sand to ensure that we are cutting out the sizes of grains that are not really in demand anymore. By making these incremental changes to our wash plants, we have allowed ourselves to remove less desirable sand before investing in the more costly drying process.

And another one, yes, go ahead, Lee.

Josh, I think a lot of it is driven by volumes and scale, but to the extent we think these changes in hydraulic mining helped us reduce our operational costs and improve yield, we see this leading to perhaps $1 to $2 per ton or more in cost savings.

Okay. And then one other one, just when you think about the business, another thing was alluded to in the prepared remarks was continuing to expand business, and as a Northern White player, you guys have been pretty acquisitive since 2020, adding both sand plants and terminals to your portfolio. Could you just talk about how you're thinking about the asset base today? Are there still opportunities to grow your asset base or are the next few years sort of about more executing on the asset base that you have? Just maybe you could talk through that a bit.

So, Josh, currently, we have 10 million tons of Northern White capacity on a very diversified rail portfolio. So, really, we're focused on building or obtaining terminal access to enhance the movement of that sand into various basins. I'll let John elaborate on our current asset base and what we have in place and what we are looking for.

Yes, Josh. So, in addition to what Chuck said, we’ve dedicated our tenure here at Smart Sand to building a diversified rail portfolio. We originate currently on four Class 1 railroads, and we believe we have best-in-class logistics. Our current markets where we're very strong are the Marcellus, the Utica, the Bakken, and Canada. Our assets consist of mines in Illinois and Wisconsin—three operating mines there, Oakdale, Blair, and Utica, Illinois—along with several terminal assets. We are excited about our ability to not only deliver the sand we are providing today but also to maximize our 10 million-ton capacity.

Yes, as that utilization increases, so does our production efficiency and cost-effectiveness. This is a great scenario for us long-term.

Maybe one just last question before I turn it back. Could you just talk about the differences that you see moving forward with the Canadian market versus the U.S. market? I know some softness a little bit here with what we've seen on the natural gas side domestically. Could you just talk about those two markets and the differences you potentially see?

In Canada, we see LNG terminals coming online and pipelines being constructed. As activity increases, it's going to continue to drive demand for our products. John, I don't know if you have any additional insights.

Yes. From a fundamental perspective, our primary gas customers are optimistic about the long-term outlook for natural gas. We're seeing consistent messaging across both the Marcellus and Canada. The Canadian takeaway capacity improvements provide a significant tailwind, and the Marcellus is continually improving. The key message from our larger customers is that they believe in the long-term fundamentals of natural gas, and we are excited about the balance we are creating with additional activity in the Utica, which is more of an oil focus.

At the same time, let us be clear, we are extremely positive about the Marcellus market long-term. We believe that's a great market, and we have established strong relationships with our customers there. So we're very excited about that.

Your next question comes from Stephen Gengaro with Stifel.

A couple of things, but just one quick clarification. On the income statement, the SmartSystems revenue you break out, is that purely just the wellsite sand storage or are there other pieces that go into that number?

Today, that is purely the wellsite storage business going forward, so that breakout will be just for that business line item.

Okay. Great. Can you talk a little bit about the dynamics of the just supply/demand in the U.S. sand market? And how you see that kind of impacting the pricing dynamic over the next couple of quarters?

Yes, I can talk a little bit about that. The Northern White market is relatively balanced in terms of supply and demand. We certainly have additional capacity to respond to any upticks in demand that may arise, especially as opportunities increase in places like the Utica. We are not too focused on regional sands in the Permian, as we primarily service other markets. Overall, our view is that the Northern White market remains fairly stable with potential positive pricing movement as new markets like Canada begin to perform well.

Yes, to the extent that Northern White demand picks up and we see growth in the Utica and Canada, and as the quality of Northern White is superior to regional products, we believe we are well-positioned to capitalize on any potential increases in demand due to our logistics capacity.

Yes, Lee, I was actually going to ask as a follow-up if you've heard any incremental interest from E&P regarding discussing Tier 1 to Tier 2 acreage and longer laterals, and how they are addressing their decline curves. Just curious if there’s been any increase in inquiries or demand for Northern White from Texas.

There's definitely been an increase, Stephen, and it appears to be gaining momentum. We sponsored a presentation at a major conference earlier this year that received significant attention, focusing on the economic advantages of Northern White versus regional sand. We see a modest uptick in demand for Northern White, but it's important to note that it represents a small percentage of overall usage in the Western Permian. However, as operators search for solutions to deal with decline curves, we believe this could present incremental opportunities for us.

And then just one final. On the industrial piece of the business, can you give us a rough idea of what percentage of the business it currently is and how you see that evolving over the next year or two?

Yes, right now the industrial business makes up approximately 5% of our total volumes. We believe we can grow this segment to at least 10% or more over the next two or three years as we pursue new contracts and opportunities.

There are no further questions at this time. I will now turn the call over to Chuck Young for closing remarks.

Thanks for joining us for our earnings call. I look forward to speaking with you again in August. Thank you.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.