Good morning, ladies and gentlemen and welcome to the Smart Sand Q3 2024 Earnings Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. This call is being recorded on Wednesday, November 13, 2024. I would now like to turn the conference over to Chris Green, Principal Accounting Officer. Please go ahead.

Good morning, and thank you for joining us for Smart Sand's third 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 the 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 13, 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. We are pleased to report that our continued focus on proactively managing our cost structure and capital expenditures led to positive free cash flow for the quarter. We remain cash flow positive for 2024 and in keeping with our stated goal of returning capital to our shareholders this year, we recently paid a special dividend of $0.10 per share outstanding, and we additionally announced a share buyback plan of up to $10 million. We remain committed to being financially disciplined and returning value to our shareholders. Importantly, during the quarter, we put in place a new five-year $30 million ABL credit facility with our new lender, First Citizens Bank. This facility provides us with an efficient and flexible source of funding that allows us to manage our business going forward as well as the ability to act quickly on emerging opportunities. In the third quarter, Smart Sand delivered sales volumes of just under 1.2 million tons, adjusted EBITDA of $5.7 million, and positive free cash flow of $3.7 million. Our sales volume this year has increased 9% over 2023, while our cost of goods sold has decreased by $6.7 million or 3.4% for the same period. Our capital expenditures are down $11 million year-to-date through September, having spent $5.1 million through September 2024 in comparison to $16.1 million for the same period in 2023. We expect total capital expenditures for 2024 to be at or under $10 million compared to $23 million in 2023. We continue to believe in the long-term fundamentals of the oil and gas business and although volumes decreased modestly quarter-over-quarter, demand remained strong through the fourth quarter. As for 2025, we are particularly excited about growing demand for natural gas in both the U.S. and Canadian markets, coupled with oil activity that is expected to increase in the Utica. In the third quarter, several new initiatives started to contribute to the business. We began delivering sand to our two new terminals in Denison and Minerva, Ohio in the quarter. These terminals opened up the growing Utica Shale basin for Smart Sand. In the quarter, approximately 18% of our volumes were sold through these terminals. In addition to establishing a new market for us, delivering sand through our own terminals reduces our logistics costs and provides a competitive advantage to surface market going forward. We continue to grow our volumes from our Blair mine. This facility allows us not only to compete in the growing Canadian sand market, but it also provides us additional supply route into the Marcellus and Utica basins in the Northeast United States. In the third quarter, Canadian volumes represented about 11% of our sales. We continue to grow our Industrial Product Solutions franchise. Our IPS sales volumes increased by 38% sequentially, and we are positioning ourselves to compete for new contracts in 2025, particularly with glass and foundry customers. We could see IPS grow from under 5% of our revenue base to the 10% range of total sales volumes in 2025. We secured a new revolving credit facility with First Citizens Bank. We are committed to being the premier provider of Northern White sand in North America and we're confident that the foundation of Northern White sand demand is strong and will be durable over time. We expect a pickup in activity in the fourth quarter as demand remains strong in the basins we serve. As demand remains robust, we are optimistic the pricing environment will improve in 2025. The trends for natural gas demand are positive due to the increasing demand for LNG and natural gas-fed power plants to support growing demand from AI data centers. The Marcellus and Canadian basins that we support are primarily natural gas basins. We expect activities in these markets will grow in 2025. We also see growing demand in the oil markets we serve in the Bakken and the Utica basins. All these markets will continue to be primarily supplied by Northern White sand. As demand for Northern White sand continues to grow in these markets we serve, we believe incremental supply will be limited due to increasing demand for fine mesh sands. Fine mesh sands represent about 90% of current frac sand demand. Many of our competition's reserves are heavily weighted towards producing coarser products that are not in favor. Our reserves are over 75% fine mesh sand, making us uniquely positioned to seize on our customers' growing appetite for fine mesh frac sand. Currently, there is limited investment in new Northern White capacity as there is minimal capital available to support new Northern White sand development or restart idle mines. Startup costs for idle mines are significant and the logistical market and reserve-based challenges that led to these mines being shut down during the downturn remain. Thus, we do not expect to see significant additional Northern White capacity entering the marketplace. With our three facilities, efficient and sustainable access to all Class I rail lines, coupled with our low-cost operations and large fine mesh reserves, Smart Sand is uniquely situated to take advantage of expected growth in Northern White sand demand in 2025 and beyond. While current activity levels and pricing are challenging, we continue to demonstrate that Smart Sand can operate effectively through the operating cycles and is well positioned to take advantage of expected improved market fundamentals starting in 2025. I want to thank all the employees for their continued dedication to Smart Sand. As always, we will keep our employee and shareholder interests 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 2024 compared to our second quarter 2024 results. We sold 1.19 million tons in the quarter, a 7% decrease from second quarter sales volumes of 1.27 million tons. Total revenues for the third quarter were $63.2 million compared to $73.8 million in the second quarter. Total revenues were lower in the third quarter due primarily to lower sand sales volumes, lower average sales prices, and lower SmartSystem revenues from reduced utilization of our fleet. Cost of sales for the third quarter were $56.7 million compared to $60.7 million in the second quarter, a 7% decrease. The decrease was due primarily to lower sales volumes in the current quarter coupled with ongoing cost and efficiency initiatives to reduce production costs. Total operating expenses were $11.4 million in the third quarter compared to $9.5 million in the second quarter. In the quarter, we had a $1.1 million non-cash charge related to the closing of our fabrication facility in Canada. This facility was part of our acquisition of Quickthree Technologies in 2018 and provided support for our SmartSystems last mile storage service business. We decided to close this facility in the third quarter and to relocate our fabrication support to our Oakdale facility. Additionally, in the third quarter, we had approximately $1.3 million in expenses related to the process of refinancing our ABL revolving credit facility. Other expenses were $1.3 million lower sequentially. During the second quarter, we had a $1.3 million loss on the extinguishment of debt, which was related to the payoff of some equipment leases that were part of the refinancing that we completed in June. Contribution margin was $13.2 million or $11.09 per ton sold in the third quarter. The second quarter contribution margin was $19.8 million or $15.53 per ton sold. Adjusted EBITDA in the third quarter dropped to $5.7 million compared to $11.9 million in the second quarter. Contribution margin and adjusted EBITDA were lower sequentially due primarily to lower sales volumes and lower average selling prices. For the third quarter 2024, we had $5.8 million in cash provided by operating activities, which led to $3.7 million in free cash flow after we spent $2.1 million on capital expenditures. Year-to-date, we have generated $11.7 million in free cash flow. In September, we closed on a new $30 million five-year revolving credit facility with First Citizens Bank. Availability under this facility is governed by a borrowing base supported by our accounts receivables and inventory. Our current borrowing base is $30 million. We ended the third quarter with no borrowings on our credit facility. Currently, we have approximately $8 million drawn on this facility. Between cash and availability from our credit facility, we currently have available liquidity in excess of $28 million. Smart Sand is committed to returning capital to our shareholders. In 2023, we repurchased approximately 11% of our outstanding shares when we bought back Clearlake Capital’s ownership in the company. In September, we announced our first special dividend of $0.10 per share that was paid in October. Additionally, we have announced a new share buyback program of up to $10 million. While we expect our industry to continue to have a lot of variability quarter-to-quarter due to changes in commodity prices, supply-demand dynamics, seasonal weather impact, and political uncertainties, we have shown our ability to manage through these operating cycles. Through our focus on cost management and operational efficiency, coupled with improved financial flexibility and liquidity, we believe we’ll be able to generate positive free cash flow more consistently and we’ll continue to look for ways to return capital to our shareholders going forward. Currently, we expect fourth quarter sand sales volumes to be in the 1.1 million to 1.4 million ton range. We are seeing an increase in activity currently in the Marcellus. As Chuck highlighted, we expect to see a pickup in activity in 2025 due to increased demand, particularly for natural gas development. We currently expect to see demand in the first quarter 2025 to be consistent with or potentially higher than our first quarter 2024 results. In the fourth quarter, we will be completing most of our capital projects that we started early in the year. This will lead to higher capital expenditures this quarter. We currently expect total capital expenditures for the year to be in the $8 million to $10 million range. We currently expect to generate positive free cash flow for the full year. However, we do expect lower free cash flow in the fourth quarter due to higher capital expenditures in the quarter and an increase in working capital to support sales activities and the seasonal buildup of wet sand inventory to support sales volumes over the winter. This concludes our prepared comments and we will now open the call for questions.

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Your first question comes from Alec Scheibelhoffer with Stifel. Your line is now open.

Great. Thanks. And thanks for taking my question this morning.

Good morning.

Just to start us off here, I was wondering, given the efficiency gains we’ve seen regarding completion and the rise in proppant demand per well, I was just curious how you see that evolving going forward. Should we start to see a plateau around current levels or continue to rise maybe at a more moderate pace? And just kind of overlaying that with your positive outlook for demand heading into 2025?

Yes. Well, it’s a good question. Obviously, we’ve seen proppant per foot kind of go almost hockey stick-like on a graph over the last few years. You probably could see a little bit of moderation. But what we are seeing is when you have multi-well pads, we’re seeing the demand for large amounts of sand to be on site on a consistent basis, which is driving kind of demand across the board, right? So if you have a pad that’s got five or six wells on it, you tend to have to have the ability to have that sand there quicker and they’re putting it down the hole faster. So you might see some moderation on proppant per foot, but certainly proppant per well pad is being used to do more wells in a particular month. That seems to be the focus of our customer base.

They’re also extending their laterals too. So laterals are getting longer per well, which is leading to more sand per well as they drill.

Yes. The other thing I would add too is with some of the other basins that we operate in. So certainly the Marcellus has always been a relatively high proppant per foot market, but we’re seeing other basins, the Bakken, certainly with our new experience up in Canada, we’re starting to see those markets expand their proppant per foot also.

Got it. Got it. That makes sense. Excellent color there. And then maybe shifting gears a little bit to pricing. So I was just curious if you could provide any kind of color or guidance on how we should think about pricing dynamics in relation to contribution margin as we look out to 2024, but more so into 2025 if you have any color there?

Yes. I think as we’ve talked about on previous calls, pricing has kind of moderated over the last couple of quarters and been relatively flat. So we haven’t seen a lot of pricing improvement. But as we go into 2025, especially with what we expect to be growing demand driven by natural gas demand in particular, and the fact that the market continues to move to finer mesh sand, which we’re very well positioned in the Northern White market to produce and provide, we think that should hopefully lead to some pricing improvement throughout 2025. So we hadn’t really seen it yet, but we are starting to see volume picking up and that’s looking positive going into the first part of 2025. With that, we think that’s going to constrain some of the Northern White supply because of other competitors' ability to provide finer mesh sand in particular. That should lead to pricing improvement over time.

Got it. Thanks again for the color there. And that’s all from me, so I’ll turn it back.

Your next question comes from Josh Jayne with Daniel Energy Partners. Your line is now open.

Thanks. Good morning.

Hi Josh.

Good morning, Josh.

First question is on IPS. I think in your prepared remarks you noted that it could go from 5% of volumes to 10% of volumes in 2025, which would be significant. Is that based on orders you already have today or things you’re still bidding on and what markets potentially would be driving this? Just a little more color there would be great.

Yes, sure. It’s business we’re working on, Josh, and it consists of some of the traditional environments, glass sand being the one that drives the most volume in that space. So it’s not frac sand volumes. Glass is the only one that even has any kind of volumes that affect that space. But there’s a lot of recreational, foundry, and those types of things. We’re excited about this business. We think that as we grow from 5% to 10%, I don’t know that it’ll get particularly bigger than that over time, but it is a market I’m kind of bullish on. Still, frac is going to be the one that drives the bulk of our volumes going forward.

Okay, thanks. And then I want to touch on shareholder returns a little bit. Obviously, you mentioned the special dividend that was paid. Just curious how you were thinking about shareholder returns going forward. I know you have the buyback as well, but why was the special dividend sort of the optimal way to return cash to shareholders? And how are you thinking about this going forward? Will you sort of assess how cash builds over the course of a year and then potentially pay it out? I'm just curious about your thinking there.

Yes, Josh, I think it’s really going to be driven by what we stated in the comments today, and when we did the special dividend, it’s really going to be driven by – we’re getting more comfortable and feeling like we’re going to be able to more consistently deliver free cash flow. We also have a stronger capital structure with our new credit facility in place. So I think that’s going to give us flexibility to be opportunistic and at times when we feel like we’re generating excess cash, we will evaluate whether it makes sense to do a dividend versus potentially buyback shares. So we’re going to be opportunistic and look at the return equation in terms of giving money directly to our shareholders who are looking to buy shares and our view of what the return on buying those shares back into the company is.

Okay, thanks. And one more if I may. Just you talked about the Canadian market being 11% of your sales and Blair continuing to ramp. Can you just update us on your thoughts on the Canadian market, how you see that going forward in 2025 and beyond and what you’re seeing?

Yes, look, the Canadian market, I think our Blair facility there, we’re very excited about. It’s a 3 million ton a year facility. It has fantastic logistics. The Canadian market, our customer base up there has a lot of their own logistics capabilities. We’re going to be adding our own up there. We think that market is logistically constrained, but they’ve got pipelines in place to the West Coast that require a lot of natural gas to be produced. So we’re cautiously optimistic on the Canadian market. And I’m spending a good amount of time up there working on it.

Yes. We’re very excited about that market, Josh. And with the LNG facilities coming online, we think that’s going to be a great place to be. They need a lot of sand.

Okay, thanks. I’ll turn it back.

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

Thanks for joining our third quarter earnings call. I look forward to speaking with you again in March.

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