Good morning and welcome to the Smart Sand, Inc. Third quarter 2023 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] 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 the 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 an adjusted EBITDA, both solid improvements over third quarter 2022 results and second quarter 2023 results. Additionally, in the quarter, we continue 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 to delever our balance sheet. We've paid off over $9 million in debt for the first nine months of 2023, 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. We plan to remain true to our core business principles and operating philosophy. 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 customer, but to be their partner in efficiently providing high-quality, efficient, 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 of 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. Canadian sales represented approximately…

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. 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. [Operator Instructions] 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.

Just one question from me, if I may, the commentary about 24 volumes being up 10%, is it your sense is that 10% rise in activity? Is it completions design -- completion designs are changing, so it's more volume per well? Is it a new customer? Just any incremental color would be appreciated.

Yes, I'll start with that John. I think some of it's actually, we have actually signed a couple of new customers and increased some volumes with some existing customers. So, some of that is increased activity related to that. And then I think we continue to see trends with the longer laterals and more stages per lateral. We continue to see trends where more sand per well, which I think is helping driving, even if you see kind of flat spending more sand per well is the trends we've been seeing. I don't know if John --

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 if the quarter-over-quarter step-up in margin attributable Canadian market at all?

Well, margins are relatively consistent with other regions. I think we -- it depends on the product. and so, we're seeing maybe, a little higher pricing in Canada, but it's not dramatically different than 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, we have -- I think from a driving margin out of that plant, we should be able to drive down production cost 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. So, 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?

So, John has kind of been the focus on that -- on the industrial sands part along with Rick Shearer. So, I'll let him answer that question. But yes, we're definitely focused on Canada as well from the industrial sands, just from my standpoint, but --

yes, William. So yes, I mean, we're focused on the traditional industrial markets and the -- in order of kind of volume, it'd be glass, foundry and then kind of it falls off there recreational and other types of things. With the addition of our blending and cooling capability, out of our Utica plant there, 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.