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. [Operator Instructions] 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 sufficient 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…

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 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,…

Thank you. [Operator Instructions] 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, sure, Steve. So right now, Northern White supply and demand fundamentals continue to be positive. Demand appears to be growing a little bit, particularly in the Appalachian basins, primarily a gas drilling market. We expect the Bakken, the Western basins remain steady other than seasonal fluctuations due to potential weather here in the fourth quarter and first quarter. We're not seeing a lot of the new Northern White sand supply come back online. There may be some pockets of incremental supply. But with some of the capital constraints out there, and the course reserves of most of the idle mines with the inefficient processing that, that yields, we don't see much, if any, of that capacity returning at the current pricing and margin levels. And the only other thing I'd add is, this year has kind of been the first time in a long time -- for as long as I can remember that we've seen both high commodity price on nat gas and oil. And so those two things are generating activity in both of those basins, high activity in both of those basins or types of basins. And we haven't seen that in the past, generally in the past it would have been high oil, low gas or vice versa. So that's kind of an interesting market demand that we've been talking about a lot.

Great. Thank you. And you mentioned, I believe, double-digit contribution margin per ton in the fourth quarter. And that's a pretty strong number given, I think, what is normally some cost -- some winter cost -- cost of goods sold increases. Can you just kind of -- is that driven by just the efficiency of the system and the price dynamics you've seen over the last year that allows you to hold it at that level in what's typically a softer fourth quarter?

Yes, Stephen, I think a couple of things that are driving that. We're seeing -- we're guiding to volumes being relatively consistent in the fourth quarter versus typically we have a little bit of a drop off. So it's allowing us to absorb our fixed cost a little better in the fourth quarter we normally do. And so that's helping. And then also, we're seeing pricing, I think kind of stabilize at current level. So we see kind of pricing remaining at good levels. So the combination of having consistent volumes in the fourth quarter versus more of a drop-off than we've seen in the last couple of years, coupled with a good pricing environment, I think this leaves us to feel confident that we'll be in contribution margin per ton levels that you saw in the second quarter and the third quarter even backing out the shortfall revenue for the third quarter number.

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

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

Hi there. Thank you for having me on. First question, do you still next quarter 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 sand in any given quarter. So for example, like in quarter -- do you sell quarter four sand in quarter three? And does that -- 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.

Okay. Thanks. Well, the question was basically like do you actually sell the sand -- like have you actually increased the number of people you have on contracts. So are you able to see into the next quarter how much volume you could possibly have and have you actually increased the number of people you have on contract.

Yes, we've added a couple of smaller contracts. And so, we don't disclose actually the percent of contracts we have outstanding, but we have added a couple of smaller contracts that are -- will have volumes associated with them starting in the fourth quarter and first quarter next year. But we have our current contracts in place and then we do have pretty good visibility with our spot customers in terms of working with them to know kind of where their volumes are going to be 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?

I think that's something we'll continue to evaluate. Right now, as you saw in our numbers, we got the positive free cash flow this quarter. And we anticipate being able to kind of continue on that trend. And once we see and are confident in terms of our cash flow being consistent and being positive cash flow, then we will evaluate the opportunities we have in terms of thinking about providing return to shareholders through dividends or other measures. So it's still a little early for that, but that's something we'll evaluate. And we'll -- as we get into 2023, we'll have more discussion on that depending on how overall activity is, but free cash flow we're generating and the consistency of that cash flow.

All right. Thank you.

Thank you.

Thank you. And that's all the questions I've had. 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.