Good morning, and welcome to the Smart Sand Second Quarter Investor Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask question. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Chris Green, Corporate Controller. Please go ahead.

Good morning and thank you for joining us for Smart Sand's second 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 August 9, 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 second quarter, we sold approximately 1.1 million tons, we generated $19 million in contribution margin and $11.4 million in adjusted EBITDA in the quarter both solid improvements over second quarter 2022 results and first quarter 2023 results. Additionally, in the first half of the year, we generated approximately $12 million in free cash flow including approximately $11 million in the quarter. We expect to remain free cash flow positive for 2023. In the quarter, we paid down approximately $13 million in debt. We are committed to maintaining our strong balance sheet that will allow us to continue to successfully manage the operating cycles in the oil and gas industry. Our focused business strategy of providing high-quality Northern White sand in an efficient and sustainable fashion to our customers throughout North America continues to deliver strong financial results and long-term value for our shareholders. 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. In the second quarter, we saw continued strong demand for Northern White frac sand. Activity in the Bakken increased substantially from the first quarter. We currently expect to see strong demand in this basin through the end of the third quarter. Typically the second and third quarters of the year are the strongest demand periods for sand in the Bakken as most producers plan the majority of their completion activity in the summer months. We currently expect activity to moderate in the fourth quarter due to normal seasonal slowdown and completion activity in this basin. With our Van Hook terminal in North Dakota, we believe we have the…

Thanks, Chuck. Now I'll go through some of the highlights of the second quarter. We sold 1.1 million tons in the second quarter of 2023, which is relatively consistent with first quarter sales volumes of 1.2 million tons. 1Total revenues for the second quarter of 2023 were $74.8 million compared to $82.4 million in the first quarter 2023. Total revenues were slightly lower in the second quarter of 2023, primarily due to lower tons sold and contractual shortfall revenue recognized in the first quarter of 2023. Our cost of sales for the quarter were $62.1 million, compared to $70.7 million last quarter. The decrease was primarily due to lower seasonal production costs. Production costs are typically lower in the second and third quarters of the year, as we build inventory over the warmer months to support sales demand later in the year as we enter the winter months. Additionally, we had lower freight expenses sequentially due to a shift in our in-basin sales mix. Total operating expenses decreased to $9.6 million in the second quarter, compared to $13.2 million in the first quarter of 2023 due primarily to a $1.9 million net loss on disposable of fixed assets included in the previous quarter as well as year-end 2022 bonuses that were paid in the first quarter of 2023. For the second quarter of 2023, contribution margin was $19 million and adjusted EBITDA was $11.4 million compared to the first quarter contribution margin of $17.8 million and adjusted EBITDA of $8.4 million. The increase in contribution margin was due primarily to lower production costs and improved margins for our SmartSystems fleets. Adjusted EBITDA was higher sequentially due to the higher contribution margin and lower operating expenses. For the second quarter of 2023, contribution margin per ton was $17.57 per ton compared…

We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Patrick Ouellette of Stifel. Please go ahead.

Hi, this is Pat on for Stephen Gengaro today. Thanks for taking the financial questions.

How you doing?

So, could you give us an update on industry supply and demand for frac sand? And what it looks like specifically for Northern White? And maybe, how you expect demand to play out in the second half of the year and into 2024?

Yes. So, as Chuck had kind of said in his comments, we expect some moderation in demand in the fourth quarter. It's hard to say, what that's going to be. The fourth quarter is always kind of a little bit of a shot in the dark at this time of the year. But certainly, the fundamentals look good on Northern White, right now. The market has been relatively in supply and demand balance. And so, we think that it's promising for the rest of this year, from a volume perspective. And we also think that Canada is going to be a nice bright spot for us, kind of going into the third and fourth quarter this year.

Great. Okay. Thanks. And then just building off talking about Canada. Regarding gross profit you noted improvements sequentially based on sales mix of the basins you were delivering to. So, is any of that margin improvement coming from the deliveries to Canada?

Well, again, as we highlighted in our press release and comments part of the margin improvement was lower production costs in the second quarter, because we capitalize inventory costs and typically we have lower production costs in the second and third quarter and then we'll see a little higher in the fourth and the first quarter as we draw down inventory. So that was basically a driver of that. Pricing was relatively flat in the second quarter versus the first quarter. In Canada, we do expect that to help overall sales but most of our sales in Canada right now are on an FOB mine basis. So that actually will lead our pricing to be a little lower on an average sales price even though we'll have less freight expense associated with that. So the margins in Canada right now seem to be fairly similar to what we're seeing in the US.

Okay. Great. That's very helpful. I'll turn it back

Next question comes from Jim Barrett [ph] of Barrett Investments. Please go ahead.

Good morning, everyone. Maybe for you your current level of capital spending for this year is that the new normal given the addition of Blair and growth plans for SmartSystems, or do you expect spending to subside on 2024 and 2025?

Well, this year we're expecting to spend about $20 million to $25 million which included specific growth initiatives at Blair, the expansion of Waynesburg as we highlighted as well as the IPS expansion. So every year we evaluate, but I can say generally that our maintenance tie-up and efficiency capital is probably going to be typically in the $10 million to $15 million a year. And then depending on growth initiatives we might see another $5 million to $10 million. So I think we'll continue to range under our current operating structure with our three mines and probably a $15 million to $25 million CapEx per year depending on growth initiatives each year.

On a separate note can you tell us how much of your volumes currently are under long-term contracts?

Well, roughly today about 50% of our volumes are under some term portion of contracts that goes. Our contract structure today go anywhere from kind of 6 months to 18 months for maybe half of those volumes and we do have a few long-term contracts that go out multiyear.

I see. And Chuck, could you -- the Canadian market can you tell us who are you sand competitors to service those customers? And just give us sort of a sense of what the competitive framework is in that up there?

Yeah. So basically, the Canadian market for the most part we see it's Canadian National originations. So, Source Badger companies like that are existing companies. But we see that market and the activity that's going on with the E&Ps there. It looks to be very, very strong. The pipeline infrastructure is being put in place and we're feeling really good about that market.

Okay. Good. And my last question is the white paper that was on your website that highlighted the superior economics of using Northern White sand in markets like the Permian and Eagle Ford. Any reception from the customers in Texas as to the -- is that generating any additional interest, or are you still in the very early innings of educating customers as to the relative narrative of the different types of sands?

Yes. I think in general right now you're seeing a lot of the E&Ps really looking at their production and their wells in the Permian and looking for ways to impact that. So we definitely think it's on the radar. Additionally, the Dunes Sagebrush Lizard thing has a way of not only impacting sand mining down in the Permian Basin, but also could have potential impact on people in their acreage holdings on drilling down there. So I think in general there's kind of a concern on what's going on down there. Again, we're not spending capital on this right now down there, but we are very much watching this.

Okay. Well, thank you both very much.

Thank you.

Thank you.

The next question comes from Jonathan Catlin of Catlin Capital Management [ph]. Please go ahead.

Hi. Good morning, John and congratulations on a terrific quarter. I just had two questions. You say that you're going to be cash flow positive for the year. You're already I think substantially cash flow positive for the year. Does that mean the second half we're going to see negative cash flow? And number two is just more of a general question. This quarter was kind of the performance seems a bit surprise analyst estimates or estimated loss you did -- you had a substantial gain. It looks like your business is evolving and the -- it looks like you are moving into more profitable areas of the market. Can you just kind of give some color on where those areas -- which markets are you seeing better profitability in and how sustainable they are?

Well, I'll answer the first question. We do have strong free cash flow in the first half of the year. We will see potentially a little higher CapEx in the second half of the year. We spent about $9.2 million in the first half. We've guided $20 million to $25 million as we complete these projects that Chuck highlighted in his comments. So we could see a little higher CapEx in the second half of the year. And typically we'll have a little bigger build of working capital for inventory in the third quarter that should moderate some in the fourth quarter. So I would expect us to not be as positive free cash flow in the second half of the year, but I do expect to generate some positive free cash flow in the second half of the year and be -- have strong overall free cash flow for the full year. And then in terms of markets, John and Chuck can join in. But I think again we believe because of our logistics advantages and what we've invested in the Van Hook terminal, in the Waynesburg terminal in particular continue to lead us to be market leaders in the Bakken and the Marcellus in particular and we continue to expect to still be strong leaders in those markets. And we believe going forward that we can do the same thing in Canada. So the real upside potential for us is to continue to grow our market shares in the Marcellus and the Bakken based on our low-cost production as well as our really efficient movement assuming the railroads continue to be good partners with us and look to expand that and build that same model into Canada. And so we don't necessarily talk about our individual profitability by basin, but those three basins continue to be -- we still see good long-term prospects in those -- in all three of those basins in terms of being primary Northern White. And then additionally, while it's still a small part of our business our SmartSystems continue to get traction as we improve their operational efficiencies. And so we expect it to continue to be additive to overall contribution margin going forward. And we are starting to make inroads into Industrial Product Solutions. As we said it's 5% of our sales this quarter, substantial improvement quarter-over-quarter. So we see those two as being additive on top of the frac sand business that should help us potentially positive as well as we go forward.

Yes. And the only thing I'd add to that is that over the years we've made some investments – capital investments and operational efficiency at our mine sites. And those are starting to pay some dividends. So that's certainly something that's providing a little bit of tailwind on operating results here. So hopefully that continues. We think that these investments have been made were something that we've been looking at doing and we're seeing some advantage for them.

Thank you very much. That’s very helpful.

Thank you.

Next question comes from Stephen Gengaro of Stifel. Please go ahead.

Thanks. Good morning, gentlemen.

Good morning, Steve.

I was wondering – so we hear a lot or a lot – we definitely heard about spot pricing softness in Texas. And I was curious, given the different supply-demand drivers for Northern White and the destinations for your product what are you seeing in sort of the spot market? And how does that kind of impact any existing contracts?

Yes. So obviously, we keep an eye on what's happening down in Texas and there has been some moderation in the pricing there, not entirely sure what's driving that. I think there's a lot of supply down there and any hiccups in demand can impact that market pretty dramatically. In Northern White, we – in certain cases we see pricing moderating depending on grade of – size of sand grain and those types of things. But it's hard to pin down exactly an individual market and is something softening. We keep a close eye on it. We work closely with our customers. We work closely with the railroads to make sure that we're continuing to offer a competitive product in there. But given that Northern White has been in relative supply and demand balance over call it – since the downturn of COVID in some of the mines are no longer in existence, we've seen that supply demand to remain in balance. And so I don't know Stephen, if that continues. I don't – I haven't heard of any additional supply coming onboard or coming online in Northern White to any great degree. So any kind of demand upset either on the upside or the downside has the potential to affect that. But mostly what we see when prices are moderating there is more seasonality or rigs moving and things like that. But right now it seems like the market is in relative balance.

Great. Thank you. And then one other for me. Have you seen much change? And you might have mentioned this I got cutoff, but you see much change on the cost side as far as – I know you've done a lot of work and done a good job managing the cost side. But on the – basically based on the COGS line, has there been any positive movements we should be thinking about as we go forward from here?

Well, I think as we highlighted and John talked about earlier, we have made investments to improve our efficiency, particularly around mining at our Oakdale facility and we're actually just kind of starting those processes. So we would expect that to really start helping margins and costs as we go into 2024. And again, that's also driven by higher volumes. To the extent we get higher volumes and increase our utilization, we do have kind of high fixed operating leverage. So as we can sell more volumes and spread our fixed costs, that helps drive our costs per ton down as well. So assuming we can maintain or increase our volumes and keep improving our mining efficiencies in particular on these new initiatives I would expect to help on a cost per ton basis bring down our cost down going into 2024.

Thank you. And if I could just slip one more in. When we think about the kind of evolution of frac sand demand or usage per stage that's obviously improved over the years. Where does that stand now? Is it stabilizing? Do you still see modest growth? How should we think about that?

Well, I think in we are seeing growth, right? The stages are -- the laterals continue to get longer folks want to pump more sand per stage. They want to do the stages faster. And really when we think about this growth and the amount of sand that we are forcing down the well in any given basin that we're operating in, it really comes back to kind of logistics cause that we talk about often on these calls which is making sure that you've got the ability to deliver the quantities of sand reliably sustainably and get them down the hole. So you have to be thinking about this from the mine to the wellsite. Chuck had mentioned we've launched this new Smart Belt technology for our wellsite solutions. And that was driven primarily by the requirement for forcing huge amounts of sand down the well in a short amount of time. And we think that we've got a good mousetrap on that and the ability to support these longer laterals. We certainly have the reserve base. We have over 500 million tons of sand. We certainly have the production capacity. We have about 10 million tons of annual capacity available and we have the right mix that comports with what these guys are going to do to fine grain sand. So we feel like we're -- and we have the logistics infrastructure with rail to make that sand delivery into the market.

Yeah. We put our system our last mile system up against anybody's system on how much sand can be pumped down a hole a day. And I think that people are starting to really recognize that.

Okay. Great. Thank you for all the detail, John.

Thanks, Stephen.

[Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Chuck Young for any closing remarks.

Thanks for joining us on our second quarter call. Look forward to speaking to you again in November.

Conference has now concluded. Thank you for attending today's presentation and you may now disconnect.