Smart Sand, Inc.

Good day and thank you for standing by. Welcome to the Q4 2022 SmartSand, Inc. 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. To ask a question during that session, you will need to press star 1-1 on your phone. You will then hear an automated message advising your hand is raised. To throw your question, please press star 1-1 again. Please be advised that today's conference is being recorded, and I would now like to hand the conference over to your speaker today, Mr. Chris Green, Principal Accounting Officer. Mr. Green, please go ahead.

Good morning, and thank you for joining us for SmartSAN's fourth quarter and full year 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'd 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. SmartPandas claims 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 that is accurate only as of the live broadcast today, March 1, 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 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. Before getting into our fourth quarter and year-end 2022 results, I want to highlight our buyback of Clear Lake Capital's equity ownership position in SmartSand. As announced yesterday, we purchased from Clearlake 5.18 million shares for approximately $8.85 million. This shared buyback amount represents approximately 11.3% of the company's outstanding share. I want to thank Clearlake for its long-term commitment to SmartSan. Clearlake provided us with our initial capital in 2012 to begin developing our Oakdale facility, and it's been a good partner for the company over the last 11 years. This transaction demonstrates our continued commitment to deliver long-term value to our shareholders. We believe this buyout of Clilix Equity Position demonstrates our focus on shareholder returns as a good investment in the future of SmartSAN. Now to our financial results. SmartSAN delivered strong operating and financial results in the fourth quarter and for the full year of 2022. In the fourth quarter, we sold just under 1.2 million tons, and for the full year of 2022, We delivered 4.3 million tons, an annual record for the company. Our acquisitions and development activities over the last few years contributed to our strong results in 2022. Our Utica facility acquired in late 2020 represented approximately 22% of our sand sales volumes last year. Our Waynesburg terminal in Pennsylvania was a key driver in our increased sales activity in the second half of 2022. 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 SmartSAN. The fourth quarter was our third consecutive quarter of positive adjusted EBITDA and our second consecutive quarter of positive free cash flow. For the quarter, we generated $10.7 million in adjusted EBITDA and $2.4 million of free cash flow. For 2022, our adjusted EBITDA was $29.3 million which was a substantial improvement over 2021 results. Activity continues to be strong, and we expect it to continue. I'm happy to announce that we just signed an extension of our contract with a Marcellus customer, extending the contract term and increasing volumes, which demonstrates continued strong demand for northern white sand in the Marcellus. We continue to demonstrate the value of our business model to deliver high-quality northern white sand sustainably and efficiently from the mines of the well sites. Northern White Sand continues to be the primary source of frac sand in the eastern and western basins of the United States and in Canada. Canada, being a major Northern White Sand market, was the main driver for our investment last year in the Blair Mine and Processing Facility in Wisconsin. I'm pleased to announce that we are moving forward to make the necessary investments in the first quarter to bring Blair online. We'll expend approximately $5 million to make Blair operational. We have signed our initial contract to deliver sand into the Canadian market, and we expect to start selling sand into the Canadian market beginning in the second quarter. With Blair opening, we now can effectively compete in all primary northern white sand markets. We are committed to the northern white sand market. We have made strategic investments over the last two years to establish SmartSand as the premier provider of northern white sand and logistics services in the market, and those investments are all contributing to our improved financial performance. Our key operating strengths are our high quality reserve base of majority finer mesh sands, our efficient mining and processing facilities at Oakdale, Utica, and Blair, our direct access to four Class I rail lines and strong connections to all Class I rail lines, our high volume in-basin terminals in North Dakota and Pennsylvania, and our efficient well site sand storage and delivery fleets, and services through our smart systems product offering. While we remain focused on our primary northern white sand markets, we are seeing renewed interest in northern white sand in the Permian and mid-continent basins. Well performance in the Permian and other southwestern basins has been declining. We believe northern white sand leads to better long-term well results as EMPs continue to focus on generating positive free cash flow We believe wells completed with northern white sand will lead to better production over the life of the well, leading to higher overall cash flow generation for the producer. We don't expect these markets to turn away from regional sand completely, but we do believe we can opportunistically sell northern white sand into these markets to add incremental value to our business. Our unit-grade capable trans-loading 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. Our volumes transloaded through our Waynesburg terminal increased in the fourth quarter, and activity through this terminal continues to be strong. Volumes through our Van Hook North Dakota terminal typically slow down in the winter months due to weather, but we expect activity through Van Hook to pick up starting in March. Utilization of our smart systems last mile offerings continue to improve. We are gaining momentum as we start to penetrate the market with our SmartPath technology. Our smart systems generated positive contribution margin in the fourth quarter and for the full year of 2022. Going forward, we expect it to deliver improving financial performance. Our industrial product solutions division continues to grow. Our industrial sales volume increased by 30% in the fourth quarter. Industrial product solutions is a long-term commitment to diversify our business beyond oil and gas. and to move more effectively to utilize our asset base. We are taking the time to build this business for long-term success. We expect to see this business segment continue to grow in 2023 and beyond. As always, we will continue to keep our eye on the future. We are focused on generating higher returns from our existing quality asset base and logistics capabilities, while maintaining prudent leverage levels that allow us to operate through operating cycles in our industry. As demonstrated by our buyback of Clearlake's equity position, We are committed to creating long-term shareholder value and will continue to evaluate and look opportunistically for ways to deliver value to our shareholders going forward. And we always keep our employees and shareholders' interests in mind in everything we do. And with that, I'll turn the call over to our CFO, Lee Beckleman.