Smart Sand, Inc.

Good morning and welcome to the SmartSand second quarter investor conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. 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 SmartSAN'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. Mark Sanders 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 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 reconciliation 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. SmartSAN 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 a strong balance sheet that will allow us to continue to successfully manage through 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 in completion activity in this basin. With our Van Hook Terminal in North Dakota, we believe we have the most efficient movement of northern white frac sand into the Bakken, which allows us to continue to be a market leader in this key northern white market. As we highlighted on our first quarter call, activity did moderate in the Marcellus in the second quarter due to lower gas prices, but sales volume into this basin were still at healthy levels. Tons sold in the Marcellus were lower than the first quarter shipments, but slightly higher than the same period a year ago. Currently, we expect activity in the Marcellus to be lower in the third quarter, but we're seeing signs that sales volumes into the Marcellus should pick up in the fourth quarter. We believe long-term natural gas fundamentals are strong and completion activity in the Marcellus will grow over time. We are currently expanding our Waynesburg terminal in southwestern Pennsylvania to allow us to take advantage of the expected increased activity in the Marcellus in the future and to increase our market share in this key northern white market. This expansion is expected to be completed before year end. Our Blair facility in Wisconsin is operational and we made our first shipments into Canada this quarter. While still a small portion of our overall sales, we expect sales volumes to continue to grow in this market. With Laird being directly on the CN rail line, we are well positioned to compete in the Canadian frax end market. We currently expect sales volumes into Canada to be 10% to 15% of tons sold in the second half of this year. Our focus on cost-effective, efficient, and sustainable delivery of frac sand from the mine to the well site has established SmartSand as a market leader of frac sand in the Baca and Marcellus markets. We believe the Blair facility now provides us an opportunity to become a market leader of northern white sand in the Canadian market as well. We believe northern white sand is undeniably a superior profit to regional sand alternatives. While our primary focus will continue to be on growing our market share in primary northern white markets, We believe northern white sand leads to better long-term well results, and EMP companies in the Permian and the Eagleford and other markets that have regional sand can improve their long-term well performance by using northern white sand in their well completion designs. We commissioned a white paper that you can read on our website that builds on a study done by Rystad Energy, a leading energy consulting firm that evaluated well results in the Delaware and Midland Basins since 2018. comparing the performance of wells completed with northern white sand to wells completed with regional sand. The results of these studies are striking. They clearly demonstrate the potential for producers to achieve improved well results using northern white sand as the profit in their completion designs. By choosing northern white sand versus regional sand, producers have the potential to significantly improve long-term well results, which should lead to higher production, higher free cash flow, and ultimately lower capital spent over time as levels. Also, regional sand supply in the Permian Basin is potentially facing a threat as the dune sagebrush lizard is now scheduled to be listed as an endangered species in the next 12 to 18 months. This listing could impact sand mining, operations, and supply that is based in the Permian that could lead to increased demand for northern white sand in this basin. It is too early to tell how big of an impact the listing of the dune sagebrush lizard may have on regional sand mines in the Permian or potential increased demand for northern white, but this is something we are keeping a close watch on. To be clear, SmartSand does not have to sell sand into the operating basins of the southwestern United States that are currently primarily supplied by regional sand to be successful. As demonstrated by our strong financial results, we will continue to deliver solid operating and financial performance by serving the current key northern white markets. However, we believe we can deliver high-quality northern white sands sufficiently and sustainably into the Permian and Eagleford basins. In particular, which can be a win-win for SmartSand and EMPs, we can expand sales volume into these markets, and EMPs can benefit from better long-term well results, which over time should lead them to be able to generate higher free cash flow as they generate more production from every well they drill. While our frac sand sales remain strong, We are continuing to look to grow our other business lines. The performance of Smart System's last-mile offering continues to improve. We added our Smart Belt technology to our service offerings, which allows us to handle greater volumes of sand at the well site while reducing our ongoing maintenance requirements. We operated two Smart System fleets with our Smart Belt system in the second quarter and saw substantial improvement in our operating results due to lower maintenance costs. Additionally, with the new belt technology, our smart systems can support higher volumes directly into the blender of the pressure pumping equipment, leading to more efficient last mile delivery for producers and pressure pumpers compared to other sand delivery options at the well site. We're investing in additional smart belts to add to our existing fleet to further extend these savings. We expect to have nine fully functional smart systems with this new technology available to serve the market starting in 2024. We expect to see continued improvement in the operational profitability of our last-mile offering going forward. Our industrial product solution business also continues to grow. Industrial product solution sales volume this quarter increased 70% over first quarter results and represented approximately 5% of our overall sales volume in the quarter. We are investing in cooling and blending capabilities at our Utica, Illinois facility, which should allow us to more aggressively market to the foundry markets and other industrial applications. This investment is expected to be completed by year end. We expect sales volumes to be in the 5% range or better for the remainder of 2024 and grow from there. We're committed to the industrial product solutions market to help diversify our business beyond oil and gas and to more effectively utilize our asset base. We are taking the time to build this business for the long-term success. 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 successfully manage our business through the operating cycles in the oil and gas industry. Our goal is to consistently deliver free cash flow and to be a market leader of delivering high-quality northern white sand to fracking industrial sand markets. And we will 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 Beckelman.