Atlas Energy Solutions Inc.

Greetings and welcome to the second quarter 2023 Financial and Operational Results Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Kyle Turlington, Vice President, Investor Relations. Thank you, Kyle. You may begin.

Hello, and welcome to the Atlas Energy Solutions conference call and webcast for the second quarter of 2023. With us today are Bud Brigham, Chairman and CEO, John Turner, President, CFO, and Chris Shola, Chief Supply Chain Officer. Bud, John, and Chris will be sharing their comments on the company's operational and financial performance for the second quarter of 2023, after which we will open the call for Q&A. Before we begin our prepared remarks, I would like to remind everyone that this call will include forward-looking statements as defined under the U.S. securities laws. Such statements are based on the current information and management's expectations as of this statement and are not guarantees of future performance. Forward-looking statements involve certain risks, uncertainties, and assumptions that are difficult to predict. As such, our actual outcomes and results could differ materially. You can learn more about these risks in our Registration Statement on Form S-1, filed with the U.S. Securities and Exchange Commission on January 31, 2023. In connection with our initial public offering, our quarterly reports on Form 10-Q, the Registration Statement on Form S-4 will be filing in connection with our Upseas Simplification Transaction and other SEC filings. You should not place undue reliance on forward-looking statements, and we undertake no obligation to update these forward-looking statements. We will also make reference to certain non-GAAP financial measures, such as adjusted EBITDA, adjusted free cash flow, and other operating metrics and statistics. You will find the GAAP reconciliation comments and calculations in yesterday's press release. With that said, I'll turn the call over to Bud Brigham.

Thank you, Kyle, and thanks to everyone for joining us today for our second quarter conference call. We're very pleased with our second quarter operational and financial results. In spite of the volatile market conditions, our team delivered another record quarter across a range of operational and profitability metrics, including total sales, sales volumes, net income, and adjusted EBITDA, to name a few. We've made good progress reducing our operating costs on a per ton basis, in my view, with more to come. Our capital projects to grow our business are progressing as planned, on time and on budget. These capital investments are being made in three different areas of our business, including first, profit mining and production, where the expansion will increase our production by approximately 50%. We believe we are already the largest profit producer in the Permian, and our growth will further enhance our scale, which is beneficial in order to reliably match the scale and efficiencies of our large-scale customers. Our existing scale and associated reliability, even prior to this expansion, is one of the reasons we enjoy better pricing stability than many of our peers. Looking forward in this regard, we've already secured commitments for over 6 million tons of our production for 2024, which is well ahead of the less than 4 million tons we had under contract for the 2023 fiscal year at this time last year. Given that our expansion increases our capacity by about 50 percent for 2024 to around 15 million tons, that's about 40 percent of our anticipated production capacity next year that is spoken for. Again, our anticipated production capacity for 2024 is up close to 50 percent from our current capacity of approximately 11 million tons. We aim to have approximately 80 percent of our 2024 capacity committed by year end. As a reminder, we had that same goal entering 2023, and due to intense demand, we ended up more than 90% contracted. The second area of expansion and associated capital investment is our logistics offering, which includes our innovative high capacity trucking and delivery systems. Our logistics and delivery systems enhance efficiencies for the industry, And as a result, we are growing our market share, as Chris will discuss in a bit. This logistics offering is important, as these trucking and delivery systems will seamlessly interface with our Dune Express conveyor system, which is expected to come online late in 2024. And that brings me to the third area of capital investment in our business, our Dune Express, which is really more similar to a midstream enterprise. Like the other capital investments, the Dune Express is on time and on budget with expected commencement in the fourth quarter of 2024. Whereas the planned expansion increases our production capacity by approximately 50% in 2024, we expect the Dune Express to further increase our revenues and cash flows in 2025. These major capital investment initiatives will begin winding down late this year with the completion of our plant expansion to the benefit of our discretionary cash flow in 2024, particularly given that the expansion should increase our production capacity by approximately 50%. And, of course, our current capital investment commitments are expected to decline further late in 2024 with the completion of our Dune Express construction. As a result, during 2024, we expect to experience a major revenue and cash flow increase, and given the declining capex, also an increase of our discretionary cash flow. This should continue in Q4 2024 and into 2025 with the anticipated completion and commencement of our Dune Express conveyor system. Again, the Dune Express is really more similar to a midstream-type enterprise, which should further drive growth in our margins distributions, and cash flows during 2025 while significantly enhancing reliability and efficiencies. Importantly, our high-capacity trucking in the Dune Express will also provide substantial environmental and societal benefits, particularly given the fact that we will be taking thousands of trucks off these dangerous commercial roads while reducing emissions and potentially saving lives. Speaking of this, We just released a new video about the Dune Express and our other initiatives, which is linked in our earnings release in our website. It's quite informative, so I encourage you to take a look at it. Regarding the macro environment that we're operating in, the Permian profit market remains very healthy. Although the downdraft in oil prices during the second quarter combined with economic uncertainty to delay the increase in the frack count that we expected, We continue to see FRAC fleets gain efficiencies, which are driving up sand consumption. For the third quarter, our production remains sold out, and particularly given how heavily contracted we are, we expect to remain busy throughout 2023. One thing investors should recognize is that there is stratification in the profit and logistics markets, just as there is with operators. which is based both on the quality of their reserves and their operational capability, including scale, which is very important for driving reliability and efficiencies. The fact that we control the largest and highest quality propent reserves and that we produce more propent than anyone in the Permian provides us with important advantages and makes our results less volatile. The unmatched scale and quality of our reserves combined with our unique dredging operations, lowers our per-unit cost structure while enhancing our consistency and reliability to the benefit of our Permian customers. These are among the reasons we are so heavily contracted and that we don't always see price softness when other smaller and lower-tier prop and producers do. But we remain encouraged by the overall market fundamentals and believe that we remain on a path to another record year for Permian sand consumption. Assuming commodity prices remain attractive, this will continue to put pressure on Permian sand suppliers to keep up with the demands of Permian operators. Given our level of contracted volumes, which continues to grow, our exceptional margins and cash flows, we are comfortable putting forward a second quarter dividend at 20 cents per share. which as of Friday's close equates to an annualized dividend yield of 4.1 percent and is 33 percent higher than our first quarter dividend in related distributions. The dividend is comprised of a 15-cent per share base dividend with a 5-cent per share variable dividend. As our CapEx investments wind down late this year and during the course of 2024, we expect our cash generation to increase, potentially providing more flexibility for our board to grow the dividend, particularly during 2024 and beyond. As we continue to work with the Board to clearly define our dividend framework, the installation of a base dividend is a major step forward, providing enhanced visibility to our investors of our plans around a return of capital program. A quick summary note on our financial performance. As shown on slide 12 in our deck, I'm proud of the fact that our margins are industry-leading, even above that of the big three and the midstream peers, while our growth has and should continue to also lead the industry. In addition, our first two quarters as a public company should provide evidence to the stability and health of our business, which does not blow in the wind with oil prices like some in the oilfield service space, largely due to our scale and reliability which matches up with our skilled, high-quality customer base. Over time, our exceptional and steady financial performance should be reflected in our stock price performance. And we have a positive development with regard to our corporate structure. As announced today, the Board unanimously approved an up-sea simplification transaction, and we're looking forward to getting that completed soon, hopefully by the end of the third quarter. In connection with the simplification transaction, all outstanding shares of Class A common stock and all outstanding common units of our operating subsidiary will be exchanged on a one-to-one basis for shares of common stock of a newly formed public holding company. And all outstanding shares of our Class B common stock will be canceled. The transaction is expected to simplify our current corporate structure into a single class of shares. And we believe the simplicity and transparency of this new structure will be beneficial to our shareholders. Finally, I would like to address the recent news that the Department of Interior is seeking to advance a listing of the Dunes sagebrush lizard under the Endangered Species Act. We want to be very clear that we are prepared in the event that the Department of Interior eventually lists the lizard. We have done many things proactively with regard to DSL conservation and to protect our business. Most importantly, by becoming a participant in the 2021 CCAA, which will allow us to operate just as we are today in the event of an ESA listing. Many of our customers are also participants in the 2021 CCAA as well. As a result, in stating again, We believe we're very well positioned to continue to operate at full capacity, even in the event of a listing. With that, I will turn the call over to Chris, our Chief Supply Chain Officer, to provide you with an update regarding our trucking and logistics business.

Thank you, Bud. Atlas Energy Solutions continues our evolution from a profit manufacturer to a differentiated, delivered-to-the-blender solution. Our vertical integration into logistics underpins our long-term strategy to continue to expand our reach across the oil fields value chain and offer disruptive solutions for our customers. We continue to grow our logistics fleet, having taken delivery of 66 trucks, which are operated by Atlas employees, and all of our 323 high-capacity trailers. Equipment deliveries are progressing on time and on budget. We expect to reach our planned 120 truck fleet by the end of this year. As a reminder, on January 3rd of this year, we made our first deliveries with our high-capacity trailers, capable of hauling one and a half times that of your typical industry payload. Since that time, we have been delivering double, now even triple trailer loads to the well site. To put this in perspective, we are achieving delivered payloads that range between 70 to 100 tons of sand which is almost three to four times the industry average. Obviously, Atlas is driving major efficiencies with these offerings to the benefit of our customers and local communities. Our differentiated solutions and associated service quality provide enhanced efficiency, reliability, and safety compared to traditional SAN delivery methods. Increased customer demand for our delivery to blender solutions is clearly reflected in our revenue growth. Secondarily, quarter-over-quarter revenue increased 45%, and year-to-date, year-over-year revenue increased 159%. Our logistics solutions were intentionally commercialized prior to the Dune Express. Almost 90% of our last-mile business is in the Delaware Basin, and 100% of our Atlas high-capacity fleet is operating in the Delaware Basin. As our customers and the broader market increase adoption of high-capacity multi-trailer deliveries, we expect continued associated market share gains in the Delaware that will seamlessly integrate into the Dune Express upon commencement in Q4 of 2024. With that, I will turn the call over to our President and CFO, John Turner.

Thank you, Chris. Today, I will review our second quarter 2023 operating results and comment on our financial position. First, looking at our profit production results for the second quarter of 2023, our sales volumes were 2.8 million tons, which equates to an annualized run rate of just over 11.3 million tons. We generated record sales of $161.8 million, representing a 5.5% sequential increase. On product sales, our sales volumes grew by approximately 2.6% sequentially, while our average mine gate price declined moderately from $46.45 per ton to $44.21 per ton, resulting in relatively flat product sales. As a reminder, given our significant contract coverage, we are limited participants in the spot market during the second quarter. But when we did make spot market sales, we were able to achieve good pricing in the mid to low $40 per ton range. We've also been working with both existing customers and new customers on contracts for 2024 and beyond, and we've made good progress on that front. Now, moving to the service sales, which is revenue generated by our logistics operations, for the second quarter of 2023, we reported a quarterly record of $36.6 million in revenue, representing a 45% increase of $11.3 million when compared to our prior period. This increase is primarily driven by expanding the size of our trucking fleet, which allowed us to take on more work. We ended July with 66 trucks, which is an addition of 43 trucks since last quarter. In total, cost of sales excluding DD&A quarter over quarter increased by $900,000 to $63.5 million, This increase was primarily driven by higher trucking and last mile logistics costs resulting from the increase in the size of our fleet. It was nearly fully offset by a reduction in our mining, mobile equipment, and fuel costs as we were able to mine more tons with our dredging assets and also benefited from lower traditional mining rates with our new vendor. We continue to see improvements in our dredge mining operations. and we expect our mining costs to continue to moderate as our dredge mining utilization rates continue to increase throughout the remainder of the year and into 2024. For the second quarter, our per ton plant operating costs were $9.62, which is 16% below the $11.46 per ton we reported in Q1 of this year. In addition, we expect the delivery of new specialized dredging equipment in early 2024 to provide for significant potential improvements in operational performance and reductions in our mining costs. Royalty expenses for the quarter were $4.3 million, representing a 46% sequential decrease. This decrease was due to the removal of the Kermit overriding royalty interest for the full quarter, which ceased towards the end of the first quarter in connection with our IPO. SG&A expense for the quarter was $12.2 million, representing a sequential increase of 43%. Adjusting for non-cash stock compensation, quarter over quarter, our cash G&A increased 34% from $7.9 million to $10.6 million. The increase in cash costs was largely the result of our IPO. and the transition to a public company incentive compensation plan as the vast majority of our 2017 unit-based incentive compensation expense had been expensed in prior periods. The increase in the cash component of our GNA was largely associated with increased professional fees associated with the up-sea simplification and other costs related to tax structuring and other corporate matters that were front-loaded in the period just after the IPO and in some cases will not be repeated. Interest expense was $4 million for the quarter. Most of this was associated with our term loan, which bears interest at 8.47% and has a 2027 maturity. We generated $3.5 million of interest income for the period, which will likely decline in future quarters as we draw down on our cash reserves to fund our growth expenditures, the Dune Express and Kermit expansion. Depreciation, depletion, and accretion expense for the quarter increased to $9.4 million, representing a sequential increase of 10.7%. This increase was due to higher depletion expense associated with higher sales volumes and additional depreciable assets placed in the service as compared to the prior period. We generated a record net income of $71.2 million for the second quarter, representing a net income margin of 44%. and earnings per share of 67 cents. Net cash provided by operating activities for the quarter was $103.9 million compared to $54.2 million in the first quarter. This increase was largely due to our accounts receivable balance normalizing from the elevated levels we saw during the first quarter, in addition to higher net income generated during the period. Adjusted EBITDA for the period was a record $92.8 million, representing a sequential increase of 10.5% and an adjusted EBITDA margin of 57%. Adjusted free cash flow, which we define as adjusted EBITDA less maintenance capex for the quarter, was $81.9 million, representing a sequential increase of 6.5% and an adjusted cash flow margin of 51%. During the second quarter, we converted 88% of our adjusted EBITDA to adjusted free cash flow, given our low levels of required maintenance capital expenditures. Capital expenditures for the quarter were $106.9 million. This includes $96 million spent on growth projects, which includes our Kermit expansion and the Dune Express, and $10.9 million of maintenance capex. We expect growth capital expenditures to continue to increase in the second half of the year as we progress on Dune Express construction, which will be partially offset by declining permit expansion expenditures as construction activities taper off as we approach commercial in-service of that additional capacity. We have already spent approximately $66 million out of our budgeted $400 million on the Dune Express. For our Kermit expansion, we have spent $151 million with approximately $54 million remaining. The Kermit expansion is expected to be fully available by year-end 2023, with some volumes becoming available early in the September to October timeframe. We are making great progress on the construction of the express and continue to track on time and on budget. As of July 31st, we had ordered more than 80% of the materials and equipment for the project. Similarly, greater than 50% of the purchases associated with installation and labor have been contracted for as well, and we have cleared approximately 36 of the 42 miles of right-of-way. At this time, we have not taken action to pursue additional growth projects along the Kerman expansion, the build-out of our trucking fleet for the remainder of 2023, and Dune Express construction that are currently underway. We may decide down the road to build additional capacity, but don't see any need to make that decision today. As some of you may recall, our Kermit and Monahans plants are much more productive and efficient than we originally anticipated. We believe the Kermit plant expansion will potentially also be more efficient than we've been anticipating and would like to see what the production potential is prior to making further CapEx decisions. In addition, and more specifically, when accounting for our new state-of-the-art dredges in wet and dry capacity, we think it is likely that we will be able to expand our stated production capacity above the 15.5 million tons for next year without additional capital expenditures. We also expect maintenance capital expenditures to remain more or less at second quarter levels for the remainder of the year. As Bud mentioned earlier, we previously distributed $15 million per quarter, and we are increasing our distributions this quarter to $20 million. This amounts to a 20 cent per share dividend for our Class A shareholders and a corresponding 20 cent per unit distribution for our holders of our common units of our operating subsidiary. Given our accessible cash generation and our future contracted volumes, we are comfortable increasing our distribution this quarter to $20 million, and installing a 15-cent per share base dividend as well, with potential for future growth in dividends as our capital investments wind down over the course of 2024. As of June 30, 2023, our total liquidity was $416 million. This was comprised of $342 million in cash and equivalents and $74 million of availability under our ABL facility, under which we had no borrowings outstanding. Principal balance of our term loan sits at $132 million, and our current capital lease balance is $39 million, and so the total amount of debt outstanding is currently $172 million, and we ended the quarter with a total debt to latest 12-month adjusted EBITDA ratio of 0.5 times. Subsequent to the end of the quarter, we entered into an agreement with Stonebriar Commercial Finance, our current term loan lender, to refinance our existing 2021 loan credit facility with a new $180 million term loan facility. Additionally, the new term loan facility will include an additional $100 million delayed draw facility. The transaction is leveraged neutral, extends our maturity to August 2030, provides the company with an additional $100 million in liquidity, and most importantly, removes some of the restricted covenants governing our payment of dividends to better align with our plans to be a distributing enterprise over the long term. I will now turn the call back over to Bud Brigham for closing remarks.

Thanks, John. To conclude, I'm very proud of our team and this company. I will finish by pointing out a single metric that directly validates the quality work of our team and this company, the fact that our customers have significantly increased the profit purchases from Atlas over time. We have seen our SAN volume per customer per quarter grow by over 50% from this time last year. This is a perfect illustration of the importance of aligning with the right customers, of the fact that our customers appreciate our scale, our reliability, our quality, and our expanding and growing logistics offerings. These are reasons Atlas remains extremely busy in 2023, and we're very excited and optimistic about 2024 and beyond. Thank you.

Thank you. We'll now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. One moment, please, while we poll for questions. Thank you. Our first question is from Derek Podheiser with Barclays. Please proceed with your question.

Hey, good morning, guys. Good morning. So appreciate all the color. You talked about being 40% contracted for 2024, and you plan to bring that up to 80% by the end of the year. Just wanted to ask you about the interplay of the weakening spot market pricing that we're seeing and how that may weigh on contract negotiations for 2024. You highlighted spot market prices. You were able to get in that low $40 per ton range. But where has that gone now? I mean, we've heard numbers more with the two handle on it. So ultimately, where do you see this price super ton trending into 2024 as you work against the weakening spot market with trying to contract up your volumes for next year?

Well, this is Bud. I'll start off, and then these guys may want to add to my comments. You know, as we mentioned on the call, we're sold out. We continue to be sold out. We have not seen, you know, given that we're so highly contracted, we have not, you know, needed to access the spot market. You know, there is a stratification in the market, you know, just as there is with operators, as I mentioned on the call. You know, the scale of our operations and the scale of our customers, I think, provides us in the reliability we've demonstrated for them. provides us with a very steady customer base without the volatility maybe that others have experienced. And so that's why, as we mentioned, you know, we're actually well ahead of schedule relative to last year when we had less than 4 million tons committed for the subsequent year for 2023. We have 6 million tons committed for next year. So, you know, You know, our business continues to be healthy, and we're adding more contracts on top of that 6 million tons we have committed for next year. Do you guys want to add anything to that?

You know, this is John. I mean, the long-term, like Bud said, the long-term fundamentals of the fermenter are as healthy as ever. You know, 2023 will be a record year for sand consumption, and we're expecting a new record in 2024. You know, most of our – right now, the analysts have our – I mean, when you look at the analyst numbers out there for 2024, I think the range is 35 to 39, and, you know, we're comfortable with that range on pricing. And that's what, you know, we got into originally in the original research analyst for the research analyst for the IPO.

Got it. Great. Now, that's super helpful. Just want to switch over to your CapEx. Appreciate the color you gave us on the Dune Express, the Kermit, and maintenance. But just thinking about 2024, you know, you took the Kermit II expansion off the table. Just help us. Anything else that we should be surprised about? Just thinking about maintenance for 2024, trucking logistics CapEx for 2024, and then maybe some help on the cadence of the Dune Express CapEx over the next 18 months up until it's commissioned.

Yeah. So first off on the plant expansion, the second plant expansion, not the first plant expansion, the second 5 million tons expansion, The answer to that is yes, we have paused the CapEx piece on that, but we do still think that we're going to potentially be able to get those volumes out of our plants as they currently exist. We're going to wait and see what happens with that CapEx associated with that additional 5 million tons. We still think that the 5 million tons are potentially up to 5 million tons. Additional tons is going to be there, but we're just going to have to see how we're going to do that. We can You know, that's going to be through plant efficiencies, more efficiencies with the dredges. You know, we're going to wait to see how this plant expansion performs. Now, on the CapEx for the Dune Express, you know, it's still on time and on budget. You know, it's just really just a timing. What I'd say is just a timing. difference in timing and modeling. You know, we can't control the way that our vendors, you know, the way they bill us. And, you know, we pay, obviously, when they bill us. But we don't control that. But when we model it, you know, we model it that the cash is going out the door. So when you're looking at for the remainder of 24, you know, we're looking at I think it's another $160 million from here. to the end of the year on CapEx for the Dune Express. And then next year, the remainder of that will be spent. The remainder of the 400 will be spent next year. So that's 66 already spent, another 160 through the end of this year. And, you know, the remainder of that will be spent through the end of next year. You know, we haven't, on the logistics side, we haven't made any decisions yet on capital expenditures as it relates to expanding our logistics offerings next year. But, you know, as soon as we get those, we'll let the market know.

Great. Appreciate all the color. I'll turn it back.

Great. Thank you. Our next question is from Neil Mehta with Goldman Sachs. Please proceed with your question.

Thank you. Good morning. Good morning, team, and did love the video, so thanks for that. It's helpful to visualize it. That's my first question. It's just on the Dune Express. It sounds like it's tracking okay, but as you think about the two or three most critical path items to get to completion, what are they? What are the tail risks we should be aware of and how are you trying to mitigate those?

So, Neil, thanks. And that is a good reminder for everybody out there. There is a video out there on our website for everybody to look at. But so to answer the question, you know, we're in great shape, you know, talking about critical path items. Number one, thinking electrical gear, which is what we'd say is our e-houses, those represent 9% of our overall budget. These are the longest lead time items and currently on order. Those are currently on order within August to September 2024 estimated delivery date. You know, the installation of those will take three to five weeks. And so we have a two to three-month cushion today, and we feel very good about where those are. Another one is the conveyor belt. That's roughly 10% of the overall budget. You know, as it relates to equipment being delivered, we are actually receiving our first the three belt shipments to the Port of Houston this week, a week earlier than expected. Our remaining two belt shipments will be delivered at the end of September and mid-November. So, you know, those include a five-month install, but, you know, obviously those things will be on site well before we're going to be installing those. And then there's the cross-country conveyor module components, which represents around 13% of the budget. You know, due to the sheer volume of the material required, you know, a majority of our vendors had to reconfigure their manufacturing facilities along with designing and implementing and retooling for the production of these components. And we're currently on schedule for April of next year. This includes the idler assemblies, concrete sleepers, roof panels, and conveyor module steel. One of the things that we do as a company in construction is we do what we call vendor audits. We perform vendor audits, and basically it's a It's a way for us to verify where our vendors are in the production process and then also to evaluate their quality control. And so, you know, we constantly do these vendor audits. In fact, we are sending one of our folks overseas here in a couple weeks who's going to go look at all of our overseas vendors to make sure that These guys are – our vendors are on time and all up to spec on the quality control front so that when that equipment arrives, we can make sure that it's going to arrive on time, and then it's also going to arrive and meet the standards that we need. It's basically a trust but verified procedure, and it ultimately ends up in better outcome for Atlas and its investors.

Yeah, that's a lot of good color there. And then the follow-up is on the dividends. I know this is an evolving topic because the reclassial inflection, you'll see a lot of it in the back half of 24 into 25. But as you think about the preferred allocation of capital to shareholders, should we think the dividend? What's your view on the variable dividend? I know you've used in past instruments as well. So just your perspective on return of capital would be great. Thank you.

Yeah, this is Bud. I'll start, and John may want to add to my comments. You know, we certainly believe in the distribution model. You know, our prior companies had a fixed base dividend and a variable on top of it. We think philosophically, you know, in my view, it's very beneficial because it adds some transparency and visibility that – as far as the ability of the business to profitably grow and generate value for shareholders. We're excited that, you know, we've got, you know, given our level, highly contracted volumes, over 90% contracted at strong pricing and growing contract for 2024, it gave us plenty of confidence to go ahead and implement a base dividend even through this period of high CapEx. and further to increase our dividend this quarter by 33% to $20 million. So I would expect, you know, of course the board will be determining it. We will be working on a longer-term formalized dividend policy over the next few months and into 2024. I would expect probably by early 2024 we will be putting that out to market. But, you know, particularly given our industry-leading margins, even better than the big three and midstream enterprises and the cash generation of this company, as our CapEx begins tapering down, our CapEx investments begin tapering down in 2024, we're going to have a significant ramp-up in distributable cash flow. And I think increasing our dividends will be a high priority for That said, you know, down the road we could have some high rate of return and high ROI cap-based growth projects subsequent to the expansion, the Dune Express, and we'll be evaluating those. But regardless, I expect Atlas to be a very compelling distributing enterprise on a go-forward basis. John, do you want to add anything? I think that's it.

Thanks, John.

Thank you. Our next question is from Luke Lemoine with Piper Sandler. Please proceed with your question.

Hey, good morning. You've been coming in over your nameplate capacity the past few quarters as you've gained efficiency at your plants and electric dredges are helping as well. And you've commented that you might be able to get the current phase two volumes with current nameplate and the permit phase one expansion. Just want to make sure that you're saying that total nameplate could be close to 20 million times per annum with your current nameplate and current phase one expansion. Is that right?

Yeah, maybe I'll make a quick general comment and John probably will want to add to it. Yeah, as he touched on, you know, when we designed and built our plants, they have exceeded our production expectations. We have two things happening now, of course. We have the expansion. We continue to innovate and advance on design. So there's a bigger range of production potential for this expansion, and we want to see how that plays out. But the other thing is, and John may want to elaborate further on this, but it's our existing plants, as you know, and as you touched on, it's been touched on, you know, the dredging plant. is continuing to advance and is going to get more and more efficient. And there's other things that we're doing at our existing facilities that have the potential to benefit our production capacity as well. So we do think there's going to be incremental capacity. We're going to be able to deliver without additional growth capex. And we kind of want to get a better handle on that on a go-forward basis. John, do you want to add to that?

Yeah, so the original plan that we talked about, I guess, originally was, you know, the Dune Express itself can be 13 million tons. We had 5 million of original tons, and we were going to bring on 10 million additional volumes and two plant expansions to get to that 13 million so that we could fully supply the Dune Express. You know, so right now it looks like, you know, like Bud said, is that, you know, we're going to be able to potentially fulfill that need without spending the additional $150 million of CapEx on that additional 5 million tons. You know, to say, I mean, so what we're – I wouldn't – when we say we're looking at additional plant – I mean, expanding our capacity up is like, yeah, we definitely think we're going to be able to hit the Dune Express and fulfill the Dune Express and then potentially get up higher than that.

All right, perfect. Thanks, John. Thanks, Bud.

You bet. Thank you. Our next question is from Jim Rawlinson with Raymond James. Please proceed with your question.

Good morning, gentlemen. Hey, Bud, just going back on the dune sagebrush possibility of being added to the endangered species list. Obviously, you guys have been kind of involved in that from the very beginning. and helping craft the CCAA and obviously setting aside acreage for habitat. Curious, so it doesn't seem like there's any impact one way or the other truly on your operations, but curious your view on if this actually goes through once we get past the litigation phase of that. Kind of where you see this impacting the rest of Permian suppliers and could this actually turn out If it happens, could this actually turn out to be a net benefit for you all from a market share perspective?

Yeah. And as you touched on, you know, we have been involved since the founding of Atlas in mitigating the risk associated with the DSL. And our general counsel, our attorney involved in this, Rick Fletcher, has been intimately involved and been a real leader in the effort. And we can make him available if anybody wants to ask him questions on it. But we spent a lot of time working with the Department of Interior, and we were the first, I think, to join the crafted CCAA, which is a very beneficial conservation plan. We're certainly the largest contributor to conservation. We're dedicating 17,000 acres for the lizard for habitat. Nobody else can dedicate that kind of acreage that Atlas can. So that's another benefit of the scale that we have. And, of course, given our participation, we're extremely confident that even the event of listing, which would be several years out and would likely be challenged in the Supreme Court ultimately by industry, that even in the event of successful listing, that we would be fully operational and not impacted anymore. As far as its impact on others, I think we're seeing more companies join, including a number of our customers join the CCAA. I expect that to continue. There will be some, I'm sure, at risk of it, and it could affect supply. But personally, I'm optimistic that – One, given the timeframes involved, and two, the way our industry will mobilize, and three, just the importance of the Permian production for energy production for our country and for the world. Personally, I think it's unlikely, in my view, that there will be significant constraints on the industry in general. And that's just my personal view. But regardless of how it plays out, Atlas is in an outstanding position.

And, Jim, one thing to add real quick, any listing of the DSL will not have any impact on the Dune Express. Just wanted to make that point.

Yes, that's correct. Yep, that's great, Collin.

I hope that helps.

Go ahead.

I'm sorry. I hope that helps. Yeah, no, that's a perfect answer. And, John, as a follow-up, just going back to cost, Obviously, costs have come down a bit more this quarter, pretty good sequential improvement. And it sounds like you'll continue to work that lower, and then you'll take delivery early next year of the new dredges to further aid that. Just kind of wanted to circle up and check on how you're thinking about that cost trajectory relative to maybe kind of getting back to the closer to the mid-single digits like we talked about during the original IPO due diligence, if you're still kind of, you know, cool with that trajectory.

Yeah, we're still on that trajectory. Look, I mean, you know, back, like, I think 2021, I mean, we were sub-seven on an OpEx basis, and that's when we were fully utilizing. I mean, all of our mining was primarily coming, all of it was coming through a single dredge. When we expanded our production capacity out there, you know, we needed to bring on additional dredges. And we won't be able to get to those lower OPEX per unit numbers until we have our new dredges come on in the first quarter of next year. But, yeah, we do see a good trajectory getting back down to that. I mean, we're down 16% this quarter. There were some changes that we made, and we still see us improving on that, and then once we are fully utilizing dredge mining for all of our productions coming through dredges, we do see us being back in that mid-single-digit range like you talked about.

Excellent. Thank you, guys. Good quarter.

Thank you.

Thank you.

Thank you. Our next question is from Don Crisp with Johnson Rice. Please proceed with your question.

Good morning, gentlemen. I wanted to ask a question about Kermit and the timing of the Kermit expansion. So I think I read correctly in the press release that you're going to start up the wet plant this quarter and then start selling next quarter. And I just wanted to know if that was kind of early in the quarter or kind of late in the quarter when we're going to see those sales, because that could be upwards of 1.2 million tons in the quarter. Just kind of want to see timing around that.

Yeah, as far as the timing of that, I mean, I don't necessarily think that we'll have 1.2 million tons of sale in the fourth quarter. That's going to be a ramp-up process. You know, we're going to be washing sand here, you know, here soon. And, you know, and then, you know, bringing those volumes on for sales a little bit later in the quarter. So it wouldn't be until the end of the quarter. You start seeing volumes come on for sale.

Okay. Yeah. And then on the logistics side, you know, obviously that has ramped up a little bit faster than we originally discussed and kind of outpaced our expectations for this quarter. But can you give us any kind of parameters around how revenues on the logistics side would ramp up maybe through the end of this year? Obviously, they're going to ramp up significantly next year with Dune Express, but just kind of the rest of this year, how we look at kind of logistics revenue ramping?

Yeah, I mean, this is Chris Schola. We've more than doubled our service sales compared to the first six months of 2022. And we're in the early stages of that ramp you referenced on our logistics revenue. You know, it'll continue to be a significant area of growth for us. Roughly 10% of our delivered loads were multi-trailers during the quarter. In terms of margin outlook for the second half, you know, we expect gross margins to remain relatively static for the logistics business, but overall gross profit to increase as we continue to build out our fleet. As we see more and more of our customers, you know, touched on earlier around adoption of the multi-trailer offerings, we do expect to see some gross margin expansion due to the efficiency of the operations. And we continue to make steady progress on the last mile contracts and awards. As you notice, the revenues ahead of schedule, even ahead of schedule, excuse me, gross profits ahead of schedule, and our truck deliveries and working with our vendors and partnerships there, being able to pull some of those deliveries in order to support the growth of the business.

And I think one thing that you just mentioned is important to remember is that a lot of the contracting that we're doing this year includes logistics as well.

Yeah, we're moving from just a very short period of time from a sand company to a solutions company, and there's been great adoption for that as we move forward. And it's actually they're demanding it in 2024, so.

Yeah, so versus last year, you know, we were contracting sand. This year we're contracting sand and delivery is just a trip.

I appreciate that. And if I could sneak in just one more, you know, there's been a lot of churn recently on activity. And just curious as maybe your top 15 customers or so, is the rig count for them kind of flat or up or down either way? Any kind of color around that?

Yeah, we actually have some numbers. I'll let these guys state the numbers, but just thematically and kind of restating what I said before, I mean, in the call that we've seen our customers, it's kind of natural selection that we have the scale and the reliability plus environmental benefits with high capacity trucking and ultimately with the Dune Express. It's really important for the scaled quality operators. And so that's why we've seen them grow their pull on sand from us by 50% over the last year or so. So these are large-scale operators. Their activity doesn't blow in the wind. With oil prices like some do, they like the fact that we're going to be sustainable and be there for them. They're going to be sustainable for us as customers. So what was that number? We actually looked, and the rig counts for our operators actually has not gone down

Yeah, correct. It stayed very, very stable within our output, but the output on the completion side has gone up radically.

Yeah. Yeah, their call on our sand is – our market share obviously continues to grow since they're buying 50% more sand from us, and their rig count actually has not declined. So that's probably the reason we have not seen the – The price softness may be that maybe some of the smaller producers that are maybe lower tier product tend to see. Not every company experiences the same demand or the same pricing in the market.

Yeah, we're seeing tremendous efficiency. 2022 was supposed to be an efficiency gain year. We're seeing the first half of 2023 is massive efficiency gains on the drilling side, more footage per day. Lateral footage being lengthened on the completion side with the integration of the new equipment and so forth. We have seen that really have a dramatic effect on efficiencies from tons per day pumped, efficiencies hours pumped per day. As a result, we are seeing tremendous gains. Single well operators are now doing zippers. Zipper operators are doing simulfracs, and there's even trimulfracs. being tested right now. So we're seeing a tremendous intensity gain right now in 2023, and it's going to move into 2024 for sure.

I appreciate all the color. Thank you. I'll turn it back.

Yeah, thank you. Thank you. Our next question is from Sean Mitchell with Daniel Energy Partners. Please proceed with your question.

Good morning, guys. Thanks for squeezing me in here. But I think you answered this in the last question, but I want to make sure I understand this clearly. It seems like with the Dune Express kind of well underway with construction and whatnot, and your logistics business is kind of moving at a little bit faster pace than maybe we expected, but is the customer mix changing, and are the conversations with prospects changing? better today uh it sounds like the answer is yes but i just want to kind of confirm that but really want to talk about customer mix and then i'll the second question i have is as your logistics business is probably growing at a faster pace and you have more trucks coming on in the back half of this year what's the labor market look like for drivers yeah thank you thank you sean maybe i'll start these guys may add to it um

I do think, I mean, it's evidenced by the number that our customers are pulling more sand from us. It's, of course, the larger customers. It's the high-quality, large-scale operators that have scaled operations out there that need the reliability, sustainability, and, of course, they do love the environmental benefits that we're providing. So I expect that to continue. In fact, you know, the fact that we're ahead of schedule on contracting sand volumes for next year relative to last year is a sign of that. I expect that to continue. Those advantages that we provide are going to be increasingly important, particularly as we get closer to the Dune Express launch that I expect our market share with those large-scale customers to continue to grow. Do you guys want to add anything to that?

Yeah, I would just say that, you know, we continue to high-grade our customer base and really make strategic partnerships that, you know, create value for both parties. We see that approach work extremely well, you know, from both a contracting and partnership, strategic partnership approach. Yeah. No, I'll let you finish. I was going to say, in terms of the labor market for the drivers, you know, You can read all the stats out there around driver shortages across the U.S. That's no different in the Permian. But, you know, as Atlas always has, we create, you know, a great work-life balance for our folks. We put together very fair packages and make sure that our employees enjoy coming to work every day and, overall, continue to actually have their friends and recommendations come in. We've seen a lot of that. Once drivers get here, they refer folks in. So we don't anticipate any major challenges on the labor side of things, but we continue to keep an eye on it.

A lot of those truck drivers are very familiar with our plant operations because they've been coming to our plant for the past five years. And they've witnessed Atlas, and they constantly talk to our employees that are out there. So we do a pretty good job of, you know, hire people and retain them.

Yeah, I do think a lot of these things we're talking about that our customers appreciate our skill and reliability and the fact that we're performing so well makes it all the better place for people to come to work and they enjoy working with us. It helps us to both attract and retain quality people.

Got it. Thanks, guys.

Thank you.

I think we have time for one more question. Okay.

Our final question is from Scott Gruber with Citigroup. Please proceed with your question.

Hey, good morning. Thanks for squeezing me in.

Thank you, Scott.

Yeah, no problem. Just one question here. As we talk to investors about the Dune Express, one of the key questions we get is around servicing the line. Once it's up and running, I believe you made some enhancements to your design relative to some of the other active conveyors out there. But can you provide some color on how you enhance that design and how you think about operating costs and maintaining the line once it's up and running?

Yeah, as far as some of the features on the Dent Express, you know, as far as making it more reliable, you know, when we constructed our plants, we did the same thing. We actually looked at the biggest, the highest points of failure or, you know, where there were points on the – typically where there was a breakdown in – you know, or where areas where we could maintain uptime and where we could design, make a better product and design a better system. One of those areas was with idlers. You know, the belt itself is probably the most, is one of the most important parts of the conveyor. Obviously, the belt, over time, will experience wear and tear. We came in when we were designing the Dune Express. We recognized that. We recognize that idlers were a place where you experienced that high wear and tear on the belt. Those idlers typically, you know, they typically go out in the way historically companies or operators of conveyors have figured out whether an idler is going out. They just basically have to drive up and down the line to listen for, you know, the sound of the conveyor and the sound of the idler squeaking as it goes out. It creates and emits a sound. We actually designed in our design have a smart idler that has a microchip in it. So that idler will notify us when it's going out so we can actually go out there and replace that idler before it expires. The other thing is, you know, going to the OPEX in the maintenance, you know, I think our OPEX in maintenance is, you know, we have, you know, You know, we plan to have a full maintenance crew, full crews of maintenance folks working out on the conveyor. You know, I think, you know, maintaining the conveyor, the biggest part of the optics is going to be electricity. So, but anyway, that's just one of the redundancies and one of the, you know, design that we put into the conveyor. There's many others that we could go into.

Yeah, I think from an overall perspective, taking the same approach that we have with our plants, you know, using technology to structurally increase the uptime and reduce OPEX, you know, through a number of engineering capabilities along with remote monitoring and maintenance programs.

I got it. That's good color. I appreciate it. Thank you.

Great. Thank you. Thank you. There are no further questions at this time. I'd like to hand the floor back over to Bud Brigham, Chairman and CEO, for any closing comments.

Well, thank you, everybody, for joining us for the call. We look forward to following up subsequent to the completion of this quarter. Take care.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.