Atlas Energy Solutions Inc.

Greetings and welcome to the Atlas Energy Solutions third quarter 2024 financial and operational results conference call. At this time, all participants are in the listen only mode. A brief question and answer session will follow the formal presentation. Should anyone 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, VP Investor Relations. Thank you. You may begin.

Hello, and welcome to the ILS Energy Solutions conference call and webcast for the third quarter of 2024. With us today are Bud Brigham, Executive Chairman, John Turner, CEO, and Blake McCarthy, CFO. Bud, John, and Blake will be sharing their comments on the company's operational and financial performance for the third quarter of 2024, 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 defined under the U.S. security laws. Such statements are based on 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 the annual report on Form 10-K we filed with the SEC on February 27, 2024, our quarterly reports on Form 10-Q, 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 refer to certain non-GAAP financial measures, such as adjusted EBITDA, adjusted free cash flow, and other operating metrics and statistics. You will find the gap reconciliation comments and calculations in the press release we issued yesterday afternoon. With that said, I will now turn the call over to Bud Berger.

Thank you, Kyle, and thanks to everyone for joining us today for our third quarter conference call. Before I let John and Blake run through the quarter and our outlook, I want to take a quick moment to take a step back and reflect on where ATLAS as an organization stands. When we founded Atlas back in 2017, we believed there was a huge opportunity to drive improvements across the property value chain with regard to both how the sand is mined and how it's delivered to customer well sites. Our stated goal is to do our part, as we are uniquely positioned in this regard, to help transform the Permian into a more efficient factory on the ground. We have already succeeded in becoming a low-cost provider of reliable propent for Permian operators and are now on the cusp of a step change relative to traditional delivery systems by implementing the Dune Express to take thousands of trucks off the public roads. By doing so, we will both enhance efficiencies and reliability while also reducing emissions. Most importantly, the Dune Express will make the roads and our communities in the Permian safer. Today, we are just weeks away from realizing that vision. The Dune Express continues to be on track and on budget. All the major highway and lease roads crossings are now complete, and more than 95% of the belt has been placed on the conveyor. From the outset, We knew the electrical infrastructure had the potential to be one of the big gating items for the project. But with the factory testing complete for the four electric houses now either being currently installed or en route to West Texas, this piece has also been de-risked. All the credit goes to our wonderful construction team, our employees, and our trusted suppliers, who have turned what seemed like a pipe dream to many into what will become a revolutionary piece of infrastructure in the Delaware Basin. Thanks to them and our customers who are stepping forward for the benefit of the communities and the environment, the Permian Basin will be further differentiated as the premier domestic oil and gas basin in the country and as a much safer, cleaner, and better place to live and work. With that, let me hand the call over to John Turner.

Thanks, Bud. 2024 has been an eventful year for Atlas. At the outset, we knew that we needed to work hard this year to ready our organization for the start of the Dune Express, ensuring that our mining operations could consistently provide the increased volumes we hope to gain in the Delaware Basin while continuing to supply our key customers elsewhere in the Permian. With the completion of the Kermit Plant expansion and the integration of the HICRUS personnel and assets into our organization, We added both productive capacity and asset diversity to strengthen our mining operations. After the fire at our current facility in April, we took a long, hard look at where we stood from an operational excellence standpoint. We felt it was necessary to make some hard decisions around our operational leadership, and once the rebuild process was completed, we began a full review of our plant systems and processes. This almost immediately began bearing fruit as it revealed multiple opportunities for improvement and standardization, but the implementation of these improvements required some costs, as Blake will detail in a moment. Additionally, during the quarter, one of our new dredges at the Kermit facility was severely damaged during the commissioning process, resulting in a total loss of that asset. While the second dredge is currently operating and feeding the plant, we have made the decision to pivot to a well-known domestic dredge manufacturer in pursuit of better real-time support and improved lead times on spare parts. We have a long track record of success with this OEM's equipment and are excited about working with them to drive down our mining costs back to our normalized levels. We have placed an order for two new dredges from this manufacturer and expect to receive the equipment in early 2026. In the meantime, we are using our existing dredges in combination with traditional mining to feed the Kermit plant. While this is delaying the next step change in our pursuit of lower mining costs, we still expect to see improvement in our overall opex per ton metrics moving forward. The combination of lingering expenses from the fire-related temporary loadout operations at Kermit, our operational improvement initiatives, and the delays in dredge commissioning resulted in higher than anticipated operational expenses for the quarter. This was almost entirely driven by higher effects at our Kermit facility, as mining operations at all our other facilities performed very well throughout the quarter. At Kermit, it's important to note that July experienced the highest OPEX per ton with each subsequent month showing sequential improvement, a trend we expect to continue through year-end when we expect to be closer to our normalized levels. Just as important, the work we have undertaken at our Kermit facility has enhanced our confidence in our ability to produce the volumes required by the Dune Express. Further enhancing this confidence, This fall, we started construction of a road and offload system that connects the Dune Express to our adjacent 115 and 874 plants that we acquired with High Crush. Upon completion of this tie-in project in late 2024, all four of our Kermit facilities will have the capability to feed the Dune Express, creating a reinforced sand supply to ensure a sufficient volume B to the Dune Express. And that's imperative as we are highly encouraged by conversations we are having with our customers this RFP season. We are currently committed on more than 60% of our nameplate capacity for 2025, with more than 10 million of those tons slated to be delivered in the Delaware Basin. This is the first RFP season where Atlas is not only selling the advantages of the Dune Express with our high quality sand, but our entire suite of logistical offerings that was enhanced by the acquisition of High Crush. While Atlas's differentiated position is always valuable, it is in markets like today where we really shine. With the decline in rig count, continued E&P capital discipline, and the recent large-scale consolidation we have witnessed amongst the operators, the overall domestic oilfield service market is experiencing a challenging pricing environment. And while sand demand has performed better than other verticals, It's always been one of the more volatile pieces of the value chain from a price perspective and has not been immune in this market. Spot prices for West Texas sand are now trading at levels where much of the supply stack is operating at breakeven gross margin and negative cash flows. At today's prices, we anticipate much of our competition will be forced to elect to defer necessary maintenance and reinvestment in their plants, and we are increasingly hearing anecdotes of shift reductions and potential mine closures. All of this points to current prices being at unsustainable levels, and just as sand prices move fast to the downside, they have also historically moved to the upside sooner and harder than we expect. However, Alice's unique combination of bandage reserves and distinct logistical advantages position us to significantly outperform our peers in today's market. Our customers are smart. and know that market conditions like today can result in distressed suppliers that become significantly less reliable. It is significantly more expensive to have sand you were depending on not show up than it is to pay for reliability and peace of mind. This has been a key differentiator for Atlas in our recent customer conversations, and we expect it to only grow in importance over the coming months, particularly with large operators who are making the Permian Basin a key part of our global development plans. Before I hand the call over to Blake, a quick update on our autonomous trucking initiative. Early next year, we plan to begin a small commercial rollout of our partnership with Kodiak Robotics with an initial fleet of two driverless trucks with the hope of continuing to grow that partnership throughout the year. We remain excited about applying autonomous driving technology into large swaths of private leased roads that are prevalent in the Delaware Basin off the Dane Express, where traffic is light and speed limits are under 20 miles per hour. With that, I'll now turn the call over to our Chief Financial Officer, Blake McCarthy, to discuss our third quarter financial performance outlook.

Thanks, John. For the third quarter of 2024, Atlas reported revenues of $304 million, up 6% sequentially from second quarter levels. Adjusted EBITDA was relatively flat sequentially to 71.1 million, or 23% of revenue, and net income was 3.9 million, or 1% of revenue. Revenues from product sales were approximately 145.3 million on volumes of 6.0 million tons, yielding an average sales price of approximately $24.34 per ton for the third quarter. Service revenues were approximately 159.1 million. During the quarter, we hit a high watermark of 28 crews and delivered roughly 75% of our volumes via our own assets. Looking ahead to the fourth quarter, we expect E&P budget exhaustion to result in a longer holiday slowdown than typically seen, which will negatively impact both sales volume and last mile crew counts. We expect our last mile crew count to remain in the 26 to 28 range through November, after which we expect to see a few cruise drops during December as operators take a break before initiating their 2025 drilling and completion plans. Service margins are expected to hover around our historical average levels. Also, sales, excluding DD&A, were approximately $225 million. Plant operating expenses, excluding DD&A, but including royalties, were approximately $88.8 million, or $14.87 per ton, significantly above our normalized levels. Higher than anticipated rental equipment expenses, repair and maintenance expenses, dredge expenses, and a greater mix of traditional mining than anticipated all contributed to the elevated production expenses. As John stated earlier, we expect the combination of improved production increment and the implementation of our operational process improvements to result in OPEX per ton metrics reaching normalized levels by year end, setting the stage for improved operational financial performance in 2025. Average OPEX per ton for the fourth quarter is expected to be improved sequentially, but still above our normalized levels. Q3 SG&A was approximately $25.5 million, a figure that was inflated by approximately $2.4 million of acquisition-related costs and approximately $6.3 million of stock-based compensation. Moving forward, cash SG&A is expected to be approximately $15 to $16 million per quarter. Royalty expense was approximately $5.7 million. Cash interest expense was approximately $10.7 million. Operating cash flow for the third quarter was $85.2 million, and adjusted free cash flow, which we define as adjusted EBITDA plus maintenance capex, was $58.7 million, yielding an adjusted free cash flow margin of 19%. Capital expenditures during the quarter totaled approximately $86.3 million, $68.5 towards growth with the remainder to maintenance. Our growth capex consisted of $50.1 million spent on the construction of the Dune Express, with $15.1 million associated with on-court expenditures. Maintenance gap X for the quarter was approximately $12.4 million. Cash and equivalents stood at $78.6 million against total debt of $475.3 million. Looking ahead to the fourth quarter, we expect operator capital budget exhaustion to result in a prolonged holiday slowdown in completion activity. While we do expect improvements in our average OpEx per ton to partially offset some of the impact to our margins, we expect Q4 EBITDA levels to be flattened down relative to Q3 levels. Due to the strong cash flow profile of our business, we are increasing our dividend to $0.24 per share, which represents a 5% increase over the prior period, or $0.01 per share. Based on our closing share price on October 27th, our annualized dividend yield is approximately 4.8%. In addition, I'm pleased to announce that our board of directors has authorized a share repurchase program, under which the company may repurchase up to $200 million of outstanding stock over the next 24 months. It is our belief that Atlas's advantages in both resource-based and logistical infrastructure position it to be a differentiated vehicle for return of capital to shareholders within the OFS universe. And we are excited to expand our optionality of means by which we can distribute this capital. That concludes our prepared remarks. We will now let the operator open the line for questions. Thank you all for joining in our third quarter call.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would 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 keys. One moment, please, while we poll for questions. The first question is from Jim Rowlandson from Raymond James. Please go ahead.

Hey, good morning, guys, and congrats, I guess, on getting to the finish line on Dune Express. John, maybe you talked a little bit about some of the issues at Kermit and kind of what you're focusing on. Maybe just expand a little bit on what some of the key issues that you're trying to address or improve as you roll into next year and volumes pick up and maybe kind of the timeline and confidence in getting to the finish line on those things?

Yeah, Jim, thanks. You know, I'll start it off, and then I'm going to let Chris take a – to walk through some of the other parts of the – you know, some of the parts of your question. But, you know, obviously it's a great question, and, you know, It would be easy to point to these things and say we've just had a run of bad luck, but we're in the business of making our own luck. 2024 has obviously been a rough year with respect to our operations, and we're 100% committed to getting it right from the ground up. We've put some new operational leadership in place at the plant that has been applying fresh ice to the entire system. And while the conclusions they draw can sometimes be painful to hear, the steps we are now taking are setting Atlas up for long-term success. We have the right assets both in our reserves and our logistics, and it's imperative that we maximize their value by developing and deploying them as efficiently as possible. So I'm going to go ahead and let Chris kind of walk through the things that we're doing.

So Chris, you want to go ahead? Yeah, thanks, John. So in my experience, large operational failures, right, they're often the result of smaller underlying issues that compound over time. And those issues eventually bubble up into something that really no one saw coming. The postmortem spotlight often exposes deeper operational problems that require immediate attention, but catalyzes profound long-term change within an organization. For all intents and purposes, the fire was that for us. It was the catalyst that kicked off a comprehensive assessment of our current operations. We rapidly addressed those items that needed immediate response, but concurrently, we've been identifying and eliminating those inefficiencies, bottlenecks, and areas of underperformance in our operation. Our communications have been streamlined and structured in a way that facilitates the sharing of information across both teams and departments. This leads to faster problem solving and a more cohesive approach to organizational strategic initiatives. We've also made procedural and structural changes to enable almost real-time visibility into revenue, costs, and profitability. Through all of this though, the bottom line is that our team has stepped up and executed. We are already seeing results from the hard work. We've been able to meet and exceed commitments to our customers. We have increased our delivery percentage. If you look at as of now, 75% of our produced sand is delivered to the blender. We are now setting new volume records for both total sand production and sand delivered to the blender. More specifically for Kermit, in October, our Kermit plant beat our historical wet plant production record by almost 40%. And three of our top four Kermit dry sand production months on record have been August, September, and October. While operations will inherently always have issues, overcoming these challenges in the way we did has not only made our organizational stronger.

Appreciate all that.

And then maybe as a follow-up, Blake, you mentioned OpEx obviously high this quarter, and you also mentioned that it's been improving steadily and you'll kind of start getting back to something more normalized, but with the dredge orders that don't come until 26, you maybe don't take that final step down until further down the road. Maybe a little bit of timeline of kind of how you see OpEx trending over the next four, five, six quarters.

Yeah. Jim, that's pretty much dead on. You kind of walked through that pretty well. Generating the lowest cost OPEX per ton across the industry is pretty core to the Atlas strategy. As John mentioned, we have the best resources, but a key part of our company culture is developing those in the most efficient manner, constantly seeking for better processes, more standardization. That's why that Q3 figure of 1487 per ton, that really sticks in our crawl. One thing that is misleading about that number is that it was entirely driven by the elevated expenses at our permit plant. The other plants were humming along quite efficiently during the quarter, and the leadership and crews of those plants actually should be very proud of their results. So Q3, the issue was primarily our large permit plant, but as it's by far our largest facility, it really drives the ship. So our operations leadership, they've been part of working to plant back on track. And even in Q3, we saw meaningful improvement from the beginning of the quarter through the end of September. So it was a pretty steady line of improvement there. We expect the optimization efforts to begin to bear more fruit during Q4 at a pretty steady level. The primary issue for Q4, though, is that we do expect to see that decline in throughput related to reduced demand driven by the operator budget exhaustion we talked about. And that, of course, negatively impacts fixed cost absorption across the complex. So while we do expect average OPEX per ton to decline sequentially, the improvement won't completely reflect the entirety of the underlying improvements. You really won't see that until 2025. However, as we mentioned in prepared remarks several times, we are increasingly optimistic about our outlet volumes in 2025. So we'll get that improved plant throughput. And we should see the average OPEX per ton trend towards the low double-digit range in relatively short order. However, as you mentioned, due to the issues we experienced commissioning the new dredges and the lead times on getting our hands on those new domestic dredges, we won't fully reach our target levels in 2025. So we'll still be the low-cost producer of sand in the market next year, but we won't really be satisfied until we widen that gap to its full extent, which is part of our long-term strategy.

Got it. That's helpful. Appreciate it, guys.

The next question is from Kurt Halid from Benchmark. Please go ahead.

Hey, good morning, everybody.

Good morning, Kurt.

Hey, thanks for the incremental color. I just want to maybe take another step to that as well, right? You know, maybe talk about the bridge here between where we were in the third quarter through the fourth quarter and into the first part of next year, I guess the first element of what I'm curious about is, you know, what kind of magnitude of volume decline are you expecting to see and maybe the same kind of context of what kind of magnitude of pricing either you're seeing through the fourth quarter or, you know, how your discussions on pricing are evolving for 2025 deliveries?

Yeah, no, it's a really good question. I wish we had a better answer for you right now, but the truth of the matter is that we're a little bit in the dark right now as it is. So the real variable that's still open right now is sales volume. So, you know, we've got a good line of sight on what our costs are going to be. And we've got a good base of contracted volumes for Q4. So we entered the quarter with a really strong contracted volume backlog. But I think the prospect of that prolonged holiday slowdown in the oil field is a very real prospect this year. Of course, you're not hearing that just from us. I think that's a pretty common refrain across the space. And so there's just From what we know now, it's pointing to volumes being down slightly, but I think that there's just going to continue to be some horse trading with customers where they come to us asking for a little Q4 relief in exchange for significant volume commitments in 2025. It's so fair to say most of the time we're happy to help our customers out in those scenarios as those trades ultimately end up being greatly to our advantage. At this point in the quarter, I can't confidently say that we won't have more conversations of that nature. Ultimately, we're looking to maximize Atlas' cash flow to shareholders, and if that entails giving some grace to key customers in the near term for some long-term gain, I'm going to take that trade every day. So I'd like to give you, say, like, hey, it's going to be right here. But a lot of those conversations can sometimes happen the week after Thanksgiving. They're like, hey, 10 days out. We're going to shut down for the last two weeks of the year. And it just feels that that's a very real risk this year. That being said, the tone of the conversations around 2025 is the flip side of that, where it's very positive. I think that the Atlas story is really resonating with a lot of the ideal customers that we designed this company for.

That's great. Appreciate that, Culler. Second one would be, I think everybody's aware here that there's been a significant reduction in trucking rates, right? And one of the key... dynamics around the dune express was the ability to deliver all the things you said it would deliver in your prepared commentary so um maybe you can give us some some insights here as to you know how uh if at all the margin profile for dune express has changed you know since inception versus where we are now given the given the dynamics of the market and again in the context of you reference that your up costs for time are going to be you know coming down a little bit in 2025, but not to the full extent of what you experience. So maybe you can package that all together and give us some context on how much of that is doing express versus not doing express.

You know, Kurt, I'll start on that, and then feel free to chime in. You know, obviously, you know, when we originally modeled, you know, the returns on the Dent Express, you know, we modeled historically low trucking rates, and, you know, we still feel like those rates that we're currently seeing are above what we had, the conservatism that we put into that forecast. And yes, depressed trucking rates do, obviously trucking rates do compress the margin opportunity on the Dune Express some. But like I said, I think it's important to remember a few things. Obviously, we don't think these trucking rates can simply maintain at these current levels much longer. You know, at these current levels, these trucking operators are barely able to cover their cost of fuel and the driver and much less maintenance expenditures and unforeseen issues. You know, they quickly go into the red if they take an extended break at the truck stop for a breakfast taco and, you know, for coffee, or if that's, you know, a flat tire or an engine issue. So, you know, we've mentioned that we've been hearing anecdotes of our mining competitors starting to institute shift reductions. Well, I think it's significantly worse in the third-party checking space. I mean, Chris may be able to talk. Maybe Chris can talk a little bit about that. But, you know, there's multiple local operators that have been closing their doors. So, long story short, if these types of rates are cutting into industry muscle, this is going to have some blowback. It's going to have blowback at some point here in the future. And so, you know, and like I said, when we were – forecasting this off the Dune Express when we were underwriting the Dune Express itself, we were underwriting to those rates that were lower than what we're currently seeing. The advantages of the Dune Express are going to last significantly longer than the next six months. It's obviously a long-life asset that's going to make Atlas margins for years to come through the up and down cycles. And all that being said, we remain very excited about the impact that the Express will have on, you know, Atlas's margin profile, free cash flow in 2025 and going forward. I mean, do you want to say something, Chris, about that?

Yeah, I mean, look, from a logistics and trucking perspective, you know, this is nothing new, right? Very cyclical. We've seen this over the last couple quarters in the associated margin compression. But as John said at the end of the day, as those costs compress, so do our costs compress at the end of the line. But that structural logistics advantage of being 68 to 72 miles closer than any of our competition, that doesn't go away no matter how low the prices go. But I do think that we are at a point right now where, you know, The amount that it will fall moving forward is incrementally almost zero. So I think we are at the low point, and we're looking forward to getting into that in 2025.

Thank you. Appreciate that.

The next question is from Keith Mackey from RBC Capital Markets. Please go ahead.

Hi. Good morning. Just first curious on CapEx. Namely for next year, you should see a bit of a ramp down in CapEx spending with the completion of Dune Express. Just how should we be thinking about the main pieces of CapEx? And then as a second part to that, what should we be thinking for buyback utilization given potentially a ramp in free cash flow?

Yeah, there's a lot in that question, Keith, but it's a great question. So, you know, honestly, we're still working through our budgeting cycle, so it's a bit early to give hard guidance on 2025 CapEx. We certainly don't have anything in the hopper with the scale of the Kermit expansion or the Dune Express by any means. So it will be down meaningfully year over year. We're always going to make sure that we're investing enough in maintenance CapEx to preserve our core assets. Additionally, we have a number of exciting growth initiatives in the incubator that are aching for some CapEx, but all of those have to be weighed against further growth to the dividend and now buying back our own stock, as you mentioned. Thus, to get through the budgeting process, these projects are going to need to display a very concrete path, covering a very high return threshold. It's a weird opinion that Atlas is at pretty attractive levels currently. So on top of that, we do continue to have frequent customer inquiries around future Encore mines. We continue to state that we aren't going to speculatively build more mines, but if there's concrete customer demand, the Encore model remains a very attractive growth avenue. I'll obviously have more detail on CapEx for you on next quarter's call. With respect to buyback authorization that we now have in place and how we're thinking about cap allocation going forward, from the start, Atlas' management and board have felt the company provides a unique platform for differentiated returns both on and of capital shareholders, particularly relative to the rest of the OFS space, which historically hasn't displayed the relative scores on those metrics, the best relative scores on those metrics against the broader market. But we have a unique position, so we've got the right assets in the right locations, and then we're in the finishing stages of completing what, in our opinion, is an irreplicable infrastructure advantage that's going to widen that return gap even further. So, you know, you take a step back, and if we think about cap allocation, you know, just, you know, forgive me for the trite analogy, but, you know, I think it's about the balance sheet as the foundation of cap allocation, particularly in a cyclical industry like ours. So, you know, leverage is always really enticing when you layer it up with an up cycle and an Excel model. But down cycles in this industry are always deeper and oftentimes longer than we expect. And we have enough collective time in the oil field and the scars to go with it to know that, you know, maintaining a fortress balance sheet is essential. So we're currently in a great leverage position, which is only going to improve next year. However, we do have approximately $148 million due on the note related to the High Crush acquisition next year, which is a pretty large use of cash. After the balance sheet, you do have to continue to invest in the core business, as we talked about, maintaining those assets to enable our superior returns. That remains imperative. On average, we think that that's approximately about $60 million per annum. But that can go up or down depending on the type of project work required. So those two are your foundation. And after that, it's balancing the demands between growth capex, inorganic growth, and incremental return of capital to shareholders. Typically, the growth capex, our operations and commercial teams put in front of us, are the highest returns of cash. We're receiving returns often well in excess of 20%. However, those projects are infinite, and we run them through a pretty strenuous justification process that sees more fall off than get through. With respect to inorganic growth, we continue to look for ways to accelerate the growth of Atlas's cash flows, but we're going to be very disciplined in that process. So, you know, we have a great core business and absolutely don't need to do anything that dilutes our current portfolio. So any acquisition we pursue is going to, you know, bring with it further competitive differentiation and an attractive valuation that will accelerate the growth of our cash flows and ultimately, you know, our ability to grow the dividend and buybacks. Which brings me to what you're really asking about, which is, you know, how are we thinking about incremental return on capital? You know, we've steadily grown our common dividend, so it's now sitting at 24 cents per share, which represents about 4.8% annualized yield. which I believe is the second highest amongst the entire OFS universe. So we're sitting pretty well there. We think about the common dividend. It's like that's a sum of money that we hope that we know we can return to our shareholders on the rainiest of rainy days. So as our business grows and hopefully achieves even greater levels of cash flow stability, we're going to constantly evaluate growing that number. But we also want to make sure that it's at a level where investors know they can bank on receiving that check every quarter. So However, we sell a very cyclical commodity, and while today's sand pricing is at depressed levels, it's going to snap back up just as violently as it goes down. So in those markets, our business model generates significantly more cash than required by our other capital needs, and we wanted to make sure with the buyback that we had another means of accelerating returns to our shareholder base at our disposal when the market begins to turn. So ultimately, our purpose is to reward Atlas shareholders for going on this ride with us, and we're going to – We're going to do it with all the tools we've got at our disposal. With respect to how we're thinking about deploying the buyback, we're going to be constantly watching the market, but we're certainly not going to do anything that's going to stress the balance sheet. We have this step change in free cash flow coming with the Dune Express, and so once we get that online, I think that is something that we're constantly evaluating as a management team and at the board level.

Okay, now that's super helpful. Thanks, Blake. Maybe just stepping back and thinking about the sand market a little bit. Certainly is in your presentation to see a long tail of smaller sand providers and prepared remarks. You talked about break-even gross margins for a lot of the market and negative free cash flow. As you think about 2025 and where we are now, Do you think that it's more a matter of supply has to drop out of the market to make the market a little bit more healthy, or do prices really just have to come up because of increased demand? How do you think about the sand market heading into 2025? Is there more softness that you can see, or do you think that we'll see some of that that rational behavior and maybe some capacity drops out that supports prices? And how do you see that playing out?

Yeah, I think from my perspective, this is Chris, from my perspective here, you know, as we come into RFP season, we've got a few different factors going on, right? The first is a number of the contracts that were historically signed are going to be rolling off here at the end of the year or into first quarter. I think we do have some depressed sand pricing out there that is low and bumping up against our competition's OPEX, right? So they're going to have to make some really hard decisions here. I think what you also have is a little bit of a hope and dream for our competition coming into RFP season. They're going to hang in there through Q4, through the low prices, and really, really bank on, if you will, getting those volumes from the RFP. And then I think you're going to see typically we have a nice pop in Q1 with refreshed budgets and activity. I really think what you'll see from that is our competition either one, reducing shifts and therefore capacity, or two, dropping out of the market overall. But I don't think you're going to see that in Q4 just because that's what everyone's waiting for is that RFP volume. But as we progress into Q1 of Q2 or late Q2 of next year, I think you'll really start to see the fallout from the market, which really provides fundamentals, if you will, for where you're going is those higher sand prices on a long-term basis.

Thanks very much. Really appreciate it.

The next question is from David Smith from Pickering Energy Partners. Please go ahead.

Hey, good morning. Good morning. Thank you for taking my questions.

Good morning to everyone.

I wanted to ask, how are you thinking about the cadence of commercial deliveries ranking up on Dune Express into next year? Maybe when you think you could get to that annualized 11 to 12 million tons per annum run rate.

I'll start off, and Chris can follow up on that. Look, obviously excited about the launch of the express in the fourth quarter. There is going to be a ramp-up period for that, you know, getting operators, you know, working through the, you know, what I say, all the ramp-up and commissioning phase for us, getting the operators to fully utilize that. fans coming off the Dune Express. Obviously, I think what you're going to find, Chris, to say is like, you know, I wouldn't expect us to be fully ramped up until sometime, you know, mid next year on those volumes. But I do think we have a lot of operator buy-in on the Dune Express. I think a lot of our customers and actually new customers are very excited about taking volumes out there taking volumes off the Dune Express and doing their part and taking trucks off the road. But here, I'll turn it over to Chris. He can elaborate more on that.

Yeah, I mean, so as we've approached this from a commercial perspective, it's always been, you know, don't get the work. Prove our reliability to the customers and simply roll them into the Dune Express, right? From a customer perspective, whether sand comes off the Dune Express or doesn't come off the Dune Express, they really shouldn't see any operational difference out there. Now, looking at our customers, you can look back a few years and it was, you know, this is never going to happen. You know, Dune Express, you know, is this real? And what we've come to is now that you're seeing it cross public roads, you're seeing the completion almost there. Those number of customer visits out to the Dune Express have gone up substantially. And I think what you're seeing take place over the last quarter is really that realization from our customer base that, yes, this is real. This is coming and we'll take trucks off the road. And not only take trucks off the road, but provide solutions to deliver more sand to the blender, right? More and more, that's what we're hearing is we want to move to 24-7 operations. And combining the Dune Express closer deliveries with multi-trailer operations, that's what delivers sand to the blender 24-7 and removes those constraints that are existing today and allows our customers to become more and more efficient.

appreciate that color um and wanted to follow up with that on maybe how we should think about the the margin progression for dx during the ramp up presumably some under absorption cost until you get to the full run rate but um maybe there's an element of introductory pricing proving out the concept just kind of compared to you know how you think about the the dyn express margins you know when it's when it's fully you know running in two years from now? How should we think about that maybe for the first half of 25?

Well, so, Dave, the one thing is we don't sell, like, Dune Express-specific like contracts where it's like okay like there's like a discount to the standard dune express price it's it's a logistics price of like delivered sand and so um there's no you know introductory pricing to the dune express or anything like that now there are every every contract is specific with with large customers and um yeah we we keep a pretty tight lid on that uh price but we're uh And we're looking to move towards more of a fully delivered price over time, where you're not breaking out price of sand versus the price of delivery. And so as the industry matures and as we mature in our business model, we'll continue to move in that direction. So no real change to our previous guide. We'll give more clear guidance. We're still working through the 2025 budget process, and we'll give clearer guidance on the next call on exactly how to model going through next year's on the margin standpoint as we iron that out ourselves.

Had to try. I appreciate it. Thank you. Got it.

The next question is from Sean Mitchell from Daniel Energy Partners. Please go ahead.

Hey, guys. Thanks for taking the question. Just curious, you guys see, obviously, and talk to a lot of customers that are using your product. Is there any change in the mix in terms of, and what I mean by that, is there any change in mix for wet sand versus dry sand as people kind of move to these We hear a lot on these conference calls, guys moving to simulfrac, trimulfrac. Are guys moving, are you seeing that in your business at all, just this kind of move to wet sand more and more?

I'll start off on that one, Sean, and then maybe Chris or Blake can follow up. Look, I think it's more about getting sand, locating sand, the assets closer to the well site. I think once you... Like if you look at some of the most sand pumped out there by our customers, you look at who those customers are, and it's actually the encore mines out there in the Midland Basin where the sand is located. know 10 15 miles maybe less from the from the well site where they can more efficiently utilize uh the trucking assets more efficiently utilize the storage and location um it's just it's just more efficient you can just serve the well site better um you know with your assets and i mean it's kind of like when you look at on the dune express you look at what the dune express is going to do it's going to take that you know the The best asset, best sand mine, the set of sand mines, the basin, dry sand mines, is going to take those sand mines and it's going to place them right in the middle. That's one of the things Chris talked about is you know, a lot of our operators, a lot of our customers are looking how to increase the amount of time that they can pump. And a lot of that, you know, a lot of that bottleneck is sand and it's distance from the well side. So I think it really depends upon what an – I think it really depends upon where the assets are.

And so, Chris, you want to – Yeah, no, John, I think you summed it up really well, right? As logistics at this point where sand pricing is has eclipsed sand in terms of you know, that percentage of total delivered cost, right, a much larger portion than it had been historically. You know, location, location, location, that's the name of the game in reducing those total delivered costs to our customers.

Got it. Thanks.

The next question is from Neil Metza from Goldman Sachs Asset Management. Please go ahead.

Yes, thank you. Neil Mehta from Goldman Sachs Research. Mike, first question is just on operating expenses per ton on the mining side and just your perspective on how you see that evolving as we make our way through 2025 and into 2026 potentially as well. What are the moving pieces and what's inside your control and what's not in your control?

Yeah, sure. You know, I think we touched on this earlier, but You know, we expect, like, a lot of the issues in that 1487 part-time number for Q3, that was a result of you know, incremental inefficiencies in the system that were basically as coming out of the rebuild process, you know, the month of July was our highest OPEX per ton quarter. And we saw sequential improvements as a lot of the, you know, operational improvement plans were put in place. You know, just as that process continues to mature and move along, we'll see that continue to drive the OPEX per ton down that would like, you know, we expect it would be in the, you know, low double digit range by the end of the year. And then expect it to kind of run, you know, remain in that range through the process, through the course of 2025. You know, we're a very high fixed cost leveraged business. And so the more tonnage we can push through the plant, the better that average shop export ton gets. So we will, you know, next year we expect to be a big volume year for Atlas. The next step change though really would be when we get our hands on those incremental dredges, and that's not going to be until early 2026. But that's really only for the Kermit plant, which only represents about a third of the OPEX of our overall complex. What we've always talked about publicly is that it represents about a dollar to two dollars at the top of incremental OPEX improvement. But, you know, you think of that only being about a third of the complex that, you know, obviously split that amongst the average of the portfolio. It's less of an impact, but that's probably the next step change. We're never going to get, like Atlas, if you think about his pretty high crush, acquisition, we were at these very, very low OpEx per ton levels. We're never going to get back there just because we have a different asset base now, particularly with the mobile mines, which bring their own advantages on the OpEx side, but more on the logistical end. So we're going to constantly be looking for ways to drive that average OpEx per ton down. We've got a new operational excellence team in place. They are coming up with ideas every day that we never saw. Again, it's fresh eyes on the system. You bring in talented people and they start to pay dividends very early.

That's really helpful, Culler. And then just your perspective on return of capital as Dune Express comes online, as the free cash will inflect, and hopefully the commodity starts to normalize here, you're going to be in a position to return a lot to shareholders. So just how do you think about buybacks versus dividends? And, you know, when you talk to your investors, do you see there's a preference?

Yeah, you know, talking to investors, you know, They like it all, which is a big surprise there, right? The more cash and the more value you can return to them, the happier they are. And we are happy to serve them lots of different courses. Again, as I mentioned before, we think about that common dividend being a number that we feel very confident that we can pay out in the worst of the down cycles. We don't want to get that to a level where at any point it would start to stress, like we'd be using the balance sheet to pay it. We want to remain at a a very not conservative level, but a significant amount of money that we know that we could pay out every quarter. And we want our shareholders to be able to count on that to come into their pocket every quarter. The buyback, that's one of the reasons that we wanted to put that buyback authorization in our back pocket is that we know that this business is going to generate significantly more cash than that common dividend requires, and that is required by the amortization of our debt that we see coming on the coming year or so. You know, Atlas is going to continue to delever. We're going to continue to pay out that common dividend, and on top of that, we'll look to use that excess cash flow to return that through the buyback. You know, this is something that we talk about every quarter with our board, too, is that we are constantly discussing incremental means of returning capital to shareholders. So just because this is what we currently have on the table doesn't mean this is going to be our end point either.

That's great, guys. Thanks for the time.

Thanks, Neil.

This concludes the question and answer session. I would like to turn the floor back over to John Turner for closing comments.

I'd like to thank everybody for joining and participating in everybody's call. Obviously, the four quarters are going to be very exciting. We're going to be talking about the Dune Express. The Dune Express makes operators more efficient, which makes the Permian Basin more efficient, and efficiency is the name of the game. when it comes to manufacturing. The Permian Basin is the largest and most important manufacturing process in America. We look forward to reporting to you guys here coming up on the fourth quarter. If you guys have any questions, please don't hesitate to call Kyle. Thank you.

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