U.S. Silica Holdings, Inc.

Hello, and welcome to the U.S. SILICA third quarter 2021 earnings conference call. At this time, all participants are in listen-only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Patricia Gill, Vice President, Investor Relations. Patricia, please go ahead.

Thank you, and good morning, everyone. I'd like to thank you for joining us today for U.S. SILICA's third quarter 2021 earnings conference call. Leading the call today are our Chief Executive Officer, Brian Shin, and Don Merrill, our Executive Vice President and Chief Financial Officer. Before I begin, I would like to remind you of our standard cautionary remarks regarding the forward-looking nature of some of the statements that we will make today. Such forward-looking statements may include comments which are subject to certain risks and asserties. For a complete discussion of the risks and uncertainties, we encourage you to read the company's press release and our documents on file with the SEC. Additionally, we may refer to the non-GAAP measures such as adjusted EBITDA, segment contribution margin, and our consolidated leverage ratio during this call. Please refer to today's press release or our public filings for a full reconciliation of adjusted EBITDA to net income and discussions of segment contribution margin and the consolidated leverage ratio. And with that, I would now like to turn the call over to our CEO, Mr. Brian Shen. Brian?

Thanks, Patricia, and good morning, everyone. Before discussing our operating results this morning, I'd first like to review a couple of significant recent corporate developments. First, effective in October, Sandra Rogers was appointed to our board of directors. She's serving as an independent member of the Audit and nominating and governance committees of the board, and will support our expanding ESG commitments. Sandra also brings valuable complementary operations and supply chain experience in addition to a diverse perspective. We look forward to the benefits of her leadership, and I'm delighted to welcome her to our board. Additionally, we announced earlier this month that we have commenced a review of strategic alternatives for our industrial and specialty product segments. We are considering a broad range of options, including a potential sale or separation of this segment. Our board and management team regularly review strategic opportunities, and with our recent equity valuation tightly correlated to energy markets, we believe it is appropriate to further assess the potential of our businesses. Both our industrial and specialty products and oil and gas segments are industry leaders, and it is from a position of strength that we believe a separation or sale of the industrial and specialty product segment has the potential to unlock significant value and maximize returns for all of our shareholders and other stakeholders. While I can't discuss specifics today, I do want to emphasize that the process is ongoing and there are a broad range of potential opportunities that we are evaluating. Let's move now to our operating results in Q3. First, I want to acknowledge our team for their focus, execution, and ability to deliver on our strategy of strong cash generation and further net debt reduction. During the third quarter, we generated significant positive cash flow, paid off our revolver balance, and increased our cash on hand to over $250 million, while reducing net leverage to less than four times trailing 12-month adjusted EBITDA. I'm very pleased with the progress that we're making in 2021 to continue to improve our balance sheet. At US Silica, we're also committed to upholding industry-leading safety and environmental standards while achieving exemplary performance. I'm happy to report that our year-to-date personal safety results are on pace to be the best year ever at our company. I want to thank and congratulate our team for all the outstanding work to achieve excellent performance so far this year, and we plan to finish 2021 as our safest year ever. Turning now to Q3 financial results, We reported a 3% sequential decrease in total volumes with flat revenues, and our adjusted EBITDA decreased 27% compared to the prior quarter, primarily due to cost and logistics headwinds, which we expect to offset with additional pricing and efficiency improvements. These sequential comparisons exclude our significant Q2 customer settlement of $128 million of consideration, which included $90 million in cash. Don will discuss the details in just a moment, but let's review some of the significant trends that we saw during the quarter. In the industrial segment, demand remained strong across most end uses and market segments with basically flat volumes and revenues. We saw particular strength for our ground silica, cool roof granules, and fluorosil products during the quarter. We did experience headwinds from global logistical and supply chain constraints, cost inflation, and higher natural gas prices. However, we've moved quickly and aggressively to combat these issues. For example, we've already implemented three waves of price increases and numerous surcharges so far this year, with more planned over the next three months. Given that there is an implementation lag in new pricing realizations, we did see some negative margin impact from cost headwinds during the quarter. In our oil and gas segment, sand and logistics demand moderated slightly, as completion slowed due to annual budget exhaustion at some customers. This resulted in a shift of customer mix and more spot sales at lower margins during the quarter. We also saw impacts from cost inflation and opportunistic maintenance expenses during the quarter. As expected, industry spend also rebalanced toward well drilling to start rebuilding inventory for future completions. Sandbox was a bright spot during the quarter with improved sequential profitability from increased pricing. And finally, a number of customers approached us during the quarter regarding securing profit and delivery services for what is expected to be a very strong 2022, and we have numerous new contracts currently under negotiation. For the rest of my time this morning, I want to give an update on our growing industrial portfolio and then finish with a summary of our outlook for the fourth quarter and 2022. Let's get started with industrials. At U.S. Silica, we offer a broad portfolio of industrial and specialty products that are rooted in a rich 121-year history. We've made strategic investments in new technology and solutions, and we're a leader in the industrial minerals market, serving critical industries such as construction, food and beverage production, biopharma, glass, and renewable energy. More recently, we have focused on high-value industrial minerals that are essential for the transition to cleaner energy and to help our customers meet their ESG goals. These specialty products include our rare low-iron silica sands, which are highly effective for maximizing light transmission in solar panel glass. We expect growth in sales of these products in 2022 and beyond as domestic solar glass production continues to increase. We are also the sole supplier to most large U.S. producers of composite fiberglass used for wind turbine blade fabrication. Our ultra-fine ground silica is used in the production of gas and diesel particulate filters that help vehicles meet stringent European and Asian emission regulations. Other important products that we sell into the clean energy supply chain are diatomaceous earth and activated clays, which are essential processing aids in green diesel production. We are honored to support the growth of these environmentally important value chains. Additionally, U.S. silica should be a beneficiary of proposed U.S. government infrastructure spending plans through our commercial construction, foundry, concrete additives, and highway construction offerings. Further, development of our industrial new products portfolio is ongoing and remains a top priority for us. During the quarter, we had numerous successes, including completing successful vendor and customer trials for our new developmental specialty mineral for glass producers, commencing sales of a newly developed sand for tile and related building products, winning business to treat pistachio crops with our new DESECT organic insecticide, initiating sales of our purified high-purity filtration product into the food and beverage markets, entering trials for a new type of specialty glass with a critical customer, and finally, we also began selling a new Everwhite Cristobalite product to a key customer. Let's turn now to our business and market outlook for the fourth quarter of 2022. Fourth quarter industrial demand is expected to have a typical seasonal decline due to holidays and customer facility maintenance. However, we expect that the positive impact from price increases and surcharges will support a sequential improvement in contribution margin dollars per ton, partially mitigating the normal decline in fourth quarter profitability. Fourth quarter activity in the oil and gas segment is expected to be negatively impacted by seasonality from weather and holiday downtime. However, given the strength in commodity prices, customer conversations for prop and sandbox logistics supply contracts are already heating up and should progressively increase through the end of the fourth quarter as customers begin to plan for their 2022 completion programs. Regarding 2022, we think we're very well positioned for strong ISP growth driven by new opportunities in several fast-growing new end uses, also new product adoption, expected GDP expansion, and planned price increases. In oil and gas, we're expecting a backdrop of increased drilling and completion spending growth of 20% to 25% versus 2021. The first half of 2022 should be particularly strong as energy company budgets reset and completions activity increases to levels consistent with very supportive commodity prices. Therefore, we are forecasting robust profit demand, improved pricing, and increased contract coverage with potential upside if commodity prices rise further. And with that, I'll turn the call over to our CFO, Don Merrill, who will discuss our financial results in more detail. Don?