Atlas Energy Solutions Inc. (NYSE:AESI) Q2 2023 Earnings Call Transcript

Atlas Energy Solutions Inc. (NYSE:AESI) Q2 2023 Earnings Call Transcript August 3, 2023

Operator: 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. [Operator Instructions] 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.

Kyle Turlington: 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 and CFO; and Chris Scholla, 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 up-C 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 will turn the call over to Bud Brigham.

Ben Brigham: Thank you, Kyle, and thanks to, everyone, for joining us today for our second quarter conference call. We are 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, Proppant mining and production where the expansion will increase our production by approximately 50%.

We believe we are already the largest proppant 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% for 2024 to around 15 million tons, that’s about 40% of our anticipated production capacity next year that is spoken for.

Again, our anticipated production capacity for 2024 is up close to 50% from our current capacity of approximately 11 million tons. We aim to have approximately 80% 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 plant 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 decline in 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 and 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.

Thinking of this, we just released a new video about the Dune Express and our other initiatives which is linked in our earnings release and 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 proppant market remains very healthy. Although the downdraft in oil prices during the second quarter, combined with economic uncertainty to delay the increase in the frac 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 a stratification in the proppant and logistics markets, just as there is with operators, which is based both on the quality of the 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 proppant reserves and that we produce more proppant 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 proppant 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 more. 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 $0.20 per share. which as the products close equates to an annualized dividend yield of 4.1% and is 33% higher than our first quarter dividend and related distributions. The dividend is comprised of a $0.15 per share base dividend with a $0.05 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 scaled 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-C 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 1:1 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 the listing of the Dune’s 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, and stating again, we believe we are 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.

Chris Scholla: Thank you, Ben. Atlas Energy Solutions continues our evolution from a proppant manufacturer to a differentiated deliver to the blender solution. Our vertical integration into logistics underpins our long-term strategy to continually expand our reach across the oilfields 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 1.5 times that of your typical industry payload.

Since that time, we have been delivering double now even triple trailer loads to the wellsite. To put this in perspective, we are achieving delivered payloads that range between 70 to 100 tons of sand which is almost 3 to 4 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 sand delivery methods. Increased customer demand for our delivered to blender solutions is clearly reflected in our revenue growth. Sequentially, 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.

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 proppant 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 was 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 tonnes 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 cease 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, our quarter-over-quarter, our cash G&A increased 34% from $7.9 million to $10.6 million. The increase in cash cost 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 have been expensed in prior periods. The increase in the cash component of our G&A was largely associated with increased professional fees associated with the up- 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 into service as compared to the prior periods. 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 $0.67.

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 Kermit expansion expenditures as construction activities taper off as we approach commercial and 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 time frame.

We are making great progress on the construction of the Dune Express and continue to track on time and on budget. As of July 31, 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 away. At this time, we have not taken action to pursue additional growth projects along the Kermit expansion, the build-out of our trucking fleet for the remainder of 2023 and Dune Express constructions 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 and 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 $0.20 per share dividend for our Class A shareholders and a corresponding $0.20 per unit distribution for our holders of our common units of our operating subsidiary. Given our exceptional cash generation and our future contracted volumes, we are comfortable increasing our distribution this quarter to $20 million and installing a $0.15 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 leverage neutral, extends our maturity to August 2030, provides the company with an additional $100 million in liquidity and most importantly, remove some of the restricted covenants governed in our payment of dividends to better align with our plans to be a distributed enterprise over the long-term. I will now turn the call back over to Bud Brigham for closing remarks.

Ben Brigham: 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 our proppant purchases from Atlas over time. We have seen our sand 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.

Q&A Session

Operator: Thank you. We’ll now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question is from Derek Podhaizer with Barclays. Please proceed with your question.

Derek Podhaizer: Hey, good morning, guys.

Ben Brigham: Good morning.

Derek Podhaizer: 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 this – 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 tonne 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 pricing per ton trending into 2024 as you work against the weakening spot market with trying to contract up your volumes for next year?

Ben Brigham: Well, this is Bud. I’ll start off, and then these guys may want to add to my comments. As we mentioned on the call, we’re sold out, we continue to be sold out. We have not seen – given that we’re so highly contracted, we have not needed to access the spot market. There is a stratification in the market, just as there is with operators, as I mentioned on the call. The scale of our operations and the scale of our customers, I think, provides us 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, we’re actually well ahead of schedule relative to last year when we had less than 4 million tonnes committed for the subsequent year for 2023.

We have 6 million tonnes committed for next year. So our business continues to be healthy, and we’re adding more contracts on top of that 6 million tonnes we have committed for next year. Do you guys want to add anything to that?

John Turner: Yes. This is John. I mean, the long term, like Bud said, the long-term fundamentals in the Kermit are as healthy as ever. 2023 will be a record year for sand consumption, and we’re expecting a new record in ‘24. Most of our – right now, the analysts have a right – I mean, when you look at the analyst numbers out there for 2024, I think the range is 35% to 39%, and we’re comfortable with taking that range on pricings and that’s what we guided to in the – originally in the original research analysts for the research analyst for the IPO.

Derek Podhaizer: Got it. Great. That’s super helpful. Just want to switch over to your CapEx. I appreciate the color you gave us on the Dune Express, the Kermit and maintenance. But just thinking about 2024, you took the Kermit 2 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.

Chris Scholla: Yes. So first off, on the plant expansion, the second plant expansion, not the first plant expansion, the second 5 million tonnes, 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. So we’re going to wait and see what happens with that CapEx associated with that additional 5 million tonnes. I mean, we still think that the 5 million tonnes are potentially up to 5 million tonnes, additional tonnes is going to be there. but we’re just going to have to see how we’re going to do that and then we can – that’s going to be through plant efficiencies, more efficiencies with the dredges.

We’re going to wait see how this plant expansion performs. Now on the CapEx for the Dune Express, it’s still on time but and on budget. It’s just really just a timing what I’d say is just the timing – difference in timing and modeling we can’t control the way that our vendors – the way they bill us and we pay obviously when they bill us, but we don’t control that. But when we model it, we model it as the cash is going out the door. So when you’re looking at for the remainder of ‘24, we’re looking at, I think it’s around another $160 million from here to the end of the year on CapEx for the Dune Express. And then next year, the remainder that will be spent – the remainder of the $400 million will be spent next year.

So that’s $66 million already spent, another $160 million through the end of this year, and the remaining of that will be spent through the end of next year. We have it 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 as soon as we get those, we’ll let the market know.

Derek Podhaizer: Right. I appreciate all the color. I’ll turn it back.

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

Neil Mehta: Thank you. Good morning, team, and did love the video, so thanks for that as it helps to visualize that. That’s my first question is 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?

John Turner: 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. So to answer the question, we’re in great shape, talking about critical path items, number one, thinking electrical gear, which is our, 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. 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.

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 in mid-November. So those are – include a five-month install, but 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 due to the sheer volume of the material required, a majority of our vendors had to reconfigure their manufacturing facilities along with designing and implementing and retooling for the production of these components. 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 as we do these, what we call vendor audits, we performed vendor audits. And basically, 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 we constantly do these vendor audits. In fact, we are sending one of our folks overseas here in a couple of weeks. He’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 meeting 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.

Neil Mehta: That’s a lot of good color there. And then the follow-up is on the dividend. Just I know this is an evolving topic because the free cash flow 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? How do you – what’s your view on the variable dividends? I know you’ve used in past instruments as well. So just your perspective on return of capital would be great. Thank you.

Ben Brigham: Yes. This is Bud. I’ll start and John and Mike want to add to my comments. We certainly believe in the distribution model. Our prior companies had a fixed base dividend and a variable on top of it. We think philosophically, 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 we’ve got, given our level, highly contracted volumes, over 90% contracted at strong pricing and growing contract for 2024, 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, 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 end of 2024. I would expect by probably by early 2024, we will be putting that out to market. But 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. That said, down the road, we could have some high rate of return and high ROI CapEx growth projects subsequent to the expansion, the Dune Express won’t 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 to that?

John Turner: I think that’s it.

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

Luke Lemoine: Hey, good morning. You’ve been coming in over your nameplate capacity the past few quarters as you gain 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 II volumes with current nameplate and the Kermit Phase 1 expansion. Just wanted to make sure that you’re saying that total nameplate could be close to 20 million tonnes per annum with your current nameplate and Kermit Phase 1 expansion, is that right?

Ben Brigham: Yes. Maybe I’ll make a quick general comment, and then John probably would want to add to it. Yes, as he touched on, 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. So as you know and as you touched on – has been touched on, the dredging is continuing to advance and it’s 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?

John Turner: Yes. So the original plan that we talked about, I guess, originally was – Dune express itself going to be 13 million tonnes. We had 5 million of original tonnes and we were going to bring on 10 million additional volumes and two plant expansions to get to that 13 million, so we could fully supply the Dune Express. So right now, it looks like Bud said, is that 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. To say – I mean, it’s what we’re – I wouldn’t – when we say we’re looking at additional plants – I mean, expanding our capacity up is like, yes, we definitely think we’re going to be able to hit the Dune Express – fulfill the Dune Express and then could potentially get up higher than that.

Luke Lemoine: All right, perfect. Thanks, John. Thanks, Bud.

John Turner: You bet.

Operator: Thank you. Our next question is from Jim Rollyson with Raymond James. Please proceed with your question.

James Rollyson: Good morning, gentlemen. Hey, Bud, just circling 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 do 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?

Ben Brigham: Yes. And as you touched on, 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 spend 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 out there.

And of course, given our participation, we’re extremely confident that even in 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. As far as its impact on others, I think we’re seeing more companies join, including a number of our customers, join the concert in 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 time frames 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.

James Rollyson: 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.

Ben Brigham: Yes, that’s correct.

James Rollyson: Yes. That’s great color. And then just. Go ahead.

Ben Brigham: I’m sorry. I hope that helps.

James Rollyson: Yes. No, that’s 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 cool with that trajectory?

John Turner: Yes, we’re still on that trajectory. Look, I mean, back in like I think 2021, I mean, we’re sub-7 on an OpEx basis, and that’s when we were fully utilized. I mean all of our mining was primarily coming to all of it was coming through a single dredge when we expanded our production capacity out there, we needed to bring on additional dredges. And if we won’t be able to get to those lower OpEx per unit numbers until we have our new dredges come on in the fourth – I mean, in the first quarter of next year. So – but yes, we do see a good trajectory getting back down to that or – 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 or all of our production is coming through dredges, we do see us paying back in that mid-single-digit range like we talked about.

James Rollyson: Excellent. Thank you, guys. Good quarter.

John Turner: Thank you.

Ben Brigham: Thank you.

Operator: Our next question is from Don Crist with Johnson Rice. Please proceed with your question.

Donald Crist: 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 tonnes in the quarter. Just kind of want to see timing around that.

John Turner: Yes. 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. We’re going to be washing sand here soon and then 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.

Donald Crist: Okay. And then on the logistics side, 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.

Chris Scholla: Yes. I mean we’ve – this is Chris Scholla. 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, it will continue to be a significant area of growth for us. Roughly 10% of our delivered loads were multi-trailers during the quarter. And in terms of margin outlook for the second half, 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 we 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 noticed, the revenues ahead of schedule, even ahead of – excuse me, gross profits as schedule and our truck deliveries and working with our vendors and partnerships there, being able to pull some of those deliveries in were to support the growth of the business.

John Turner: 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.

Chris Scholla: Yes, we are 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, the transition.

John Turner: So versus last year, we were just extracting sand. This year, we’re contracting sand and delivery as well on a logistics trend.

Donald Crist: I appreciate that. And if I could sneak in just one more. 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?

Ben Brigham: Yes. We actually have some numbers. I’ll let these guys take 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 the environmental benefits with high-capacity trucking and ultimately with the Dune Express that’s really important for the high 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. So these are large-scale operators that 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 we – what was that number? We actually looked at the rig counts for our operators actually has not gone down.

Chris Scholla: Yes, correct. It’s stayed very, very stable. But yet our output – but the output on the completion side has gone up radically so.

John Turner: Yes.

Ben Brigham: Yes. 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 price softness that maybe some of the smaller producers that are maybe lower tier product tend to see that not every company experiences the same demand or the same pricing in the market.

Chris Scholla: Yes, we’re seeing tremendous efficiency, 2022 is poised to be an efficiency gain here. We’re seeing the first half of 2023 is massive. Efficiency gains on the drilling side, more footage per day, lateral footage premium length and 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 tonnes per day, pump deficiencies, hours pumped per day. As a result, we are seeing tremendous gains in there. We move single well operators use are now doing simul-frac are now doing zippers. Zipper operators are doing simul-fracs and there’s even trimul-fracs being tested right now. So we’re seeing a tremendous intensity gain right now in 2023, and that’s going to move into 2024 for sure.

Donald Crist: I appreciate all the color. Thank you. I’ll turn it back.

Ben Brigham: Yes. Thank you.

Operator: Thank you. Our next question is from Sean Mitchell with Daniel Energy Partners. Please proceed with your question.

Sean Mitchell: Good morning, guys. Thanks for squeezing me in here. Just – Bud, 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 better today? It sounds like the answer is yes, but I just want to kind of confirm that. But I 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?

Ben Brigham: Yes. Thank you, Sean. Maybe I’ll start and these guys may add to it. I do think, I mean, it’s evidenced that 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, the fact that we’re ahead of schedule on contracting 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?

John Turner: Yes, I would just say that we continue to high-grade our customer base and really make strategic partnerships that create accretive value for both parties. We see that approach work extremely well from both a contracting and strategic partnership approach.

Chris Scholla: Yes. No, I’ll let you finish.

John Turner: I was going to say in terms of the labor market for the drivers, you can read all the stats out there around driver shortages across the U.S. That’s no different in the Permian. But as Atlas always has, we create 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, we will continue to keep an eye on it.

Chris Scholla: A lot of those truck drivers are very familiar with our plan on our operations because they’ve been coming through our plants for the past five years. Yes. So – and they’ve witnessed Atlas, and they constantly talk to our employees that are out there. So we do a pretty good job of hiring people and retaining them.

Ben Brigham: Yes. I do think a lot of these things we’re talking about that our customers appreciate our scale and the reliability and the fact that we’re performing. So we’ll make it all the better place for people to come to work and they enjoy working with us. And – it’s just – it helps us to both attract and retain quality people.

Sean Mitchell: Got it. Thanks, guys.

John Turner: Thank you.

Ben Brigham: Operator, I think we have time for one more question.

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

Scott Gruber: Hey, good morning. Thanks for squeezing me in.

John Turner: Thank you, Scott.

Scott Gruber: 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’re thinking about the operating cost and maintaining the line once it’s up and running?

Chris Scholla: Yes. As far as some of the features on our – on the Dune Express, as far as making it more reliable. When we – anytime when we constructed our plants, we did the same thing, we actually looked at the biggest, the highest point of failure where there were points on – or typically where there was a breakdown in or where are areas where we could maintain uptime and where we could design and make a better product and design a better system. One of those were errors was with the idlers. 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 recognize that. We recognize that idlers were a place where you experienced that high wear and tear on the belt.

Those idlers typically – 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 the sound of the conveyor and the sound of the idler squeaking as it goes out, it creates – it 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 going to the OpEx and the maintenance. I think our OpEx and maintenance is we have – we plan to have a full maintenance crew, full crews of maintenance folks working out on the conveyor.

I think it’s maintaining the biggest part of the OpEx is going to be electricity. So – but anyway, that’s just one of the redundancies and one of the designs that we put into the conveyor. There’s many others that we could go into.

John Turner: Yes. I think from an overall perspective, we’re taking the same approach that we have with our plants, using technology to structurally increase the uptime and reduce the OpEx through a number of engineered capabilities along with remote monitoring and maintenance programs.

Scott Gruber: Got it. It’s a good color. I appreciate it. Thank you.

Ben Brigham: Right. Thank you.

Operator: 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.

Ben Brigham: 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.

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