Good day, ladies and gentlemen, and welcome to the Smart Sand third quarter 2017 earnings conference call. [Operator Instructions] As a reminder, this conference is being recorded. I'd like to introduce your host for today's conference, Mr. Phil Cerniglia, Investor Relations Manager. Sir?

Good morning, and thank you for joining us for Smart Sand's third quarter 2017 earnings call. On the call today, we will have Chuck Young, Founder and Chief Executive Officer; Lee Beckelman, Chief Financial Officer and John Young, Executive Vice President of Sales and Logistics. Before we begin, I would like to remind all participants that our comments made today will include forward-looking statements, which are subject to certain risks and uncertainties that could cause actual results or events to materially differ from those anticipated. For a complete discussion of such risks and uncertainties, please refer to the company's press release and our documents on file with the SEC. Smart Sand disclaims any intention or obligation to update or revise any financial projections or forward-looking statements, whether because of new information, future events or otherwise. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, November 9, 2017. Additionally, we may refer to the non-GAAP financial measures of adjusted EBITDA and production costs during this call. These measures when used in combination with GAAP results provide us and our investors with useful information to better understand our business. Please refer to our most recent press release or our public filings for a full reconciliation of adjusted EBITDA to net income and production cost to cost of goods sold. [Operator Instructions] I would now like to turn the call over to our CEO, Chuck Young.

Thanks, Phil. Good morning. I'm pleased to report that Smart Sand had the best quarter since its founding six years ago. Sales volumes were up dramatically, both year-to-date and year-over-year. This would not have been possible without the hard work and dedication of our employees, their focus on maximizing production and effectively managing railcar movements, while operating in a safe and efficient matter, led to our record sales volume for the quarter. There were also other positives in the quarter. Our expansion program continues to move along. Also product demand and pricing remained highly favorable. Lee will give you more details on our financial results during his prepared remarks, but first, I'd like to touch on some of the highlights. In the third quarter, we sold approximately 653,000 tons of frac sand and we generated adjusted EBITDA of 11.6 million or $17.80 a ton. This represents a 23% increase over second quarter volumes and 184% increase over third quarter 2016. Those record sales volumes resulted from strong demand for our high quality Northern White frac sand along with operational improvements at our facility. Based on current activity and dialogs with our customer base, we expect this trend to continue into the fourth quarter of 2017 and into 2018. Lee will provide you more details on projected fourth quarter sales volume during his remarks. Let's now look at our expansion plans and the future of Smart Sand. I'll start with the previously announced expansion plans. At Oakdale, we're on track to bring online another 2.2 million tons of annual processing capacity by the end of the first quarter of 2018. This will increase our nameplate capacity of our Oakdale facility to 5.5 million tons per year. Also at Oakdale, we expect the completion by year end of our Union Pacific unit…

Thanks, Chuck. As Chuck highlighted, we had our best quarter to date, substantially increasing our financials both quarter-over-quarter and year-over-year. My comments will be focused on comparing the third quarter 2017 results with the second quarter 2017 results. I'll with start with sales volume. Sales volumes were approximately 653,000 tons in the third quarter, a 23% increase compared to second quarter 2017 volumes. As discussed by Chuck, this was a result of our focus on maximizing production and effectively managing railcar movements, while operating in a safe and efficient manner. Our sales mix in the third quarter was consistent with second quarter results, with approximately 80% of our sales being contracted customers and approximately 20% being in spots sales. We currently expect sales volume to be in 700,000 to 750,000 tons range in the fourth quarter. In the third quarter of 2017, approximately 77% of our sales volumes were shipped via unit train compared to approximately 82% in the second quarter. In regard to revenues, total revenues for the third quarter were 39.3 million, a 32% increase over second quarter results. Sand sales revenues increased to 22.2 million in the third quarter from 16.9 million last quarter, due primarily to higher sales volume and a higher average sales price, which improved to approximately $34 per ton, a 7% increase over the second quarter results. The average sales price per ton improvement sequentially was driven primarily by an increase in spot sale volumes and higher spot sale pricing. Reservation revenue, which is included as part of our sand sales revenue was 7.5 million in the quarter, equal to second quarter 2017 levels. During the quarter, we recognized 1.2 million in shortfall revenue related to annual contractual shortfall payments from one customer. This customer's contract is based on a contract year that…

[Operator Instructions] Our first question is from Martin Malloy of Johnson Rice.

Congratulations on getting the volumes up and production costs down during the quarter. The first question is around the contracting that you have in place. I believe that there is some escalators in some of your contracts regarding the price of WTI being above $55. Could you talk about the mechanics of how that works, how long WTI has to be above 55 and what percent of your contracts this applies to?

Well the WTI escalator applies to all of contracts and currently we are around 74% contracted of our current capacity. The way that mechanism works is that it's a look back at the previous contract quarter. And if WTI work to average at $55 or higher, most of the contracts have a breakpoint of $55. If WTI was to average $55 or higher than we would get an increase in our contracted pricing. Every contract is a little different. But on average it would be about $5 per ton.

So it's possible that that would apply during the first quarter of '18.

Potentially, if oil prices stay where they were there today and are consistent above 55, we could see - start to see some benefit of that beginning in the first quarter of '18, yes.

And then the options that you have for the properties down the Permian Basin. Any commentary that you could give us in terms of the discussions that you've had with customers down there and the reception that you're getting.

So there's definitely demand down there from existing customer base and additional customers for us to have a Permian option. With regard to the mines that we've looked at, you know, the same mechanisms that we looked at when we built Oakdale are the same, we look at reserve size, making sure that we've got scalable, bit scalability at the plant. We're looking for logistics that are going to work out at that site. But yeah, there is demand out there again from both with the new contracted customers for us and some of our existing customer base. And as Chuck had mentioned, we are looking for an anchor, you know, we'd be looking for an anchor tenant to start that project.

I think it's important to mention that our entry point is best in class of anybody out there that has been down adding this kind of capacity on. So we feel really good about what we've done there. We're also looking to see how the logistics problem as far as the trucking is going to work from those invasive mines. And we're also looking to see what the railroads; we think the railroads are going to protect their market share down there. So we're looking to see how that all plays out and we're ready to pivot.

Our next question is from John Watson of Simmons & Company.

Quick one on 30/50, could you give any more color on that? Is that due to a change in well design or is it because of a shortage of 40/70 and are there multiple customers who are now looking for 30/50 instead of 40/70.

Certainly the heaviest demand is on the diner mesh, 100 mesh and 40/70. 40/70 is still the product that is very happy demand. As far as, you know, I think we're kind of in a little bit of a mechanism where customers are, they may have trouble getting 30/50, so their pivot point either 100 mesh or 30/50. If they can't get 100 mesh, then they may pivot to 30/50. I think probably it's just an overall kind of shortage of ability to get sand thought. And they don't want to hold up on pumping these wells. So I don't know if it's a long-term benefit. From our perspective 30/50, you know, we make a lot more 40/70 than we do 30/50, it was just kind of an interesting point that all of our 30/50 is now being taken.

I'd add to that. If you're playing the spot market right now in this business, you're probably being rationed sand. So when you're rationed sand you'll change your designs, the pressure bumpers need the sand if they're not, if they don't have sand, they're not working. So I think that there is a lot of people that are running into that. And quite honestly all the development talk has been about Permian mines and they haven't all come on as of yet. And a lot of the sand that's up in the north, no one's really developed additional capacity. And really, the Permian stuff is a 100-mesh story, right. So there's a lot of people pumping different stuff and playing with different mixes and doing what they have to do to get their wells completed.

And on the spot pricing front, expectations for pricing was higher by 5% to 10% in Q4, is part of that due to the pricing for grades like 30/50 moving higher and maybe the gap between 30/50 and 40/70 shrinking or is that just a general expectation for pricing for all grades to move higher by a couple of percentage points.

John, so it's general. We're seeing price improvement across the board and stock. Right now the pricing, depending on product ranges from into the 40s and some cases up into the 50s now. And we've seen you know we kind of have seen continue to advertise to absorb price changes in the market there. So again it's you know really a case of, you know, we're selling as much sand as we are making right now. And there doesn't seem to any indication of that slowing down anytime soon.

We have many more orders then we have sand, right. So, and the lot of requests for sand and it's just - it's - it's, you know, we can't get this new capacity on soon enough.

[Operator Instructions] I see no other questions in queue. I'll turn to management for closing remarks.

Thank you for joining us for the call. That concludes our third quarter earnings call.