Good day, ladies and gentlemen and welcome to the Smart Sand Fourth Quarter and Full Year 2017 Earnings Conference Call. [Operator Instructions]. As a reminder this conference is being recorded. I would now like to hand the floor over to Phil Cerniglia, Investor Relations Manager. Please go ahead, sir.

Good morning, and thank you for joining us for Smart Sand's Fourth Quarter and Full Year 2017 Earnings Call. On the call today, we 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 the information, future events or otherwise. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, March 15, 2018. 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 costs 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 has posted another good quarter and good year. Here are some highlights. We had the highest utilization levels in our history, up nearly 200% year-over-year. Revenues and net income were higher for both the quarter and the year, and market demand was and continues to be very positive. Demand for frac sand remains strong. In fact, we believe we could top 120 million tons this year. We also continue to see positive momentum in frac sand pricing. Lee will give you more details on our financial results during his prepared remarks, but first, I'd like to give you a progress report. Let's start with our Oakdale expansion. We announced last year that we'll be boosting Oakdale capacity to 5.5 million tons. Things are moving along nicely. We completed the construction of our third rail loop last June and our second wet plant in October. We also finished the multiunit train build-out of the Byron transload facility on the Union Pacific railroad in December. Our 2 new dry plants should be completed and operational during the second quarter. The new capacity should ramp up over the second quarter and be fully operational by the third quarter. Starting in the second quarter, our annual production capacity of 5.5 million tons will be 55% contracted. These contracts have a weighted average life of just over 2 years. Our strategy remains centered around our team's ability to adapt quickly to the constantly changing industry landscape while operating safely and efficiently to maximize profitability through all industry cycles. Operating at this record level would not have been possible without the hard work and dedication of our talented employees. We believe several key advantages will enable Smart Sand to continue to take advantage of the…

Thanks, Chuck. As Chuck highlighted, we had a strong fourth quarter for sales volume and a very successful 2017 in terms of overall sales and financial results. My comments primarily will be focused on comparing the fourth quarter 2017 results with the third quarter 2017 results. I'll also touch on the calendar year 2017 results as well. Starting with sales volumes. We sold approximately 706,000 tons in the fourth quarter, an 8% increase compared to third quarter 2017. Our spot sales activity increased in the fourth quarter compared to the third quarter, while spot sales increasing to approximately 26% of our total sales volumes versus approximately 20% in the third quarter. In the fourth quarter 2017, approximately 68% of our sales were shipped via unit train compared to approximately 77% in the third quarter. This reduction in unit train shipments was somewhat related to the increased spot sales activity during the quarter. Total revenues for the fourth quarter were $43 million, a 9% increase over third quarter results. Sand sales revenues increased to $24.4 million in the fourth quarter from $22.2 million last quarter due primarily to higher sales volumes. The average sales price per ton in the fourth quarter was basically flat with the third quarter 2017 results at $34.49 per ton versus $34 per ton last quarter. Pricing in the quarter actually improved at the mine gate in the 5% to 10% range. However, we had less spot in-basin sales during the fourth quarter, which led to overall lower average spot sales pricing in the quarter relative to the third quarter. Reservation revenue, which is included as part of sand sales revenue, was $7.5 million in the quarter, equal to the third quarter 2017. During the quarter we had no shortfall revenue. In the third quarter 2017, we…

[Operator Instructions]. And our first question comes from the line of George O'Leary from Tudor, Pickering and Holt.

Very helpful color on the guidance front. I was just curious if you could provide just a little more insight, given all the moving pieces, whether logistics, the mine coming online, the hiring, et cetera, and maybe the cadence as we progress through the year, both volumes and top line. I realized the plants coming on in the second quarter, I mean, it's probably biased, volume growth and revenue growth towards the back half of the year, but just curious how you would frame that for folks.

Yes, George, right now we expect to bring the dryer four on five early in the second quarter, we'll be ramping that up, decommissioning, kind of in April, then ramping up production over May and June. And so I think second quarter will improve from first quarter results. We'll have some increased volumes that will be ramping up. And then as we get to the second half of the year, again, assuming market conditions can stay consistent where they are today and activity remains strong, that we'd start being more fully utilizing that capacity in the second half of the year. And normally, as we've said in the past, we'd like to -- we believe, when we're operating well and there's strong demand, that we should be in the 85% to 90%-plus range of utilization of our nameplate capacity. So that's our goal as we get into the second half of the year.

Yes, one other thing, we brought the people in already and trained them to run those plants. So we've been carrying that even though those plants aren't up and running yet. So when the plants are commissioned that we have skilled labor already in place to make sure that our nameplate capacity, we actually can run at that.

Yes, that's part of our cost increase in the first quarter is that we brought in most of those employees, we were training them, so we should be fully staffed or close to fully staffed as we get operational beginning kind of in early April.

Very good. That's very helpful. And then just from an underlying pricing perspective in the sand market, what are you guys seeing? Or what are you guys seeing so far, first quarter? It sounds like most other producers or foreign enterprises actually increasing first quarter, and then as some more of these Permian sand mines have come on, how would you describe that competitive nature of selling volumes down into the Permian Basin? Has there been any change there? Any pushback on the mine pricing? Just curious on what you're already seeing.

So what we've been seeing is a lot of people that thought they had this Permian sand supply locked up and could potentially be contracted that some of these Permian mines are falling flat on their ability to produce sand. So we have a lot of people all coming at once, and we're probably one of the few people that actually have built Northern White capacity over the last year. It's coming up. And we're really happy with where our contract talks are on that Northern White capacity. So we think the Permian sand is running into a little bit of a problem in being able to produce. I'll let John comment on a little bit on price.

Yes, and so the pricing continues to improve sequentially quarter-over-quarter. We probably saw about a 5% to 10% increase on the spot pricing from the last quarter. All indications is that we're going to continue to see very strong demand on both 100 mesh and 40/70. Interestingly 30/50 is becoming -- there's more demand on 30/50 cropping up now. So we anticipate that the pricing is still going to continue to be strong. Certainly, there's no lack of buyers for our sand, and we anticipate that to continue, provided oil price and all the adjunct things stay the same.

Great. I'll slip in one more if I could. You guys mentioned looking at last mile solutions, just I realized you don't want to tip your hand. But just looking at the various solutions that are out there today and maybe just in big buckets, boxes versus silos versus other, what are some of the pluses and minuses as you guys see it to the various different offerings that are out there?

So we think that silos system is the better system. We are very, very close to making a decision in the direction we're going in that area. And then we also think that the trucking part of it is a huge -- how fast you can turn trucks is a huge part of this. And basically, any decision we make will also involve making sure that the trucks that we work with are turning quickly.

And our next question comes from the line of James Wicklund with Crédit Suisse.

If I look at your guidance for Q1, and I understand that the startup costs and higher operating costs and all, and then some improvement in Q2. Based on your guidance, you could be at a $30 million to $40 million EBITDA quarter run rate by Q4. Am I doing the math, right?

I think your number in Q4 may be a little high. I think we'll be -- kind of what we're seeing is we'll ramp up fairly well into the second quarter and then have a pick up in the third and fourth. So I'd say, $40 million in the fourth quarter is a little high, so moderating down more to a lower level, but being more consistent kind of second quarter and then ramping up in the third and fourth quarter.

Okay. We'll work on the math. I appreciate it. And in terms of adding people, how many people have you added to Oakdale? What's the percentage increase and the absolute number increase of people you've added in Oakdale? Just give us an idea of scale.

I think order of magnitude, we've gone from roughly -- I think, in September, we probably had around 80 folks or so at Oakdale, and we're ramping up to be around 150. And that'll be -- and so you've got to remember we've added -- we've gone from three wet dry plants and a wet plant to two dry plants and an additional wet plant. So we're at seven, actually, operating plants at the facility versus 4 previously. But again, we're going to be ramping up to around, give or take, 150 people on operations.

Okay. Last one, if I can sneak in, everybody's talking about the disruptions in rail in Q1. You guys don't seem to be particularly affected. But I would think that spot sales, the price of spot sand would have gone nuts in Q1 with all the shutting capacity on the sand. How are you all seeing this play out in Q1? And can you talk about the impact of spot pricing?

Well, so spot pricing is continuing to improve, Jim. From a logistics perspective, we think we've managed through the bottlenecks pretty well. And the -- what helped with that, obviously, was having 2 railroads effectively serving Oakdale, so we're able to kind of balance the load between them and continue to move our product effectively. Also, we shipped a lot of unit trains. We've been a prime mover on unit trains, and that's certainly helped with our movement. But yes, that railroads had a little bit of struggle during the first quarter. It's yielded a bit of improvement on our spot pricing. And I think it will tell you that demand has been very, very, very strong, and we don't see any slowdown from that.

Yes. One thing I'd add to that, Jim, is primarily the -- because of the 3/3, we're primarily filling our contracted volumes. So we don't have a lot of room for spot in the quarter. I mean, we're still about the 20%, 25% spot and 75% of contracted volumes and that's going to mute how much benefit we can get from spot pricing in the first quarter.

We're pretty excited about this new capacity coming online because it'll be outside of some of the existing contracted pricing. And that looks very positive where that pricing is at.

Okay. Do we have our rail issues behind us now?

So I would say, because we have two rails, that the rail issues were less for us. We've heard, we've read the releases from people that they'd had problems with certain rail lines in Wisconsin. But it really -- for our business, it really is not impacted like it has some of the other sand mines. And we also think part of that issue is gradation issue, where the sand that where we're at, we have 81%, 40/70, 100 mesh, and some of these other mines are basically were built for the 20/40 market. And when you go into winter and you have a winter pile and you start racing through some of the mesh sizes you don't have, that could cause some issues in what you're able to make for the marketplace.

[Operator Instructions]. Our next question comes from the line of John Watson with Simmons & Company.

Looking through the 10-K, it looks like you all contracted an additional 560,000 tons or so from the Q3 call to now. Can you talk to us about these contracts, how they compare to some of your legacy agreements and perhaps provide an update on any additional contracting discussions that are underway?

Well, currently, of the 5.5 million tons that'll be up and running at April we're about 55% contracted. And so our contract discussions continue to -- so that gets -- calculates to be about around 3 million tons on contracted capacity of the 5.5 million tons. And we continue to have really good dialogue and good opportunity for additional contracted volumes at Oakdale. So that all continues to be positive. I guess, John, can add a little bit more comments on the contracting side.

Yes. So we added some contracts in the fourth quarter. And we hope to have some additional things that we'll report on additional contracts shortly here. But the market for contracting is definitely strong right now, and given that we're one of the few that has additional Northern White capacity, I think that's been helpful for those discussions.

And our next contracts that you'll see, you'll see us move away from some of the FOB Oakdale to FOB the basins through terminals. So we're really -- that's a focus of our business. We want to capture more of that margin because we think we're pretty good at managing the logistics of that. And you'll see us get into that as you also see us start to put our foot into the last mile.

Okay. That's helpful. And for the contracts that you've signed recently, safe to assume that those are a similar structure to your agreements that you signed in past years?

Yes, our contracts have similar structure. Typically, we'll have WTI escalators. We'll have either reservation charges or quarterly true-ups built into our contracts currently. So our -- and our discussions are all typically in that similar fashion.

Perfect. And then on contracted pricing, I think we talked about a $5 move in Q1 and then potentially another move in Q2 based on where WTI is trading. Can you give us an update on those expectations and where you think contracted pricing will settle in Q1 and maybe expectations for Q2?

I think the benefit in Q1 is more around $2 to $3 a ton, because again, it lags, so you look at the last calendar quarter. So I think in the fourth quarter, we had WTI average of about $55 and that led to a benefit in Q1 around $2 to $3 on a weighted average basis. If all stays consistently above $60, between $60 and $65 for WTI, we're looking at probably getting an incremental benefit of $4 to $6 per ton that would flow through under those contracts.

Great. One last one for me. The strategic opportunity, you all mentioned in the press release in the Bakken, that's a transload not an in-basin mine, correct?

Correct. The strategic opportunities are in the Bakken and the Marcellus as well as other areas. Right now those are transload opportunities that we'd be looking to either commit to build a structure in a location or buy an existing asset or group of assets.

And that concludes our question-and-answer session for today. I'd like to turn the floor back over to Chuck Young for any closing comments.

Thank you again to everyone for joining our earnings call today. We look forward to taking advantage of the positive market trends in 2018.

Ladies and gentleman, thank you for your participation in today's conference. This does conclude the program. And you may now disconnect. Everyone, have a great day.