Good day, ladies and gentlemen, and welcome to the Q1 2018 Smart Sand Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions]. As a reminder this conference is being recorded. I would now like to turn the conference over to Phil Cerniglia, Investor Relations Manager. Please go ahead.

Good day, ladies and gentlemen, and welcome to the Q1 2018 Smart Sand Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions]. As a reminder this conference is being recorded. I would now like to turn the conference over to Phil Cerniglia, Investor Relations Manager. Please go ahead. Phil Cerniglia Good morning, and thank you for joining us for Smart Sand's first quarter 2018 earnings call. On the call today, we have Chuck Young, Founder and Chief Executive Officer; Lee Beckelman, Chief Financial Officer; and John Young, Chief Operating Officer. 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, May 10, 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. Finally, during today's question-and-answer session, we ask you to please limit your questions to one plus a follow-up to ensure that we have enough time to answer so many questions as possible. I would now like to turn the call over to our CEO, Chuck Young.

Thanks Phil. I'm pleased to report that Smart Sand has posted another positive quarter and we're off to a good start for the year. Here's some highlights of the quarter. We had our highest quarterly sales volume ever, pricing trends continue to be positive, our average selling price increases by 16% compared to last quarter, demand was up in fact it exceeded supply, and we further expanded our logistics footprint. Here some headlines. A new terminal up and running in North Dakota. A deal to buy an innovative frac sand storage company, continuing strong product demand, if we can make it, we can sell it, and Smart Sand where we're adding new sales capacity in the second quarter. Is Smart Sand position to take advantage of this growing market? Absolutely. We have some big assets including these. A solid portfolio of long term take or pay contracts, a low cost operating structure, strategic investments in logistics infrastructure, a strong balance sheet to support our long term growth initiatives and a dedicated workforce that consistently produces results. We're gearing up to meet the continually increasing demand especially for Northern White. Our expanding capacity should be fully operational in the second quarter. We're moving quickly toward our long term goal becoming a fully integrated mine to the wellhead supplier. Part of our plan is that more direct exposure and sales opportunities in the operating basins. So we're primarily pursuing investments in three growth areas, transloads in the operating basins, last mile solutions for sand storage at the well site, and development of mine locations outside of Oakdale. Here some elements of that strategy. In March, we acquired the rights to operate a unit train capable transloading terminal in Van Hook, North Dakota. It will serve the Bakken formation. We geared up quickly,…

Thanks Chuck. As Chuck highlighted, we had record volumes in the first quarter and we continue to progress on several of our stated initiatives to expand our logistics capabilities. I will be going over the first quarter 2018 financial results and my comments primarily will be focused on comparing to the fourth quarter 2017 results. Starting with sales volumes. We sold approximately 723,000 in the first quarter, a 2% increase compared to the fourth quarter 2017. Our spot sales in the first quarter of 2018 were approximately 23% of our total sales volume versus approximate 26% in the fourth quarter of last year. In the first quarter, approximately 81% of our self were shipped via unit train compared to approximately 68% in the fourth quarter of 2017. In regards to revenues, total revenues for the first quarter were $42.6 million, a slight decrease over fourth quarter revenues $43 million. Sand sales revenues increased to $28.9 million this quarter compared to $24.4 million last quarter, due primarily to higher average sales prices. Average sales price per ton in the first quarter increased 16% to $39.98 per time versus $34.49 per ton last quarter. The increase an average selling price sequentially was primarily due to higher contracted sales prices which increased partially due to pricing adjustments in our contracted prices for changes in the price of oil and partially due to one contract with invasion pricing, which ramped up sales volumes in the core. Transportation revenue which includes freight and rail car rental was $13.7 million in the quarter compared to $18.7 last quarter. The reduction in transportation revenue in the quarter was primarily due to the mix of sales with less shipments for customers we freight with freight pass-through. Our cost to sales for the quarter were $344.4 million compared to…

[Operator Instructions] And our first question comes from Martin Malloy of Johnson Rice. Your line is now open.

Good morning.

Good morning, Martin.

Could you remind us how the pricing escalators work as an average on average per ton basis across your tons that you are producing if the average price is $65 and net $75 for crude?

It's not, every little contracts a little different but actually above $60 a barrel for the first quarter we will be beginning a pricing adjustment on our current contracted volumes and on a weighted average basis of about $6 a ton. So get an incremental $6 per ton on our contracted volumes in the second quarter for all prices being above $60. The next row covered in would be about $70 to $75 and that again will be at roughly another $5 ton, per ton adjustment on the current contracted volumes.

Okay. Great. And then, on that - I appreciate you give more information on next call the Quickthree acquisition, but just trying to get a better feel for the strategy here. Are these just for this unit is just going to be utilized by Smart Sand for their customers and has this unit been deployed already? Already in what basin?

So, Quickthree has been operational for some time now and they have units pretty much across most of the basins, heavy concentration in Canada and the Marcellus. And our strategy with that is that we first and foremost would like to put our sands through that but we will be open to utilize in this technology. I think the thing that to be true benefit of this is their ability to unload gravity dump trucks quickly and as trucking gets more complicated, we feel that this technology really is as a step up above what's out there today in the marketplace. So we're going to deploy that and we think that our customers don't only buy sand from us they buy sand from other people, so if they want that to help bring down their trucking costs, we have no problem deploying it and not having Smart Sand and go through it.

Okay. Thank you.

Thank you. And our next question comes from John Watson of Simmons. Your line is now open.

Hey, guys. Good morning.

Good morning, John.

A few quick ones on Quickthree and if you can have an answer feel free to tell me the move on, but it was the legacy business model for Quickthree to sell these systems or to rent them and could you maybe provide some color on the number of systems sold or rented currently?

Primarily, Quickthree was selling the systems and I think in totals, they roughly have a number of about 90 silos out in place. Now what's happened in the marketplace since we've gone from people doing 1,500 to 1,600 tons of wealth to 2,000 tons a day, the amount of silos you need per well head has gone up. But our strategy with this is going to be to lease the systems. We're also looking - we're looking to partner with - we think that again nobody likes trucking or want to invest in trucking, but we feel those guys are critical in the marketplace and what we're doing is we're going to partner up with trucking companies and allow them to sharing some of the benefit of doing the hard work which every well head needs trucking, we hope not too much distance on trucking, it's kind of our strategy is a little different. But we think that's going be a great way for us; one, include the truckers, and two, some of the share profit in this business but also to be able to get the sand to the well head.

Okay. That's super helpful. And 90 silos is that a one silo per frac or per well?

So, roughly, we - in our model it's going to be 4 to 5 silos per well head.

Okay.

That's a good number.

Okay. Perfect. And do you know the split U.S. versus Canada for 90 silos historically?

It's probably…

Yes, it's north of 89% Canada

Okay.

Okay. Okay, perfect. That's super helpful. And one more from me if I can, Smart Sand historically hasn't sold the ton of sand into Canada, is that started to change with this acquisition?

So, this is John here. What we've actually - we have sold sand into Canada, that's just not a primary focus of our business at the moment. There are some indications that the players are coming a bit further south in Canada which opens up the market to the origin on making Pacific Rail, they have good destinations into there. I think Canada will continue to be an opportunity that we evaluate. Keep in mind we also have our asset on Canadian National Rail which is ready to develop at any time should be Canadian market heat up to the point where we want to get involved in the heavy state. Right now, all my sand does really spoken for in the lower 48 though, so we're pretty focused on that and producing for that market.

Sure. Thanks so much, guys. I appreciate the color.

Thanks, John.

Thank you. [Operator Instructions] And our next question comes from Akil Marsh of Janney. Your line is now open.

Hi, thanks for taking question. Another one on Quickthree and understand if you can answer this but is Quickthree at the moment generating EBITDA and/or free cash?

Yeah, we're not going to get into numbers right now. As we said before, I think we're still evaluating how it's going to fit in our systems and into our business model. So we're not really going to give any real data on what they're generating today. Also the business model is really going to be changing. So in terms of how they were selling and promoting Quickthree is we're to be a little different than what we're planning to do over the next 12 to 24 months with the business.

Okay. And regards to the leases in West Texas, it sounds like there's a little bit more activity there. So is the way to think about West Texas is that you're definitively moving forward or should we still kind of view it as an option to move forward if you do want to in the future?

Yeah, the strategy that stand today with West Texas is they have our project start already and that's what we're working towards right now in the permitting and the design phase.

And additionally, our West Texas operation will come with a real component. We believe sand mines belong on rail and we think some of the challenges that are going to take place down in that area, Texas as it relates to trucks are going to require to get the terms as short as possible in trucking.

And you get to remember we really have three options to add additional capacity. We have Hixton which is we can develop, we have additional ability to expand Oakdale and we now have the West Texas leases. So we're going to basically - when we look at capacity, we're going to look where it makes the most sense to get the best value for that. And so we have a lot of options now we can look at and consider as relates to where our next and our capacity should be add and to support our business.

Great. Thanks taking my questions.

Thank you. And our next question comes from Martin Malloy, Johnson Rice. Your line is now open.

Thank you. Just had two follow-up questions. First one on liquidity and given the Quickthree acquisition, the remaining amount you have to spend with your CapEx guidance, can you talk about how comfortable you are liquidity and funding?

So, currently we're comfortable, again we've expanded our capacity to $60 million with Quickthree. We will - we could be funding up to around $45 million to $50 million which will give us additional$10 million of liquidity into the facility and we are ramping up our capacity in the second quarter and expect that to be at higher levels in the third and four. So assuming our volumes start to pick up as expected that's going to start generating a lot more cash flow from our Oakdale operations to help, support our needs. But we're keeping a close eye on that and is that we need to, we have the ability to look expanding our credit facility, we also have some delay to tap some equipment financing and other sources of capital relatively quickly if we need to. So we feel comfortable we are today on liquidity.

Okay. And just thinking about the cost per ton, I appreciates your guidance for the full-year. Should we look forward the decline in the cost per ton to be back half weighted?

Well, yeah, it should, I mean if you think about cost per ton, when you think about the first quarter, we had a lot of extra cost wrapping up our labor to be ready for the expansion without having the volumes there to support that cost. So we're going to be ramping up in the second quarter, our volumes will be increasing but they will be to the full level of what that expanding capacity can support. So as we get to the third and fourth quarter and we get a higher utilizations of the total facility and fully utilize dryers four and five that should help us bring our cost per ton down and that should moderate more in the third and fourth quarter as our volumes move up. And our overall cost don't move up as great as we've already born a lot of that cost in the first quarter getting ready for that expanded capacity.

Great. Thank you, very helpful.

Thank you. And our next question comes from [indiscernible] [0:01:48.5]. Your line is now open.

Hi. I started following this company about a year or so ago and I look at a company with a very strong balance sheet and with the fundamental of the industry looking very good and since then I've seen the balance sheet deteriorate quite a bit, while there is higher production, profitability has permitted and your stock is under performing your peers. So I guess I want to know with all the investments you are making in kind of going on against those borrowing limits, where is the flection point going to be profitability and what it is going to look like over the next few quarters?

Well, again actually our balance sheet still very strong. We only have $50 million of debt against a $250 million balance sheet. So, the balance sheet is still strong, our volumes have improved, yes, our costs were high in the first quarter but again that was due to specific guidance that we had actually guided to and that we built up that cost, anticipation of our increase volumes the second half of the year. And frankly, we've basically been able to provide to manage that capital spend to get up to our capacity expansion with very little debt to do it. So we've done that primarily from cash we generated from our equity offerings and cash flow. So I think we've done a pretty good job of managing that. Yes, our cost structure is in where it want to be. Yes, we want to improve our profitability and we think as we start ramping up sales volumes through the second half of this year, assuming market conditions stay consistent. We should start showing improvements in our profitability over the course of the year.

Yeah, one other thing I would add is that we are essentially are almost doubling our capacity and we have the people in place to run the two new plants. And as we can see of how this sands being made in the Permian it's just not as easy to gear up and get started for from the ground stop on new plants and you have to bring these people in and train them so. So we've done that and the first quarter reflects that cost, but we have to do that because we had to be ready for the plants 4 and 5 which are already making sand.

Okay. Thank you.

Thank you.

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

Thank you, again, everyone for joining our earnings call today. We look forward to taking advantage of the strong demand for frac sand in 2018.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.