Good day and welcome to the Smart Sand Second Quarter 2018 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 follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to Phil Cerniglia, Investor Relations Manager. Sir, you may begin.

Good morning and thank you for joining us for Smart Sand’s Second Quarter 2018 Earnings Call. On the call today, we will 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 new information, future events or otherwise. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, August 9, 2018. Additionally, we may refer to the non-GAAP financial measures of adjusted EBITDA and contribution margin 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 contribution margin to gross profit. 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 strong quarter of financial performance for our investors. Just as important, we continue to make substantial progress in executing our long-term vision that is to become an integrated full-service provider of frac sand and logistic support to deliver mine to well site proppant solutions for our customers. Here are some highlights of the quarter, we generated our highest quarterly sales volume ever 839,000 tons. We reported $19.3 million of adjusted EBITDA, that’s a 229% increase over first quarter results, we completed our capacity expansion increasing our annual nameplate capacity to 5.5 million tons, Our Van Hook terminal became operational in April and through the acquisition of Quickthree solutions, we expanded our logistics capabilities into the last mile segment. With the capacity expansion at Oakdale now complete, we’re actively pursuing new contracts and we’re continuing to expand our spot sale market opportunities. We continue to see an appetite for these long-term contracts from both new and existing customers and as of June 30th, 58% of our annual nameplate capacity is contracted under long-term take-or-pay contracts. These are contracts that have a weighted-average life of just over two years. We’re currently in active discussions with multiple customers for new contract service operations in the Permian, the Marcellus, and the Bakken basins. As we prove during the most recent downturn our contracts, our fully enforceable and to provide as with the positive downside protection specifically around pricing exposure, further as we increased our focus on logistics will have the opportunity to increase our pricing and margins as we deliver more sands into the basins. Our first priority is to maximize the utilization of our Oakdale facility. As we've said on previous calls our goal is to be at least 75% contracted…

Thanks, Chuck. Chuck highlighted we had record sales volume in the second quarter and strong financial results for the quarter. I’ll be going over the second quarter 2018 financial results and my comments primarily will be focused on comparing to the first quarter 2018 results. Starting with sales volumes, we sold approximately 839,000 tons in the second quarter, a 16% increase compared to the first quarter 2018. Our spot sales in the second quarter of 2018 were 17% of our total sales volume versus approximately 23% in the first quarter. In the second quarter of 2018 approximately 76% of our sales were shipped via unit train compared to approximately 83% in the first quarter of 2018. Moving to revenues, total revenues for the second quarter were 54.4 million a 28% increase over the first quarter [Audio Gap] revenues of 42.6 million. Sand sales revenues increased to 40.5 million in the second quarter compared to 28.9 million last quarter due to higher average sales prices and higher sales volumes. The average sales price per ton in the second quarter increased 21% to $48.23 per ton compared to $39.99 per ton last quarter. The increase in 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 increase in basement sales in the quarter. Transportation revenue which includes freight and rail car rental was 13.3 million in the quarter basically flat with last quarter's results of 13.7 million. Costs of sales for the quarter were marginally lower 34.7 million compared to 35.4 million last quarter. As we’ve discussed in the past, we typically have lower cost during the non-winter months primarily during the second and third quarters of the…

[Operator Instructions] And our first question comes from the line of Jim Wicklund from Credit Suisse. Your line is now open.

With Quickthree, did you buy the manufacturing facility as well? Or did you buy intellectual property? And I’m assuming these systems your guidance was barely explicit on the 7 million to 10 million for 5 to 7 systems, so it’s easy for us to figure out the average costs. But I was just wondering, what you expect the returns to be? We know what Solaris and Sandbox do, so I’m assuming that you’re in that neighborhood but if you can talk about that. And what exactly did you buy with Quickthree?

So, we did buy a manufacturing facility with that in all the intellectual property that came along with that, and we're making those systems right now. Our view on this is we’re not going to hand the sand up to other people to touch it in the way in the supply chain. We’re going to take sand all the way to the wellhead and deliver it to the blender. And that’s kind of our view on the system. We will work on a rental basis as well, but we think that’s the true value added to the system instead of multiple people touching sand all the way to the wellhead.

So they’re fully integrated?

Fully integrated and we’re going to be bringing our 12k 100 mesh sand right to the well blender because we think that’s what petroleum engineers want to have.

Is there a basin that you’re targeting first? Or is this going to be whoever raises their hand first regardless of baseline?

So, we've had tremendous success at our planes Van Hook terminal that we bought, and we’ll probably go out there initially, but we’re targeting all basins. And the Permian, we’re very much working on some stuff down there that involves partnering up with the rails and driving larger volume trains 200 railcars at a time and delivery with this system.

And if I could switch my follow-up to your conductivity test for Permian, we all kind of thought that Northern White would definitely win in the quality of 40/70 and so testing conductivity for 100 mesh versus 100 mesh in the Permian is a little bit of a surprise, several companies have talked about the pluses and minuses of each. Are these companies that you're doing these tests they’re existing customers of yours I assume? And is it just 100 mesh that we’re testing? Or is it the full range of grades that we’re testing?

It's John here. We’re testing all grades on that but in particular there was a focus on the final mesh sand, the 470 and 100 mesh these are -- these would be new customers to Smart Sand. And there’s definite concern from them with regard to long-term URs on these wells and the difference between using Northern White and regional sand.

And I think Jim the other thing is there’s some major players in that basin that obviously have major rail relationships too, and I think they're looking at, hey, let's bring the rail right through our acreage because we’re not doing this for 30 days, 60 days, 90 days. We’re doing this for 30 years and trying to make the trucking as safe and sustainable as possible. So, I think the thesis of everyone is going to truck 40 million tons of soft sand to the wellhead is kind of a little -- it's [indiscernible] so I think there’s a little bit. The one thing I know is you don't mess with the railroads and I think there's little bit of a play come back.

And if I could -- does this make you a little more cautious about developing one of your two Permian sites, you talked about getting it ready if you get enough contract coverage? Or is that just you’re going to play both sides and have the optionality?

I think we’re going to keep the optionality, but for right now my vote is to keep hitting this news button on that.

Our next question comes from the line of John Watson from Simmons. Your line is now open.

I wanted to follow up on Jim's question. I totally appreciate it if you'd rather not say, but any color on profitability per system for Quickthree once they’re up and running?

Yes, John, it’s still early as we’re getting ready and putting plans out and putting our systems out. Also our system has the lot of flexibility in terms of size and configuration. It could be all silos. It can be silos in a quick load and so it’s going to someone drive the margins on that as well. But generally we believe we’re going to go out we’re going to market in our margins and profitability will be consistent with what you're seeing our competitors in the space, both the Solaris and Sandbox and others. We think we can achieve a similar timeline.

John, the other thing that’s added into what we’re doing on that is we’re just not selling the system, right. We’re also going to be involved in the movement of this sand, right. So, when we talk about 200 car unit trains and moving sand that efficiently, I don't know anyone else that’s really able from originating side able to do that and we are. So, we’re going to make sure on the permitting side, we have the same thing and we’re going to play in the economics in all this all the way through to the wellhead. So it’s not just the system, right, which is a great business on its own. It is the actual movement of the sand all the way into wellhead, and turning trucks more often than other people are doing.

And switching gears to I guess what’s happening real time, can you give any update on what you're seeing either on the contracting side or as you’re contracting more customers around the spot side with regard to sand pricing? Are we flat in Q3 slightly up slightly down where you guys seeing right now?

Yes, so just to reiterate I mean our goal is 75% contracted. We think that we're right around 58% today on our 5.5 million tons of Oakdale. We have multiple opportunities that put us well beyond that 75% in fact well beyond the 5.5 million tons. With regards to the market today, we've seen a little bit of softness in July, but ultimately we think that that's probable related a little bit to takeaway capacity in the Permian, the other markets seem to be strong we had our best months ever up to the Marcellus in the Bakken. So our goal is still to contract at 75%. We've seen a little bit of softness on the demand side, a little bit of softness on pricing, but you would think at short-term and ultimately we're expecting a strong second half of the year.

One other thing on that now before primarily most of our contracts were FOB to mine and we're seeing a lot more interest and people taking the sand and taking it further down and benefitting off of our supply chain.

And maybe one last one, if I can sneak in. I know it's early but any framework for us to think about for 2019 CapEx?

No, it's well early to that John. So, I think it's too early that we think about that and then really be driven by, if we do pursue ultimately adding in basin facility or looking to add additional term loan, but right now we can't really give much guidance on that.

And our next question comes from line [indiscernible] from Tudor Pickering Holt. Your line is now open.

Just to follow up quickly on John's question for 2019. I know it's still early, but the budget is basically 5 to 7 systems for Quickthree over the back half of the year from manufacturing capability perspective. Is two to three systems or quarter I mean is that what we should think about for 2019 or from a manufacturing capability perspective? Do you have the ability to manufacture more of those systems per quarter, if demand warrants moving forward?

Yes, so, we're bolstering our manufacturing capabilities right now. So, we feel like we're going to be able to meet the demand in the market for these systems, but right now it's basically our manufacturing keeps us ahead of those numbers.

Yes in terms of what were ramping up to or building up the systems and growing into that we would right now we anticipate we have the capability by the end of the fourth quarter and going into the first quarter next year to under our current manufacturing facilities to be able to produce two systems or fleets per months.

And I just wanted to clarify some of your comments in prepared remarks and Q&A around contracting. It sounds like you're seeing pretty strong demand on this incremental demand for long-term contracts. Have you signed up any new contract and say in the past two or three months? Or is this just sort of more demand you see on the horizon?

Well, we actually just recently signed a trans loading agreement out of the Bakken and we’ve extended some of our existing contract base existing options on those contracts recently. So on the contracts we're talking about the other customers are dealing with would be new customers to the Smart Sand it's a pretty robust demand out there for Northern White so we would expect that have some news on that before the end of the year.

[Operation Instructions] And our next question comes from the line of Stephen Gengaro of Stifel. Your line is open.

I guess two things. One when you when you think about the -- and I’m getting a little granular, but when you think about third quarter guidance and you look at kind of volume increases, and then you look at so your EBITDA guidance. Your EBITDA is growing it appears faster than your volumes. Is that just because of the ancillary services? Are you expecting sort of a different type contribution margin from the sand sales?

Well, I think if you get to the higher end of the EBITDA guidance, you're getting a little higher contribution margin that’s driven by having hiring basins potentially and additional spot sales. So that would kind of drive the delta, if you look at the lower end of guidance it's pretty consistent with where we were and for this quarter in terms of profitability and contribution margin.

Okay. And when you talk contribution margin, are you speaking companywide going forward, you’re talking more about sand sales and sand contribution? Or is it the entire network?

Well, it’s the entire network and that’s the reason we’re going to contribution margin because basically it’s a fully integrated business. It has the sand sales. It has transportation revenues. It has the in-basin. And so, it’s coming in what’s the total -- the total integrated business and the margin we’re contributing, contributing from that in terms of moving to that integrated model to mobile to -- while we'll continue to have sand sales that will be in the mine. We’re also looking to grow through the sales in basin and ultimately to the last mile and delivering the sand to the well site.

Yes, really, you’re right on target there. Really, we're driving our business towards a delivered cost at the wellhead. So, that’s really what we think the E&P wants. And again, our delivered cost is going to be a delivered cost with premium sand.

And then just one of other thing when we think about the growth in the silo systems, are you looking at displacing a certain product line out there? Or you think it’s just more creating a smart sand systems from sort of mind to blender? I’m just trying to think about how you gain traction in that business with the competition is in the market?

So, we look at this is a business you don’t want to keep handling things off to people because when you do that, you lose control of it, right. And there’s slowdown, there’s efficiencies that are you lose by handing off all the time. So, we look at the business as if we manage this all the way through the wellhead is going to be a more efficient movement, it's going to keep our sand competitive and it’s going to ensure the E&P that they get the best quality consistent sands at the wellhead. When guys are pumping 25,000 tons down a well and they’re trying to get all these stages on a day. You need to have that kind of organization in the movement of sand all the way through. But if you’ve got 4 or 5 different people touching it, you lose that. And I think that’s for that, right now you have this whole Permian thing that everyone’s talking about. You have guys that are going to say that there are going to originate 50 million tons a year of sand from mines and truck it and support wells that are hit the 50 miles away and manage all that stuff. And we just think it gets get super difficult. So, that's why we view what we’re doing is really the smart way to do it.

And one just quick final question, if you make a decision to go ahead on the in-basin side. What's the timeframe, so you think you start selling sand?

Well, basically, we’re working on right now that'd be shovel ready and we think by the end of the third quarter or the fourth quarter, we’d have a fully permitted site ready to go design, and once we break ground, I think it’s 6 to 9 months where we’ll be able to start delivering sand in the market.

Steve, what I would say is the railroads out there, we want to partner with you guys and not cannibalize you and we want to work with you guys. So I would say that I hope the day comes where we’re not building that regional mine. I’d rather build regional terminals and bring the best sand in and perfect the movement of the sand to the wellhead because that’s really what we’re in. And you know what it doesn’t matter few barrels of oil doesn’t matter when oil is at 30, but when oil is at 55, 60, 65, 70, it does matter. And what those wells do in the second and third year is very important.

And our next question comes from the line of Brad Handler from Jefferies. Sir your line is now open.

First some comments on Van Hook, I know commenting on the trans load working for a full quarter getting a full quarter out of it is probably not quite the right way to think about it, but can you help us think about capacity, first of all you opened it in April, you opened it in the fourth quarter…

Van Hook we’ve put very limited money in there. It was a great terminal when we bought it because it was moving crude and was one of the best, and we’ve already ramped that thing up considerably so we’re very happy with what's going on right now, but we are doing some expansions out there and I’ll let John get more detail with some numbers on that.

Yes, right now, we think our capacity up there is roughly about 700,000 tons a year. We’re expanding that. We want to be over a 1 million. The rail yard certainly large enough to support that operation, we’ve got some additional CapEx plans to bring in silos and maximize the efficiency of that location. The demand we’ve seen for use in that facility has actually been a pleasant surprise up there. When we turned it up, we’ve had a lot of folks breaking down our doors for additional capacity there. So, we’re really-really confident about it, it is in a great location. It's kind of the play that is moving towards where that location is, so we feel really good about the Bakken terminal.

And it is a great movement with the rail, with the railroads that we’ve partnered up with. So, we basically went and said hey, we want to about this, spend the right money and perfect the movement of the rail and of the sand into this area, and it’s an example of what we’re also going to do in the other basins with the railroads.

Got it. Thanks for that color. That's obviously sounds good.

One of the little sensitive information I think the other day we almost -- we almost got over 2,500 tons in a day at that site.

Can you -- let’s talk a bit about the 200 car unit train fleets and I think we’ve now sort of paid attention to this side of the business enough to know that the -- but it’s not the rails we’ve certainly heard other logistics providers talk about why unit trains have hopped out I think it’s closer to 120 maybe it’s 130 or something. But it sounds like there was some pretty good reasons that I don't actually remember, why there was certain limits today? So can you speak to that notion of 200 cars? And what it is that you need to do perhaps to make it work more effectively?

So, the thing that I say about that is that basically the railroads there is limitation a lot on the sides of these trains comes from the originating and terminating side. So if there is not trans loads set up to be able to handle the large size trains or originating site set up to be able to make those trains then you have a limitation in size on that track. So what we do is that we go to the railroad we say, hey, what's the most efficient model for you guys to move this volume, and how can we drive your efficiency, how can we make your railroading piece at precise as possible. And basically they say come back and said, hey; we want to approach just going to this size. If you guys will invest in the basin and bring the terminal and set the terminal up to handle this and drop these cars off full, pick up empty, you set up that way. There are very much in line with that and drives efficiency on their network.

Yes, the only other thing I would add to that what Chuck said there is that. It's definition dependent in a lot of cases. There is size of the unit train, your long train program in a particular basin maybe a 130 cars, the long train program in another basin maybe 200 cars. And really it's the geography on the rails for that railroad to take that determines that. But we are very confident that 200 cars program down into the Permian basin is doable and desirable from both our perspective and the railroads perspective.

And maybe if I could sneak in a third please. And maybe it's a quick one and maybe it's not. The comments about connectivity and quality, how much are you speaking in effect to kind of the Permian sands went large versus just more -- there's a lot of variability in the quality in the basin and therefore they're going to be limits perhaps on the quality of some of the sands, but others of it is actually the crusher is fine or some other attributes are fine?

Yes, so, I think you've recognized that we have two properties down there they are in, both are kind of in the heart of the areas where the sand is being processed and developed. And our main concern with the sand down there is one, the physical properties as you alluded to. The crush is not as it’s not as high as the Northern White on either there was 40/70 or the 100 mesh products it's down there. And that won't necessarily show itself initially when you pump it down the well and so, that's a long term EUR thing where the sand grinds up effectively and cogs up the conductivity back to the wellbore. But there is some other challenges down there that I think aren't being properly addressed and you want it to water, you need a lot of water to wash the sand to get the turbidity out of it. Any dust that you leave in the sand has marked impact on the ability for that well to produce longer term and has the ability for us to produce the product that is within MSHA and in fact those are your guidelines at the well site to make sure the dust contents flow. So we're kind of timed to plays both sides of sands on this and that we have property down there, but there are definitely some quality concerns from our perspective being sand producers. But we've also -- we're parroting a bit of what we've heard from some of the E&Ts down there that are more concerned about the EUR versus IP and what they’re seeing in their test results. So, we think that there is a lot of activity and noise around the regional sands out there, but I think ultimately this may come down to a quality play for the guys who are ultimately concerned of that Europe.

And I’m showing no further questions. I’ll now turn the call back to Chuck Young for closing remarks.

Thank you for joining Smart Sand second quarter earnings call. We look forward to strong remainder of 2018.