Good day, ladies and gentlemen and welcome to Smart Sand’s Third Quarter 2018 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call maybe recorded for replay purposes. It is now my pleasure to hand the conference over to Mr. Chris Green, Senior Financial Reporting Manager. Sir, you may begin.

Good morning and thank you for joining us for Smart Sand’s third 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 and 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 8, 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, Chris. I am pleased to report that Smart Sand has had another good quarter on multiple fronts. We had strong financial results. We will give you specifics later in the call. We substantially ramped up our sales volume through our Van Hook terminal and we began manufacturing our first well site storage system fleets to be deployed in the field under our service model. Now, the details, we posted quarterly sales volume of 823,000 tons, that’s just short of our record sales volume last quarter. We generated $22.1 million of adjusted EBITDA for the quarter. And we continue to execute on our strategy of expanding our services for our customers from the mine to the wellsite. Here is how we did it. We increased the activity through our Van Hook terminal in the Bakken hosting in-basin deliveries up 97% over last quarter. Our increase in-basin sales activity also helped to improve our average sales price. It went up from $48.23 per ton to $53.77 per ton and we ramped up our wellsite storage solutions. We have now completed our first fleet of silos and we are looking to have our first wellsite storage systems operating in the field soon that will come either in the late Q4 or early Q1 next year. Smart Sand is now a fully integrated frac sand services company that offers complete mine to wellsite solutions. Our unit train capable Van Hook terminal in the Bakken is seeing increasing activity. It’s up over 97% sequentially since going live in the second quarter of this year. Three of our existing customers now ship sand through our terminal to North Dakota. We’re in active dialog with several potential new customers for contracted volumes through this terminal beginning in 2019. This shows the value of our long-term focus…

Thanks, Chuck. As Chuck highlighted, we did have solid volumes in the third quarter and strong financial results for the quarter. I’ll be going over the third quarter 2018 financial results and my comments primarily will be focused on comparing to the second quarter 2018 results. Starting with sales volume, we sold approximately 823,000 tons in the second quarter, just short of our record sales volumes last quarter. We did see a drop in spot sales in the third quarter decreasing to 70% of our total sales volumes versus 17% in the second quarter. In the third quarter 2018, approximately 67% of our sales were shipped via unit train compared to approximately 76% in the second quarter of 2018. In regards to revenue, total revenues for the third quarter were $63.1 million, a 16% increase over second quarter revenues of $54.4 million. Sand sales revenues were increased to $44.2 million in the third quarter 2018, compared to $40.5 million last quarter due to higher average sales prices. The average sales price per ton in the third quarter increased 11.5% to $53.77 per ton versus $48.23 per ton last quarter. The increase in average selling price sequentially was primarily due to higher contracted sales prices due to increased in-basin sales in the quarter. Transportation revenue which includes freight and rail car rental increased 28% to $17 million in the quarter versus $13.3 million in the previous quarter. This increase was primarily due to increased in-basin sales activity as one of our contracted customers shifted volumes to our Van Hook terminal from other destinations and is being charged transportation fee for this service. We expect this shift in volumes to continue for this customer. Our cost of sales for the quarter increased to $40.6 million compared to $34.7 million last quarter. The…

Thank you, sir. [Operator Instructions] And our first question will come from the line of James Wicklund with Credit Suisse. Your line is now open.

Good morning guys. Good quarter. Stock up 25%, so somebody other than you guys like this, so this is good, Lee what are your current – what’s the current spot price for sand, I know that 58% is contracted, but the spot price per sand today, we have heard from other sand companies that very recently prices have tumbled and I am just wondering if you can give us a current market update?

Well, I will turn it over to John Young, actually. On operations, he can kind of give you an update on where spot is today. But I would say in general, as we have always said Jim, spot prices are negotiated. So there isn’t one specific spot price, it really comes down on negotiations and the particular customers you are working with and the particular basin you are shipping that sand to, so.

Yes. And one other thing I would add on that, it’s where spot price – where FOB the plant, FOB the basin, FOB the wellhead, I think that these are all things that are changing around right now which are very important. But from that, we will hand it over to John.

Yes. So Jim for 40/70 mesh and 100 mesh, the spot price we are seeing out there FOB Oakdale is probably in the mid to high-20s depending on the particular day. We are still moving some spot volumes out there, but the – as everyone knows, the market demand has fallen off a little bit in the third quarter, in the fourth quarter we expect pretty strong recovery, expected kind of beginning of next year.

And do you think that Q4 will be the bottom for spot sand prices, FOB Oakdale, everyone do, but will the fourth quarter mark the bottom do you think for spot sand prices?

Yes. I think that with the – since the recovery since the last downturn, we have only had a few kind of fourth quarters to judge it by. Last year, we saw a little bit of fall-off in volume in late December even though it was a relatively strong market. So yes, I mean I think our view is that we see a pretty rapid up-tick once the new budgets are in place like in the first quarter next year which would indicate that your fourth quarter kind of access the bottom to – what we expect.

Okay, that’s helpful. I appreciate it. And your well site solutions, your silo systems, one it’s going to be in – around the end of the year plus or minus a little bit, congratulations on that. And you are going to spend $5 million to $10 million, how much does one of these systems cost and you talk about your service model, I am assuming you are just talking about the service model of renting them out and can you give us an idea of what kind of returns you expect, any metrics that you want to give us would be helpful?

Yes. Jim, I would say that the cost of the fleets are going to really depend on the configuration because we can just rent silos only or we can also rent silos with what we call our quick load, which allows for gravity dump trailers and feeding into the silos. But our silos on average – our fleets are costing from about $1.2 million to $1.8 million and that in number includes the earn-outs that we pay over the first 3 years. So you are looking at about $1.2 million to $1.8 million depending on the configuration per system. And then I would say in regards to the economics and we haven’t given out specific economics, but we are out basically marketing our assets and are marketing at similar kind of economic levels that you are seeing at Solaris, Sandbox and the other economics that are our peers are currently generating in the market.

And what kind of term, I mean I know that in this market if you can get a good margin, you get as much term as you can – it’s both the combination of what you are willing to do and what your customers are willing to do, but what kind of term can you get in your business model on these things these days?

This is – Jim, I think that you have it’s a relative – we are relatively new entrant to the market and we are still looking at terms. I mean I think our desire will be kind of 2 years would be what we would be looking for. Certainly, what we have seen is no shortage of demand for this technology. We do think we have a competitive advantage in the market versus the other technologies that are out there. We kind of think we have the best of both worlds given the gravity feed of the boxes and relative ease of use of the silos, along with the ability to be agnostic as to whether or not a customer wants to use nomadic trailers or bottom dump trailers. So there has been – really well received in the market. This is not a new technology in the market. The company we bought had deployed quite a few of these devices in various markets out there. So we are feeling pretty positive on that. And again, we are looking for kind of longer term arrangements say 2 years will be the average.

And with almost 500 frac crews out there, you don’t have to place many to – to have it be meaningful. Okay. Gentlemen, thank you very much. I appreciate.

Thanks Jim.

Thank you. And our next question will come from the line of George O’Leary with Tudor, Pickering, Holt. Your line is now open. George O’Leary: Good morning guys.

Hi George, how are you? George O’Leary: I am good. Thanks. I thought the color around – seeing nice demand for Northern White volumes was interesting, I am curious what you are hearing from your customers directly as to what could potentially be the driver of the quality issues with the in-basin sand that seems to be grabbing market share at the moment?

Well, I think what we are seeing, number one is, we have made a plan with the business because we have been listening to everyone saying regional sand, regional sand, regional sand, but what we are seeing is the actual quality and consistency of that sand is not there. And then additionally, our customers are coming to us on the last mile side and saying hey, will you help us manage our trucking in our last mile. And we are looking at where this trucking is taking place and we are telling these people that we are not going to give you a trucking pass-through rate by the load. We have to charge you a daily fee. So we really think that kind of stuff is going to really come into the market and it’s the cost that people have not planned on. So in that as those costs go up, we think that terminals in Northern White will come back in those markets. George O’Leary: Okay, that’s helpful. And then just generally, how do you think about the contracting environment for Northern White frac sand for your mine in particular. Clearly, you’ve great access into – in the Bakken, especially with the terminal there, also good rail access into the Marcellus. Is there still decent appetite for Northern White volumes on a contracting basis in those 2 markets, or you kind of hit the pause button while the market soften and wait until the market potentially rebound next year to look to actually contracted volumes?

Yes. We’re still continuing to have significant contract discussions, long-term high-volume discussions, primarily in those markets that you mentioned. There is still relatively high demand of wells in – certainly in the Marcellus are again high-volume wells of finer mesh sand. So we would expect that we will be able to contract additional sand volumes based on our available capacity in Oakdale. We’re having those discussions right now and again, we see – we definitely see contracting as something that we’ll be able to do in the future. And as we kind of start to see this recovery take hold, I think there – I think there still will be some concerns over sustainable high-volume supply of finer mesh Northern White.

Yes. The one thing we would say is, these other basins are getting busier and the Northern White sand that the market or the analysts have out there saying, hey, there is all this Northern White. I would say to you that a lot of these Northern White mines that were created, were created as 20-40 mines and 30-50 mines and people can go, hey, we are idling this mine because it’s this and it’s that. You have to look at the gradation and the reserve base of these sand mines. So number 1, if you’re not moving unit train, which we’re seeing a major carrier move away from unit trains, that’s a huge problem for sand – moving sand, right. So makes it very difficult for that sand to end up in the marketplace at the right price. And then number 2, if you don’t have a reserve base of the sand that’s in demand, you can get buying your tailings piles for a while, but eventually, you’re mining that stand out of the ground and it’s got to be the right gradation that the market wants. So that plays into the demand, so we’re seeing good demand for our reserve. George O’Leary: That’s very helpful color. I’ll turn it back over guys. Thanks.

Thank you. And our next question will come from Stephen Gengaro with Stifel. Your line is now open.

Thank you. Good morning, gentlemen.

Good morning.

Good morning.

Two questions. The first on your contracts and I know there’s a lot of them are tied to the price of oil. Have you had any customer conversations about pricing on these contracts about possibly extending terms and amending price and how do you react to those conversations if you have?

Yes. So we’re taking a very similar approach to what we did in the last downturn kind of that 2015, 2016 and we’re willing to work with our customers, but we definitely require value in return from them. As in the last downturn, we’re prepared to defend our contracts if we need to. And one of the things that I think is important when you think about long-term contracts, our customers were benefiting earlier this year when spot pricing within that $50 and $60 range FOB plant, they were paying less on their contract volumes. And so one of the things about contract is, it provides pricing stability to our customers in the event of higher spot pricing and then in some situations like now, where spot pricing is a little bit lower. So we’re happy to kind of work with customers, but we do require that they provide some value to us in return and we’ll continue to work with them. We’ve great relationships with our customers and we would anticipate to keep our relationships great with them.

Great. That’s very helpful color. And as a follow-up just on the capital spending side and obviously you’re talking about the share repurchase program. Are you anywhere closer or farther thinking about as a development I think –

Stephen, sorry, but – Stephen, you’re breaking up. Can you re-ask your question?

Oh I’m sorry. I was just curious on the CapEx side. Have you thought anymore about an in-basin mine being developed or do you think you’re farther from thinking about that based on the growth in volumes in general and in-basin right now?

I think the biggest problem in-basin right now is not whether or not you can create supply of sand off of rail, right. I think the biggest problem is whether or not you can truck that efficiently and effectively long-term to the wellhead. So we view right now is kind of a wait and see. We think that lot of people have rushed in there and I’ve been consistent on this all the way along and I think sand mines in large bulk movements belong on rail. And the idea that you’re going to write rail out of the equation I think is insane, and the idea that you’re going to support a wellhead 100 miles away from a mine and bring 3,000 tons every day and then everybody is going to do the same thing through little two-lane roads is insane too. And the idea that you’re going to pay truckers by the load and let them be responsible for all the de-merge and all that kind of stuff is not sustainable. So until all that is solved, you won’t see us build a sand mine down there. And I think that you’re going to see people that have like bitten off and said, hey, we’re going to take the responsibility for moving the sand to the wellhead and the pressure pump, we will bring the sand there, I think those people are going to come back and go, wow, this is really, really tough. This doesn’t – it look good on a spreadsheet, but when you take the rail out, you take out storage, rolling storage with the railcars, you take the transloads out that are right beside the wellhead, that’s not the way to move sand. And I think we’ve proven it this last quarter, our business plan is proving out what we did in the Bakken with our first investment with the terminal. We’ve proved out to the marketplace that yes, everyone else is doing terrible running with this different plan and this is the way to move sand. So, we are partnering up with the rail and we’re going to continue to do that and we’re going to be smart about our movements.

Yes, our focus right now is getting a better return on our asset, increasing return on our asset at Oakdale and getting our utilization up there and we have options to add capacity, but we’re not going to add capacity unless we have contracts to support that and really support getting a solid return on that investment. So we do have options to add capacity in the Permian, at Oakdale and actually at Hixton, those are all low-cost options to us, but we’re in a position that we don’t have to invest an incremental capacity, it’s about getting a better return on the asset we have today and that’s going to be our focus going into 2019 and beyond. And if we invest in incremental capacity, it’s going to be where we know we’ve got strong contract to support to – support that investment and generate a strong return.

It seems like a great approach to me. Thank you for the color.

By the way you want to – you are a truck driver, you want to get a lot of turns per day, come work with us because we’ll help you with doing that. Thank you.

Okay. Thank you.

If you have tuned in, you’re a truck driver on the CNBC or something.

For all truck drivers, please call us.

Call John.

Thank you. And our next question will come from the line of John Watson with Simmons Energy. Your line is now open.

Good morning, guys.

Good morning, John. How are you?

Hey, good morning.

Good. Thanks. A quick one on the guidance, Lee. Is – did I hear you right, 625,000 to 675,000 tons for Q4?

Correct.

Okay, great. Relative to where your contracted that’s slightly below, I think if I’m doing my math right. Can you talk me through the dynamics there, is there something specific to 4Q where your guided volumes are below where your contracted or correct me if I’m thinking about that incorrectly?

No, you’re correct, John, and right now we do have 1 customer in particular, who’s not taken their contracted volumes, but that we still have the quarter and those numbers could change. So based on current activity, we’ve kind of guided to the expectation that they might not take their full volumes and that’s been factored into the guidance. That being said, they are under contract and we would expect to – as John highlighted earlier, we work with our customers, but we expect our contracts to be paid through shortfalls, et cetera, and we would expect to give whatever shortfalls that are due in the quarter for customers that don’t take their contracted volumes.

Yes.

Okay. That makes sense. Just wanted to make sure I caught that. And then in terms of the EBITDA guide, if I’m doing my math correctly, I’m thinking production costs probably goes up slightly in 4Q and that would imply roughly flat pricing for the quarter. Could you comment on your expectations for contracted pricing. I would assume flat, but correct me if I’m wrong?

No, I think that’s fair. I think, right now the third quarter, there isn’t any pricing adjustments going in the fourth quarter for WTI. So pricing will be consistent on a contracted basis. The movement on contracted pricing will really kind of depend on how much volume goes through our Bakken terminal versus FOB mine. And we do have some customers that are shifting volumes from other locations to the Bakken. So that can help. And then as we have highlighted before, typically we do have higher production costs in the fourth quarter and the first quarter as we have shutdown two of our wet plants and we typically have a slowdown in our mining activities in the winter months in Oakdale, Wisconsin and that leads to less cost being capitalized. So our production costs are typically a little higher in those quarters.

Okay, thank you for that Lee. One last one for me on Quickthree, do you have an expectation where the first system either Q4, Q1 where it’s deployed in which basin?

Yes. I think, right now it’s looking like it’s going to be deployed into the Permian, but that may update depending on where we end up finishing with it, but I would anticipate that will be in Permian.

So what’s really nice about also the North Dakota setup, we have existing customers that are trying to speed up their transit times on trucks and this system fits in nice right from our terminal and we are very close to the wellhead. So as you see us push out our business model, where we are getting involved in the efficiency of truck movements because we think that’s the real big important part of this. You are going to see us try to land it through terminals. And I think to me a lot of these terminals that have been left for dead in the Permian Basin, I think you might see a reverse on those and you staying closer to the wellhead and getting more turns per day on the trucks, I think that’s going to be a differentiator and people are going to have to really take a look at that on their savings as well as their well performance. And I think down the road, you are in the long term I think you are going to see people move towards a setup like that.

Great. Thanks for that guys. I will turn it back.

Thanks, John.

Thank you. And I am showing no further questions in the queue at this time. Ladies and gentlemen, thank you for your participation on today’s conference. This does conclude the program and we may all disconnect. Everybody have a wonderful day.