Good day, ladies and gentlemen, and welcome to the Smart Sand Q4 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following the managements prepared remarks, we will host a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference call maybe recorded. It is now my pleasure to hand the conference over to Josh Jayne, Finance Manager. Sir, you may begin.

Good morning, and thank you for joining us for Smart Sand’s fourth 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 new information, future events or otherwise. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, March 14, 2019. 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 our 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, Josh. Despite of challenging conditions, Smart Sand had another good quarter. Lee will give you specifics on our strong financial results later in the call. But first, I wanted to touch on some of the fourth quarter highlights. We generated $18.8 million of adjusted EBITDA for the quarter on sales volume of 610,000 tons. Our sales volume through our Van Hook terminal in the Bakken increased over previous quarter by 30,000 tons. Van Hook volumes represent one-third of our total sales volumes in the quarter. For the year, we generated adjusted EBITDA of $66 million, that's up 116% over our 2017 results. The increase was due to higher sales and greater contribution margin, thanks to our expanded logistics capabilities. We've now contracted two sets of our last mile silos and we have two additional sets ready to be deployed. Our base of long-term contracts provided a solid financial foundation for the Company during the fourth quarter slowdown. As of December 31, 2018, 58% of our annual nameplate processing capacity was contracted under long-term take-or-pay contracts. These contracts are fully enforceable. They provide us with positive downside protection through downturns in the operating cycle. We continue to be focused on executing our long-term strategy of expanding our services for our customers from the mine to the wellsite. We saw a continued strong activity through our Van Hook terminal in the Bakken, moving almost 200,000 tons transloaded through that terminal for the quarter. This validates our approach to investing in logistics and providing complimentary logistical services for our clients. Moving our sales proposition farther down the supply chain and closer to the wellsite is working for Smart Sand. We’ve been able to capture incremental value by delivering sand in the basin rather than selling FOB to mine. We believe our focus…

Thanks, Chuck. As Chuck highlighted, we were able to deliver solid financial performance in the fourth quarter, despite the slowdown in activity. I’ll primarily be going over the fourth quarter 2018 financial results. Starting with the sales volume, we sold approximately 610,000 tons in the fourth quarter. The decline in sales volumes from the third quarter 2018 was primarily due to the slowdown in completions activity. Though our overall sales volumes were down sequentially, our sales through our Van Hook terminal increased to almost 200,000 tons, compared to 170,000 tons in the previous quarter. This increase continues to validate our approach to investing in logistics and providing complimentary logistical services for our customers and moving our sales value proposition farther down the supply chain and closer to the wellsite. Total revenues were $52.2 million in the fourth quarter of 2018, a 17% decrease compared to the third quarter 2018 revenues of $63.1 million. Sand sales revenues decreased to $29.4 million from $44.2 million in the third quarter 2018, primarily due to less volume sold under both spot and contract sales. The average sales price per ton in the fourth quarter was $48.20 per ton versus $53.77 per ton last quarter. The decrease in average selling price sequentially was primarily due to the mix between contract and spot sales as well as less spot sales volume, partially offset by more volume sold in-basin at our Van Hook terminal in the Bakken. In the fourth quarter, we recognized $3.9 million of shortfall revenue for payments from customers who did not take their minimum volumes in the quarter. Currently, some of our contracted customers will likely not take the minimum volumes in the first quarter of 2019 as well and we expect to have shortfall revenues in the first quarter as well. As…

Thank you, sir. [Operator Instructions] And our first question will come from the line of George O'Leary with TPH & Company. Your line is now open.

Good morning, guys.

Good morning.

Good morning, George.

Nice to see some of the on-site proppant management systems go under contract. I wondered if you guys could provide just a little more color on how to think about that business of realizing CapEx as being allocated there, but how many systems you guys could potentially deploy kind of the economics to think through that as we mull over rolling that into our models for the year.

Yes, I'll talk – this is Lee. Thanks, George. I'll talk a little bit about the economics and then John and Chuck can talk about this overall activity levels for this business. But as we've said in the past, our average cost for a fleet is about $1.5 million and we continue based on the contracts we've put in place, currently expect to get about a two-year payback or less on that investment. So that's kind of how the math is looking and continue to look in terms of the economics. Also, currently our operations and kind of built into the capital that we have given guidance to, we're currently producing roughly one fleet a month in our facility. So we have the ability to kind of be building one fleet a month that we could add to under contract over the course of the year.

Great. That's very helpful. And then on the logistic side of the equation, clearly Van Hook is paying off, and you indicated that volumes will be ramping there throughout the year. What else is there to do on the logistics front or is it more just about maximizing utilization at Van Hook in 2019?

So George, I think basically the way and what we're doing in Van Hook is our idea of the way sand should move to all basins. So again, we bought the Plains All-American terminal in Van Hook, ready to go with big rail infrastructure. We think the same thing belongs in the Permian on people's acreage. We think it belongs in the Marcellus on people's acreage, and now that people are actually trying to set the business up and do it for 30 years. We think this is the way it's going to go. And when you move this stuff and you have great flow for the railroads or to the last mile equipment, it basically drives the economics inefficiency. So everything we've done has been built around that. It's been built around big rail movements and we'll continue to perfect that, and we'll line up with customers who want to do it that way.

Great. I'll sneak one more in if I could. I think you mentioned the fact that volumes would be 250,000 to 300,000 tons in the March timeframe this year. So a nice jump up as you progress through Q1, thinking about this 600,000 to 650,000 range you provided for overall Q1 guidance. I wonder if you could peel back the onion there a little bit and provide some color on regionally if the increased volumes are to those kind of two core markets, the Northeast and the Bakken or if what you alluded to is regards to Permian seeing some issues related really into in-basin sand and other factors that maybe related to that in-basin sand if the Permian is actually adding to that growth in the March timeframe versus February?

Yes. George, John here. So the growth that you're alluding to in March, kind of the increase in volume we're seeing is broad-based and it's across the board to all basins. Interestingly though, there's a good chunk going into the Permian. What we believe, is in response to some potential well results that operators aren't happy with. So remains to be seen kind of what that looks like over time. But this year appears, it was kind of to be the opposite of last year where we started the year very strong, and kind of finished slowly. This year appears that kind of we're starting a little bit late, but the volume looks like it's going to be relatively robust based on our conversations that we're having with customers on both spot and contracted.

And George, one of the things that we kind of put a challenge out to you guys, the analyst is we think you guys need to dive deep into the E&Ps that use the Northern White and how their wells are standing up in regards to the E&Ps that have gone to regional because we think they're all under a lot of pressure on cash flow and long-term cash flow. And we think once you start looking at that a little closer, you start seeing that Northern White makes sense, move properly with big unit trains.

Great. Thank you all for the color.

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

Thanks. Good morning.

Good morning.

Can you give us a sense please when you think about the first quarter volumes, is the contracted percentage similar to what you talked about earlier as far as 58% of your volumes contracted for the year? Is that a good way to think about it or is it different in the first quarter?

Well, I think in the first quarter it's going to – contract volumes will be a little bit higher on that, but we actually have some pickup in spot. In the fourth quarter, we had very little spots and so it was nearly all contracted volumes, so we're seeing in the first quarter is pretty consistent contracted volumes, but a pickup in spot. And we really start to see that pickup really beginning in February and March. Although, our contracted volumes are also picking up as activities is picking up for them as well. So I'd say it's probably going to be maybe in terms of volume split for the first quarter, maybe 70% contracted, 30% spot give or take.

What's interesting about the Permian sand in particular is from what we hear out there, there's available capacity at Permian mines yet there's Northern White rolling into the Permian Basin right now. So it's very interesting. Not everyone's coming out and telling us about what's happening and why that's happening, but we think we kind of can read between the lines.

And just a reminder of the 58% of our total capacity it wasn't of our volumes in the fourth quarter, so 58% of our total capacity 5.5 million. As we highlighted, we do expect some of our contracted customers do not take their full volumes in the quarter and we'll have additional shortfall payments in the first quarter as well.

Just to be clear that 58% number you gave was contracted volumes of your capacity for 2019.

Yes, we have 5.5 million tons of capacity of which roughly 58% of it is under contract currently.

Okay. That makes sense. Thank you. And then just on the Permian issue, you bring up an interesting point about Northern White volumes coming into. Have you dug deeper? I mean, do you think it's well result related? Do you think it's contracted volume related coming out of some of the Northern White mines? I mean, have you dug deeper into that? Can you give us your perspective?

I think there's probably a number of reasons. Certainly, we believe that a lot of this has to do with well results, right. We've had regional sand in the market now for anywhere from 12 to 24 months down there. So even operators are getting their results back now are kind of seeing kind of first year decline curves and things like that. So certainly we believe that’s part of it, but we also believe logistics are a big part of this, right. There's been some recent news articles where operators in the Kermit area are trucking sand to a rail terminal, putting on rail for 20, 30 miles and then trucking it to the basin to get out of some of its congestion. And that's before the bulk of the capacities on line there. So we think from a logistics standpoint, trucking sand 100 miles from let's say Kermit area into the loving area becomes very difficult from a sustainability standpoint, whether it's shortage of truckers or truckers not willing to work for that money. And every one of those pieces has an economic impact, which takes into account what your upfront savings are by using regional sand versus what you're well results are. And every time you chip into that amount of money, you lose some of the incentive for using regional sand. So we think it's kind of a broad based issue with the regional sand down there. I don't think we're saying that regional sand has no place. We just think that some of the operators more concerned about years two, three, four in their wells are definitely going to be looking towards making sure that the decline curves are shallow.

I had additional – you add, as these majors are getting serious about fracking and setting up long-term. They're going to push the envelope with the railroads on larger train size, which we think will drive efficiency. And we quite honestly, we believe if a petroleum engineer has their pick and economics become pretty close that they absolutely will go with the Northern White. And the other point we want to make about that is that finer mesh, Northern White, especially 40/70, is not as big a supply as what everyone thinks it is because there's a lot of mines that are sitting up in the north. There are very coarse mines because everyone wanted 20/40 before. So we think that plays into the whole picture here too.

Thank you. And if I could just slip in one follow-up to that is have you seen any difference between how the majors are thinking about their sand needs and willingness to use in-basin versus some of the mid-cap names?

I think the majors have a lot of experience with railroad and moving large movements, whether it's crude or whatever. So I think as their supply chain guys get involved in that and really start dialing down on that, and then they can show – like basically with the railroads, you have to show efficiency to the railroad. So in the past this business is kind of done with things and manifest, slow things down on the rail, hasn't been a great business for the railroads. But if someone's driving efficiency and knows that they can use 10 million tons a year or 8 million tons a year, and they can go to this bigger train movement and say, hey to the railroads, listen, we're going to do this no matter what and we're going to commit to this, then the railroads can drive the efficiency on their network and therefore pricing becomes better.

Great. Thank you for the color.

Thank you. And our next question will come from the line of Martin Malloy with Johnson Rice. Your line is now open.

Good morning.

Good morning.

Good morning.

Could you maybe speak about what you're seeing in the spot market for Northern White, 40/70 and 100 mesh?

Yes, sure. So certainly beginning about mid-February and continuing through where we are right now. There's been a substantial increase in spot volumes. Again, broad based both operators and service companies looking for substantial volumes of 40/70. What's driving that? Again, I think we've spoken about that in this call. We think there's a few factors driving that. But it is broad based and it's across the board in all the basins that we're seeing that increased volume.

And is that impacting the pricing yet?

Yes. Pricing is recovering a little bit. We got down into the kind of lower 20s, and now we’re seeing kind of the 30s. We’re in the 30s now on pricing and we expect that to continue to increase. Don’t know what the rate of increase will be, but the demand is pretty – the demand for 40/70 and 100 mesh is pretty robust right now.

Yes. Okay. And the 30s price, is that for the 40/70?

Yes. We always know things are starting to get good when other sand providers are looking for Northern White sand, right, in the mesh sizes that are in demand. So we feel like it's going in the right direction.

Just to clarify, it's for both, 40/70 has got a little bit of a premium over 100 mesh, but they're both in the 30s.

Okay, great.

And one other point I would add is if you're not doing unit train in this business right now, I think it would be very difficult to play a big role. So I think that that's super important out there, so the train length should be getting longer, not shorter.

Okay. And obviously you are a lower cost provider here. Do you expect that we'll continue to see some idling or closures of Northern White mines here in the next couple months?

So I'll start this off. I think that the industry really needs to dial down on what mines are closing up, right. So I would say if you don't have massive rail infrastructure, right, and you don't have a reserve base that leans towards fine, being 40/70, and 100 mesh, you should close.

Yes, I think I would just add to that that in the last upturn, right, last year when we're seeing volumes increasing from Northern White mines, keep in mind that a lot of those mines were just running their tailings piles that they had developed in the 2012, 2015 timeframe. And those tailings from those coarser mines tended to be fine sand, and they were running that fine sands through their drying process. Those tailings piles are gone now, which requires them to process their core substrate and that doesn't produce yields that are sustainable.

One other point I’d add, I think you probably will see more pressure on the regional sand mines then you will on the northern mines to close. So if you're relying on trucking is your source to get sand out, you're going into congestion and as the railroads worked on perfecting their movements and lining up with the larger E&Ps majors to tie stuff up for a long time and tie their resources up for a long time, I think you'll see your regional sand mines that are relying solely on trucking and trucking long distances. I think there'll be a lot of pressure on those.

Okay. If I could sneak one last question. Could you maybe comment about the outlook for unit trains on the UK down to the Permian?

So I don't really have any update on that. I know that they moved away from the unit train movements. I'm hoping to be able to speak with their management team sometime shortly at NFTA hopefully.

Great. Thank you.

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

Thank you. Good morning.

Good morning.

I was hoping to dig in a little more on the shortfall comment that you made, Lee. I might have missed this, but how many customers did you say are currently paying shortfalls?

We didn't give numbers on the number of customers paying shortfall, but we've had – it's basically a couple of customers in the fourth quarter and probably be consistent in the first quarter.

Okay. That's perfect. In recent discussions with customers regarding future contracting, can you give us an update there? I agree spot pricings moved higher since Q4. Are you looking to sign additional contracts? Is there appetite for that? And can you speak to maybe the gap between contracted pricing and spot if those discussions are ongoing?

Yes, I think in the past we've indicated that. Our interest is your longer term contracts in a commodity business, you want your longer term contracts, you’re willing to sacrifice a little bit in current spot pricing markets to secure longer term contracts because they helped you through the lower points. As spot pricing continues to recover and accelerates in the 30s and potentially up to the 40s and even got into the 50s last year, when it was busy. Customer's appetite for signing long-term contracts increases, as they see the delta between what their contracted contracts are available at and what they're paying on the spot market. So those conversations are ongoing. We've got plenty of healthy discussions going on with service companies and operators across the basins out there. I would anticipate that during the year assuming that oil stays at a reasonable price and demand continues to increase as we're seeing, we'll be back in the contracts market and signing up long-term contracts.

Okay.

One other thing I'd like to add to that is, as it becomes a bigger volume that needs to be moved, it's very important that we have the scale availability with our mine size to handle that because you can't drive the efficiency with the railroad unless it’s a point-to-point movement on big volumes. So we think that the size of the contracts as far as volume could be getting to a bigger size.

Well, the other thing to point to that is that we do have a capacity available to support big contracts as well. So if there's a customer that wants to do big volumes and commit, we do have excess capacity that is available that we can move quickly to meet that need.

Okay, great. And the customers currently paying shortfalls, do you expect any of them in Q2 or Q3 to shift their mindset and want to start taking those volumes?

We have healthy demand for our sand right now, right. So we don't project. One thing that’s just generally, we never really have problems with customers in upturns. We'll have issues with costumers and contracts during downturns, right. So we do think things are looking a little bit brighter right now.

Yes. What I can say based on March’s activity, our contracted volumes are picking up. So assuming activity stays consistent with March, I would expect our contracted customers to continue to take to their minimum levels or get closer to the minimum levels overall.

Okay. Okay, I'll switch gears to Quickthree. The line of sight for deployment of systems, I think you said you all could build one per month. Is there a contract beyond the four that are mentioned in the release or expectations – firm expectation for more than four to be deployed at some point this year?

Ask that question again, John. I didn't quite…

Yes. So I think the release mentions two systems working, two additional systems that are expected to be deployed. And I believe you said earlier you all could build one per month. I'm just wondering what the line of sight to increase from four is if you have additional contracting discussions that are ongoing beyond those four.

So we can – as far as our – our manufacturing is very scalable, right. So as we see demand and need, we will bolster that. I'm not sure if that answers your question or if you….

Well we've got 200 contract today and we've got two that are readily available that we could put in the market and very short-term. In terms of producing a set of silos, which typically are going to be about a month again the market, so we're not going to give direct guidance as to how quickly we deploy. But if you do the math, John, you could say that, we've got at least two available today and if we build one set a month kind of from April forward, that adds another eight sets that we have available. So we have roughly 10 sets that we could deploy beyond the two sets currently under our current production capabilities.

Okay, great. Understood. Thanks for that color guys. I'll turn it back.

Thank you. And we have a follow-up question coming from the line of Stephen Gengaro with Stifel. Your line is now open.

Thank you. Just one quick one, when I think about the shortfall payments. Is that a – can you just give me a little color? Is that profit you would have earned or is that the revenue number and is it basically kind of a pure profit number when I think about those payments?

Well, it's a revenue number and it comes in as revenue and basically it's not equal to what we would have got in terms of selling the sand. So basically, it's, in effect, a payment to cover our cost, but since we didn't make the sand, a lot of that will drop through to the bottom line of EBITDA because by not producing the sand we didn't have all the production costs associated with it.

Okay, great. That's what I was thinking about. I just wanted to make sure I was correct. Thank you.

Thank you. Ladies and gentlemen, this concludes our question-and-answer session for today. So now it is my pleasure to hand the conference back over to Mr. Chuck Young for any closing comments or remarks.

Thank you for joining us on Smart Sand’s fourth quarter call and year-end earnings call. We look forward to talking to you again in May.

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude our program and we may all disconnect. Everybody have a wonderful day.