Good day, ladies and gentlemen, and welcome to the Smart Sand's Second Quarter 2019 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference call is being recorded. I would now like to turn the conference over to Josh Jayne, Finance Manager. Sir, you may begin.

Good morning, and thank you for joining us for Smart Sand's Second Quarter 2019 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 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 7, 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 reconciliations 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. I'm pleased to report that Smart Sand had another solid quarter. We enjoyed sequential increase in sales volume as the market continued its recovery. We sold approximately 741,000 tons of sand, and we generated $26.2 million in adjusted EBITDA. How did we do this? By executing our long-term strategy. Here's what it includes: supporting our existing long-term contracted customers; extending our spot market business; being one of the lowest cost producers of high-quality Northern White sand; maintaining low debt levels; and being one of the lowest leverage companies in the proppant industry, delivering efficient and sustainable supply chain logistics from the mine to the wellsite; and ramping up the utilization of our last-mile SmartSystems. We've rebranded our wellsite storage solutions as SmartSystems. It includes our storage silos, SmartDepot and SmartDepot XL. We encourage everyone to check out the additional information on our website at www.smartsand.com. During the second quarter, we extended our long-term contract with EQT, and our volume-weighted average contract life is now almost two years. We know that quality and consistency of sand supply is critical to our customers. Therefore, we'll continue to work to find mutually beneficial terms with customers to meet their long-term sand supply and logistics needs. As we've said time and again, we're willing to work with our long-term contract customers to find terms that work for both of us, but we must also defend our contracts in the interest of our company, our employees, our other customers and our shareholders. Even as we keep signing new long-term contracts, we continued to extend our spot market penetration to new customers as we meet growing demand in the Bakken, Marcellus and Utica basins. Spot volumes represented 19% of our total volumes in the second quarter. We know that by increasing total market share…

Thanks, Chuck. Today, I'll be going over the second quarter 2019 financial results, and my comments primarily will be focused on comparing to the first quarter 2019 results. As Chuck highlighted, we had strong results as we capitalize on the increasing activity in the second quarter. Starting with sales volumes. We sold approximately 741,000 tons in the second quarter, a 14% increase over the first quarter. The increase in volumes was attributable to increases in both spot and contract sales volumes. As Chuck indicated, our spots volumes for the quarter were approximately 19% of our total sales volumes. In regards to revenues. Total revenues were $67.9 million in the second quarter, an increase of $16.1 million when compared to our first quarter sales of $51.8 million. Sand sales revenue, including reservation charges, was up $5.8 million in the second quarter to $31.4 million from the first quarter results of $25.6 million. Logistics revenue, which includes freight for certain mine gate in sales, railcar usage and logistics services, was approximately $20.3 million, consistent with the first quarter results of $20.4 million. In the second quarter, we recognized $16.3 million in shortfall revenue compared to $5.8 million of shortfall revenue in the first quarter. As we've mentioned before, our take-or-pay contracts with minimum quarterly and annual required volumes in payments provide Smart Sand with a stable source of revenue to help the company manage through the operating cycles in the industry. $14.5 million and $3.8 million of the shortfall revenue in the second quarter and first quarter, respectively, were related to contracts and litigation. Our cost of sales for the quarter were $43.1 million compared to $40.6 million for the previous quarter. The increase in cost of sales is primarily due to a higher sales volume sold in the second quarter compared…

[Operator Instructions]. Our first question comes from George O'Leary with Tudor, Pickering, Holt & Co.

The Northern White sand prices improved notably during the first 5-ish months of the year off some lows in December. And our understanding is that leading-edge pricing has started to retrench a little bit. I wondered if you could talk about the pricing that you guys are seeing in July relative to the second quarter on spot volumes and maybe bifurcate between 100-mesh and 40/70?

Yes, George. So from a standpoint of -- you're right to separate the products, right? So 100-mesh and 40/70 continue to be a very strong demand. 30/50 is moving to certain basins in decent volumes. And of course, 20/40, we're not moving a lot of that. I don't think anybody's moving a lot of that. But our view on frac sand pricing right now is from a spot perspective, it's flat to down a little bit, but depending on what the product is and what the immediate demand is, we haven't seen a lot of price degradation recently.

Okay. That's helpful. And then just a second question, given that the comments you guys made in perusing the Q this morning, the shortfall payments associated with customers with whom you guys are in ongoing litigation at the moment, are those customers paying their bills? Or is that a part of the receivables billed? And just kind of how the dialogue going there with those customers and in collecting the actual cash on those shortfall payments?

Well, in terms of the question on the revenues, they are going into the receivables that's fully disclosed in our 10-Q in terms of the revenues recognized for those shortfall payments in litigation in the receivables associated with it. And so no, they aren't coming into cash flow today. In terms of any comments or discussions in regards to those contracts under litigation, we don't really comment on current litigation other than to say that we still believe in our contracts, and we'll continue to fend them and expect to get paid on ultimately in due course.

All right. And I will sneak in one more, if I could. I apologize if I missed this, but could you just kind of breakdown the volumes that are going to the Bakken and the Northeast versus volumes that are going elsewhere? And then maybe frame -- well, level of volumes you guys are also selling into the Permian basin, if any?

Well, we've actually -- I mean the reality is we get volumes going beyond just the Bakken. We've actually increased volumes in the West of United States. So we think about it in terms of our volumes going to the West United States, it's roughly about 50% of our volumes today. Roughly about 1/3 of our volumes are going into the Northeast and around 10% or so are going into what we call the Southern regions, which includes the Permian, the MidCon and the Eagle Ford.

Our next question comes from Stephen Gengaro with Stifel.

Two things. Two things, if you don't mind. The first is -- and this is just a clarification on my part. When you think about the shortfall revenue, should I think about that as basically dropping straight to EBITDA line?

Again, we don't comment directly on litigation and the impact of those financials financially. It is a contractual obligation that they do to pay to us and ultimately get paid. But in terms of how you think about it going through quarter-to-quarter, again, we don't want to get into any comment or specific discussions around contracts under litigation.

Oh no, but I'm just thinking like, just say it for the second quarter you reported and you look at a $9 million uptick sequentially in shortfall revenue, is that shortfall revenue? There's no cost associated with that, so that's pure EBITDA? Is that a reasonable way to think about it?

Stephen, the way to think about it is contractual payments owed to us from our customer in recovery of costs. And basically, they owe us the obligation and either take the sand we provide -- or provide the take-or-pay payment. In regards to how that relates to our financials, again, were not going to make any direct comments on that. It's something that's in litigation.

Okay. And then as I think about your contribution margin per ton going forward, is -- if I was without you guiding me any numbers, if I was to sort of back out what we would estimate how the shortfall revenue is impacted, excluding that, should we be thinking it is flattish in the third quarter sequentially?

Yes. In terms of, look, getting contribution margin, excluding the shortfall revenues, you could say that our -- we expect that to be relatively flat quarter-to-quarter. Again, we don't give specific guidance on contribution margins so...

Our next question comes from John Watson with Simmons Energy.

Guys, I was hoping you could comment on your view of completions activity in the back half. I think on the 1Q call, we talked about a constructive view good activity expectations from your customers. Do those still hold? And I'm trying to put your view of completions activity with your guidance for 3Q. So any color there would be great.

Yes, sure. So I'll take that. So we've guided to 625,000 to 725,000 for the third quarter. And what we're kind of hearing, which I'm sure you are, too, across the board, we have differences amongst customers as to what they're expecting in the back half, right? Some are saying we're going to be very busy, and others are going to say we might see a little bit of a slowdown. So our best view on it right now is that we're going to be generally conservative in our guidance. Obviously, there is some potential upside there. And if you take it into a combination with what we did in Q2 where we had about 14% increase, so we had a pretty good quarter to guiding kind of flat to down a little bit, I think, it's still reasonable given a little bit of the uncertainty that's out there.

Okay. Got it. And appreciate if you'd rather not comment here, but the EQT contracts, congrats on getting that extended, signed. How does the profitability for that contract compared to some of your legacy contracts? Is it in line? Better? Worse? Any color there will be awesome.

Yes. Well, so we don't disclose individual contract details or pricing or anything on that. Suffice to say that it's consistent with the existing agreement that we have in place with EQT.

Okay. Got it. And then lastly, the three systems that are now working. Are those operating under a contractual agreement? Or is it more of a month by month or pad by pad type of arrangement for the SmartSystems?

Yes. So again, we're not going to get into the specifics of the contractual arrangements that there are under. Suffice it to say that we do have 3 in the field. And the good news is we're getting very positive feedback from the customers using them, and we continue to be optimistic and are going to be aggressive with our deployment of these solutions out there.

And I'm showing no further questions at this time. I would like to turn the call back over to Chuck Young for closing remarks.

Thank you for joining us for Smart Sand's Second Quarter 2019 Earnings Call. The third quarter is already shaping up to be another great one for Smart Sand as we continue to see the positive results of executing on our long-term strategy. We look forward to reporting again in November with our results for the third quarter.

Ladies and gentlemen, this concludes today's conference. Thanks for joining and have a wonderful day.