Thank you for standing by and welcome to the Smart Sand Second Quarter 2020 Earnings Conference Call. At this time, all participant lines are in a listen-only mode. After the speaker's presentation, there will be a question- and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Josh Jayne, Finance Manager. Thank you. Please go ahead sir.

Good morning, and thank you for joining us for Smart Sand's second quarter 2020 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 August 5, 2020. Additionally, we will refer to the non-GAAP financial measures of adjusted EBITDA and contribution margin during this call. These measures, when used in combination with our 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. Good morning. This was a quarter that nobody wanted and many had not fully foreseen. As we all know, the COVID-19 pandemic devastated the worldwide oil industry. As a result, we saw an unprecedented drop in drilling and completions activity in this country. For our industry, the situation provided a real test of long-term planning, financial prudence and operating efficiency. I'm pleased to tell you that Smart Sand was not caught unprepared. We've always positioned ourselves to survive downturns and to benefit from the recoveries. As expected, this is a period of both oversupply and low demand. As a result, we had historic low sales volume of 208,000 tons and revenue of $26.1 million. As we discussed on our last earnings call, we anticipated a slowdown and responded effectively. We moved quickly to reduce our cost structure to be in line with the lower market activity. Due to these efforts, we were able to reduce debt, while maintaining our cash balances. At the quarter's end, we had approximately $25 million in liquidity from cash and availability under the credit facility. Before moving on, I'd like to take a moment to thank all our employees for their commitment and sacrifice to support Smart Sand during these difficult times. They have been great. Their loyalty and dedication have been critical. Though the market is still reeling, it looks like we may be coming off the bottom. We've kept in close contact with our customers. We're partners with them. So, we're always working with them to ensure that we're ready to move forward together. We also continue reaching out to potential new customers. We especially seek out those that want to partner with a company that has proven to be a reliable source of high-quality sand through any market. We're a…

Thanks Chuck. As expected, the second quarter was a tough one due to the historic slowdown in the oil and gas industry. There continues to be a lot of volatility in the market currently and that uncertainties makes it difficult for operators to commit to coming back online. However, as Chuck stated, we do see some signs of a pickup in activity from the second quarter lows and we are preparing ourselves to be a big part of our recovery when it happens. Here's how the second quarter ended up. Starting with sales volume, we sold approximately 208,000 tons in the second quarter down significantly over any comparable quarter. These reduced sales volumes are the primary driver for all results we are reporting for this quarter. I will point out a few nuances to some of the reported figures but by and large the low sales volume are the driver for our results for the quarter when compared to the first quarter 2020 results. Total revenues for the second quarter 2020 were $26.1 million compared to $47.5 million in the first quarter. Shortfall revenue in the quarter was approximately $14 million as we invoiced our last invoice to the customer with whom we remain in pending litigation. We do not expect any shortfall revenue to be recognized under this contract going forward. Cost of sales for the quarter were $11.9 million compared to $41.1 million last quarter. While we were able to cut some costs there are also some costs such as non-cash depreciation, real estate taxes, and insurance that we cannot easily reduce. For the second quarter 2020, our contribution margin was $19.3 million and adjusted EBITDA was $15.6 million compared to the first quarter contribution margin of $11.5 million and adjusted EBITDA of $6.4 million. The increase sequentially…

Thank you. [Operator Instructions]. Our first question comes from Stephen Gengaro of Stifel. Your line is open. Q – Stephen Gengaro: Good morning, gentlemen. A – Chuck Young: Good morning.

Good morning. Q – Stephen Gengaro: I guess I have two questions. And the first one I'm going to ask carefully. When you guys look at the second half of the year and you look at contribution margin per ton and we can all sort of make our assumptions on it. But do you think given what you've done on the cost side that you could see that number on an adjusted basis be flat or higher in the back half of the year versus the second quarter? And I'm not asking for numbers. I'm sort of asking for sort of direction on how we're thinking about the cost savings you've done versus pricing etcetera?

I would say that number for the second half of the year assuming volumes are consistent or a little bit higher than the second quarter will probably be flat to maybe down a little bit on an adjusted basis. Q – Stephen Gengaro: Yes. That make sense. Okay. And then you mentioned this a little bit on the prepared remarks. But when you think about the volumes that you've seen in the quarter and what's going on sort of in the northeast and maybe west, are you seeing the same trends we've seen recently that most of the Northern White volumes are still going to those markets? A – Chuck Young: Yes. I'd say that we do see most of the volumes going to those markets. John, you might want to shed a little bit more insight there. A – John Young: Yes. I think that it's no secret in the market that the northeast has kind of weathered this hydrocarbon storm pretty well. I mean natural gas projects continue to come on line. And so, we've seen volumes sort of maintain relative consistency out there. North Dakota interestingly seems to be coming back a little bit, I think a little bit sooner than maybe we expected. And we hope that that continues although I think that any kind of prediction as to what this recovery looks like right now, I think is a little bit premature. Q – Stephen Gengaro: Great. And if I could sneak one more in. You -- we've seen some bankruptcies in your space. You guys are obviously in a great spot financially. As you think about how the recovery unfolds here over the next couple of quarters, do you expect that you could start to see some positive pricing momentum as you get and I'm not giving I'm not asking for a specific timeframe but as you get into the recovery phase here given some production which has been shut in and some bankruptcies by companies that don't have the financial strength you have? A – Chuck Young: I think it's difficult to say on that until we really understand what the activity is going to be the back half of the year which I think that's still out and we're still learning that. So I think it's pretty difficult to predict that. I don't know if anybody else has any other thoughts on that. A – John Young: No. I think we still have to see how bankruptcies play out in restructurings and how those organizations come out as well as right now on the activity side. I think it's still very kind of volatile and fluid. And so, I think it's hard to predict what kind of impact that's going to have on pricing over the second half of the year. Q – Stephen Gengaro: Okay. Great. Thank you, gentlemen. A – Chuck Young: Thank you.

[Operator Instructions]. Our next question comes from Lucas Pipes of B. Riley FBR. Your line is open.

Hi. Good morning, everyone. A – Chuck Young: Hi, Lucas.

I wanted to follow-up a little bit on the revenue side. In the second quarter kind of as we take the $26 million less the shortfall of revenue, do you have a sense of how much of that was related to logistics specifically? I'm not sure you may have mentioned it in the prepared remarks. I wanted to make sure I didn't miss that.

Yes. In the second quarter there wasn't a lot of logistics revenue. It was primarily sand sales for backing out the shortfall. I'm just looking at sand revenue, we -- it was probably generated from the sand sales we had in the quarter.

So like if I would assume for example 10% or so related to logistics of the remainder would that be the right ZIP code?

In terms of the quarter, when we're talking about logistics, it would actually be a little bit higher than that.

Okay. That's – but like not more than 20%. Is that kind of a fair range?

Yes I think it's in the 10% to 20% range based on the second quarter is a fair number.

Very helpful, I appreciate that color. Thank you for that. And then I noticed, it's a small item, but looking at the cash flow statement, it appeared that there were some asset sales during the second quarter. You had some – you had a kind of cash – I assume it's sort of cash gain on there. And would you be able to provide some color as to what assets may have been disposed during the quarter? And then to what extent this – there might be further opportunity for asset sales? Obviously, it's a tough time out there for everyone, but I would be curious on your take on that.

Well, the gain on sales of $275,000 is very minor. It wasn't anything specific some minor equipment. And as it relates to right now we're not really looking to have any significant sales from assets. It will be just more kind of opportunistic, if it's a piece of equipment or something that we're not using or idle et cetera. So I wouldn't look to be – for that to be anything significant in the future.

Very, very helpful. I appreciate that. I will jump in queue for now. Thank you very much.

All right. Thank you.

Thank you. Our next question comes from Stephen Gengaro of Stifel. Your line is open.

Thanks. Just a quick follow-up gentlemen. The – looking at your receivables – and I understand that there's a large receivable in there for one customer. As we look at the second half of the year – I know you talked a little bit about this in the prepared remarks. Do you think in general ex that receivable and how that plays out that working capital is pretty neutral?

Well, as – if sales increase in the second half of the year from the second quarter receivables are going to grow absent the one under dispute. So that would be a little buildup of assets. So that would probably be a negative working capital, potentially depending on how sales work. But it's not going to be sales activity sake similar to the second quarter or a little higher, it's not going to be significant.

Okay. Okay. Great. Thank you. And I just – the other quick follow-up. You mentioned on the prepared remarks your CapEx guidance and you mentioned excluding any acquisitions. Is that – should we be thinking about that there could be something out there, or is it just a general kind of caveat to CapEx?

Well, I think, if you look at all of the bankruptcies going on there's a lot of stuff out there, right? So we definitely – as opportunities will come around we will look at them.

And is there – along – those lines is there a – are you – would you get involved? And you may not be prepared to answer this but would you be – would you get involved on the in-basin side, or do you think you'll be staying with Northern White as your sort of sole key product given its inherent benefits going forward?

It's tough – our personal belief is that, it's a very difficult business to run. But obviously, if the price is right then we will look at that.

Well, I think as we highlighted in our prepared remarks we're looking for four different attributes to basically drive any consolidation and/or acquisition we might participate in, and so part of that is getting access to new customers and new markets. So if there is an in-basin opportunity that provides us an expansion of our business and gives us access that makes sense to new markets and new customers we'll look at it. But again, that doesn't change the fact that we have a very strong belief in Northern White and think Northern White is going to continue to be – have a strong place in the market long term. And so we're looking to – we would look at opportunities that gives – increases the value for that as well.

Very good. Thank you gentlemen. That's very helpful.

Thank you. Our next question comes from Lucas Pipes with B. Riley FBR. Your line is open.

Hey, good morning, again. Thanks for taking my follow-up. I wanted to ask kind of follow-up on some industry questions and some of your comments. Could you provide your perspective on the current state of mines out there? Not looking for any kind of specific operator, but would you say that equipment is pretty rundown? Is CapEx needed? And so the mines and the supply that has left the market would you say it's kind of gone for good or could it come back with a relatively minor cash infusion post restructuring and such? And then -- that's question number one. And then question number two when we look at kind of forward curves for oil and natural gas do you have a sense for what demand could look like in 2021? And then what would you expect that to translate to in terms of Northern White shipment specifically? Thank you for that.

Well, the question on the state of mines and what they look like so just my two sense on that is that sand is one thing but the logistics around that sand is super important. So that's kind of my thing that I focus in on. John you might want to share some of your thoughts on what's going on there and what you're seeing.

Yes. What I would add I mean, I would kind of just turn around and talk a little bit about Smart Sand with regard to how we operate. As you know, we have a single site in Oakdale, Wisconsin where we have 5.5 million tons of capacity. And that allows us to do a number of things. One it allows us to run one management team out there and to bring on and take off capacity as needed, but also to maintain those assets that are idled should they need to be idled to be able to bring them back quickly. When you have multiple mines around various areas and they each have smaller amounts of capacity whether you've kept that management maintenance team on to keep those things up and running does kind of limit your ability to bring those assets back online quickly with a minimum amount of cash. And we haven't gone out and really surveyed many of the -- many of our competitors out there as to what's going on. But we do keep our ear to the ground and we think some of the assets out there particularly, the ones that are logistics constrained may have a tough time coming back. They've been the ones that have been idled the longest. They have the highest cost of operation. And so we think when the market turns around here I think, we're in good shape to be able to meet that incoming market demand because our plants are ready to go. We're not sure kind of how our competitors look at that. But certainly one thing like any piece of equipment if it's not being maintained it becomes expensive and time -- it takes a long time to bring this stuff back up and running.

Very helpful. Thank you. And on the second question on -- in terms of kind of demand on the curves?

Yes. I think Lucas, this is obviously very hard to predict demand in 2021 based on kind of current activity levels. But I think what we can say is if production drops or continues to drop in the U.S. as expected or predicted over the next six months going in 2021 assuming demand gets back to more normal levels if the pandemic gets under control and back to normal levels you would see, I think, an opportunity for activity to pick back up in 2021 because producers will be while they'll be managing their cash flows and trying to live within free cash flow they're also going to try to get the production back up. And so we think that would be an opportunity for activity to potentially increase in 2021 assuming again market demand gets back to levels pre-pandemic. And with the drop in production producers are trying bring their production back up to pre-pandemic levels as well.

Very, very helpful. Thank you. And then just one final one. And I think, I could probably piece it together from the financial statements, but I thought I'd just ask. The proceeds from asset sales was it just $265,000, or is there maybe just kind of that this could also be in excess of book value and such? So kind of in terms of total cash proceeds anything else?

It was minor Lucas. I wouldn't focus on that number. It was a very minor event in the quarter.

Got it. Okay. Great. I really appreciate it and best of luck

Thank you.

Thank you. I'm showing no further questions at this time. I would turn the call back over to Chuck for any closing remarks.

Thank you for joining us for Smart Sand's second quarter 2020 earnings call. We hope to have good news for you soon. Stay safe.

Ladies and gentlemen, this does conclude today's conference. Thank you for participating. You may all disconnect. Have a great day.