Ladies and gentlemen, thank you for standing by and welcome to the Smart Sand Third Quarter Earnings Call. At this time, all participant are on 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 maybe recorded. [Operator Instructions] I would now hand the conference over to your speaker today, Josh Jayne, Finance Manager.

Good morning, and thank you for joining us for Smart Sand's third 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 November 10, 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, and, good morning. We all know the market continue to be challenging in the third quarter. Even so Smart Sand was able to deliver improved operating results over the second quarter lows. We were also able to keep pursuing our long-term strategy to be the premier supplier of Northern White frac sand from the mines to the well side. And we did it by acquiring strategic assets at a very attractive valuation. The frac sand market did show some signs of improvement in the third quarter, sales volume increased from 208,000 tons to 309,000 tons. Yes, we're still below pre-pandemic activity levels, but we're encouraged by the recent pickup in activity. Long and dramatic drop in the oil and gas prices, we expect fourth quarter activity to be consistent with third quarter, or perhaps even a little better. As always, we're very focused on managing our costs and operating efficiently. Even in this low volume environment, our cost initiatives and reductions in capital expenditure have paid off. We've been able to generate cash flow from operations and we've maintained good cash balances and liquidity. We now have 15 million in cash and a total of 28 million in available liquidity. We couldn't have managed through these difficult times without the effort of our employees. I want to thank all of our employees once again for their continued commitment to Smart Sand. We've managed to weather today's volatile operating cycles in industry better than most of our peers and how we're approving capital structure and operating philosophy. As a result, we're able to continue pursuing strategic opportunities that will allow us to capitalize on the recovery when it finally occurs. In September, we acquired the oil and gas profit segments of Eagle Materials, who was an all-stock, no cash,…

Thanks, Chuck. As Chuck stated, it looks like we may have hit the bottom late in the second quarter. It's the third quarter starting to see modest improvements in sales volumes. And we are excited about the opportunities that come along with our acquisition of the Eagle Materials proppants business. We acquired this business, we did it cash free and debt free. Along with the acquisition, we executed those put it into support facility, whereby we may draw the facility to support working capital needs for up to one year and then repay that over the subsequent three years or any time before. This ensures that this acquisition will not be a burden on our cash flows as we get it back online and start generating revenues. As Chuck discussed, we believe there may be additional opportunities for consolidation in our industry. We are interested in playing a part in this consolidation. However, as we have demonstrated with this acquisition, we are committed to low leverage levels, a prudent capital structure, generating positive cash flow from operations and maintaining adequate liquidity levels. So we will not risk our balance sheet to pursue growth opportunities. Any acquisition, we may consider will need to provide us with strategic long-term assets at a reasonable valuation that will not risk our strong balance sheet and liquidity. Now we'll go through some of the highlights of the third quarter. Starting with sales volume, we sold approximately 309,000 tons in the third quarter, a 49% increase over the second quarter volumes of 208,000 but still well below pre-pandemic activity levels. The volumes during the third quarter were still low activity levels did pick up during the quarter from the low point reached in June. Nevertheless, the volumes remain the primary driver behind much of our results…

[Operator Instructions] Our first question comes from Stephen Gengaro with Stifel. Your line is now open.

Two questions about Appalachia and the first being the purchase of the Chevron assets by EQT, how that might impact you? And then, second with the Eagle transaction. I'm just sort of thinking about the in-basin penetration Appalachia being pretty small, and what kind of opportunities you see there for growth over the next year or two?

So I'll let John Start that one.

Okay. So Stephen, yes. So on EQT, very strong relationship there. So as we see their growth we view that as positive for us, you probably saw in the quarter that we did renew our agreement with EQT. And, so we're relatively confident that that will benefit Smart Sand down the road as they integrate those assets. With regard to the Appalachia region, I think your question was on regional sand. One of the challenges that Appalachia has is, in developing regional sand is that -- generally there's not a lot of assets that can be developed easily. There's a lot of geographical concerns near these basins. Appalachia named after the Appalachian Mountains, so a lot of mountains in and around there. So, we think that it will be more difficult to develop sand mines in comparison to say the Permian Basin where the sand is everywhere. And, there's a relatively easy permitting regime in place down there. So we think Appalachia is a good growth prospect for us. We think that by adding the Eagle Materials assets, that those give us additional ways to get our sand in there competitively. And, we're excited about the opportunity to continue growing Appalachia.

Thank you. And then, just one follow-up, thinking about the accounts receivable balance and the shortfall revenue in the quarter. I think that sort of normal shortfall revenue and collections down to normal schedule, is that reasonable?

Yes. The shortfall revenues are from contracts that are currently in force and would be processed in a normal due course that we recognize.

Thank you. [Operator Instructions] Our next question comes from Lucas Pipes with B. Riley Securities. Your line is now open.

This is actually Dan Day on for Lucas. Just wanted to get some color around, maybe what we can be thinking about for an uptick in sales volumes with these new mines. I think you said in our prepared remarks that they're sort of ramping up now and then 4Q. If I look back the last couple of years, like in a good year, you seem to be around 3 million tons annually, and sort of a weaker year more like 2.5 million tons, obviously 2020, put that to the side, but like, going forward, sort of what can we sort of think about for like a good year sales volumes with these new mines in the fold? Thanks.

Well, we're not giving guidance for 2021 yet, but as you can see, in this fourth quarter, we guided 15% to 20% increase. And so, we feel good about the fourth quarter and where it's going, I think we need to get into early 2021 to see activities levels pick back up. But I think it's not unreasonable things that we could not -- we could get back to pre-pandemic levels are better than on a run right in the second half of 2021 and going into 2022. But that's depending on all prices, the current political environment and many other factors, it's really kind of how well the economy responds post pandemic and a lot of factors that it's really too early to factor in to give you a good guidance into 2021 and beyond that.

I understand. Anything you think about as far as like differences in cost structure between, your Odell mine and the new ones?

We would add on under logistics, just the Eagle Materials mines add access to rail that we didn't have before, which helps us into different basins is super important.

I think in question, in terms of your cost structure and John you can add to this as well. But I think our goal would be to, again, we see a lot of opportunity for that mine to be able to operate in the same fashion we do is Oakdale and a lot of opportunity there. And so our goal will be to kind of drive it to be a very low cost, very efficient production. Like Oakdale, we do most of our activity all in a single location. We're able to manage our web plant with our dry plant pretty efficiently. We believe over time so we think that's going to be we're going to be able to achieve our goal and be able to achieve kind of similar cost per ton at Utica that we are being able to achieve at Oakdale.

Yes. The only thing I would add to that is, is the asset that we did buy their much of the equipment is very similar to what we're used to working at Oakdale. So we think we'll be able to drive the efficiencies up in Utica, the same way we've been able to drive them up in Oakdale because of our familiarity with that equipment.

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

Thanks. Just two quickly, one, that I'm not sure, I know, you can't give a lot of color. But is there any update on the timing of the litigation or is it or is there anything you can say there on timing?

We're not going to give the update on litigation.

I figured but I wanted to check in. And then a second, as we think about CapEx into next year, Lee, should we just sort of think about it, relative to where our activity assumptions are for now, is that a reasonable approach?

Yes. I agree that's regional approach. I think in 2021, we're going to continue to be focused on really managing our capital efficiently. And our goal is to live within our cash flow. And so we're looking to basically from our cash flow from operations, less our capex to continue to be positive in 2021, like we've managed in 2020.

Thank you. And then maybe just one final one. I know it's hard to assess. But when you think about spot pricing in the market right now, are you seeing any direction in the market yet? I think I've heard it's stabilized and maybe slight pauses? Or I'm just curious what your view was on. And maybe any sensor what activity days, we might need to see on the track side to see some more positive momentum?

Yes, so John here. So I think that from our view of spot pricing, I think it depends on the product, right, you know, 40:70, certainly, there's still high demand for 40:70. Depending on the market under mesh, the fine grade sands are still in demand. With regard to spot pricing. Yes, I think that you, you get to a point time where it's difficult for long-term players and folks who are concerned about their balance sheet to sell, in those in the teens, where we were seeing that before. And so, from a standpoint of seeing some stabilization, we haven't seen a huge amount of requests for irrational pricing, like we were seeing at the beginning of the pandemic, I think that as some of our peers, you're coming out of bankruptcy or are still working through that process. At some point, there has to be some rationality around the pricing. And so from that respect, we've seen kind of spot pricing, in the low 20s for the in demand products. And, there's still not a huge market for some of the core so products. And, the real question is whether or not you end up selling them at the at the low price or not, we don't make a lot of course products, so it's not something we've really had to think about.

Thank you. Our next question comes from Samantha Hoh with Evercore ISI. Your line is now open.

Maybe leads us to go back to your guidance on 4Q volumes to be up. Are you anticipating any shortfall revenue for next quarter?

Currently, we're not anticipating that, but it really depends on which customers take volumes and how that manages through. But right now, we're not expecting any significant shortfall volumes, our revenues in the quarter.

So the second implied that I mean, if you strip out the 3Q, all revenue, but on a maybe apple-to-apple basis with volumes turning higher, do you think maybe contribution margin on a per ton basis has bottomed?

No, I think that's fair. I think right now again, with pricing, I think kind of bottling them out and kind of what jjohn was talking about, on spot prices, etc. I think we could, if current activity levels stay consistent or improving to 2021. Yes, I would say that contribution margin has bought.

Okay, and then just one last one. I think I might have missed some of this in your prepared remarks. But in Utica, it sounds like you're resuming mining operations there. It's kind of strikes me as this might be one of the First, Northern White mines to be reactivated. Is that the case? As far as you know? And then also, what's the timeframe in terms of, you know, getting operations back up at that line frame in terms of the getting operations back up at that mine.

I would say and John and Chuck can chime in, but I think we are probably the first ones to bring back on other Northern Light production. One of the, as Chuck alluded to earlier, one of the advantages of Utica, it's on the BNSF. And that gives us access into other markets that we were may not be able to get as efficiently out of go. So it's very complimentary to our outfield business. And yes, we have actually started staffing up and building up to be able to start producing sand and you at Utica this quarter. So we might actually see sale contribution this quarter, or late in the quarter maybe and then well until next year. Yes, and I think going forward, Utica add to our volumes this quarter. Goin forward to have sales and Utica add to our volumes as quarter and going forward into 2021. It's one thing making the sand but a huge part of making the sand is also finding an efficient way to move it to the bases got to get to and then Utica gives us some great options there. Use complaisance.

Thank you. Our next question comes from Jonathan Catlin, Catlin Capital Management. Your line is now open.

Congratulations on a good quarter and managing through this difficult time. The one thing I love this story about Smart Sand, but you guys are doing the one thing that really concerns me or I find really troubling is the continued increase in accounts receivable, I've actually never come across a company that had accounts receivable, that's equal or almost equal to its market cap. I'm just trying to get an understanding of how that's going to resolve itself and why keeps increasing and how it's going to get resolved over time. And when it's going to start turning downward?

Well, you've got to remember and it's fully disclosed in our financials that I believe 54 million of that account receivable balances related to our litigation with one of our customers. So that balance built-up based on what they owe us contractually under the contract. And that's under dispute and under litigation. So that is part of that build up over the last 12 months, what you see from the second quarter, the third quarter in the build-up of the receivables is really just from the increase in activity. And a lot of that activity increase actually 40% of our volumes in the third quarter were sold in September. So a lot of that activity got built up and receivable in September, which we would see on a normal course to turn into cash in the fourth quarter. So as sales start to build back up, we will see some buildup in receivables. But we got a bigger bump at the end of the third quarter because our volumes started picking up in the third quarter and September. But again 54 million of those receivables are based on the litigation we currently have.

And there's no timeframe when that litigation will get resolved, correct?

No. We don't give any comments as to terms of where that litigation is.

Thank you. I'm not showing any further questions at this time. I would now like to turn the call back over to Chuck Young for closing remarks.

Thank you for joining Smart Sand's third quarter 2020 earnings call. Stay safe.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.