Good day and thank you for standing by and welcome to the Sand Inc. Second Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. [Operator Instructions]. I would now like to hand the conference over to Josh Jayne, Director of Finance and Assistant Treasurer. Please go ahead.

Good morning and thank you for joining us for Smart Sand's second quarter 2021 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 different 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 4th, 2021. Additionally, we may refer to the non-GAAP financial measures of contribution margin, EBITDA, adjusted EBITDA, and free cash flow during this call. We believe that 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 contribution margin to gross profit, EBITDA, and adjusted EBITDA to net income, and free cash flow to cash flow provided by operating activities. I would now like to turn the call over to our CEO, Chuck Young.

Thanks Josh and good morning. We enjoyed another good quarter for volume with similar tonnage to the first quarter. Second quarter volumes of 767,000 tons are up 269% from the second quarter 2020 levels when the pandemic began to negatively impact our business. Additionally, sand sales volumes in the first half of 2020 were approximately 10% higher than the first six months of 2019. So, while our activity was flagged quarter-to-quarter, our overall activity is trending higher this year than before the pandemic severely impacted our activity. This upcycle so far is different than previous upcycles in the oil and gas industry. While market activity is much stronger today than it was a year ago, E&Ps continue to focus on spending within their cash flow. This spending discipline has led to a slower recovery for sand demand in our core markets. We are committed to living within our cash flow, while still pursuing opportunities to expand our business. We're managing our operating costs in line with current activity levels, but have the incremental capacity to sell more sand with minimal additional investment. So, we can quickly respond should market activity begin to increase. We're actively pursuing opportunities to expand our customer base and logistics capabilities in key long-term markets. This week, we announced the new three-year agreement to supply sand to EQT, including at a new transloading terminal that we intend to have operational by the end of this year. This new contract demonstrates our continued commitment to provide long-term sustainable sand supply and logistics solutions to our customers. The Appalachian Basin is a key market for Smart Sand and as we move towards adding a new terminal there, we expect to offer even greater efficiency to our customers, while also providing ESG benefit by reducing trucking mileage and associated…

Thanks Chuck. While we are encouraged by the pickup in activity we have seen thus far in 2021, E&Ps have stayed disciplined with respect to spinning within their cash flow. As Chuck indicated, second quarter 2021 volumes were slightly higher than first quarter 2021 volumes. We continue to expand our customer base during the second quarter and believe a more diverse customer base will strengthen our business going forward. We remain committed to low leverage levels, a prudent capital structure, generating positive free cash flow for the year, and maintaining adequate liquidity levels. Now, I'll go through some of the highlights of the second quarter compared to our first quarter 2021 results. Starting with sales volumes. We sold 767,000 tons in the second quarter 2021, a slight increase over the first quarter 2021 volumes of 760,000 tons. Total revenues for the second quarter 2021 were $29.6 million compared to $27.5 million in the first quarter 2021. The revenue increase was driven by higher in-basin sales in the second quarter compared to the first quarter. Sand revenues were higher by $5.7 million, which more than offset the decline in logistics revenue of $1.7 million. Our cost of sales for the quarter were $32 million compared to $32.4 million last quarter. Despite a slight increase in revenues in tons sold, we actually saw a decline in our cash production cost quarter-over-quarter by approximately 5%. Total operating expenses were $26.3 million compared to $6.1 million last quarter. The increase from the first quarter is primarily driven by $19.6 million recorded as non-cash bad debt expense in the current period, which is the difference between the $54.6 million accounts receivable balance that was subject to the company's litigation with U.S. Well Services and the $35 million cash received in the settlement of such litigation.…

[Operator Instructions] And our first question comes from Bill Austin from Daniel Energy Partners. Your line is now open.

Hey, guys.

Hey Bill.

Hey, Bill.

Hey, I just wanted to start with a little on -- if you wouldn't mind just characterizing the competitive landscape that you're seeing in Northern White market today?

Yes, sure Bill. So, what we're seeing out there is we've got the traditional providers of Northern White up in servicing kind of Midwest and Northeast, and then a little bit down south into some opportunities in Oklahoma. The Northern market is -- the Northern White sand market is relatively healthy. We are seeing as Lee mentioned in his comments with our deliveries into North Dakota, we're seeing a little bit of whitespace as our customers out there retool for a push towards the end of the year. With regard to who our main competitors are up there? It's primarily U.S. Silica and Covia. There's a couple of smaller operators that provide sand there, but with our asset diversity on rail, both UP, CP, and now BN [ph] origination, we're competing pretty well up there, as opposed to where we were when we only had single railroad. So, we feel pretty good about it.

Great. Thanks. And then one more, you touched on a little bit, but have you guys seen any logistics challenges with all these final [ph] fracs that are happening? Is this going to create problems down the road with the amount of final [ph] fracs that we're kind of seeing in the market?

Well, I think what you're touching on there is you're kind of trucking, right? And certainly we've heard anecdotal evidence that your trucks are problem. Our view on trucking is that you've got your -- the -- your supply chain is only as strong as your weakest link and trucking traditionally has been difficult. Last-mile is always difficult in that respect. And so our view on that is, what you've got to do is you've got to make truckers more efficient. You've got to make their load times shorter. So, when we build transloads out there, we're focused on keeping those load times as short as trouble, keeping the time that a trucker waits in line to be loaded as short as possible. We want our translators to be strategically located, so the truck distances is shorter. And then when we get to the well-site, we want to offload those trucks as quick as possible. And so when we think about trucking, we look to other bulk commodity businesses for what they've done in trucking. And one of the things that's obvious to us is the use of Bottom Dump Hopper trucks, right, also they load very quickly, they unload very quickly. And what they also do is they have a heck of a lot more throughput than a traditional pneumatic truck or a box system, because they don't weigh as much. So, you're able to get that -- that advantage translates into more throughput. So, our focus is really helping those truckers out making them more efficient and thinking about in the long-term, how we encourage trucking or truckers to come into this business, and kind of alleviate some of that supply chain. And we think with kind of our smart systems that are capable of doing bottom dump trucks, we've got a leg up on the competition there.

Okay. Thanks. And my last one, you touched on it, again, real briefly at the end. Any of the budget shortfall that you guys were seeing from the operators, how do you guys think about that in terms of Q4 potential seasonality? In terms of what you guys are seeing out there? I know you briefly hit it, but like anything more on how you guys are seeing that in the fourth quarter? Or is it too early to tell?

Yes, I think it's -- Bill it's little too early to tell. I mean we are seeing a little slowdown in the Bakken on timing issues, and I think that can pick back up. And we do expect some pickup in activity in the northeast in the fourth quarter. But it will really be dependent how our volumes go quarter-to-quarter on really that Western United States activity and there's a pick back up at the end of the year, and weather, and also other E&Ps are going to continue their budget spending into the fourth quarter or basically look to move some of that into the first half of next year. So, it's a little hard to say. But I do think we do expect picked up in the northeast, but it's a little early to see how the planning is going for fourth quarter in the Bakken and some of the other Western bases we're now competing in.

Yes, and the only thing I would add to that Bill is as we kind of look at commodity pricing out there, both on oil and natural gas and with the new terminal we're building up in the Northeast, we think we could blend some of that seasonality that we've seen in past years with the ability to get throughput if the weather is difficult or we see kind of any of the seasonality associated with flooding or whatever in the Northeast.

Okay. Well, I appreciate it, guys and thanks. I'll turn it back over.

And thank you. And our next question comes from Stephen Gengaro from Stifel. Your line is now open.

Thanks. Good morning gentlemen. Morning

Good morning Stephen.

Good morning.

A couple of things to me, if you don't mind, and one is I think following up on the prior question. You mentioned in your prepared comments about smart systems and sort of the 30% drop you see in trucks to the well site. I'm just curious, is that a silo versus container benefit? Or is that something within your systems relative to the market?

So, yes, Stephen, what we're specifically referring to there is the amount of throughput you get through a truck. So, for -- to give you an example, up in North Dakota, we see throughputs as high as 35 tons per truck, right. North Dakota has -- not to get too technical, but North Dakota has 106,000 pound gross weight trucks up there. And so when you have a 35 ton throughput, which is brought about as a result of them using what is effectively a relatively light grain trailer or grain type trailer, versus a box, right? A box, you've got your steel that makes up the box that that cuts down on the throughput of that. So, 30% is as an estimate of the difference between how much throughput you can get on a box or a traditional pneumatic trailer versus some of these grain trailers that are out there now, that are -- you were able to bring this huge amount of throughput. So, if you're increasing your throughput by your call at 10 tons per load, that's where you kind of get to that 30%.

Got it. Thank you. I think Lee touched on this a bit in the prepared comments as well, but the average revenue per ton in the quarter, it was up sequentially and I think it was related to the in-basin sales side and I was just curious is there any price there? And what are you seeing kind of on the pricing backdrop?

I think right now we're seeing pricing being kind of stable to having some improvement and overall opportunities for improvement and margin by delivering in-basin and managing our logistics cost there. So, I think it's been relatively stable. And when we see some opportunity for a little improvement, but right now we don't see. I think we're basically viewing it as a relatively stable market for pricing right now.

And can you tie that in at all to the -- as we think about contribution margin per ton in the current environment, I mean, we tend to think about it as probably around mid-single-digits, kind of, where you came in the quarter. Is that reasonable? If you -- I guess it blends depending on sort of cost of goods sold because the seasonality, but is that a reasonable sort of starting point?

Yes, I think at our current, kind of, volumes and what we're looking at that we would be in that mid-single-digits level and be consistent in the range of what we ended -- did in the second quarter.

Great. Thanks. And then if you don't mind , one final one on my end. The -- you got this U.S. Rail Services issue behind you, you have a lot of cash, the balance sheet is in great shape, I know you have some CapEx. How do you think the use of cash evolves over time? And then -- so I'm sure just thinking about how much cash you'd like to have on the balance sheet to run a business and maybe using it in some ways to return to shareholders over time?

Well, I'll start maybe Chuck can chime in as well. But I think it's a little early. We definitely like our liquidity position. We like having that cash and it is a strategic asset to us that we can look to utilize in terms of how we see incremental growth opportunities to help increase our utilization of our existing assets. I think that's a key focus, can we use some investment, whether it be a terminals or improving the utilization of smart systems? How do we get more utilization and throughput through our existing asset base? And then I think once we have, kind of, see where the business has stabilized and where our cash is, we can consider other uses of cash on our balance sheet, albeit from some type of return to shareholders.

And one other thing I would add is that 14%, shareholder of Smart Sand, I don’t like that and we're going to try to abide by that.

Okay, great. Thank you, gentlemen.

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

Hey guys. Just real quick on me. I think I heard that CapEx guidance was reduced on the upper end from $15 million to 12 million. But meanwhile, you're building out this new transload facility. Can you kind of walk me through the movement there in terms of your CapEx guidance?

Yes, CapEx guidance is really separate from anything that transload and we have some other sources to help kind of pay for that transload. So, the CapEx guidance is separate of that. And we're still finalizing what that number is, but from the guidance we gave from the $10 million to the $15 million, under our normal business and discretionary capital, we're using for smart systems, we are pulling that back to a tighter range of $10 million to $12 million based on that spending.

So, are you still thinking you'll have 10 smart system deployed by year end or is that lower?

No. We've never said we'd have 10 deployed, what we said, we have 10 that could be available and we'll probably be in the eight to potentially 10 range.

Okay. What's the opportunity of expanding your customer base using this new transload in Appalachia, there are discussions going on with potential new customers?

Yes, Samantha, there are -- and the transload where it's going to be is in a really, really good spot. One of the interesting things about Appalachia and one of the reasons we're so excited about this new transload is it's relatively mountainous terrain around there and finding a spot that has the ability to build a large enough rail yard to be significant and provide the logistics advantages that we provide out of our Van Hook, North Dakota terminal is difficult and we've managed to find a spot that is -- I would suggest is unique and in a fantastic location, kind of, in the heart of where multiple operators are currently fracking. So, yes, we're really excited. We're having conversations actively right now with others in addition to EQT. So, we're really, really excited about this new terminal.

Okay, great. And if I could just sneak one more. I was curious about the trends in logistics with just shift to in-basin. Is that something that you think is going to be a trend through the second half? Or I mean can you maybe speak a little bit in terms of what's going on from the operator perspective there?

Are you referring to in-basin sales?

Yes, I'm just kind of curious about the mix being more in-basin this last quarter than prior?

I think in general -- and John and Chuck can chime in, but in general, we have seen a pickup and more of our movements going into in-basin pricing and delivery versus spot. Spot, what I'd call FOB mine pricing.

Yes, I would agree with that. And certainly as we look to get this new transload up and running, I think we'll probably see a bit more movement to pricing in-basin versus FOB the mine. Although, we still do sell FOB the mine and we've got a number of customers that take there. But ultimately, if you can prove out the logistics on the -- at least a rail side of the logistics, customers want to take advantage of that. They don't necessarily have entire group spun up any more to handle that kind of logistics management.

Okay, great. Thanks guys.

And thank you. And we have a follow up from Stephen Gengaro from Stifel. Your line is now open.

Thanks. Thanks for taking the follow-up. So, two quick ones that I think are related, but the -- on the long-term agreement you announced yesterday with EQT, is that a -- is it a kind of index to a spot price -- is that is that how sort of the pricing dynamic works on that contract?

Yes, we don't we don't get specifically into contract pricing with customers, Stephen. So, we're not going to comment on that.

Okay. Okay. And in general terms, the transload terminal that you're building in Pennsylvania, will that tend to help -- I believe it tends to help pricing and contribution margin per ton over time. Is that an accurate statement?

In general, yes, that's an accurate. It's particularly as we looked -- with the terminal we'll have more opportunity to not only work with EQT, but others that have in-basin pricing and provide that full value and hopefully, capture margin through that.

It also helps us drive efficiency with the railroads. So, we're able to demonstrate to the railroads that we can move large trains, smoothly, effectively, we have on both sides, ability to take larger sized trains in and out, which drives the efficiencies with the railroads, which should help in pricing.

Yes. And then the last thing I would add to that is it provides a good firm base for us to continue marketing our last-mile products into that market. So, with the new terminal, we've got a home base for smart systems and kind of tying all those things together in a unified supply chain for customers.

Great, I appreciate the color Thank you.

Thank you.

Thank you. Thank you. And I am showing no further questions. I would now like to turn the call back over to CEO Chuck Young for closing remark.

Thank you for joining us on Smart Sand second quarter's earnings call. We look forward to talking to you again in November.

Thank you This concludes today's conference call. Thank you for participating. You may now--.