Phil Cerniglia – Investor Relations and Budgeting Manager Charles E. Young – Chief Executive Officer Lee E. Beckelman – Chief Financial Officer William John Young – Executive Vice President of Sales and Logistics.

George O'Leary – TPH & Company John Watson – Simmons Martin Malloy – Johnson Rice Waqar Syed – Goldman Sachs Marc Bianchi – Cowen.

Good day, ladies and gentlemen, and welcome to First Quarter 2017 Smart Sand, Inc. Earnings Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to introduce your host for today's Conference Mr. Phil Cerniglia, Investor Relations Manager. You may begin..

Good morning and thank you for joining us for Smart Sand's first quarter 2017 earnings call. On the call today, we will have Chuck Young, Founder and Chief Executive Officer, Lee Beckelman, our Chief Financial Officer, and John Young, our Executive Vice President of Sales and Logistics.

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, May 11, 2017. Additionally, we may refer to the non-GAAP financial measures of adjusted EBITDA and production costs during this call.

These measures, when used in combination with GAAP results, provide us with useful information to better understand our business. Please refer to our most recent press release or our public filings for a full reconciliation of adjusted EBITDA to net income and production costs to cost of goods sold.

Finally, during today's question-and-answer session, we ask you to please limit your questions to one plus a follow-up to ensure that we have enough time to answer as many questions as possible. I would now like to present our CEO, Mr. Chuck Young..

Thanks Phil, good morning. I'm pleased to tell you that Smart Sand had an outstanding first quarter. Our sales volume showed big increases both from Q4 2016 and year-over-year. These results could not have happened without the hard work and dedication from our employees.

Lee will give you more details on the first quarter results during his prepared remarks. I want to begin with a brief commentary on our increased sales volume and what we believe this means for the industry. In the first quarter, we sold nearly 560,000 tons of frac sand. We generated a positive adjusted EBITDA of $3.7 million or $666 a ton.

This represented a 103% increase over fourth quarter volume and it's a 332% increase over first quarter 2016 volume. We believe this shows activity in the oil and gas industry is continuing to improve and demand for frac sand is clearly increasing.

We operated at about 68% of our annual nameplate capacity during the first quarter and we foresee even better things to come. Beginning in the third quarter, we expect to approach 90% greater utilization of our current 3.3 million tons of annual capacity.

We believe as we operate near full capacity, we'll continue to see cost improvement that will help us deliver strong financial results. Our focus remains on signing long-term take-or-pay contracts. The goal is to have a sales mix of approximately 75% contract and 25% spot. In the first quarter, roughly 70% of our sales were on a spot basis.

We're looking to increase that in future quarters. Above 63% of our current annual capacity is contracted. The weighted average life is just over three years. We're having active dialog with both E&P and oil field service companies for term contracts in the range from one to five years.

We continue to believe that contracting the majority of our capacity under long-term contracts is the way to do this business. Here is why? Long-term take-or-pay contracts provide surety of sustainable frac sand supply for customers and provided stability in any market conditions. Our balance sheet remains essentially with no debt.

We completed a successful follow-on offering in February that raised net proceeds of $24 million. The successful offering allowed us to end the quarter with about $74 million in cash. I'm pleased to report today that we'll now be expanding our annual nameplate capacity to $5.5 million tons.

What drove this decision, increased market demand for our high-quality finer mesh Northern White frac sand. Under the current expanded plan, we'll build two dyers and new wet plan. These new plans will be enclosed. That will allow us to run our wet sand operation call year. This results in significant operational and cost efficiencies.

The wet plan should be up and running by September. The additional drying capacity could come online as early as December. Other expansions are also in the works. We're adding a third rail loop at Oakdale and we're breaking grounds on the expansion of our refinery in Wisconsin transload facility, which is located on the Union Pacific railroad.

We're making it a multi-unit train facility. We expect Byron's expanded capabilities to be operational by September. Here is why this is important. The additional logistics infrastructure will greatly enhance our rail delivery option in Oakdale. It should also us to get to competitive rail rates through all the operating shale basins in the Lower 48.

This expansion will increase our CapEx budget to approximately $85 million for the year. Our primary focus remains on growing our Oakdale facility, but we continue to explore regional sand mine development, in-basin transloads and last-mile logistical opportunities.

We believe there is value in controlling and managing all stages of the supply chain to efficiently deliver frac sand all the way to the wellhead. As we evaluate these opportunities, we'll remain selective.

We'll only move forward on the opportunities that we believe will benefit our customers and provide both incremental margins and long-term shareholder value. I'll now turn the call over to our CFO, Lee Beckelman for closer look at the company's first quarter results..

Thanks Chuck. As Chuck highlighted we had a solid first quarter and strong incremental volume growth and positive financial results. My comments will be focused on comparing the first quarter 2017 results with the fourth quarter results from last year. Let start with sales volumes.

Sales volumes were approximately 559,000 tons in the first quarter, a 103% increase over fourth quarter 2016 volumes. Most of the increase in sales volumes during the quarter came from contracted customers taking increasing volumes under the contract. Approximately 83% of our sales volumes in the first quarter came from contracted customers.

Spot sales grew to approximately 17% of our sales volume, up from approximately 7% in the fourth quarter. Spot pricing continues to improve especially for 40/70 and we expect this trend to continue under current market conditions. This time we anticipate approximate 20% of our sales in the second quarter will be from spot sales.

As Chuck mentioned, our utilization improved in the first quarter. Current market conditions continue. We expect our utilization will continue to increase going forward in 2017. Our current quarterly, nameplate production capacity at Oakdale is approximately 825,000 tons which is equivalent of 3.3 million tons per year.

We operated at average utilization of our current nameplate capacity of approximately 68% in the first quarter. We expect our utilization to increase to 75% to 80 % range in the second quarter. We are in the process of adding a third rail loop at Oakdale, which we expect to be available by the end of June.

This investment will allow us to maximize our available capacity for sales, so assuming drilling and completion activity stays at current levels of better. We anticipate we'll be operating at 90% or greater utilization in the third and fourth quarters of this year.

As announced today, we are in the process of expanding Oakdale to 5.5 million tons of annual nameplate capacity. And we anticipate having this additional capacity online and operational by the end of 2017 or early in 2018.

In the first quarter 2017, approximately 79% of our sales volumes were shipped via unit train compared to 69% in the fourth quarter. Now turning to revenues. Total revenues for the first quarter were $25 million, a 15% decrease fourth quarter 2016 results.

Well we had 103% increase in sales volume sequentially and sand sales revenue increased from $9.6 million in the fourth quarter to $16.7 million this quarter. Our overall revenues were lower sequentially due to no shortfall revenues this quarter versus approximately $18 million of shortfall revenues in the previous quarter.

Reservation revenue, which is included as part of our sand sales revenues was $7.5 million in the quarter, a $3 million increase sequentially due to the addition of our new take-or-pay contract that started in January. Transportation revenue for the quarter was $8.3 million compared to $1.9 million last quarter, due to increased sales activity.

Average sales price per ton for the quarter was approximate $28.98 per ton, a 17% decrease from last quarter. This resulted primarily from fixed reservation charges being spread over an increased volume of ton sold in the quarter.

Reservation charges are monthly payments that we receive under certain take-or-pay contracts, where the customer takes a minimum monthly ton or not. As discussed in our last earnings call, we include these reservations charge revenues in our average sales price per ton calculation.

Therefore, when customers don't take their minimum monthly volumes, these reservation charges get spread over smaller number of tons, which results in a higher unit selling price. During the first quarter, our contracted customer started to take increasing volumes that are at or approaching their minimum monthly volumes.

This caused our average selling price to decrease as these monthly minimum payments were spread – some reservation charges were spread over a larger number of ton sold. For costs of sales, our costs of sales in the quarter were $19.6 million compared to $8.8 million last quarter.

The increase is due primarily to increase sales activity, which lead to higher utilities and higher equipment expense as we ramped up activity.

We also had increased labor expense as we brought our new employees to support increased sales activity and to be ready for the start-up of the mining season, which began in April, and we had increased freight expense due to this increased sales activity as well.

Our production cost per ton for the quarter was $15.94 per ton, a slight decrease in the fourth quarter results of $16.03. As highlighted earlier, we expect our utilization to be reaching at 90% level of better in the second half of 2017.

And as our utilization increases, we expect our production cost per ton will continue to improve over the course of the year. Assuming we can achieve our expected utilization levels, we anticipate that our production cost per ton should approach to $12 per ton level by the fourth quarter of this year.

Gross profit was $5.4 million in the quarter, and approximates $15.2 million decrease from fourth quarter results. This reduction in gross profit was primarily due to the shortfall payments we received in the fourth quarter, which were not offset by cost of goods sold in that quarter.

And again, we had no shortfall revenues in the first quarter of 2017. Operating expenses in the quarter were $3.8 million, a decrease of approximately $1.6 million from the fourth quarter, primarily due to lower wages and benefits associated with bonds as we paid in the fourth quarter of last year.

Total other expenses in the quarter were approximately $74000 which compares to other income in the fourth quarter. Total expense in the first quarter were approximation $74,000, which compares to other income in the fourth quarter of 2016 of approximately $7.7 million.

The other income in the fourth quarter consisted primarily of $6.6 million of proceeds from the assignment of our settlement of a bankruptcy claim with one of our former customers. For the quarter we had income expense of $515,000.

Our statutory effective rate for the quarter was approximate 35% and we anticipate our effective tax rate to be in the 35% to 40% range going forward. We had net income of approximately $1 million and adjusted EBITDA of $3.7 million in the first quarter.

Both net income and adjusted EBITDA were down sequentially, again primarily due to the shortfall payments received in the fourth quarter that did not recur in this quarter. In the first quarter, we have capital expenditures of $1.6 million, which consisted primarily of enhancement and cost improvement initiatives.

As Chuck highlighted, due to expected market demand and increase market demand and expected operational efficiencies, we are now moving forward with adding a wet plant and two dryers to increase our nameplate processing capacity to 5.5 million tons per year. We are also adding rail infrastructure at both Oakdale and Byron.

As a result, our capital expenditure budget for 2017 is now approximately $85 million, and our capital spending will begin to ramp up in the second quarter.

As Chuck highlighted, we complete the follow-on offering in February this year, netting approximately 24 million in proceeds and we have approximately $74 million in cash on the balance sheet at the end of March. Our $45 million revolving credit facility is fully available for us to draw on as needed as additional source of liquidity.

We continue to maintain a clean balance sheet with minimum debt and we have ample liquidities for our operations and plant growth initiatives. This concludes our prepared remarks. Operator, you may now open up the line for questions..

Thank you. [Operator Instruction]. And our first question comes from the line of George O'Leary with TPH & Company. Your line is now open..

Good morning guys..

Good morning, George..

There was a very helpful color on the call. I guess you talk a little bit about pricing and given your heavy bent towards 100 mesh in 40/70.

Just curious how much you are seeing between – on the pricing front between those two grades as 100 mesh closing the gap at all at 40/70? And then maybe some color just on absolute pricing levels that you guys are seeing for Q2 delivery and any thoughts on where the pricing is heading in Q3? Sorry for the long list of questions all rolled into one..

No problem, George. So, it's John here. With regard to the pricing, 40/70 continues to be in very high demand and its commanding the higher end of the spot pricing right, certainly into the 40s. 100 mesh continues to be kind of in the lower 30s for that product.

The demand is strong for both products, but certainly 40/70 in the market is the one that everyone is looking for, so hopefully that provides a bit of color on that..

Yes. That's very helpful. And then, on the production costs front, realizing you guys are ramping up some costs a little bit inflated at the moment.

Just looking forward over the next quarter or two best you can, any color on where those production costs on a per ton basis may trend quarter-on-quarter just to help us from our modeling standpoint?.

Well, as I highlighted in my comment, George, over the course of the year, first we start to ramp up and getting to 80% to 90% utilization. We expect that cost to – our production cost per ton to improve and get down hopefully to $12 per ton level by the fourth quarter.

So I would see it starting to sequentially improve and moving in that direction over the course of the year..

Okay..

We had a lot of increased – we are ramping up the activity quite a bit. In the first quarter we had a lot of the new hires we added at the plant to support the sales activity and bring in new equipment and ramp up for the mining season to start in April.

So that led to little higher costs in the first quarter and we expect that the moderate as we get to increasing sales activity and don't really have a need to add a lot of additional headcount or equipment as we go into the mining season in the rest of the year..

Okay. That's very helpful.

Say if I just model the kind of a linear decreased towards 12% that wouldn't be unreasonable assumption?.

No, that's not unreasonable..

And then maybe one more if I could look. Looking through the Q, I noticed that inventories took a nice dip quarter-on-quarter.

I am just curious if you guys have reached kind of a plateau level on inventories going forward? And what's your thought is with regards to the level of inventory you want to keep as you expand mine capacity?.

Well inventory was down a little bit in the first quarter because we are not running on mine – not running the mine, so you're depleting your inventories you processed in the first quarter because currently we only mine in the summer season.

So inventory should kind of stabilize as we go into the second quarter and going forward because we are starting the wet plant production. So we are increasing the wet plant, the wet sand that we use ultimately to dry.

Now with our increased activity, our inventory levels are going to be probably a little lower overall, because we are going to be processing and selling more of the sand directly in the summer as we're having greater sales activity this year versus previous – versus 2016 for example over the summer months..

This is Chuck here, additionally when we add our wet plan that runs year around. We won't have to make a bigger stockpile as we have previously to get through the winter months..

Great. Thanks for the color guys..

Another question comes from the line of John Watson with Simmons. Your line is now open..

Good morning guys..

Good morning..

One quick one on freight expense, can you help us think through the different components of freight expense during the quarter and maybe expectations for freight expense per ton moving forward?.

I don't know we have a freight expense per ton number. But basically the components of freight expense are primarily for some of our customers, we are the freight payer, and we pass that through. So, we pay the expense and then that correspondingly get passed through as freight revenues.

Additionally, that's probably the biggest component and then there is two other components being, but for the other component of freight revenue and expense is really our railcar expense. We leased our railcars. Again most of our railcar is probably 75% to 80% of them are under contract with our customers as we sign a long-term contract.

We have the rail, if we're providing the railcars we have a rental agreement with that. That expense – those expense and correspondingly we make a little margin but not much in terms of renting those cars out to our customers.

And then in the first quarter there was a little increase relative to revenue, because we were bringing some cars out of storage and there is some cost associated with bringing cars out of storage to actually get them delivered to Oakdale.

But I'd say, 75% to 80% of that freight expense is typically just the freight shipment on the rail and the other 20% or so is really our railcar expense..

Okay. Make sense. On the contracted price per ton front, I know a lot of those contracts are tied to WTI.

Is it possible that we might see a dip in that number in Q2 given where oil prices are?.

No, we give our floor price to most of our contracts basically kind of a $50 to $55 level, so any oil price below that, we're still at the same pricing point.

So, we don't really wouldn't have any dip and we're kind of at our current level today and so we really get a nice bounce, as oil prices were to average above $55 per barrel, we'd get a nice bump and we're able to get above that level or higher..

Okay. That's helpful.

And then lastly, I'm going to try some math on sun which is dangerous, but it looks like March volumes were close to 230,000 tons just backing out what you'll told us about Jan and Feb and that would imply a quarterly run rate of about 680,000 tons for the quarter, just holding flat and that's a little bit above the guidance of 75% to 80% utilization.

First off, is that math roughly correct and if so, why would Q2 be blow the March run rate?.

Well, your math is roughly correct for March, but you got to remember, we really try to run our business on unit train basis, so it sums up – you know March we had the timing of when some inner trains were coming in, we were able to basically get those shipments out on kind of a current run rate basis in terms of how our current setup is and with the addition of the third rail loop is what's really helped us to get to that higher number.

there is some limitation on how we can move the trains in and out.

So, while we might be able to achieve those numbers, we're pretty kind of consistently in the second quarter will be kind of at that 75% to 80% level utilization, just in terms of how we're able to logistically manage the cars in and out, since we're really focused on being a unit train – shipping on unit train basis..

Right. Well, thanks for answer my questions and congrats on the strong volume growth..

Thank you..

And our next question comes from the line of Martin Malloy with Johnson Rice. Your line is now open..

Good morning..

Good morning. .

I had a couple of questions about the capacity expansion. I just want to make sure my understanding was correct for each wet plant, you can add three dryer plants for your capacity expansion.

So, presumably to expand capacity again by 1.1 million tons per year, just be one more dryer unit?.

When you are running in and John and Chuck can chime in. Typically when you are running under our configuration having a wet plant just for the summer season, you can support two dryers with one wet plant. So, no, it would be two dryers at 2.2 million tons for one wet plant.

With this new configuration, we're actually going to have the two dryers with the one wet plant, but it's going to be able to operation all year for that new piece, so that will change that math a little. This will be able to process that wet sand year around and really allow us to be able to add more dryers relative to our wet plant production..

So, traditionally we've run eight months is a good year. Now we're going to get year around running out of the wet plant. So, it kind of changes the mix up a little bit. It allows us to utilize that equipment full year..

And how unique is having a wet plant that's capable of running year around?.

We've definitely seen some of it in the industry out there. There's a fuel bar here that has full year operations up in the Northern climate and the southern climate is obviously, they can watch sand all year, because they don't have the issue with the freezing weather, but it's – we're not pioneered here.

We're utilizing existing tested technology and we feel pretty comfortable..

Thank you..

[Operator Instructions] And our next question comes from the line of Waqar Syed with Goldman Sachs. Your line is now open..

My question to the freight charges that you mentioned. It appears you had a $1 million loss probably on the freight side. Now, when do – when should we expect that losses to go away and do you expect to start making – generating some returns on the freight portion.

In the past industry has generated pretty decent returns on freight?.

I'll expect them to be kind of close to breakeven, maybe a slightly – you know just really the timing. Sometime in terms of when we're getting the freight revenues relative to when we're getting the freight expense.

That kind of makes the match on that, but I would just like it to be more breakeven Waqar, really not on the freight expense component, we're really not making any money on that, we're just passing it through.

And then we'll probably, to the fact that we're looking to, try to have more spot sales and have some railcars and support that, we'll have some incremental railcar expenses not being passed on to our customers. So that should lead to that over time to be you know a slide negative freight expenses by revenue to basically around breakeven..

And when do you expect to be breakeven?.

It all depends on timing of the car, so it really depends on the quarter on the activity levels and then how that works together.

So, I would hope to be break – close to breakeven on a quarterly basis, but it's going to fluctuate depending on kind of what the activity was and which customers you know not all of our customers, we pay the freight expense. They pay directly, some we pay. So, it's not a number that I can just peg to you and give you a specific answer to..

Sure. And then in terms of your capacity expansions, do you have any indication from customers that they would like to lock up that extra volumes now or, how you are thinking about contracting the full capacity comes online..

I'll let John give you a direct update from the front-line..

So, Waqar yeah, so the announcements of 5.5, we've told you before that we're looking – when we're looking at 60% of contracted available capacity, we start to think about additional planning and we definitely have line of sight to 60% of the 5.5 million and that's just on existing customer contracts with customers looking to expand with us.

So, we feel relatively confident that we easily get to that 60% number. And then that's not even including the robust activity, the robust demand that we still there from newer customers both on the E&P and the service company side.

So, relative comfort with that expansion going to the 5.5 over the previous announced 4.4 and we hope we'll have some announcements on that front in the near term..

Now with all this regional sand that's being found, you know, do you have any – how you're thinking about that with respect to this capacity expansion.

You mentioned, you have line of sight, but does that worry you that the industry is finding quite a little bit of capacity closer to the Permian and Eagle Ford in Texas?.

So, we do see regional sands coming into the marketplace, but we think there is a strong appetite in our customers and additional new customers that are coming to us looking for Northern White and we still think that that is going to be a substantial part of the marketplace..

And this line of sight that you have for 50% of 5.5 million is that still primarily for Texas, or is that more for the Rockies or the Marcellus?.

I mean, over the past, we've been relatively diverse in where our sand goes to. You know a good amount of our volumes goes up to Marcellus, a fair amount goes into the Mid-Con, the Permian, the Eagle Ford and out West. And we would anticipate that with the line of sight we're talking about, we would anticipate that diversity would continue..

Waqar, you got to remember, almost 50% of our volumes are there, going into the Marcellus and we're seeing really good activity. The regional sands are really more discussion around Texas. All the other basins, we're starting to see activity pick up and Northern White is very competitive into those markets..

Sure.

In three months?.

I still think that the gradation as far as the 40/70 gradation, from a region sand, I don't really think that that's even touching that supply there..

Yeah. Thank you sir..

Thank you..

And our next question comes from the line of Marc Bianchi with Cowen. Your line is now open..

Hey, thank you. Curious if you could comment on some of the equipment procurement that you are doing for the expansion here. We've heard just through some conversations with some of the companies that there could be some bottlenecks just because the manufacturing capacity of this equipment is limited.

So curious, you know how you've managed through that risk and if you have any thoughts kind of for the broader industry as that progresses?.

So, we have our long lead items, the majority of what we're doing.

We definitely see that equipment for further expansion tied back it's a longer cycle, so you've got to get your name and before you get in a queue, yet it's definitely a lot more people looking for equipment and if you haven't made that plan, because the equipment prior to now, you are looking well over the next year..

So we're seeing kind of lead time on the main components might be up to six months in terms of being able to get your order and being able before you get six months or longer getting delivery of that under the current activity level..

We also think and not only that, some of the existing capacities out there, is sustainability of the capacity having to make the gradations out of the reserve base is definitely something that I think is coming into question..

And that six months lead time, is that kind of across all the components you need, or is there something in particular, perhaps it's the dryer or something else in the chain that's really the longest lead within all of those pieces..

I think the biggest lead item is the screens, the screens for the dryer, probably the one having the longest lead time right now..

And if you kind of think back to 2014, when there is a large build cycle.

How long did we time stretch-out at that time? Do you guys have any sense for what that looked like?.

I think in the high of the cycle in 2014, you were seeing lead times – it might be approaching to get to nine months or longer..

Okay great. Well, thanks for the color. I appreciate it..

Thank you..

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

Thank you again everyone for joining our call today. It was a strong quarter with positive financial results in times of industry improvement. We look forward to the remainder of 2017..

Ladies and gentlemen, thank you for participating in today's conference call. This does conclude the program. You may all disconnect. Everyone have a great day..