Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Q1 2019 Smart Sand Inc., Earnings Conference Call. At this time, all participants are in a listen-only mode. Following managements prepared remarks, we will host a question-and-answer session and instructions will be given at that time.

[Operator Instructions] As a reminder, this conference call maybe recorded for replay purposes. It is now my pleasure to hand the conference over to Josh Jayne, Finance Manager. Sir, you may begin..

Good morning, and thank you for joining us for Smart Sand’s first 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 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 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 reconciliation 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. Smart Sand had another good quarter and we observed an important trend. We begin to see the turnaround in the market that we've been forecasting. By sticking to our long term plan for success, we're able to capitalize on the turnaround and once again deliver positive results. Here are some highlights of the quarter.

We sold approximately 648,000 tons of sand and we generated more than $12 million in adjusted EBITDA. Sales volume through our Van Hook terminal in the Bakken continued to grow. In fact, they represented 25% of our total volume sold. We've seen a lot of interest from both new and existing customers in taking sand from this terminal.

Van Hook should continue to be a strong contributor to our operating results going forward. Spot sales represented about 18% of our total sales volumes, following minimal sales volumes in the previous quarter.

That's especially important, because increasing spot sales are generally a good leading indicator of higher overall market activity and this greater spot sales activity has continued into the second quarter. The build up of our wellsite storage solutions perceive the pace and we see more and more interest in our logistical offerings.

Industry activity started to increase towards the end of the quarter. E&Ps took a cautious approach at the start of the year, but we've recently seen substantial pick up in completions activity that is started the show in our operational results through both volumes and revenues. Here's another encouraging factor.

All prices have begun to recover from the dip at the end of 2018. If oil prices stay near current levels, we should see activity continuing to increase in Q2 and the remainder of the year. We believe EMPs will stay the course in terms of focusing on living within their cash flow and our long-term return on capital.

That's why long-term well performance is so important. To improve long-term return on capital and well performance, both the quality of the sand and the ability of an integrated frac sand service company to deliver it reliably matter.

Just as our customers strive to live within their cash flows and meet their long-term return on capital target, so do we. Our business model is built to provide high returns to -- for our stockholders. And how do we do that, by maintaining a low-level balance sheet with minimal debt and smart usage of cash. Thus, our long-term plan is working.

We focus on management of the supply chain. This has two great benefits. One is the value proposition for our customers; and second, it can add incremental margin to our bottom line.

Providing these value-added logistical services to our customers, strengthens our relationships with them and it builds the partnership that increases success for both Smart Sand and our customers for many years the come. We're a fully integrated frac sand supply services company.

As such, we have the infrastructure in place to provide sustainable logistics all the way to the wellsite and ultimately into the blender and in the most effective manner.

Our wellsite storage solutions are integrated with a flexible, user friendly profit management system to help control the merge, drive down cost and improve safety and deliver high volumes of sand sustainably. Smart Sand's last mile technology is both unique and innovative.

It addresses the shortcomings of other wellsite storage solutions now in the market. Our wellsite storage solution provides all the benefits of boxes, silos and hybrids and all-in one package. We support both nomadic and gravity dump trailers. We have industry-leading dust suppression and we can turn trucks fast.

We are able to provide our wellsite storage solutions in any basin regardless of whether we are delivering sand to that market. Logistics will always matter in our business. Our business is a logistics business. We move sand in bulk and getting it to where our customers need it is essential.

In bulk commodity movements the way you move product is critical. That's because it reflects on what you can offer your customers and how you drive scale and efficiency with your railroad partners. But as much as we're logistics business, we're also a quality business. The quality of the products we deliver is critical.

Our continued focus on quality is paying off. We believe there will continue to be long-term demand for a higher quality, finer mesh Northern White sand throughout North America. As we've said time and time again quality matters.

Finer mesh Northern White sand outperforms regional sand in every measurable way and most importantly, in crush strength and turbidity. Northern White sand continues to be the preferred proppant of choice in the Bakken, Marcellus and Utica basins. In the last quarter 60% of our sand went to those basins.

While regional sand is commonly used in the market and in particular, the Permian, we see the trend that bode well for long-term demand for Northern White sand compared to regional options.

For example, in the Permian, the trucking problems have persisted, so have down spacing, parent-child relationships, non-prime acreage, congestion delays, safety concerns, and E&P sustainability goals. We don't see an ending sight to those issues.

We continue to believe that over the long-term E&Ps are going to come to further appreciate the benefit of high quality Northern White sand. It's a commodity that can be levered in large bulk shipments by rail in close proximity to their acreage. This is the successful and sustainable well performance and sand supply model for E&Ps.

Well, let's be clear, while we want to compete in the Permian, Smart Sand doesn't need to operate in the Permian to be successful. In fact in the first quarter, 95% of our sand went to areas other than the Permian. And though the Permian is not critical to our business, our model works there.

Our sand better than regional sand and we're more than happy to sell our sand there. We continue to fill requests from big operators in the Permian that are shifting their focus from adding wells to getting the most from each well. These operators are concerned with the client curves and EUR.

They believe as we do that Northern White sand is the answer to many of their problems. We've examined our long-term strategy and we believe more than ever in staying the course and focusing on logistics and quality, while executing on our business model strategies.

That will enable us to continue to deliver positive long-term operating results from the organization and the people most important to us the company, our employees, our customers, and our shareholders. And with that I'll turn the call over to our CFO, Lee Beckelman..

Thanks Chuck. As Chuck highlighted, we were able to deliver a solid financial performance in the first quarter as we were quick to capitalize on the market turnaround. Starting with sales volume, we sold approximately 648,000 tons in the first quarter, a 6% increase over the fourth quarter 2018.

The increase in volumes is primarily due to increased spot sales as completions activity began to resume mid-quarter. Sales to Van Hook terminal remained strong with more than 160,000 tons transloaded through our terminal. This was lower than our fourth quarter shipments to Van Hook, primarily due to weather-related issues during the quarter.

We expect volumes at Van Hook to get back to fourth quarter levels of approximately 200,000 tons or more going forward. With regards to revenue, total revenues were $51.8 million in the first quarter, relatively flat when compared our sales in the fourth quarter of 2018 of $52.2 million.

Sand sales revenue was $25.6 million, a decrease from $29.4 million in the fourth quarter. The lower sand sales revenue was primarily attributable to fewer tons being sold through the Van Hook terminal quarter-over-quarter which also decreased the overall average selling price per ton.

In the first quarter, we recognized $5.8 million of shortfall revenue for payments from customers who did not take their minimum volumes in the quarter.

As we've mentioned before, our take-or-pay contracts with minimum 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.

Logistics revenue, which includes freight for certain mine gate sand sales, railcar usage and logistics services, was approximately $20.4 million, up slightly over the fourth quarter logistics revenues of $18.9 million.

The increase in logistics revenue is primarily a result of the wellsite storage equipment sold under contracts existing prior to our acquisition of Quickthree solutions. Otherwise, current quarter logistics revenue was flat when compared to the prior quarter.

Our cost of sales for the quarter was $40.6 million compared to $34.2 million for the previous quarter. The increase in cost of sales is primarily due to a higher volume of sand sold in the first quarter compared to the previous quarter. Historically, we have seasonally higher gap cost of sales in the first and fourth quarters.

Some of that fluctuation has been mitigated by the completion of our enclosed wet plant, which we can operate year-end. But we still had some excess production cost from the fourth quarter capitalized in inventory at year-end, and those costs were recognized as we delivered sand in the first quarter.

For the first quarter 2019, our contribution margin per ton was $26.35 compared to $37.34 last quarter. This decrease was due to lower contract sales volume through our Van Hook terminal partially offset by an increase in shortfall revenue.

When we sell sand in basin and closer to the wellsite, we capture more incremental margin and by selling sand at the mine gate. We intend to continue pursuing increased sales volumes through our Van Hook terminal. Gross profit was $11.2 million in the first quarter compared to $18 million in the fourth quarter of 2018.

The decrease was primarily due to the mix of sand sales at the mine gate versus our Van Hook terminal. In the first quarter, we had lower volumes sold through the Van Hook terminal and higher volumes sold at the mine gate, and that coupled with seasonally higher gap cost of sales led to a lower gross profit in the first quarter.

Our operating expenses in the quarter were $5.2 million, which is consistent with the prior quarter, excluding the $17.8 million non-cash goodwill and intangible asset impairment charge in the fourth quarter and the $1 million non-cash fair value adjustment in the current quarter.

Salaries, benefits, payroll taxes, depreciation and amortization and SG&A expenses were all relatively consistent quarter-over-quarter. For the quarter, we had an income tax expense of $1 million compared to a benefit of $2.1 million in the fourth quarter. We continue to expect our effective rate to be in the low 20% range.

We had net income of approximately $4 million and adjusted EBITDA of $12.4 million this quarter, which is -- which was in line with guidance given on our last earnings call.

The net income and adjusted EBITDA results reflect the positive steps the company took to increase sales and reduce cost during the quarter in spite of the overall slow start to completions activity in the quarter.

In the first quarter, we spent $8.5 million in capital expenditures, which was primarily for the manufacturing of our wellsite storage solutions, and maintenance and efficiency upgrades at our Oakdale facility.

We still anticipate total capital expenditures to be in the range of $30 million to $40 million for 2019, of which approximately $10 million to $15 million currently is allocated to maintenance and efficiency projects at Oakdale and Van Hook, and $20 million to $25 million for the build out of additional wellsite storage solutions and potential new terminal investments.

Approximately $10 million of the capital for 2019 is discretionary. Whether or not, we spent this capital will be driven by market activity and demand over the course of 2019, in particular for our wellsite storage solutions.

In terms of guidance, for the second quarter 2019, we currently expect sales volumes to be in the $700,000 to $800,000 range and adjusted EBITDA to be in the $13 million to $17 million range. In the first quarter, we generated $6.3 million in cash flow from operations.

As of March 31, 2019 we had approximately $2.4 million of cash on our balance sheet and $12.5 million in total undrawn availability under our credit facility. As of today May 7th, we pay down at an additional $6.5 million on our credit facility and our current availability is $19 million.

Consistent with our business operating model we can -- we expect to continue to generate positive cash flow from operations and plan to manage our capital spending to minimize borrowings under our credit facility.

With our current expected cash flows from operations, current availability under our credit facility and other available sources of borrowing, we believe we have sufficient liquidity to support all of our operating activities. This concludes our prepared comments and we will now open the call for questions..

Thank you, sir. [Operator Instructions] And our first question will come from line of Stephen Gengaro with Stifel. Your line is now open..

Thank you. Good morning, gentlemen..

Good morning..

Good morning..

Can you just -- if you don't mind, can you give us some color as we think about the second quarter and how it flushes out on the moving pieces on the -- on sort of the contribution margin per ton measure? I know the operating costs are higher in 1Q and there are some other factors at work.

But as far as how you guys are thinking about it and the visibility you currently have at least, what are the gives and takes on that as we go forward here?.

Yeah, Stephen we don't get direct guidance on contribution margin, but I think two factors playing into the second quarter as our contracted pricings will be a little lower in the quarter, because WTI dropped in the first quarter relative to the fourth quarter.

So we will have an adjustment in our contracted pricing that on our overall pricing is probably $2 to $3 per ton but that will be balanced out.

As we get into the second quarter, we do start ramping up our wet plant operations and that leads to us capitalizing less -- or capitalizing more expenses in the quarter as we build up our inventories over the second and third quarter. So that should lead to a little lower production cost.

So again I wouldn't -- we don't give specific guidance, but I think those two things would balance out in the quarter..

Okay, great. Thank you. And then as we think about the commentary you made and I think you said 95% of the tons were destined for non-Permian locations in the first quarter. I think that was the number you threw out.

Is that looking similar in the second quarter? But I know you gave some tonnage guidance but as far as where it's headed? Is that at any shifts?.

Well right now it seems to be pretty similar. I mean, the route is we are increasing spot sales. So spot sales have a tendency to move to different basins, depending on where the activity and the opportunities are. So I think it could shift a little bit but between the different license.

But overall we're seeing a pick up and activities, again very strong in the Bakken, Bakken very strong in the Marcellus. We've seen a good pick up and activity in the Rockies in the first quarter and expect that to continue. Then we've actually seen some pick up in both the SCOOP/STACK a little bit as well of the Eagle Ford..

And the another thing I would add is the start of this year was very slow right? So January we came out of the gate pretty slow this year. We're actually surprised by that..

Okay, great. Thank you, gentlemen..

Thank you..

Thank you. And our next question will come from the line of George O'Leary with TPH & Company. Your line is now open..

Good morning guys..

Good morning, John..

Good morning..

I thought that the commentary around some E&Ps kind of shifting their focus from drilling and completing more wells to really completing better wells was interesting. And I realized that the in-basin Permian sand, some of it is pretty good or okay quality, while still being lesser quality than Northern White.

But some of the other in-basin mines that have been built out or are being built out? My understanding is, those are kind of another tier lower. So as you've seen the pick up this year, as some of those other basins like the Eagle Ford or the MidCon where we're seeing some of this other sand -- this other in-basin sand increasingly, be built out.

Is that the lower hanging fruit where you guys can take share? And guys are kind of great thing about, various impacts to lower productivity from using these lower quality proppants? Or are you seeing that in the Permian as well?.

Yeah. So George, I think in general, we're seeing a little bit of pull back from the adoption of regional sand in the Eagle Ford in particular. We feel a little bit of it up in the MidCon. Permian sand is still accelerating. I would say as additional volumes coming on -- are coming on.

However, we're seeing a little bit of anecdotal evidence out there right now that certainly, the performance characteristics are not Northern White and kind of interestingly, one of the things that -- for one of the comments that heard out there is that, this change to Eagle sand looks just like the change from ceramics to Northern White back in the year 2012-2013 timeframe.

And I don't think that's accurate. I think that some of things that drove the change from Northern White or from ceramic to Northern White will effect that ceramics with so much more expensive than Northern White city. In some cases, a 6 times factor more expensive. And we're not talking about those differences in pricing now.

And the differences is in performance, can be relatively high for not a lot of cost saving. So I think that, E&Ps are now starting to take a real hard look at this, as they have to live within cash flow and leaving wells -- leaving EURs on the table at wells. I don't know that, that's going to be even attractive business proposition moving forward..

Great, that's helpful color. And then, can you just talk a little bit about the efficiency of your kind of last mile or on-site storage solution, in particular the trucks unload times.

And then just maybe how you limit, NPT versus silos are boxes on the wellsite? Maybe just outlined some of the specifics there?.

Yeah, sure, I mean the beauty of the Quickthree system that we deploy our silos system is that very limited moving parts in it. It's actually gravity feeds directly into the blender. The silos are setup in a semi-circle around the blender.

And what that allows for us, we don't have any downtime due to, bearing replacement, belt replacement, no T-belts required or any of that kind of stuff. So, from an uptime perspective on the silos, it's very high. We also are agnostic to the trucking technology to bring the sand there.

So, if you have nomadic trailers or gravity dump trailers, the system can support both of those. With regard to unloading times, the nomadics are what they are. The reason folks don't like nomadics is because it takes good amount of time to off load nomadics into the silo system. Gravity dump are definitely where we think the business is going.

The trailers are lighter they can have more throughput and they obviously unload faster. A typical gravity dump truck will unload in between, five and 10 minutes versus the nomadic which can take 30 to 45 minutes. So, we see the business moving towards gravity dump trailers, like I said they could be light.

You can get more throughput on them and you can get more turns per shifts on trucking, which is really what we've been thinking about in the supply chain here.

Right now the weak link is the last mile trucking and some of the things we're seeing in the market particularly in the Permian are these extremely long mileage turns combining with slow offloading at wells site and that's not sustainable. And we think that there's better ways to do that. You've got to get that last mile as short as possible..

Hey, guys, can sneak in one more if I can.

Just where do we sit from a leading-edge pricing perspective on 40/70 versus 100-mesh and maybe we can just take the mine gate pricing to make it easier? And then maybe remind us how low we got on each of those two mesh sizes in the fourth quarter of 2018?.

Yes. Sure. So we're seeing relatively robust demand on both products. 100 mesh is certainly still the product of choice up in the Marcellus and into the Bakken in some cases although 40/70 is very, very strong right now. The demand is high and I think that there's a few reasons that 40/70 demand is high is because the supply is relatively limited.

One of the things that's often talked about in Northern White is all the idle capacity out there or the thoughts that there's idle capacity up there.

And one of the things you’ve been -- George you've been on these calls enough with us to know that most of the mines that were built up in Wisconsin were really built on course substrate and have a really tough time creating the fine or making the fine mesh sands up there.

So what we're finding is that if you want a unit train of 40/70, there's not a lot of mines that can satisfy that request. We're one of them that can. So our 40/70 demand is very robust. From a pricing standpoint, mine gate pricing FOB is kind of in the 30s for both products, 100 mesh is a little bit less than 40/70.

As where that compares to in the height of the downturn late last year and into the beginning of the year, mine gate pricing was unsustainable $20 or below. So we've seen substantial recovery there..

Great. Thanks for the color..

You’re welcome..

Thank you. And our next question will come from the line of John Watson with Simmons Energy. Your line is now open..

Thank you. Good morning..

Good morning John..

Hey, John..

On the Quickthree last mile systems, I apologize if I missed this in the prepared remarks.

Two systems active as of today is that correct?.

Yes. We have two systems -- we have one system currently deployed and other one in the process of being deployed again..

Okay. Okay, great. That's helpful. Thank you. And then you mentioned 18% of sales were spot in the first quarter.

Could you help frame for us the difference in contribution margin per ton for spot sales versus your current contracted book?.

Well, we don't give guidance to split up our pricing between spot and contracted, John. I can say that the spot prices are probably in line with what John was talking about earlier in terms of overall pricing and pretty be fairly consistent right now between contract and spot in terms of contribution margin..

Okay..

It's also really dependent on whether it's an in-basin sale versus a FOB mine sell as well. Typically, we do capture and being able and create the value in managing the supply chain, we are able to capture a little incremental value Permian basin sell verses the FOB mines sell..

Sure. You -- on the last call we talked about exchanging -- getting longer contracts and giving up a little price on certain contracts.

And I'm wondering if those discussions have continued, if you've had further discussions on that front? And I'm really trying to think through the guidance for EBITDA -- or implied guidance for EBITDA per ton in the second quarter.

So any color there would be very helpful?.

Yes. So color on contract discussions is that we're continuing to be in a lot of discussions out there for both extension of existing contracts and new contracts. We're not quite at the place yet where we're comfortable signing up to long-term deals on those.

The spot pricing is definitely recovered to a place where contract discussions are more interesting to us, but we're still waiting for a little bit more before we sign out. Really when it comes down to is when our business is really focused on being long-term and sustainable.

We're willing -- and I think our commentary on the last call was that we're willing to give up some short-term margins for the idea of having a sustainable business over time. We don't need to squeeze every nickel out of every ton of sand provided that that sand has a -- has the sustainable and long-term vision for how we're going to deploy it.

So I think we're getting close to the point where we're interested in signing up long-term deals. Again I think you'll see some additional news from us on that shortly. But we're still kind of in those discussions..

Understood. Thanks guys. I'll turn it back..

Thank you. [Operator Instructions] Our next question will come from the line of Lucas Pipes with B. Riley FBR. Your line is now open..

Hey good morning everyone.

First one is to ask a little bit more kind of high level on the last mile logistics side and whether you have estimated for kind of the breakdown of market share by the various product offerings in the market kind of for 2019-2020? And then second to that, if you have maybe kind of a target share in mind as you continue to grow up this business? Thank you..

Well I think consistent what I think you've heard with Solaris and sand box et cetera, I think both of them claim to have about a 25% market share each. So they represent about 50% of the market.

And then the other 50%, I think that's split up fairly consistently to probably five or 10 players maybe with 5 up to 5% to 10% maybe market share each for those. And so that's kind of the breakout. I would think, we haven't given specific guidance, but we're basically starting from scratch.

So I think if we build up our units consistently overtime, we could try to over the next 12 to 24 months carve out kind of a 5% to 10% market share..

Got it. That's helpful. Thank you. And then switching back to Northern White and I know this has come up a few times in the call. But I think you alluded to their not being spare capacity in Northern White.

Could you elaborate on that? Do we need to see more production cuts in Northern White? And maybe conversely, are we going to see capacity come back here if prices continues to strengthen for some products? Thank you..

I think this capacity of production capacity and there's capacity of reserve base in the ground. And a lot of these Northern White mines that were started were started for 2040 products, so that -- they don't have the right substrate in the ground.

So I'll let John jump into a little more on the -- what do you see is out there in the market places for some of the existing mine..

Yes. I think that's really -- if you look at kind of Western Wisconsin up there where our mine is 81% -- every time we pull a ton of sand out of the ground, 81% of it is either 40/70 or 100-mesh. Some of the Western Wisconsin mines -- or a lot of the Western Wisconsin mines have the opposite substrate.

So they'll pull a ton sand out of the ground and 60%, 80% of it will be 20/40, 30/50. And so what that basically means is they have to work a lot harder to produce a ton of 40/70 than we do.

And I think that last year that was obfuscated a little bit with the masses are out there because a lot of these mines were able to run their fine mesh tailings pile which had been created over years of producing 20/40.

So they may have had several hundred thousand tons sitting on the ground of fine mesh tailing that they were able to run through and produce 40/70 and 100-mesh. So again, we don't have any numbers on that, but we do keep an eye on our competitors up in the market and it does seem like in some cases they struggle anecdotally.

We're hearing from customers that if you buy from some of our competitors, they really want you to be taking -- if you want to train a 40/70 or 100-mesh, they want you to be taking 30/50 and 20/40 also to kind of balance some of their production.

But with Smart Sand even if we didn't sell another ton of 20/40 or 30/50 for the deal in the future of Smart Sand, we'd still be in really good shape with our 81% fine mesh reserve. So we're feeling pretty good about that. We'll see how that plays out this year.

Certainly, the demand for those fine mesh products is relatively strong and seems to be increasing as we get into this year..

And I think you could look out there and see smoke in the air from some of our competitors who probably didn't have the right gradation in the ground or quality at some of their frac sand mines. I think we've witnessed a little bit of that fallout in the first quarter..

That's very helpful gentlemen best of luck. Thank you..

Thank you..

Thank you. And I'm showing no further questions at this time. So it is my pleasure to hand the conference back over to Mr. Chuck Young, Chief Executive Officer for any closing comments or remarks..

Thank you for joining Smart Sand's First Quarter 2019 Earnings Call. We believe this is going to be a great year for the company. We look forward to talking to you again in August when we will report results on the second quarter..

Ladies and gentlemen, thank you for your participation on today's conference. This will conclude our program and you may all disconnect. Everybody have a wonderful day..