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Edited Transcript of SND.OQ earnings conference call or presentation 16-Mar-17 2:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 Smart Sand Inc Earnings Call

Mar 20, 2017 (Thomson StreetEvents) -- Edited Transcript of Smart Sand Inc earnings conference call or presentation Thursday, March 16, 2017 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Phil Cerniglia

Smart Sand, Inc. - IR and Budgeting Manager

* Chuck Young

Smart Sand, Inc. - Founder and CEO

* Lee Beckelman

Smart Sand, Inc. - CFO

* John Young

Smart Sand, Inc. - EVP of Sales and Logistics

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Conference Call Participants

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* George O'Leary

Tudor, Pickering, Holt & Co. Securities, Inc. - Analyst

* Jim Wicklund

Credit Suisse AG - Analyst

* John Watson

Simmons & Company International - Analyst

* Martin Malloy

Johnson Rice & Company, L.L.C. - Analyst

* Bo McKenzie

Seaport Global Securities LLC - Analyst

* Waqar Syed

Goldman Sachs Group Inc. - Analyst

* Brian Finkelstein

KeyBanc Group - Analyst

* Adam France

1492 Capital Management, LLC - Analyst

* John Daniel

Simmons & Company International - Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Smart Sand Fourth Quarter and Full Year 2016 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to turn the call over to Phil Cerniglia, Investor Relations and Budgeting Manager. Sir, you may begin.

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Phil Cerniglia, Smart Sand, Inc. - IR and Budgeting Manager [2]

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Good morning, everyone, and thank you for joining us for Smart Sand's fourth quarter and full year 2016 earnings call. On the call today, we will have Chuck Young, Founder and Chief Executive Officer; Lee Beckelman, Chief Financial Officer; and John Young, 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, March 16, 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, and we believe investors may want to consider this impact to our performance as well. 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. (Operator Instructions)

I would now like to turn the call over to our CEO, Chuck Young.

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Chuck Young, Smart Sand, Inc. - Founder and CEO [3]

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Thanks, Phil. Good morning. 2016 was a challenging yet transformational year for Smart Sand. For the full year 2016, we sold approximately 826,000 tons of frac sand while generating positive EBITDA of $37.8 million, increases of 10% and 59%, respectively, over 2015 results. In a difficult operating environment for most of the year, we were able to deliver positive operating and financial results.

Lee will give you more details on the full year and fourth quarter in a few minutes, but we are proud of the results and we were not -- we were able to deliver in 2016. This could not have been done without the efforts and diligence of our highly capable and dedicated team of employees as well as the support of our contracted customers. We will continue to work smarter, and the momentum gains towards the end of 2016 and into 2017 is terrific news for Smart Sand and the industry alike.

I wanted to touch on a few key highlights. First, we successfully completed our initial public offering in early November of 2016, commencing the evolution of Smart Sand into a publicly traded company.

Our successful IPO allowed us the opportunity to pay off our former revolving credit facility, retire preferred stocks and provide us the flexibility and liquidity to expand into logistics opportunities. We've raised approximately $121 million in net proceeds during the IPO. The IPO most recent -- approximately -- our IPO most recently -- and most recently, approximately $24 million in net proceeds through a successful follow-on equity offering in February of 2017. Currently, we have $70 million in cash and $45 million on an undrawn facility to support future growth initiatives.

As we have previously announced, we're going to increase our capacity to 4.4 million tons by the end of 2017. We have also moved forward on the administrative process under our current permits to extend past 4.4 million tons at Oakdale in the future should market demand continue. While we believe we have ample opportunity for additional investment in our Oakdale operation, we will also continue to evaluate strategic acquisition opportunities for inlet basin logistics and last mile opportunities as well as potential regional mine opportunities. We have the liquidity and the balance sheet to make strategic acquisitions to complement our current operations at Oakdale.

Second, as the market activity began to improve towards the end of 2016, we began to experience resurgence of customers interested in long-term take-or-pay contracts. We announced a multiyear take-or-pay with Rice Energy in December of 2016 and most recently, a new multiyear take-or-pay with Liberty Oilfield Services. We continue to have very active dialogue with both E&P and oilfield service companies for term contracts ranging from one to five years. Our philosophy is that long-term take-or-pay contracts greatly help us weather the downturn and will be an integral part of our long-term success of our company going forward. All of our long-term contracts have built-in price escalators tied to WTI. Also, with each new contract we enter into, we look to increase our floor price in the contract to be in line with current spot prices.

Third, we've seen an increased interest in our finer mesh sand, 100 mesh and 40/70, with the increased use of high-proppant intensity slickwater frac designs. This development offers us a unique competitive advantage as our mine reserve is composed of approximately 81% finer mesh sand. We believe that some of the recent capacity expansion announcements made by our peers are related to the increased demand of finer mesh sand and not necessarily related to the full utilized existing capacity. We believe effective current capacity in the industry is much less than the industry's stated capacity due to many of the current idle mines being heavily weighted to coarser reserve mixes.

With the shift in demand to finer mesh sand, these mines are inefficient and of a higher production cost to produce the finer grades as a lot of the sand they produce now goes into the waste pile. Therefore, we believe supply and demand will continue to be tight for finer mesh sand in the market and that a lot of the new capacity additions are related to meeting this change in finer mesh sand. We believe these new announcements of finer mesh capacity additions only reinforce the competitive advantage of our mine site in Oakdale with its large, high-quality reserve base of finer mesh sand and its ability to ship sand on either the Canadian Pacific or Union Pacific railroads to ensure competitive rail rates into the operating basins. The signing of the Rice and Liberty contracts demonstrates that we have the sand that is in demand in the market, and good news is we have reserves in place in Oakdale to continue to supply this increasing market demand.

Our sales volume showed improvement each quarter in 2016, with fourth quarter volumes increasing to approximately 274,000 tons, a 19% increase over third quarter sales volume. The increased sales volume have continued into the first quarter of 2017, and we've seen improved sales volume in each of the months -- the first months of this quarter as our contracted customers have been increasing purchases.

Additionally, while we are pursuing incremental new term contracts with the improved pricing we've seen in the market, we began to participate more aggressively in the spot market and approximately 14% of our sales volume in January and February were from spot sales. Going forward, we plan to continue to participate in the spot sales market while looking to add new term contracts.

At our Oakdale site, we have over 330 million tons of proven reserve, and we believe over time, we can ultimately expand our production capacity at this location to approximately 9 million tons annually. In January of 2017, we announced that we will be expanding our Oakdale facility by 1.1 million tons to 4.4 million tons of annual capacity by adding one additional dry plant and one additional wet plant. We also announced that we will expand our rail infrastructure in Wisconsin to support our increasing customer demand. With the signing of the Liberty contract, we now have contracted capacity of approximately 63% of our current production capacity, with a weighted average term of 3.1 years. We will be utilizing some of the proceeds of the IPO and follow-on offering as well as cash flow from operations to pay for this expansion.

Finally, I'd like to discuss current pricing in the market. As discussed on our last earnings call, during the recent market downturn, we chose not to compete in the spot market. That's because we viewed the price drop to be at, frankly, irrational levels. We viewed the price of sand as being at or below most sand companies' production costs and as such, not sustainable. Instead, we focused our efforts on renegotiating our contracts to generate sufficient cash flows to support our business. We believe, this was the right strategy as evidenced by our strong EBITDA results for 2016. At this time, we have a positive view of pricing trends in the market. And as mentioned above, we have begun to actively participate in the spot market. Currently, we are also seeing improved pricing terms in new contracts we've signed and are negotiating.

And with that, I will now turn the call over to our CFO, Lee Beckelman, for a discussion of the company's fourth quarter results.

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Lee Beckelman, Smart Sand, Inc. - CFO [4]

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Thanks, Chuck. As Chuck highlighted, we had a strong 2016. I'm going to spend most of my comments discussing fourth quarter results and will also provide some additional comments on the full year.

Starting with sales volumes. Sales volumes were approximately 274,000 tons in the fourth quarter, a 19% increase over third quarter results. Most of the sales volume increase in the fourth quarter came from contracted customers taking increasing volumes under their contracts. As Chuck highlighted, spot pricing started to improve in the fourth quarter and we began to selectively participate in the spot market. For the first two months of 2017, 14% of our volumes were sold on a spot basis.

Also as Chuck discussed, market activity has picked up in 2017, both with our contracted customers and on a spot basis. For the first two months of 2017, we have sold approximately 331,000 tons with the vast majority being finer mesh sands. Sales trends have continued to be positive in March. And right now based on current market conditions, we expect these trends to continue into the second quarter 2017. In the fourth quarter 2016, approximately 65% of our sales volumes were shipped via unit train. So far in 2017, approximately 85% of our sales volumes have been shipped via unit train.

Moving on to revenues. Total revenues in the fourth quarter 2016 were $29.5 million, a 170% increase over the third quarter results. So what led to this increase? The increased sales volumes mentioned previously and approximately $18 million of shortfall revenues in the quarter from two customer shortfall payments that were recognized in the fourth quarter. Additionally, we had about $4.5 million of reservation charge revenues and transportation revenue of $1.9 million in the quarter, basically in line with the third quarter.

Average sales price per ton for the quarter was $35.09 per ton, a 14% decrease from last quarter. We include reservation charge revenues in our average sales tons price per ton calculation, so the reduction in our selling price is from this charge being spread over the increased sales tons in the quarter. The reservation charge is a monthly payment under certain contracts that we receive for a minimum number of tons whether the customer takes the minimum monthly tons or not. Therefore, when a customer doesn't take their minimum monthly tons, this reservation charge gets spread over a smaller number of tons and our average selling price per ton. As contracted customers start to take increasing volumes up to their minimum monthly volumes, our average sales price per ton will decrease as the monthly minimum payment is spread over a larger number of tons sold.

Our cost of sales for the quarter were $8.8 million, an increase from the third quarter results of approximately $2.8 million. This increase was primarily due to higher labor expense primarily related to higher bonus expenses for year-end bonuses in the quarter. We also had higher maintenance expense for year-end maintenance activities, as we typically do maintenance for our wet plant while its down in the fourth quarter and the first quarter. And we had increased freight expense, primarily from the increased sales activity in the quarter. Gross profit increased to $20.7 million in the quarter, approximately a $15.7 million increase over third quarter results, primarily due to higher sales activity and the shortfall payments in the quarter.

Moving on to operating expenses. For the fourth quarter, operating expenses were $5.4 million, an increase of approximately $2.9 million over third quarter expense. This increase was due to: higher wages and benefits, primarily due to bonuses paid in the quarter; and costs related to our IPO and now being a public company, including increased accounting, financial reporting and insurance expenses.

Total other expenses or income in the fourth quarter were approximately $7.6 million of other income, an approximate $10.2 million increase over the third quarter results. This increase was primarily due to $6.6 million of proceeds from the assignment of our settlement of a bankruptcy claim with one of our former customers and reduced preferred stock and other interest expense.

As Chuck highlighted earlier, with the proceeds of our IPO in November 2016, we fully redeemed our preferred stock and fully paid off and terminated our former revolving credit facility. So we will not have these interest charges going forward until such time as we may borrow under our new credit facility, other than minimal interest expense on some equipment leases and no payables currently outstanding.

In the quarter we had a $1.1 million loss on extinguishment of debt, which was due to the early termination of our former credit facility. For the fourth quarter, we had income tax expense of $9.4 million. Our statutory and effective tax rates for the year were 35% and 47.4%, respectively. With the redemption of our preferred stock, we expect our effective rate to be more in line with our statutory rate going forward, and we anticipate an effective tax rate to be in the 40% range. Net income for the quarter was $12.4 million, which was an improvement over a net loss of $95,000 in the third quarter. For the fourth quarter, we had adjusted EBITDA of $26.9 million compared to $4.5 million in the third quarter.

Moving on to capital expenditures. In the fourth quarter, we spent $400,000 in capital expenditures, primarily for enhancement and cost improvement initiatives. As Chuck discussed earlier, we are moving forward with adding a wet plant and a dry plant to increase our nameplate processing capacity to 4.4 million tons per year. We anticipate having this capacity in place and operational by the end of 2017. And additionally, we plan to add logistics assets in Wisconsin and are also evaluating investment options in the operating basins. Currently, we anticipate spending approximately $55 million in capital expenditures for the year for these growth initiatives.

In regards to liquidity, with the net proceeds from our IPO in November 2016 and our follow-on offering in February this year, we currently have approximately $7 million in cash available. Additionally, as discussed on our last call, we have a $45 million revolving credit facility with a three-year term that we closed in December 2016. This facility is fully available to be utilized and currently has no outstanding borrowings. So what does this mean for Smart Sand? It means we have an industry-leading balance sheet with essentially no debt outstanding and ample liquidity to support our operations, plan and growth initiatives and potential strategic acquisition opportunities.

Now I'll touch on a few highlights for the full year 2016. For 2016, we sold approximately 826,000 tons, a 10% increase over 2015 results. Revenue for the year was $59.2 million, a 24% increase over 2015, primarily due to higher reservation charges and shortfall payments. Net income for 2016 was $10.4 million compared to net income of $5 million in 2015. Adjusted EBITDA was $37.8 million compared to $23.9 million for 2015. For 2016, we spent $2.5 million in capital expenditures.

Finally, I think it's important to highlight that during the downturn in our industry over the last two years, Smart Sand is one of the few and maybe the only frac sand company to generate positive EBITDA and net income. So we have demonstrated our ability to perform well in difficult markets. And as Chuck highlighted earlier, we are now poised to take advantage of improving market trends and increasing activity in our market.

This concludes our prepared comments, and we will now open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from George O'Leary with TPH & Co. You may begin.

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George O'Leary, Tudor, Pickering, Holt & Co. Securities, Inc. - Analyst [2]

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Just curious on the frac sand price front, since we've had some mixed messaging from some other sand players out there, so hoping you guys can maybe help clear that up a little bit. So we've heard spot sand prices, depending on the grade, are anywhere from $35 to $45 a ton today. And I fully understand that, that doesn't mean Q1 pricing is at that level. That means E&Ps trying to lock up volumes into the future, i.e., Q2-plus are having to pay those levels as the market is tightening and folks are having to un-idle mines, et cetera. But just curious as to what your view is on "spot pricing" but really, kind of what guys are having to pay for volumes delivered Q2-plus? Are we in the right ballpark, or are we way overshooting it?

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Chuck Young, Smart Sand, Inc. - Founder and CEO [3]

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I'm going to let John touch on this. The only thing I would say, spot pricing, spot sand availability from us is very difficult, right? So if you're looking for spot sand, I think it's a pretty tough market to play in. And I'll let John comment on the pricing.

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John Young, Smart Sand, Inc. - EVP of Sales and Logistics [4]

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Yes, George, so I think your number was $35 to $40. We see spot pricing right now in the $30 to $40 range depending on the gradation, with the 40/70 being the most expensive product out there right now. And so I think that's consistent with what our peers have said about pricing, and we've seen some -- the pricing hasn't really gone backwards in its escalation. It seems to be moving forward. But right now we're in that kind of $30 to $40 range.

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George O'Leary, Tudor, Pickering, Holt & Co. Securities, Inc. - Analyst [5]

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Okay. That's very helpful color. And then you mentioned a little bit looking out and potentially considering M&A alongside the capacity additions and some of the origin logistics expansion that you guys are executing on. But you also mentioned regional sand acquisitions as something that's potentially on your radar. Just curious as to what you see out there. What looks interesting in your opinion? Is it a legacy player or some new reserves that are interesting to you?

And then in tandem with that question, and sorry for asking a two-parter, but your volumes were up nicely quarter-on-quarter in the fourth quarter. They're obviously trending up well in the first quarter, and it sounds like it's getting better in March versus Jan, Feb. Just curious if you're seeing -- if you have the perception that your fine sand may be capturing share from some of the lower-quality regional sand players in the market.

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Chuck Young, Smart Sand, Inc. - Founder and CEO [6]

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Listen, we definitely think people want to use the finer Northern White sand, the fine mesh Northern White sand. We think that the logistics is extremely important in it. We believe that a lot of the regional sands that we've looked at so far, the long-term sustainability of it is difficult. There are some challenges with water and various other things that you face trying to make sand in those deposits. And we also believe that the railroads understand that that's out there, and they're going to be super competitive. But that being said, we'll also look to have, as far as backup to what we have, some regional sand opportunities.

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Lee Beckelman, Smart Sand, Inc. - CFO [7]

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And George, I think it's important to highlight and focus on our Oakdale asset. Basically, we have over 330 million tons there, ability to expand capacity, it's a finer mesh sand. And so while we'll look at regional opportunities strategically, the reality is we have the right sand mix at our current asset with the right logistics. So we think we have good opportunity to continue to grow and expand Oakdale and complement that potentially with regional opportunities as they make sense to add.

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Chuck Young, Smart Sand, Inc. - Founder and CEO [8]

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And it's really a railroad story, right? So for us, we have two competing railroads that basically get into all the basins, either through partners or themselves directly. And they want to have that business. And we do think that the sand, the frac sand rail rates have come down substantially from where they were at before, but they're still not where coal and wheat is yet. So we believe that, that is a big, big part of the business that not a lot of people talk about. But they don't talk about it because they don't have two originating railroads.

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George O'Leary, Tudor, Pickering, Holt & Co. Securities, Inc. - Analyst [9]

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And then you guys aren't necessarily involved in this, but just always curious to get your color. As rail rates come down, have you guys seen -- even as you just help your customers get proppant delivered to the well site, even if they're the ones who are really taking ownership of that process, trucking rate inflation, any color on the trucking rate inflation?

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John Young, Smart Sand, Inc. - EVP of Sales and Logistics [10]

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Not -- we haven't seen a huge amount of trucking rate, although most of our customers handle that themselves and they haven't replied with any color back to us on those trucking rates.

One of the things that we would say about kind of that last mile and the in-basin so far is we haven't seen it as a bottleneck. We've seen that finer mesh sands and the gradation challenges out there are far more important than actual logistics bottlenecks out there. People are in need of 40/70, 100 mesh, and so that's kind of where we focus our efforts, on increasing our capacity as much as possible on that.

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Operator [11]

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Our next question comes from Jim Wicklund with Credit Suisse. You may begin.

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Jim Wicklund, Credit Suisse AG - Analyst [12]

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I was going to ask you to rank last mile, regional sand and basin logistics. But from the sound of it, you would rank regional sand in third place and last mile kind of in second to last place. So would one assume that basin logistics and transload-type situations would be at the top ranking of the three different things you ticked off at the beginning?

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Lee Beckelman, Smart Sand, Inc. - CFO [13]

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Well, Jim, I think the reality is I think we're looking at all strategic options, so what's going to be the best to help us drive our business long term. But in terms of ranking, I don't think we necessarily think of it as a ranking that way. It's basically looking at the strategic equivalent options and what's going to be the best one to drive the business as we move forward.

So I do think that you're right, the logistics opportunities that help drive incremental sales demand out of Oakdale is a driver. And then relative to last mile versus regional sand, I think that's really going to be driven by the economics of those opportunities and which ones we think positions us best for the long term.

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Jim Wicklund, Credit Suisse AG - Analyst [14]

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Okay. And you had also said that part of the capital was going to be used to improve the logistics at the mine, and that was going to be one of the first uses of money, not just expanding capacity, but improving logistics. Can you talk about what the improved logistics at Oakdale will consist of?

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Chuck Young, Smart Sand, Inc. - Founder and CEO [15]

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Yes, so Jim, with the fact that we're ramping up additional volumes out of Oakdale, there's a need to have additional track to support that kind of movement. So not only are we doing that with Canadian Pacific, but additionally, the Union Pacific yard, we're in the final stages and about to pull the trigger on the build on the Union Pacific unit train yard. We're in the final stages of our negotiations with them.

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Jim Wicklund, Credit Suisse AG - Analyst [16]

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Okay. And my last question if I could, and without giving anything away on a competitive basis on your competing rail and it's great that you get to play those guys against each other. But you noticed -- you note that sand prices -- excuse me, rail prices have come down considerably. Can you give us just a broad range of what it costs today to get a unit train per ton from Oakdale down to some close transload facility in the Permian?

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John Young, Smart Sand, Inc. - EVP of Sales and Logistics [17]

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Jim, John here. Yes, so effectively, the range is anywhere from between, call it, $40 to $50 a ton, depending on where you're going into those basins and whether there's a short line involved to complete the movement.

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Operator [18]

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Our next question comes from John Watson with Simmons & Company. You may begin.

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John Watson, Simmons & Company International - Analyst [19]

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Can you all provide any color on how March volumes are tracking month-to-date relative to January and February and maybe an outlook for Q2, if there's any clarity there?

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Lee Beckelman, Smart Sand, Inc. - CFO [20]

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Well, we're not going to give any specific guidance for Q2. What I can tell you is that our volumes have been improving. So December to January and then January to February, we've seen incremental improvement in volumes. And through March, we're seeing some incremental improvement as well. So we've been having positive trends on a month-to-month basis, but we're not going to give any -- and we expect that to currently to continue within our current capacity. We expect that to continue into the second quarter.

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Chuck Young, Smart Sand, Inc. - Founder and CEO [21]

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We're working really hard these days in making sand.

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John Watson, Simmons & Company International - Analyst [22]

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Right. And the January and February volumes reflect that, so congrats on solid volumes. On the contract front, you mentioned escalators on price for some of your contracts. Can you compare and contrast maybe how the Liberty and Rice contracts compare to your legacy ones and maybe how those escalators relate to WTI?

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Lee Beckelman, Smart Sand, Inc. - CFO [23]

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Well, we don't give any specific comment on specific contracts. But what I can say is that all of our contracts today have a WTI floor that typically starts in the $50 to $55 range and then it moves up. So once you get above $50 or $55, you then have another cut, normally around $60 to $65 per barrel and then maybe another cut at $70 to $75 per barrel. And those incremental moves as price moves up is around -- normally around $5 per ton for each jump, give or take.

And then secondly, I will say that as we move into new contracts, we are seeing improvements on the floor, probably in the range of maybe from where we were in contracts in 2016 to now, $5 to $10 per ton increment higher in our floor price.

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John Watson, Simmons & Company International - Analyst [24]

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Okay. Okay. That's helpful. And then lastly, for Q1 on the price front, and I appreciate the reservation charge is spread over more tons is going to have an effect, but do you think we might see average price move up as price offsets maybe that effect of reservation charges?

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Lee Beckelman, Smart Sand, Inc. - CFO [25]

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Not necessarily, because I think our -- what we're seeing is our -- in 2016, none of our contracted customers took their volumes under the minimum contract. So we're just now catching up and really going to start seeing them at or near their minimum volumes in the first quarter. So I still think you'll see the average selling price maybe come down a little bit or be more in line with the fourth quarter. And then as you get into the second quarter and beyond, as we start running under fully contracted volumes with our current contracts that, that price might start to stabilize and move up, on an average selling price per ton basis.

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Operator [26]

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Our next question comes from Martin Malloy with Johnson Rice. You may begin.

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Martin Malloy, Johnson Rice & Company, L.L.C. - Analyst [27]

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I was wondering if maybe you could talk about what you're seeing on the RFP front currently and maybe a little bit more about the timing of -- the potential timing of further expansion at Oakdale. Once you pull the trigger on a further expansion, how long would that take?

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John Young, Smart Sand, Inc. - EVP of Sales and Logistics [28]

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Yes, so John here. So I'll kind of address that. So we're still seeing healthy, strong demand, particularly in the finer mesh sands on an RFP basis. And we continue to seek long-term contracts for -- just similar to what we said in our last quarterly update, our goal is to be about 75% contracted, 25% spot on our available capacity. And as we get north of kind of 50% to 60% contracted, we look to start to add incremental volume. And once we've got visibility at 50% of that, we will. And that's where you saw the announcement from 3.3 million tons to 4.4 million tons. And so as we get visibility up to that 50% to 60% on the total 4.4 million tons on our contracted capacity, we'll look to add that fifth dryer.

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Martin Malloy, Johnson Rice & Company, L.L.C. - Analyst [29]

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And once you pull the trigger and announce that expansion, how long would that take to get all that in place to expand the capacity?

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Lee Beckelman, Smart Sand, Inc. - CFO [30]

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Typically, when we look to expand capacity, once we're ready to break ground, it takes us six to nine months. So if we were to look to talk about adding a fifth dryer, once we actually break ground on that, it would be typically six to nine months to put that in place.

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Chuck Young, Smart Sand, Inc. - Founder and CEO [31]

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So what we're doing right now in our air permit, we have the fourth dryer, the air permit's being modeled out for that. But additionally, we've modeled out an additional next dryer at the same time.

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Lee Beckelman, Smart Sand, Inc. - CFO [32]

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And adding a fifth dryer will be a little, in terms of capital expense and timing, will be a little less because we don't have to add a wet plant with this dryer. So we've added our second wet plant -- or adding our second wet plant this year. To go to 4.4 million tons to 5.5 million tons, we'll be able to not have to add an incremental wet plant, so only be adding the 1 additional dryer.

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Martin Malloy, Johnson Rice & Company, L.L.C. - Analyst [33]

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Okay. And then you commented on the industry capacity being pretty tight for 40/70 and 100 mesh. Would you care to comment maybe about what you see out there as industry capacity and how much could come back within, say, 12 months or come online in that 40/70 or 100 mesh area?

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Chuck Young, Smart Sand, Inc. - Founder and CEO [34]

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Yes, so on that, we view that -- in 2014, the industry, everybody wanted 20/40, right? 2013, all the build -- all the new capital went into building really, really coarse lines. So with that, when you're sitting on a reserve base that has 70%, 75% coarse sand, for you to make 40/70 or 100 mesh is really, really difficult. So we just talked about wet plants. To really effectively, you'd have to double or triple up your wet plant capacity to make that amount of sand you could make in 2014 or 2013.

So do we have detail on each mine? No. But we know in certain parts of Wisconsin, it's extremely coarse and there's a lot of guys that were really, really good in 2014 at making sand. And just because of the nature of how fast it shifted over to the fine, it makes it really, really difficult now. I don't know, John, if you actually have any numbers.

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John Young, Smart Sand, Inc. - EVP of Sales and Logistics [35]

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Yes, I don't -- I think we're in agreement with the amount of dry capacity that's been indicated by some of the analysts, like Tudor and et cetera. I think the issue on that, though, is if you have 1 million tons of drying capacity, but you're really only 25% to 30% of the product that people want, you really only have kind of 250,000 to 300,000 tons of effective capacity. I think that's kind of the story from a gradation perspective that's still -- I think the industry is fleshing that out as we speak.

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Chuck Young, Smart Sand, Inc. - Founder and CEO [36]

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Now you can add wet plants to that mix and process a lot of -- on the wet side, process a lot of sand and make a pile of 100 mesh or 40/70. But to do that, a lot of these guys set up their reserve base on 40 million tons of reserve, and you're going to go right through that in a very, very short period of time. So it's not worth putting the additional investment in.

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Operator [37]

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Our next question comes from Bo McKenzie with Seaport Global. You may begin.

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Bo McKenzie, Seaport Global Securities LLC - Analyst [38]

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I know you don't want to talk about pricing per se. But trying to read between the lines, if you're seeing spots $30 to $40 and you're saying that as you're coming through new term contracts, you are putting in higher floors, can we infer that as you sign up contracts, much like this recent one that you signed, that you're at the top end or maybe above the spot range on the initial term, with the higher floor?

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John Young, Smart Sand, Inc. - EVP of Sales and Logistics [39]

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So Bo, it's John here. Yes, so Bo, what I would say to that, and again, we're not going to get into specific price points on contract, but what we had said in our last call was that in the downturn, the spot pricing was irrational. We weren't interested in contracting customers at that point. But there was a point where we would start to contract customers and we had indicated that, that was kind of in the mid-20s. And so we started contracting once spot got into the mid-20s, and contracts after that initial contract have continued to increase price point. And we would expect that as our capacity continues to be used up, we'll continue to seek a higher floor price. Within reason.

Again, I don't think we're going to get -- we're not signing contracts above current spot price today, but we're certainly not signing below them, either.

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Lee Beckelman, Smart Sand, Inc. - CFO [40]

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And I think it's fair to say, Bo, that we're in that -- I mean, our current discussions around contracts, our floors are in that range, but we're not going to give specifics about where they are.

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Chuck Young, Smart Sand, Inc. - Founder and CEO [41]

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And if we have multiple discussions going on right now about capacity, our dry capacity is getting up towards a limit, so people are going to have to wait for the next dryers to come online. So that is definitely something that is impacting price, too.

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Bo McKenzie, Seaport Global Securities LLC - Analyst [42]

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And on the spot side, correct me if I'm wrong, but it seems like I remember back in 2010, 2011 to 2014, that while term may have been $65, $70 FOB mine, spot prices looked way beyond that as the market got really tight at that point in time. Do you remember how high they got?

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John Young, Smart Sand, Inc. - EVP of Sales and Logistics [43]

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So Bo, it's John here. So back in the peak kind of 2013, 2014, we saw FOB pricing between $50 and $70. There was some anecdotal stuff of pricing approaching $100 FOB mine and substantially beyond that, FOB wellhead, although I don't know if there's any really good published data. We certainly never sold at $100 FOB mine, I would have -- I'd be happy to report that. But we generally saw in the last upturn a $50 to $70 price point. The difference this time around is back then it was on the coarser products, the 20/40 and 30/50, and right now, the finer products seem to be commanding the price -- the higher prices now.

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Lee Beckelman, Smart Sand, Inc. - CFO [44]

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And you also got to remember, on spot prices, there isn't a real exchange or transparent market. A lot of these prices, it may be at the higher end because of the specific need or a specific time that they had to get that volume in. So when you hear these higher numbers, it may be around specific activity versus the overall trend for someone who's just lining up and getting spot when they can get it, having lower prices than that.

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Bo McKenzie, Seaport Global Securities LLC - Analyst [45]

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In all fairness, that probably correlates real well with the rest of oil cost in terms of frac equipment, rigs and stuff when you're desperate.

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Chuck Young, Smart Sand, Inc. - Founder and CEO [46]

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There you go.

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Operator [47]

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Our next question comes from Waqar Syed with Goldman Sachs. You may begin.

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Waqar Syed, Goldman Sachs Group Inc. - Analyst [48]

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Just one question on the volumes, the regional markets where the sand is moving. Could you give a breakdown of what percentage of your sales are moving to Texas versus Appalachia versus North Dakota and the Rockies in general?

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Lee Beckelman, Smart Sand, Inc. - CFO [49]

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Well, generally, they have, Waqar, about 40%, 45% of our volumes are going to the Marcellus region. About a similar amount is going in the Permian and then the remainder, around 10%, is going to a variety of locations, a little to the Eagle Ford, some into Colorado and into other markets.

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Waqar Syed, Goldman Sachs Group Inc. - Analyst [50]

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Okay. Do you see that shifting at all going forward? Or do you see that this stays within that kind of range?

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John Young, Smart Sand, Inc. - EVP of Sales and Logistics [51]

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Well, Waqar, I think that we certainly like the diversity of getting into gassy plays and oily plays. But ultimately, I think we're in line with thinking that the Permian's going to continue to be a significant driver of volumes. We think the Marcellus, the wells are getting bigger in the Marcellus.

I think what will be interesting is how the other markets start to recover. We've certainly seen some recovery into the Mid-Con, and we've seen some recent interest in recovery into the Bakken. So I think that -- I don't know that the -- I don't necessarily know that the volumes into the Permian and Marcellus are going to change between the two, but we may see additions of additional areas where we send sand.

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Chuck Young, Smart Sand, Inc. - Founder and CEO [52]

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And part of that kind of is going to dictate our logistics strategy of where we invest -- either buy or invest in the future. I think that's a really important part, where we can make the biggest bang for the buck.

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Waqar Syed, Goldman Sachs Group Inc. - Analyst [53]

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Sure. Now one of your competitors recently mentioned that the total sand capacity may be closer to 120 million tons. Do you have a view on what is the cost at which some of those mines could be reactivated or what FOB pricing is needed for reactivation once we go above like 70 million, 75 million tons of supply?

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Lee Beckelman, Smart Sand, Inc. - CFO [54]

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Well, Waqar, I don't think we have a specific number that we can give you. But I mean, back to the -- of that 100 million, 120 million tons of potential capacity, a good majority of that, that's offline today, we do think it's majority coarse sand. And so to bring that online and to be competitive, to be available and to make a profit in the market, they're going to have to have a higher price to really bring that production on. Because they're going to be much more efficient than mines like ours that are 80% mine.

So I think that clearing price, I'm not going to give a specific number, but I think it's well beyond -- it's getting -- it's going to have to be kind of in the high 30s, low 40s before those really make economic sense to bring on consistently.

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Chuck Young, Smart Sand, Inc. - Founder and CEO [55]

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And another thing I would say to that, the sustainability of those coarse mines is definitely in question. So I think there's going to be some people who will have to bail on those and try to find new reserves and try to get up and running somewhere else.

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Operator [56]

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Our next question is come from [Brian Finkelstein] with KeyBanc Group. You may begin.

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Brian Finkelstein, KeyBanc Group - Analyst [57]

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Just had a couple questions. Do you know if there's any contractual shortfall payments in the future?

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Lee Beckelman, Smart Sand, Inc. - CFO [58]

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Well, we don't have a shortfall payment until they actually don't take the sand. So our contracts either have monthly minimum charges, reservation charges that they pay on a monthly basis. All of our contracts today have a quarterly true-up where they would come in and have a quarterly true-up. So if they didn't take their volumes, their minimum volumes of the quarter, then we would calculate a true-up, and it would be paid at that time.

So we basically don't try to predict those. We track and keep track of it and then ultimately, on the quarterly true-up payments will get settled on a quarterly basis.

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Chuck Young, Smart Sand, Inc. - Founder and CEO [59]

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That being said, we don't have a lot of customers that are contracted with us right now that aren't taking their sand, right? So we definitely see huge utilization out there. If they can't use it, somebody else can.

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Lee Beckelman, Smart Sand, Inc. - CFO [60]

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No, that's fair. And then just a follow-up. You guys are ramping up production quite a bit. How should we think about production cost since they appear they spiked some this quarter? But what would be more of a normalized, do you think?

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Lee Beckelman, Smart Sand, Inc. - CFO [61]

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Well, for the full year 2016, our production cost per ton were $15.40 per ton. I would think as we begin to ramp up, that we would hopefully see that number kind of be at that level or below as we go through 2017, as we get some efficiencies for running at higher utilizations.

The fourth quarter was high primarily due because of bonus payments that were made in the quarter as well as we did have an increase in maintenance expense because we spent, as I said, a lot of times, in the fourth quarter and the first quarter you'll have higher maintenance, particularly around our wet plants. So we'll probably see that slow a little bit into the first quarter. And as we get into the second and third quarter, if our utilization levels are at or above where we are today, I would expect to start seeing that to come down.

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Chuck Young, Smart Sand, Inc. - Founder and CEO [62]

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And by adding the additional track, we can keep the dryers running nonstop. And then additionally, we're really looking into the dredge and figuring out how that will work inside our deposit right now.

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Lee Beckelman, Smart Sand, Inc. - CFO [63]

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Okay. No, that's perfect. Just my last one. You guys provide a handful of items in revenue. But if you break out -- if you included the reservation revenues and then you can back into sand sales revenue, it appears it went from like 40 to low 30s. At what point does that bottom out? Should it be bottoming out soon?

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Lee Beckelman, Smart Sand, Inc. - CFO [64]

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Well, again, I don't think you can necessarily break the two apart. I mean, the reservation revenue and sand revenue are really part of the contractual payments and go. And so they pay -- the reservation charge is basically a subpart of what they pay on a price per ton. So I don't think it's really fair to break the two of them out. But I would say with our volumes increasing, our overall sales revenue and reservation charge revenue will be increasing accordingly.

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Lee Beckelman, Smart Sand, Inc. - CFO [65]

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Okay. And I understand, I didn't break it out, but if we broke it out, it'd be $17 and $16 per ton on each. And I'm just trying to match how the current market is $30 to like $40 and on a clean basis, it was like $17. I'm just trying to (multiple speakers) --

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Lee Beckelman, Smart Sand, Inc. - CFO [66]

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Well, again, you can't break them out because that sand revenue isn't the total price that someone pays for their sand for that -- under that contract. So I mean, just as an example, for example purposes, if I have a customer and they have a reservation charge and let's say it's $20 per ton for 50,000 tons per month, their sales price would be, let's just say, $30 per ton. So the way we calculate our revenue, the sale price of that $10 would go into sales revenue and the $20 goes into reservation charge. So their total sales price per ton is $30.

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Operator [67]

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Our next question comes from Adam France with 1492 Capital. You may begin.

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Adam France, 1492 Capital Management, LLC - Analyst [68]

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Guys, could you speak to the difference in price per ton as you move up the mesh spectrum? And second part of the question will be, when you think about the Bakken and the sand requirements there, are there any regional sand deposits in North Dakota? Or is that almost always coming out of Wisconsin?

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John Young, Smart Sand, Inc. - EVP of Sales and Logistics [69]

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Yes, so Adam, John here. So as I mentioned before, kind of we're seeing pricing in kind of that $30 to $40 range with the finer mesh sand and the 40/70 in particular being at the high end of that spectrum, which is, again, a pretty marked change from what we saw in 2014, where 20/40 would've been commanding the higher prices. 20/40 is one of the products that -- will be at the very -- at the low end of that spectrum now.

With regard to Bakken -- regional sand opportunities for the Bakken, not that I've seen out there. I mean, generally, the good thing about the Bakken is it's relatively close to Wisconsin. For us in particular, we have a single line haul on the Canadian Pacific into the Bakken, so we have a relatively competitive rail situation in there.

And what's interesting about the Bakken, though, is I think they were kind of the last holdout on the coarser mesh sand, but they've now moved to this high-intensity fine mesh sand fracs across the board. So that could be a good -- as I mentioned before, I think that could be a good area of growth for us.

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Operator [70]

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(Operator Instructions) Our next question comes from John Daniel with Simmons. You may begin.

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John Daniel, Simmons & Company International - Analyst [71]

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Just a question, I know you said that volumes were improving in March, but is there any risk that the current weather that we had this week is going to disrupt operations at all?

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Lee Beckelman, Smart Sand, Inc. - CFO [72]

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John, you're breaking up a little, apologize, can you -- are you asking if weather has any impact on our operations in the first quarter?

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John Daniel, Simmons & Company International - Analyst [73]

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(Technical difficulty) the bad weather that came through, and you ship a lot to the Marcellus, if I'm not mistaken.

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John Young, Smart Sand, Inc. - EVP of Sales and Logistics [74]

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Yes, so John, I think your question is -- and again, you're breaking up a little, but I think your question relates to has weather impacted our operations through the winter.

In general, no. We occasionally get a relatively big snowstorm in Wisconsin that may impact our operations for several hours. But from the standpoint of coming into the winter, we had plenty of washed sand in inventory to see us through that winter, where you don't operate the wet plants. And with the movement to about 85% of our volumes moving on unit train today, which is a pretty marked shift, particularly from 2014, those trains tend to move origin to destination without really running into any trouble with switching yards and frozen switches. So kind of -- we think we've, excuse the pun, but we've weathered the winter pretty well out there.

And again, we've operated in the winter since -- in Wisconsin since we started, so we're pretty good at it now.

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John Daniel, Simmons & Company International - Analyst [75]

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Okay. Am I coming in clearer now?

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John Young, Smart Sand, Inc. - EVP of Sales and Logistics [76]

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Not really. (Multiple speakers) we can't understand what you're saying.

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John Daniel, Simmons & Company International - Analyst [77]

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I'll call you offline.

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Operator [78]

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Our next question comes from Jim Wicklund with Credit Suisse. You may begin.

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Jim Wicklund, Credit Suisse AG - Analyst [79]

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And I'm not sure if this is going to be asked correctly, but if you sold all your -- if all your customers took their minimum volumes in the quarter that are contracted, what would that volume of sand be?

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Lee Beckelman, Smart Sand, Inc. - CFO [80]

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Well, currently, we're at 63% contracted. So if we were -- if everybody was -- all contracts started at the same time and in the quarter and they all took their minimum volumes, we'd be -- and we were able to ship it on a unit train basis and get them all shipped in that quarter, through logistics, we would be at 63% of 2.2 divided by 4.

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Chuck Young, Smart Sand, Inc. - Founder and CEO [81]

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That's 3.3, Lee.

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Lee Beckelman, Smart Sand, Inc. - CFO [82]

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3.3, sorry. 63% of 3.3 divided by 4.

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John Young, Smart Sand, Inc. - EVP of Sales and Logistics [83]

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Yes, so Jim, I think the number is 173,000 tons, yes, roughly a month.

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Operator [84]

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Our next question comes from Bo McKenzie with Seaport Global. You may begin.

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Bo McKenzie, Seaport Global Securities LLC - Analyst [85]

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Just kind of more of a hypothetical question. It seems to me that as you guys build out your logistics capabilities, and it appears some of your competitors out there, that the ability to sell to the end customer as opposed to the frac companies, selling to E&P and selling in market, might ultimately net you a better net back to mine. Is there -- how much of the mix is directly to the E&P? And are there opportunities to garner some portion of the profits that are being picked up along the way between the mine and the well?

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John Young, Smart Sand, Inc. - EVP of Sales and Logistics [86]

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So Bo, it's John here. So what I would say to that is, I mean, one of the things that we've said before is we think that this business fits very well with an E&P's movement towards the higher intensity volumes. We've gone to kind of a tactical acquisition of sand relatively easy under the smaller volume fracs to what's really one of more strategic concern to the E&Ps, where you've got wells that are 10,000 to 20,000 tons per well and represents a bit more of a risk.

So we do think E&P is a good fit. We also believe, though, that the service company is going to fence for those E&Ps that just aren't willing to take on that risk. And where E&Ps are willing to pay more money, we're certainly not going to turn them away. But we think ultimately, the E&P is looking at this business from a strategic standpoint given the shift in volumes for each well versus what we were dealing with back in 2013 and 2014.

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Bo McKenzie, Seaport Global Securities LLC - Analyst [87]

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So does that mean the opportunity is out there for a much greater percentage of selling directly to the E&Ps as opposed to the service contractors?

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John Young, Smart Sand, Inc. - EVP of Sales and Logistics [88]

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Well, I think, yes, I think that's one way to take it. I mean, certainly, we're going to continue to sell to both, and both have their -- the service companies certainly have their value to the business here. But E&Ps are definitely getting more involved in the conversation now as they recognize -- again, in a 50-well program in 2013, you could be looking at about 100,000 tons per year for an E&P. That same 50-well program now could be using as much as 1 million tons a year if it's a 20,000-ton well. And moving 100,000 tons of sand versus moving 1 million tons of sand is a pretty marked difference from a -- for a risk profile for an E&P. It's easy to cobble together 20 railcars of sand on a 2,000-ton well. It's a different story cobbling together 200 railcars for an individual well.

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Bo McKenzie, Seaport Global Securities LLC - Analyst [89]

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And I guess the corollary, and this may sound like a third question, but it's actually part of the same one, what are the opportunities for you guys with improved logistics to capture some of that supply chain movement profitability that the guys that are selling just FOB mine to the frac companies aren't getting?

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Lee Beckelman, Smart Sand, Inc. - CFO [90]

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Well, Bo, I think that is a potential opportunity. That's something we're evaluating. It really depends on the rail movement plus the term we have, the volumes we're moving, et cetera. There's a lot of pieces that go into that.

But yes, that's one of the reasons we will look over time, if we're going to be investing in infrastructure in the basins, that's going to be because we see the ability to help us sell more sand out of our assets but also capture some of that margin over the long term by being able to be able to manage that supply chain more efficiently and be able to provide that service to our customers long term.

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Operator [91]

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

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Chuck Young, Smart Sand, Inc. - Founder and CEO [92]

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Thank you, again, to everyone that joined our earnings call today. As discussed during our prepared remarks, it was a difficult yet strong year with positive financial results and signs of industry improvement. We look forward to the momentum of the oilfield services industry in 2017 and beyond.

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Operator [93]

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Ladies and gentlemen, this concludes today's conference. Thanks for your participation. Have a wonderful day.