Smart Sand Inc (SND) 2018 Q2 法說會逐字稿

Good day, and welcome to the Smart Sand Second Quarter 2018 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded. I would now like to turn the conference over to Phil Cerniglia, Investor Relations Manager. Sir, you may begin.

Good morning, and thank you for joining us for Smart Sand's Second Quarter 2018 Earnings Call. On the call today, we will 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, August 9, 2018.

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 a full 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, Phil.

I am pleased to report that Smart Sand has posted another strong quarter of financial performance for our investors. Just as important, we continue to make substantial progress in executing our long-term vision, that is, to become an integrated, full-service provider of frac sand and logistics support, to deliver mine to well site proppant solutions for our customers.

Here are some highlights of the quarter.

We generated our highest quarterly sales volume ever, 839,000 tons. We reported $19.3 million of adjusted EBITDA, that's a 229% increase over first quarter results. We completed our capacity expansion, increasing our annual nameplate capacity to 5.5 million tons. Our Van Hook terminal became operational in April. And through the acquisition of Quickthree Solutions, we expanded our logistics capabilities into the last mile segment.

With the capacity expansion at Oakdale now complete, we're actively pursuing new contracts. And we're continuing to expand our spot sale market opportunities. We've continued to see an appetite for these long-term contracts from both new and existing customers. And as of June 30, 58% of our annual nameplate capacity is contracted under long-term take-or-pay contracts. These are contracts that have a weighted average life of just over 2 years. We are currently in active discussions with multiple customers for new contracts to service operations in the Permian, the Marcellus and the Bakken basins.

As we proved during the most recent downturn, our contracts are fully enforceable, and they provide us with positive downside protection, specifically around pricing exposure. Further, as we increase our focus on logistics, we'll have the opportunity to increase our pricing and margins as we deliver more sand into the basins.

Our first priority is to maximize the utilization of our Oakdale facility. As we've said on previous calls, our goal is to be at least 75% contracted at our Oakdale mine. We believe we have good current opportunities to reach this goal over the next few quarters. We're going to continue to focus on making this facility a low-cost producer that can compete in any market environment. We'll also keep making incremental investments in logistics assets to turn our growing mine to wellhead logistics capabilities into increased sales volume from Oakdale.

Now I want to highlight a couple of trends we are seeing in the current marketplace, trends that we are well-positioned to take advantage of.

First, there is renewed focus by some E&Ps on the quality of sand, and we're seeing this quality focus away from players in the Permian Basin. For example, we've recently had customers request conductivity testing for our 100 mesh sand. That's something we've never been asked for before. These requests are coming from Permian producers who are not satisfied with their current well results using regional sand. As a result of this renewed interest in sand quality, we're having active contract discussions with several Permian producers. This gives us increased confidence that there will continue to be demand for premium Northern white sand in the Permian, even if the new regional supply ramps up to expected levels over the next 12 to 24 months.

Second, customers are continuing to seek sand providers that can provide solutions to deliver sand both cost-effectively and efficiently into the operating basins. With that in mind, we took substantial steps during the quarter toward our long-term goal of becoming a fully integrated mine to well site proppant solutions provider. Here are 2 examples. Our Van Hook terminal, which serves the Bakken formation, became operational in April. This facility is unit train capable. We've already begun servicing customers through this location. In June, we completed the acquisition of Quickthree Solutions, a highly regarded manufacturer of portable vertical frac sand storage solutions at the wellsite. We're very excited about expanding the portfolio of sand products and logistics services that we offer to our customers.

Now let's talk more about Quickthree.

This acquisition is important to Smart Sand because we can now provide fully integrated frac sand service from mine to wellsite. We now have the technology, production capacity and management team to compete in the last mile market. We see many opportunities for us to develop this line of business. Quickthree has developed, patented and deployed sand storage system at the wellsite. This technology is both unique and innovative, as it addresses the shortcomings of other wellsite storage solutions now in the market.

Here are some of the advantages we see in the Quickthree product offering versus existing wellsite solutions.

First is the ability to load sand into silos from a valley dump trailer by using our quick load portable bucket elevator. It dramatically reduces the time and costs to unload trailers at the wellsite. We believe that our proprietary quick load system can unload a trailer at the wellsite 5x faster than its unloading automatically. Our technology is also capable of loading each silo individually by nomadic trailer, if that is the preferred or available trucking solution for a particular well location. We have proprietary and unique trailer for our silos and quick loads. With it, we can deliver the equipment to the wellsite and then detach. As a result, operators will only need 1 or 2 trailers to support a fleet in the field. This lowers the costs of each fleet, and it also reduces the space required for our fleet at the wellsite.

Our storage silos contain multiple ports. This allows each silo to store a variety of mesh sizes of frac sand. And a final point, our storage silos have compact footprints compared to the rest of the proppant storage industry.

We are changing Quickthree's business model. We're going from a build to suit and sell model to manufacturing systems for our own fleet to provide a service for our customers to the wellsite. This transition will take some time. We are just now ramping up the production of storage systems for our fleet. Currently, we budgeted $7 million to $10 million in capital for fleet development for the remainder of 2018. We expect to have our first fleet available for lease in the market in the third quarter, and we anticipate having 5 to 7 fleets completed by year-end.

We're excited about this technology. We believe the Quickthree product line will compete very effectively in the market. We're currently in active dialogue with several potential customers for our last mile solution.

I'd now like to spend some time discussing future growth initiatives. Part of our plan is to have more direct exposure and sales opportunities in the operating basins, as is demonstrated by our 2 recent acquisitions. So we continue to pursue investments primarily in 2 growth areas: transload facilities in the operating basins and developing mine locations outside of Oakdale.

Why should we invest in transloads in the operating basins? There are 3 major long-term benefits. First, it's a chance to attract new contracted customers. Our long terminals will be able to market directly to companies looking to source their sand needs locally. Second, we'll have more opportunity for spot sales. We can forward deployed sand, so we can meet unanticipated customer needs fast. And third, we can capture incremental margin on the sale of our sand farther down the supply chain. With our own in basin terminal capacity, we can directly manage the costs of rail and terminal operations, and we can sell our sand at an in-basin price.

We're currently looking at acquiring or developing transload opportunities in both the Marcellus and the Permian basins. We'll probably add at least one more terminal location this year.

In regard to developing mine sites directly in the basins, we've previously disclosed that we have 2 locations under lease in the Permian. For one of these locations, we've started the permitting and initial design process to make this site shovel ready. We continue to monitor the market's appetite for new regional sand in the Permian. We can move quickly to develop this location if and when we see sufficient initial contract support to warrant the investment in a new mine location.

In addition, we have our location in Hixton that has direct access to the Canadian National rail line that delivers directly into the major Canadian operating basins. We continue to evaluate opportunities in Canada. And like our Permian locations, we can move quickly to develop this location if and then we get sufficient initial contract support to justify the investment. Because our initial investment costs are low in all these potential new mine locations, we can afford to be patient. We can look to develop these locations when we believe we can capture strong returns on our investment.

So in summary, it was another strong quarter, and it was one in which we made some great moves to create long-term value for our shareholders. While the current market environment has slowed down a bit from the first half of the year's strong pace, I continue to see positive trends for the industry. They include: the increasing long-term demand for frac sand, renewed focus on sand quality, and continued interest in the integrated sand logistics solutions from mine to the wellsite. Smart Sand is ready and well positioned to take advantage of these opportunities.

I'll now turn the call over to our CFO, Lee Beckelman, for a closer look at the company's second quarter results.

Thanks, Chuck. As Chuck highlighted, we had record sales volumes in the second quarter and strong financial results for the quarter. I will be going over the second quarter 2018 financial results, and my comments primarily will be focused on comparing it to the first quarter 2018 results.

Starting with sales volumes. We sold approximately 839,000 tons in the second quarter, a 16% increase compared to the first quarter 2018. Our spot sales in the second quarter of 2018 were 17% of our total sales volume versus approximately 23% in the first quarter. In the second quarter 2018, approximately 76% of our sales were shipped via unit train compared to approximately 83% in the first quarter of 2018.

Moving to revenues. Total revenues for the second quarter were $54.4 million, a 28% increase over first quarter revenues of $42.6 million. Sand sales revenues increased to $40.5 million in the second quarter compared to $28.9 million last quarter due to higher average sales prices and higher sales volumes. The average sales price per ton in the second quarter increased 21% to $48.23 per ton compared to $39.99 per ton last quarter. The increase in average selling price sequentially was primarily due to higher contracted sales prices, which increased partially due to pricing adjustments in our contracted prices for changes in the price of oil and partially due to increased in-basin sales in the quarter.

Transportation revenue, which includes freight and rail car rental, was $13.3 million in the quarter, basically flat with last quarter's results of $13.7 million.

The costs of sales for the quarter were marginally lower, $34.7 million compared to $35.4 million last quarter. As we have discussed in the past, we typically have lower costs during the non-winter months, primarily during the second and third quarters of the calendar year, as we ramp up our wet plant operations, which leads to more costs being absorbed and capitalized into inventory during these time periods, and as such, leads to lower overall reported cost of sales during these quarters.

Additionally, we had lower contracted labor expense in the second quarter as we were able to add additional plant personnel during the quarter in support of the start-up of our expanded capacity.

As you will see in our file 10-Q, we've decided to move away from reporting production costs as a non-GAAP item, and we'll be reporting contribution margin on a go forward basis. With the addition of the Van Hook terminal and the Quickthree last mile business, we're expanding our business lines to include logistics services to sell and deliver sand from the mine to the wellsite, and we believe these logistics services are going to be a growing part of our operations. As such, our sand production costs is only a portion of our overall cost structure, and we believe it is no longer relevant to highlight on a standalone basis. We believe that contribution margin, which we define as total revenues less the cost of goods sold, excluding depreciation, depletion and accretion of asset retirement obligations, is a better performance metric to management and external users of our financial statements.

For the second quarter 2018, our contribution margin was -- per ton was $28.19 compared to $14.28 per ton last quarter. The increase was primarily due to higher average selling prices per ton and lower overall cost per ton due to the higher sales volumes and lower cost of sales sequentially, which was primarily due to the higher capitalization of costs in the second quarter into inventory, as I just discussed.

Gross profit was $19.8% million in the quarter, 175% increase from the first quarter gross profit, due primarily to higher revenues in the quarter resulting from higher sales volume and higher average selling price. Our operating expense in the quarter were $6.9 million, a 16% increase sequentially. The majority of this increase, compared with the first quarter, was due to approximately $700,000 in onetime expenses related to the acquisition of Quickthree.

For the quarter, we had income tax expense of $2.4 million compared to $232,000 in expense in the first quarter. Our effective tax rate was 19.4% for the quarter and we currently expect our effective rate to continue to be in the low 20% range.

We had net income of approximately $10 million and adjusted EBITDA of $19.3 million this quarter compared to net income of $975,000 and adjusted EBITDA of $5.9 million last quarter.

Net income and adjusted EBITDA were higher in the quarter due primarily to higher sales volume and higher average selling price in conjunction with flat costs of sales sequentially.

Year-to-date, we have spent $96.7 million in capital expenditures, which was split as follows: approximately $46.4 million has been spent on logistics acquisitions for the Van Hook terminal and Quickthree. These investments support our growth initiatives to become a fully integrated provider of frac sand services from the mine to the wellsite to capture the incremental margin in providing sand and logistics services directly in the operating basins.

We also spent approximately $50.3 million in investments to complete the expansion of our Oakdale facility and for other enhancements and development projects.

For the remainder of 2018, we currently anticipate spending between $28 million to $38 million in additional capital, of which $7 million to $10 million will be spent building 5 to 7 silo storage system fleets to support our growth initiatives to expand into the last mile operations in the operating basins, and the remaining $21 million to $28 million being spent on additional operational enhancements at Oakdale and Van Hook.

In terms of guidance for the third quarter, we currently expect sales volumes to be in the range of 900,000 to 1 million tons, and we currently expect adjusted EBITDA to be in the range of $21 million to $26 million.

As of June 30, 2018, we had approximately $1.7 million of cash in our balance sheet. In the second quarter, we've generated $19 million in cash flow from operations, as we ramped up sales volume and reduced our working capital requirements.

In April, we expanded our credit facility to $60 million. We currently have $45 million drawn on this facility, with the full remaining $15 million available to support our liquidity needs. We drew down on the facility in the first quarter to fund the purchase of Van Hook, and in the second quarter, to fund the acquisition of Quickthree. In July, we amended this credit facility to, among other things, increase our equipment financing baskets to $30 million. We plan to utilize this basket as a financing source for silo storage systems that we plan to manufacture over the remainder of 2018.

For the second half of 2018, we expect to continue to generate strong cash flow from operations, which, coupled with our availability under our revolving credit facility and the increased equipment financing capacity, provides us ample liquidity to continue to support our growth initiatives while maintaining a strong balance sheet.

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

(Operator Instructions) And our first question comes from the line of Jim Wicklund from Crédit Suisse.

With Quickthree, did you buy the manufacturing facility as well? Or did you buy intellectual property? And I'm assuming these systems, you're guidance was fairly explicit, on the $7 million to $10 million for 5 to 7 systems, so it's easy for us to figure out the average cost. But I was just wondering what you expect the returns to be. We know what Solaris and Sandbox do, so I'm assuming that you're in that neighborhood, but if you could talk about that. And what exactly did you buy with Quickthree?

So we did buy a manufacturing facility with that and all the intellectual property that came along with that, and we're making those systems right now. Our view on this is we're not going to hand the sand off for other people to touch it in the way in the supply chain. We're going to take sand all the way to the wellhead and deliver it to the blender. And that's kind of our view on the system. We will work on a rental basis as well, but we think that's the true value added to the system instead of multiple people touching the sand all the way to the wellhead.

So they're fully integrated?

Fully integrated, and we're going to be bringing our 12k 100 mesh sand right to the well blender because we think that's what petroleum engineers want to have.

Is there a basin that you're targeting first, or is this going to be whoever raises their hand first regardless of basin.

No. We've had tremendous success at our plains Van Hook terminal that we bought, and we'll probably go out there initially, but we're targeting all basins. In the Permian, we're very much working on some stuff down there that involves partnering up with the rails and driving larger volume trains, 200 railcars at a time and delivery within this system.

Okay. And if I could switch my follow-up to your conductivity tests for Permian. We all kind of thought that Northern White would definitely win in the quality of 40/70, and so testing conductivity per 100 mesh versus 100 mesh in the Permian is a little bit of a surprise. Several companies have talked about them pluses and minuses of each. Are these companies that you're doing these tests for, they're existing customers of yours, I assume. And is it just 100 mesh that we're testing or is it the full range of grades that we're testing?

It's John here. We're testing all grades on that. But in particular, there was a focus on the finer mesh sand, the 40/70 and 100 mesh. These will be new customers to Smart Sand. And there is a definite concern from them with regard to long-term EURs on these wells and the difference between using Northern White and regional sand.

And I think, Jim, the other thing is there's some major players in that basin that obviously have major rail relationships too, and I think they're looking at, hey, let's bring the rail right through our acreage because we're not doing this for 30 days, 60 days, 90 days. We're doing this for 30 years, and trying to make the trucking as safe and sustainable as possible. So I think this thesis of everyone's going to truck 40 million tons of oil sand to the wellhead is kind of a little -- it's a (inaudible) a little too soon. I think there's a little bit -- the one thing I know is you don't mess with the railroads, and I think there's a little bit of a play coming back.

Interesting. Okay. And if I could, does this make you a little more cautious about developing one of your 2 Permian sites? You talked about getting it ready if you get enough contract coverage. Or is that just you're going to play both sides and have the optionality?

I think we're going to keep the optionality. But for right now, my vote is to keep hitting the snooze button on that.

Our next question comes from the line of John Watson from Simmons.

I wanted to follow up on Jim's question. I totally appreciate if you'd rather not say, but any color on profitability per system for Quickthree once they're up and running?

Yes. John, it's still a little early as we're getting ready putting plans out and putting our systems out. Also, our systems have a lot of flexibility in terms of size and configuration. It could be all silos, it can be silos and a quick load, and so it's going to somewhat drive the margins on that as well. But generally, we believe we're going to go out, we're going to market, and our margins and profitability will be consistent with what you're seeing our competitors in the space, both the Solaris and Sandbox and others. We think we can achieve similar type margins.

John, the other thing that's added into what we're doing on that is we're just not selling the system, right? We're also going to be involved in the movement of the sand, right? So when we talk about 200 car unit trains and moving sand out efficiently, I don't know anyone else that's really able, from originating site, able to do that, and we are. So we're going to make sure on the terminating side, we have the same thing. And we're going to play in the economics and all this all the way through to the wellhead. So it's not just the system, right, which is a great business on its own. It's the actual movement of the sand all the way to the wellhead, and turning trucks more often than other people are doing.

Great. That is super helpful. And switching gears to I guess what's happening real time. Can you give any update on what you're seeing, either on the contracting side or as you're contracting more customers on the spot side with regard to sand pricing? Are we flat in Q3, slightly up, slightly down? What are you guys seeing right now?

Yes. So yes, just to reiterate, I mean, our goal is 75% contracted. We think that we're right around 58% today on our 5.5 million tons out of Oakdale. We have multiple opportunities that put us well beyond that 75%. In fact, we'll be on the 5.5 million tons. With regard to the market today, we've seen a little bit of softness in July, but ultimately, we think that, that's probably related a little bit to takeaway capacity in the Permian. The other markets seem to be strong. We had our best months ever up to the Marcellus and the Bakken. So our goal is still to contract 75%. We've seen a little bit of softness on the demand side, a little bit of softness on pricing, but you would think it's short term, and ultimately, we're expecting a strong second half of the year.

One other thing on that. Now before primarily most of our contracts were FOB, the mine, and we're seeing a lot more interest in people taking the sand and taking that further down and benefiting off of our supply chain.

Sure. Okay, great. And maybe one last one on if I can sneak it in. I know it's early, but any framework for us to think about for 2019 CapEx?

No, it's a little early for that, John. I think it's too early to really think about that. And that would really driven by, if we do pursue ultimately adding in basin facility or are looking to add additional terminals. But right now, I can't really give much guidance on that.

And our next question comes from the line of from (inaudible) Tudor Pickering Holt.

Just to follow-up quickly on John's question for 2019. I know it's still early, but you budgeted basically 5 to 7 systems for Quickthree over the back half of the year. From a manufacturing capability perspective, it's 2 to 3 systems a quarter, I mean is that what we should think about for 2019? Or from a manufacturing capability perspective, do you have the ability to manufacture more of those systems per quarter if demand warrants moving forward?

So yes. So we're bolstering on our manufacturing capabilities right now. So we feel like we're going to be able to meet the demand in the market for these systems. But right now, it's basically our manufacturing keeps us at those numbers.

Yes. In terms of what we were ramping up to, we're building up the systems and growing into that. Right now, we anticipate we'll have the capability by the end of the fourth quarter and going into the first quarter next year to, under our current manufacturing facilities, to be able to produce 2 systems or fleets per month.

Okay. Got it. That's helpful. And I just wanted to clarify some of your comments in prepared remarks and Q&A around contracting. It sounds like you're still seeing pretty strong demand on, at least, incremental demand for long-term contracts. Have you signed up any new contracts in, say, the past 2 or 3 months? Or is this just sort of forward demand you see on the horizon?

Well, we actually just recently signed a transloading agreement out of the Bakken, and we've expanded some of our existing contract base, existing options on those contracts recently. So on the contracts, we're talking about the other customers we're dealing with, with be new customers to Smart Sand. There's a pretty robust demand out there for Northern White, so we would expect to have some news on that before the end of the year.

(Operator Instructions) And our next question comes from the line of Steven Gengaro of Stifel.

I guess 2 things. One, when you think about the -- and I'm getting a little granular. But when you think about third quarter guidance, and you look at kind of volume increases and then you look at your EBITDA guidance, your EBITDA is growing, it appears faster than your volumes. Is that just because of the ancillary services? Or are you expecting sort of a different type contribution margin from the sand sales?

Well, I think if you get to the higher end of the EBITDA guidance, you're getting a little higher contribution margin, that's driven by having -- higher in basins potentially and additional spot sales. So that's what's kind of drive the delta. If you look at the lower end of the guidance, it's pretty consistent with where we were and for this quarter in terms of profitability and contribution margin.

Okay. And when you talk contribution margin, are you speaking company-wide going forward, or are you talking more about the sand sales and sand contribution? Or is it the entire network?

Well, it's the entire network, and that's the reason we're going to contribution margin, because basically, it's a fully integrated business. It has the sand sales, it has transportation revenues, has the in basin. And so it's coming in, what's the total, the total integrated business and the margin we're contributing from that in terms of moving to that integrated model to -- while we'll continue to have sand sales in the mine, we're also looking to grow through the sales in basin and ultimately to the last mile and delivering the sand to the wellsite.

Yes. Really, you're right on target there. We're driving our business towards the delivered costs at the wellhead. So that's really what we think the E&P wants. And again, our delivery cost is going to be a delivered cost with premium sand.

Great, that's helpful. And then just one other thing. When we think about the growth in the silo systems, are you looking at displacing a certain product line out there? Or you think it's just more creating a Smart Sand systems from sort of mine to blender to, I mean -- I'm just trying to think about how you gain traction in that business with the competition that's in the market.

Yes. So we look at this as a business. You don't want to keep handing things off to people, because when you do that, you lose control of it, right? And there's slowdowns, there's efficiencies that you lose by handing off all the time. So we look at the business, as if we manage this all the way through to the wellhead, it's going to be a more efficient movement. It's going to keep our sand competitive. And it's going to assure the E&P that they get the best quality consistent sand at the wellhead. When guys are pumping 25,000 tons down a well, and they're trying to get all the stages done a day, you need to have that kind of organization in the movement of the sand all the way through. But if you've got 4 or 5 different people touching it, you'll lose that. And I think that that's part of -- right now, you have this whole Permian thing that everyone's talking about. You have guys that are going to say that they're going to originate 50 million tons a year of sand from mines and truck it and support wells that are 50, 100 miles away, and manage all that stuff, and we just think it gets super difficult. So that's why we view what we're doing is really the smart way to do it.

Great. That's helpful. Just one just quick final question. If you make a decision to go ahead on the in-basin side, what's the timeframe, for you to think to start selling sand.

Well, basically, we're working on right now to be shovel ready, and we think by the end of the third quarter or the fourth quarter, we'd have a fully permitted side ready to go with design. And once we break ground, I think it's 6 to 9 months where we'd be able to start delivering sand in the market.

What I would say is the railroads out there, we want to partner with you guys and not cannibalize you, and we want to work with you, guys. So I would say that I hope the day comes where we're not building that regional mine. I'd rather build regional terminals and bring the best sand in and perfect the movement of the sand to the wellhead because that's really what we're in. And you know what, it doesn't matter, a few barrels of oil doesn't matter when oil's at $30, but when oil's at $55, $60, $65, $70, it does matter. And what those wells do in the second and third year is very important.

And our next question comes from the line of Brad Handler from Jefferies.

First, some comments on Van Hook. I know commenting on a transload working for a full quarter, getting a full quarter out of it is probably not quite the right way to think of it. But can you help us think about capacity? First of all, you opened it in April, so you don't have a full quarter...

Van Hook, we put very limited money in there. It was a great terminal when we bought it because it was moving crude, and it was one of the best. And we've already ramped that thing up considerably. So we're very happy with what's going on right now, but we're doing some expansions out there. I'll let John get more in detail with some numbers on that.

Yes. Right now, we think our capacity up there is roughly about 700,000 tons a year. We're expanding that, we want to be over 1 million and the rail yard's, certainly large enough to support that operation. We've got some additional CapEx planned to bring in silos and maximize the efficiency of that location. The demand we've seen for using that facility has actually been a pleasant surprise up there. When we turned it up, we've got a lot of folks breaking down our doors for additional capacity there. So we're really, really confident about it. It's in a great location. It's kind of -- the play is moving towards where that location is, so we feel really good about the Bakken terminal.

And it's a great movement with the rail with the railroads that we've partnered up with. So we basically went and said, hey, we want to go about this, spend the right money and perfect the movement of the rail and of the sand into this area. And it's an example of what we're also going to do in the other basins with the railroads. Another little tidbit of information, I think the other day, we almost got over 2,500 tons in a day at that site.

Got it. Okay. That obviously sounds great and that's great prospective. Can you -- let's talk a bit about the 200 car unit train, please. I think we've now sort paid attention to the side of the business enough to know that the right -- it's not the rails, we've certainly heard other logistics; providers talk about why unit train topped out. I think it's closer to 120, maybe it's 130 or something. But it sounds like there were some pretty good reasons, but I don't actually remember why there were certain limits today. So can you speak to that notion of 200 cars, and what it is that you need to do perhaps to make that work more effectively?

So the thing that I would say about that is that, basically, the railroads, the limitation a lot on the size of these trains comes from the originating and the terminating sides. So if there's not transload set up to be able to handle the, large-sized trains or originating sides set up to be able to make those trains, then you have a limitation in size on that site. So what we do is we go to the railroad, we say, hey, what's the most efficient model for you guys to move this volume, and how can we drive your efficiency? How can we make your railroading piece as precise as possible? And basically, they've come back and said, hey, we want to approach going to this size. If you guys will invest in the basin and bring the terminal and set the terminal up to the handle this and drop these cars off full, pick up empties you set up that way, they're very much in line with that, and it drives efficiency on their network.

Yes. The only other thing I would add to what Chuck said there is that it's destination dependent in a lot of cases. The size of unit train, your long-train program in a particular basin maybe 130 cars, a long train program and another basin, maybe 200 cars. And really, it's the geography on the route for that railroad to take, that determines that. But we're very confident that 200 car program down into the Permian Basin is doable and desirable from both our perspective and the railroad's perspective.

Got it, got it. Yes, I think I recall hills being an issue. Maybe if I could sneak in a third please, and maybe it's a quick one, maybe it's not. The comments about connectivity and quality, how much are you speaking back to kind of the Permian Sands with large versus just more -- there's a lot of variability in the quality in the basin, and therefore, there are going to be limits perhaps on the quality of some of the sands, but others of it is actually the crusher is fine or some other attributes are fine.

Yes. So well, I think you recognize that we have 2 properties down there, they're in -- both are kind of in the heart of the areas where the sand is being processed and developed. And our main concern with the sand down there is: one, the physical properties, as you alluded to. The crush is not as high as the Northern White on either 40/70 or the 100 mesh product that's down there. And that won't necessarily show itself initially when you pump it down the well. So that's a long-term EUR thing where the sand grinds up effectively and clogs up the conductivity back to the wellbore. But there's some other challenges down there that I think aren't being properly addressed. And one is the water. You need a lot of water to wash the sand to get the turbidity out of it, any dust that you're leaving the sand has marked impact on the ability for that well to produce longer term. It has the ability for us to produce a product that is within MSHA and in fact OSHA guidelines at the well site to make sure that dust content flows. So we're kind of trying to play both sides of the fence on this thing that we have property down there, but there are definitely some quality concerns from our perspective being sand producers. But we've also -- we're parroting a bit of what we've heard from some of the E&Ps down there that are more concerned about EUR versus IP and what they are seeing in their test results. So we think that there's a lot of activity and noise around the regional sands out there, but I think, ultimately, this may come down to a quality play for the guys who are ultimately concerned of that EUR.

And I'm showing no further questions. I'll now turn the call back to Chuck Young for closing remarks.

Thank you for joining Smart Sand's Second Quarter Earnings Call. We look forward to a strong remainder of 2018.

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