U.S. Silica Holdings, Inc.
Q1 2018 Earnings Call Transcript

Published: 24 Apr 2018

[Operator:]

Greetings and welcome to the U.S. Silica first quarter 2018 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star, zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Michael Wilson, Vice President of Investor Relations and Corporate Communications for U.S. Silica. Michael, please go ahead.

[Michael Wilson:]

Thanks. Good morning everyone and thank you for joining us for U.S. Silica’s first quarter 2018 earnings conference call. With me on the call today are Bryan Shinn, President and Chief Executive Officer, and Don Merril, Executive Vice President and Chief Financial Officer. Before we begin, I would like to remind all participants that our comments today will include forward-looking statements which are subject to certain risks and uncertainties. For a complete discussion of these risks and uncertainties, we encourage you to read the company’s press release and our documents on file with the SEC. Additionally, we may refer to the non-GAAP measures of adjusted EBITDA and segment contribution margin during this call. Please refer to today’s press release or our public filings for a full reconciliation of adjusted EBITDA to net income and the definition of segment contribution margin. Finally, during today’s question and answer session, we would ask that you limit your questions to one plus a follow-up to ensure all who wish to ask a question may do so. With that, I would now like to turn the call over to our CEO, Mr. Bryan Shinn. Bryan?

[Bryan Shinn:]

Thanks Mike, and good morning everyone. I’ll begin today’s call by discussing our strong first quarter results, then I’ll give an overview of our top strategic initiatives that we expect to create significant additional value for the enterprise, including our acquisition of EP Minerals. Finally, I’ll comment on what looks like the very positive outlook for our key markets. Don Merril will then provide additional color on our financial performance for the quarter before we open up the call for your questions. Total company revenue for the first quarter of $369.3 million increased 2% sequentially and adjusted EBITDA for the first quarter of $95.4 million was also up 2% sequentially. First quarter contribution margin for oil and gas of $99.4 million was up 4% sequentially, driven by higher sand volumes and a very strong performance from Sandbox. We sold a record 3.3 million tons in oil and gas during the quarter despite some extreme winter weather conditions and a sluggish start by some of our oil and gas customers. I’m also pleased to report that due to the breadth and depth of our mine and trans-load network, we were not adversely impacted by the widespread rail disruptions that many in our industry experienced in the first quarter. Our Sandbox unit performed particularly well during the quarter with contribution margin up 23% sequentially, driven by higher volumes, lower costs, and targeted price increases. Momentum was very strong during the quarter with March setting an all-time record for monthly Sandbox loads shipped. Based on significant customer interest, we expect continued substantial growth in this business. Revenue for our industrial and specialty products business of $56.4 million was up 9% on a year-over-year basis driven by a small uptick in volume and the positive impact of strategic price increases implemented during the quarter. Quarterly contribution margin of $20.4 million was essentially flat on a year-over-year basis as increased maintenance costs and higher operating expenses from the extreme winter weather offset price increase and higher volumes. In summary, Q1 was a very good start to 2018 financially. Let’s move now to an update on our key initiatives that will drive growth, enhance our competitive position, diversify our sources of profits, and create additional value for customers and shareholders. First, we’re making very good progress on our two new in-basin mines in West Texas. I’m excited to report that the first drying lines started up at our Crane County, Texas facility in Q1. That line is currently running at approximately 500,000 tons per year or about 50% of its initially permitted capacity. It is expected to ramp up to a production rate of 1 million tons per year by the end of Q2. We expect that the remainder of the facility will continue to start up and reach full 4 million ton per year run rate by the fourth quarter of this year. Our second facility in La Mesa, Texas is on track to produce wet tons in June with drying commencing in Q3 and ramping to full capacity of 2.6 million tons per year by the end of 2018. While I’m very proud of the work that our team is doing, we are behind the originally planned start-up timelines for our new West Texas facility, as are many of our competitors, demonstrating the many challenges of bringing new capacity online in this difficult location. We continue to believe that local sand production will come online much slower than many predict, and further that demand will grow much faster than our industry can bring on capacity, further exacerbating the current very tight market. During the quarter, we also announced the sale of three trans-loads located in the Permian, Eagle Ford and Appalachian basins for $75 million in cash. Of the 57 trans-loads that we utilized today, these were the only facilities that we actually owned. Some speculated that this sale was a referendum on the future of Northern White Sand, but nothing could be further from the truth. This was an opportunistic transaction with one of our best logistics partners and a logical extension of our asset-light trans-load strategy, where third party partners invest in infrastructure, thereby allowing us to focus capital on other higher return alternatives. In that regard, during the first quarter the company repurchased approximately 2.8 million common shares for a total of $75 million. As of March 31, 2018, we have repurchased approximately 3.5 million shares, completing the $100 million authorized under the current plan. I’d now like to spend some time talking about our acquisition of EP Minerals. I’m very excited about the opportunity to own this business with a rare combination of advantages and strengths that will enable us to diversify our sources of profits and smooth out some of the volatility that comes from the cyclical nature of our oil and gas business. There’s certainly a lot to like about EP Minerals. First, it fits within our core competencies as a mining and logistics company. Also, they have a very attractive market structure and are number one in the U.S. and the number two player globally. They’ve historically had strong margins with double-digit EBITDA growth every year over the last decade and very reliable cash flows. They have diverse markets with over 10,000 customers and high recurring revenue. On top of that, they have identified several bolt-on growth opportunities and possess a robust pipeline of new projects in various stages of development. EP Minerals was exactly what we were looking for in an attractive adjacent business to our ISP segment. We expect to close on the acquisition next week and I think going forward, there will be numerous opportunities to collaborate on several fronts, including providing sales leads and international cross-selling with our combined broader product portfolio. I also believe we’ll find ways to work together in new product development and sharing best practices in areas such as mining, processing and logistics. The bottom line for me is that by adding EP Minerals to our portfolio, U.S. Silica becomes a stronger, more resilient company. Further, increasing stable, consistent cash flow generation will allow us to be even more flexible and opportunistic when it comes to investing throughout oil and gas cycles. The EP Minerals acquisition also clearly establishes U.S. Silica as a high value-add minerals company with exposure to a broad array of markets and is another step in our transformation into becoming a performance materials growth company with more consistent earnings and cash flows, and even greater financial flexibility and strength. Finally, let me provide a market outlook for both our operating segments. In oil and gas, we continue to see strong demand for Northern White, regional and local frac sand. More rigs, longer laterals, more sand pump per foot, and greater rig efficiencies from pad drilling are driving sand volumes per well up and to the right. We estimate that the total frac sand demand run rate today is greater than 100 million tons per year, and we expect demand to ramp throughout the year at a faster pace than capacity additions. Accordingly, we expect the market to remain extremely tight throughout 2018 and into 2019. We’ve contracted up just over 70% of our total oil and gas volumes, and the weighted average length of those contracts is approximately 2.5 years; however, given the projected tight market into the future, several customers have recently approached us about extending and upsizing some of the contracts that we’ve just signed, as well as adding Sandbox delivery services to ensure uninterrupted sand supply. Given these dynamics, we anticipate that our spot pricing will continue to increase in the second quarter at mid-single digit rates, and that some of our contract volumes which are indexed to horizontal rig count will reset to higher pricing as well. Based on customer feedback, we also expect that Northern White sand demand will remain strong through the end of the year. For Sandbox, we expect improved volumes and pricing in the second quarter as we continue to add crews, increase pricing, and benefit from the increased volumes of sand being pumped per well today. For ISP, we expect a strong Q2 with higher volumes and margins driven by positive seasonality and new price increases that were put in effect April 1 on certain whole grain products. We also expect continued strength in the U.S. automotive and housing markets driven by GDP growth forecasts in the range of 2.5 to 3%. A strong economic backdrop should continue to drive robust growth in our glass, foundry, building products, and fillers and extenders business lines. Furthermore, we believe the home improvement sector remains attractive, and based on conversations with our customers, we expect particularly robust growth in the composites and roofing markets. With that, I’ll now turn the call over to Don. Don?

[Don Merril:]

Thanks Bryan, and good morning everyone. I will begin with the results of our two operating segments, oil and gas and industrial and specialty products. First quarter revenue for the oil and gas segment was $312.9 million, slightly above the revenue in the fourth quarter of 2017 primarily driven by increased sand volume and Sandbox activity. The ISP segment revenue was $56.4 million, up 3% from the prior quarter driven by higher volumes and price increases that were announced in February. The oil and gas segment contribution margin on a per-ton basis was $30.58 compared with $30.22 for the fourth quarter of 2017. On a per-ton basis, contribution margin for the ISP business of $23.39 was down from $25.05 in the previous quarter. Let’s now look at total company results. Selling, general and administrative expenses in the first quarter were $34.6 million. The increase in SG&A expense is a result of increased headcount and business development expenses. Depreciation, depletion and amortization expense in the first quarter totaled $28.6 million, up 5% over $27.3 million in the fourth quarter of 2017. This increase is mostly due to our ongoing capital expenditures related to our new West Texas mines and the expansion projects at some of our existing facilities. Interest expense for the quarter was $7.1 million and the effective tax rate for the three months ended March 31, 2018 was 19%. On the balance sheet, cash and cash equivalents as of March 31, 2018 was $329.5 million compared with $384.6 million at the end of 2017. As of March 31, 2018, our working capital was $456.8 million and we have $45.5 million available under our revolving credit facility. As of March 31, 2018, our total debt was $510.9 million compared with $511.2 million at December 31, 2017. During the first quarter, we completed the share repurchase authorization that was announced back in November. As of March 31, 2018, we have repurchased 3,555,104 shares at an average price, including fees, of $28.13, or $100 million of common stock. Of this total, 2,828,023 shares of common stock were repurchased during the first quarter at an average price, including fees, of $26.52 for a total of $75 million worth of common stock. During the quarter, we incurred capital expenditures of $72.3 million primarily associated with our Permian Basin and Sandbox growth projects as well as other various maintenance and cost improvement capital projects. We continued to expect our 2018 capital expenditures to be in the range of $300 million to $350 million. We anticipate closing on our $750 million acquisition of EP Minerals by the end of this month. We intend to finance the transaction and refinance our current debt through a new seven-year, $1.28 billion committed term Loan B credit facility and an expanded $100 million revolving credit facility. With that, I’ll turn the call back over to Bryan.

[Bryan Shinn:]

Thanks Don. Operator, would you please open up the lines for questions?

[Operator:]

[Operator instructions] Our first question today is coming from James Wicklund from Credit Suisse. Your line is now live.

[James Wicklund:]

Good morning, guys, and thank you for the beat of the quarter. Nothing like making us look smarter than we really are. Can you guys speak to the particular bottlenecks that you’re seeing in bringing the West Texas tonnage online? Everybody talk about shortages of truck drivers and everybody talks about the congestion on the roads, and now we’re talking about takeaway capacity and flaring gas and everything else. But specific for you guys, what do you see bringing on the West Texas tonnage? What are the bottlenecks going to be and what are they today?

[Bryan Shinn:]

Sure Jim, it’s a great question. We’re currently running at about 500,000 tons a year run rate with our first line in Crane, so we have that up and started, as I said in my prepared remarks, and I do expect that we’ll have that line ramped up to essentially its permitted capacity by the end of the year, so it’s coming. Generally we’ve seen a couple of different kinds of issues out there. The first was just vendor fabrication issues, and there’s an awful lot of steel when you look at what’s involved in putting these type of facilities up. I think ourselves and others just ran into some fabrication bottlenecks there. Labor is certainly an issue out there right now. We’re hiring people as fast as we can, but it seems like for every 10 people we hire, one resigns to go work somewhere else. Unemployment is really low in the Permian. I would say the other thing that is challenging for all of us who are bringing up mines in the his environment is that the deposits are somewhat more difficult. They contain clays and muds and a lot of other things that are difficult to properly process, especially in a low water environment like most of us are running in, in West Texas, and then there’s just all the other start-up challenges of a big site like this. So it’s a number of things, it’s not any one thing in particular. It seems like there is a number of issues, but we’re working through them and expect to see the site ramping up in the coming months here.

[James Wicklund:]

Okay, and the follow-up if I could, congratulations and thank you for the stock buyback. For any other companies that might be listening to your call today, investors really want to see companies and executives buy back stock at this point as a great use of cash. Now you’ve exhausted this authorization, I’m assuming there’s going to be another one behind it, and since you’ve made a big industrial acquisition that free cash flow now is going to be dedicated to increased stock buybacks, increasing dividends. What’s the plan going forward from here?

[Bryan Shinn:]

Sure, Jim. As you can imagine, we think a lot about that. Every board meeting, we have a good robust discussion around uses of cash, and I think the first important point here is that we will be generating tremendous amounts of cash in the coming quarters and over the next few years as we get this oil and gas capacity ramped up and running. I would expect that we’ll have hundreds of millions of dollars a year of free cash, and so we’ll think very carefully on how we allocate that. I think there’s generally three categories that the board is looking at right now. Certainly we will continue to make investments in some of our high return growth opportunities, so Sandbox for example, we’ve been growing that quite a bit and I think there’s lots of additional opportunities to take market share there and grow. The ISP business in and of itself, as you mentioned a minute ago, has been growing, and we have a lot of growth projects there; and then EP Minerals as well, I think we’ll have some projects, so we want to make sure we don’t starve the growth opportunities. We also want to make sure that we’re careful, kind of the second category here, in managing our leverage. We’re a pretty conservative company, we’re taking on about $1.3 million in debt between the refinancing of our existing debt and EP Minerals, so we want to make sure that stays at the right level. Then third, as you said, returning cash to investors is very important to us. Ironically, I think perhaps some people forget that we do have a dividend and we’re one of the few companies in the oilfield space, or companies with heavy exposure to oilfield anyway, that managed to maintain that dividend all through the downturn, so we have that. We just completed the $100 million buyback, and I think that we recognize the need and advantage to returning cash directly to investors, so that’s going to be a part of our plan. But as I said to begin with in answering your question, the good news is we have lots of cash and I think we can do some pretty interesting things with that over the next couple years.

[James Wicklund:]

A high-class problem. Gentlemen, thank you very much.

[Bryan Shinn:]

Thank you, Jim, and take care.

[Operator:]

Thank you. Our next question today is coming from William Thompson from Barclays. Your line is now live.

[William Thompson:]

Thank you, good morning, Bryan. Maybe we could start with how much of your Northern White capacity, or maybe your overall oil and gas capacity excluding the Permian plant, are actually shipped into the Permian. Then a follow-on to that, just maybe provide a little bit more color around the contracts. You said 70% of oil and gas is contracted, volumes contracted at 2.5 years. Maybe the mix on regional sand versus Northern White, you mentioned a few incremental long-term contracts. Given the history around enforceability on those contracts, what is the confidence and why contract now if we’ve historically seen downside? You’ve highlighted before about prepayment - that’d be helpful.

[Bryan Shinn:]

Sure, all great questions, Will. I would say that given that we’re one of the largest suppliers into the industry, our volume flows kind of roughly would mimic the industry consumption, so Permian tends to be about 50% of the frac sand that’s consumed in the country, and so our sales would mirror that. Obviously right now we’re shipping a lot of our Northern White in there, so probably about 45% to 50%, I would guess. As far as the sand supply itself, we’re completely sold out right now. We’re literally selling everything that we can make, and we have had a number of good contracts that we’ve signed over the last several quarters. We’re now, I think, over 30 contracts that we have in oil and gas. As I said in my prepared remarks, we signed a few more in Q1. The thing I really like about our latest generation of contracts is that, as you mentioned in your question, that most of them involve a prepayment from our customers, so I think that gives us a lot more security in that we can take a prorated portion of those prepayments to earnings on a quarterly basis, whether customers buy their volumes or not. I think that gives us a whole other level of security and certainty as compared to the more traditional take-or-pay contracts.

[William Thompson:]

That’s helpful. You alluded to earlier, you sold the last owned and operated trans-load facilities, so some of your customers--your competitors have highlighted the fact that they think that’s a competitive advantage, to own and operate the trans-load. You mentioned that your preference is to be sort of asset-light, you have Sandbox helping on the last mile logistics. Can you talk about--you also mentioned the fact that you had no real disruptions around the rails. How do you operate in this environment where logistics is so imperative and you don’t really have control of trans-load, but obviously you have control of the last mile through Sandbox?

[Bryan Shinn:]

Yes, so it’s interesting, I think it’s a difference in philosophy perhaps between us and our competitors. If you look at the 57 trans-loads that we currently operate, plus or minus--or currently use, rather, almost all of those except for the three that we sold were already run by third parties, so we’ve chosen to establish a network of trusted partners. We let them invest the capital and then we utilize the facilities and have contracts of varying lengths with those suppliers. We think that works really well, because we know that oil and gas is going to be a cyclical industry, but what we don’t know is when the cycles are coming. Being asset-light, we have more flexibility to move in and out of the trans-loads as opposed to owning these assets. We also know that the fracturing activity moves, and rather than getting locked into a series of trans-loads that we’ve invested a lot of our capital into, it seems like it’s better to let others do that for us. I think that strategy has worked really well. Generally, we’re regarded as having the best network and the best service in the industry, so I think we’ve picked the right strategy. I’d rather take our capital and, instead of investing in trans-loads, be able to invest it in other growth projects and return that to investors.

[William Thompson:]

That’s helpful, thank you.

[Bryan Shinn:]

Thanks Will.

[Operator:]

Thank you. Our next question today is coming from George O’Leary from Tudor Pickering Holt & Company. Please proceed with your question.

[George O’Leary:]

Morning, guys.

[Bryan Shinn:]

Morning, guys.

[George O’Leary:]

Piggybacking on Will’s question a little bit, and I found the color around pricing and margins in oil and gas encouraging, could you help remind us the contract breakdown between what percentage of that, let’s say, fixed versus activity levered, or do you have any kind of oil price-indexed contracts? Just curious what that mix is, so maybe we can hone in on how much exposure you have to increased prices in the second quarter.

[Bryan Shinn:]

I would say that most of the contracts that we’ve signed recently are relatively fixed in price. We do have some, maybe 25% I would guess, that are leveraged to rig count, so if we see rig counts go up, we’ll see increases there, and I actually mentioned that in my prepared remarks we expect that most of the contracts that we have that have that type of clause in it will actually move up to the next price tier in the contract, so that should give us a bit of tailwind there. I think generally the market is extremely strong. I would say just looking back over the last eight or nine years that I’ve been in this industry, save for some points in 2014, this is probably the strongest that I’ve seen in terms of demand, and the market is as tight as I’ve seen it in my several years in the industry.

[George O’Leary:]

Great, that’s helpful. The other part of the business, it sounds like it was gaining some steam this quarter again, the Sandbox business. Could you update us maybe on the--and I realize the fleets have continued to get larger, but the earnings power seems to be increasing as well per fleet. Could you remind us kind of a target for 2018 in terms of how many fleets you expect to have deployed?

[Bryan Shinn:]

Sure. We had said that we hoped to be around 90 fleets deployed by the end of the year, and I think we’re still on track for that. We saw about 71 fleets out there running, Sandbox fleets running in Q1. We expect that we’ll continue to increase that through Q2. Demand is really strong right now. We’ve got, I don’t know, probably 25 to 30 fleets that we’re currently in discussions with a variety of customers on--some customers--I was actually talking to a customer just the other day that is thinking about switching 10 fleets to Sandbox, so there is a lot of momentum there, a lot of interest in the last mile delivery, and particularly in containerized solutions. I think what a lot of folks recognize is that there’s just tremendous savings there, certainly versus the pneumatic systems. We’re seeing maybe 50% fewer trucks and truck drivers to deliver by containers versus pneumatic, so there’s a lot of savings there, and typically the way we think about it is we’ll share those savings with the customers so we make a good profit but the customers also see reduced costs and improved service. It’s a very powerful offering.

[George O’Leary:]

Great, thanks very much for the color, Bryan.

[Bryan Shinn:]

Thanks George.

[Operator:]

Thank you. Our next question today is coming from Michael LaMotte from Guggenheim. Your line is now live.

[Michael LaMotte:]

Thanks, good morning guys.

[Bryan Shinn:]

Morning, Michael.

[Michael LaMotte:]

Hey Bryan, I’d like to circle back on the volume guidance for the second quarter. If my math is correct, and that’s always a question, we’re looking at sort of midpoint 400,000 tons of growth, which about half seems to be coming from the Crane increase. The question really is around the Northern White - I would have thought that given the disruptions in Q1, that Northern White volumes could have grown or will be growing more sequentially. Is there some maintenance in the second quarter or anything else that’s keeping a governor on that 10 to 15%?

[Bryan Shinn:]

No, Michael. We’re just completely sold out right now, so there really isn’t any more Northern White volume. We’re obviously trying to squeeze everything we can out of mines right now, and sometimes as the weather warms up we can get a few more tons through our facilities; but save for that, we’re already at capacity for Northern White and pushing just absolutely as hard as we can. In terms of the overall volume guidance, talking about being up maybe 10 to 15% for oil and gas, I think that’s just purely a factor of how much we can produce, and mostly it’s how much comes out of Crane County here in Q2. It’s not demand related at all. It’s purely supply and how much we can squeeze out of our system with the kind of tight market that we’re in right now.

[Michael LaMotte:]

Okay, well capacity constraint is a good thing for price, and it certainly is consistent with what you’re seeing there. The second question is on Sandbox. As I look at the final mile market and how the pneumatics are really going away as quickly as you and your competitors in that space roll out capacity, at 90 or so fleets, looking at--I know it’s a bit early to be looking at 2019, but the growth rate, I suspect, would slow as we go into next year, and the focus would really shift more on efficiency initiatives and asset turnover. I’m kind of curious as to the kinds of technologies and initiatives you have to focus on efficiency at Sandbox and asset turnover.

[Bryan Shinn:]

Sure. I think just to your point around growth, for the next 12 to maybe as much as 24 months, I think we’ll see the industry converting away from pneumatics and moving to the next generation of last mile solutions, of which I think Sandbox is the premier solution out there today, so that kind of share shift will happen. Then after that, the growth will probably be more determined by just changes in overall demand in the market. We continue to see sand intensity going up, as I think has been noted by others, and happy to talk more about that if folks have interest in it; but there are a number of technologies that we’re working on in Sandbox to help improve our efficiencies, and we’re also looking at opportunities to get more sand per box, so the team has an initiative there. We’re looking at a variety of other technologies associated with driver networking and dispatch times to be able to shorten the flow times of product, and we’re also looking at--constantly looking at reengineering some of our systems and equipment to make them more efficient. So the team has a lot of things going on right now, but I would say our primary focus is market penetration and gaining that share that we know is going to be in play over the next 12 to 24 months.

[Michael LaMotte:]

How much more sand per box do you think you could get?

[Bryan Shinn:]

You know, I think we could probably get another 10 to 15% in there, and the team is working on that pretty diligently. That all comes sort of right off the top in terms of improved margins - you know, for every additional percent you get in there, all that drops right to the bottom line. I think we’re also looking at continuing to improve the profitability of Sandbox, which is admittedly already pretty robust, but we think there is still opportunity there.

[Michael LaMotte:]

That’s great, thanks guys.

[Bryan Shinn:]

Okay, thanks Michael.

[Operator:]

Thank you. Our next question today is coming from Chase Mulvehill from Wolfe Research. Your line is now live.

[Chase Mulvehill:]

Hey, good morning, Bryan.

[Bryan Shinn:]

Morning Chase.

[Chase Mulvehill:]

I guess if we can kind of come to Q2 guidance a little bit, I don’t know if you want to provide a little bit more color on your outlook for oil and gas contribution margin per ton. You gave us some good color last quarter about what you expect that to be in the first quarter, and you beat that; but maybe give us some color on your outlook for 2Q for oil and gas contribution margin per ton.

[Bryan Shinn:]

Okay. Look, I think it’s probably going to be flattish at this point, based on what we see. As I think about oil and gas in general in Q2, as I mentioned earlier, we are going to be constrained by our ability to produce tons. Hopefully we can beat that 10 to 15% volume number, but we’ll see on that. I think we will see some improvements in spot pricing. We talked on my prepared remarks about kind of a mid-single digit increase in spot pricing, so that’s certainly a positive for contribution margin per ton, but we only have about 25 to 30% of our volumes exposed to that. We do usually see some positives in our manufacturing facilities as the weather warms up - it’s easier to drive the sand, throughput can increase a little bit, things like that. I would say on the other side of the coin, the thing that worries me in terms of margins in oil and gas for Q2 is just that we continue to make sure that we serve our customers, and as we’re a little bit behind in getting Crane County up, we’re supplying customers typically from other sites, either in the Texas region or in some cases even Northern White, and the logistics costs associated with that are a little bit higher. We try to balance all that out, so when I look at all the puts and takes, right now I would say kind of flattish for CM per ton in Q2, but we’re obviously working really hard to see if we can’t do better than that.

[Chase Mulvehill:]

Just to confirm, when you say flattish oil and gas, that’s inclusive of Sandbox, correct?

[Bryan Shinn:]

Correct.

[Chase Mulvehill:]

A quick follow-up. It sounds like you’re pretty positive about sand fundamentals this year, so a couple of questions around that. Given the positive backdrop, what’s your outlook for La Mesa potentially going to 4 million tons at some point in the medium term, and then maybe your view on Eagle Ford in-basin mines - you know, we’ve seen a lot of announcements there. Should we expect that Silica should be exploring options down there, or do you just think that the adoption of that sand would be slow, given the quality?

[Bryan Shinn:]

You know, really great questions, and I think we have gotten a lot of demand requests for La Mesa. We have a number of contracts up there, and I think that as soon as we get that up and running, we’d obviously like to push that as hard as possible. We know we’ve got a couple of large customers in particular that are waiting with baited breath for that plant to come online, so I think that’s going to be a very popular supply spot, especially given its location up north in the midland. As far as other in-basin sand, I think it’s very interesting. I know that there’s a lot of commentary in the industry around this right now, and bottom line is I think a lot of the concerns over this supply are sort of way overdone. The main reason, and you picked up on it in your question, is that typically the deposits we’ve seen outside the Permian, and it’s not just the Eagle Ford but we look in all the basins, obviously, almost universally are another step down in quality. What do I mean by that? Well, if you look at the Permian 100 mesh, maybe it’s a 7 or 8K crush sand which is a big step down from Northern White, but customers have found a way to make that work, or at least some customers have. Others still don’t like it. But when you step down to some of the other regions, we’re talking 3, 4K crush, so typically 50% lower quality, particularly on crush. As we’ve talked to a number of the energy and services companies out there, even those who tend to be more flexible around product specifications, we haven’t found hardly any of them that want to touch that sand, so we’re watching that. We’re looking at it carefully, but at this point it feels to me like it’s not going to be the kind of wave like we’ve seen in the Permian, where perhaps the quality in many cases is good enough. When you get to the Eagle Ford, the Marcellus, some other areas that are purported to have sand mines coming up, I really think the adoption rate is going to be much, much different than what we might see in the Permian, and quite frankly even there we’ve had a number of customers--a very large customer came to us just in the last couple of weeks and said, look, we thought we wanted to use the Permian sand, but the quality there even is not good enough, so they asked if we could sign--or they could sign with us a large Northern White contract. This is a very sophisticated large customer. A lot of opinions out there. I feel like, though, that as you picked up in your question, generally the quality--as you get further and further afield from the Permian, the quality gets even worse, which is going to limit adoption of those products

[Chase Mulvehill:]

All right, thanks Bryan. That’s great color. I’ll turn it back over.

[Bryan Shinn:]

Okay, thanks Chase.

[Operator:]

Thank you. Our next question is coming from Marc Bianchi from Cowen & Company. Your line is now live.

[Marc Bianchi:]

Thank you. Back on the contribution margin for first quarter, that was $30.60 a ton. Did that include the $9.4 million that was cited in the adjusted EBITDA number, so was that a cost that’s included in the contribution margin for the oil and gas segment?

[Don Merril:]

Yes, well we took that out, right, to get to that adjusted contribution margin, and we think rightfully so. I mean, these are start-up costs that are related to unforeseen issues that Bryan talked about in our expansion plans, so we can’t capitalize them, they’re not inventory-able, and we don’t expect them to continue, so we pulled them out of that number to give you a better look at the contribution margin vitality in oil and gas.

[Marc Bianchi:]

Okay, so then the $99.4 million of contribution margin in the first quarter for oil and gas did or did not include $9.4 million of cost? I’m not asking adjusted EBITDA, just the contribution margin for the segment.

[Don Merril:]

Right, right. It was taken out of that number.

[Marc Bianchi:]

Okay. Then Bryan, in your thoughts on things being flat for second quarter, should we think about that also excluding any of those start-up costs?

[Bryan Shinn:]

I’m sorry, can you repeat that question?

[Marc Bianchi:]

The thought of the contribution margin in response to Chase’s question, you mentioned that it should be flat sequentially. Is that also excluding those one-time costs?

[Bryan Shinn:]

Yes. You know, our guidance in Q2 assumes that we’re not going to have--we’re going to have substantially less of the start-up costs that we saw in Q1, in Q2.

[Marc Bianchi:]

Okay. Then I think we were talking last quarter and looking at the 30 to 35% volume growth for--. Kind of in the second quarter, obviously there have been some delays with the ramp of Crane and all. Would you anticipate to be able to get to that level in the third quarter? I think it worked out to something like a little over 4 million tons. Is that a reasonable thought, or is the ramp even more delayed than that?

[Bryan Shinn:]

Four million tons of oil and gas volume, Marc? Is that your question?

[Marc Bianchi:]

Yes, that’s right.

[Bryan Shinn:]

Yes, I think we can get to that. Yes.

[Marc Bianchi:]

Okay, great. I’ll turn it back. Thanks so much.

[Bryan Shinn:]

Thanks.

[Operator:]

Thank you. Our next question is coming from David Deckelbaum from Keybanc Capital Markets. Your line is now live.

[David Deckelbaum:]

Morning, guys. Thanks for taking my questions.

[Bryan Shinn:]

Morning, David.

[David Deckelbaum:]

I know you guys have answered a lot of questions around pricing going into the next quarter, but I was just looking for maybe a little bit more clarity, at the sake of being redundant here. With the contracts that are rolling, is it fair to assume that these are two-year legacy contracts, so the price reset for those would be in the healthy double digits?

[Bryan Shinn:]

We don’t have a lot of contracts rolling. We’ve actually signed a lot of contracts in the last 12 months, given all of the new capacity, so I don’t think we’re going to see a meaningful roll in terms of contracts in the short term.

[David Deckelbaum:]

Okay, so then the guidance that you gave on spot pricing, just on average, I guess corporate wide on a per-ton basis, you think pricing should be in that sort of low single digits sequentially for Q2, then?

[Bryan Shinn:]

Correct. Spot pricing looks really strong right now, so that’s probably going to be--spot pricing of itself will be higher than low single digits. But when you average it across all the pricing, given that 75% is controlled by contract, plus or minus, and only 25% is exposed to the spot market, on average we said mid-single digits.

[David Deckelbaum:]

Got it. I wanted to revisit some of the comments that you made about a large sophisticated customer that felt that some of the in-basin sand was not necessarily up to snuff. Was this a very recent occurrence, and I guess it’s fair to assume this would have been using a peer’s sand and not necessarily Silica’s? How does this have you thinking about the adoption curve of the in-basin sand, I guess one, for Silica, but broadly for the volumes coming online there?

[Bryan Shinn:]

It’s a really good question, and I think our customers fit into three broad groups. You have some who have clearly already said, look, this sand is good enough for us, we are happy with the results, we think we’re happy with the results, and so that’s kind of the base load customer set, if you will. Then on the other side of that, you’ve got customers who said absolutely not, we’re not interested in this; and then in the middle, I think which is where a lot of customers sit, is that they’re either waiting and seeing, or they’ve tried it and they’re waiting for well results, or there’s kind of a bit of a tug of war going on between the technical and the business teams or something like that. It’ll be interesting to see which way some of those customers in the middle move, and it feels like they probably won’t stay in that middle ground, they’re going to either move to one side or the other. This particular fairly large customer had done all their work, done some test wells, and they weren’t really happy with the results, and so they were looking to go back to Northern White sand. It’s hard to say what percentage of the customers in that middle bucket move to the left or to the right, if you will, but we’ll just have to wait and see. I think the important takeaway is that it’s not like everybody is saying this is the perfect product and is going to adopt it. Look - if you think about this industry, no matter what it is, it seems like there’s a wide spectrum of opinions, and there’s frequently disagreement on almost everything from a technical nature in terms of completion, so I guess we shouldn’t be surprised that there will be disagreement around which types of proppant to use as well.

[David Deckelbaum:]

I guess as a quick follow-up on that, do you think that the solution then is ultimately going to be for customers like the one that you had this experience with, that they’ll be using some of the in-basin sand and blending it with more Northern White and more of the higher crush strength sand out there, or this is a we don’t want to use it at all?

[Bryan Shinn:]

We haven’t seen a lot of customers blending the sand. It tends to be one way or the other - either customers like the local sand and they use that almost exclusively, or they don’t and they use Northern White or some of the regional sands that they perhaps have been using for a long time. I think the other point here that maybe some folks miss is that no one is for sure what the long-term implications of using this lower quality sand will be in terms of well performance, and in some cases it takes a while, many months or year to be able to know that. Some companies will take the chance and move ahead, and others won’t.

[David Deckelbaum:]

Sure. I appreciate the color very much. Thanks guys.

[Bryan Shinn:]

Okay, thanks for the questions.

[Operator:]

Thank you. Our next question today is coming from John Watson from Simmons & Company. Please proceed with your question.

[John Watson:]

Good morning, guys. On rail, I know it hasn’t been an issue for you, but for the industry, do you expect some level of disruption from rail in Q2, and is that contributing to your guidance for spot pricing to move higher during the quarter?

[Bryan Shinn:]

Good question, John. It seems like most of the rail disruptions have gotten ironed out. I don’t expect we’re going to see a lot from rail. We may see some disruptions from barging. I’m not sure it’s--once again, it may be one of these things that’s not that appreciated in the industry at this point, but there has been tremendous flooding in the Ohio River and Mississippi Rivers, kind of all up and down that waterway system, and so you’re seeing record high water levels on both the Ohio River and the Mississippi, and there’s a lot of barges and freight that is tied up on the river right now. Several companies, including ourselves, use that as a shipping lane, so I think in Q2 that probably much more than rail could impact our industry. I don’t think it’s going to be a dramatic impact, but it’s yet another thing that further exacerbates what’s already a pretty tight supply and demand situation.

[John Watson:]

Okay, got it. Unrelated, on ISP for Q2, volumes and margins are moving higher. Is Q3 of ’17 a decent watermark for us to look at for Q2 of ’18?

[Bryan Shinn:]

I think we’ll probably be a little bit better than that, quite honestly. Right now, our forecast for Q2 and Q3 for ISP are pretty darn strong. We’re seeing additional volumes and we expect margins and pricing to be up substantially. We had announced a price increase in January which has come through, but we actually just announced another price increase in the industrial business in April for some customers, so that will start to come in Q2 but obviously hit fully in Q3. I feel pretty good about ISP - I think we’re going to see some very strong quarters ahead.

[John Watson:]

Okay, great. I’ll turn it back. Thanks, Bryan.

[Bryan Shinn:]

Okay, thanks John.

[Operator:]

Thank you. Our next question is coming from Ken Sill with SunTrust Robinson Humphrey. Your line is now live.

[Terry Starling:]

Hi, good morning, guys. This is Terry Starling in for Ken.

[Bryan Shinn:]

Morning, Terry.

[Terry Starling:]

Good morning. My question is on Sandbox and how to think about the contribution to revenue growth going forward. As the volumes start to increase and you just keep adding fleets, should we see higher [indiscernible] more accretive to margins going forward?

[Bryan Shinn:]

I think you’ll see a couple of things. One is that as we add fleets, some sort of linear scaling in terms of revenue, obviously. I would hope that we get some additional leverage beyond that in terms of margin, because you don’t have to add the fixed costs on a one-for-one basis; or said another way, when you add that next crew, the total fixed cost per crew that are out there goes down just a little bit. I think we’ll see good momentum there - in Q1 for example, we saw revenue up 11% and contribution margin up about 23%, and I expect that we’ll continue to see some pretty nice increases as we go forward here in Q2 and Q3 and beyond. I’m pretty excited about Sandbox. We’re working hard on our costs. We’ve had to scale the operations a lot there, and sometimes when you’re scaling operations dramatically like we’ve been with Sandbox, you can overshoot a bit on costs. I think we’ll continue to kind of trim that and right-size our expenses, so that should help profitability as well.

[Terry Starling:]

Okay, thank you. I guess the follow-up on the sand question, I noticed you guys mentioned the issue with organic material in the sand deposits and drying it, and some of the delays with the equipment. How would you rank the importance of crushed ranks versus clay or organic material in the proppant in terms of what a customer wants, and then kind of a follow-up to that, is this something that you believe is fairly pervasive in the Permian and that a lot of these mines, once they start pulling the sand out, start cleaning and start drying and testing it, that the quality or the amount of available capacity really isn’t what they thought initially just by looking at the area of the mine?

[Bryan Shinn:]

Sure, so to your first question, you want to strip out as much of the things in the deposit that are not sand, so clays, muds, other impurities, because typically those elements have very little to no crush strength, and so you can imagine--let’s just say take a worst case scenario, and you had a product that was 50% sand and 50% clay or something, the crush strength would be very, very low on that. Part of what we do in this industry is take out all those impurities, and in West Texas just because of the nature of the deposits and the fact that you tend to operate in a low water environment, it makes it harder and harder to clean that product up. I would say after looking at probably, I don’t know, 100 different deposits before we picked the ones that we did, which we thought were some of the best that we’d seen, that yes, that problem is pervasive. You see others out there in the industry struggling as well to do that processing, and I think ultimately that might limit the effective capacity of what’s been installed. It’s another interesting point - when someone announces a 3 million ton mine site and maybe they’ve put some equipment up, that doesn’t mean they’re actually shipping 3 million tons out the back door, right, so we look at it through a bit of a different lens and understand that just because it has a nameplate capacity, that’s not what’s actually available to sell to customers. The more difficult it is to mine and process, typically the lower the effective capacity of those assets would be.

[Terry Starling:]

Thank you. How would you rank the--I guess the organic material is more because it reduces the overall crush strength of a volume of sand. Is that correct? It’s not so much the organic material has an impact for the well or causes other issues?

[Bryan Shinn:]

Well, it does cause other issues because as the crush strength overall gets lower, what you find is that those other materials crush into smaller particles and they can clog up the flow pathways in the well bore, so that’s why customers want high crush sand. It’s not just for the fact that they want a high crush, it’s that they don’t want the grains to crush when they get under the tremendous pressure that they’ll find down in the well, because when they crush they form small particles that clog up the pathways for the oil or gas to flow out and ultimately inhibit the production of the well. That’s why crush is really important.

[Terry Starling:]

Okay, that’s very helpful, thanks.

[Bryan Shinn:]

Thanks Terry.

[Operator:]

Thank you. Our final question today is coming from David Smith from Heikkinen Energy. Your line is now live.

[David Smith:]

Thank you and good morning.

[Bryan Shinn:]

Hi David.

[David Smith:]

Hi. Wanted to circle back to Sandbox. Pretty solid quarter. I think you said 71 crews in Q1. Wondering if you could tell us roughly how many boxes are associated with that, or maybe roughly a good recent average for boxes per crew?

[Bryan Shinn:]

Yes, I would say that our crews probably average about 60 boxes per crew right now. When we bought the business, it was more like 40, and we’re actually building crews now that have 80 or 90 boxes; but today, we’re probably averaging 60, and that’s just an artefact of the tremendous increase that we’ve seen in sand per well. It’s good news for us because every time we turn a box, we get paid, and so more so than just the number of crews themselves, the number of boxes that are the circulating are--or the metric that we talk about internally is how many loads of sand, and a load equals one box, how many loads of sand did we deliver in the quarter, so that’s probably the main internal metric that we use to monitor the progress of Sandbox, say through a month or through a quarter.

[David Smith:]

Thank you, great color. Also, just curious about your expectations for whether or for how much higher steel prices would impact Sandbox on a capex per unit basis.

[Bryan Shinn:]

Sorry, higher what kind of prices?

[David Smith:]

Steel - steel prices.

[Bryan Shinn:]

Oh, steel. Yes, it’s a great question, and we’ve see fabrication prices go up a bit, but we had pre-ordered some equipment, and actually we have a specialized steel that we use for the boxes, so we tend to keep--at our fabricators, we keep some inventory of that on hand already, so we had pre-purchased some steel back before some of the recent discussions around tariffs drove the prices up. So at least in the short term anyway, I don’t think we’ll see a lot of impact from that.

[David Smith:]

Great, thank you so much.

[Bryan Shinn:]

Okay, thanks David.

[Operator:]

Thank you. We have reached the end of our question and answer session. I would like to turn the floor back over to Bryan for any further or closing comments.

[Bryan Shinn:]

Okay, thank you very much, Operator. I’d like to close today’s call by thanking everyone who helped us deliver a really strong start to 2018, and I want to reiterate that I think we’re positioned for our best year ever in 2018 and we certainly expect record performance across the company. Thanks everyone for dialing in, and have a great day.

[Operator:]

Thank you. That does conclude today’s teleconference. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.