U.S. Silica Holdings, Inc.
Q4 2017 Earnings Call Transcript

Published: 21 Feb 2018

[Operator:]

Greetings and welcome to U.S. Silica Fourth Quarter and Full-Year 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Michael Lawson, Vice President of Investor Relations and Corporate Communications for U.S. Silica. Thank you. You may begin.

[Michael Lawson:]

Thanks. Good morning, everyone, and thank you for joining us for U.S. Silica's fourth quarter and full-year 2017 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 yesterday'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 that all who wish to ask a question may do so. And with that, I would now like to turn the call over to our CEO, Mr. Bryan Shinn. Bryan?

[Bryan A. Shinn:]

Thanks, Mike, and good morning, everyone. I'll begin today's call by reviewing our fourth quarter results, and then I'll provide an update on the steps we're taking to double the profitability of our Industrial business, as well as the progress that we're making to meet the growing demand for frac sand and last-mile logistic solutions in our Oil & Gas business. Finally, I'll comment on the outlook for our key markets. Don Merril will then provide additional color on our financial performance for the quarter and for the full year, before we open up the call for your questions. Despite some headwinds in our Oil & Gas business late in the quarter, total company revenue of $360.6 million increased 5% sequentially. Adjusted EBITDA for the fourth quarter was $93.2 million, a decrease of 3.6% sequentially. Fourth quarter contribution margin for Oil & Gas of $95.8 million was essentially flat with the previous quarter, as price increases of approximately 5% were offset by higher cost at Sandbox, and higher plant and logistics costs mostly associated with the startup of our new brownfield and greenfield expansions. We sold a record $3.2 million tons in Oil & Gas during the quarter, despite some customers taking extended time off during the holidays. We also experienced periodic disruptions in our business due to the extreme winter weather. For Sandbox, these same year-end disruptions pressured quarterly margin by lowering crew utilization and increasing trucking cost per load. I believe, however, that margins will rebound going forward through increased pricing and normalized crude utilization. We ended the year with 66 Sandbox crews in service and expect to exit the first quarter with more than 70 active crews. We continue to see very strong demand for Sandbox services and believe that we have about 17% market share of last-mile sand logistics today. Our Industrial & Specialty Products business continued to outperform the overall market. Quarterly contribution margin of $21.3 million was up 12% on a year-over-year basis. We believe our ISP business can continue to grow its bottom-line results at multiples of GDP, as it benefits from an increasing mix of higher margin specialty products. Looking back at 2017 in total, I'm very pleased with the record results we delivered across the company and the significant progress the U.S. Silica team made toward our stated goal of doubling the size of our Oil & Gas business. When our expansion work is completed sometime this summer, I believe we will offer our customers something that no one else can

[Donald A. Merril:]

Thanks, Bryan, and good morning, everyone. I'll start as always with commentary on our two operating segments, Oil & Gas and Industrial & Specialty Products. Revenue for the Oil & Gas segment in the fourth quarter of 2017 was $306 million. This represents a 7% increase sequentially when compared with the third quarter of 2017, driven by a combination of higher pricing and record volumes which benefited from the first full quarter results from our acquisition of Mississippi Sand, which closed in August of 2017. Revenue for the ISP segment of $54.5 million was down 7% on a sequential basis from the previous period, primarily driven by seasonally lower volumes which we historically experience in the fourth quarter. Contribution margin on a per-ton basis from our Oil & Gas segment was $30.22, compared with $30.54 for the third quarter of 2017. Favorable effects from the price increases on contribution margin per ton were offset by higher plant costs and unfavorable logistics costs incurred as part of our plant expansion programs. On a per-ton basis, contribution margin for the ISP business of $25.05 represents an increase of 4% from the same period of the prior year. This increase is due to the success of our ISP segment continues to realize in the shift to higher margin products. Turning now to total company results. Selling, general and administrative expenses in the fourth quarter of $29.6 million were flat when compared with the third quarter of 2017. Depreciation, depletion and amortization expense in the fourth quarter totaled $27.3 million, compared with $24.7 million in the third quarter of 2017. The increase in DD&A was driven by incremental expense related to our capital spending and higher depletion costs associated with more tons sold. Moving further down the income statement, interest expense for the quarter was $7.2 million. Due to the newly enacted government tax legislation, we recorded a deferred income tax benefit of $35.8 million at year-end, which had a significant impact on our tax rate for both our fourth quarter and full-year results. The effective tax rate for the three months ended December 31, 2017 was a negative 67%. Our full-year 2017 tax rate was a negative 6%. Without the effect of this deferred income tax benefit and other discrete items, our tax rate for the year ended December 31, 2017 would have been 22%. We do anticipate our 2018 full-year tax rate to be between 18% and 20%. Now, turning to the balance sheet. Cash and cash equivalents as of December 31, 2017 was $384.6 million, compared with $711.2 million at the end of 2016. As of December 31, 2017, our working capital was $489.3 million, and we have$45.5 million available under our revolving credit facility. As of December 31, 2017, our total debt was $511.2 million, compared with $513.2 million at December 31, 2016. As we announced on our November call, the board authorized the company to repurchase up to $100 million worth of our common stock. As of December 31, 2017, we have repurchased 727,081 shares at an average price including fees of $34.41, or roughly $25 million of common stock, leaving authorization for an additional $75 million in repurchases. Our strong balance sheet, available liquidity, and expected cash flow from future operations allow us to execute the repurchase program. And along with paying our dividend, we believe these are key ways for the company to enhance shareholder value. During the fourth quarter, we incurred capital expenditures of $95.1 million, primarily associated with our continuing Permian Basin and Sandbox growth projects, as well as other various maintenance and cost improvement capital projects. We expect our 2018 capital expenditures to be in the range of $300 million to $350 million. And with that, I'll turn the call back over to Bryan. Bryan?

[Bryan A. Shinn:]

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

[Operator:]

Yes. Thank you. Our first question is from Marc Bianchi with Cowen & Company. Please proceed with your question.

[Marc Bianchi:]

Morning. Thank you. I wanted to start with CapEx for 2018, came in a little bit higher than we were expecting. Could you maybe go through the major buckets there and maybe what the variance is between the $300 million and $350 million range that you provided?

[Donald A. Merril:]

Yeah. You got it, Marc. What we're guiding towards is the completion of our expansion projects that we talked about, doubling the size of the Oil & Gas business. So we've got about $175 million of that range that is for the completion mostly of our West Texas facility, but as you know, we have some brownfield expansions in there as well. So, that's the majority of it. And then we also – I believe Bryan mentioned about $70 million of additional Sandbox expansion that's in that number. So, you put those two together with about $20 million to $25 million of maintenance CapEx and about $30 million of capital associated with growth projects in ISP, gets you pretty close to the low end of that range.

[Marc Bianchi:]

Okay. Thanks, Don. And I guess the Sandbox CapEx of $70 million sounds a bit high. It seems like you're only adding about 20 crews, if I've got my math right. Can you talk to what's going on there?

[Bryan A. Shinn:]

Yeah. So, Marc, this is Bryan. As we look at what it costs now to put up a Sandbox crew, we're talking more like $2.5 million, something like that. And the reason is that we've continued to increase the number of boxes per crew as sand intensity has gone up. And also embedded in some of our previous capital spend, we're taking existing fleets up to the number of boxes that we need to run these high sand intensity wells.

[Marc Bianchi:]

Okay. Thanks for that. If I could just one more on the cost headwind that you mentioned in the fourth quarter and then it sounds like getting even more pronounced in the first quarter. Can you put that in terms of dollars per ton? So, if we think about all this stuff eventually being behind you, what sort of headwind are you dealing with right now?

[Donald A. Merril:]

Yeah. I can put that in percentages for you, Marc, as opposed to dollars. And I think as we roll from Q4 to Q1, we probably have about a 5% headwind on contribution margin per ton. And the other thing that I think is important that as we roll our way through 2018 is the amount of sand that's contracted is going to be much higher in 2018 than it was in 2017. So, that's going to have an impact on CM per ton as well.

[Marc Bianchi:]

Okay. And there was some headwind in the fourth quarter as well, right?

[Donald A. Merril:]

That's right, towards the end of the fourth quarter.

[Marc Bianchi:]

Okay. So...

[Donald A. Merril:]

And then that bled into the first quarter. Yeah, January, the first couple of three weeks of January were pretty tough.

[Marc Bianchi:]

Okay. Okay. Thanks for that. I'll turn it back.

[Donald A. Merril:]

You bet. Thanks, Marc.

[Bryan A. Shinn:]

Thanks, Marc.

[Operator:]

Our next question is from Scott Gruber with Citigroup. Please proceed with your question.

[Scott A. Gruber:]

Good morning.

[Bryan A. Shinn:]

Morning, Scott.

[Donald A. Merril:]

Morning, Scott.

[Scott A. Gruber:]

Coming back to Sandbox, crew count at year-end expected to be over 90, still impressive growth but that's down a bit from your previous forecast of over 100. Bryan, is that reflecting the higher capital intensity per crew, the more competition? What drives that moderation?

[Bryan A. Shinn:]

Yeah. It's a great question. And, look, there's still tremendous demand out there for Sandbox. I think, just given what we saw at the end of 2017 with the holiday slowdowns and the weather and all that, we're just being a bit more cautious as to what actually gets deployed towards the end of 2018. And when you think about it in terms of share, we continue to grow share in the market pretty substantially. If you look in 2017, for example, we started out the year at about 13% of crew share, if you will, that was being serviced by Sandbox. We ended the year at about 17%. And you might say, well, that doesn't sound very impressive, but when you look at it over the same period, frac crews grew about 47%. So, just to stay even, we would have to grow our Sandbox crews by 47%. We actually did almost double that. We grew by 89%, the number of crews, from Q1 to Q4 of last year. And comes along with that a lot of challenges as well, as you might imagine. It's not just about the equipment and getting that fabricated, but we're hiring a lot of team members who join the company. We're scaling the systems, all the processes, all the back office. We have to have trucks. There's a lot that has to scale with this. So we just want to be realistic in the goal that we put out there. Obviously, our hope is to do better than that.

[Scott A. Gruber:]

No, I appreciate the color. If the box volume per crew is higher than initially expected, is the revenue and EBITDA opportunity at 90 crews bigger than 100? Can you size that potential for us?

[Bryan A. Shinn:]

Exactly. So the way we think about the business is more boxes equal more loads and more sand and we make more profits, right? And actually this system scales pretty well in terms of capital efficiency because if you just have to add more boxes and you don't have to add some of the other support equipment, like you could still do with one forklift, and you still have one cradle with the box to sit on and things like that, it's actually a good thing in terms of efficiency and ROIC.

[Scott A. Gruber:]

Got you. Would you agree that the opportunity for revenue and EBITDA, assuming flat pricing, is bigger at 90 than 100, given the trend in kind of box intensity?

[Bryan A. Shinn:]

Sorry. When you say 90 versus 100, I'm not following you.

[Scott A. Gruber:]

If you get to 90 crews at year-end versus the 100 crews you talked about last year, given the revenue opportunity per crew...

[Bryan A. Shinn:]

Okay. Yeah. Sure. So, on an equivalent basis, certainly, right? I do think, though, that over time there'll also be some pressure as more competitors emerge. And so there's more folks out there doing silos. There's other people trying to get into the last mile. So we just have to balance off that sort of theoretical view that there'd be more profitability with the reality of the competition. And it's difficult to project where that is 12, 18, or 24 months from now. But my guess is, like anything, there's more competition that comes into this space over time, and that probably puts some downward pressure on margins. So we'll have to see where that balance point is as we go ahead.

[Scott A. Gruber:]

Has there been any pricing pressure to-date?

[Bryan A. Shinn:]

Sure. There's some. I would say the profitability hasn't changed dramatically. But as we get new entrants into the space, certainly that'll put some pressure on price.

[Scott A. Gruber:]

Got it. Appreciate the color. Thank you.

[Bryan A. Shinn:]

Thanks, Scott.

[Operator:]

Our next question is from James Wicklund with Credit Suisse. Please proceed with your question. James Wicklund - Credit Suisse Securities (USA) LLC Good morning, guys.

[Bryan A. Shinn:]

Morning, Jim. James Wicklund - Credit Suisse Securities (USA) LLC Sandbox, can you tell us where your business is concentrated 66 crews (23

[Bryan A. Shinn:]

Sorry, Jim. We're having a really hard time hearing you. You were kind of garbled there. James Wicklund - Credit Suisse Securities (USA) LLC I'm sorry. I apologize. Can you hear me? A slight enhancement (24

[Bryan A. Shinn:]

No, not really. James Wicklund - Credit Suisse Securities (USA) LLC Okay. I appreciate it. I'll take it offline. Thanks.

[Bryan A. Shinn:]

Sorry, Jim.

[Operator:]

Our next question is from William Thompson with Barclays. Please proceed with your question.

[William Thompson:]

Hi. Thanks. Bryan, maybe I missed this in your prepared comments, but when do we expect Crane County be at full utilization? Just maybe help us on the ramp in terms of both Crane and Lamesa?

[Bryan A. Shinn:]

Sure. So I would expect that we would see Crane continue to ramp up throughout the year. It's started up now and we'll be ramping. I would guess that sometime, let's call it maybe third quarter, we would hit full run rate at Crane. Lamesa, I would expect to start up more like mid-year and then ramp up and maybe hit full run rate towards the end of the year. So, certainly by the end of the year, both mine sites should be cranking at full go. Crane will obviously hit that sooner given that it's starting up a few months ahead of Lamesa.

[William Thompson:]

And then maybe just update us in terms of the contract coverage of those volumes from those two Permian plants.

[Bryan A. Shinn:]

So we have very heavy contract coverage. We've targeted 70% to 80% and their customer response was so overwhelming that we're certainly at the high end of that range and maybe beyond, particularly as we get started up here. So we have good contract visibility from those two sites and very strong contract coverage.

[William Thompson:]

And in terms of the guidance for pricing flat sequentially in first quarter, obviously you highlighted the fact that you have pretty high contract coverage for your overall Oil & Gas capacity, and a big portion of that is fixed rate. Maybe give us sort of a high level view of the trajectory of pricing, why we won't move from more spot exposure to fixed rate? And maybe what you see on a spot rate in terms of the implications of these rail disruptions and other issues on spot pricing?

[Bryan A. Shinn:]

So we're certainly seeing some increase in spot pricing in the market today given the rail disruption, and I assume you're talking about the Canadian National and somewhat...

[William Thompson:]

Right.

[Bryan A. Shinn:]

...on the Canadian Pacific Rail. So, as we've seen in the past, when those type of things happen, spot prices go up and we're seeing that today. The market is very short-sand right now and, quite frankly, I expect that to continue. There's a huge demand wave that is coming through the industry right now. And if you look at where we expect demand to be in 2018, I would expect that we'd be somewhere between 100 million to 110 million tons of sand or about 45% up from the average of 2017. And so, that's a bit stronger than we had originally forecasted. But given where rig count is today and the number of frac crews, it would certainly support that. And then the other thing that's happening is we're seeing quite a build-up of DUC wells. Our estimate today is that there are about 7,700 DUCs out there. And just to put that in perspective, it would take about 50 million tons of frac sand to complete those wells. So, when you look at the new drilling plus the DUCs and maybe some drawdown there, you get a pretty bullish scenario for 2018 demand. And I think that's going to keep upward pressure on prices throughout the year, irrespective of some of the planned startups of new capacity that are projected to come online, Will.

[William Thompson:]

So, fair to say that your fixed price is below spot market today and that's why it's kind of the guidance for 1Q to be sequentially flat?

[Bryan A. Shinn:]

That's right. So I think, Will, we have a sliver of our product right now that we can put into the spot market but it's a relatively small percentage. And so, as we transition from the last couple of quarters where we didn't have quite as much contract coverage to the first few quarters here in 2018, we'll see some balance. That small piece that we still have to sell on the spot market, prices should be going up. But on our contracts, we'll see an average sort of flattening out. So, net-net, I would expect that we'll see sort of flattish pricing going forward for the next couple of quarters.

[William Thompson:]

That's helpful. Thank you.

[Bryan A. Shinn:]

Thanks, Will.

[Operator:]

Our next question is from Ken Sill with SunTrust Robinson Humphrey. Please proceed with your question.

[Ken Sill:]

Yeah. Good morning, guys.

[Bryan A. Shinn:]

Morning, Ken.

[Ken Sill:]

Yeah. So, Q4 to Q1, you're going to see 5% contribution margin erosion on top of, in Q4, your costs went up $3 million more than your revenues did. So, could you outline how that's going to play out as Crane and Lamesa come up, because I'm assuming part of that's related to startup costs there? So, I mean, you've already seen a significant contribution margin degradation and that's going to continue and get worse this quarter. When do we see that turn around or should we? I mean, are contract prices that much lower that we should just expect lower contribution margins going forward?

[Bryan A. Shinn:]

So, let me take the first part of that and maybe ask Don to weigh in on some of the details around the longer-term contribution margin. But if I think about how the year is going to start out for us here in Q1, the first point is that ISP looks really good. We tend to focus a lot on Oil & Gas, but let's not forget we have another side of our business. And so, that's right on track with the kind of budgeted projections for that part of the company. Oil & Gas, as we said in our prepared remarks, was a bit slow to start off January given the extreme winter weather. And the other thing that hasn't been publicized as much is just there was a slow customer kind of rebound, if you will, after the holidays. I don't know, first few weeks in January, there was just a bit of a malaise and we saw a slow rebound by frac crews and demand there. And so we kind of started off in January with softer volume and pricing on the sand side. And, of course, as you could imagine, Sandbox was similarly impacted. Frac crews have slowed down or gotten off to a slow start for the year. They don't need the sand. The good news is that February is rebounding. And I would say February looks like a kind of at-expectation month kind of as we had forecasted it when we were putting our budget together for 2018. And so the bottom line is that the cause for all this was, I guess, what we would call transient issues, nothing to do with the fundamentals of the industry or local sand coming online or any of that. Even better news is that March typically tends to be a pretty strong month for us. We usually get big rebound in the Industrials business, kind of the first big month for Industrials. And Oil & Gas is usually pretty strong in March as well. The weather starts to warm up and so that helps our cost a bit at our plants as we don't have to fight the cold weather there. So, my expectation is that we'll make up some ground in March and sort of to be determined how the quarter turns out. But at this point, it feels like Q1 could look a lot like Q4 in terms of the financials. And maybe I'll ask Don to talk a little bit more around some of the longer-term implications around margins and what we're seeing out there.

[Donald A. Merril:]

Yeah. So, what I'd add to what Bryan had to say is really what you touched on, which is the contracts. I mean, clearly, as we contract more volume, specifically out in the West Texas, those contracts are going to come at a price that's lower than what we're seeing on the spot market today. So, that's really the implication here. So we'll see that 5%-ish contribution margin per ton degradation in Q1, and we should see that throughout the rest of the year. Now, I would add though as we begin to add a lot of tons, you'll clearly see contribution margin dollars start to go way up, right, as we have more volumes at those contracted prices.

[Ken Sill:]

Yeah. And then just a follow-up. I mean, you guys were saying before that the Sandbox fleets would essentially pay themselves in about a year on an EBITDA basis. But that was when the cost was $1 million, $1.5 million. With the cost up to about $2.5 million, are they still kind of a one-year payback or has that been stretched to like crazy, maybe take the year-and-a-half, two years?

[Bryan A. Shinn:]

Yeah. Look, I mean, it's probably a few months more now, but the payback is still amazing, Ken.

[Ken Sill:]

Yeah. Okay. Thank you. I'll ask the rest of questions offline.

[Bryan A. Shinn:]

Yeah. Thanks.

[Operator:]

Our next question is from Connor Lynagh with Morgan Stanley. Please proceed with your question.

[Connor Lynagh:]

Yeah. Thanks. I was wondering if you could just give us a little more clarity on the relative level of volume change in February versus what you saw in January, or maybe how you expect to exit the first quarter. Could you just give us a feel for what you could be doing right now with your operating capacity versus what you were actually able to do in January?

[Bryan A. Shinn:]

Yes. So, as we look at let's say Q2 for example, Connor, and to your question around Q1 exit, our outlook right now is we could be up 30% to 35% in volumes versus Q1. So I think we'll see substantial increases in Q2 and then, as the capacity ramps up at the new-builds at Crane and Lamesa and some of the brownfields that we're putting in service as well, we'll see substantial quarter-on-quarter increases throughout 2018.

[Connor Lynagh:]

Yeah. That makes sense. And I just wanted to clarify the comments you were making on where you're contracting your local capacity. So, just broadly contribution margin per ton, is this mid-20s, low-20s, high teens, just how do we think about the mix affected as these tons start to come into the fold here?

[Bryan A. Shinn:]

So I would say that the contracts that we've signed generally mirror the kind of contribution margin that we had in 2017. So, if you want to look back at the same contribution margins during that period, that's a pretty good proxy for I would say what the average contract is for the local sand.

[Connor Lynagh:]

Okay. So, fair to say it's mid-20s or so.

[Bryan A. Shinn:]

Yeah. That's a reasonable estimate, I think, if you're putting a model together.

[Connor Lynagh:]

Okay. Thank you.

[Operator:]

Our next question is from Michael Lamotte with Guggenheim. Please proceed with your question.

[Michael Lamotte:]

Thanks. Good morning, guys. Bryan...

[Bryan A. Shinn:]

Hi, Michael.

[Michael Lamotte:]

...if I could follow up on the – in your prepared comments, you made mention sort of a new sand-to-hopper service model. And if I think about the risk of disruption that we saw here in the first quarter with the rail, having sand volumes warehoused or stored inventory levels closer to the point of consumption, particularly the grades that are not going to be able to be served in basin mines. How do you think about storage warehousing closer to the point of consumption?

[Bryan A. Shinn:]

So in addition to our local mines, let's say, out in the Permian, we have an extensive transload network that we've operated for the last several years. And so my expectation is that based on what customers are telling us that there's still going to be a mix of Northern White and local sand that's demanded out there, Michael. And so we'll just flange up our new mines with that network. And I think we've done a really good job of balancing out the supply and demand there and servicing our customers. And I think it's one of the reasons that customers have come to us and wanted to sign additional contracts. I mentioned in my prepared remarks, we now have more than 30 contracts. If you look back in the sort of history of this business, I would say typically we've had more like 8 to 10 contracts in Oil & Gas. So we're very heavily contracted, and I think that reflects the confidence that a customer has in U.S. Silica to deliver. And whether it's with our new to the wellhead model with Sandbox or just delivering sand from our transload network, let's say Northern White Sand that's come down from, well, Wisconsin or Illinois, I feel like we're the best in the business with that.

[Michael Lamotte:]

I know you all generally lease those transload facilities. Has there been any change in the cost of those leases or the number of facilities that you're actually leasing, 2018 versus 2017?

[Bryan A. Shinn:]

No, we haven't really seen any change in 2018 versus 2017, Michael.

[Michael Lamotte:]

Okay. And then the last one for me on the M&A side for ISP. The industrial businesses generally, if you just look at the public company comps, valuations on industrial businesses generally are higher. What's the cash market look like for M&A from a valuation standpoint, particularly as it compares to where Silica is trading today?

[Bryan A. Shinn:]

So I would say that the things that we're looking at in the industrial space to expand our offering in some cases into new markets or things that are complementary to our existing businesses, most of those trade at a multiple, as you said, that's substantially higher. And I would say that a typical industrial business is trading at somewhere between 9 to 13 times EBITDA. And so, if you're out there looking in the market for those type of acquisitions, that's where you need to be to be competitive.

[Michael Lamotte:]

Okay. Thanks.

[Bryan A. Shinn:]

Okay. Thanks, Michael.

[Operator:]

Our next question is from George O'Leary with TPH & Co. Please proceed with your question.

[George O’Leary:]

Morning, guys.

[Donald A. Merril:]

Morning, George.

[Bryan A. Shinn:]

Good morning.

[George O’Leary:]

On the M&A front, it sounds like there are a lot of opportunities out there that you guys have. I wondered if you could just maybe rank-order your preferences for capital deployment. You also have growth projects going on. So, thinking about what the next step is, is more predisposed to doing something on the Industrial side? Are there increasingly attractive opportunities on the Oil & Gas side of the equation? And then it sounds like competition in logistics is heated up. Might there be something you'd be looking at doing on the logistics front as well?

[Bryan A. Shinn:]

So I think the short answer, George, is yes to all of that. And obviously, with M&A, it's opportunistic. You can't buy what's not for sale. So we generally have kind of a rubric that we use for the things that we would prefer, the priorities, if you will, as you said. But we're looking across all of that. And I think also we've got the luxury with our cash generation to be able to continue to return shareholders cash more directly. So we've maintained our dividend. We instituted a share buyback program last quarter, and as we talked about in our prepared remarks, we've executed against that pretty strongly so far. I expect that we'll be out in Q1 repurchasing additional stock. So we're looking to do all that and still fund our high growth projects, as Don talked about earlier in the piece. So we have a lot of knobs to turn and a lot of flexibility, and I think that positions us well to take advantage, no matter where the opportunity comes on.

[George O’Leary:]

Okay. Great. That's really helpful. And then maybe just one more, piling on to that question. On the logistics front, given the competitive dynamics there, is there any thought or are you guys mulling over incremental M&A opportunities or organic growth potentially into other last-mile type offerings? Or does is it seem like so you could offer, say, a silo and a box, or does it seem like the boxes are going to be the sole way forward for the company?

[Bryan A. Shinn:]

So we're obviously looking at a number of things. And I wouldn't say that we're necessarily locked into just boxes. There certainly are other modes out there that some customers like. And so we're looking at all of that, George.

[George O’Leary:]

All right. Great, guys. Thanks for the color.

[Bryan A. Shinn:]

Thanks.

[Donald A. Merril:]

Thank you.

[Operator:]

Our next question is from John Watson with Simmons & Company. Please proceed with your question.

[John Watson:]

Morning.

[Bryan A. Shinn:]

Morning, John.

[John Watson:]

Bryan, do you have any thoughts on the new mine announcements in the Eagle Ford that we've heard about over the past few weeks and the viability of sand being mined in that region?

[Bryan A. Shinn:]

We've seen those announcements. Look, it's not new news that there could be mines in some of these locations. I mean, for example, we've had an Oklahoma mine for the last couple of decades. And so, wouldn't surprise me to see one or two of these type of mines crop up. In the Eagle Ford specifically, we've looked at mine sites there. As you can imagine, we've been pitched a lot of opportunities. And I would say that in that basin everything we looked at was very poor quality and not really suitable even for the "kind of local" sand standards that some operators are willing to accept these days. So, look, I'd expect to see a few of these sites crop up. But based on what we're seeing in the market and our own looking around to see what could be there, I just don't see the kind of wave that we've experienced here in the Permian.

[John Watson:]

Okay. Understood. And you mentioned an expectation for strong spot pricing in 2018. I know it's a ways away but in 2019 do you have any expectations for spot pricing? Might spot pricing fall below where you're contracted due to the capacity additions expected over the next several months?

[Bryan A. Shinn:]

Yeah. I would say, John, that every time we've done a forward projection in this industry for the last several years, say, for the kind of downturn in 2015 and 2016, we have under-predicted the level of price and demand. We were just having a conversation about this earlier in the week. And so our longer-term projections are still pretty bullish when you get into 2019 to 2020, but every time we make those projections the market outruns us. So I tend to be fairly optimistic going forward based on what we're hearing. And as we have signed a lot of these contracts recently, we're talking to senior executives at energy companies. And if you look at their plans for the next several years, they need a heck of a lot of sand, right? So I'm very optimistic about where this market is headed. Even with some of the new supply that's coming online, I still don't think it's going to be enough if the kind of projections that we're hearing from major energy companies are true and, look, those folks are the closest to it. So I think there's a lot of reason to be optimistic here beyond 2018. I think 2019, 2020, we should still be in a very strong demand position based on everything I'm hearing out in the market.

[John Watson:]

Great. And one last one for me. For Crane and Lamesa, are there any plans to forward-stage sand at a transload before going to the well side, or is that not something that you all are thinking about at this juncture?

[Bryan A. Shinn:]

So we have a lot of interesting plans with Crane and Lamesa. We're going to have Sandbox-only dedicated lanes where we can hot swap full boxes out. So we'll preload boxes at both of those sites. And then, with Sandbox, I think it's one of the advantages we have versus silos and other solutions is we can create what we call pop-up transload. And so we have plans to do that. So you can create kind of like a mini transload where you forward-stage material. And if you look at the concentration of drilling in certain locations would be the big pad wells that are happening, I think that could be a really cool way to shorten the logistics time. And so, imagine that during off-hours you're loading those boxes ahead of time, getting them out pre-staged, and then you have very attractive and quick logistics out to the well site. So there's a lot of really exciting stuff coming. I think we're not just sort of building West Texas mines in the same mold that we build Northern mines. We're putting a lot of new sort of wrinkles and features into them. And I'm really excited to get the group on the phone here that's listening and some of our major investors out to see Crane in particular. It's just an amazing site. We have 12 loadout lanes there. We're going to be able to rock and roll trucks through there very quickly. And I think the level of interest that we've got from customers is indicative of how they feel about the site for sure.

[John Watson:]

Okay. Great. Well, I'll turn it back. Thanks, guys.

[Donald A. Merril:]

Thank you.

[Bryan A. Shinn:]

Okay. Thanks, John.

[Operator:]

Our next question is from Samantha Hoh with Evercore ISI. Please proceed with your question.

[Samantha Kay Hoh:]

Hey, Bryan. I was wondering if you could update us on the expansion plans that you have in, like, Tyler, Pacific and also Kosse as well.

[Bryan A. Shinn:]

Sure. So, part of the expansion projects were the brownfields, and you've mentioned the major ones there. And so we're in the process of starting all of those up right now. So we've already gotten some production out of Tyler and that's ramping. That was actually kind of a two-phase project. Phase 2 should be starting up here in the next, I don't know, maybe six to eight weeks. So we should really be able to get a lot more tons out of Tyler here. And same for Pacific, everything is mechanically complete. They're just going through the startup and the checkout there. So I'm pretty excited about getting that up, and obviously that plays into our overall strategy to supply our customers.

[Samantha Kay Hoh:]

As a follow up, can you talk to the amount of capacity at Tyler that is contracted and maybe just what you're seeing on the demand side there? I mean is there any spot availability? And what sort of value proposition is that on the trucking side just from the customers' perspective? Is there some sort of trucking rate where it just doesn't make sense to truck those volumes into the Permian, for example?

[Bryan A. Shinn:]

Sure. So what we've seen out of Tyler, Samantha, is that a lot of the volumes are going to the East Texas area, so East Texas and Louisiana and South. We still have great logistics there. We can get those volumes going west also. So I think there's a pretty wide band of coverage for Tyler. It's one of the things we liked when we bought the site is that you can send the product almost anywhere. The contract coverage there is pretty high. I think it's similar to what we've seen at the other sites, so the kind of 70% to 80% number that we've talked about. And once again, we just have strong demand across all of these sites right now. And I think that 2018 is going to be sort of a banner year for proppant sales all across the industry.

[Samantha Kay Hoh:]

Thanks.

[Bryan A. Shinn:]

Thanks, Samantha.

[Operator:]

We have a follow-up question from Ken Sill with SunTrust Robinson Humphrey. Please proceed.

[Ken Sill:]

Yeah. Thanks for letting me back in.

[Bryan A. Shinn:]

Hi, Ken.

[Ken Sill:]

Yeah. Two questions. One, you guys said you had 30 customers now, which is 3x what you typically would have. What's the mix in customers between E&P companies and fracking customers, I mean, the pressure pumping providers?

[Bryan A. Shinn:]

Yeah. So we haven't disclosed that specifically. I would say, though, that a lot of the new contracts that we've signed are operators who wanted to self-source sand. So we have a higher percentage today than we've typically had of energy companies. And I think most of us expected that, quite frankly. With the local mine sites in the Permian, that's a perfect opportunity for energy companies to self-source. It's sort of a less risky option just because of the shorter logistics chain, right? I think a lot of the energy companies back several years ago thought about self-sourcing, but just managing all the rail logistics and transloading and all that just felt like too much of a headache for them. But now, given the proximity of these mines to their drilling activity, it's kind of a tailor-made solution. And then for us, when you couple that up with a Sandbox solution, especially where we're delivering right to the wellhead for those customers, it feels like a really attractive proposition for them based on what they tell us.

[Ken Sill:]

Yeah. And that leads to my follow-up question. I mean, you go out and you visit E&P companies and they're all like, well, we're going to self-source our sand and the next conversation is going to be, well, we'll just have our own sand mines. So, for those of us on the phone, what is it that you guys bring to the table that sets you apart from, like, the guys that are just opening spot mines out in West Texas, because there's a lot of capacity coming on from private equity like that, or E&P companies starting their own sand mines and just cutting out the distribution network entirely? And what's to prevent that?

[Bryan A. Shinn:]

Yeah. Yeah. It's a great question, right? And so, as we talk to those customers, both the energy companies and the service companies, what most of them tell us is, look, we don't really want to open our own sand mine. We have better things to do with our capital. It's not our expertise. I mean, look, some of the big operators, could they do it if they wanted to? I suppose, right? But I don't sense a lot of appetite for that. I sense that what they want is to do business with someone like us who not only has the local mines but also has the Northern White capacity and all the last-mile logistics and kind of the full suite of offerings. I think what our customers want is a reasonably priced product delivered where they want it 24 hours a day, 365 days a year, and we provide that. So I think, as long as we provide that service, we'll be in good shape. In terms of kind of opening up mines and how easy it is and things like that, look, I think what we're going to see here in the coming months is that you can talk about opening up a mine, but actually doing it and consistently getting product out to customers in a way that you don't disappoint them is not as easy as it looks. So we've heard stories in the last month or two of some of our competitors who opened up mine sites that have been running out of water and have to shut down, having equipment that failed within days of installation because it wasn't the proper equipment; weird stories about one of our competitors who decided to put in one bolt out of three in their installation as they were building things because it was quicker to get up and running, right? So I think there'll be a differentiation in terms of quality and service. I look at the quality that we're getting out of Crane County right now and, boy, it's a really great product. We have not experienced the kind of issues that many others have in terms of poor product quality as we started up out there. So I think the customers notice all those things. And once again, it's why we have 30 contracts now. Customers want to do business with us, and I think it speaks well to U.S. Silica and to our ability to make really good long-term profits in this industry.

[Ken Sill:]

Thank you.

[Bryan A. Shinn:]

Thanks, Ken.

[Operator:]

Ladies and gentlemen, we have reached the end of our question-and-answer session. I would like to turn the call back to Bryan Shinn for closing remarks.

[Bryan A. Shinn:]

Okay. Yeah. Thanks, operator. I'd like to close today's call by thanking everyone who helped us deliver what was record performance in 2017. I'm really proud of what we achieved last year on many fronts, and I believe that we're going to have even better 2018. I'm really thankful for everyone who dialed-in today. And everyone have a great day and hopefully we'll talk to you soon.

[Operator:]

Thank you. This concludes today's conference. You may disconnect your lines at this time and thank you for your participation.