U.S. Silica Holdings, Inc.
Q1 2014 Earnings Call Transcript

Published: 30 Apr 2014

[Operator:]

Good morning, and welcome to U.S. Silica's First Quarter 2014 Earnings Conference Call. Just a reminder, today's call is being recorded and your participation implies consent to such recording. [Operator Instructions] With that, I will now turn the call over to Mr. Michael Lawson, Director of Investor Relations and Corporate Communications. Please go ahead.

[Michael K. Lawson:]

Thanks, Bryan. Good morning, everyone, and thank you for joining us for U.S. Silica's First Quarter 2014 Earnings Conference Call. With me on the call today are Bryan Shinn, President and Chief Executive Officer; and Don Merril, 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 definition of segment contribution margin. [Operator Instructions] 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 highlights from our strong first quarter performance, followed by an update on the progress we're making on several strategic fronts to drive long-term growth and success across our company. Finally, I'll provide commentary on some of the current trends we're seeing in our markets as well as an outlook for both our Oil and Gas, and Industrial and Specialty Products business and an updated financial outlook for 2014. Don Merril will then take a deeper dive into our first quarter financial performance before we open up the call for your questions. As widely reported, extreme cold and heavy snow in the upper Midwest caused disruptions to the oil and gas completion operations during the first quarter. The profit supply chain was also slowed by weather-related mining and railroad issues. U.S. Silica experienced some issues in January as well, but having inventory forward-staged in basin helped us avoid significant disruptions. So while the severe winter weather may have challenged some of our competitors, our company had ample inventory already positioned in basin to meet customer demand, proving the strength and resiliency of our local inventory business model. The result, total company volumes in the quarter were a record 2.3 million tons, a 22.5% increase over the same period last year, driven largely by surging volumes in oil and gas. Oil and gas volumes and price ramped during the first quarter with volume totaling a record 1.3 million tons, up 45% year-over-year, and pricing rebounding nicely. We experienced robust demand across all frac sand grades with almost 70% of sales occurring in basin via our transloads. On the ISP side of the ledger, volumes of 976,000 tons represented a slight increase year-over-year despite some operational challenges caused by the severe weather. In fact, all of our industrial plants experienced some type of weather-related issues during the first quarter. Across the company, higher volumes drove record revenue in the quarter of $180.1 million, a 47.2% improvement over the first quarter of 2013. Adjusted EBITDA for the quarter was $41.9 million, an 8% improvement year-over-year, and up 14% sequentially from the fourth quarter of 2013. Clearly, we're off to a very strong start in 2014, and the momentum is continued into Q2. It appears to us that the market for frac sand is beginning to tighten. We're currently sold out of all grades of frac sand, and we're increasing prices where possible. We've also made substantial progress in selling more oil and gas volumes through our higher margin transloads by utilizing enhanced analytics and decision-making processes to more efficiently match shipping origins and destinations. Increased demand for finer grades of frac sand is also having a positive impact on pricing and margins in our ISP business as supply is starting tighten in some of these legacy markets as well. We have recently announced several price increases on our whole grain industrial silicon products, which will begin to take effect on May 1 or when specific contracts allow. Going forward, we believe that industry demand for our high-quality oil and gas products is on pace this year to increase faster than projected supply growth. Some of the incremental supply, of course, will come from our frac sand mine and plant located near Utica, Illinois. I'm pleased to report that we are still on track to start production at this low-cost state-of-the-art facility in a couple of months, and we anticipate that demand will be very strong. The addition of Utica will give us a total of 6 million tons of annual raw frac sand capacity. Our next Greenfield site, located near Fairchild, Wisconsin, is in the final permitting stages, and we anticipate local approval in the near future. The first phase of this 3 million ton per year site with direct UP rail access could come online as early as the third quarter of 2015. We're also evaluating a variety of alternatives to bring additional capacity online in what could become a very tight market. In Q1, we sold approximately 50% of our total oil and gas volumes on a contract basis and 50% in the spot market. Due to current market conditions and our track record of consistently meeting commitments, we have been approached by several customers to negotiate new contracts and to modify existing contracts with term extensions and volume and price increases. We're working closely with a select group of these customers to deepen our business relationships. I'm also very happy to report that our resin-coated sand products are gaining acceptance in the market, and we expect strong sales in Q2. I think resin-coated sand could actually be a nice tailwind for us this year, as we continue to ramp up sales to our traditional service company customers and generate pull-through demand by marketing directly to energy companies. Going forward, for oil and gas, we anticipate that the market will stay reasonably tight for frac sand, and we would expect continued high sales volumes at improved prices. The horizontal rig count is now at an all-time high, and both energy and service companies have been offering increasingly bullish commentary on drilling activity in 2014. In the Permian, for example, the horizontal rig count is up 33% year-to-date and 71% year-over-year. Rig efficiencies continue to improve. Laterals are lengthening, and we continue to see increased proppant density, all driving strong demand for our high-quality Northern white sand and resin-coated sand products. Based on customer and market feedback, we believe that this heightened demand is more a function of a true acceleration of underlying demand versus catch-up for work deferred from January and February of this year due to the harsh winter. Moving to the outlook for our Industrial business, we believe that ISP is right on track to deliver strong bottom line results in 2014 as planned. We successfully implemented meaningful price increases earlier this year and expect to implement additional price increases in the second quarter. We're also beginning to generate noticeable contributions from our new product launches in ISP, and anticipate rolling out additional new products later this year. Finally, on the supply chain front, we continue to expand our logistical platform to better serve customer needs. We recently started construction on our new world-class 20,000-ton transload in Odessa, Texas, to serve the growing Permian Basin, which is slated to come online in the fourth quarter of this year. We'll begin construction soon on a new 10,000-ton addition to our San Antonio transload, which is also scheduled to become operational in the fourth quarter. Further, we are evaluating the feasibility of another 30-plus transload sites to improve our throughput in all the major basins and place our product ever closer to the wellhead. At the same time, we're making significant investments in rail assets. Our logistics and supply chain team forecasted the impending railcar shortage long before many of our competitors did, and we placed significant orders for cars well in advance of our current and future needs. We continue to ship more unit trains and are now sending about 12 unit trains per month from our Ottawa and Sparta facilities, and expect to ship even more once our new Utica mine and plant come online. Based on our strong start to the year, our financial outlook for 2014 continues to improve. With expected strong oil and gas volumes and pricing and margin increases across our business, we now expect 2014 adjusted EBITDA at the upper end of our $180 million to $200 million guidance range. And with that, I'll turn the call over to Don Merril to review our financial results and updated guidance in more detail. Don?

[Donald A. Merril:]

Thanks, Bryan, and good morning, everyone. As was stated earlier, volume in the first quarter of 2014 totaled 2.3 million tons compared with 1.9 million tons sold in the first quarter of last year, and 2.1 million tons sold in the fourth quarter of 2013. As Bryan pointed out, our strong in-basin inventory positions helped drive record top line results. Total company revenue for the first quarter of $180.1 million was up 47% year-over-year, and increased 20% sequentially over the fourth quarter of 2013. On a year-over-year basis, revenue for the oil and gas segment grew by 77% to $130.6 million, while revenue of $49.5 million for the ISP segment increased 2% when compared to the same period last year. Volumes for the oil and gas segment were 1.3 million tons in the quarter, up 45% over the same period last year. Contribution margin from oil and gas was $41.6 million compared with a contribution margin of $36.2 million for the first quarter of 2013, and up 22% sequentially from the fourth quarter of 2013. The increase in contribution margin was due to a richer product mix from selling course grades out of inventory, price increases that were mostly implemented in March and lower distribution and operating costs as a result of a focused cost savings effort. Volumes for the ISP segment of approximately 1 million tons increased 1% on a year-over-year basis. Contribution margin for the ISP segment of $13.2 million was flat with the same quarter in the prior year. SG&A expense for the quarter was $15.4 million compared with $12.4 million in the first quarter of 2013. The increase in overhead was driven by $500,000 increase in expenses associated with the addition of strategic headcount, and an $800,000 dollar increase in bad debt expense to better protect the balance sheet as sales continue to rise. Finally, the company incurred approximately $1.8 million in business development expense related to M&A activity as the company continues to search for strategic growth opportunities. Depreciation, depletion and amortization expense in the first quarter was $9.6 million compared with approximately $8.3 million in the same quarter last year. The increase in DD&A expense is being driven by our investments in capacity expansion initiatives combined with increased depletion due to the additional volumes being mined. Looking at the other income and expense line, interest expense for the quarter was $3.8 million compared with $3.6 million in the first quarter of 2013. The increase in interest expense reflects the cost of additional debt after refinancing our senior credit facility. The effective tax rate in the quarter was approximately 25% compared with 27% for the first quarter of 2013. Cash and cash equivalents and short-term investments totaled $160.8 million compared with $153.2 million at December 31, 2013. As of March 31, 2014, our working capital was $275.2 million, and we had $46.5 million available under our revolving credit line. As of March 31, 2014, our long-term debt was $367.1 million compared with $368 million at December 31, 2013. We incurred capital expenditures of $10.6 million in the first quarter of 2014. The bulk of our first quarter spend was related to the continued investment in our new Utica frac sand facility, a new transload facility under construction in Odessa, Texas, and various maintenance capital requirements. With that, I'd like to now turn the call back over to Bryan.

[Bryan A. Shinn:]

Thanks, Don. Operator, please open the lines for questions.

[Operator:]

[Operator Instructions] And your first question comes from the line of Ben Swomley.

[Benjamin Swomley:]

I was hoping you could share a little bit more color on the pricing trends that you're seeing. Looking at the oil and gas division, on the last call you thought there might be opportunity later in the year to increase pricing somewhat. And it seems like maybe things are actually looking a little bit more constructive than what you would have thought 2 months ago, since you've already started to increase price. When did or when will the pricing increases go into effect, and can you give us a ballpark average price increase?

[Bryan A. Shinn:]

Yes, sure, Ben. And of course, as you know, the price -- our pricing power is dependent a lot on supply and demand amongst other things. And what we've seen, as we've gone through the first quarter is that the supply and demand balance has definitely tightened up. And we can talk a bit, if folks are interested, around all the demand trends. I would say people are probably fairly well educated around that. The supply is not keeping up with that in the marketplace. And so we saw an opportunity to go in, in late first quarter and start to get some additional pricing. We had pretty broad price increases that we put in, in March. And so, we started to see those read through late in the quarter, and we would expect that those would -- will continue on as we get into second quarter and beyond. We actually have done some additional smaller price increases in April, ones that we couldn't do earlier in the first quarter. And I would say, to your question around how much, I think we have the potential on the year to see mid-single-digit price increases. Certainly, depending on how the supply and demand trend plays out. There could be some upside to that. But I would say, mid-single-digits would be a good place to set expectations. And the good news there is that we expect to see that impact broadly across all basins, more or less. It's not just confined to, say, the Permian or something where we all know things are very hot. So we're getting broad pricing traction across the basins in the country.

[Benjamin Swomley:]

And you mentioned that you're in talks with customers for additional contracts or contract extensions. Can you give us a little bit more color there? What are the -- perhaps quantifying the sizes of the contracts you're looking at compared to historical contracts, or are you planning on keeping your overall contract coverage lower so that you can take advantage of a tighter supply/demand market later in the year?

[Bryan A. Shinn:]

Well, as you can imagine, that's a question that we debate a lot internally here. Today, just to remind everyone, we're currently about 50% sales under contracts and 50% to spot customers by volume. And compare that to last year, where we were 70% or 75% contracted. And so we definitely have a lot more on the spot market today than we did in 2013. We're currently in discussions with more than 10 customers to potentially either enter into new contracts. So we have some new customers that we may do contracts with, but also, we have the potential to rework existing contracts. And I would say that we've been approached by almost all of our existing contract customers about extensions, volume increases and, in most cases, those are coming with -- potentially, with price increases as well. I see the appeal [ph] for the dynamic in the market. We had one customer that had come to us and they had initially asked to double their existing contract. They've now come back and asked us to quadruple the volumes under a reworked contract if we come to agreement on pricing and terms. We have another customer that's looking for 5x increase in their volumes. We have another contract customer that's taking at 4x their contract level, but taking that at market pricing, right. So I think it's one of the things that gives me comfort when I think about supply/demand and where that balance is going. It's clear that our customers who are clearly very intimate with the downstream market, they've done their own diligence, and I've concluded a couple of things

[Benjamin Swomley:]

That make sense. And if I can sneak one last one in here. Just -- I wanted to follow up your comment on supply not keeping pace with demand. I think, on past calls, you framed your outlook on industry capacity growth as less coming online in nominal terms over the next 2 to 3 years than over the last 2 to 3 years. Does that still stand or what's your updated view of the industry's ability to add capacity in light of demand acceleration?

[Bryan A. Shinn:]

So we have actually just recently updated our supply and demand model, and as you know, Ben, I think we've got one of if not the leading model in the industry around frac sand supply and demand. And these projects to add a new -- large new mine sites in places like Wisconsin and Minnesota are pretty hard to miss, if you're looking for them, and we certainly track them closely. A couple of trends that we're seeing

[Operator:]

Your next question is from the line of John Kasprzak.

[John F. Kasprzak:]

So I guess, related to that last comment, Bryan, could you maybe update the market growth outlook? I think, back in time, we thought it was on 10% to 15% volume growth market and flat rig count. That's obviously changed, maybe recently it was maybe 15% to 20%. Where do you think we stand now giving your comments?

[Bryan A. Shinn:]

Yes. So in some ways, it feels like I've gotten into a time warp and gone back to 2011. The market kind of feels like that again, if you remember how strong things were back then. And as you mentioned, Jack, our initial modeling was calling for 10% to 15% demand increase in 2014. I think, we're way beyond that now based on what we're seeing. And there's a number of factors that are playing into this. Some are obvious and other perhaps not so much. And so for us, 5 or 6 things we look at, the first, obviously, is increased rig count. That's a positive to completion activity and sand demand. The rig efficiencies that we saw starting in 2012 and continuing into 2013, that continues into '14, and so we get some tailwind from that. More stages, longer laterals, that trend has been around for a while and is continuing. One that's a bit newer is downspacing, right? So we're seeing companies drill and complete wells much closer together than has been done in the past, and so that's driving additional volumes. We're seeing increased profit density. There now is a growing course of energy companies out there who are showing results with significantly increased amount of profit in the wells. And then this last piece, which I haven't really heard a lot of people talking about yet, but what energy companies that uses kind of increased profit regime are reporting is significantly improved economic results. And so that makes more and more wells even farther from the fairway, if you will, hit the minimal hurdle rates for development. So all that together is just pushing huge increases in the amount of sand that's being used per well. And just to give you maybe a couple of numerical examples, if you'd asked me last year, kind of what's a good average per well in terms of frac sand, I would have said something like 2,500 tons. Now we're seeing 5,000-ton wells as common. We've actually seen wells up to 8,000 tons. And if you think about that, it's just a staggering volume. That's almost a whole unit train of sand. So imagine a mile-long unit train just to complete one well. So given all that, we currently now expect the demand growth probably in excess of 25% for 2014, and there are continuing anecdotes coming in and real evidence based on the things I've said earlier around our customers coming to us for 3, 4, 5x increase in their contract volumes.

[John F. Kasprzak:]

That's great. To resin-coated sand, you mentioned that might start to kick in, if that's the right way to say it, in Q2, start to see some sales there. Can you just talk about the dynamics in play bringing that, I guess, bringing demand for that product back and what's happening with pricing there?

[Bryan A. Shinn:]

Sure. So our team has been working very diligently since we started up the facility last year at Rochelle and, of course, I think as we've been pretty open about, it wasn't the perfect time for a market standpoint to do that, given that the market was probably 15% to 20% long in terms of supply. But I think the efforts of our team have been paying off. And as I look at what's coming through in April, for example, I think we'll sell more resin-coated sand in April than we have in the entire time since we started up our Rochelle facility, and we expect that sales will continue to increase from there. We have a number of repeat customers now. Our products are being used across many of the basins in the country with outstanding results. So I'm feeling much more confident around resin-coated sand, and so I expect it will continue to ramp up in the coming quarters here. And from a pricing standpoint, prices have come up a bit. We had always said that we wanted to try and get at least $100 a ton contribution margin bump from our resin-coated sand business, and I think prices are moving in and around that range. So that's good news. And I expect that, as we finish up the year here, we'll come back and report some pretty positive results and developments on the resin-coated sand business.

[Operator:]

And your next question is from the line of Brandon Dobell.

[Brandon Burke Dobell:]

One, if you guys could hit, I guess, mix of volume commentary. Obviously 100 mesh has been a much discussed topic, maybe what that looked like in the first quarter, what the trends are, especially as you think about those customers that are coming back and asking for 2, 3, 4, 5x contract, are they shifting away from course grades, towards course grades? I'm just trying to figure out the impact of, I guess, mix shift on contribution looking out the balance of the year?

[Bryan A. Shinn:]

Yes. It's a really interesting question, and no doubt, we're seeing increased demand for 100 mesh. In Q1, certainly part of the increases that we saw were related to that. I guess, the way I look at it, Brandon, is that I don't see this right now as a cannibalization. I know that's kind of one of the questions that a lot of folks have is, is this 100 mesh sort of taking away volume from 40/70 or some of the other more traditional grades. And I really see it as a plus one and I think the numbers bear that out. As we talk to our customers, it's clear that, they're using that in most cases in addition to the other grades. With that said, one of the issues for us is that 100 mesh, as everyone knows, sells for much less in terms of price per ton and the contribution margin is much less than our other grades. So as that volume ramps, it's dilutive to overall contribution margin per ton but certainly accretive to total contribution margin dollars. And we saw that again in Q1.

[Brandon Burke Dobell:]

Okay. No, I guess, that's a segue from that. The pricing action or pricing actions that you've started to take, should we assume that, that gets applied equally across all the types of all the grades of sand or are you taking -- are you able to take more price at 20/40 and not much at 100 mesh or vice versa?

[Bryan A. Shinn:]

So we're actually getting pretty good pricing in 100 mesh as well. So we're actively working to improve the margins there. But certainly, we've gotten price across -- broadly across all the grades. There are some sort of grades in certain locations where there is more pricing power and some less, as you might imagine. But it's pretty broad-based and I think at the end of the day, the pricing work that we're doing is all about getting our margins up to the highest sort of reasonable level that we can. I also wanted in that process highlight the work that our supply chain team has been doing. So it's not just about price, it's also about efficiency and managing our costs. And our supply chain folks have been doing a great job of taking out cost at the same time that we're increasing price.

[Brandon Burke Dobell:]

Okay. And then final for me, given the demand trends versus supply, is there anything you guys can do, for example, at Ottawa or even at Sparta, to increase the throughput there. So as you think about new or incremental sources of your own supply, beyond just the new mines you've talked about, anything you can do with existing infrastructure whether it's on the specific oil and gas mines or from the ISP side to increase the tonnage to sell for the oil and gas distribution network?

[Bryan A. Shinn:]

Yes. So we continue to actively look at those kind of opportunities. I would say though, the reality is that our legacy sites, when we saw the shortages in 2011, for example, we ask ourselves those same questions, and not just us, but most of the folks who were around in the industry at that time. And we all pushed capacity. We did brownfield-type of work, broke bottlenecks. And so, certainly, for the mines that have been around for a while, I don't think there's a lot of opportunities to do that. There could be some small incremental capital projects, but we're not talking large pieces of volume there.

[Operator:]

And your next question is from the line of Blake Hutchinson.

[Blake Allen Hutchinson:]

First of all, just maybe circling back to the quarter. The commentary suggested that your inventory staging and maybe some of the efforts on the pre-positioning might have covered up the transportation issues but to be clear, were you still taking the burden of added mining/transportation cost in the period that still hampered margins, maybe not as much as 4Q but some lingering effects there?

[Bryan A. Shinn:]

So it was certainly great to have the inventory pre-staged. But I think that a lot of the work that we did in the supply chain over the last couple of years really paid off. I would say that compared to a lot of our competitors, we didn't really have substantial disruptions. And once again, it's a credit to the work that our supply chain and operations teams have done. We've been doing this for 114 years, right? So we've had tough winters before, and we know how to work through these things. But certainly, having the inventory out there where customers could buy it made a positive contribution as well.

[Donald A. Merril:]

So you'll see when we release the Q a little bit later today, that inventories actually dropped $13 million from the end of December to the end of March. And that equates to roughly 160,000 tons. So a lot of tons being sold in basin during the quarter.

[Blake Allen Hutchinson:]

Great, that's very helpful. And then, I guess from a -- somewhat related to that and somewhat related to a lot of commentary thus far, you talked about some of the pricing increases imposed, you talked about some headway on the matching origin destination and some -- giving some granularity to our analytical metrics. At the same time, the volume numbers you're throwing around make it seem like we're going into a very frenzied environment. What's the confidence level, or what's happening at the same time maybe on the cost side? And would you caution us from just building in kind of pricing as being pure to the profit line and these efforts as being additive? Is there an x factor out there that this frenzied environment just creates a whole other realm of -- hit to the cost structure, and just kind of big picture thoughts on that?

[Bryan A. Shinn:]

Yes, it's a really good question. We are doing so much work on the supply chain side, and I'm so proud of what our operations and supply chain teams have done. And it's being led by our new Chief Operating Officer, Mike Winkler. It's one of the reasons we created the COO role was exactly to focus on these type of things. And we're actually potentially seeing our costs come down because of the work that these folks are doing. Let me give you a couple examples, in spite of all the, as you said, kind of a frenzy, we've actually substantially reduced our railcar demurrage, and it's amazing when you track this over the last several months, it's coming down pretty rapidly. I talked in the prepared remarks around optimizing the shipping origins and destinations. We've done a great amount of work there. And then one of the things that, I think, gets overlooked sometimes is that we're significantly ramping up our unit train shipments. We are now running about 12 unit trains a month, and I expect that, that will continue to increase. Our new sites are all going to be unit train capable. That takes a lot of cost out of the system, simplifies a lot of logistics and at the end of the day, it just provides for a much more efficient supply chain. So I would say the watchword for us is efficiency and simplicity, and I feel like we're making great progress in both of those areas.

[Operator:]

And your next question is from the line of John Daniel.

[John M. Daniel:]

Just a couple of questions for me. At the time of your original 2014 guidance, how much pricing had you build into that plan? And can you help -- I guess, that's first question.

[Bryan A. Shinn:]

Yes, we had very little pricing built into the initial guidance we gave. At the time, the market was not in the position it's in today, so there was very little pricing in that. And [indiscernible] since you're asking a pricing question, [indiscernible] is our ISP business as well. Because the ISP business is taking some pricing, too. It may not have as big an impact as we're seeing in the oil and gas but in this market, they're capable to take -- their ability to take price is there as well.

[John M. Daniel:]

Okay. And then just one last one for me. It's a question on the M&A and the business development expense. I'm assuming the fact that it's identified as an add back, is that the cost relates to a specific opportunity that did not materialize, and therefore, can we assume that this is nonrecurring?

[Bryan A. Shinn:]

I would assume it is nonrecurring. I would say this, that we're constantly looking at strategic opportunities in the business. We're always looking at things. There were a lot of dollars associated with one, but we're going to continue to look at strategic opportunities to grow the business. But I would consider this a onetime add back.

[John M. Daniel:]

Fair enough. And just is it fair to say that most of those costs were external parties and wasn't just -- does that make sense?

[Bryan A. Shinn:]

Yes. The vast majority of that was to external third parties.

[John M. Daniel:]

Okay. And then as you think about the M&A opportunities as a part of the growth strategy, can you characterize whether the development efforts are more on growing sand reserves, or just an enhanced distribution or what's -- is there a central theme that you're looking at?

[Bryan A. Shinn:]

So this is Bryan. Maybe I'll take that one. I tend to think about our 2 businesses differently. In the oil and gas side, we're definitely looking at opportunities to grow our supply chain footprint, and so I look at that as kind of a holistic supply chain. So everything from reserves to processing capability, to rail infrastructure, and then downstream transload. So I think [ph] supply chain footprint when you think about M&A for the oil and gas side. On the industrial side of the business, we're looking at opportunities there as well, but those would be more sort of bolt-on capabilities that could help us drive some of the differentiated product development that we're doing there.

[Operator:]

And your next question is from the line of Matt Conlan.

[Matthew D. Conlan:]

As you talk about the possibility of mid-single-digit price impact on pricing, is that -- are you taking about the FOB price or the in-basin price, because there is a difference?

[Bryan A. Shinn:]

Yes, we're looking at -- we're taking pricing as opportunistically and as often as we can, of course. It's going to be across the board, but it certainly will depend. So that type of price increase is going to depend by basin. So that's the average that we're looking at across all grades and all locations.

[Matthew D. Conlan:]

Right. I guess, the question is, does that -- looking to your overall operations, are we looking at 5% on $50 per ton FOB pricing or 5% on $100 a ton that you sell in the basins?

[Bryan A. Shinn:]

Yes, I would say, it's an average again, so across -- it's fair to take that math across both x plant and the in-basin, but when you do that, keep in mind that 50% of our volumes are still at contract. So we don't have the opportunity to price on that.

[Matthew D. Conlan:]

Understood, understood. So changing gears, even allowing for the dilution of margins for more 100 mesh sales, it does still seem like your per ton costs are still a lot higher than they were, midyear last year? Do you still have a lot of Sparta volumes having to pay rail switching fees?

[Bryan A. Shinn:]

Yes, we do. We're still sending a lot of the Sparta volumes down South, where we do have those switching fees. I think, our overall cost per ton to actually manufacture, if you will, to pull the sand out of the ground is probably lower today than it was back 6 to 8 months ago. But certainly, what we're seeing is as we continue to grow our percentage of sales in-basin, you're certainly seeing an increase on the cost side because it just costs us more to get those tons in-basin.

[Matthew D. Conlan:]

Right. Do you see an opportunity to redirect those Sparta volumes into the Bakken, which might be a little bit cheaper for you?

[Bryan A. Shinn:]

Yes, I think the -- when we bring Utica online, it's going to have a straight shot down into the Permian, which is definitely going to allow us to redirect Sparta. So I think we'll start to see that mix shift as we move forward in 2014 towards the back half.

[Operator:]

And your next question is from the line of Kurt Hallead.

[Kurt Hallead:]

I was curious, given the -- again, given the positive industry backdrop, supply/demand dynamics, commentary about pricing improvement, you did increase your -- or tightened your EBITDA range, though you did not increase it in an absolute sense. So I'm just kind of curious that given all the dynamics and the pricing, and I understand the 50-50 split between spot and contract, but it seems like you would have a little bit more potential momentum to move the EBITDA number up a little bit higher. Is there a cost dynamic in play here that is kind of keeping you from moving that top end of the EBITDA range up? I was hoping you can give us some color on that.

[Bryan A. Shinn:]

Yes, it's a really good question, Kurt, and I think for me, anyway, it just comes from kind of a natural conservatism. I mean, we see a lot of positive trends in the market, but I want to continue to see that play out on the bottom line results, right. And so that's how I would look at that. I would say there's -- if you ask me how I feel, I feel pretty optimistic. I feel there's more sort of upside than downside to our outlook. But, once again, I want to see it play out over the next quarter or so, and be able to come back to you at the end of Q2 with results that might perhaps lead us in the direction that you're talking about.

[Kurt Hallead:]

So in that same light, I was wondering if you can give us an update -- not too long ago, you provided a forecast of or a target of doubling your EBITDA over the course of next 3-year period or so. Can you give us an update on your views on that?

[Bryan A. Shinn:]

Yes, sure. So as you recall last year at our Analyst Day, we rolled out a kind of 2016 outlook for the business. And that time, we said we'd roughly double the size of the business in terms of EBITDA to between $250 million to $300 million. And I expect that with Sparta, Utica and Rochelle, we'll be right in that range. And then certainly, as we add Fairchild, because at that time, those numbers didn't really include Fairchild, we'll potentially move to the upper end of that range or even beyond, assuming that we're successful as we assume we will be in placing products from Fairchild out in the market in and we hadn't really talked about that yet, but -- on the call here, but Fairchild is our next mine site after Utica and that's right on track. As I've mentioned before, that could be up to 3 million tons worth of capacity. I would expect that we'd be in a position to start that up perhaps as soon as Q3 of 2015. Wouldn't likely start up all 3 million tons at once. There would be kind of a phased approach. Maybe the first phase would be sort of, say, 2 million tons or something like that. But when you look at what would roll through into 2016, that will all be kind of, in my mind, additive to that $250 million to $300 million range.

[Kurt Hallead:]

Okay, now in that same context and in that EBITDA forecast of $250 million to $300 million, how much resin-coated sand did you include in that?

[Bryan A. Shinn:]

So we included all of the installed capacity at Sparta, Utica and Rochelle in that outlook. And remember, installed capacity at Rochelle could potentially go up to 400,000 tons, right. So stage 1 was 200,000 tons; second phase is another 200,000 tons. We obviously, haven't made the decision to pull the trigger on that second phase yet. But that was all in that $250 million to $300 million EBITDA range.

[Kurt Hallead:]

And then I was wondering if you can give us some general sense on the pricing differentials between spot and contract right now?

[Bryan A. Shinn:]

So we continue to see a premium between spot and contract. Historically, we'd said that spot was 10% to 15% premium over contact, and I would say given all the market shortages in Q1 and some of the other supply/demand factors, we're probably trending towards the higher end of that historical range in terms of differential between spot and contract.

[Operator:]

And your next question comes from the line of Marc Bianchi.

[Marc G. Bianchi:]

Thank you, my questions have been answered, guys. Great quarter.

[Bryan A. Shinn:]

Okay. Thanks, Marc.

[Operator:]

Your next question comes from the line of Trey Grooms.

[Trey Grooms:]

So first question is, kind of a follow-on to one of the earlier ones about kind of redirecting some of the Sparta capacity with Utica coming on, and with that being in the kind of the outlook and everything longer-term, how do we think about the timing there of -- with redirecting and where the demand is, it sounds like very robust. Should we expect that timing of seeing Sparta fully sold out with these redirected volume, should that come pretty quickly, once Utica comes on or how do we think about that?

[Bryan A. Shinn:]

I don't -- look, I think it's going to take some time for us to redirect all that Sparta. So Utica's going to ramp up, right. We are going to start the ramp-up in June. It's going to ramp up. And then Sparta, right now, we're seeing such a healthy demand in the Permian. I could see us continuing to ship down there until Utica is up and 100% fully operational. So I think you're not going to really see this until the back half of 2014.

[Trey Grooms:]

Okay. So back half of '14, you think that Sparta can have all of that redirected, is that what you're saying?

[Bryan A. Shinn:]

I don't know if we're going to get all the way there. And -- I look at it like, look, we're going to send the product where the customers really want it, and if the Permian remains hot and hotter than the Bakken, then we're going to continue to ship there. However, I do believe that we are going to redirect some of those Sparta tons west and east, where it's much more profitable for us to do that.

[Trey Grooms:]

Got you. Okay. And then on Fairchild, I don't know if you guys have quantified this, but you mentioned that it's not in your -- it's not in the $250 million to $300 million EBITDA kind of target there. What's -- from where we sit today, what is the kind of the incremental EBITDA potential from that new mine?

[Bryan A. Shinn:]

Well, if you look at it, right, its nameplate capacity was fully built out, it would be 3 million tons, right? If I was modeling that, I never assume 100% utilization rate, so you kind of pick your number, 80%, 85%, something like that, assuming demand stays strong. And then if you take a look at where you think contribution margin per ton would be, and that site's directly on the UP. So we have a good, low-cost infrastructure, straight shot to a number of the basins. So that would be pretty competitive from a -- from margin standpoint. So there's definitely upside there, but like anything, it will ramp over time, right?

[Trey Grooms:]

Okay. And have you guys thought about or the timing of how you're going to ramp this out? I know there's going to be phases, you've mentioned before, but with that first phase coming out in 3Q '15, is there -- have you quantified or thought about the amount that will be in that first phase?

[Bryan A. Shinn:]

So kind of what's on the drawing board right now, Trey, is a -- the 2 million tons, first phase, and that may move sort of up or down depending on what happens in the marketplace. But the reality is you can only bring one of these big plants up so fast, right. There's several different lines within the plan and can only start things up so quickly, can only get kind of railcars ramping so fast. And so there's kind of practical limitations too is to -- even if you build out the whole 3 million tons right away, you can only get it online and kind of operating at high efficiencies so fast. So as our operations guys constantly remind me, you can't just flip the switch and get all 3 million tons in one quarter, right?

[Trey Grooms:]

Right, got you. And just switching to ISP real quick, you -- on oil and gas side, you quantified kind of mid-single-digit pricing in March, but you mentioned ISP had a May increase. What was the increase there, could you quantify that for us?

[Bryan A. Shinn:]

Yes, so it's in the same kind of area. I would say there it's maybe closer to 10% in terms of increases.

[Operator:]

Your next question is from the line of Vaibhav Vaishnav.

[Vaibhav Vaishnav:]

Wanted to speak about the 2016 goal of $250 million to $300 million EBITDA, right. We were assuming that there should be a 1% market share increase, and we are now also talking about pricing increase, so just wanted to see how you see the dynamics playing out versus pricing increase or -- and/or market share or is the demand that strong that you can have pricing increase as well as market share increase?

[Bryan A. Shinn:]

Yes. So I think it's definitely the latter, Vaibhav, is the way I'm looking at it. If you look at our share growth strategy, we've said we'd take 1 to 2 points of share per year for the next several years, [indiscernible] our plan. So we went from 8% in 2012 to 10% in 2013. I think, we'll take another 1 to 2 points of share this year in 2014. And given what's going on in the marketplace and our forecast for supply and demand, I think we have a good chance of being able to take share and raise price. As an example, we've already raised price this year, while we're taking significant share in the market. So I feel pretty confident that assuming demand stays strong, that we can do both.

[Vaibhav Vaishnav:]

Okay. Switching gear on the supply side. So we are seeing increasing restrictions from communities and governmental parties for new permitting. At the same time, we see you guys and other public companies coming on and adding new supply seamlessly. Could you help me reconcile that, or is it as simple as that you guys have been working on this for like last couple of years and now you're just seeing demand enough to bring that capacity online?

[Bryan A. Shinn:]

Yes. Well, it's funny you used the word of seamlessly, right. From an internal view, it doesn't always seem that way, right. I mean, there is probably 2 years' worth of work to find a site, get it permitted and get the construction done, particularly in places like Wisconsin and Minnesota, right. So if you look at our Sparta site, which was the last big site we brought on line, that was a 2-year process. Utica was a 2-year process. Fairchild site is going to be about 2 years, so it's just -- it's tough to do it from start to finish much faster than that. So I think it may look easier from the outside than it is on the inside. And when you're on the ground in Wisconsin and Minnesota, talking to folks, there's just a lot of practical barriers. I think we're seeing it come up again in Minnesota. I just saw a quote from the governor the other day saying that he is supporting kind of reintroducing the legislation for a 2-year moratorium there. We will see where that goes. We know there is a few counties in Wisconsin that have moratoriums in terms of new development, and actually just spent some time recently with our team kind of looking over the properties under the development and the opportunities, and boy, it's just getting tougher and tougher to find sites that you'd be proud to own in any market conditions. So I think, that it will continue to be more challenging than you might think to bring on capacity, particularly at the kind of massive increased rates that could be potential from where demand is going.

[Vaibhav Vaishnav:]

And one last question, if I may. We were trying to sell more into Bakken. We had hired new sales person over there. I just wanted to see how are things progressing on that front?

[Bryan A. Shinn:]

Yes, we've got a couple of new sales people actually in the Bakken. We've hired a person in Canada and so on. So those are all -- people are working on that right now, and we're starting to see some increases in both of those areas.

[Operator:]

And our final question comes from the line of Brad Handler.

[Brad Handler:]

Maybe first, could you speak to -- in light of your optimism about the market and in light of being approached, I guess, by the 10 different customers, could you speak to us philosophically about how you might go forward with the mix of contract versus spot exposure over the next, I don't know, a couple of years sort of time frame?

[Bryan A. Shinn:]

Yes, it's a great question and it's something that as you can imagine, we're talking about a lot internally. And as we think about contracting, there are a lot of things to consider. So first is who are the customers and what's their strategic position in the market, and we tend to like longer-term relationships, so we think about that. Pricing is obviously a factor. Product mix is important, as we talk to customers, some customers might want a contract that's very heavy towards a certain grade of product. And that can be a challenge because the reality is that as we mine a ton of sand, we get a mix of all the grades, right, and then -- so that's product mix and we also have destination mix. So we look at where we can serve most economically, and want to set ourselves up well there for long-term success. So we look at all of that. I'll tell you though, I know this may be a little frustrating to folks, but we frankly don't have a specific target of saying, let's have x percent of volume under contract. I think we're trying to look at all of those factors that I mentioned before and come up with a suite of contracts that fit our long-term growth objectives for the business.

[Brad Handler:]

Okay. No, I don't know that there's a right target either, by the way, whatever that's worth, my opinion. But I was just curious about it. It's interesting. The presumably still long-term contracts, if you find the right mix, with the right grades in the right locations are attractive though, having multiple years as sort of part of an anchor?

[Bryan A. Shinn:]

Certainly, right. And so, yes, we like to have a long-term contract. It's great to know who your customers are going to be for the next 5 or 7 years, that you develop deep supply chain relationships. In many cases, the customers have sort of, if you will, outsourced their supply chain work to us. We tend to do a lot of the delivery for them, and those are the kind of partnerships that we like.

[Brad Handler:]

Right. I know it's getting late, but if I could sneak in a couple of quick ones, I'd really appreciate it. Maybe with regards to some nearer-term questions. With regards to the second quarter, so you had strong sales out of inventory, as Don described for us, how does that -- in terms of what is still in inventory and an ability to deliver in Q2, how might you help us think about what tons sold could be in 2Q of '14?

[Bryan A. Shinn:]

Yes. I think, as we continue to push the -- our manufacturing operations to do -- to squeeze out every ton, I think we are looking at Q2, probably volumes pretty close to what we saw in Q1.

[Brad Handler:]

Okay. Got you. That's -- so...

[Bryan A. Shinn:]

Sorry, just another comment on that, right. You have to remember as well that as the weather starts to warm up, that certainly helps us from an efficiency standpoint, right. And so easier to get more product out than it is in the dead of winter.

[Brad Handler:]

Got it. A robust figure. And then last one for me. Maybe you can give me a bit more of a bridge or give us more of -- a bit more of a bridge from Q4 '13 contribution margin per ton to Q1. And I ask that because it sounded as though most of the need -- most of the things moved in the right direction. You described a better mix, I think, you described working through lower costs, your distributed proportion rose, which I think helps -- it doesn't help your margin percentage, but I think it helps the margin per ton, right, just it flows more dollars in per ton sold. And so all that seemed to move in the right direction, and yet it was up $1. And I might have thought in light of your commentary, it would have been up more. Help me understand that better, please, or correct me.

[Bryan A. Shinn:]

Yes. So no, you're right, and there's a lot of positive commentary in the quarter about where things were coming in. And if you look at how the quarter rolled out, we really kind of hit a trough, I would say, in January or into mid-February. So things really started to turn around in the second half of February and March, where we started to see the price increases hit as well. So I think if you were to look at the contribution margin per ton by quarter, you would've seen it hit a trough, like I said, again, in January, and then start moving up all the way through March. So I think, what you are seeing is a nice trend of contribution moving upward. And what we've also said, Brad, is that we think we're going to leave the year at that mid-$30 contribution margin per ton in oil and gas, right. So you can see there's going to have to be an increase in that in 2, 3, and 4 in order for us to come out at $35.

[Brad Handler:]

Right, right, right. That was an average number, yes. No, no, no, I think you're certainly modeling that to get to the high end.

[Bryan A. Shinn:]

So I think we're done with the questions. Maybe -- let me just say in closing that we're very excited about our strong start to 2014, and I believe that we have outstanding future prospects for our company. We're currently experiencing unprecedented demand for our products, and I believe that our investments in top talent, infrastructure, logistics, new capacity and new products are clearly paying off. Customers want to buy from U.S. Silica because they know they get exactly what they ordered, and they'll get it when and where they needed it and for us, that's all about speed. Customers also want to do business with us because we have facilities in the right places with the right products in competitive prices, and that's about having scale. And finally, customers want to work with U.S. Silica because we have a long-standing reputation for maintaining a strong balance sheet, strong customer relationships, and a strong team of professionals, and that's all about strength. And I believe that speed, scale and strength will drive our success in 2014 and beyond. I also, before we sign off today, want to thank my colleagues for their dedication and hard work in making U.S. Silica the tremendously successful company that it is today. For all of our investors also, we appreciate your interest and your support and look forward to speaking with you again in the near future. Thanks, everyone for dialing in and have a great day.

[Operator:]

And thank you again for joining us today. This does conclude today's conference call, and you may now disconnect. Have a good day.