U.S. Silica Holdings, Inc.
Q2 2014 Earnings Call Transcript

Published: 30 Jul 2014

[Operator:]

Good morning, and welcome to U.S. Silica's Second 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'll 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 Second 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. But before we begin, I'd 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 public filings for a full reconciliation of adjusted EBITDA to net income, and definition of segment contribution margin. [Operator Instructions] With that, I'll now turn the call over to our CEO, Bryan Shinn. Bryan?

[Bryan A. Shinn:]

Thanks, Mike, and good morning, everyone. I'll begin today's call by reviewing highlights of our record performance in the second quarter, and then provide you with an update on the various strategic initiatives underway here at U.S. Silica to drive long-term growth and enhance shareholder value, including a recent acquisition of Cadre Services. Finally, I'll provide our views on some of current trends that are impacting our markets and business, as well as an outlook for both our oil and gas, and Industrial and Specialty Products businesses. I'm extremely pleased with the performance of both our operating units in the quarter, driven by robust demand from our oil and gas customers, total company volumes were a record 2.6 million tons, a 27% increase over the same period last year. Oil and gas volumes surged in the quarter to a record 1.5 million tons, a 53% improvement on a year-over-year basis and 13% up sequentially, further evidence that a growing number of energy companies are increasing the amount of proppant that they're using per well. I'll have more to say about this later in my prepared remarks. Demand continued to be very strong across all basins and frac sand grades with approximately 68% of our oil and gas volumes sold during the quarter in basin by our transload network. On the ISP side of the ledger, volumes were only up about 3% on a year-over-year basis, largely as a result of the timing of production runs by some of our Glass customers and the strategic shift of some ISP volumes to oil and gas customers. Pricing was also up across the company driving enterprise contribution margin per ton to an all-time record high of $28.68. As expected, we delivered strong rebound in contribution margin per ton in the oil and gas segment. The market for frac sand remains extremely tight and we continue to be sold out of all frac sand grades. We increased prices further in the second quarter and believe that there is still pricing upside for future oil and gas spot sales. Increased demand for finer grades of frac sand continue to have a positive impact on pricing and margins in our ISP business. Don will have more to say in his prepared remarks, but contribution margin for the ISP business was at a record level during the quarter, and the business is on track to have its best year ever from a bottom-line perspective. Due to higher volumes and improved pricing, we delivered record revenue for the quarter of $205.8 million, a 59% improvement over the second quarter of 2013, and up 14% sequentially. Adjusted EBITDA for the quarter was a record $59.8 million, a 46% improvement year-over-year, and up 43% sequentially. Let me provide you now with an update on some of the initiatives underway at U.S. Silica to drive the long-term success of the business as well. As I mentioned on our first quarter call, we've been approached by several of our oil and gas customers to negotiate new long-term supply contracts. I'm pleased to report that during the quarter, we signed 4 new take-or-pay contracts and modified 1 take-or-pay supply agreement with terms expiring between 2015 and 2019. The volume weighted average roll-off date of our contract portfolio is now in the second quarter of 2018. For one such take-or-pay contract, we received from the customer a $100 million prepayment, which will be netted against future sales. Our decision to enter into additional long-term take-or-pay contracts was predicated on the fact that the new pricing under these contracts provides an excellent return for the business. Further, some of the new contracts have volume escalators allowing us to presell a portion of the new Fairchild plant, which we expect to come online in the fourth quarter of 2015. Locking in more volumes under long-term contracts also enables us to be more efficient from a production and supply chain and logistic standpoint. Most importantly, it provides us with an opportunity to better serve our customers as energy companies are increasingly requiring that service companies have long-term sand supply agreements in place before being qualified to bid on new work. Demand for high-quality premium frac sand is being driven by increased drilling activity, especially in fast growing basins like the Permian and the Eagle Ford. In addition to the rise in activity, a growing number of energy companies are experiencing tremendous success with longer laterals, closer stages and higher volumes of profit. This phenomenon appears to be trending across all of the major shale plays, and we expect that the market will stay reasonably tight for frac sand for the rest of this year and into next year as well. As previously discussed, we are moving quickly to keep pace with this increasing demand. Our new state-of-the-art frac sand mine and plant near Utica, Illinois has started off on schedule, and we had our first sales in July. We're ramping up production and expect to be shipping at design capacity by September 1. During the quarter, we also obtained a mining and development agreement with the town of Fairchild, Wisconsin. We are now in the final stages of purchasing the land and have started preliminary engineering work on the new 3 million ton per year frac sand facility with direct access on the Union Pacific rail road. We are also closing tomorrow, July 31, on our acquisition of Cadre Services. The accretive acquisition aligns with our strategy to increase market share by expanding our footprint and product offerings in one of the fastest growing basins in the country, and provide our customers with a high-quality, regionally produced proppant, which effectively meets the demands of many of the Permian oil and gas wells. We welcome all of our Cadre employees to the U.S. Silica team. Moving on to ISP, we're witnessing a step change in this business. We continue to see strong demand for many of our offerings, especially our high-value ground products. We're successfully implementing price increases that were put into effect earlier this year, and we are planning another increase on certain specialty products later this summer. We are beginning to get meaningful contributions from our new product initiatives and have several other new offerings under development, which are expected to drive additional margin expansion. I want to thank and congratulate our Industrials business team for the excellent work that they have done to both deliver strong bottom line results in 2014, and to position this business for sustained future growth. Finally from a supply chain standpoint, our COO, Mike Winkler and his team made exceptional progress during the quarter to take cost out of the system, both at the plants and at the transloads. Our production cost per ton company-wide were at a record low, and we shaved meaningful dollars per ton off of our logistics cost by finding more profitable origins and destinations, and by shipping more unit trains. We've shipped over 60 unit trains year-to-date and our railcar fleet of 4,250 cars at the end of the second quarter is anticipated to grow to over 5,100 cars by the end of the year. With that, I'll now turn the call over to our CFO, Don Merril. Don?

[Donald A. Merril:]

Thanks, Bryan, and good morning, everyone. As Bryan stated, total company revenue for the second quarter of $205.8 million was up 59% year-over-year and increased 14% sequentially over the first quarter of 2014. On a year-over-year basis, revenue for the oil and gas segment grew by 92% to $149.3 million, while revenue of $56.5 million for the ISP segment increased 8% on a year-over-year basis. Volumes for the oil and gas segment were 1.5 million tons, up 53% over the same period last year. Contribution margin from oil and gas was $57.1 million, an increase of 61% over the same period last year, and up 37% sequentially, from the first quarter of 2014. On a per ton basis, contribution margin for oil and gas in the quarter was $37.82, compared with $35.90 for the same period last year, and $31.19 for the first quarter of 2014. Approximately half of the sequential increase in contribution margin per ton, is due to price increases implemented earlier this year with remaining half coming from a combination of lower transportation cost and a reduction in operating costs. Volumes for the ISP segment of approximately 1,095,000 tons were up 3% on a year-over-year basis. Contribution margin for the ISP segment was a record 17.6 million, and increased 15% compared with the same quarter in the prior year, and up 34% sequentially from the first quarter of 2014. Contribution margin per ton for ISP was $16.09 versus $14.48 the second quarter of 2013, and $13.52 in the first quarter of 2014. The increase in contribution margin per ton in ISP in the quarter was driven largely by product mix and the price increases Bryan mentioned earlier. SG&A expense for the quarter was $19.3 million or 9% of revenue, compared with $10.1 million or 8% of revenue for the second quarter of 2013. The increase in overhead was driven mainly by an increase in compensation expense of $6.1 million and $1.7 million in business development expenses related mostly to the company's acquisition of Cadre Services. Going forward, we would expect SG&A as a percent of revenue to run closer to 8%. Depreciation, depletion and amortization expense in the second quarter was $10.3 million, compared with approximately $8.9 million in the same quarter last year. The year-over-year increase in DD&A was driven by continued capital spending associated with our growth in capacity expansion initiatives, combined with increased depletion due to the additional volumes of sand mined. We would expect this expense to continue to grow due to the anticipated capital spending in 2014. Looking at the other income expense line, interest expense for the quarter was $4 million compared with $3.5 million in the second 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 28%, compared with 25% for the second quarter of 2013. Cash and cash equivalents, and short-term investments at June 30, 2014, totaled $181.1 million, compared with $153.2 million at December 31, 2013. Additionally, as of June 30, 2014, we had $46.7 million available under our revolving credit facility. Long-term debt was $366.2 million as of June 30, 2014, compared with $368 million at December 31, 2013. We incurred capital expenditures of $7.4 million in the second quarter of 2014. The bulk of our second quarter spend was related to continued investment and our new Utica frac sand mine and plant, a new transload facility under construction in Odessa, Texas and various maintenance capital requirements. As we noted in the press release, we're raising our full year 2014 guidance. The company now anticipates full year adjusted EBITDA in the range of $215 million to $225 million, which includes a small contribution from our Cadre acquisition. Additionally, the company now expects capital expenditures in the range of $95 million to $105 million due to our accelerated growth focus. Finally, we expect an effective tax rate of approximately 27% for the rest of 2014. With that, I would like to turn the call back over to Bryan.

[Bryan A. Shinn:]

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

[Operator:]

[Operator Instructions] And your first question comes from the line of Vebs Vaishnav.

[Vaibhav Vaishnav:]

My first question is a 2 parts question on pricing. So it sounds like you have put more pricing increases beyond the mid-single digit increases we implemented at the end of first quarter. Any magnitude you can provide on pricing increases? And B, if we think about frac sand market being undersupplied or at least tight over next 12 months, what kind of additional pricing increases can be put through?

[Bryan A. Shinn:]

Yes, thanks for the question, Vebs. I guess the kind of the first thing is, the way I think about it is more in terms of contribution margin per ton, so I'll come back to that in a minute. But specifically to your question, as we had mentioned before, we had raised prices in late Q1, and then we have some additional price increases in early Q2, and so we're now into the double-digit range for the year when we look at price increases. So we moved up pretty quickly there. But as we think about it, that's kind of one side of the equation, the other side is all of the efficiencies, both operational and sort of supply-chain pairing if you will, from matching up origins and destinations and so. When we put those together, we really, I think we're on a very successful trend here, and hopefully expect some continued opportunities there. And specifically around the pricing side, we certainly have some product on the spot market and I think there's opportunities there for some additional pricing upside, and so we hope to see some of that as we go forward.

[Vaibhav Vaishnav:]

Okay. And my unrelated follow-up is on the resin coated sand part of the business, that story doesn't get enough attention. We are hearing of growth in resin coated sand demand and pricing as well. With that as a backdrop, if you can talk about what the current utilization is on your RCS plant, is it under 50%, more than 50%? And what are the thoughts about on brining the second phase online?

[Bryan A. Shinn:]

So resin coated sand is definitely growing. I think the market is strengthening, of course, if you look back maybe 12 or 18 months ago, the market was significantly oversupplied. We have seen that tighten up quite a bit, and certainly that has helped both sales and pricing as you said. We're still under 50% utilized at the facility, although sales continue to ramp, and so I would say that the second phase of Rochelle, which is our resin coated sand plant, is certainly something that we have on the drawing board, but we're not ready to contemplate that just yet. We want to see continued stronger sales from resin coated sand and get the asset that we have on the ground filled up first.

[Vaibhav Vaishnav:]

And if I may squeeze in one last question on Fairchild. How long does it typically take for you guys to bring on a plant online once you have all the permits and land purchased?

[Bryan A. Shinn:]

So we would expect, at this point to have the Fairchild side up and running in Q3 of 2015. So we just received the critical permit from the Fairchild Township few weeks ago, so you can kind of get a feel for how long it takes to get the site up from there. And then, beyond that, for a site as large as that, that will be as large as any of the sites that we have in that network. It will take a good probably 2 to 3 quarters after startup to be able to ramp fully up to design rate.

[Operator:]

Your next question comes from the line of Jack Kasprzak.

[John F. Kasprzak:]

The -- regarding the new contracts, can you tell us now how much of your volume will be under these contracts in 2015?

[Bryan A. Shinn:]

Sure. As we came into Q2, we had about 50% of our volumes contracted, so under the long-term take-or-pay contracts. As you can imagine that given the tightness of the market, we had a variety of requests from our customers to both sign new contracts and to amend existing contracts. As I mentioned in my prepared remarks, we signed 4 new contracts and amended and extended 1 other contract during the quarter. And the range of those is from 1 to 5 years. So we really like the new contract so we signed. The great product mix, great destination mix and really a strong customer base. So if you look at the volumes of that Jack and the timing, we've actually moved our average contract roll-off from about mid-2016 to mid-2018. So we've added 2 years to the average contract roll-off, and I'm really pleased about that. So with all that said, when you do the math, we moved from about 50% under long-term contract to something more like 60% to 65% as we sit today. And certainly, as we bring Fairchild on in 2015, we will have the opportunity to capture additional contracted sales, we believe.

[John F. Kasprzak:]

That's great. Thanks for the color. Second question is just maybe mechanical question on how pricing works, and has the dynamic changed over time in terms of your getting price increases, is this a situation where you kind of send out a sort of average increase per grade to customers, or is it a negotiation by customer, kind of how does the -- what are the mechanics of implementing price increases?

[Bryan A. Shinn:]

So we have 2 kinds of sales, right. So our contracted sales, the prices are typically relatively fixed. In the contracts, we will have some escalators for things on the costs side, like for example, if natural gas price goes up, we have the ability to add some price. But those prices out of the contracts are relatively fixed. Then on the spot side, obviously, it's kind of as the name implies, right, just literally almost a case-by-case basis that we offer a price out there for a customer who comes to us and wants to buy 5,000 tons of products at this location. We will say, okay this is the price at this point in time, and then they either accept that or not, right. So it's kind of case-by-case, and it gives us really good ability to move up with the market assuming that pricing continues to be strong..

[Operator:]

Your next question comes from the line of Marc Bianchi.

[Marc G. Bianchi:]

Just the volume increase over your nameplate is pretty interesting. I was hoping you could talk a little bit more about where you see that going, what's driving it and maybe, I suspect, it might be 100 mesh, how to think about the impact to contribution margin per ton going forward as a result?

[Bryan A. Shinn:]

It's really a good question, Marc, and I think it's a critical point for us. And you're exactly right. A lot of it was additional 100 mesh. But just to kind of take you through the progression. So after we brought Sparta online, our nameplate oil and gas capacity was about 4.5 million tons. So that's kind of where we came into the year. And so through a combination of excellent work by our operations team and being able to sell more 100 mesh, and not only sell it from our traditional oil and gas plants, but from our nontraditional sites, i.e. those that historically have supplied more into the industrial side of our business, it's pushed our run rate capacity now to more like 6 million tons, when you add all that in there. And that's sort of everything fully utilized. And then when Utica comes online, that's another 1.5 million tons online -- or -- well, it's already online. So theoretically now as it ramps up, we will be at something more like 7.5 million tons. So just back to the question, about half of it was 100 mesh driven and the other half were just continued operational efficiencies, being able to squeeze absolutely everything out of our oil and gas plants.

[Marc G. Bianchi:]

Okay. The Utica previously was a 1.5 million ton before we started talking about 100 mesh. Does that mean there is upside to the 1.5 million tons rated capacity and then kind of same question with Fairchild at 3 million tons?

[Bryan A. Shinn:]

No. Not really. I mean basically the capacities are limited by the dryers in the plants. And so for Utica, we can dry and screen 1.5 million tons of product, and we can make a mix of different grades depending on what the customer want. But if we make more 100 mesh, than that means we make less of something else. The difference was in the oil and gas -- sorry the non-oil and gas plants. We had excess capacity there, and these are the plants that serve Glass customers and a variety of other industrial end users. And so we've always had excess capacity there, it's just kind of speaking to the total demand for 100 mesh that customers are now reaching out to us and even though some of those plants may be a little sort of less logistically efficient, now they are in play, given the demand for 100 mesh.

[Operator:]

Your next question comes from the line of Brad Handler.

[Brad Handler:]

I guess maybe a couple of questions on the distribution side of things, and maybe just to orient us. The first is, there is more conversation around constraints on the trucking side of the business, which I know is not your responsibility, but are you seeing signs of that trucking constraints, and if so, at some point does that become an issue for your business?

[Bryan A. Shinn:]

So to this point, Brad, we haven't seen those kind of constraints. I will say though that when you look at the total supply chain, we tend to think in terms of velocity of products through the chain, and to me this is kind of a fascinating thing that's developed over the last few quarters here, because of the large increases on a per well basis of sand that's needed. Many of the supply chains in the industry just can't keep up with that, right? And it's practical things like you now have to be able to load many more trucks out in a given period of time, so you can have all the sand converge at well at the same time. And many of our competitors and others in the industry didn't build their networks to handle this, right? So we are really focused on this sort of velocity term and as we think about building our network out and continuing to do that, that's just kind of how we're thinking about it. I think it's one of the reasons that we've been taking share quite honestly, because many of our competitors just can't keep up with the pace that sand is moving to the system these days.

[Brad Handler:]

Bringing it to the transloads, you can keep up with the required pace, is this what you're saying?

[Bryan A. Shinn:]

That's exactly right.

[Brad Handler:]

Okay. And then presumably, again, the customers you're aligned with have the takeaway capacity from the transloads to allow you to keep bringing more sand into the transloads, right. I mean so that it's flowing well for you, that's what I guess I hear you saying.

[Bryan A. Shinn:]

Exactly. And we take customer partnerships very seriously. And so we have a pretty rigorous criteria that we look at when we think about who we're going to sign up with in terms of contracts. And so, we've been very fortunate that the partners that we're working with that really haven't have the kind of logistics issue downstream of the transload, if you will, that you were talking about earlier.

[Brad Handler:]

Right. Okay. Well, fair enough. Sort of a related follow-up in that it's still on distribution. So I know you guys have been -- you mentioned this earlier in the call, you've been aggressively adding railcar capacity into your network as you grow. I don't know whether you'd consider yourself long railcars today, or if you anticipate being long at some point soon. But do you sense as the industry -- presumably you sense that that's an opportunity, right, and I'm hoping you can speak to that, but presumably not everybody is going to be long railcars, and I guess I'm curious at that in and of itself creates a business model opportunity, does that mean you do more third-party distribution for example, or how am I -- if that's at all interesting for you, and how may that play out?

[Bryan A. Shinn:]

So the whole rail and transportation side is very interesting, right. If you would ask me 2 years ago, when we came out and become a public company around, how difficult is it to sort of get into the business and successfully serve customers, I would've talked pretty extensively about how hard it is to open up a mine site and while that's still true. The reality is, there's 2 other issues that have emerged, and you're sort of right on top of them with your two questions. One is just the overall ability of the networks, the sand distribution networks to keep up from a velocity standpoint. But then the second one, that's emerging is this whole railcar issue. If you talk to the companies that build railcars, they will tell you that new builds sand car is out about 24 months now -- 24-month lead time. But we got way out in front of that and have a massive amount of orders in place to support all the facilities that we're bringing online. I think perhaps some of our competitors did not do that based on what we're hearing. So I don't expect that we'll be long in railcars. I think we're going to need all the railcars that we can get, and we have enough to cover our needs, but I think perhaps others are not in that position.

[Operator:]

Your next question comes from the line of Kurt Hallead.

[Kurt Hallead:]

I guess, I just want to follow-up on you guys made this brown sand acquisition. I wanted to get some additional insights as to what the driver behind that was. Thinking about in the context of, when you guys first went public, one of the primary selling points for the company was high-end premium Northern White sand, I think the perception out there on brown sand is that anybody can pick it up in their backyard and lower pricing, lower margins. So I just want to get some color around, the thought process and rationale as to your interest in getting involved in the brown sand market?

[Bryan A. Shinn:]

Yes. It's a really interesting question, Kurt. I guess, the way I look at it is that, if you look in the Permian in particular, there is a subset of wells where the hickory type products, Hickory Sandstone is what's down in the Voca area. Those products are very technically suitable for those completions, and we currently see about 20% to 25% of the total sand being pumped in the Permian as this sort of hickory or so-called brown sand. And as we talk to customers, they are very happy with the performance of that sand in some of those more shallow wells and places like the upper and lower Spraberry and some of the other different formations where it works. And so we saw this as an opportunity to get into kind of a product line, if you will, that we just didn't have any products in the past. So we're thinking about this as a kind of complete plus 1 on top of our existing Northern White offerings, and it certainly doesn't dilute the Northern White in any way. But it gives us a brand new product and also a platform to operate in the Permian. And I think that one of the other thing that made this deal attractive for us is that even through the cycle as things balanced out a bit in 2013, we saw the demand for this type of braid-ey [ph] products be very strong and well-accepted by the market.

[Kurt Hallead:]

Okay, great. And then maybe a follow-up, if you look at -- you heard a number different service companies discuss during the course of their second quarter conference calls and the continuing challenge with the logistics kind of things and questions address the logistical nature of it. So my question is really geared toward the volumes that you guys booked in the second quarter, was this really -- how much of that increase in volumes in the quarter was driven by some of the logistical challenges and therefore is not repeatable as we move forward into say the third quarter or fourth quarter, can you give us some color, or maybe some handle on how to think about that, that would be great?

[Bryan A. Shinn:]

Sure, Kurt. Look, I don't think hardly any of it was driven by say other peoples logistical challenges. I think it is being primarily driven by the increased sand that's being used per well. And, I mean, quite honestly the demand level out there is just staggering, right. You listen to commentary from multiple sources, and we get a lot of private conversations with customers and others, but just look at the public sources, and I was listening to an earnings call of major service company yesterday, and they said their sand consumption in the first 6 months of this year has increased by 95% over the same period in 2013. So essentially doubled right in and that's the kind of demand dynamic that we see going on out there. So I think that the primary driver far and away is just to increase proppant that's being used per well, and through a variety of technical factors for that, which I'm sure many people on the call are familiar with, I think that's really the driver.

[Operator:]

Your next question comes from the line of Blake Hutchinson.

[Blake Allen Hutchinson:]

First of all, just -- I don't think we've heard anything in your commentary, be it volume-based, pricing-based, logistical-based that would tend to persuade us that in the second quarter, you had anything that was just a one-time sort of benefit, I relate that to your kind of guidance that kind of keeps the run rate for back half fairly similar to what we saw in 2Q, given that Utica is coming on, and that was supposed to be a significant margin uplift perhaps for the year, and the Cadre acquisition looks like G&A is in check, I mean is there anything to suggest that -- or to talk us back down in terms of keeping that level of conservatism to the extent that we will kind of flat with our outlook here?

[Donald A. Merril:]

Blake, this is Don. Our outlook gives us -- is the best look that we have at the back half of the year. And really, if there is conservatism baked into our guidance, it's going to be Q4. If you recall Q4 of last year, things really tailed off, right around the Thanksgiving time, and it got pretty bad throughout December, and we still remember that. So really that's what we're looking at, maybe some reduction in volume as we go into the end of the third quarter into the fourth quarter. And that's just again based on some historical looks that we have had at the business in the past. But there is nothing fundamentally around contribution margin per ton or anything like that, that's baked into our guidance that would force that number down, it's more on the volume side.

[Blake Allen Hutchinson:]

Okay, great. So some late season activity, transportation issues perhaps?

[Donald A. Merril:]

That's right.

[Blake Allen Hutchinson:]

In okay, great.

[Bryan A. Shinn:]

Unfortunately, we remember all too well the cold-weather in December, right. So..

[Blake Allen Hutchinson:]

Right. It happens every year. And then just from a big picture perspective, Bryan, maybe you can help those of us that are more situated in the oil and gas world. We see your business model and the ability of your ISP base to help answer, now that the industry accepts it, some of the volume demand from the oil and gas phase. What is the type of industry-at-large's ability to start to pull from what, up until now, had been kind of an industrial -- segmented industrial production base, and does that cause any disruptions to the 100 mesh story in your view?

[Bryan A. Shinn:]

No. I don't think so. There's only a few of us that have that kind of historical industrial base. It's a couple of the older line sand companies like ourselves. But I think, we saw some of this coming and we also kept a lot of our 100 mesh product on the spot market and available. Based on some of the trends that we spotted last year, we were prepared for this as one of the alternatives. And we don't see hardly any of our competitors that are similarly positioned to be able to do that.

[Operator:]

Your next question comes from the line of Brandon Dobell.

[Brandon Burke Dobell:]

The upper revision to CapEx, maybe a little color on, I guess either what changed last quarter versus this quarter in terms of opportunities to put capital to work, and is -- within that, is there any plans to, I guess, expand the nameplate capacity at Ottawa or perhaps even Sparta given the demand trends?

[Bryan A. Shinn:]

No, really, Brandon, the increase in the outlook for capital spending really relates to our Fairchild facility. So really accelerating the long lead time items to maximize the capacity coming out of that facility as quickly as possible. So that's what represent the about $20 million uptick in our guidance in CapEx.

[Brandon Burke Dobell:]

Okay. And then maybe back to the previous question around the ISP versus oil and gas kind of crossover, how much more room is there, I guess, to shift some of the 100 mesh out of the ISP business into the oil and gas customer set that we see kind of the biggest amounts you can push there in the second quarter, or do you think there is more room i.e. is there just more room or nameplate capacity for oil and gas versus what we saw second quarter?

[Bryan A. Shinn:]

Yes. I think there's these 2 pieces to that, Brandon. There is maybe a little bit of extra capacity that's available over nameplate as we look at some of our other facilities that we still haven't kind of brought online in terms of oil and gas at this point. And these are the nontraditional facilities I'm talking about. But also, as you can imagine, we're in a variety of discussions with our industrial customers, and we have some ability there, where we don't have long-term contracts, and we're selling to customers on the spot market to have products be a bit fungible, if you will, between the segments. So I think there is some additional upside there, but not a tremendous amount.

[Brandon Burke Dobell:]

Okay. And then back to your comment, Bryan, about kind of matching up origin and destinations better, how do we get the size, how do we size the impact of that relative to the contribution per ton performance we saw in the second quarter? And I guess the implication is, was it -- if it's small, do we see another step-up in the efficiencies from that effort push contribution to per ton higher in Q3, or did you capture a lot of what you think you could do in Q2?

[Donald A. Merril:]

So if you look at, I just got to assume you are referencing the jump in oil and gas contribution margin per ton?

[Brandon Burke Dobell:]

Correct.

[Donald A. Merril:]

And If you look at that, Brandon, about half of that $6 roughly increase was due to pricing, and the other half was due to operational and distribution efficiencies. And then if you look at that, about half of that was, I would say is more permanent, real cost savings associated with renegotiated barge rates, renegotiated transload fees and reduced demurrage mostly is what's driving that. And then the other half, I would characterize more as variable. And that is efficiencies due to volume as we push our facilities more to a 24/7 operation to capture this upside in volume. We are really seeing some efficiencies from that. And then, the rest of it is in transportation and distribution savings associated with us shipping to more efficient locations, which just happens to where our customers want it. So that's the piece that could move around a little bit. If our customers want sand in locations that are a little bit more difficult, than that contribution margin per ton be effected negatively by that. But as you know, our mantra is "The right product at the right place, at the right time" and we're going to continue to do that despite the increase in cost that we may see.

[Operator:]

Your next question comes from the line of Christopher Butler.

[Christopher W. Butler:]

The -- if we're looking at your guidance for this year, and the Cadre acquisition, has there been any change to accretion on the EPS level that you're expecting in the back half of the year?

[Donald A. Merril:]

No. There really hasn't. When you make an acquisition relatively late in the year, you're going to be affected by the purchase accounting and the dollars associated with implementing some of the synergies that you going after. We don't see any real EPS accretion, and very little EBITDA accretion in 2014. However, we stick to the guidance we gave for 2015.

[Christopher W. Butler:]

And shifting over to the ISP business, again, did you talk to the success, it looks like you've had the success on the implementing the price increases you talked about last quarter. And could you talk about the effect on margin of the shift of 100 mesh if that was positive or negative in the quarter from this business?

[Bryan A. Shinn:]

Yes. So Chris, there's a couple of things there, out team has been very diligently pursuing, well I think are very appropriate price increases across the ISP business, and in some areas like our higher end ground products, where we have a very strong offering, I think we've increased prices there, certainly on some of the 100 mesh within the ISP business, what we have as well. The interesting thing is that we managed to achieve a contribution margin per ton in industrial business of over $16, and that's the best ever we have done in the history of the company, and it was actually about 11% up versus our best quarter previously since the IPO. So the team is having tremendous success there, and I think that we will continue to see additional price increases come from the industrial side of the business.

[Christopher W. Butler:]

And in the mix shift on -- with the shift of 100 mesh, does that help you or does that hurt you in this quarter?

[Bryan A. Shinn:]

So 100 mesh just in general, it can be a little bit dilutive relative to the rest of oil and gas. So it depends how you want to look at it, right. I look at it from a company standpoint, the margins are clearly higher in oil and gas, right. So from a total company margin standpoint, it's accretive, could be a little bit dilutive from an oil and gas standpoint, if that makes sense.

[Christopher W. Butler:]

But on the ISP side, there would sounds like it would have helped you a little bit on ISP if only from a utilization?

[Bryan A. Shinn:]

Yes, exactly.

[Operator:]

Your next question comes from the line of John Daniel.

[John M. Daniel:]

First question, Bryan, is the capacity at your existing mines, is that limited to the processing capabilities?

[Bryan A. Shinn:]

Yes. Typically the rate limiting step is drying, and also that's the most expensive and difficult to expand.

[John M. Daniel:]

I guess, the question then is, as you look, maybe not for the balance of this year, but in the next year, are you -- is there any efforts to get permits to add additional drying capacity at the existing mines? And hypothetically speaking, if you were to do something, let’s say Utica, add another processing plant, what could you then -- could you take that number up in terms of the production rate?

[Bryan A. Shinn:]

So there may be some limited ability to do that, but it's not big numbers, right. We are always looking at those kind of alternatives, and the thing you find is that, let's say you want to put another dryer or something in Sparta. Well, then you hit the next roadblock, which is the ability to load out, and then, maybe then you have a mining issue or then you had a natural gas issue. So there's all kind of different things that might come up. We're constantly looking at that. I think there may be a few opportunities around the system to squeeze out a little bit more over the next couple of years, and suddenly are operations and engineering teams are all over that as you can imagine.

[John M. Daniel:]

Okay, fair enough. Are any of the recent contracts that you signed with E&P companies, and are you taking any calls from E&P companies that are seeking to self-source?

[Bryan A. Shinn:]

So we typically look at our customer base as the service companies. I would say that the exceptions to that are energy companies that have their own service arms like a PTL or Pioneer, those kind of folks. But typically, we think that the service companies are the right customer set for us.

[John M. Daniel:]

Right. I guess I -- and I understand that are you getting calls from E&P companies seeking to self-source?

[Bryan A. Shinn:]

Sure. I mean, we get those kind of calls all the time.

[John M. Daniel:]

Okay, all right. Fair enough. The last one from me, there's probably others in the queue, just at Utica, can you walk us through how much volume might be shipped by barge? And if so, what that might have on your contribution margin?

[Bryan A. Shinn:]

So, we don’t have a specific target by barge. But as you bring it up, Utica has multiple options. It's kind of our Swiss army knife plant. So we have access to 4 Class 1 railroads and barge. And so, we'll just make real-time calls John, around where the product is needed, and how we can maximize our system-wide contribution margin per ton. So we don't have like a specific target for barging out of Utica.

[John M. Daniel:]

I guess, let me phrase it another way, if you had the choice, would you prefer to barge it or would you prefer to use rail?

[Bryan A. Shinn:]

So the barging works pretty well. But it's limited, right. So barging out there, we can get to a certain locations in the Marcellus and we can get to the eastern part of the Eagle Ford, right. So it all depends on demand and our other options. Our rail is very efficient going into the Marcellus as well, out of our site. So just so it depends.

[Operator:]

Your next version comes the line of Matt Conlan.

[Matthew D. Conlan:]

Just to really try and pin you down here. Can you tell us how much volume in the second quarter was 100 mesh?

[Bryan A. Shinn:]

Yes. Look we've never sort of given that level of detail, Matt.

[Matthew D. Conlan:]

Okay. We can sort it back into it based on your nameplate capacity, but I just wanted to try to eliminate any variability in that.

[Bryan A. Shinn:]

Sure.

[Matthew D. Conlan:]

Okay, so it's clear you're selling more, more and more the frac sand in basin. And last year, neither you nor your competitors really seemed to garner much additional margin for that additional effort. Are you starting to see some premium profit for selling it in basin these days?

[Bryan A. Shinn:]

Yes. We do get additional profitability from selling it in basin, it's not step change profitability. I mean it's a few dollar more per ton typically in doing that. But it's really more of a market share gain. And as I was mentioning in one of the answers to a previous question, this sort of velocity through the transportation network and our ability to keep up and our network's ability to keep up, I think has served us extremely well as we see demand just kind of move off the charts here.

[Matthew D. Conlan:]

Okay, great. And just one clean up question. Would you expect your 2015 tax rate to be in that 27% range as well?

[Donald A. Merril:]

Yes, I would say next year is probably 27% to 28%.

[Operator:]

Your next question comes from the line of Ben Swomley.

[Benjamin Swomley:]

So I had a couple of follow-ups here. First on pricing, and I appreciate all the color you've already given us. But I'm wondering, did you see any difference in price moves for different types of grades. I've heard that 100 mesh has moved actually a lot on a relative basis.

[Bryan A. Shinn:]

That's right, Ben. We have actually seen higher price increases on a percentage basis in 100 mesh than we have in any other grades and that's partially because 100 mesh was a bit more depressed in terms of pricing in the past. But of course, the other element to pricing is just supply and demand, right. So demand has gone up a lot for 100 mesh. It's gone up a lot in other grades as well, but probably more in the 100 mesh side.

[Benjamin Swomley:]

So we are up about double digits for the coarse grade and then 100 mesh potentially more, or is the double-digit kind of include that sort of blended average?

[Bryan A. Shinn:]

Yes, I think it kind of includes that blended average.

[Benjamin Swomley:]

Okay. And we saw full quarter impact during 2Q?

[Bryan A. Shinn:]

Pretty much. I mean there was some price increases that came in the end of the first month or something like that, but I would say it's pretty much fully in the quarter.

[Benjamin Swomley:]

All right. On the cost improvement side, I definitely noticed the cost -- average cost per ton came down a couple of dollars. Is that at all -- and I know you gave us some color already, I'm wondering how much of your volume from Sparta is still going to the Permian, or whether you have been able to sort of ramp up sales into the Bakken or Canada from that facility?

[Bryan A. Shinn:]

We saw a lot of the volume go into the Permian, and the reality is it's just where the demand is super strong right now. So we're still headed down there, and we'll see how demand ramps in the Permian over the next several quarters. Our hope was to be able to swap out some of the Sparta volume for Utica volume and kind of rejigger the network, a lot of that will depend on the relative demand amongst basins.

[Benjamin Swomley:]

Okay. It sounds like though we haven't actually seen that, that's still potential upside. So when I think about your guidance into the back half of the year -- but what I'm hearing so far, and correct me if I'm missing something, is you're assuming big, sort of repeat of negative seasonality in the fourth quarter, flat pricing, with where you were in 2Q, and minimal or no further cost improvement. So in other words you're holding everything flat, am I getting that right?

[Bryan A. Shinn:]

Yes. I would say there's going to be some slight improvements as we continue to work through the rest of the year in cost takeouts. We are going to continue to work on that. I think there is opportunity for some pricing. But we're looking at the fourth quarter being reminiscent of last year's fourth quarter. So I would agree with your thought there.

[Benjamin Swomley:]

Is that based on customer conservations or is that just in the spirit of being conservative?

[Bryan A. Shinn:]

That's in the spirit of being conservative and the understanding that, look history tends to repeat itself a little bit as far as the weather goes, and look, we're just -- we're trying to be as thoughtful as we can in our guidance.

[Benjamin Swomley:]

Okay. And so -- and just to remind me, so we're up about 10% total on price, and that sounds like a pretty good start, but how does that compare to the price move you saw in the back half of 2011?

[Donald A. Merril:]

Yes. I don't know, Ben, -- I think if I look back, and all those numbers are in front of me. But pricing went up more than that in 2011, but it was a bit of a different game as well, right. I mean there were fewer of us in the industry at that time. And I think, everybody was a bit less sophisticated around looking at options and alternatives back in 2011. So it feels just as strong from a demand standpoint, if not stronger, but I think the suppliers and the customers, we've all kind of gotten more sophisticated, there's more products being delivered in basin, just a lot of changes to the dynamics, so it's kind of hard to compare.

[Benjamin Swomley:]

Fair enough. And one last one from me. I know I've asked a few here. Going back to the old MLP question. Any -- are you still thinking about potentially using an MLP structure for some of the new assets, or is that off the table at this point, how are you thinking about it?

[Bryan A. Shinn:]

So, if you go back, we've reviewed that a couple of times in the past internally, and kind of taken a hard look at it to see what may or may not make sense in terms of changing our corporate structure. And historically, the analysis typically came out that the view wasn't worth the climb, especially because of the tax consequences of contributing fully depreciated assets into an MLP. So certainly, as we add new assets, taxes become less of an issue. And I say the other thing that's interesting to me is I look at our industry and think that there's definitely potential for consolidation ahead. Certainly having an MLP structure brings perhaps additional optionality and flexibility. So look, I mean, we're always evaluating these things, and our mantra is to continue to deliver best-in-class returns to our investors. So to the extent that, considering an MLP or other kind of structuring options might improve that, and have us deliver better results for investors, we're always open to that, always considering alternatives.

[Operator:]

Your final question comes from the line of Trey Grooms.

[Trey Grooms:]

Just a couple to kind of clear up, and it kind of goes back to the previous question. But with double-digit increases that you're seeing now, combined with kind of the -- how much you have contracted plus any change that you're seeing in product mix. I mean, ASPs, if I'm getting it right, were kind of flat sequentially in oil and gas, and are expected to continue to be flat. Is that being impacted by more of a push from into the 100 mesh or the mix playing a role, what -- I'm just trying to get my hands around it. If it's expected to still be flat going forward in your guidance?

[Donald A. Merril:]

Our ASP did move up a little bit in the second quarter. And yes, I mean I think your assessment is accurate, right. The more 100 mesh we sell, clearly is going to have an impact there. But it is going to generate additional EBITDA dollars, right. As we sell more of the 100 mesh like we saw in Q2.

[Trey Grooms:]

Okay. And then, as far as in-basin sales, is that kind of maxed out or do you think that, that mix will continue to move more towards in-basin. Are we kind of where we can as much as we can get to on that?

[Bryan A. Shinn:]

So it feels like, we've kind of stabilized around 65% or 70% for the last couple of quarters, Trey. And that feels like a pretty reasonable place to be for a while. The reality is that some of our customers, some of the larger, more sophisticated service companies have their own logistics networks, and they'll always be a percentage of sales that will be sold at the plant, in my opinion.

[Trey Grooms:]

Okay. And then Bryan, this is kind of a bigger picture question. You guys used to have a really good chart in your presentation materials, kind of outlying how you see the cost curve of the industry. With the capacity that's come on, and you guys are expected to bring on and others, how do you see that cost curve, how has it changed and how do you see that changing as you look out over the next year or 2?

[Bryan A. Shinn:]

Yes, it's a very interesting question, Trey, and we just did a refresh of that chart. We haven't put it out yet publicly, but one of the key upshots of that is that in the past we saw about 65% of the industry capacity low cash cost like U.S. Silica, we think that's moved down to about 55%. So as said in another way there is now more capacity on a percentage basis that's in that kind of moderate and high cost region. As the cost curve looks like it's getting steeper based on our work.

[Trey Grooms:]

And then you think that continues with even though you guys are bringing on a big slug of, what will be pretty good low-cost capacity with Fairchild, I would expect, and some of the others, is that the picture we have today, do you think that kind of continues?

[Bryan A. Shinn:]

Well, look, I think the bottom line, it's just getting harder to find low-cost sites. And look, we are bringing on some low-cost capacity, others probably will, but there is a lot of it that's coming on out there where compromises that were made to bring the capacity online. And so, I think if you look kind of a big picture question, if you step back and look over the 5 to 10 years, I believe it's going to be increasingly difficult to bring on low-cost capacity, and I really like our position being a very heavy in the low-cost end.

[Operator:]

Thank you. There are no further questions. I would now turn the call back over to Bryan for any closing comments.

[Bryan A. Shinn:]

Thank you very much. Well, look, clearly, our company is driving success with our mantra of speed, scale and strength. We have acted quickly and decisively to find and permit new high-quality frac sand reserves to ensure our customers of adequate supply going forward. We moved very quickly, but diligently to capture an acquisition, that's Cadre. It's a great opportunity that expands our capacity and product offerings in one of the fastest-growing basins in the country. And in a relatively short time, we built up one of the largest and most extensive logistics network in the industry. To accomplish this, we have drawn on our financial strength and our top notch team. We have expanded production capacity and transportation infrastructure, and it's enabled us to gain share, as I mentioned today, in a growing market. And I believe we've established U.S. Silica as one of the industry’s most significant suppliers of silica-based products. I want to thank my colleagues for their dedication and hard work in making U.S. Silica the tremendously successful company that it is today. And for all our investors, we certainly appreciate your interest and support, and look forward to speaking with you in the future. Before we sign off today, I had one final note. I wanted to remind everyone about our upcoming Investor Day, which will be held September 9 and 10 in San Antonio, Texas. At the meeting, we plan to refresh our long-term growth goals through 2017. And I'm also pleased to announce that we'll be joined by the head of a major Class 1 railroad, who will provide his views on the current and future state of rail logistics, as it relates to frac sand industry. So thanks, everyone, for coming in today, and have a great day.

[Operator:]

Thank you. That does conclude today's conference call. You may now disconnect.