U.S. Silica Holdings, Inc.
Q3 2014 Earnings Call Transcript

Published: 30 Oct 2014

[Operator:]

Greetings, and welcome to the U.S. Silica's Third Quarter 2014 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Michael Lawson, Director of IR and Corporate Communications for U.S. Silica. Thank you. You may begin.

[Michael K. Lawson:]

Thanks. Good morning, everyone, and thank you for joining us for U.S. Silica's Third Quarter 2014 Earnings 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] And with that, I will 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 the highlights from our very strong performance in the third quarter, followed by an update on the various strategic initiatives underway here at U.S. Silica to add speed, scale and strength to the enterprise. I'm very pleased with the performance of both of our operating units in the quarter. The step change in demand that we continue to see from our blue chip oil and gas customers drove record volumes for the company of approximately 3 million tons, a 42% improvement over the same period last year. Oil and gas volumes in the quarter grew to a record 1.9 million tons, an 80% increase on a year-over-year basis and a 26% improvement sequentially over the second quarter of 2014. Market trends of more horizontal wells, longer laterals, increased stage counts and more profit per well continued to drive sales higher. We're seeing strong demand for our products across all of the major basins, and we expect to remain sold-out of all grades of frac sand for the foreseeable future. ISP volumes in the quarter of approximately 1.1 million tons improved 4% over the same period last year but were virtually flat on a sequential basis. The year-over-year increase in volumes for the ISP business was due mostly to increased demand for ground silica products and strength in our recreational markets. Pricing continued to strengthen in both operating segments, driving enterprise contribution margin per ton to a record $31.33. Don will have more to say about segment contribution margin in his prepared remarks. Higher volumes and stronger pricing drove record revenues for the company in the quarter of over $241 million, an increase of 67% over the same period last year and a 17% improvement sequentially. Adjusted EBITDA for the quarter was a record $77.5 million, a 72% increase on a year-over-year basis and up 30% sequentially. During the quarter, we signed 3 new take-or-pay contracts in our oil and gas segment and renegotiated an existing agreement. And today, we're selling approximately 70% of our total oil and gas volumes under long-term supply agreements. We're currently in discussions with existing customers about extending and expanding contracts and with new top tier customers to establish contracts. Based on this, we expect to enter 2015 with more than 70% of our oil and gas capacity under long-term contract in anticipation of the start up of new capacity at our Fairchild and Pacific sites in the second half of the year. While much has already been said about the decline in oil prices and the potential impact to drilling activity, we see no signs of that to date and have experienced no reduction in demand or orders for our products. We're actively engaged in conversations with our customers about their future growth and none has brought down their estimated requirements, including 2 customers we're negotiating new contracts with today. That said, we're closely monitoring the environment, but as I noted earlier, activity continues to surge due to the unprecedented level of service intensity. Further, we believe that increasing usage of raw sand proppant to enhance well productivity and economics is a long-term direction of the industry. With these heightened activity levels, however, come certain challenges and opportunities for our industry. Railcars continue to be in short supply, with lead times for ordering new railcars now as long as 2 years. We're currently managing over 6,500 railcars and will have over 7,000 railcars in our fleet by the end of this year, and we expect to have over 9,000 cars in service next year. Our supply chain and logistics team continues to improve our railcar turn rate by maximizing unit trains, improving origin and destination pairings and through improved tracking systems for our railcars. We've shipped over 100 unit trains year-to-date, more than double the number we shipped last year, and we're currently moving about 20% of our oil and gas volumes via unit trains. Unit trains give us faster railcar turns and thus, greater utilizations -- utilization of those scarce rail assets. As I've noted in the past, scale matters and speed matters even more. We believe the current transportation bottlenecks that some in our industry are encountering represent an opportunity to grow our customer base by taking share from less capable competitors who lack the infrastructure and the financial strength to be successful in today's marketplace. Another way we're navigating bottlenecks on the rails is by increasing our usage of barges for finished product shipment. We shipped double the number of barges in the third quarter than we had shipped in the previous quarter, mostly to our high-velocity transloads serving the Eagle Ford and Marcellus Shale Basins. From a broader supply chain and logistics standpoint, we continue to make good progress on improving efficiencies and driving costs out of the system, and in particular, we're focused on optimizing shipping lanes and lowering the demurrage cost and improving rail management. On the new capacity front, I'm pleased to report that we're right on schedule. Our Utica plant is running well and we're currently sold out as we ramp that location to 24/7 operations. We're also on schedule for our new 3 million ton frac sand mine and plant in Fairchild, Wisconsin, and expect to break ground on the project sometime next month. We've also secured the vast majority of the land needed for our next full-scale greenfield site, also in Wisconsin. And we started the initial work on doubling the capacity of our Pacific, Missouri facility to 1.6 million tons. In total, those 4 projects represent approximately 8 million incremental tons of new frac sand capacity that we expect to come online over the next 8 quarters. Finally, our new high-velocity transload in Odessa, Texas, located on the Union Pacific railroad, is currently scheduled for start up in late December or early January of 2015. As you know, we completed our acquisition of Cadre services during the quarter. Cadre is an 800,000-ton per year Hickory frac sand mine and plant. I'm very pleased to report that the business is operating at maximum capacity and is performing even better than initially expected. Furthermore, our oil and gas sales team has done an outstanding job of leveraging existing customer relationships to help sell out Cadre capacity. Turning to the ISP side of the ledger. We continue to see strong demand for many of our products, especially for our high-value ground products. In terms of end markets, our ISP business is seeing particular strength in building products, foundry and fillers and extenders. Price increases implemented this summer continue to drive higher contribution margin in ISP, although we did have some onetime operating costs, repairs and maintenance which negatively impacted ISP profitability during the quarter. ISP continues to focus on developing new higher margin products to deliver in 2015. Our industrial group recently received U.S. EPA approval for a new antimicrobial-coated sand for the pool filtration industry. We plan to launch the product next month at a major trade show and have signed an exclusive agreement with a national pool and spa retailer to distribute the product. Finally, I want to thank my colleagues for their dedication and hard work and congratulate them on U.S. Silica being named the Best Small Company in America by Forbes Magazine earlier this month. It's a tremendous accomplishment, and I'm very proud of the talented team that we have in place. You make our company the tremendous success that it is today. And with that, I'll turn the call over to our CFO, Don Merril. Don?

[Donald A. Merril:]

Thanks, Bryan, and good morning, everyone. I'll begin by commenting on our 2 operating segments, Oil and Gas and Industrial and Specialty Products. Revenue for the Oil and Gas business for the third quarter of 2014 nearly doubled, up 98% on a year-over-year basis to $186.8 million, while revenue for the ISP segment of $54.4 million represented an 8% improvement over the same period of the prior year. Contribution margin from Oil and Gas in the third quarter was $77 million, an increase of 92% over the same period last year and up 35% sequentially from the second quarter of 2014. On a per ton basis, contribution margin for Oil and Gas was $40.65 compared with $38.15 for the same quarter of the prior year and $37.84 for the second quarter of 2014. The sequential increase in contribution margin per ton was driven by a combination of price, primarily from new contracts signed earlier this year, and improved transportation costs due to our focus on cost reduction and efficiency. On a per ton basis, contribution margin for the ISP business of $15.34 represented a 12% improvement over the same period in the prior year. However, the result was a 5% decline from the record $16.09 per ton this segment achieved in the second quarter of 2014. The sequential decline in ISP contribution margin per ton was a result of certain onetime operating expenses partially offset by higher prices for ground products. Turning now to total company results. SG&A expense for the third quarter increased by $5.8 million to $18.6 million compared with $12.8 million for the third quarter of 2013. The increase was driven mostly by a $4.9 million increase in employee-related expenses. Additionally, business development expenses increased by $1.3 million on a year-over-year basis due largely to our acquisition of Cadre, which closed during the third quarter on July 31. Depreciation, depletion and amortization expense in the third quarter was $12.4 million compared with $9.2 million in the same quarter last year. The year-over-year increase in DD&A was driven by continued capital spending to support our growth initiatives combined with increased depletion due to the additional volumes of sand mined. As we've said in the past, we would expect this expense to continue to grow due to anticipated capital spending through the remainder of the year. Continuing down the income statement. Interest expense for the quarter was $5 million compared with $4.1 million in the same period last year. The effective tax rate in the quarter was 26%. However, we still expect the tax rate of approximately 27% for the end of the year. Turning now to the balance sheet. Cash, cash equivalents and short-term investments as of September 30, 2014, totaled $196.9 million compared with $153.2 million on December 31, 2013, and we had $47 million available under our revolving credit facility at quarter end for a total liquidity as of September 30, 2014, of $243.9 million. Long-term debt was $365.3 million as of September 30, 2014, compared with $368 million at the end of the prior year. We incurred capital expenditures of $33.6 million in the third quarter of 2014. The majority of our third quarter spend was related to our new Utica, Illinois frac sand mine and plant, a new high velocity unit train-capable transload near Odessa, Texas, the expansion project at our Pacific, Missouri facility, the development of our new greenfield site in Fairchild, Wisconsin and other maintenance capital projects. Additionally, as previously mentioned, we finalized our acquisition of Cadre for the purchase price of $98.3 million and received a customer prepayment of $100 million during the third quarter. I'm also happy to announce that subsequent to the end of the quarter, we received an upgrade from Moody's Investors Service on our senior secured credit facility to Ba3 from B1, a testament to the strength of our balance sheet and the outlook for our business going forward. Also, our board, last week, approved an extension to our $25 million stock repurchase program through December 11, 2015. The program had been scheduled to expire on December 11, 2014. Finally, as we stated in our earnings release, we are updating our EBITDA guidance for the full year to the high end of our previous range of $230 million to $240 million. With that, I'd like to turn the call back over to Bryan.

[Bryan A. Shinn:]

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

[Operator:]

[Operator Instructions] Our first question comes from the line of Marc Bianchi with Cowen.

[Marc G. Bianchi:]

I was hoping you could provide some more background on the updated guidance. If I take the sum of the first 3 quarters, if you plan to be at the upper end of your $230 million to $240 million adjusted EBITDA range for the year, it implies a pretty meaningful step back in the fourth quarter. I know you previously said guidance includes some assumptions for the fourth quarter seasonality, but I think the continued Utica ramp should be an offset. Was there anything unusual in volume or margins this quarter that you see as unsustainable? Or is there any tangible evidence that things are lower sequentially at this point?

[Bryan A. Shinn:]

Thanks for the question, Marc. For those of you on the call who know us, we tend to be a little bit conservative. And we had this debate as we thought about guidance for the year. And we just thought it was prudent to be a bit conservative in the fourth quarter just because of the weather that we saw last year, quite frankly. There's a little bit of seasonality, typical seasonality in our Industrial business. But I would say that if we don't see the same kind of harsh winter, harsh December that we saw in 2013, there's probably a lot more upside than downside to our overall guidance.

[Marc G. Bianchi:]

Okay. And then just a follow-up on current market conditions. We're hearing some conflicting reports from the field, mainly from some of your customers. I mean, the frac services industry, generally, saying that they're seeing or expect to see frac sand prices go down, in particular, at the mine mouth, so FOB mine. Could you comment on what you're seeing on the pricing side and kind of what the expectations are over the next couple of quarters?

[Bryan A. Shinn:]

Yes, sure, Marc. We really haven't seen anything in terms of price decreases. Actually, we're seeing some price increases quite frankly. And I think because of a lot of the attributes that we bring, we're continuing to earn a very, very attractive pricing. Certainly, as you saw in the third quarter, our contribution margin per ton went up for Oil and Gas and it was the best ever in the history of the company at $31.33. So we're pretty optimistic about pricing. And also, with some of the new contracts that we've been signing, the prices are very attractive as well. So I feel good about where we're headed with price.

[Operator:]

And our next question comes from the line of Kurt Hallead with RBC. [Technical Difficulty] Our next question comes from the line of Vebs Vaishnav with Bank of America. Our next question comes from the line of Robin Shoemaker with KeyBanc.

[Robin Ernest Shoemaker:]

So I just wanted to ask for your -- what you could say about resin-coated sand market. I know you expect to ramp up there and sell your full capacity, but what could you say about that market?

[Bryan A. Shinn:]

So we're continuing to take share in that market, Robin, and we're seeing good demand out in the industry. Actually, we signed some contracts for resin-coated sand with key customers. And our products are gaining good acceptance in the market. So it's still early days for us. We're still penetrating the market. But I'm very optimistic about our progress and about our ability to sell out our Rochelle facility in the future.

[Robin Ernest Shoemaker:]

Okay. So just in terms of, very broadly, the plans that you laid out through 2020 in your recent Analyst Day, given the decline in oil prices, and I know we're all struggling to understand the implications of that, but does anything in them -- in terms of the number of greenfield sites, does it all look still doable to you if we do settle at an oil price more like where it is today rather than early September?

[Bryan A. Shinn:]

Yes -- no. It's a really good question, Robin. And so maybe let's talk first a little bit about the oil pricing and how that impacts the sand industry generally and how we think it impacts U.S. Silica. As you can imagine, we're having a continuing dialogue with a variety of industry sources, service companies, energy companies and a number of other experts. And right now, we see 2 scenarios. The first is that WTI stays kind of where it is today, in the low 80s, plus or minus or higher. In that case, we don't expect much impact at all to sand demand. We came into this forecasting season looking for 25% to 30% year-over-year increase in demand. So that's from 25 -- or sorry, from 2014 to 2015, that's the kind of market demand, 25% to 30% demand growth and that was with flat rig count. We think that scenario still stands with oil prices in the low 80s. The second scenario is one where oil prices dropped further, and it seems like a lot of folks are talking about mid-70s or low 70s as at least the potential anyway. And we believe if the prices drop to those levels and remain there for a few months, there's a potential for some moderate pullback in terms of demand. And we think that it would be a fairly small pullback and that it would reduce the year-on-year frac sand demand increase from 25% to 30%, which I said in the base case, to maybe, like, 20% to 25%. So it'd be a 5% to 7% reduction in sand demand. And the reality is even in this scenario, it's tremendous growth. We're still talking about 20% or 25% year-on-year growth. And our current expectation is that even that scenario really doesn't impact U.S. Silica very much, and certainly happy to talk more about that. And so given all that, to your specific question, we laid out a goal of getting to $550 million to $600 million in EBITDA by 2017 at our Investor Day. And it was going to require us continuing to add greenfield capacity. And I'm happy to report that we haven't changed anything. And we don't see any signpost right now that would take us off track there. Our Utica site is ramping up. Fairchild is right on track, as well as Pacific, to start up next year as planned. Our second greenfield site behind Fairchild, which is another Wisconsin site, is right on track. We've actually just recently secured almost all the land options that we need to start up that site. And so we would still expect that to start up in 2016. So that's a bit of color. The short answer is we don't see anything right now that would impact our plan to be on a trajectory to achieve those 2017 numbers that we laid out.

[Operator:]

And our next question comes from the line of Kurt Hallead with RBC.

[Kurt Hallead:]

I just want to get a -- you guys have been getting inundated the last few weeks here with a lot of questions about the frac sand market. I know you guys gave some pretty optimistic outlook at your Analyst Day back in September. And given the recent changes in the oil price dynamic, just figured I'd start there and get a sense from you whether or not you're seeing any even leading edge indications of potential slowdown in frac activity and frac sand usage yet.

[Bryan A. Shinn:]

Yes, we're really not, Kurt. If anything, we're actually seeing it continue to go the other way. And there's lots of mathematical models and theoretical things that you see that point in that direction. But for me, it's kind of where the rubber meets the road. It's what conversations are we having with our customers. And so what we're seeing is that customers are actually seeking us out and wanting to do more business with U.S. Silica. If you look in the last quarter, we've continued to take share and we've also signed several new contracts over the last few months. So I'm very optimistic about where we're headed.

[Kurt Hallead:]

Great. And then we're getting a lot of, again, a lot of questions or maybe concerns about the incremental sand supply that's coming into the market. I think you guys may have indicated the prospect of having less than a 2-year payback on some new investments. And I think investors generally get skittish about what goes on in this sector when you have that kind of quick return and quick payback dynamics. So I'm just wondering if you might give us some indications on what you're seeing in terms of incremental supply from an industry standpoint coming in and how you think that balances out from a demand dynamic.

[Bryan A. Shinn:]

Sure, Kurt. Look, we, I think, have the best supply-demand model in the industry. We're proven to be very accurate over the last couple of years. And we do see the startup of several new mine sites over the next 18 months, including our own. But as you look at that, going forward, we think it's going to be tougher to find those sites and to permit them, I think, as perhaps some of our competitors are finding out. And aside from the supply and demand balance just at the mine site, which we think is still going to be very tight in 2015, this is increasingly becoming a logistics business, as I know you're well aware. So what really matters is how much sand can you deliver to the basins and have ready for customers when they want it and I think that's a place where we really excel as well.

[Operator:]

And your next question comes from the line of Vebs Vaishnav with Bank of America.

[Vaibhav Vaishnav:]

Wanted to speak about the volumes contracted. So you mentioned there are about 70% volumes contracted as of right now. Is that include -- does that include Fairchild volumes or the Fairchild capacity that is going to come online or is it on the existing basins?

[Bryan A. Shinn:]

Yes, so let me talk about that a bit. I think it's really interesting and it's a pretty cool dynamic, quite honestly. As I was mentioning to Kurt just a minute ago, customers continue to seek us out and want to do more business with U.S. Silica. We signed a number of contracts over the last few months. And some of those has been term extensions for existing customers. Some have been volume expansions, and in other cases, we've had actually new customer contracts signed. Because of that, I expect that we'll actually be higher than 70% contracted as we go into 2015. I think we could be 80% to 90% contracted in the first half of '15. And certainly, some of those contracts have escalators, volume escalators in them once Fairchild comes online. So we already have a significant percentage of Fairchild contracted with the contracts already have signed and we're actually in the process of negotiating kind of final process with a few more customers. So we have lots of contractual opportunities, and I think we'll continue to sign those.

[Vaibhav Vaishnav:]

Okay. And I think Don mentioned that the gross profit per ton in Oil and Gas segment increased because of pricing and the cost improvements that you're working on. Is there a rough handle you can give us to what are the bigger reasons for improvement in gross profit per ton? Was it cost savings or pricing?

[Donald A. Merril:]

Yes, so I'd say the increases that we saw at Q2 versus Q3 in contribution margin per ton are really broken down into 3 categories. And I would say it's roughly 1/3, 1/3, 1/3. 1/3 price, 1/3 mix improvement, as we send more products through high-velocity transload facilities, and then the last one being cost improvements around our distribution and cost savings at our plant sites.

[Bryan A. Shinn:]

And maybe just to add something to that, Vebs, too, just keep in mind that we saw this really nice contribution margin per ton improvement on a quarter-over-quarter basis. And that's with the addition of Cadre, right? So those Cadre tons, while it's very attractive and profitable in their own right, aren't quite as profitable as the rest of the mix. So we're able to not only increase contribution margin but do it with that kind of a little bit of dilution, if you will, coming from the Cadre acquisition.

[Vaibhav Vaishnav:]

And last one for me, if I may. So Oil and Gas in basin sales declined to 61% in third quarter from 68% in second quarter. Anything to read into that? What caused that?

[Bryan A. Shinn:]

No, I think it's just normal variation, sort of puts and takes. We've seen the sales kind of move up and down. And I think we pretty consistently said that right now, we are in this sort of 60% to 70% window, we think, of range of sales in the basins.

[Operator:]

And our next question comes from the line of Blake Hutchinson with Howard Weil.

[Blake Allen Hutchinson:]

Just wanted to start with some of your opening commentary, Bryan, and what has been an opening commentary for much of the industry regarding, I guess, an acceleration of sand intensity per well and look back at your Analyst Day, where you talked about the average well going from 1,000 pounds per lateral foot to 2,000 pounds per lateral foot. I was wondering after seeing another quarter of acceleration in data, when you lay out these parameters, today, which one are we closer to? Just in very broad strokes, are we somewhere in the middle of that migration from 1,000 to 2,000? Just your thoughts on where we are in terms of intensity, today.

[Bryan A. Shinn:]

So, it's a really important question, Blake. And I think we're moving toward the higher end of that range. And I've had some conversations recently with customers and with some folks in the energy industry, the EMPs themselves, that would almost suggest that the numbers are sort of being artificially limited by availability of sand supply. And I think that's kind of a hidden trend here that a lot of folks are missing. So it feels to me like even if there's more supply that becomes available, there's this tremendous thirst for this product. And you look at so many of the energy companies and they're all saying some version of we're not even sure where the end point is in terms of productivity improvement. We haven't reached it yet. So we expect the sand intensity and the service intensity to continue into the future.

[Blake Allen Hutchinson:]

And so I guess, I mean, I know you guys lean towards a conservative side in all forms of guidance. But if you were doing it today, would the upper end of that parameter be moved up from what you've seen today?

[Bryan A. Shinn:]

Look, I mean, I have to go back and look at the data specifically. I mean, I don't have a specific number there. But I would say that the average is definitely moving more towards that 2,000. And we also tend to look at the amount of sand used per well, right? And we're hearing increasing examples of customers that are using up to 10,000 tons. In some cases, even more, more than a unit train of sand per well. So the leading edge is moving up. If you'd ask me 6 or 9 months ago where was the leading edge, I might have said 6,000 to 8,000 tons. Now it's 10,000 to 12,000 tons and to me, that's indicative of an average that's moving higher.

[Blake Allen Hutchinson:]

Great. And then just one point of clarification, when you talk about in basin, does the mix -- does the -- do Cadre sales essentially not count as in basin, is that all considered FOB or all considered in basin and has skewed kind of the progression there?

[Bryan A. Shinn:]

Yes. So those are all FOB plant sales. So it's a good point. I mean, that's one reason why the numbers are slightly different this quarter. But we certainly don't see any material change in terms of our major Northern White sand customers and their thirst to buy product in basin.

[Operator:]

And our next question comes from the line of Brandon Dobell with William Blair.

[Brandon Burke Dobell:]

Maybe taking a prospective view, Bryan, going back to your second scenario on lower oil prices. Let's say there is a paring back of demand. How did the contracts that you guys have signed act in an instance where a service company has said, we're going to need x when they sign the contract and they come back and say, you know what, we're going to need 85% of x. Just trying to figure out how the -- what the wiggle room around the contracts would look like if there is a pricing change or how hard and fast are those volume commitments the service companies have made?

[Bryan A. Shinn:]

It's a great question and obviously, one that we think about a lot, Brandon. And so if you look at a lot of the recent contracts we signed, these are our third-generation contracts and they incorporate a lot of the learnings over the last few years. And so you'll see a variety of provisions in there, things like minimum volumes. In some cases, in fact, in most cases, the prices are fixed and have some escalators. There are make-whole provisions, to your point, around what happens in some kind of a downturn. Some contracts are a percentage of share. And then we've tended to, over time, put more specificity in the contracts on how we deal with the shortfall by either party, right? So it's not just our customers. We have some obligations to provide here as well. Look, based on what I'm seeing in terms of demand, even if there's a bit of a pullback, there's still millions more tons that are going to need to be pumped in 2015 than 2014. And my expectation is that customers are going to continue to buy from us for a variety of reasons. One is that they're going to need the product. And there aren't that many other providers out there who can consistently and reliable --reliably deliver the product into the basins. I think we bring a tremendous amount of value to our customers. And it's interesting to listen to the dialogue. Over the last couple of years, it's shifted to much more of a long-term relationship kind of a dialogue. And then the last point here that's important is we're highly integrated into our customer supply chain. So I think all of those things tell me that our customers will continue to buy. Also one point that is interesting, I was looking back just the other day, with all the new contracts that we've signed recently, our contract mix is much more heavily weighted to the larger, kind of more balanced service companies. And those are certainly the ones that you think that if there is any kind of a pullback, those are the ones who are probably going to continue to maintain most of their volumes. So I feel really good about our suite of contracts and actually, I think this is the best group of contracts we've had since I've been here with the company.

[Brandon Burke Dobell:]

And I think you mentioned 20% of volumes are now unit trains. I think that was a year-to-date number, if I'm not mistaken?

[Bryan A. Shinn:]

That's correct.

[Brandon Burke Dobell:]

Where do you think that goes? And I guess it's kind of a 2-part question, there's a where you'd like it to go and there's what infrastructure is capable of handling in terms of origin and destination matching? And what you guys can realistically do relative to what your customers want you guys to do?

[Bryan A. Shinn:]

So essentially, all of the facilities that we're putting in, all the future facilities that we talked about at our Investor Day are unit train-capable. And quite honestly, Brandon, I think the only way that our industry and the railroads will be able to ship these huge volumes of proppants that are going to be needed over the next few years is to be able to do it via unit trains. So certainly, the railroads are partners in this, they're encouraging the sand companies to move more and more to unit trains. And I think that we'll do that and be very successful at it. The other key thing here that I think is maybe missed sometimes in this is that it's a lot about velocity these days. You hear us talk about that. And let me give you an example of what that means. A couple of years ago, if we had a 10,000-ton transload facility, 10,000 tons worth of sand in a silo out in the basin, I would have felt pretty good. Well, now, that's just one well, right? And so it's not about having those facilities so much as it is how fast can you replenish those facilities. And if you're not using unit trains, you're kind of in a slow lane in doing that, and you're just not going to be successful out there to meet the needs of customers today.

[Operator:]

And our next question comes from the line of Trey Grooms with Stephens.

[Trey Grooms:]

So Bryan, I think last quarter, you mentioned that you were expecting kind of mid-30s type contribution margin for the year in Oil and Gas, or $1 per ton, I guess. Does this change at all given the strength you saw in the third quarter on contribution margin?

[Donald A. Merril:]

This is Don, Trey. And I think in the last quarter, we talked about mid to the upper 30s. And we're sticking with that. I would say closer to the higher 30s right now in Oil and Gas, mainly due to these contracts that we signed recently came with a little bit higher pricing, so that's going to be sticky going-forward, and what we're seeing around the mix and the cost savings. So I would think that we're kind of at the high end of the 30s right now for contribution margin per ton.

[Trey Grooms:]

Okay. Great. And then -- and with that -- with the contracts you do have in place being a little higher-priced, is that kind of high 30s the kind of the way to think about it as we look into next year as well?

[Donald A. Merril:]

Yes, I would say so. Yes.

[Trey Grooms:]

Okay. And then you mentioned increasing barge usage to get to a few of the basins there. How much are you moving via barge? And are you guys shipping -- can you just give us a little more color on that? Are you guys shipping the wet sand? Or are you -- I'm sure you're probably processing and shipping dry sand would be my guess. But how does that cost profile compare to the rails? If you could just give us a little color on that.

[Bryan A. Shinn:]

Sure. So I would say we shipped about 10% of our overall oil and gas volumes during the quarter by barge. And just to be clear, because I think there's been some confusion in the industry on this, we're just shipping dried finished tons. We've seen some of our competitors think about and try models where they're shipping wet sand on barge. And we don't think that's a very cost-effective way to go. I would say that generally, just because of the origins and destinations involved in our barging, our barge rates are very competitive with rail. And in some cases, depending on the exact destination, even a little bit better than rail. But in our opinion, it really only works if you're barging dried finished products as opposed to wet sand to be processed later.

[Trey Grooms:]

Got you. And if I could just sneak one more in on the ISP business. You mentioned some onetime costs. Don, if you wouldn't mind giving us a little color there, how to think about that and the impact in the quarter.

[Donald A. Merril:]

Yes, and they really were onetime-type activities, right? So if you were to add that up, it was about 800,000, give or take, of those onetime-type items. So if I were to take that out, our contribution margin per ton in ISP would be right back if not just a little bit better than what we saw in the second quarter.

[Operator:]

Your next question comes from the line of Sonny Randhawa with Miller Tabak.

[Amritpal Singh Randhawa:]

I have a question on I guess, did -- are we walking back the contribution margin to the high 30s again from 40.6?

[Bryan A. Shinn:]

So I think -- yes, I mean, maybe just to give you a perspective, right? What we said pretty consistently is that our long-term target, what we think is sustainable across many years, is probably more like the $35 to $37 range. That's our sort of internal planning target. We think we can do better than that in some cases, like we're doing now. I think what Don was referring to is, once again, kind of a conservative case. I think there is probably a case out there that says the contribution margin stays where it is, right around 40, right? But the difference between 38.50 or 39 and 40 is pretty thin. So we think we're in that range somewhere.

[Amritpal Singh Randhawa:]

Okay. And I guess, looking at supply, it's -- I think everybody is kind of worried about the demand side with crude prices where they're at. But there seems to be an awful lot of supply coming on the market to meet that demand. Given that the balance sheet of the customers are a lot better than the balance sheets of the people putting the supply on the market, I mean, excluding yourself and some of the larger public players, what do you guys see in terms of supply going into 2015? If we are to sustain at this current level or we get a little bit lower into 70s?

[Bryan A. Shinn:]

So I believe that the supply, even if we get into the 70s with WTI, I think the supply-demand balance remains very tight. And as I was mentioning earlier, I think a big part of it as well is not just the supply balance at the mine site but you have to look at all the pieces along the way. So it's about the ability to have railcars, the ability to get train service, whether you ship in unit trains, do you have the transload locations, do you have the balance sheet to be able to front all the cash to fill up those transloads with finished products. All of those things. So when we think about supply and demand today, we're looking at 4 or 5 nodes along the chain, and several of those are really tight right now. And so at any one time, 2 or 3 of them tend to line up and create shortages, kind of rolling shortages across various end use destination points. And you've heard many of our customers talk about that on their earnings call. And so we think all of that continues to persist into 2015.

[Amritpal Singh Randhawa:]

Okay. And if I could just get another one in here. Have you guys seen, I guess, the bid-ask for some of these smaller players within the industry? It is pretty fragmented. Have those come in at all? Have you started having more discussions with people? Are people just becoming more talkative?

[Bryan A. Shinn:]

So I think that we're increasingly an industry where scale really matters. And in over my almost 30 years in business, whenever I was in an industry like that, it tended to be one that was ripe for consolidation. So I don't think our industry is any exception. So I would expect to see some consolidation over the next few years. And I think the good news about U.S. Silica is that we're extremely well positioned with very low leverage and the kind of advantaged logistics network that we have where we can take some of these sites that maybe others don't find profitable, and we can plug them into our network and do great things with them. So I'd expect to see an increasing chorus of opportunities coming forward. And certainly, we'll be very active in that process.

[Operator:]

And our next question comes from the line of Connor Lynagh with Morgan Stanley.

[Connor Lynagh:]

Just wanted to dig in on the logistics side a little bit. So given your view of how much supply is coming online and where demand is trending and then there's 2-year waiting time for railcar, is the industry capable of delivering enough railcars to meet oncoming supply? Do you guys view that as a bottleneck right now?

[Bryan A. Shinn:]

I think that's definitely one of several potential bottlenecks, Connor. And it feels like it is just kind of on the razor's edge of being able to deliver that, given all of the other constraints in the railcar fabrication industry, it feels like that's going to be a real challenge point for sure.

[Connor Lynagh:]

Okay. And then maybe on the brown sand side a little bit. How tight is that market relative to the white sand market? And how realistic is the possibility of customers switching to brown sand if they can't get white sand?

[Bryan A. Shinn:]

So we have seen a tremendous demand for brown sand. The Cadre team had done an excellent job with the asset and with the business. And then as we came in, I think we were able to take that to another level and literally, with the injection of our sales team and our know-how and connections in the industry, we've been essentially sold out from the first week that we owned the business, as we went in and really worked at it. And so I believe that there's strong opportunities for brown sand. We have demand today in that side of the business that we can't fulfill. And so just as we've talked in the past around expansion opportunities in the Northern White side, I think there could be some expansion opportunities ahead in the brown sand side as well. So we feel really good about that. And kudos to our team who's come in and just done a great job on that acquisition, and to be literally accretive already in the third quarter, I think, is a testament to that.

[Connor Lynagh:]

Have you guys seen any pricing increases on that?

[Bryan A. Shinn:]

We think there's opportunities there. We've seen some of that. And I think as that market continues to stay tight and we have some time to get in and work with customers, that's a real possibility.

[Operator:]

[Operator Instructions] Our next question comes from the line of Darren Gacicia with Guggenheim. Our next question is from the line of Matt Conlan with Wells Fargo.

[Matthew D. Conlan:]

Again, fantastic quarter and I do agree that U.S. Silica seems to have the best supply-demand model in the business. And now that I've buttered you up with that, with the base case of 25% to 30% demand growth for '15 over '14, what is U.S. Silica's estimate for total frac sand demand in 2014? I imagined it's quite a bit higher than some of the third party estimates have been.

[Bryan A. Shinn:]

Yes, so we've never given the specific number, Matt. And so we tend to look at it in terms of year-over-year. That seems to be the most meaningful comparison, and so that's where we talk about the 25% to 30%. But you've certainly seen a lot of third party sources out there that quoted a number starting 2013 of somewhere in the mid-40s in terms of demand. So 45 million tons, I think, was a popular number that was quoted by some third parties. And then demand here in '14 is up easily 30 to 35%. So you can look at those kind of numbers and get a sense for where we think the market is.

[Matthew D. Conlan:]

Okay. Great. And just because we're getting a lot of questions about what happens to sand demand if there is a slowing of demand due to lower commodity prices, what do you see the course of who gets hurt first? I assume uncontracted volumes would be diminished before contracted volumes get impacted. Would you say that brown sand would see -- get crowded out before white sand?

[Bryan A. Shinn:]

So I think we have to go back and look at the cost curve of the industry, right? And so there is 10% to 20% of the capacity out there that is substantially higher cost than, say, U.S. Silica and some of the other low-cost players in the industry. And as a result of that, those folks need much higher prices to make any kind of reasonable margins. And typically, those also tend to be the folks who are more disadvantaged from a logistics standpoint. So I think those folks probably are the first ones to feel some pressure. And I would say anybody that doesn't have significant logistics footprint, anybody that is not significantly using unit trains and also anyone who doesn't have good strong contracts. And it's not just about the percentage of your supply that's contracted, it's who you're contracted with, right? So if you think about where the -- if you think about from an energy company standpoint, where does the pain start, it probably starts with the highly leveraged, smaller cap energy companies who are drilling kind of at the fringes of some of the basins, right? And those folks, in our experience, tend to be served by a lot of the second and third tier service companies, right? So it kind of rolls through. And I guess, long story short, the more contracts you have with the bigger service companies, probably the better you are, right? So we've taken all that into account as we put together our portfolio of contracts and our business model.

[Matthew D. Conlan:]

Okay. And then just to take it a step further, I think we could probably assume that, that 10% to 20% of capacity, that's substantially higher costs that are most disadvantaged from logistics, those are probably also be the companies that are least likely to have contracts and certainly, least likely to have contracts with the bigger players?

[Bryan A. Shinn:]

I think that would be a good assumption.

[Operator:]

Our next question comes from the line of Darren Gacicia with Guggenheim.

[Darren Gacicia:]

So first question, on growth. When you kind of try to parse out kind of maybe where growth is coming from, probably more from a structural sense than just kind of a sheer volume sense, is -- between plays, maybe some of the less mature plays that are starting to show up. And I know you sell directly to the pressure pumpers, but from an end-user perspective, are you also seeing kind of an adoption of practices kind of expanding the market as a total? Like some of the people have become bigger kind of sand per well users, that best practice is now spreading. And maybe how far are we along in that process?

[Bryan A. Shinn:]

No, look, I think it's a really astute observation. And we know this industry tends to be kind of a follow-the-leader industry in terms of technical trends. And we certainly see much more broadscale adoption coming in terms of these new kind of mega fracs in terms of the proppant density. And I think that we're going to see that continue to ramp up. And if I had to give you a number, I would say that I think we're probably somewhere in the neighborhood of 30% penetrated in the industry in terms of those kind of higher proppant density fracs. So it feels like there's a long way to go down the curve in terms of penetration. And then the other important dynamic is that at the same time, the leading edge of that curve is going up and to the right, as I mentioned earlier. So we're seeing 2 trends at the same time, both of which bode well for increased proppant use into the future.

[Darren Gacicia:]

I could imagine that's why you're a little less sensitive with the oil price, given the thematic trends happening.

[Bryan A. Shinn:]

Exactly. And if you think about it, even at $70 oil, we're talking about a 20% or 25% increase in proppant demand potentially, right? So nobody's talking about less proppant demand in '15. We're just talking about how big is the increase, right? So we feel pretty confident as to where that's going.

[Darren Gacicia:]

And the one last, slightly unrelated. Transload, I think in your release, you have 61% of Oil and Gas up from I think what, mid-50s last year around this time. When you look at contribution margin, I think during your Investor Day, and if I'm misquoting you, I apologize, we're looking to get that number, that 61%, up to kind of closer to 70%. On a delta between 61% and 70%, considering that it seems to be much more cost-efficient, what do you think that does on a dollar per ton basis to contribution margins to kind of ramp from one point to the other?

[Bryan A. Shinn:]

Yes, so you know what we said is that we've been trending up over the last several quarters, and we expect it to cap out somewhere in the mid to high 60s, maybe 70%. So I think somewhere in the 60% to 70% on a quarter-by-quarter basis is pretty consistent actually, given the kind of natural fluctuations in that. And then as we pointed out earlier, we've also got the injection of Cadre in here, which really is counted as all FOB plant tons. So that kind of skews the number a little bit. So I wouldn't read too much into that number. It's going to move around quarter-to-quarter.

[Darren Gacicia:]

But does it have a -- does an increase in the number of units trains improve the contribution margin, given kind of a different cost structure? I guess, I'm just trying to get the sensitivity around that.

[Bryan A. Shinn:]

Yes, we -- look, unit trains are very cost-efficient. And so certainly, it tends to be less supply chain cost for us as we deliver by unit train.

[Operator:]

And our next question comes from the line of Agata Bielicki with Simmons & Company.

[Agata Bielicki:]

First question, are you able to track contribution margin by basin? And if so, which are the basins that would be most and least profitable?

[Donald A. Merril:]

Well, I can answer the first part of the question. Yes, we do track it by basin. And we really have not commented on profitability by basin.

[Agata Bielicki:]

Okay. So does that mean there'd be any chance you could provide maybe a geographic breakdown on proppant volumes?

[Donald A. Merril:]

We really have not, for a variety of reasons, gone into that level of detail around where we sell our products, specifically in basins.

[Bryan A. Shinn:]

So I guess, Agata, maybe I would add to that, that our sales track the rig distribution pretty closely, right? So the majority of our sales are into the big 4 basins, right, so you got the Permian, the Eagle Ford, the Marcellus and the Bakken. That's where most of the rigs are. And so it will track pretty closely to rig count.

[Operator:]

And there are no further questions at this time. I'd like to turn the floor back to Bryan Shinn for closing remarks.

[Bryan A. Shinn:]

Well, thank you very much. As we outlined for investors and analysts last month at our Annual Investor Day in San Antonio, U.S. Silica continues to deliver double-digit growth ahead of our plan, and we expect continued strength across the enterprise. Our company is an industry leader, as I think many on this call have commented, with low-cost, advantaged logistics and a balance of attractive markets. We're successfully executing on our strategy to keep pace with the surging demand for our products, particularly in oil and gas, as we grow our capacity there. We continue to move our point-of-sale closer to the well and increase product velocity, as I talked about today during the Q&A. And as we do that, we continue to take market share as well. And quite frankly, we continue to outgrow our growth market, and I'm very excited about that. For all of our investors, we appreciate your continued interest and support and we look forward to speaking with you in the future. So thanks, everyone, for dialing in and have a great day.

[Operator:]

Ladies and gentlemen, this concludes today's teleconference. Thank you for your participation. You may disconnect your lines at this time.