U.S. Silica Holdings, Inc.
Q4 2014 Earnings Call Transcript

Published: 25 Feb 2015

[Operator:]

Greetings, and welcome to the U.S. Silica's Fourth Quarter and Full Year 2014 Earnings Call. At this time, all participants are in a listen only mode. A brief question-and-answer session will follow the formal presentation. [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 Investor Relations and Corporate Communications for U.S. Silica. Thank you. You may begin.

[Michael Lawson:]

Thanks. Good morning, everyone. And thank you for joining us for U.S. Silica's Fourth Quarter and Full Year 2014 Earnings Conference Call. With me on the call today are Bryan Shinn, President and Chief Executive Officer; and Don Merril, Vice President and Chief Financial Officer. Before we begin, I would like to remind all participants that our comments today will include forward-looking statements, which are subject to certain risks and uncertainties. For a complete discussion of these risks and uncertainties, we encourage you to read the company's press release and our documents on file with the SEC. Additionally, we may refer to the non-GAAP measures of adjusted EBITDA and segment contribution margin during this call. Please refer to yesterday's press release or our public filings for a full reconciliation of adjusted EBITDA to net income and definition of segment contribution margin. And with that, I will now turn the call over to our CEO, Mr. Bryan Shinn. Bryan?

[Bryan Shinn:]

Thanks Mike. And good morning everyone. I’ll begin today’s call by reviewing our strong performance in the fourth quarter and some of our key accomplishments in 2014, followed by an update on current market conditions and the actions we’re taking to manage through this current period of lower oil prices. Certainly 2014 seems like old news, but I think it’s important to spend just a few minutes recapping our impressive results. Strong market demand in oil and gas drove fourth quarter volumes for the company, of just over 3 million tons, a 43% improvement over the same period last year. Oil and gas volumes in the quarter, grew to a record 2 million tons, a 79% increase on a year-over-year basis, driven largely by the continued adoption of new completion techniques, which employ more sand per well. I’ll speak in a moment about our thoughts on sand demand for 2015, but suffice to say that we believe this trend is here to stay, and should offset some of the decline in demand we expect to see as a result of the significant number of rigs that have been already been laid down this year. ISP volumes in the quarter of approximately 1 million tons were up 2% over the same period last year, driven largely by new business in foundry and stronger demand for building products. Pricing was strong in both operating segments, which produced an enterprise, contribution margin per ton of $31.07. Don will have more to say about segment contribution margin in his prepared remarks in just a moment. Higher volumes and stronger pricing drove record revenue for the company in the quarter of $249.6 million, an increase of 67% on a year-over-year basis. Adjusted EBITDA for the quarter was $67 million, an increase of 87% over the same period last year. Now let me take a couple of minutes to review some of the major accomplishments our company achieved in 2014, because I think many of the actions that we took last year have put us in a better position to manage through the changes that we’re seeing in our markets today. Our acquisition of Cadre Proppants by any measure has been a home run; the premium hickory sand provider has exceeded all of our initial expectations, and has been accretive to earnings for the two quarters under our ownership. The integration is now complete, and we’ve had success cross-selling our northern light and resin-coated sands to Cadre customers. And we’ve also sold premium hickory sand to U.S. Silica customers. Cadre today continues to be sold out with firm pricing. We shipped a record 125 unit trains in 2014, double the number we shipped in the previous year. In the past three years, we’ve built sophisticated supply chain that positions U.S. Silica, as one of the most efficient, effective, and the lowest cost suppliers in the industry. We also continued to launch new, value added products from our industrial and specialty product segment, with 13 new products and over 30 more in the pipeline. The investments we’ve made in ISP have fuelled revitalization in this important business segment, while at the same time, providing the steady growth and strong cash flow that it has had for more than 100 years. Now let me turn to our views on our markets today, in ISP sector, markets remained strong in 2015, led by growth in housing starts, and continued recovery in the automotive sector. Our products were used in many materials consumed by these two industries, including fiber-glass installation, roofing shingles, glass, and paints. Demand for fine industrial silica grades, similar to those used in the oil and gas sector has remained strong as well. In the oil and gas industry today, the reality is a bit different. When OPEC announced in late November of last year, that it would not cut oil production in spite of high supply levels and weakening worldwide demand, the global reaction was swift. Yet the immediate impact on our business was negligible. Since then, we’ve seen US oil producers cutting their 2015 capital expenditure budgets by as much as 40%. In response to lower spent, drilling rigs are being laid down at the fastest pace in the history of the rig count, according to industry analysts, with some estimating that rigs could fall by more than 40% peak-to-trough this year. What does all this mean for the proppant industry in general and US Silica specifically? While many questions still are waiting answers, what we do know is that the decline in drilling activity could lead to reduced demand for proppants in 2015. For example, if we see a 30% to 35% reduction in average rig count, we estimate that raw frac sand demand could decline by as much as 15% to 20% from 2014 levels. The difference is attributable to higher rig efficiencies, smaller decline in horizontal drilling where proppant is used and well designs with more proppant per well. Some energy companies have commented on recent earnings calls that they intend to focus their efforts on completing existing wells in an effort to maximize production. Conversely other producers have stated that they do not intend to complete some of the wells already drilled in an effort to reduce cost. Given all the uncertainties and this type of conflicting information it’s very difficult to know at this point in time to tell total demand for frac sand will play out in 2015 but early indications point to lower demand sequentially. Supply is challenging to forecast as well, based on our analysis of announced and known capacity expansions, there were plans to bring approximately 30% more capacity online throughout 2015. What’s not clear at the present time is how much of this new capacity will either be slowed or stopped in light of current market conditions. So how do we operate in this uncertain environment? Well, first we believe it’s prudent to continue to plan for significant long-term growth as drilling and completions activity will ultimately rebound. We also believe that it’s critical to maintain flexibility and create optionality as we closely monitor customer needs and the market situation. For example, our 2015 CapEx plan is designed to be extremely flexible allowing us to speedup or slowdown investment as market conditions dictate. We also seek to use our war chest of cash to make strategic investments in additional capacity and capabilities. We plan to be flexible with our customers as well. We're in active discussions with contract customers regarding how to best support their business plans in the current market environment. We're considering numerous alternatives including pricing flexibility, lengthening contract terms, increasing unit train shipments, improving response time and closer aligning on supply chain planning to reduced total delivered cost. We also plan to be flexible from an operational standpoint; we've embarked on a company wide initiative to reduce our budgeted SG&A expenses by 20% in 2015. We are also looking carefully at our workforce requirements and ways in which we can operate our plans more efficiently. We are in discussions with our vendors to help take out cost and we're concentrating on finding the best origin and destination pairings for product shipments to ensure that we optimize profitability. As we've seen in past oil and gas cycles are key to success in a downturn is to act quickly and decisively and to stay closely aligned with customers. We've already adapted to the current reality of lower commodity prices. Clearly, no one knows when the market will rebound but I expect that when it does that, it will come back quickly and we’ll be really well positioned to capitalize on investments made during the down cycle. And with that I’ll turn the call over to Don, Don?

[Don Merril:]

Thanks, Brian. And good morning everyone. I’ll begin by commenting on our two operating segments, oil and gas and industrial and specialty products. Revenue for the oil and gas business for the fourth quarter of 2014 nearly doubled on a year-over-year basis to $196 million or revenue for the ISP segment of $53.5 million represented a 13% improvement over the same period in the prior year. Contribution margin from oil and gas in the quarter was $80.4 million, an increase of 135% over the same period last year and up 4% sequentially from the third quarter of 2014. On a per ton basis contribution margin for oil and gas was $40.27 compared with $30.57 for the same quarter of the prior year and relatively flat with $40.65 reported in the third quarter of 2014. On a per ton basis contribution margin for the ISP business of $13.14 represented a 4% decline from the same period in the prior year and a 14% decline from the third quarter of 2014. The sequential and year-over-year decline in ISP contribution margin per ton was a result of higher production costs in the fourth quarter partially offset by higher prices for our ground products. Turning now to the total company results. SG&A expense for the fourth quarter increased by $21.2 million to $35.7 million compared with $14.5 million for the fourth quarter of 2013. The increase was driven mostly by increases in compensation expenses of $8.7 million, the majority of which was associated with our annual bonus incentive plan and $6.4 million in business development expenses as we continue to look for ways to grow the business. Additionally, we incurred $6.9 million increase in bad debt expense related to the overall assessment of our customers' ability to pay their obligations to us. In particular the majority of these expense due to one customer in oil and gas segment. Depreciation, depletion and amortization expense in the fourth quarter was $12.7million compared with $10.1 million in the same quarter last year. The year-over-year increase in DD&A was driven by continued capital spending in support of our growth initiatives combined with increased depletion due to the additional volumes of sand mined. Continuing to move down the income statement and the other income and expense line, interest expense for the quarter was $5.4 million compared with $4.1 million in the same period last year. The effective tax rate in the quarter was 13.7% compared with 9.2% in the fourth quarter of 2013. Our fourth quarter tax rate was lower than originally expected due to the revised and reinstated R&D tax credit, a larger than expected tax depletion deduction as well as lower state taxes. Turning now to the balance sheet. Cash, cash equivalents and short-term investments at December 30, 2014, totaled $342.4 million compared with $153.2 million at December 31, 2013. As of December 31, 2014, our working capital was $416.1 million and we had $46.8 million available under our revolving credit facility. At December 31, 2014, total debt outstanding was $502.3 million for debt to adjusted EBITDA ratio of 2.0. Taking into account total cash and cash equivalent on the balance sheet of $342.4 million at yearend, U.S. Silica's net debt was $159.9 million for a net debt to adjusted EBITDA ratio of 0.6. During 2014, our cash flows from operating activities exceeded our capital expenditures for the first time since the IPO. We incurred capital expenditures of $41 million in the fourth quarter of 2014, the bulk of which consisted of investments in various growth and maintenance initiatives. During the quarter, we upsize our senior secured term loan by an additional $135 million to make a strong balance sheet even stronger while providing additional flexibility to facilitate our disciplined approach to capital allocation which includes organic growth opportunities, funding acquisitions or returning cash to shareholders. Regarding the latter, our Board late last year authorized an increase to our share repurchase program up to $50 million. Between December 22, 2014 and February 12, 2015, we have purchased a little over 600,000 shares at an average price of $25.99 per share. We also plan to use our strong balance sheet to capitalize on unique opportunities created by this low oil price environment to enhance our speed, scale and strength as an enterprise. Looking mostly of mining or logistical assets they would compliment our existing network. Finally, as we noted in the press release, we think imprudent to this point in time given how quickly the oil and gas industry has reacted to reduce drilling activity in response to lower oil prices to temporary suspend our financial guidance until such time as we can begin to see more clarity in customer demand trends. Obviously, we will be watching this very closely and will provide you with an update on our next earnings call or sooner if practical. With that I'll turn the call back over to Bryan.

[Bryan Shinn:]

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

[Operator:]

[Operator Instructions] Our first question comes from the line of Blake Hutchinson with Howard Weil. Please proceed with your question.

[Blake Hutchinson:]

Good morning, guys. Kind of taking all this commentary and translating into more of a kind of Silica's specific translation and I guess if something you can answer because there is some hard data behind it, what -- is the unwillingness to give a full year forecast simply that there is up to date results that actually or what you have seen has been relatively stable with 4Q which makes it difficult to diagnose the open end impact on Silica or would you suggest that we need to look out at the industry and start taking the type of volume, potential volume declines and pricing declines that are out there and start reflecting that on Silica's results immediately in the year. Just kind of trying to get better gauge where we are starting from for your franchise.

[Bryan Shinn:]

Sure, Blake. I think most of the uncertainty that we see right now is obviously on the demand side. And we said in our prepared remarks I think most people in the industry including us are now expecting at least a 40% peak-to- trough decline in rig count and some of the more recent estimates are suggesting something even little bit south of that. So if you put that on a kind of year-on-year basis it is probably 30% to 35% year-on-year decline in rig count. Now the good news for the fracs and industry and us specifically is that we have some offsets to that. So we still expect to see 15% to 20% more sand per well on a year-on-year basis. We get little bit of tailwind through continuing improvement in rig efficiencies and the good news is that we are seeing more vertical wells drop off than horizontal wells in the declining rig count, and obviously the vertical use less sand than the horizontal. So all those are positive. The other side of the coin is that we are starting to see some wells that are been drilled but not completed right. And so you hear lot of energy companies talking now about potentially saving some money by holding back some percentage of their wells and completing them later. And so it just tough to know how all those puts and takes play out. I'd say that you look at all that and it's not unreasonable to see a scenario where maybe we have 10% to 15% less frac sand demand in the industry year-on-year. But specifically to your question, that's the part that's really uncertain. So it's hard to know how some of that demand plays out. When things turn, is this a V shape recovery or U or an L right. So I think that's what's preventing us from giving really firm guidance as we've done in the past.

[Blake Hutchinson:]

And I guess just to follow up with that. I mean I think my question was more around how abruptly this maybe impacting you in terms of -- I mean because you just kind of mixed signal there, you are saying in some areas like hickory sand you sold out with firm pricing, you are considering pricing flexibility, I guess how does that all add up to what you face today or year-to-date, I mean our volumes backing up already or is the delivery system becoming less efficient because of that or is that more -- is the commentary more look we this maybe something that occurs towards the end of the quarter in the second quarter but we just don't know yet.

[Bryan Shinn:]

No. Look we've already seeing some impact and I think we said in our prepared remarks that we would expect decline sequentially, right. I'd say that as I look at, say first half of 2015 for us, it is probably going to feel lot more like the first half of 2014. And so if you look at last year it was kind year of two halves, the first half demand was okay but we really saw demand pick up in the second half of 2014 and pricing as well. But it feel like that the first half of 2015 is kind of more back to where things were in the early part of 2014, just kind of give you a sense for what we are seeing out there.

[Operator:]

Our next question comes from the line of Brandon Dobell with William Blair. Please go ahead with your question.

[Brandon Dobell:]

Thanks. Good morning, guys. Maybe just take the conversation with the customers in a different way. How deep the conversations getting around future supply from you guys? Are customers still worried about getting shutout of the market if things come back? Just trying to get feel for how confident you are in capacity expansion as Newman expansions those kinds of things based on the conversations you are having with customers and embedded within that there is an obvious market share or wallet share component to that conversation about how much demand you are going to see from particular service company?

[Bryan Shinn:]

Yes. It is really good question. And as you can imagine we are having lot of discussion with our customers on a variety of topics and I would say that most of the conversations is today centered around how we can support their business goals and it really varies like customer right. So we see some customers out there that are aggressively taking share, some that are moving to new basin some by their choice and some by the fact that they are losing work in the basins where they currently have their crews situated. And almost all the customers are talking about faster response time. One of the interesting things about the dynamics right now in the service industry is that customers are winning and losing work at a rapid pace. And so we need to be in a position to respond to that. You can imagine customers are asking us for pricing flexibility given the dynamics in the industry right now. We look at things like longer contract length and increasing our share as you mention but there are lots of things, other things we can do for customers. For example, we shipped 125 unit trains last year, I think that's the most of any sand supplier in the industry will probably do more than that in 2015 and so it gives that decreased response time that customers are looking for. And it is also important in this environment to more closely align on supply chain planning. Sand is obviously high volume product and if we send train load of sand to the wrong location it cost us a lot of money. So we are trying to be very focused on our contract customers and meeting their need. So it gives a bit of color as to what the conversations are typically like today.

[Brandon Dobell:]

Okay. And then a quick follow up on that. As you guys think about the wallet share component of the conversations, how much of ability do you guys get talking to the bigger service companies or even smaller service companies about let's call it vendor consolidation vendor concentration, are they accelerating those types of conversations, is it more-- it is -- based on what's going on so we are going to kind of keep it the vendors we have and then address that later. What is that feel like you guys?

[Bryan Shinn:]

So we definitely see a vendor consolidation, we are talking with senior leadership at a very large service not too long ago and they said that in 2014 they purchased sand for more than 30 different suppliers, their goal is to get down to 4 or 5 on going forward basis and we are going to one of those 4 or 5. And so that pretty representative of the discussions that we are having. I think things are playing out in the industry today are really differentiate people like us who have all the capabilities to serve customers quickly at good cost with a national foot print from many of the kind of one off interest that we had over the last couple of years. So it seems like this one actually accelerate some of the consolidation efforts that were already underway, Brandon.

[Operator:]

Our next question comes from the line of Marc Bianchi with Cowen. Please go ahead with your question.

[Marc Bianchi:]

Hi, guys. The CapEx guidance you provided seems a little bit lower than I was expecting. Is there some deferral of the Fairchild facility here? Can you kind of talk to more specifically what you are planning on spending on 2015?

[Bryan Shinn:]

Sure, Mark. So our plan is to maintain a flexible approach that's really driven by the demand signals that we are getting in the market. If you look at how we have been running projects over the last 18 months to two years, we mostly been optimizing for speed to market and so now the applications of that are that we are spending a lot of extra money on those projects and working night and weekends and doing a lot of sort of premium time things to bring capacity on faster. I think now we are looking at with this more flexible approach is to go back to more of I guess what I call sort of normal schedule, so you work Monday to Friday, you work day light hours and things like that. Now the reality is we can change back and forth very quickly between those two approaches. But as we run projects in more of kind of normal mode right now, that means that we probably push out some of the completion date. And so for example if you choose we can still have Fairchild up and running before the end of the year as we had originally planned. If we scale back a little bit and run in more sort of normal mode, probably pushes the startup into 2016 and the reality is we are just looking for those demand signals out in the market. If I had to speculate I think what's going to happen is when this market comes back, it is going to come back hard, and I think that's going to be exacerbated by the potential backlog of drilled but uncompleted wells. So we want to make sure we are ready to response to that and I think we will -- we'll spend the CapEx that we need to spend to make sure that we don't miss the upturn when it comes. With that said, we are still talking about $100 million to $120 million growth of CapEx this year which is pretty -- still pretty substantial investment.

[Marc Bianchi:]

Sure, sure. I guess along those lines of capital investments and bringing on new plant, even if you get back to margins like you said first half of 2014, you are still at pretty healthy return on new investments. How much lower could margins go before you start to say while the new investment doesn't look as attractive to us?

[Bryan Shinn:]

Yes. There is a long ways to go for that. I think it is more trying to maintain some discipline and when you look at the supply, I'd say that our forecast were that we would see originally 25% to 30% supply increase coming online during 2015. So that was kind of the initial view. Quite honestly would surprise me if almost any of that capacity actually makes it to market in 2015 given the current demand dynamics out there. But obviously we will maintain our options and as we see alternatives to accelerate the CapEx program back up we'll certainly do that.

[Operator:]

Our next question comes from the line of Brad Handler with Jefferies. Please go ahead with your questions.

[Brad Handler:]

Thanks, good morning. I guess the couple -- appreciating your -- we're diving in the same direction I guess and appreciating the lack of visibility I guess couple of areas of questions for me. Is your best guess that your contract customers will wind up taking all of your volume in 2015? The consolidation process you are talking about and working with those customers. Whatever the volumes wind up being is your best guess or is it just -- it is total contract story.

[Bryan Shinn:]

No. I don't think I will play out like that. We currently have eight take or pay contracts that if you add up the volume is probably in that range of 60% to 70% of our capacity. So I think we will be in that range. The rest of the volume obviously is on the spot market. And with that said, we actually have couple of customers that we are negotiating contracts with. One is another take or pay contract and other is a very large contract structural but differently but still has a very high likelihood of take through that. So that could theoretically push up our percent under contract for the year if those contracts get signed in the coming weeks here. But I think the base case Brad is that we still stay in that 60% to 70% contract range and we will see if we sign other attractive contracts than we certainly willing to go higher than that.

[Brad Handler:]

Okay, that's interesting. So in other words you would think that some of the contract customers might take a little less and again I am not -- I know you are not committing to how much -- how you compare to the industry but some of your contract customers take little less and therefore your response customers take a little less but the balance stays roughly the same. Is that how I should interpret what you just said?

[Bryan Shinn:]

That's probably right. Although the reality is that the volumes with the contract customers haven't really changed that much. I mean we are still relatively on track there. And we are seeing some declines in Q1 and I think part of that is just the uncertainty in the market in this kind of overhang of drill but not completed wells and so I am so hopeful that we will see some rebound as we get into the second half. But it is just too early to tell how that's going to play out.

[Brad Handler:]

Maybe just a related follow up and maybe it is a question for Don. But how would you expect your SG&A costs to run in 2015? You talked about 20% reduction, I don't know how that you comp this part of that, I know how business development expenses fit into that, but could you speak to where do you think we should put it as a placeholder for SG&A 2015.

[Don Merril:]

I think we should probably startup the year in that $19 million to $20 million range per quarter. And then you are going to see that 20% reduction start getting so probably start reducing that over as the year progresses.

[Brad Handler:]

And I guess that's inclusive of -- just to be clear it is inclusive of comps, inclusive of business development --

[Don Merril:]

That's right, yes.

[Operator:]

Our next question comes from the line of Lack Hirschman with Stephens. Please go ahead with your questions.

[Juliet Kay:]

Yes, hey, guys. This is actually Juliet Kay [ph] on for Trey Grooms. Wanted to drill down into -- you talked about increasing unit train shipments and you think you can get those open up in 2015. When you look at delivered cost per ton for your customers and everybody is talking to increase shipments for unit train I think the industry is running 20% to 25% of frac sand volume on unit train, how much do you think you can currently ship in unit train and as kind of follow on to that, as more and more sand is delivered in the basin, do you have any concerns that it could create gain over supply in the basin level?

[Bryan Shinn:]

Yes. So it is a couple of great questions, Drew [ph] I think we roughly have the capability to probably double our current unit train shipments and actually we are just opening up a big new trans load in Odessa, Texas in the next few weeks here. And that's going to one of the largest unit train trans load in the country. It can actually take two unit trains simultaneously and we've a number of customers that have been waiting for that to open up. And all the facilities that we built recently in those that we build in the future would be unit train capable. So I think we will continue to increase the percentage of unit trains and just remind again what your second question is.

[Juliet Kay:]

Just as you as the industry moves to more and more unit train -- and you see more sand delivered actually in basin and it starts to one more sand in basin, do you have any concerns as we move in that direction that we could see an oversupply to basin level.

[Bryan Shinn:]

Right. No, not really. And actually if you look at our in basin pricing particularly our spot pricing, it is holding up very well. And I think it is a result of all the difficulties to get product out into the basins and even though rail cars aren't tight as they were in 2014 given that some of the drops in demand here. There are still lots of challenges to get the product out into the right place. And so we haven't seen those kinds of issues at this point.

[Juliet Kay:]

Okay. And I guess one more follow up on that. As you talk with customers about price concessions and you look to reduce delivered cost per ton. How much do you guys think that you can actually squeeze out in terms of delivered cost per ton for you customer and who do you think ends up reaping those benefits?

[Bryan Shinn:]

Well, I think we are actively looking at all kind of cost along the chain and some are vendor related cost and others are just continuing to work on efficiency improvements. And I think that there is clearly another 5% to 10% of cost there to potentially target. We will see how successful we are ultimately in getting those cost out but it would be my intention to share part of those savings with our customers and look at the end of the day our core strategy in oil and gas really hasn't changed. We want to continue to grow share and share is up already in the first quarter. And I think we will continue to grow share throughout the year. And to do that we want our customers to take share as well. So one of the things we are trying to do is to support our customers in this kind of uncertain environment. And I think one of the reasons the customers continue to choose U.S. Silica is because of our logistics network and the fact that we are easy to do business with. And certainly passing along some of the savings that we can get through our efficiency improvements. And things we are working on together by the way. We have a lot of joint projects with customers to take our cost by working together more closely. I think all those accrue benefit to us as well as benefits to our customers.

[Operator:]

[Operator Instructions] Our next question comes from the line of Chase Mulvehill with SunTrust. Please go ahead with your questions.

[Chase Mulvehill:]

Hey, good morning, fellows. So I guess some clarification on, you said the first half 2015 will look like, lot like first half 2014. Are you guys talking about oil and gas volumes, oil and gas contribution margin per ton or all the above?

[Bryan Shinn:]

Yes. So it is all the above but primarily just kind of look at the bottom line. And if you look at earnings that we generated in the first half of 2014 in this sort of the environment and particularly around Q1 in oil and gas. Q1 this year kind of feel the same as Q1 of last year. And I think it is important to differentiate that our business in oil industry really accelerated in the second half of 2014. And so if you were to take that run rate say second half run rate or 4Q run rate and try to extrapolate that into 2015, that just not sort of realistic look at it given the kind of rig count drops that we've seen.

[Chase Mulvehill:]

All right. General consensus seems to be that frac sand or spot frac sand pricing can decline and call it 20% to 30%. What I kind of struggle with is kind of what this means for your pricing right, so if we kind of look at 4Q average oil and gas pricing of $98 per ton, spot is down 20% to 30% then what is that mean for your 4Q average oil and gas pricing right. Because you did some of that term is below spot done that all that was booked at the peak, right. So I am just trying to understand the risk associated with that number.

[Bryan Shinn:]

Yes. So sorry you said with --versus 4Q pricing or I wasn't exactly sure what time period you were referring to.

[Chase Mulvehill:]

Yes. So 4Q average oil and gas pricing was about $98 a ton right.

[Bryan Shinn:]

Yes.

[Chase Mulvehill:]

And if we -- the general consensus is that spot pricing can fall 20% to 30% right. And so I am trying to translate the 20% to 30% risk in spot pricing to your $98 per ton right. Because that $98 per ton doesn't represent peak spot pricing right. It represents term contracts, it represent some peak spot but not a lot right.

[Bryan Shinn:]

Yes. I get your question now. So these are generally on pricing. It is hard to do compare and contrast because it varies so much by basin and by grade. I'd say generally what we are seeing so far in Q1 is a weaker pricing environment not surprisingly than we saw in the second half of 2014. I was going back to look at some of the numbers again over the last week or so and with service company work changing hand so quickly is kind of above the odd dynamics is correct into this downturn. Sometimes it actually creates spot shortages out in the market in ways that you wouldn't necessarily thinking and that actually is a positive for our pricing. So if you look at our spot trans load pricing to start the year off, once again spot pricing at trans load still relatively flat in Q1 versus Q4. And one of the questions that we always get asked and we talked about a lot is that, we are still seeing spot pricing above contract right. So lot of the same dynamics have held is just that in some cases pricing is kind of reset to a little bit lower level. Is that helpful?

[Chase Mulvehill:]

Okay, thank you. One more follow up. Could you just talk a little bit about the business development expense? What is that?

[Don Merril:]

Yes. The business development expenses for us is we actually run rate [Technical Difficulty] associated with us trying to grow the business, so if we are looking at our acquisition, divestures, we are always looking at things like that. We pass those expenses if were to use outside consultants, we pass those expenses through the P&L.

[Operator:]

Thank you. Our next question comes from the line of Richard Verdi with Ladenburg Thalmann. Please go ahead with your question.

[Richard Verdi:]

Hi, good morning. And thanks for taking my call. Two quick questions. The first I understand visibility is challenging but few months ago you laid out a really compelling EBITDA plan to increase significantly after 2017 and then again to 2020. Given the current environment and looking out accepting that visibility is tough, how do you feel about this plan being achieved right now?

[Bryan Shinn:]

You are talking about our longer term plan.

[Richard Verdi:]

Yes. For 2017 and then again in 2020 -- EBITDA

[Bryan Shinn:]

So our goals haven't changed in terms of what we want to achieve. I still think this notion of doubling the size of the company as our intermediate goal is the right one. Given a current challenging environment, it might take us a little bit longer to achieve that goal but we are certainly not abandoning that at all. And I think we are continuing making substantial investments to get there. Things like this well scale trans load that we just open, we have a pipeline of new capacity projects. Fairchild is the first big one in the pipeline. But we have several more behind that we are actively developing. So I think we will be ready and we are also very well positioned from a cash standpoint. And we have over $300 million of cash in the balance sheet and lots of other liquidity. So I think we will be able to do things in this down cycle that others won't. And one of the things that we are looking at M&A right. So initially when we talked about doubling the size of the company by 2017 that was essentially all organic growth. I think there is a good chance we could still get there with a little bit of M&A, right. So getting there by purely organic growth maybe a bit of stretch right now by 2017 anyway given the current environment but who knows. If we see a faster rebound, if it looks more like V than a U or an L, I think that goal is not wildly unrealistic but so our goal to double the size of the company as quickly as we can and then I still like the goal out there, gaining to a $1 billion in EBITDA once again as quickly as we can get there.

[Richard Verdi:]

Okay, great, that's super. That's very helpful, thank you. And also a little bit on strategy and more books shipping over to the ISPs segment. You had mention housing and auto are strong, is there any kind of thought with the challenging environment right now in oil and gas that maybe there maybe a little bit more focus on that housing and auto and maybe more of a look at water and given the secular water term, it's stable area to exploit. Is there thinking that to kind of shift a little bit more of focus over that segment to try to help the financial move along here.

[Bryan Shinn:]

No. It is really a smart observation, Richard. And it is something that we are taking and look at. We are actually funneling more investments into our ISP business now than we ever have. And we are committed to growing in that sector and we are not going to let whatever come disruptions might happen in oil and gas, stop us from growing there, so we have a lot of really interesting projects in the pipeline. We are looking at M&A on that part of the company as well. I think it is one of the things quite honestly that differentiates us from a lot of other companies in the oil and gas kind of service based generally and sand company specifically, but it is really nice industrial business which has a lot of growth options. And quite frankly probably we haven't paid as much attention to that in the past as we could have given our focus on oil and gas. And so I think you will definitely see us going more pedal the metal on the industrial side and continuing that diversification.

[Operator:]

Thank you. And our next question comes from the line of Ekta Palaki [ph] with Cement and Co. Please go ahead with your question.

[Ekta Palaki:]

Good morning. Hi, there. So have you negotiate contracts with your customers today, do you get a sense or any difference in pain or possibly panic between the public fact customers versus the private fact customers?

[Bryan Shinn:]

Sorry, you are talking about our service company customers?

[Ekta Palaki:]

Correct

[Bryan Shinn:]

Okay. No, not really. I'd say the difference is more in terms of scale. You definitely get a different feel when you talked to the largest service companies as opposed to some of the smaller ones. And sometimes that's a public private delineation as well. I mean obviously lot of the smaller companies tends to be private. I think the challenge is that the large service companies with their scale can command and compete on price in a way that some of the smaller companies can't. And we frequently hear stories from our smaller customers of them losing work to the big guys. If you look at who we have our contracts with and how we are situated, the majority of our volumes are sold to the larger service companies in the industry. So I think we have advantage there. But it feels like the gap between large and small could be exacerbated in this downturn.

[Ekta Palaki:]

Okay. And then I guess tucking with the larger small kind of customer base. Could you tell us and if that -- if the bad debt expense is tied to one customer or multiple? And if you kind of can speak to those payment matters, are they larger, are they small and have you noticed a rise possibly in some of the slower payers.

[Don Merril:]

Yes. So we increased our bad debt expense in the fourth quarter almost $7 million. The majority of that related to one customer, a relatively small customer that we had a large exposure to. We did a complete review as we always do of all of our AR and to make sure that our allowance for doubtful account is set appropriately. So we did adjust that a little bit as well. So just to make sure that we were completely prepared for making sure that we protect our balance sheet as best as we can as end of the quarter.

[Ekta Palaki:]

Okay. And then I guess one final one for me. Kind of given your previous comments about growth and product pipeline in ISP. So would it be fair to assume that those increased manufacturing costs will continue into Q1 and to possibly Q2?

[Don Merril:]

No. I would say look we were hit by some unforeseen expenses, manufacturing expenses in some of our ISP plants in the quarter. There is going to be small overhang going into Q1 but nothing like the $4 million -$4.5 million that we saw in Q4.

[Operator:]

Thank you. And our next question comes from the line of Marc Bianchi with Cowen. Please go ahead with your questions.

[Marc Bianchi:]

Hey, thanks guys for get me back in. You talked about the cost curve for the mine and produced in the past and maybe you could update us on where you think you sit there and then maybe address the cost curve for the industry for delivered sand. So on in basin basis if you look at and all the trans load and unit train capabilities that you are putting together, and how does the cost curve look for the industry for the different players on the delivered basis.

[Bryan Shinn:]

So I think Marc that to kind of high level view I would have is that the cost curve is pretty similar to what we talked about in the past where we have maybe 60% to 65% of the capacity at the mine side being low cost and then the other 35% being moderate to high cost. Just on the kind of the FOB plant side, we are seeing, we look at M&A market, and we looked to lot of different M&A candidates that recently -- almost all of them are situated in the moderate or high cost buckets. So I think we kind of solidify our understanding of what that looks like. When you get on out into delivered basis which was --I can think the crust of your question, I think the amount of capacity as low cost shrink even further because some of the folks they can make it at a low cost that their plants don't have logistics infrastructure. So I don't have a specific curve for that. I would say it is probably 50% or less that would fit into that low cost into multiple basins and have a nationwide footprint. So in a downturn like this where price is very important to our customers, I think it gives us a tremendous advantage to compete.

[Marc Bianchi:]

And I just suppose that's been the focus of your M&A exploration is that -- what was associated with this most recent business development?

[Don Merril:]

Yes. I would say that about half of it was associated with that. We also were able to buyout a tolling agreement that we had in one of our facilities as well that shows up in that expense.

[Operator:]

Our next question comes from the line of Christopher Butler with Sidoti. Please go ahead with your questions.

[Christopher Butler:]

Hi, good morning, everyone. Just wanted to get back a little bit to not necessarily the bad debt but customer quality and your understanding of where you stand versus the industry and where their cost competitive might -- competitiveness might be versus the industry and how that may affect your volumes for 2015?

[Bryan Shinn:]

So, Chris, I would say generally our customer base is very high quality. We tend to be over weighted towards the large service companies, all the names you might expect if you are doing a list from largest to smallest in terms for horse power for example. What we are seeing though is kind of a new dynamic out there. And if one particular bad debt expense that Don gave some color on just a minute ago, this is a high quality small customer that was doing fine. And just lost their work to bigger more efficient providers right. And so it happens very quickly in the current environment. And so I think we've gone back and looked at some of our customers, particularly the smaller customers with a bit of different lands than we have in the past. I mean we have a customer who doesn't find generating earnings current on their receivables one week and the next week they lose all their work to a competitor who is better positioned and can offer lower prices and they can't get their crews back to work. And so it is a different kind of scenario that we've seen in the past in terms of bad debt. So we are certainly adjusting to that. And one of the other things we talked about all the time from a commercial standpoint as well is to make sure that we are pricing appropriately to those customers who have a higher risks and so we expect that we get a risk premium if we sell to those customers that we feel are further around the risk curve.

[Christopher Butler:]

And with your description of temporary suspension of guidance as you sit here today. What would be your expectation as far as timing and being able to have a better view point on the year?

[Bryan Shinn:]

So I think that we just have to see how things play out. There are just so many uncertainties and moving parts right now. It feels like once a rig counts find the floor, once I think most energy companies and others are convinced that we found some kind of a floor in oil pricing that will give us the base from which we can build but quite honestly we need to hear from our customers as well. And none of our customers are giving guidance either and so I think it would unwise for us to kind of step out and give guidance when our customers, companies much larger than us with presumably better visibility haven't been able to do so. So I think it will take a little bit time for things to settle down, Chris.

[Operator:]

Our next question comes from the line of Brad Handler with Jefferies. Please go ahead with your questions.

[Brad Handler:]

Hi, thanks for let me back in as well. I know Chase had a question about, your comments about 1H 2015 versus 1H 2014 and I appreciate that I think the questions risk almost overreaching relative to your feeling comments right but if I may try to do the same and you can push us around. Should we interpret -- if I take it strictly speaking, it looks like your oil and gas volume for example might be in the 1.4 million ton range in Q1, right. If I am trying to take -- if I am trying to look at 1H of 2014 and think about it at the top line level that would imply 30% fall in volumes sold in Q1 versus Q4. Am I reading too much into that or is it a comment around while at this point in time, yes, everything is kind of in free fall and so it is falling in line with the recount and things and something stabilize. Can you help-- and can you just help with that kind of context please.

[Bryan Shinn:]

Sure. I am sort of talking about couple of things right. One is more -- it is kind of how the market feels right. So in Q1 of last year the market felt a little bit long right. We didn't have as much pricing power, volumes were a bit depressed. And so you look at the volume versus kind of pricing and contribution margin and you could sort of look at that and say, well, maybe we are a little bit higher volume, maybe little less margin. But it just it kind of feel like the same sort of environment. And when I look at what we delivered in terms of profitability in the first half of 2014, those are the kind of numbers and sort of ranges that it feels like we are in right now. But I wouldn't read too much into any sort of specific line on the earnings statement. I am just kind of talking about a macro and I know that a lot of our investors and analysts' community are looking for some kind of guidance right something other than, well, we can't tell you anything just because it is uncertain. Just trying to give you a feel for -- where it is sort of realistic to expect in terms of our results right now.

[Brad Handler:]

I understand and that's why I try to catch my question that way. But that's still, that's helpful color. So I appreciate it. Maybe just one housekeeping while I am on and expected tax rate?

[Don Merril:]

I think the tax rate in 2015 is probably going to be 25% maybe a little sub that.

[Bryan Shinn:]

Okay. That sounds we are well -- I guess maybe just a couple of closing comments. I have to say that when I think about 2015 and beyond, I am really very excited about our prospects as a company and it might sound a strange to say it this way but I expect that 2015 is actually going to be one of the best years ever for U.S. Silica. I am not sure we are able to replicate the results that we did in 2014 given the rig count declines and other sort of pressures out there. But I still think we are going to have a very good year as a company. We are going to sell a lot of frac sand, we are going to continue to take share in the oil and gas segment and I think our industrial business will do very well. As we said before driven by automotive, housing and some of the new product pipeline items that we have coming. We are continuing to make substantial investments as well. We have a pipeline of new capacity projects that we will continue to invest in and as we said we are going o invest $100 million to $120 million of CapEx this year, maybe more if things start to recover. We also see a lot of opportunities for business development and M&A. So we are pretty excited about that. We have war chest of cash which gives us a lot of optionality that most of our competitors don't have. And so I think that's going to be a positive for us as well. But more importantly when the market turns we are going to be ready. We still plan to double the company EBITDA to more than $500 million as we talked about. In response to one of the questions this morning, we said that, that goal might be pushed up by 2020 more than 2017 which was the original goal. But I think we will stay get there. And I am really very excited about the prospects for the company. So thanks everyone for dialing in today. I really appreciate it. And I look forward to speaking with all of you at the many conferences and events that we will be doing over the next month or so. Everybody have a great day.

[Operator:]

Thank you, ladies and gentlemen. This does conclude today's teleconference. You may disconnect your lines at this time. And thank you for your participation.