U.S. Silica Holdings, Inc.
Q4 2015 Earnings Call Transcript

Published: 24 Feb 2016

[Operator:]

Greetings and welcome to the U.S. Silica Fourth Quarter and Full Year 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Michael Lawson, Director of Investor Relations and Corporate Communications for U.S. Silica. Mr. Lawson, please go ahead.

[Michael Lawson:]

Thanks. Good morning, everyone, and thank you for joining us for U.S. Silica's fourth quarter and full year 2015 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 the definition of segment contribution margin. And with that, I would now like to turn the call over to our CEO, Mr. Bryan Shinn. Bryan?

[Bryan A. Shinn:]

Thanks, Mike, and good morning, everyone. I'll begin today's call by reviewing our fourth quarter performance and highlighting a few of our key accomplishments in 2015. I'll then comment on the market outlook for both operating segments and discuss the actions we're taking in our Oil and Gas business to maximize results in what we expect to be another very challenging year in 2016. Don Merril will then provide additional color on our financial performance during the quarter before we open up the call for your questions. For the total company, fourth quarter revenue of $136.1 million declined 12% sequentially. Weaker market conditions and an extremely competitive environment drove lower revenue in Oil and Gas for the quarter as rig count continued to decline and pricing pressure persisted. As is typical, revenue also declined sequentially for our Industrial and Specialty Products segment in Q4, due to the seasonality of our larger end markets, such as glass and building products. Adjusted EBITDA for the quarter of $10.8 million was down 55% sequentially from the third quarter of 2015 and was negatively impacted by weakening conditions in Oil and Gas and seasonality in the ISP business as well as higher maintenance costs and inventory write-downs during the quarter. Contribution margin in Oil and Gas of $7 million fell 58% sequentially primarily as a result of continued pricing pressure. Average mine gate pricing for the quarter declined approximately 9% sequentially. Despite a 16% drop in the rig count from Q3 to Q4, sales volumes in Oil and Gas for the quarter declined just 4% sequentially to 1.55 million tons as we leveraged our low cost operating model and robust distribution network to drive volumes and expand our market position. We grew sequential share faster than our public competitors in Q3 and those that have announced so far in Q4. For the full year, sales volumes in Oil and Gas of 6.1 million tons declined just under 10% versus 2014 against the backdrop of nearly 50% decline in average rig count and an almost 40% drop in frac sand demand. As an industry, we also continued to benefit from growth in profit intensity. Our Industrial and Specialty Products segment had an excellent quarter, which enabled it to complete the best year in our 115-year history. Contribution margin of $15.2 million grew 13% compared with the prior year and increased 26% on a per-ton basis. New higher margin products and favorable customer and product mix contributed to ISP earnings growth in the fourth quarter and for the full year. In spite of all the turmoil caused by lower oil prices, U.S. Silica became a safer, stronger and more competitive company in 2015. We had our best ever safety and environmental performance. We grew our market share in Oil and Gas by approximately 50%. We eliminated more than $40 million of costs from our company through aggressive actions to optimize shipping, reduce overheads, renegotiate supplier contracts and improve operational efficiencies. We maintained our strong balance sheet, ending the year with almost $350 million in liquidity and generated operating cash in excess of our capital expenditures for the year. We also returned approximately $42 million directly to shareholders in 2015 via stock buybacks and dividends. I believe that our strong balance sheet will enable us to navigate the current environment, strengthen our market position and ultimately capitalize on the business opportunities our markets present, while enabling U.S. Silica to emerge even stronger as a company when oil and gas markets recover. More importantly we worked very closely with our customers to provide the tremendous flexibility they needed to manage their businesses in real time while adapting to ever changing market conditions. For example, we shipped a record 53 unit trains in the fourth quarter and a total of 147 unit trains for the year, a 14% increase from 2014. In the fourth quarter, we also opened four new transloads, one that's unit train capable and our first Canadian site. Overall, I'm very proud of the work that our team did in 2015 to deliver many outstanding results in what proved to be challenging business conditions. Let's turn now to our market outlook for this year. On the ISP side of the ledger, we're expecting another year of strong bottom line results, driven by the continued roll-out of new higher margin products and selected price increases announced earlier this year. Demand in most of our industrial end-use markets is expected to stay robust. In our Oil and Gas segment we expect continued challenges in 2016. E&P investment levels are expected to fall for the second consecutive year with producers reducing capital expenditure levels anywhere from 40% to 50% on average, based on announced budgets. E&P guidance implies that rig count will also continue to decline. Recent analyst reports and our discussions with customers suggest that the rig count could potentially fall another 30% to 35% during 2016. When and where the rig count finally bottoms is certainly uncertain. But we expect continued low oil prices this year with downward pressure on both our volumes and profitability in Oil and Gas. Moreover, excess rail cars continue to be a significant drag on our earnings. Approximately 40% of our 7,000 railcar fleet is idled at the present time. Our plan going forward is to effectively manage the current environment by controlling what we can control in the short term and creating a clear path to position our company for long-term success. For 2016, we intend to stay keenly focused on preserving capital, making further cost reductions, improving customer satisfaction and strengthening our market position. We also plan to use our cash wisely. As indicated in our press release, we will reduce capital expenditures in 2016, giving priority to critical maintenance projects and cost improvement initiatives. We're working on many cost improvement projects all across our supply chain and have contingency plans in place to take additional actions based on market conditions. We believe that our prudent actions will result in positive cash flow generation later in 2016 and going forward, allowing us to remain in a very strong financial position. As I've stated often in the past, we believe our industry is ripe for consolidation, and M&A is still in the mix in terms of our capital allocation plans. However, we will continue to remain disciplined in our approach to ultimately get the best deal done for our company and for our shareholders. We also expect to be an even faster, easier, more efficient company to do business with in 2016. Greater unit train capacity, faster load-outs, and more automated processes are just some of the things our teams are working on to improve our value proposition and get customers what they need, when they need it. That also includes new products. For example, we introduced a new Oil and Gas resin-coated product in Q4 and another just this month, a proprietary polyurethane-based product designed specifically for low temperature reservoirs that has demonstrated best in class bond strength, crush resistance and conductivity. Both products are expected to drive increased resin-coated sales this year. We also have an exciting pipeline of new products in our Industrials business and expect to continue to launch new offerings in 2016. And with that, I'd like to now turn the call over to Don Merril. Don?

[Donald A. Merril:]

Thanks, Bryan, and good morning. 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 2015 of $88.8 million declined 13% sequentially compared with the third quarter of 2015, while revenue for the ISP segment of $47.3 million represented a 12% decline sequentially. Contribution margin from Oil and Gas in the quarter was $7 million, down 58% on a sequential basis compared with the third quarter of 2015. On a per ton basis, contribution margin for Oil and Gas declined 56% sequentially to $4.48 compared with $10.22 for the third quarter of 2015. Contribution margin for our Industrial and Specialty Products segment was $15.2 million, a decrease of 24% sequentially over the third quarter of 2015, but a 13% improvement on a year-over-year basis. Contribution margin per ton for the ISP business of $16.53 declined 17% sequentially from the third quarter of 2015 but represented a 26% improvement from the same period one year ago. The year-over-year increase in ISP contribution margin per ton was driven largely by a combination of a mix of higher margin business and new value-added products. Turning now to total company results, selling, general and administrative expenses for the fourth quarter increased 16% sequentially to $15.7 million compared with $13.6 million for the third quarter of 2015. The increase was largely due to additional restructuring costs and business development expenses, partially offset by lower compensation. On a year-over-year basis, SG&A for the full year 2015 declined by $26.2 million or 29% to $62.8 million compared to $89 million for the year ended 2014. The reduction was mainly due to a $13 million decrease in compensation-related expenses and a $10.5 million decrease in bad debt expense due to the decrease in sales and a recovery of a previously reserved receivable. Depreciation, depletion and amortization expense in the fourth quarter was $16.4 million compared with $15.2 million in the third quarter of 2015. The sequential increase in DD&A was mostly due to an equipment write-off charge of $1.1 million in the fourth quarter. Continuing to move down the income statement and the other income and expense line, interest expense for the quarter was $6.8 million, which stayed relatively flat compared to the $6.7 million in the third quarter. From a tax perspective, we recognized an income tax benefit of $4.2 million in the fourth quarter of 2015. The tax rate for the quarter was better than expected due to the favorable impact of the full-year statutory depletion allowance. Turning now to the balance sheet. Cash and cash equivalents and short-term investments at December 31, 2015, totaled $298.9 million compared with $338.2 million at December 31, 2014. As of December 31, 2015, our working capital was $355.2 million, and we had $46.7 million available under our revolving credit facility. At December 31, 2015, total debt was $491.7 million. We generated an operating cash flow of $61.5 million in 2015, which exceeded our full-year 2015 capital spending of $53.6 million. We incurred capital expenditures of $15.5 million in the fourth quarter of 2015. The bulk of our fourth quarter spend was associated with the company's investments in various maintenance, expansion and cost improvement projects. For the full year 2016, we anticipate our capital expenditures to range between $15 million and $20 million, related largely to critical maintenance projects and cost improvement initiatives. As Bryan noted, we remain aggressively focused on reducing costs throughout the entire business and prudently spending capital dollars to maximize financial returns and take advantage of growth opportunities. Our daily actions are clearly focused, protecting the balance sheet and preserving our cash to ensure that we are ready for a prolonged downturn as the market dictates. Finally, as noted in the press release, we will continue to refrain from providing financial guidance until such time as we can begin to see more clarity in our customer demand trends. We continue to watch this very closely, and we will provide you with an update on our next earnings call. With that, I'll turn the call back over to Bryan.

[Bryan A. Shinn:]

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

[Operator:]

Certainly. At this time, we will be conducting a question-and-answer session. Our first question today is coming from Ole Slorer from Morgan Stanley. Please proceed with your question.

[Ole H. Slorer:]

Yeah. Thank you very much. Hi, Bryan. I wondered whether you could just help a little bit on the 12% sequential reduction in ASPs. Just to clarify, was about three-quarters of that pricing and the rest a function of selling less in basin? Or was there another product mix impact as well?

[Bryan A. Shinn:]

Good morning, Ole. Thanks for the question. If we look at pricing, when we look at the true pricing impact quarter-on-quarter, it was probably something more like 8% or 9%. Obviously there's mix in there and also impact of selling at plants versus selling in basins.

[Ole H. Slorer:]

And when we look so far this quarter, can you give us any color on whether this is a forecasting a long time into the future? Can you just bring us up to speed on what pricing is doing right now relative to the fourth quarter?

[Bryan A. Shinn:]

Sure, Ole. So given the macro conditions that we see out there right now with the further rig count declines, we're down more than 20% since December 31. And the announcements on E&P budgets being down to say 40% or 50%, in some cases more, we certainly are feeling some pricing pressure from our customers. The discussions we're having with customers now though is, that look, there's really not that much more to give. So I think there's probably a few percent more pricing pressure that we might see here in Q1. But I think we're rapidly reaching a point where there's just not a lot more to give. And customers, to their credit, I think are starting to recognize this. But they're in a tough spot as well with service companies, they're being pressured to the extreme these days by the energy companies. So we'll see how it plays out. But I would say down a few more percent in Q1 would not be unreasonable.

[Ole H. Slorer:]

And this finally on the volumes only down 1%, what's going on, on the competitive landscape? Do you see certain mines pulling out that suggests some market share going in your favor? Or how would you explain what's going on there?

[Bryan A. Shinn:]

Yeah. So it's a great question, Ole. We continue to see high-cost producers idle capacity. Our current estimate is that there's at least 20 sites that have come offline. And we estimate that 15 million tons to 20 million tons of capacity or probably close to 30% has actually come offline already. We think there's probably more to come there. So I think that will help. But the industry is still, if you look at the demand versus capacity, we're still not in a great position. I would say that as an industry we're probably running right now at maybe 60%, something like that. So there's still a lot of over-capacity out there. But we do see a lot of the higher cost guys already out and more coming out all the time.

[Ole H. Slorer:]

Thanks a lot. I'll hand it back.

[Bryan A. Shinn:]

Thanks, Ole.

[Operator:]

Thank you. Our next question today is coming from Michael LaMotte from Guggenheim. Please proceed with your question.

[Michael Lamotte:]

Thanks. Bryan, if I could get you or Don, get you to comment on the fixed versus variable cost mix? It seems with the addition of the transload facilities this year and the idled railcars that you've seen a pretty big shift in 2015 versus 2014 on a fixed versus variable basis. So first of all, if you can talk about that mix, and secondly, in terms of trying to get costs down over the course of 2016 where the likely opportunities are?

[Donald A. Merril:]

Yeah, so right now the company is looking at 50% fixed and 50% variable, right? It's more like 52%/48% but 50%/50% is where we are right now on that. And as far as the cost savings go, as Bryan said in his prepared remarks, we are ripping out cost in every opportunity that we have. We're also looking at continuing to do that as we go into 2016. Everything is on the table right now as far as cost reductions.

[Bryan A. Shinn:]

And, Michael, just a little more color on that. If you look back in 2015, we actually took out more than $40 million worth of costs and we've got another substantial amount teed up here as we get into 2016, and I was going back the other day just looking at all the buckets that we had success in, in 2015 and I think these are the same places that we'll go in 2016. So we did a lot on optimizing our shipping so we saw good impact on reducing our freight costs. We reduced overhead substantially. We actually had a 16% reduction in our salaried employees in the company and the effective number was actually more than that, because we didn't take out much on the industrial side, where we're obviously doing extremely well, so the effective reductions were more than that 16% would indicate. We've renegotiated I think every supplier contract in the company, in some cases, multiple times. We're back again asking for more help from our suppliers, and that includes the railroad, railcar providers, transloaders, everybody who touches our supply chain. A lot of great work on the operational efficiency side. I'm really proud of the work that our operations team did. We actually had the best year in terms of productivity metrics in our 116-year history. And it's pretty amazing, given all of the ups and downs that we put the ops team through in 2015. We've also idled shifts at some of our plants. We set out to get at least 20% additional out of our SG&A budget, and we did more than that. So quite a lot of success in 2015, and I expect that, as Don said, our team's all over this again in 2016. And we'll have a lot more success to come.

[Michael Lamotte:]

I appreciate that extra color, Bryan. Thank you. On the operating leases in particular, any, it looks like that's still running about $11 million a quarter. Any visibility on getting that down over the course of this year?

[Donald A. Merril:]

Yeah. I think from an operating lease perspective we do not anticipate any additional cars coming into our fleet in 2016. And we are working very diligently to try to alleviate some of the lease costs that we do have, utilizing programs such as sub-leasing, et cetera. So we're going to continue down that path and take care of that expense as best we can. We are experiencing somewhere in the neighborhood of $5 million a quarter of what I call lazy assets. Those are cars that are in storage today that are not producing for us. So that's something that is very high on our radar screen.

[Michael Lamotte:]

Okay. Great. Thanks, Don. I'll turn it back.

[Bryan A. Shinn:]

Thanks, Michael.

[Operator:]

Thank you. Our next question today is coming from Sonny Randhawa from D.A. Davidson. Please proceed with your question.

[Sonny Randhawa:]

Morning, guys. Thanks for taking my call.

[Donald A. Merril:]

Good morning.

[Bryan A. Shinn:]

Good morning, Sonny.

[Sonny Randhawa:]

We saw a lot of capacity come off in the third quarter and fourth quarter. And a lot of that's in the Midwest. How quickly could we build up enough wet sand capacity if, it seems like we're probably going to see a lag of that capacity coming on over the next quarter or so. How quickly could you build up enough wet sand capacity to make it through next winter?

[Bryan A. Shinn:]

So it's a very interesting question. And you obviously know a lot about the industry asking something of that depth. It's something we've seen in the Wisconsin mines in particular. What happens, Sonny, is a lot of our, what I'll call less capable competitors, had built up stockpiles, wet stockpiles. So they did the mining as you have to do in the warm weather in Wisconsin and then they've slowly drawn those stockpiles down. I don't think most of those companies, if any, will have the financial wherewithal to restart mining, as opposed to ourselves. And obviously, we can restart mining in our Wisconsin location and build up our stockpile again when the weather warms up here. So I think it gives us an advantage. And those are some of the competitors that I mentioned earlier that have not gone out yet, gone out of business. They're just working down their wet stockpile, processing it, drying it, and shipping it. But once they complete that, I think you'll see a lot of those folks go out of the market.

[Sonny Randhawa:]

Okay. And I guess we've seen a lot of, I guess the area that we've seen the most strength is the Permian. From a cost perspective, you guys seem to have a lot of leverage on the BNSF. How would we look at the BNSF relatively in costs getting tons down to the Permian compared to some of the other railroads?

[Bryan A. Shinn:]

So the BNSF is very competitive, and we see a lot of the additional demand that service companies want today in BNSF end uses or locations, rather. And of course the Permian is so big you have to divide it up, and there's certain areas that are really strong for the BNSF and others that are stronger for the UP. So we'll have to wait and see how the crew situation evolves in the basins. It's one of the things that we've been paying pretty close attention to, and our team has built a really neat proprietary model where we track all of the frac crews in the country right now, and it's one of the ways that we try and stay one step ahead of where the demand is going to be. I think the BNSF is going to continue to be a strong railroad for us, and we look forward to growing our volumes on that rail line.

[Sonny Randhawa:]

Great. I'll turn it back.

[Bryan A. Shinn:]

Thanks, Sonny.

[Operator:]

Thank you. Our next question is coming from Blake Hutchinson from Howard Weil. Please proceed with your question.

[Blake Allen Hutchinson:]

Good morning, guys.

[Bryan A. Shinn:]

Good morning, Blake.

[Blake Allen Hutchinson:]

Just some thoughts around just mix and mix in terms of grades produced and delivered. I guess at this point I know you guys do a lot of macro work at year end. As you look at kind of the year-over-year and make the kind of intensity argument, would it be safe to say the year-over-year volume improvements from an intensity standpoint were largely relegated to the fine grain sands? Or would that be kind of an unfair statement for the industry overall?

[Bryan A. Shinn:]

Yeah. So a lot of different thoughts in there, Blake. I would say that we really haven't seen our mix of sales change that much. I would say if anything, as you were sort of alluding, perhaps there's a little bit stronger demand on the finer side, so the 40/70 and 100 mesh. But as we think about demand for say 2016, the good news and bad news. The bad news is it's just hard to forecast at this time with all the chop in the market, but the good news is that the way you do it is still the same, right? So it's all about the number of rigs, the efficiencies, the number of stages, sand per stage and all that. So our view is that we'll still see sand per well up probably 8% to 10%. I would say at least half of that increase is going to be on the finer side, the 40/70s and the 100 mesh grades as we said. So we still see some tailwinds there. I think the challenge is going to be how far the rig count falls and how many crews come offline and when you consider (27

[Blake Allen Hutchinson:]

Okay. And I guess following on that kind of macro commentary as it pertains to Silica have – where are we in terms of intra-grade pricing and margins? I mean you talk to a thousand sources and get a thousand different answers. Are we more or less looking at similar pricing and margins amongst the grades? Therefore, we should be looking more towards your percentage of end base and delivery, your percentage of unit train, et cetera, as the drivers of kind of differential drivers plus margins versus average?

[Bryan A. Shinn:]

Yeah, and of course the challenge is that these things move around a lot and so there are sort of months and quarters where everything comes together and the pricing is pretty similar across the grades. I would say 100 mesh is typically a bit lower if you look at the so called 20 by 70 grades, the three coarser grades. There are times when those prices kind of harmonize, if you will, but then there's other months and quarters where a particular grade gets in demand for a variety of reasons. And so it's hard to talk in the macro. I would say, generally, the prices have come closer but there's still opportunities out there, for example, to get higher prices for certain grades in certain locations in a given time. So it's hard to paint that one with a broad brush, Blake.

[Blake Allen Hutchinson:]

Okay. That's helpful. And then just finally from your pricing commentary earlier, I guess this could go either way, we're pulling into levels of overall production where you could make the argument that just the major known entities are left as cost advantaged producers. I guess, which direction would you think that goes in? Does that actually increase pricing discipline or now that you know exactly who you're up against, do you think there could be another chance for throes of heightening intensity as the year goes on? Just trying to get your view on that and I'll hang up and listen. Thanks for the time.

[Bryan A. Shinn:]

Thanks, Blake. So I think as we, as you said, sort of retreat back to a smaller number of larger producers, any industry I've ever been in, in my career that typically equates to more pricing discipline, not less, and so that's what I would expect but we'll see. It's obviously still a tough market out there and folks are doing what they need to do survive and not all large producers are created equal. Some of us have more advantages than others in terms of balance sheet strength and transload network and things like that. So that all plays into it as well. Certainly we'll see, my hope is that the market will become more disciplined over time. But we'll have to wait and see how that plays out.

[Operator:]

Thank you. Our next question is coming from Jim Wicklund from Credit Suisse. Please proceed with your question.

[Unknown Speaker:]

Hey, guys. This is Jake (30

[Bryan A. Shinn:]

Morning, Jake (30

[Unknown Speaker:]

Morning, guys. First on the railcars. Could you just remind us of the cost of storage there?

[Bryan A. Shinn:]

Yeah. So if you look at the railcars, as Don said, we're typically looking at, on a quarterly basis now, about $5 million a quarter. So that includes storage. That includes the lease cost of the cars. And it also includes the costs that we would incur as we have to take cars in and out of storage. So that's the macro number for that.

[Donald A. Merril:]

Yeah. I would just add, look, the cost to actually store the railcar is relatively immaterial to that $5 million a quarter number.

[Unknown Speaker:]

Okay. Understood. And then it looks like you put about 300 into storage in the fourth quarter after 800 in the third quarter. So number's coming down. Based on what you're seeing so far in the first quarter do you think you're going to store any more? And are there any numbers you can put around that?

[Bryan A. Shinn:]

So I don't have a specific number for you. But if volumes continue to be pressured, which I think they will be here in Q1, that will likely equate to more cars in storage. We're working hard to continue to grow share. So we'll see how successful we are with that as we enter 2016 here. But just given that in the last 60 days we estimate that more than 30 frac crews have come offline, seen rig count declines already this year more than 20%. That's going to weigh on demand early in 2016 here.

[Unknown Speaker:]

Okay. And then going back to your pricing commentary. So looked like you expected to give up a few percentage points of price in the first quarter. Was that from pure price? Or is there any mix shift on top of that? And then...

[Bryan A. Shinn:]

So that's pure price. The mix shift will be plus or minus to that. We try to wash out the mix shift and give the true pricing number, so it's on a, if you will, to use a retail term, same store basis, right, where we try to wash out everything but pure price when we give you those numbers like a couple percent.

[Unknown Speaker:]

Okay. And then based on what you're seeing so far in the first quarter, do you expect the – or what you have seen so far in the first quarter, is the percent of sales in basin ticking up, ticking down, relative to the fourth quarter?

[Bryan A. Shinn:]

Yeah. So I think that we're seeing relatively flattish trends versus Q4.

[Unknown Speaker:]

All right. That was it for me. Thanks, guys.

[Bryan A. Shinn:]

Okay, Jake (33

[Operator:]

Thank you. Our next question is coming from Robin Shoemaker from KeyBanc Capital Markets. Please proceed with your question.

[Robin E. Shoemaker:]

Yes, thank you. And thanks for the color on the railcar situation. I did want to ask about the 2500 railcars you have on order, I believe, with delivery starting in the second half of 2017 approximately. Are you looking to further delay those deliveries?

[Bryan A. Shinn:]

Yeah, it's a great question, Robin, and we are actively discussing those topics with our railcar providers. And the reality is when you start to do the math, I'm not sure that our industry needs these cars ever, right? Even in the near future. I think that the railcar providers are starting to understand the dynamics and how things are changing in our industry. And a couple of things that I think are aside from the obvious sort of demand reductions, we're seeing a lot more unit trains being shipped. And unit trains use somewhere between 70% to 80% less cars because the cars turn much faster. So that in of itself is a big change in the amount of railcars that the industry needs. And then as we see some more demand being fulfilled by regional sands which tend to only use trucks, and not railcars, that puts another dent in the need for railcars. So the conversations we're having with our railcar providers kind of go along this line. We say, look guys, there's this sort of backlog that we signed up for, our competitors have signed up for, but the reality is when you do the math you're probably never going to actually build those cars. So let's all put our cards on the table, because the industry is not going to need them, and you'd probably be challenged to get them financed even if the industry did need them. So we're having strong discussions with our railcar suppliers, and hopefully we'll continue to push those cars out to such time as we might need them. But that's going to be relatively far in the future just based on the trends that I mentioned around unit trains and a bit more regional sand in the mix.

[Robin E. Shoemaker:]

Okay. Well, that sounds like a significant change there. So let me just ask the other question. In 2015 where do you think you ended up with in terms of market share in frac sand? And were you in number one, two or three?

[Bryan A. Shinn:]

So I believe that we grew our share from about 12% as we entered the year to something plus or minus around 18%. So we think we saw a 50% increase in share for the year. I'll leave others to opine on who's number one, two or three, but certainly we're one of, if not, the largest player in the space.

[Robin E. Shoemaker:]

In the last call you indicated that 30% to 40% market share is realistic. And I guess maybe the contraction in the market has even maybe giving more support to that argument. But is that a realistic goal?

[Bryan A. Shinn:]

I certainly think that's realistic. As we think about M&A and the opportunities that that presents, I don't think it's unreasonable to have a target to get to that level of market share.

[Robin E. Shoemaker:]

Okay. Thank you.

[Bryan A. Shinn:]

Thanks, Robin.

[Operator:]

Thank you. Our next question is coming from Chase Mulvehill from SunTrust. Please proceed with your question.

[B. Chase Mulvehill:]

Hey. Good morning, fellas.

[Bryan A. Shinn:]

Good morning, Chase.

[B. Chase Mulvehill:]

I want to follow up on LaMotte's question real fast. And so you said 52% of your costs are fixed, correct?

[Donald A. Merril:]

That's right.

[B. Chase Mulvehill:]

Okay. That was a 4Q number, right? Just so we can have a starting point.

[Donald A. Merril:]

Yes. Yeah, that's exactly right. Yep.

[B. Chase Mulvehill:]

And when you're saying costs, it's basically cost of sales, which is revenue minus gross profit?

[Donald A. Merril:]

And – yeah. Yeah. That's right.

[B. Chase Mulvehill:]

Exclusive? So you're not including any D&A and all that? So I just want to make sure we're all kind of...

[Donald A. Merril:]

No, no. Yeah. No, DD&A would be in that number.

[B. Chase Mulvehill:]

Oh, it is included in that number?

[Donald A. Merril:]

That's right. Yep.

[B. Chase Mulvehill:]

Okay. All righty. Thanks for clarifying that. We all need to kind of be on the same page there.

[Bryan A. Shinn:]

(37

[B. Chase Mulvehill:]

And so if we think about your average mine gate cost per ton in 4Q, can you give us ball park-ish what that number was?

[Donald A. Merril:]

Yeah. We really haven't discussed where those costs are on a per ton basis. I would tell you though on an overall basis, based on what Bryan said earlier, productivity levels being the highest they've been and all the costs that we've been pulling out, our average cost per ton is going down.

[B. Chase Mulvehill:]

Okay. Assuming – because mix, if you're talking, are you talking your total volumes? Or are you talking at the mine gate when you say that?

[Donald A. Merril:]

Well, when we talk about costs, we talk about the mine gate.

[B. Chase Mulvehill:]

Got it. Got it. Okay.

[Donald A. Merril:]

So the costs to produce a ton of sand put onto a railcar.

[B. Chase Mulvehill:]

Got it. Okay. All right. That's helpful. And so the average price per ton for mine gate volumes in the fourth quarter, were they still above $25 a ton?

[Bryan A. Shinn:]

Yeah. We haven't given that kind of guidance. Certainly we're working hard with our customers to find the right price point that works for everybody. It's a challenge in this environment, given all the pressures on both sides though.

[B. Chase Mulvehill:]

Okay. I'll try another one. 1Q volumes. How should we be thinking about 1Q volumes. Obviously they're going to be down. And so what have you seen so far? And maybe some type of range for 1Q volumes.

[Bryan A. Shinn:]

Yeah. We haven't given any specific guidance for 1Q, Chase. I think that, as you said, volumes will be down a bit, given all the macro environment. We're hoping that at some point later on in 2016, things can pick up. But that's certainly not our base case. Our base case is that volumes come down a bit and stay there for the year.

[B. Chase Mulvehill:]

Okay. Is there any destocking going on in 1Q or anything that would cause you to be any different than the rig count or completion activity?

[Bryan A. Shinn:]

I think if you look at the combination of rig count and the number of crews out there, that would give you a pretty good indication of what our demand would be. Now the reality is there is a bit of a disconnect just because the rig count is somewhat of a lagging indicator, given that it takes probably 30 days to 60 days for that to roll through to the impact on our business. The frac crews and the commentary from the service companies is probably a more immediate way to look at it.

[B. Chase Mulvehill:]

Okay. Squeeze a real quick one in; Brady Brown volumes, were they up in the fourth quarter? And this shows up in in-basin volumes, right? Your Voca plant?

[Bryan A. Shinn:]

Yeah. That's correct. So our volumes have been pretty strong all year honestly in that. And we've been essentially sold out at that site all year.

[B. Chase Mulvehill:]

And are you planning to increase capacity there in 2016?

[Bryan A. Shinn:]

Well. I think there's always opportunities to do that. Certainly there's debottlenecking and other things you can do to squeeze more out. And when a plant is sold out with a creative operations team, they tend to figure out ways to get more tons out to meet customer needs. We hate to disappoint customers.

[B. Chase Mulvehill:]

Okay. All righty. I think I went into next quarter's question bank, so I overdid myself. Sorry. I'll turn it back over

[Bryan A. Shinn:]

No problem, Chase. Thanks for the call. Take care.

[Operator:]

Thank you. Our next question today comes from Vebs Vaishnav from Cowen & Company. Please proceed with your question.

[Vaibhav Vaishnav:]

Thanks for taking my question, gentlemen. Hi, Bryan. Hi, Don. How are you doing?

[Donald A. Merril:]

Hi, Vebs.

[Bryan A. Shinn:]

Good morning, Vebs.

[Vaibhav Vaishnav:]

I guess I'm going to take another crack at what Chase was trying to ask. So if you think about the volumes, how would the exit rate volumes for the fourth quarter versus the beginning? And what have you seen in January and February?

[Bryan A. Shinn:]

Sorry. Your question is what were the exit rate volumes in 4Q versus the beginning volumes of 4Q?

[Vaibhav Vaishnav:]

Yeah. So was December much higher than October? Or was it lower? And then what have you seen in January and February in Oil and Gas volumes?

[Bryan A. Shinn:]

Yeah. So as we look at 4Q, obviously the volumes held up better than any of us reasonably expected, relatively flat, I think down only 4% from Q3. At the very end of 2015, obviously the last week or so we saw some drop off in volume, but other than that the volume associated with the holidays and things, it was relatively consistent throughout the quarter. As we said before, we expect a bit more down in Q1, but we're not giving any specific guidance on that at this point.

[Vaibhav Vaishnav:]

Okay. Given the volumes would be down so less cost absorption and you are still seeing some pricing pressure, what would be the argument against a break-even contribution per ton for the first quarter in Oil and Gas?

[Donald A. Merril:]

Yeah, I think we're – from an overall contribution margin, I would think it's going to be down a little bit in Q1 as we've been kind of indicating that volumes will be down, so it gets to that point where the fixed cost absorption becomes a big part of the P&L and we will see that in Q1.

[Vaibhav Vaishnav:]

Okay. Okay. And last one for me, in ISP business you guys mention about the seasonality being one of the major drivers for lower contribution, but could you provide some more color around that because over the last two or three years there have been some years where we have seen that seasonality and some years where we haven't. So any color would be very helpful

[Bryan A. Shinn:]

Sure, Vebs. So look, I think the underlying ISP business ever since I've been here, since 2009, has been weaker on a variety of fronts in Q4 and there've been some sort of unusual circumstances in the one year or the other where it didn't happen that way, but it's basic stuff like there's a lot of our business that's tied to sort of warm weather activities, a lot of outdoor things, pool and spa, athletic fields, those type things. We see the housing market decline more in 4Q in terms of demand. A lot of the major glass houses and other sort of major production facilities take a holiday shutdown, sometimes for two or three weeks to rebuild their lines. And so that's typically what we see. You know, it's interesting. We've gotten a few questions from folks already on kind of what happened to Industrials and I was shocked at that, because Industrials had, I think one of, if not the best fourth quarter ever, in terms of contribution margin. Contribution margin per ton was up 26% versus last year, so Q4 of 2014. So I view the Industrial quarter as very strong and industrial business as very strong, so I want to make sure everybody understands that. Just with normal seasonality, customers that we would expect to be going off-line, went off-line during the quarter.

[Vaibhav Vaishnav:]

That's very helpful. Thank you, gentlemen.

[Bryan A. Shinn:]

Thanks, Vebs.

[Operator:]

Thank you. Our next question today is coming from John Daniel from Simmons & Company. Please proceed with your question.

[John Matthew Daniel:]

Yeah. Thanks for squeezing me in.

[Bryan A. Shinn:]

Good morning, John.

[John Matthew Daniel:]

Bryan, I think you mentioned that 53 unit transfers shipped in Q4. Was all of that Oil and Gas?

[Bryan A. Shinn:]

Yes.

[John Matthew Daniel:]

And about what percent of that volumes did that make up?

[Bryan A. Shinn:]

What percent of the fourth quarter volumes?

[John Matthew Daniel:]

Yeah. The unit train.

[Bryan A. Shinn:]

The unit trains?

[John Matthew Daniel:]

Something like that.

[Bryan A. Shinn:]

Yeah. So typically for the year we run about 25%. Without doing the calculation live here, that's pretty typical. But about 25% of our volumes are shipped by unit trains now in Oil and Gas.

[John Matthew Daniel:]

Okay. Great. And just a couple housekeeping things. Can you update us on within Oil and Gas just your mine by mine productive capacity and the rough utilization ranges for those mines?

[Bryan A. Shinn:]

Yeah. So we haven't ever given specific utilization by mine site. I would say that when I look at our Oil and Gas capacity around the system, we're running currently about 75% in total. We haven't ever broken it down on a site by site basis.

[John Matthew Daniel:]

Okay. Fair enough. And then as a follow-up to your earlier commentary on the industry stockpiles declining, I'm assuming that comment applies more to Wisconsin mines and perhaps the others in the upper Midwest. Is that fair?

[Bryan A. Shinn:]

So I would say anywhere where it's a cold weather location where they have to build the stockpile in advance and put that big investment, cash investment in the warm season to then draw it down later. But it's primarily the Wisconsin sites. There may be other mine sites around the country that operate like that for other reasons.

[John Matthew Daniel:]

Okay. And I know you don't want to come across as being too bullish. But just hear me out on this. But conceptually, if the stockpiles are winding down and if the higher cost people are not going to kick up production because it doesn't make economic sense to do that, and knowing that 2016 is going to be really bad year, we all know that. But does that lead you to believe that as we get into 2017 that we are, what are the odds that we face a shortage? Or do we just simply see that production shift to those with Texas-based mines, if you will?

[Bryan A. Shinn:]

So what I believe, John, is that many, if not most of those mine sites that have to build these big stockpiles, will not be able to compete in the industry. So certainly, that takes effective capacity out. A lot of it depends in terms of do we see a shortfall or how that plays out to where the rig count goes and where the number of frac crews go. And obviously, that's all driven by the energy budgets. So there's so many unknowns in there, it's hard to speculate. But certainly, directionally it should be helpful to shoring up prices. And for those of us who will still be around in 2017, 2018, 2019, whatever, it feels like clearing out some of those less capable competitors probably is a positive for all of us.

[John Matthew Daniel:]

Okay. And then just a last one for me. Over the last year or two there's been lots of talk about the possibility and need for M&A in the frac sand world. I would assume that the current market conditions increase your desire and appetite to perhaps do a transformative deal. Can you just talk about one, the desire; and two, the reality of that happening this year?

[Bryan A. Shinn:]

Sure, John. So step back, and as you said, think about the fundamental drivers for this. Think about what's changed and what hasn't changed. Well, the market's still very fragmented, and I personally believe that we need to consolidate as an industry. And I think most others do. So that really hasn't changed. There's still the opportunities to leverage the scale and resources to provide better services to our customers. And the customers themselves are looking to consolidate, certainly see the big service companies only wanting to have a few sand suppliers. All those positive drivers are still there. As far as it relates to U.S. Silica, I continue to believe that we have a leadership role as a consolidator, given our balance sheet and the kind of leadership team that we have and the scalable processes that we have across our company. So all those things are the same. The thing that's different though is that the challenging market conditions that we're all facing, I feel, could be the catalyst to start to close the bid ask. And quite frankly, we're starting to see some of that. I feel like we're starting to make some progress. We're seeing more inbound contacts from folks who may want to get out of their piece of the value chain. Some of those are competitors of ours. Others are people who are somewhere else in the chain who are interested to do something. So while I'm not here to announce anything today, I feel like we're starting to make progress. And I think as the pain continues in 2016, that will probably be a catalyst, or could be a catalyst, to allow us to get something done in what otherwise looks like it's going to be a pretty tough year for 2016.

[John Matthew Daniel:]

Okay. Thank you for all that detail.

[Bryan A. Shinn:]

Thanks, John.

[Operator:]

Thank you. Our next question is coming from Tom Dillon from William Blair. Please proceed with your question.

[Tom R. Dillon:]

Hi. I'll take one more stab at the volume (51

[Bryan A. Shinn:]

So it's a great question, Tom. And I think that our customers are certainly under pressure. The energy companies, obviously, with budgets being down are being more selective, and the energy companies are pushing the service companies for additional cuts. And we've seen in some cases service companies who perhaps are not as competitive for other reasons coming back and trying to push more cuts from their suppliers, but we're resisting that. I think that as I said earlier, it feels like we're kind of coming to the end of the road here in terms of price decreases. But we have seen the big customers continue to order, so if you look at the largest service companies, they seem to be doing okay for right now. Perhaps some of the mid-tier folks are a little bit more under pressure.

[Tom R. Dillon:]

Okay. Thanks. That's helpful. I'll let someone else get one in.

[Bryan A. Shinn:]

All right. Thanks, Tom.

[Operator:]

Thank you. Our final question today is coming from the line of Jud Bailey from Wells Fargo. Please proceed with your question.

[Judson E. Bailey:]

Thanks. Good morning.

[Bryan A. Shinn:]

Morning, Jud.

[Judson E. Bailey:]

Question, most of my questions were answered but I had a – you mentioned earlier 20 sites that you estimate are offline by some of your smaller competitors.

[Bryan A. Shinn:]

Right.

[Judson E. Bailey:]

Could you comment, what would be the capital commitment and the time required to bring those back online if market conditions get back to a point where it would make sense to do so? I'm trying to think about what would it take to bring that capacity back? I assume higher pricing, but there's going to be quite a bit of investment involved I would assume. Could you maybe talk about that dynamic a little bit?

[Bryan A. Shinn:]

Yeah. So I think there's a few things that you have to look at. If you shut a site down, the first is that you've got to get your people back, right? And you may or may not be able to get the same employees, so you have kind of a training ramp-up time. Depending on how you shut it down, you've got some equipment maintenance and work to do there. In many cases, we're starting to hear rumors of people not just shutting down but also shutting down and selling off parts of their equipment, so that makes it even harder to come back online. I think the reality is though, to bring a site back online, you also have to have a base load of volume. So you can't run that site, any site including one of ours, effectively if you're only running it at say 10% or 15% or 20%. So if I owned one of these sites, if I was an independent company thinking about bringing it online, I'd want to see line of sight pretty quickly to being able to get the site up to 80% or 90% of capacity. Otherwise, my cost per ton would be so high it would be very difficult for me to compete. So I think there are lots of hurdles there as these smaller sites shut down; lots of hurdles for them to get started back up.

[Donald A. Merril:]

The one significant hurdle I would is, if it is a company that does participate in basin sales, there's a very large working capital component as well. It's a big investment to get that inventory going as Bryan suggested, and then get it in basin before you start seeing any type of revenue and cash flow on that.

[Judson E. Bailey:]

All right. That's good color. Appreciate that. And then I guess my follow-up would be, as you're talking to your customers and obviously I think that – it sounds like they appreciate that there's very little you can give on price. What are the most important things that they're talking to you about? Is it delivery times? Is it product mix? Can you just talk a little bit about what you can do to help them more if you can't reduce price a little more and what they're asking for?

[Bryan A. Shinn:]

So the number one thing that we get in terms of requests is speed and the associated flexibility associated with that. We've had a number of examples where our larger customers have come to us essentially with no notice and want a unit train delivered like in the next couple of hours out to some location in a basin. And so the ability to do that allows them to go out and bid for work and capture work on a short-term kind of short-notice basis themselves. So I think that's probably the number one attribute aside from pricing is flexibility, and we've really bent over backwards for customers. And I think it's one of the reasons that we've continued to gain share in this challenging environment.

[Judson E. Bailey:]

All right. I appreciate the color. I'll turn it back. Thank you.

[Bryan A. Shinn:]

Thanks, Jud.

[Operator:]

Thank you. We've reached the end of our question-and-answer session. I would like to turn the floor back over to management for any further or closing comments.

[Bryan A. Shinn:]

So, in summary, let me say that I feel privileged to work with our talented team here at U.S. Silica, and I want to thank my colleagues for the way they met the tremendous challenges that our company faced in 2015. As I previously noted, we plan to take decisive steps in 2016 to further solidify our position as an industry leader by effectively managing the oil and gas downturn and leveraging our many advantages to win in a tough market. At the same time, we will continue to enhance our ISP business and drive industry consolidation. I want to thank our investors for their interest and support and I look forward to meeting and speaking with all of you in the future. Thanks to everyone for dialing in today, and have a great day.

[Operator:]

Thank you. That does conclude our teleconference today. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.