US Silica Holdings Inc (SLCA) 2012 Q1 法說會逐字稿

Good morning, and welcome to US Silica's 2012 First Quarter Conference Call. Just a reminder, today's call is being recorded and you participation implies consent to such recording.

At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. With that, I will turn the call over to US Silica.

Good morning everyone, I'm Brad Casper, Vice President of Corporate Strategy here at US Silicia. With me today are Mr. Bryan Shinn, President and CEO of US Silica and Mr. Bill White, our CFO.

Before we begin, I would like to remind all participants that during the course of this conference call we will make comments that provide information other than historical information and will include projections relating to the Company's future prospects, revenues, or profits. These statements are considered forward-looking statements under the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995 and are subject to risks and uncertainties that could cause actual results to differ materially from those projected.

These statements reflect the Company's beliefs based on current conditions, but are subject to certain risks and uncertainties that are detailed in the Company's press release and public filings, and we incorporate these by reference for today's call.

Additionally, we will refer to the non-GAAP measures of adjusted EBITDA and segment contribution margin during this call. Please refer to the press release or our public filings for a full reconciliation of adjusted EBITDA to net income and definition of segment contribution margin.

At this time, I'd like to turn the call over to Mr. Bryan Shinn.

Good morning, everyone, and thank you so much for joining us for US Silica's First Quarter 2012 Earnings Conference Call.

During the call today we will reference a few charts that are available on our website under the Investor Resources section, and I invite you all to follow along with the presentation online. We also hope that everyone has seen the press release that we issued this morning regarding our first-quarter results. Later today, we expect to file a quarterly report on Form 10Q with the Securities and Exchange Commission.

I'll begin today with a short summary of our first-quarter results then discuss recent trends in Oil-and-Gas Proppants market and relevance to US Silica's business, followed by an update on our key growth initiatives.

Bill White, our Chief Financial Officer, will then review our financial results for the first quarter in detail and will update our guidance for full-year 2012.

I'm pleased to announce today that we had record performance in the first quarter of 2012, delivering the best quarterly financial results in the Company's history. Our revenues increased by almost $40 million year over year to more than $102 million. Our contribution margin more than doubled from $21 million to $47 million. Adjusted EBITDA increased by over 100% to $37 million and earnings per share grew from $0.07 to $0.37.

Our strong quarterly results were driven by excellent performance in our Oil-and-Gas unit and further enhanced by solid results in our Industrial and Specialty sector.

As we discussed in our fourth-quarter earnings call, US Silica completed capacity expansion of more than 1 million tons of high-quality Northern White frac sand at the end of 2011. We brought this capacity on line as planned, and our facilities are operating at designed rates.

As many of you are aware, the majority of this expansion volume was sold under contract before startup. This increased contract sales volume, coupled with our ability to satisfy customer needs with spot market sales resulted in strong revenue growth in oil-and-gas profits compared to both first quarter 2011 and, sequentially, compared to fourth quarter 2011.

During the first quarter of this year, we did experience a rapidly changing Oil-and-Gas marketplace, continued low natural-gas prices, drove redeployment of drilling rigs and frac crews toward oil and liquid-rich basins such as the Bakken and Eagle Ford. This created numerous supply-chain disruptions for our customers while also changing the overall profit-demand mix.

We were able to rapidly respond to this by effectively utilizing our operational flexibility, supply-chain expertise and transportation infrastructure to deliver the right products to the right basins at the right time.

By working closely with our customers to meet their needs in real time, we demonstrated the value of the close partnerships that we have created together.

By the end of the quarter, many of our customers realigned their supply-chain processes and, as a result, we saw demand from contract customers accelerate in March; and this trend has continued into April.

While overall, we view this as a positive trend, it may result in slightly lower average selling prices in second quarter due to a projected higher proportion of contract sales versus spot. Further, we believe that sales price variability will increase in our Oil-and-Gas sector going forward depending on a number of factors, including which customers we sell to, product mix, point of sale, and end-use basin. Our Business team continues to actively manage all of these factors to maximize our EBITDA.

Our Industrial and Specialty segment also performed well in the first quarter of 2012. Both volumes and average selling price in the segment increased over the prior years, leading to 8% growth in revenues year on year. Sales into our Glass segment were strong for the quarter as a result of higher demand from our Flat Glass customers.

Another sector that performed well in the first quarter was Building Products. Due to the relatively mild winter, we saw early, strong demand from customers in this market segment. While we are obviously very pleased with our short-term financial results, our team is highly focused on flawless execution of our 2012 business plan and implementation of a robust, long-term strategy resulting in continued industry leadership and increasing margins.

As part of this strategy, we are developing opportunities that provide the right kind of growth for our Company. These include acquisition of high-quality API spec frac-sand reserves; development of Greenfield sand mining and processing sites; entry into the Resin Coated Sand business; strategic acquisitions; additional investments in supply chain and logistics, as well as potential alliances, joint ventures and other strategic partnerships.

I would like to take a few minutes this morning also to update you on two of our growth projects that are currently underway. The first is our entry into the Resin Coated Sand market. As mentioned during our fourth-quarter call, we're constructing a facility designed to produce up to 400 million pounds annually of this value-added product. We've initiated plan construction in Rochelle, Illinois and expect this facility to be operational by the first quarter of 2013.

The silica core substrate for this facility will come from our nearby plant in Ottawa, Illinois. As a result, we will enjoy the ability to quickly shift output by grade to match demand and reduce substrate shipping costs. The capital required for this project is expected to be in the $42 million to $44 million range. Additionally, we're building the Rochelle plant with infrastructure that will allow us to double capacity to a total of 800 million pounds annually in a relatively short period of time, based on market demand.

The second major initiative that I want to discuss this morning is the construction of a Greenfield raw sand plant in Sparta, Wisconsin. In December, 2011, we acquired property and reserves for this facility. And in early January 2012, we received a permit to begin construction. At this time, we're happy to announce that our Board of Directors has approved construction of the new facility at this location. And we expect it will initially produce 750,000 to 850,000 tons annually.

We have recently broken ground on the construction of this facility and expect it to be fully operational by the end of the second quarter of 2013. Total investment will be in the range of $50 million to $60 million. Our Sparta facility will be designed for flexible production output to match changing demand patterns real time, while maintaining a cost-per-ton that is in line with our existing production facilities.

We expect the plant to initially produce substantially all coarse material for the oil and liquid-rich basins. And given its location and direct rail access, logistics will be very attractive to important basins such as the Bakken. As with the Rochelle plant, we're building the infrastructure for this facility to rapidly scale capacity based on market demand.

We expect the annual EBITDA from these two projects to ramp up during 2013 to an approximate annual value of $50 million to $60 million by 2014. Total projected capital expenses for both projects is approximately $100 million.

Now, I will turn the call over to our Chief Financial Officer, Bill White, to discuss our financial results, 2012 capital spending, and financial guidance.

I'll start with providing financial highlights for the first quarter of 2012, and then provide an update on our expected first half and full-year 2012 performance.

As Bryan noted earlier, the first quarter set another record for US Silica in terms of earnings, as measured by adjusted EBITDA and by net income. There were more than 1.7 million tons sold in the first quarter, compared to 1.5 million tons in the first quarter of 2011.

The approximately 20% increase was primarily in the Oil-and-Gas Proppants segment. The revenues for the first quarter of 2012 were $102.6 million, compared to $64.4 million for the same period in 2011. Nearly all of the revenue increase came from the Oil-and-Gas Proppants segment as we leveraged additional volumes from the ISP business towards growing end-market demand for frac sand.

For the first quarter of 2012, adjusted EBITDA was $37 million; net income was $19.1 million; earnings per share was $0.37 per share; compared to adjusted EBITDA of $16.7 million; net income of $3.5 million; and earnings per share of $0.07 for the first quarter of 2011.

Volumes for the Oil-and-Gas segment were 679,000 tons. And the contribution margin for the Oil-and-Gas segment was $35.1 million for the first quarter, as compared to 434,000 tons and a contribution margin of $11.5 million for the first quarter of 2011.

Volume for the ISP segment was 1,064,000 tons and the contribution margin for the ISP business was $12.4 million for the first quarter of 2012, as compared to 1,035,000 tons and a contribution margin of $9.9 million for the first quarter of 2011.

SG&A expense was $9.9 million for the first quarter of 2012, as compared to $5.3 million for the same period in 2011. The growth in SG&A was driven primarily by increased staffing to support the growth in the Oil-and-Gas segment and to meet the additional administrative requirements of a public company.

Interest expense was $3.8 million as compared to $5.4 million for 2011. The decline in interest expense year over year was due to refinancing our senior debt in the second quarter of 2011.

Turning to cash flow and liquidity -- cash and cash equivalents were $84.6 million as of March 31, 2012, as compared to $54.6 million as of March 31, 2011, with the increase coming from the proceeds of the IPO. US Silica incurred capital expenditures of about $15 million in the first quarter of 2012 mainly due to the construction of our Resin Coated production facility in Rochelle, Illinois and prepayments for equipment with long lead times that will be utilized at our new Sparta, Wisconsin plant.

Now we want to spend a few minutes reviewing the financial results that we expect to achieve in 2012.

Items which we considered in this outlook include spot-pricing volatility for Oil-and-Gas products; continued migration of rigs between basins; potential operating disruptions for maintenance and logistical factors; and startup costs and construction-related expenses related to the Rochelle and Sparta projects.

Given these and other factors, there can be some volatility in our production or sales rates from quarter to quarter. For the first half of 2012, we expect revenue of approximately $192 million to $204 million and adjusted EBITDA of $72 million to $75 million.

For the full year of 2012, we reaffirm that revenues will be approximately $395 million to $420 million and adjusted EBITDA will be approximately $142 million to $150 million. We're raising the range for capital spending slightly to between $100 million and $115 million, of which approximately $15 million is maintenance CapEx. The bulk of the CapEx during the remainder of the year will be directed towards our Rochelle and Sparta plants, currently under construction.

These ranges show substantial growth from 2011, with revenues expected to grow by at least 30% and adjusted EBITDA by approximately 50%. We're confident in reaffirming that we will achieve these results, as the primary drivers are already in place, with the expansions of the Ottawa and Rockwood plants and the improved Oil-and-Gas segment pricing from recently signed contracts with well-service providers.

Let me now turn the call back over to Bryan.

Well, that concludes our prepared remarks. I would like to reiterate that we're very pleased to have had record financial performance in the first quarter and that we expect to deliver against our financial guidance for the year.

Now, let's open the lines up for questions.

(Operator Instructions). Doug Garber, Dahlman Rose.

The first question that I had was about your contract coverage. In terms of your guidance on the revenue line -- how much of that is already sold in the contract market and how much of that should come from the spot market?

So, Doug, we have about 70% to 80% of our volume covered under take-or-pay contracts. And those contracts run through the end of 2013 at the earliest, and then some run for another two to three years beyond that.

The spot market availability -- can you give us any color as to what grade of sand you have available? Have you designed it so you have more coarse material available in this market, or is it just kind of run-of-the-mine?

So our spot availability is probably a little bit coarser than run-of-mine, and so that's how we designed it when we went out and put together the take-or-pay contracts.

I wanted to get an update on pricing trends -- probably more in the spot market than the contract market. Specifically, are you seeing variance by different basins? Could you just give us color of the magnitude of the differences you're seeing in the different basins?

The way I look at the spot market is that the pricing is primarily driven by the kind of local supply-demand balance. So as you mentioned, it's kind of a basin-by-basin phenomenon, and it changes, obviously, in real time.

What we saw in Q1 was a high number of equipment and crew moves associated with the lower natural-gas pricing, creating profit shortages -- temporary shortages -- across a number of basins. And these shortages would come and go.

The result of that was a pretty robust spot market in terms of volume and price. And the good news for US Silica is that with our multi-plant operations, supply-chain capability, and infrastructure, we're able to rapidly respond and increase spot sales in Q1 to support our customers.

Regarding the basins, certainly the basins where a lot of the crews moved to -- i.e., the oil basins -- had more spot shortages of products. So places like the Bakken and the Eagle Ford -- we sold quite a bit there in quarter one. But similarly, in other basins as well -- Marcellus was very active for us on a spot basis. And basically anywhere where the dynamics were changing and it required kind of a rapid supply-chain response by our customers tended to create those kind of short-term imbalances.

[Ben Slomley], Morgan Stanley.

Congrats on the quarter. Did you provide a breakdown of revenue between Oil-and-Gas and Industrial segments?

No. We didn't provide a breakdown of revenue. We did break down the volume and the contribution margin. We're not breaking down the revenue. It's partly because there is a fair amount of transportation revenue in that and we're just looking to guide towards volume and contribution margin.

On the spot-market pricing trends -- I just wanted to follow up a couple of your comments just now -- specifically in the Bakken and the Eagle Ford where you're seeing stronger demand for coarse-grained white sands. What are the pricing trends you're seeing there? You mentioned that there were some temporary supply shortages, and maybe spot pricing moved up higher.

But with regards to the price that you expect to realize over the next six to nine months, how do you see those pricing trends evolving?

It's a great question, Ben, and it's a little bit hard to predict because the spot market by definition comes and goes. We continue to see a robust market out there for sure. We are seeing some interesting trends around our contract customers that is driving some changes as well. We're actually seeing our contract volumes increase. So the requests from our [nine] take-or-pay contract customers for additional volumes are actually going up. And some of those customers are actually requesting purchases beyond their contract volumes. So we're working with them on that.

Are they willing to pay a price above their current contracted price for those incremental volumes?

We've seen some of that. Obviously, we're working closely with these customers to help meet their business needs out in the basins. I would say that as the service companies have adjusted to the new reality of where the demand is across the basins, they're probably doing a better job from a supply-chain perspective of planning out their profit needs. And so that will probably ease the issues with supply-chain imbalances that we saw a lot in quarter one. So there could be some leveling out of that imbalance as we go into quarter two and quarter three.

With respect to your increase in CapEx -- previously we were expecting $70 million to $95 million in CapEx. We knew that the Resin Coated phase one was underway. So presumably the increase in CapEx is targeting the Sparta, Wisconsin facility?

That's correct. The permitting process for Sparta has gone very well. We've had good weather to start making -- start activity in that area. So it is more Sparta-related than it is related to the Resin Coated Sand business.

One last question on the Resin Coated expansion -- one of your competitors decided to delay its building-out of new resin-coating capacity. What are you seeing in terms of resin-coated pricing? How are your expectations evolving in terms of payback on that project?

So as we look at the Resin Coated project, Ben, we see it as a natural forward integration for US Silica. And as we said previously, we expect to have the initial 400 million pounds on line by the end of Q1 2013 in Rochelle.

We're really excited about this project because we think we have a great competitive position in the market. The plant that we're going to be building in Rochelle, Illinois is only about 30 miles from our flagship plant at Ottawa. That gives us outstanding access to low-cost, high-quality Ottawa sand that can be used as the feedstock. Then, from a downstream perspective, the plant is ideally situated. It sits at the intersection of two railroads -- BNSF and the Union Pacific.

We think we're going to have a very competitive facility. Also, we have the flexibility there to be able to coat exactly what the market wants. So more 20-40, more 30-50 -- whatever the market needs, we can handle that. So we think our competitive position is going to be outstanding.

As far as the market itself, resin-coated sand is probably a bit more balanced from a supply-demand perspective than the raw sand. But we've done a lot of analysis on this and we believe that the market is going to tighten again in 2013. So, just as we're bringing our plant on line, we feel that the market will be tightening up.

Even if there is some short-term price pressure on resin-coated sand, it's a value-added product and, as I said, a natural forward integration for US Silica -- very attractive margins for us. So we're very confident about this project and very excited to get the facility on line.

So what do you think tightens the market in 2013, specifically? What's driving that?

It's just the supply-demand effect. If you look at the supply that's coming on line and you look at the projected demand by basins across the country, we spent a lot of time both on the raw and the resin-coated sand side, putting together proprietary supply-demand models that we use to make decisions in our business. The data that's coming from that is what's driving that comment.

It sounds like that's a demand growth on the rig-count side, drilling activity, and oily liquids plays?

Yes, that's right. But also we're looking at the capacity that's projected to come on line as well, obviously.

(Operator Instructions). Jeff Bernstein, AH Lisanti.

You guys alluded to a potential in Q2 to see a little bit of a shift from spot to contract and perhaps some impact on ASP. Can you just flesh that out a little bit more for us?

I think that the way to look at it is that our contracts, particularly the new contracts that we signed at the end of 2011 for our incremental volume that we brought on line -- the million-plus tons that we brought on line this year.

We're signed at a very good price point. It was at the end of 2011. We're very pleased with those contracts and with the customers that we sell to there. With that said, typically the spot pricing is going to be a bit higher. And, as I mentioned, it's hard to know exactly what the volume trend is going to look like there.

But we're also very conscious of supporting our contract customers and helping them achieve their business objectives. So when contract customers -- our most important partners going forward -- ask us for additional volume, certainly we want to do everything that we can to work with them to fulfill those needs.

One of the bigger service companies in North America, on their call, talked about an outlook for absolute price declines in proppants, which they sort of said generically in the second half of the year next year. When I followed up with them and said is it sand, is it ceramic? What is it exactly? They said -- well, that was really kind of a public-service message to all the suppliers. We know they're bringing on capacity and we're going to want lower prices.

How do you respond to that public-service message?

The way I look at it, Jeff, is that we have to look at our reality. Every company looks at things a little bit differently depending on their situation. And what we've got at US Silica is the product that's in most demand in the market. That's our Ottawa White Sand. It's an outstanding product, and it's really what customers want. Then we couple that with the ability to deliver that product to exactly where people want it, when they want it.

So we view ourselves as having a really strong offering in the market. And we think that it's fairly priced based on the value that we bring. Certainly, we're always talking to customers about these things. I've been doing sales and marketing for over 20 years. I don't think I've ever met a customer that didn't want a lower price. We certainly understand that; but we feel like our offering is very fairly priced in the market today and we deliver a tremendous amount of value to our customers.

Jack Kasprzak, BB&T.

I wanted to ask about a comment you made on the industrial side -- some of the strength you saw there in the quarter, specifically in building products. We know the weather in the first quarter was very good, mild.

Has that continued into the second quarter with regard to industrial demand on the building-products side?

Yes. I can't really speak too much about the second quarter at this point, but I would say that we certainly feel good about our industrial business. It's off to a very strong start this year, Jack. As you observed, building products looks like it's going very well. Some of that's driven by the weather. Some of it is driven by the efforts of our sales team to penetrate new accounts. Many of our other sectors, we think, have a lot of upside as well -- the Flat Glass market, Foundry sector.

It's one of the interesting things about US Silica that -- obviously, you know well, Jack, from your industrial background -- but we obviously have a whole other side to our business that provides value and I think will give us a lot of upside into the future.

As we've said a couple of times here, part of our mission on the industrial side of our business is to try and move more towards a performance-materials business. So we're focusing on some really interesting growth projects and opportunities there, which should add significantly to our bottom line in the coming years.

What can you say about pricing on the industrial side -- made a lot of comment on the proppants side, for obvious reasons; but do you expect pricing on the industrial side to be generally a little higher this year? What color can you offer there?

Generally, we've done well, historically, around industrial pricing. If you go back and look at trends in this industry, it's done pretty well. I think we typically have been in the 4% to 5% a year pricing. We expect to continue to grow price.

On the oil-and-gas side of our business, we provide a lot of value to customers. Many of our industrial customers we've been doing business with for decades. We have a great working relationship with them. I would expect that we'll continue to get compensated for the value that we bring.

That's great. Thanks a lot.

That concludes our question-and-answer session. I'd like to now turn the floor back over to management.

Thank you very much. I really appreciate everyone joining us this morning. As we said in our prepared remarks, we're very excited about our strong start to 2012. Certainly, as you saw in our financials, we had excellent performance and we continued on our planned growth trajectory for 2012.

As I think you're all aware, our business model is not dependent on just one or two shale basins. And we believe we have the product line and logistics capabilities to effectively meet the needs of our customers. But we also feel very comfortable with the outlook we provided this morning, and believe we're well positioned to perform through the periodic market volatility that we might see and certainly as we've recently seen in quarter one.

We also believe we've been very prudent in our outlook. Certainly, if there are future strategic changes in the market that could materially impact our business, we'll keep you all updated.

So thanks again and everyone have a great day!

Thank you. This concludes today's teleconference. You may disconnect your lines at this time and have a wonderful day.