US Silica Holdings Inc (SLCA) 2013 Q1 法說會逐字稿

Good morning, and welcome to US Silica's first quarter 2013 earnings conference call. Just a reminder, today's call is being recorded, and your participation implies consent to such recording. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. With that, I would like to now turn the call over to Mr. Michael Lawson, Director of Investor Relations and Corporate Communications. Please go ahead.

Thanks, Brenda, and good morning, everyone. And thank you for joining us for US Silica's first quarter 2013 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 this morning's press release or our public filings for a full reconciliation of adjusted EBITDA to net income and definition of segment contribution margin.

Finally, during today's question/answer session, we'd ask that you limit your questions to one, plus a follow-up question, to ensure that all who wish to ask a question may do so. If you have additional questions, we would invite you to get back in the queue and we'd be happy to take as many questions as time permits. With that, I would now like to turn the call over to our CEO, Mr. Bryan Shinn. Bryan.

Thanks, Mike, and good morning, everyone. I'll begin today by sharing highlights from our first-quarter performance followed by an update on our two business segments -- Industrial and Specialty Products or ISP, and Oil and Gas Proppants. I will also provide a progress report on some of our strategic initiatives and discuss key market trends going forward in 2013. Don Merril will then provide color on our first quarter financial results and outline our guidance for the second quarter of 2013.

The first quarter of 2013 was very strong for our Company, and we posted record revenue, driven by strong performance in Oil and Gas. And we again delivered EBITDA at the high end of our guidance range. Specifically, on a year-over-year basis, quarterly volume increased by 8% to 1.9 million tons, while revenue climbed over 19% to $122.3 million. On a sequential basis, volume was flat in ISP, and up 17% in Oil and Gas. Adjusted EBITDA of $38.8 million increased 4.9% year-over-year, and was flat sequentially. First quarter earnings per share were $0.33. Our EPS in Q1 was negatively impacted by $1.9 million or $0.03 a share, due to extraordinary expenses related to our recent secondary stock offering and M&A activity. Don will review this more fully during his comments.

Let's examine our two business segments in further detail. Sales and contribution margin from the ISP segment in the quarter were up approximately 2% on a sequential basis, reflecting our continued focus on higher value, higher margin sales. Further, contribution margin dollars were up 7% versus the same period last year. We expect this segment to continue to be a positive contributor to 2013 earnings growth, due to continuing rebounds in the housing, chemical, and automotive end markets, and our focus on developing and marketing higher value offerings. In our Oil and Gas segment, demand continues to be very strong, driven by efficiency gains in drilling and hydraulic fracturing. Volumes and revenues increased 17% and 4% sequentially. Oil and Gas contribution dollars declined by 3.6% sequentially, off a very strong Q4.

Our contribution margin was down due to three main factors. The first and largest was product mix. We experienced unusually strong demand for our lower-price 100 mesh product. While profitable on an absolute basis, the contribution margin per ton of 100 mesh is significantly below our other products thereby diluting the quarterly average. If not for this unusual demand, we believe that contribution margin per ton would have resembled that of other quarters in 2012.

Second was customer mix. Our contract customers purchased volume significantly in excess of their commitments in Q1. Given that spot prices remain well above contract, this negatively impacted contribution margins. This shift should reverse itself through the balance of the year. Third, as discussed on our last call, we made some contract modifications, trading pricing adjustments for longer terms and increased volumes, which took effect at the beginning of 2013. Those factors were partially offset by higher spot prices, which rebounded in the quarter.

Let's move to an update on strategic growth initiatives, starting with our new Sparta plant. We had a very successful start-up of the new facility earlier this month, and have completed initial sales to US and Canadian customers. Our products have been well accepted by the market, and we expect sales to ramp during the rest of the year. Additionally, due to market demand, our Board has authorized the acceleration of the construction and commissioning of Sparta Phase Two, which will add an additional 850,000 tons of annualized capacity of coarse, high quality Northern White Sand to our portfolio. Once this expansion fully comes on line later this year, our total annual frac sand capacity will be approximately 4.6 million tons; more than a 50% increase versus last year.

We also made significant progress at our new Rochelle facility, with the launch of our resin-coated sand product line. We now have two products under commercial production that have been certified by independent third-party testing, and several potential customers are currently conducting their own internal qualification testing. We're also starting to shift initial product volumes to our transloads, in anticipation of sales in late Q2 or early Q3. Finally, as many of you are aware, US Silica has been at the forefront of utilizing in-base and transloads to improve customer service and grow share.

We further expanded our storage network in Q1 by commissioning 5 new transloads, bringing our total network to 21. In addition, our new state-of-the-art unit train capable transload in San Antonio to serve the Eagle Ford has just been competed. And the first unit train of sand in inbound as we speak today. We set a goal of having 25 to 30 transloads on line by the end of the year. And given that San Antonio is number 22, I'm highly confident that we will meet or exceed that goal.

Let me take a moment to talk about how our logistics capabilities are improving our competitiveness and positioning us to grow share. Every transload we add expands our addressable in-basin market by putting us within driving distance of additional rigs. We spend a lot of time thinking about how to get the most leverage out of each new location. The point-of-sale for our products is moving from the plant to the basin, and we're leading the way. Spot contracts for multi-well pads are creating acute needs for large amounts of profit. Smaller service providers with limited logistics capabilities are partnering with us to forward stage and carry the cost of inventory. Larger players want to eliminate complexity and administrative challenges by partnering with fewer venders that have broad geographic reach, reliability, and logistics. Our national transload network gives us an advantage for both types of customers.

To replicate this network, a new competitor needs to develop a system of plants with direct access to every major railroad. Simultaneously, they also need to build out a national network of transloads in every major basin. Further, they need a balance sheet to support the delivery cost of inventory at each transload. Finally, to bring it all together, they need a world-class supply chain organization to forward-stage inventory in advance of demand, and then shift on the fly when plans change. We see no new entrants, and only a few existing competitors that are able to accomplish this.

I also wanted to take a few minutes this morning and talk about the market trends that we expect to impact our business over the next several quarters. Generally, I'm optimistic about what we're seeing in the Oil and Gas sector. Despite reduced overall rig activity, horizontal rig counts were up sequentially, and most of our customers are expecting this trend to continue, especially in areas like the Permian. We also expect continued strong demand in the Marcellus, where we believe that we have one of the best transload networks in the industry. We expect Proppant demand growth to outpace rig count growth as the enhanced efficiency of those rigs drive growth in both wells drilled and stages-per-well.

Additionally, we continued to hear from our customers about the superior returns they achieve by investing in greater profit density across more closely spaced stages. We're feeling this demand growth, and it was one of the reasons that March 2013 was the single highest volume demand month that we've ever experienced for frac sand.

It's also important to note that increasing service intensity will impact drillers, service companies, and providers of consumables differentially. We believe that frac sand providers will be direct beneficiaries of increasing service intensity and that sand-based proppants will continue to grow at the expense of other products. Further, we're not facing competitive pressure from imports, and, put simply, the market dynamics we experience as a top-tier Northern White Sand provider are very different from those supplying manufactured proppants and second-tier sands.

Our strategy for the Oil and Gas segment going forward is to continue to add and profitably sell out new capacity to a mix of contract and spot customers through an increasingly robust distribution network. We plan to accomplish this through a combination of organic growth, greenfield development, and select acquisitions to complement our business model of being a low cost high-quality producer with outstanding logistics capabilities and strong customer service.

On the ISP side of the ledger, we'll continue to work to transform this segment to a technology-driven enterprise, by developing capabilities and products that enable us to penetrate more profitable markets. We have a robust opportunity pipeline with several new offerings under development, the first of which we anticipate launching into the water treatment market later this year. We expect to generate at least $10 million in incremental EBITDA from new Industrial products by 2015.

The last topic that I want to discuss today is capital allocation. We frequently receive questions from investors on this, and I want to update you on our current plans. Management, in close consultation with our Board, spent significant amounts of time considering capital allocation alternatives. In addition to investing our cash in high return projects, such as our recently constructed greenfield site, we're also carefully evaluating options for highly accretive acquisitions within our current supply chain for Oil and Gas, and to build capabilities in ISP.

As noted earlier in my remarks, we incurred Q1 charges associated with potential M&A activity. Beyond growth projects and M&A, we have also considered options to return cash directly to share holders. Our Board is committed to pursuing a rigorous and disciplined approach to capital deployment and to achieving best-in-class total shareholder returns, including evaluating return of capital initiatives and policies.

After completing a thorough analysis of our forecasted cash flow and the needs for growth capital, I'm pleased to announce today that our Board of Directors has approved initiation of a regularly -- of a regular quarterly cash dividend. The initial quarterly dividend will be $0.125 per share for shareholders of record as of June 19, 2013. Future dividend payments are, of course, subject to Board approval. And initiation of this dividend reflects the confidence we have in our future business prospects and our ability to generate cash beyond our needs for growth investments.

Now I would like to turn the call over to Don Merril, our Chief Financial Officer, to discuss our financial results in more detail and update you on our guidance. Don.

Thanks, Bryan, and good morning, everyone.

As Bryan mentioned, tons sold at the first quarter of 2013 totaled a record 1.9 million, compared with 1.7 million sold in the first quarter of last year, and approximately 1.8 million tons sold in the fourth quarter of 2012. Revenue in the first quarter was up 19% year-over-year, and increased 3% sequentially over the fourth quarter of 2012. The increase in revenue was driven largely by volume growth in our Oil and Gas segment.

On a year-over-year basis, revenue for the Oil and Gas segment grew by almost 37% to $73.6 million, while revenue for the ISP segment was essentially flat from the prior year totaling $48.7 million, versus $48.8 million in the first quarter of 2012. Volumes for the Oil and Gas segment were at 920,569 tons, and the contribution margin was $36.2 million compared with 678,982 tons and a contribution margin of $35.1 million for the first quarter of 2012. Volumes for the ISP segment totaled 964,956 tons, and the contribution margin for the ISP segment was $13.2 million, compared with 1,063,900 tons and a contribution margin of $12.4 million for the same quarter in the prior year.

SG&A expense was $12.4 million for the first quarter of 2013, compared with $9.9 million in the first quarter of 2012, and up $1.2 million sequentially from the fourth quarter of 2012. As Bryan noted, the increase in SG&A in the quarter is largely the result of extraordinary charges related to the secondary offering that was completed during the quarter, and additional expenses associated with M&A and other business development activities related to the Company's growth initiatives.

Depreciation, depletion, and amortization expense in the first quarter was $8.3 million, compared with approximately $6 million in the same quarter last year. The increase in DD&A expense is being driven by increases in capital spending associated with our growth and capacity expansion initiatives, combined with increased depletion, due to the additional volumes mined. We expect depreciation, depletion and amortization expense to continue to increase right along with our capital spending in 2013. Interest expense for the quarter decreased 6% to $3.6 million, compared with $3.8 million in the first quarter of 2012. The decline in interest expense year-over-year was due primarily to the conversion of an equity note immediately prior to our IPO in the first quarter of 2012.

Turning to the balance sheet, cash and cash equivalents totaled $42.9 million at March 31, 2013, compared with $61 million at December 31, 2012. The majority of the reduction relates to the payment of a special dividend in Q4 of last year. As of March 31, 2013, our working capital was $101.3 million, and we had $29 million available under our revolving credit line. As of March 31, 2013, our debt increased by $10 million to $265.4 million, compared with $255.4 million at December 31, 2012. We incurred capital expenditures of $22.7 million in the first quarter of 2013. The bulk of our first quarter spend was related to our raw sand plant in Sparta, Wisconsin; the acquisition of an existing silica sand processing facility fear our Ottawa operations; and the construction of three new transloads -- one in Texas, one in West Virginia, and one in Ohio.

Turning to our outlook for the second quarter of 2013, we expect revenue to be in the range of $132 million to $140 million. We expect adjusted EBITDA for the second quarter of 2013 to range between $39 million and $42 million. At this time, based on our strong start to 2013, we are reaffirming our full year 2013 guidance for adjusted EBITDA in the range of $165 million to $175 million, and capital expenditures in the range of $50 million to $60 million.

With that, I would like to turn the call back over to Bryan.

Thanks, Don. Before taking questions, I did want to mention that we look forward to hosting many of you next month at our first Investor Day at our flagship facility in Ottawa, Illinois. We believe that the program that we have planned will be very beneficial in helping you better understand our Company and our Business and the specific strengths and advantages that US Silica enjoys in the marketplace. That concludes our prepared remarks today. Operator, would you please open the call up for questions?

Thank you. We'll now conduct the question-and-answer session.

(Operator Instructions)

Our first question comes from Jack -- Jack Kasprzak with BB&T. Please state your question.

Thanks. Good morning, everyone. Were there any start-up costs that might have related to Sparta One that might have impacted margins in the quarter?

Sparta One was up and running by the end of Q4 into Q1, so that any of the startup costs would have been handled in Q4.

Okay. So nothing unusual in terms of the margin performance there?

No.

And I just want to make sure I understand one of the three issues or items that you -- Bryan, in your comments, you said impacted the oil and gas segment. That is, customers buying in excess of their commitments in Q1. So does that imply that, down the -- later in the year, when there's a contract -- when the contract is fulfilled, they'll be buying it at spot prices, and if spot prices are still higher than contract prices, you'll kind of realize the benefit, if that's the way to say it, of later in the year? Is that sort of what you were saying?

Yes. So, it's a great question, Jack. And maybe just to add a bit more color around that, we saw extremely strong demand from our contract customers. Actually, if you do the math, they purchased more than 120% of their contract minimums. And, as you observed, if we had sold those excess volumes at spot, we certainly would have improved our margins. As in the previous quarters, the spot price remains above contract, and actually the spot prices were up in Q1 versus Q4, and that's the first time we've seen a quarter-on-quarter increase in spot pricing actually since Q1 of '12. So as we thought about this during the quarter, we made the decision to support our contract customers, and to allow them to purchase extra volume, but certainly the spot demand was available. Just to give you an example, that -- March was the busiest month that we've ever had in our history for frac sand sales-- at least the request for sales, for sure. We turned down over 50,000 tons of business in March alone, so I expect that as contracts -- as customers reach their contract levels throughout the year, that this will balance out, as you said. But we viewed it as a positive that we had such strong customer demand in Q1.

Great, thanks for that color, Bryan.

Okay. Thanks, Jack.

Our next question comes from Brandon Dobell with William Blair. Please state your question.

Thanks. To segue from that one, Ron, you mentioned the mix issue in the quarter. Maybe a little bit of color around how much of a delta between the lowest quality and highest quality, or how --much of an impact that 100 mesh had on contribution margin in the quarter versus your expectations? Then it sounds like you're relatively confident that that would --if the reverse would go away as the year progressed -- and I guess some color on your confidence would be helpful, too.

Sure, Brandon, and thanks for the question. We sold massive volumes of 100 mesh during the quarter. It was actually 2X our highest quarter in 2012. And as we commented, even though -- every time we sell there is profitable on an absolute basis -- it's pretty dilutive to contribution margin per ton. And if you do the quick math on that one, if we had sold a -- kind of a normal amount of 100 mesh, our contribution margin per ton would have been in the range of where we were in 2012. I think another important note about the excess 100 mesh sales is that it didn't cannibalize our other sales. We still had extremely strong demand for the other grades, and we actually set a record volume for those other grades. And my expectation is that this will probably balance out over the year. We're seeing less 100 mesh demand in Q2 here in April, but that's kind of one of those factors that's a little bit out of our control. The well engineers will decide to use whatever product mix that they choose to. But I would expect that quarter one was a bit of an anomaly there based on what we're seeing so far.

Okay. And does it follow -- just to make sure I got your comments around the new capacity correct. Any sense of how quickly Sparta and then the second line should kind of reach capacity? Should we think of that happening in '14, or would that extend out to '15?

So, it's a great question, right. And so we have our folks working on that quite a bit right now, as you can imagine. We have our engineering and our construction teams working on the exact schedule that we can get a start-up done, and certainly our sales team is out working in the market right now. I would say that we're relatively encouraged by the strong demand in Q1, and that's one of the major factors that led us to meet with the Board and request approving acceleration of this project. I think it will definitely ramp over time. It won't be sort of a step function, where it's all sold out day one. So it will ramp, I think, as we go through toward the end of '13 and then into '14. But certainly if we see the kind of demands that are in the market right now, and if that continues, I feel really good about our ability to sell most of that product by the time we get into '14.

Okay. Great, appreciate it.

Sure. Thanks, Brandon.

Thanks.

Our next question comes from Trey Grooms with Stephens. Please state your question.

Good morning. So on the -- on San Antonio coming on-line -- first off, was there any cost in the quarter associated with that that you could point out that would have impacted? Secondly, how do we think about the impact from that? Because it's a rather large transload facility for you guys, in basin sales -- kind of how we think about that rollout could impact sales and margins, just kind of going forward -- that one particular facility?

Sure, Trey. And so, to your first question, we didn't have significant costs in the quarter associated with that; so that really wasn't an issue. Around San Antonio just generally, we're extremely excited about that. As you said, it's quite a large facility, and we have the capacity to put probably in excess of 500,000 tons through that facility on an annual basis. So with the kind of demand that we're seeing down in the Eagle Ford, is we would expect that facility to be very busy. And it has two main advantages that we like.

One is that, obviously, it gives more efficient logistics out to the basin. And the cost per ton to deliver out into the transload is significantly reduced, versus a more traditional type of rail-shipping scenarios. I think the other, and perhaps more important, thing is it gives us great flexibility and responsiveness. So when we ship a unit train say from our Ottawa facility to San Antonio, we can literally have the sand there in a couple of days, versus a couple of weeks shipping it the sort of old-fashioned way, if you will. And really what our customers are coming to us and talking a lot about is responsiveness. We see more -- more and more of the stimulation crews that are working on a spot basis, and our customers are tending to get awarded large jobs with very short notice. So partnering up with US Silica and having us have an additional sort of rapid response capability in San Antonio, I think, will serve us extremely well.

But just kind of looking at -- just to be clear, on your guidance for the year, that assumes all of the roll-out of all of these kind of in-basin facilities that you're planning for the year, and any kind of impact on the margin dollars or percentage, I guess, that you would see as a result of those?

That's correct.

Okay, thanks. I'll jump back in queue. Thank you.

Okay. Thanks, Trey.

Our next question comes from Blake Hutchinson with Howard Weil. Please state your question.

Good morning, guys.

Good morning.

Just getting back to kind of the 100 mesh market in itself. We saw an uptick in your volumes delivered in the back half of last year as well, and -- leading into this. Does that -- should we start to read anything into that in terms of that market, perhaps, getting a little -- back into a little better balance? Or do you think to this point it's more of a regional advantage playing out for Silica?

You're talking about the 100 mesh sales in particular, Blake?

Yes. I mean, at this point, given the volumes you guys worked through in the back half of last year and this year, it would suggest that if the industry is doing the same -- or maybe even that portion of the market is getting back into a little better balance. And is it too much to read into that -- a little healthier 100 mesh for the industry at large? Or is this just kind of silica's regional advantages playing out to some extent?

Okay, yes, I've got it. I think it's a couple of things. Obviously, we have the advantages and the customer contacts and relationships. But I think there's just a lot of experimenting going on right now with different proppant mixes, and we believe that this sort of surge in 100 mesh demand was at least in some part attributed to folks trying to use less guar in their fluid systems, and needing a lighter-weight proppant as they did some different kind of trials there. So it's not necessarily saying that, you know, the gas market is coming back, and 100 mesh is going to go great -- great guns again. So I wouldn't read that into it. So it's the best intel that we have for the market right now.

Great. That's really helpful, and then, just in terms of realizing that the first quarter might have been abnormally high in terms of the contracted volumes versus spot market, you did go through a healthy process of you making some adjustments to customer contracts. You know, if we had tracked in the past, maybe in the 70% to 80% of volume range, do you think the natural tendency post your rearrangement of some of these contracts is just going to be a little bit higher?

So we'll have to see how it plays out. I think that being in the 70% to 80% range is the right kind of sweet spot for us right now. You know, if you look at what we did on the contracts, we had customers approach us, and we actually had multiple customers that extended their contract term for the length of the contract. We also had multiple customers that asked for increased volume. And we've always said that we'll trade value for value, and I think we got a lot of value in the trades that we made there.

So, for example, it's going to allow us to bring the Phase One of Sparta on and still have 70% or greater of that product contracted out. We believe that our 2013 contract volume will probably increase by around 30% as a result of the great work that our sales team has done. And the other thing that I really like is that with these contract extensions that we achieved, the volume-weighted contract roll-off has moved out from about mid-2014 out into 2015. So a lot of wins for us, and a lot of value that we got out of doing that work with our customers.

Okay. And then just -- sorry, if I can just fit in a point of clarification. Did you fit or deliver any meaningful volumes from Sparta in 1Q? As you said it was actually functional?

No, we didn't. We're ramping up, as we start here in April. The plants come up flawlessly. We've had initial sales to the US and to Canada. The product has been really well accepted by customers, and we expect to continue to ramp as we go forward here.

Great. Thanks so much for your time. I'll turn it back.

Okay, Blake, thank you.

Thank you. Our next question comes from Brad Handler with Jefferies. Please state your question.

Thanks. Good morning, guys.

Good morning, Brad.

Maybe coming back around on a couple of items, but -- and maybe I missed this. Forgive me if I did. But did you actually share what percentage of your oil and gas volume was sold through contracts in Q1? And if you didn't, can you?

We did not, and we've never disclosed that number to that detail. I would say that, you know, our goal was to be between 70% and 80%, and I think given the kind of comments I made earlier around the customer mix, that you can infer that we were at the top end of that range.

Sure. Okay. Fair enough. Maybe -- similar point of detail, which I think you disclosed. What percentage of your product was sold on a delivered basis in Q1?

So we were in the neighborhood of 40%.

Okay. Versus something around the 35%-range for the fourth quarter?

Yes.

Is that --? I think that's what I have in my notes.

We were up a little bit, Brad. I would say, sort of quarter-on-quarter, I would call it flattish, as we continue to bring new transloads on-line, I think that that percentage will track up.

Through the course of '13 that should drift higher?

Yes, we believe that that will move higher through the course of '13. And you can imagine San Antonio alone, right, has the capability to put 500,000 tons a year through, as I said, so just that will make a meaningful impact in the percentage.

Sure. That makes sense. I'm not sure if this counts as a third question or not, and if it does, I'm sorry, but maybe I can slip in another one. Your comments about acquisitions were interesting to me. Maybe I just hadn't thought about it, but as you look at the landscape, is -- perhaps you could comment on which is -- which appears to have maybe more opportunities. Would it be other transloading facilities, or other things in the distribution side relative to the source-of-sand side?

Yes. So I guess as we look at acquisitions in the oil-and-gas space, I think that the -- most of our energy has been spent on what I'll call the kind of -- value chain. So if you kind of walk it through from the mining, to the processing, to the transportation piece, which includes the transloads, we're sort of looking along that chain. And I can say that we've looked at things in all of those categories.

And, you know, the attractiveness piece obviously has two elements to it, right? One is, how does it fit with our strategy? And the second is how is it priced, and would it be highly accretive, right? So, kind of where we've looked down the chain, we've obviously found different answers there. I would say that we do have a lot of reserves in the ground right now, so going to acquire additional reserves per se may be less attractive. So I like the immediacy of having the ability to process and transport those reserves. So probably further downstream, maybe a bit more attractive.

And we haven't talked at all about the industrial side of our business. We're obviously looking at potential for M&A there. And there it's more sort of capability -- building acquisitions, in terms of developing our new products, our specialty and performance product line.

Got it. Okay. Thanks, guys.

Okay. Thanks, Brad. Take care.

Our next question comes from Travis Bartlett with Simmons & Company. Please state your question.

Good morning.

Good morning, Travis.

Looks like it was pretty strong sales volume just from the oil and gas proppants segment in the quarter, up 17%, and it and sounds like most of the volume increases were not from Sparta during the quarter. So I was wondering, how much of the increase would you attribute to the new processing plant that you guys acquired during the quarter, if any?

Yes, there was almost none. You know, we had been getting some output from that processing plant in the past on a contract basis, so there really wasn't much impact there specifically. The increased sales that you saw came, to a large extent, from 100 mesh, but then our team has been working on a series of operational efficiencies to try and squeeze more and more out of our existing assets, and we were able to do that on the coarser grades of product, as well.

Okay. And just wanted to clarify that. And then speaking with Sparta here -- if total annual capacity from the first phase is 800,000 tons annually, or 200,000 tons per quarter, and -- I guess it's ramping up over the course of the year -- but how close to full capacity do you think you can get in Q2 from that site?

So, look. We don't have sort of specific numbers to share on that today. But I would say we'll ramp up, and our sales team is doing a great job out in the marketplace. You saw what kind of demand that we talked about in the market, and some of the sales that we had to turn down because we just didn't have capacity. So I think we'll do a really good job of ramping those sales up, and I expect we'll start to see some significant volumes from Sparta in Q2.

Okay. Perfect. And then last one from me here, just shifting gears towards pricing. I thought it was interesting that you guys noted that spot prices for frac sand actually increased during the quarter, so I just wanted to kind of get your thoughts on the outlook for spot market pricing going forward. I know it's still largely basin-specific, but just kind of wanted to get the outlook there.

Yes, as you said, it moves around a lot. I would call it sort of flattish. We're not calling the bottom in pricing here, but just kind of relaying to you what we saw. I also think that because of our network of distribution points, we can kind of cherry pick some of the best spot pricing, and our team works a lot on that to make sure that we maximize our spot pricing. So -- as we also said in our remarks, you can't necessarily take the sort of results that we're achieving and translate those to, you know, what others might do.

Right. Did you guys quantify the spot market pricing increase that you guys saw during the quarter?

We did not, but I would call it sort of low single digits.

Low single digits. Okay. Perfect. That is -- that is it for me. Thank you very much.

Okay, Travis. Thank you very much.

Our next question comes from Brandon Dobell with William Blair. Please state your question.

Thanks. A quick follow-up. Guys, you've talked in the past about some of the barriers in this business driven by access to rail lines, things like that. As this country and Canada continues to build out more rail networks for takeaway capacity from some of these basins, would you expect that some of the reserves from a variety of people, small and large, that are -- I guess have not been close to railways, that now all of a sudden may be closer, just given how much new rail capacity is being put up -- does that change the dynamics? Does it change your thinking about who may be the low-cost providers, or who could be a low-cost provider if the rail network changes materially the next two or three years?

Yes. So it's a great question, Brandon. And we spent a lot of time thinking about the kind of realities on the ground in Wisconsin, Minnesota, and Illinois. And I would say just generally what we see is that it's getting more difficult, for a lot of reasons. You know, there certainly are some rail capacity additions that are coming, but we work pretty closely with the major railroads, like the BNSF, and the UP, and I don't think we're going to see any kind of step change in their ability to put new tracks in that are going to reach some of these locations, at least based on what we see today.

What we do see, though, is that -- is a lot more community opposition. There's a bill pending in the Minnesota State Senate right now to ban new sand mining across the whole state, which you're probably aware of. And so if I was going to characterize it, I would just say it's generally getting more difficult, and what we see is that the majority of new mines that are coming on-line today are sort of moderate- to high-cost versus ours, which are low-cost. And so, for us, that means somewhere one-and-a-half to two times or more the cash costs of production for the majority of the mines that are coming on right now.

Okay. And then switching gears for a second to the industrial side. You guys have talked -- all the initiatives around both, I guess, increasing value but also driving more volume. I mean, how do we think about that part of the business for the remainder of this year from a revenue perspective, given how -- I guess how tough it is for us to get our kind of arms around where the revenue versus volume is going?

Yes. So I think that the business is going to remain strong throughout the year, from what we can see. We have a number of new customers that we think will come on-line throughout the year, and certainly the work that the team is doing to try and move our mix, if you will, to more specialty and performance-type products -- we're putting focus on those-type customers. So what you might see is less volume, but higher net margins out of that effort. So I think we're having a lot of success there.

We've also got a number of products in the pipeline. The first of which will come out later this year, into the water treatment industry. So that will be a brand-new product for US Silica, so I'm really optimistic about our industrial business, and I think we'll going to be very successful in our mission to kind of change the growth trend line of that part of our business.

And if I may just add some color to that. You know, our tons were down 100,000 in the ISP business. However, the contribution margin was up 7%. So I think that goes to show that we're moving to more value-added products in that side of the business.

Okay. And it sounds like that trend should -- I don't think accelerate with the -- is a term you would use, but continue that kind of modest switch in volume types, through the remainder of the year? More towards higher-value volumes?

Yes, I would think we would continue to see that type of modest growth on the contribution side, as well as -- there was a couple of things that happened in the quarter, as well, that were timing-related, particularly in our glass market, where some of our customers have pushed off some volumes into later quarters, so we'll see that come back a little bit, as well. Okay. Great. Thanks, guys.

Thank you. There are no further questions. I'll turn it back to Management for closing remarks.

Okay. Well, just wanted to thank everybody for dialing in today, and we look forward to talking with you all again next quarter. Thank you very much.