US Silica Holdings Inc (SLCA) 2013 Q2 法說會逐字稿

Good morning and welcome to US Silica's second-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 will now turn the call over to Mr. Michael Lawson, Director of Investor Relations and Corporate Communications. Please go ahead.

Good morning everyone and thank you for joining us for US Silica's second-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 (technical difficulty) measures of adjusted EBITDA, and segment contribution during this call.

Please refer to yesterday's press release or our public filings for a full reconciliation of adjusted EBITDA to net income, and definition of segment contribution margin. Finally, during today's question-and-answer session, we would ask that you limit your question 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 queue and will 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 will begin today by sharing highlights from our second-quarter performance, followed by an update on our (technical difficulty) segments, industrial and specialty products or ISP and oil and gas proppants. I will also provide a (technical difficulty) report on some of our strategic initiatives, and discuss key market trends as we move into the second half of the year. Don Merril will then walk through our second-quarter financial results, and update our guidance for the remainder of 2014. The second quarter of 2013 was again a record year for our Company with (technical difficulty) for volumes, revenue and adjusted EBITDA. Our results in the quarter (technical difficulty) largely by another strong performance in our oil and gas business, as well as improved profitability in our ISP segment.

Specifically, on a year-over-year basis, quarterly volume increased by 15%, to 2 million tons, while revenue climbed over 24% to $129.8 million. Adjusted EBITDA of $40 million increased 10.4% year-over-year, and was up 5.6% sequentially. Don will provide more color on our financial performance for the quarter during his comments. Let's review our segments in further detail. Oil and gas once again drove most of our growth, as we saw higher volumes at a slightly lower contribution margin per ton, which equated to adjusted EBITDA (technical difficulty) into our guidance range, and a pickup of 1 to 2 points of market share versus last year. We experienced strong demand overall for high quality northern white frac sand during this quarter, (technical difficulty) course of sand short and the finer grades on the long side of balanced.

This (technical difficulty) has continued into quarter three and we are seeing a record order backlog in August. Volumes and revenues increased 9% and 6% sequentially. Contractors (technical difficulty) took over 120% of their expected volumes in the second quarter, proving (technical difficulty) our contracts and positive impact of our expanding trans load network. (technical difficulty) sales increased 165% year-over-year, and we continue to refine, grow our trans load facilities to increase market share. I will discuss this in more detail during the call. Our contribution margin during the quarter was negatively impacted by lower pricing for fine frac sand (technical difficulty) increased transportation expense incurred to move product to higher cost destinations (technical difficulty) customers.

In particular, the majority of the sales from our new Sparta facility were directed to higher delivery cost basins as we supported contract customer growth. Sparta gives us an advantage in serving customers in the Balkan and Canada, however growth in those areas was not enough to absorb new capacity due to rig movements an the spring break-up. Our confidence is growing however to be able to sell out Sparta volumes by the end of 2013. We expect pricing to remain under pressure (technical difficulty) minor grades as the market absorbs the increased supply that has come online this year, offset by pricing of course product, driven by continued shortages of this grade. Coarse sand deposit is defined to a small geographic region in the US, and the large grains are preferred for more oil and liquid completions. That gives us backdrop we are experiencing relative (technical difficulty) average spot prices with essentially flat overall spot pricing for the last four quarters.

Moving to the ISP segment, we saw sales and contribution margin up approximately 7% and 16% respectively on a sequential basis, reflecting our continued focus on higher value, higher margin sales. Contribution margin dollars were up 9.5%, versus the same period last year. Margin expansion in ISP is being driven by strategic price increases, mix improvement in (technical difficulty) manufacturing efficiencies. We expect this segment to continue to be a positive contributor to 2013 earnings growth, driven by strength in residential construction and repair and remodel activity. As we have discussed, our key ingredients in the housing industry in applications such as roofing, window glass and (technical difficulty) paints. We also expect to continue our margin expansion in ISP by developing and marketing higher value product offerings.

Let's talk a bit more about our adaptations over the next few quarters for the business. Our oil and gas customers continue to require flexibility around delivery points, and as noted in the past, they prefer to buy in basin versus FOB [the plants]. We expect this trend to continue and to drive a more segmented raw sand market going forward. We anticipate that we will see (technical difficulty) removed to consolidate their spend and we believe that top-tier companies like US Silica with the plant production capability, logistics scale and flexibility, as well as in basin availability, continue to take share going forward. As strategic growth initiatives are designed to help (technical difficulty) after new opportunities in this changing marketplace, starting with our new Sparta plant. This quarter (technical difficulty) online the second phase at Sparta adding another 850,000 tons of annual capacity of coarse high-quality northern white sand to our portfolio. Our total (technical difficulty) sand capacity now stands at approximately 4.6 million tons, up more than 50% versus last year. We also made significant progress at our new resin coated facility.

We now have two products in inventory in multiple trans loads and at our Rochelle plant. We are also working on development of a new curable product and expect commercial availability late third quarter, or early fourth quarter of this year. The resin coded sand market is over supplied right now, but we are focused on driving commercial sales and are pursuing mobile opportunities with customers. 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. In spite of a flat to declining rig count this year, there has been a meaningful increase in the (technical difficulty) well pad activity and ample evidence of that pad sizes are getting much larger, driving (technical difficulty), service intensity and a significantly higher well count. Recent market feedback supported by commentary on second-quarter earnings calls, also indicates that more of our customers are working (technical difficulty) hour operations.

We've also seen indications that operators continue to increase the number of stages on horizontal wells. It is our view that the resulting increased well and stage count will drive increased demand for profit well into the foreseeable future. As (technical difficulty) commentary suggests that we are just in the early days regarding the number of operators who are utilizing the technology to drill more stages with tighter spacing and more profit intensity. We are also cautiously optimistic about the prospects for increased drilling activity that may be supported by higher WTI pricing. Turning to supply chain and logistics, as I noted earlier in my remarks, we incurred additional transportation expenses in the quarter, related to moving product for contract customers to areas where we presently have higher per ton logistical costs. We are working with our supply chain partners to offset this by (technical difficulty) costs and adding new trans loads to optimize our existing network.

We have seen some early payback from this work as margin strengthened throughout the quarter. I'm also pleased today to announce that we have made an initial investment in a new Greenfield site near Utica, Illinois with annual capacity of approximately 1.5 million tons of raw frac sand. We're working with a third-party to develop the site, and construct a wet processing plant along with drying and screening operations. Site work is currently underway and we would expect the mine and plant to come online in Q1 2014. The site is focused on enhancing our competitive position in the Permian and Eagle Ford basins, currently two of the most active and growing markets in North America. We believe this new Greenfield site will be a significant contributor to achieving our stated goal of double EBITDA by 2016.

We also expect to announce some significant new partners in the coming weeks, that will bring additional low cost capabilities to our supply chain network. On the ISP side of the ledger, we are making excellent progress expanding our high-margin, specialty and performance product portfolio. We are on track to launch two new products in the second half of 2013. The first is an antimicrobial sand for use in the water treatment industry. The second is a coated sand innovation that will leverage our capabilities at Rochelle, for a new product that we intend to launch into the industrial space. Additionally, we have recently invested in a new proprietary technology that will enable us to expand the breadth of our fine ground sand portfolio, and we're pursuing a number of other exciting opportunities that we will share in the coming quarters.

While we are in the early innings of our transformation of this business, we are very excited about the progress being made to date and the opportunities to enrich our product mix and diversify our Company going forward. For the Company as a whole, the bottom line is that our business is very strong, and we expect robust second-half performance driven by record oil and gas demand, and continued margin expansion in our industrials business. In the midterm I would like to confirm that we're right on plan to achieve our 2016 target of $250 million to $230 million EBITDA with the potential for additional growth by M&A. Before turning the call over to Don, I did want to mention two other things. The first is our new senior secured credit facility. Last week we closed on a $425 million facility, and as a result we were able to add approximately $110 million of additional cash to our balance sheet.

Don Merril and his team took advantage of the current low interest rate environment to bolster our balance sheet and reduce our cost of capital. Pricing on the new term loan is very attractive and the loan is covenant light. We believe that having that cash in our balance sheet provides us with additional financial flexibility, to execute on our long-term strategy with respect organic growth opportunities, and shareholder enhancing initiatives including acquisitions, investments, dividends and share buybacks. The second item is to announce that our Board of Directors has approved a dividend of $0.125 per share for the third quarter, reaffirming the strength of our business model, and our commitment to improve total shareholder returns to the (technical difficulty) return of cash. With that I would now like to turn the call over to Don, to discuss our financial results and refinancing in more detail, and to provide an update on our '13 guidance. Don?

Thanks Bryan and good morning everyone. As Bryan mentioned tons sold in the second quarter of 2013 totaled (technical difficulty) 2 million tons compared with 1.8 million sold in the second quarter of last year and approximately 1.9 million tons sold in the first quarter 2013. Revenue in the second quarter was up 24% year-over-year an increase of 6% sequentially over the first quarter of 2013. The increase in revenue was driven largely by volume growth and (technical difficulty) oil and gas segment. On a year-over-year basis revenue for the oil and gas segment grew by almost 43% to $77.7 million while revenue of $52.2 million for the ISP segment (technical difficulty) represented a 4% improvement, year-over-year. Volumes for the oil and gas segment were 988,120 tons and a contribution margin was $35.5 million compared with 684,992 tons and a contribution margin of $33.2 million for the second quarter of 2012. Volumes for the ISP segment totaled 1.060448 million tons and the contribution margin for the ISP segment was $15.4 million compared with 1.098425 million tons and a contribution margin of $14 million for the same quarter in the prior year.

SG&A expense was $10.1 million for the second quarter of 2013, compared with $9.7 million for the second quarter of 2012, and down $2.3 million sequentially from the first quarter of 2013. Going forward we would anticipate SG&A expense to be in the range of $11 million to $12 million per quarter for the remainder of this year. Depreciation, depletion and amortization expense in the second quarter was $8.9 million compared with approximately $6 million in the same quarter last year. The increase in DD&A expense is being driven by our investments in capacity expansion initiatives, combined with increased depletion due to the additional volumes mined. We expect depreciation, depletion and amortization expense of approximately $9.3 million, per quarter for the rest of the year. Interest expense for the quarter was $3.5 million compared with $2.4 million in the second quarter of 2012.

The effective tax rate in the quarter was 25.4%, however we still expect our effective tax rate to be closer to 27% for the remainder of 2013. Turning to the balance sheet, cash and cash equivalents totaled $47.1 million at the June 30, 2013, compared with $61 million at December 31, 2012. As of June 30, 2013 our working capital was $118.8 million and we had $33.1 million available under our revolving credit line. As of June 30, 2013 our long-term debt was $251.8 million compared with $253 million at December 31, 2012. Subsequent to the end of the quarter, we successfully completed the refinancing of our senior secured credit facility. As you may know this transaction came on the heels of a corporate ratings upgrade from S&P to double B-minus.

The refinancing consists of a new $425 million senior secured credit facility, comprised of a $375 million term loan and a $50 million revolver. Pricing on the new term loan was set at LIBOR plus 300 basis points. The current credit market and low interest environment provided us with the opportunity to further enhance our financial flexibility, and lower our cost of capital, and we believe this transaction compliments our long-term strategy with respect to growth opportunities and shareholder enhancing initiatives. We incurred capital expenditures of $8.5 million in the second quarter of 2013. The bulk of our second-quarter spend was related to engineering, procurement and construction of the second phase of our raw sand plant in Sparta, Wisconsin, trans load facilities and various plant maintenance capital requirements. As Bryan mentioned our board has declared a regular quarterly cash dividend of $0.125 per share to common shareholders of record at the close of business on September 19, 2013 payable on October 3, 2013.

Turning to our outlook, we are reaffirming our full-year 2013 guidance for adjusted EBITDA in the range of $165 million to $175 million. We're adjusting upward our guidance for capital expenditures to a range of $60 million to $70 million, compared with our previous range of $50 million to $60 million. With that I would now like to turn the call back over to Bryan.

Thanks Don. That concludes our prepared remarks today. Operator would you please open up the call for questions?

(Operator Instructions)

Ben Swomley, Morgan Stanley.

In Q1 I believe your average contracted price was below average spot market price. Can you give us an update on whether that is still true in Q2 and heading into July?

Sure Ben. Pricing was actually really interesting in Q2. Obviously there is a lot of interest in the investment community around that. And I would say that what we're seeing is that pricing is holding up very well. Total price for oil and gas (technical difficulty) tons was relatively flat, it was down about 1% or 1.5%, that's sort of total price. Most of that was customer mix and a few other things. But what I that was more interesting and sort of to your question around spot pricing is that spot pricing actually increased mid-single digits sequentially.

If we hold 100 mesh constant across Q1 and Q2. And actually it was the highest spot pricing we've seen since Q3 of 2012 on an absolute basis. And of course spot pricing still remains substantially above contract, that specifically to your question. So, I was really pleased with pricing in the quarter.

I guess with that backdrop then when you think about and when you consider how placement of Sparta volumes have gone so far, do you think you will be able to place the incremental volumes from Utica -- from the new Utica facility at comparable levels to what you're selling at today?

It's kind of interesting, I think as most folks on the call probably know, for the last several quarters we have been essentially sold out in oil and gas capacity. So as we have had new demand come in from customers this year, it has mostly been out of Sparta that we have been serving that. And kind of a range of logistical choices out of Sparta, some have more profit, some have less. One of the things that we saw in the quarter was that we had a lot of requests from customers to ship to destinations where we had a little bit less favorable logistics. And examples are some of the places in the Permian where there's high growth right now. So if you have contribution margin per ton for the quarter, that was the primary issue for us was serving those kind of non-favorable destinations.

But the good thing is that we did that to support our customers as they were taking share and as we were taking share. The Utica plant is really interesting. We designed that and picked that location specifically to target some of the destinations today where Sparta would be a higher delivery cost if you will. So Utica is going to be low delivered costs to places like the Permian and the Eagle Ford and particularly to some spots of those basins where we think there's substantial long-term growth. So we're really excited about the Utica project. It is going to fill-in a really nice piece in our network, and as we said, we expect that to be up and running in 1Q '14.

Great. And are you going to bring on the full 1 million or 1.5 million tons at once or are you going to do it in stages?

We have not made a final decision on that yet, but we will have the ability to bring it up quickly if we choose to. If I had to guess at this point I think we will probably bring it up like we did Sparta, one piece at a time. But as we did with Sparta if we see the demand down in the marketplace, we design our facilities so that we can accelerate the construction and the engineering so that we can get it all up quicker.

Perfect. That's it for me. Congrats again on the quarter.

Trey Grooms, Stephens.

So kind of thinking about these shipments that you are talking about to non-favorable destinations. The increased shipments there. When we're looking at that and also kind of the current customer mix, and it sounds like having more contracted customers in that mix impacted ASP just slightly. But, how do we think about kind of the puts and takes there and how it goes into your thinking for your EBITDA guidance for this year? Are we expected to stay at kind of similar levels as we saw in 2Q or what is your thinking there as it relates to that guidance?

Are you thinking in terms of contribution margin per ton Trey? Was that your question?

Yes, per ton.

Okay. So we don't have any specific guidance obviously around contribution margin per ton today. But let me tell you how I think about it. There's as you said the puts and takes. So I think the positive things that we're seeing is that we are seeing stable to increasing spot pricing, which is the first time we've seen that in a few quarters so that is great news. We're seeing very strong demand for 2040 product, which is our highest priced product so that is certainly tailwind there. We are actually seeing increased 100 mesh pricing we had some pretty substantial increases in 100 mesh price in Q2 as a result of some of the strong demand that we see out in the market.

So that's great news. We are also working with our logistics providers and some of these less favorable destinations to take out costs and to work to improve our margins there. So I see all of those as very positive. As you mentioned the strong contract sales, although it was a bit of a negative in this quarter, and may be a kind of a negative again in terms of margin in Q3, I think that could turn into a positive later in the quarter as our contract customers run out of their total contract volumes, and then perhaps end up with some higher prices there. I think that we will continue to make some pricing adjustments with customers as we take share. So that could be a headwind on contribution margin per ton.

Overall 100 mesh demand is very strong, and even though we are getting some increased pricing there, every ton of 100 mesh that we sell, although it's additive to EBITDA dollars, is dilutive to EBITDA margin, so we don't see that trend changing based on the recent feedback that we have gotten from customers. And so, those are the kind of puts and takes I would say that at the end of the day, the demand that we are getting as we take share in the market, and we are well on our way to meeting our target of taking 1% to 2% share again this year. Most of that is going to come from Sparta, and so, it would depend on where the customers want it. In some cases it is more favorable and in some cases less. So lots of puts and takes there. I would say when I add it all up I'm relatively optimistic about where contribution margin per ton is going to go over the next couple of quarters. I think we have more tailwind's than headwinds.

All right thanks for that. You mentioned a lot of the things that you guys are benefiting from. And service intensity was one of the main things that you touched on. But one of the EMP guys came out last night and mentioned that they were doing additional testing and kind of expanding into deeper wells in the Eagle Ford -- additional testing with sand. And expanding into deeper wells and that sort of thing, which I guess could bode well for you guys over time with how our substitution of the higher-priced proppants out there. But what are you guys seeing as far as trends there? Are you seeing any increased usage as far as just from a substitution standpoint in any of the basins out there?

So we are for sure and you have heard several of the EMPs out there being fairly vocal about substituting ceramics or sorry -- substituting high-quality northern white sand for ceramics. I think that trend is going to continue. While that is a tailwind for us, the volumes there are relatively small so ceramics in total are only about 10% of the volumes in the market. So even if we take some share there, it helps but it's probably not going to drive results. But I certainly like to be selling the products that customers want to use more of as opposed to the ones that they are trying to use less of, right.

Great thanks a lot. I'll jump back in queue.

Jack Kasprzak, BB&T Capital Markets.

Just following up on the margin questions thanks for the detail Bryan. You also said in your comments that margins -- oil and gas margins strengthened throughout Q2. So given that there are more headwinds than tailwind's and that they strengthen throughout Q2, looking at Q3, should they be on a slightly better trajectory or kind of flat? Could you add some color there?

Yes so what we saw Jack is that June was the highest contribution margin per ton month per quarter in the quarter. So that's great news. And then as I was answering Trey's questions, all of those puts and takes I feel like we have got more tailwind's then headwinds. So I think we have more positives when I add all of those up there is probably five or six positives and two or three negatives. So net, net it just feels like we're going into Q3 with a positive tailwind. With that said, we certainly don't control all of the end use destinations for our products. And just to give you a feel, alright, I think it is important to understand this, it has gotten a lot more complicated.

When we were selling everything FOB plant, we had 8 contracts times 4 grades and so we had 8 times 4 for 32 possible price permutations out there amongst our oil and gas contract customers. Now with all the selling at destination and bringing Sparta online you do the quick math and that's up over 1,600 origin destination combinations. So there's a lot more ability for that to move around on a monthly or a quarterly basis. So I think we will probably see -- we'll see more variability, but overall, it feels like things are moving in a positive direction.

Okay great thanks for that. Secondly can you update us on your contracts, have you extended any, added any? Where do we stand in terms of contracted percentage of contracted volumes versus Q1?

Yes so it's a great question. We're right on track in terms of customer contracts. Pretty much where we were in last quarter. Strong demand from our contract customers. They bought over 120% of their contract levels again in Q2. We haven't at this point added any new contracts but I'll say in the last few weeks we have been approached by another customer, someone we don't serve today who is interested in potentially signing a take or pay contract with this. So that's good news.

And I think it is kind of indicative of some of the things that we see out in the market, particularly around shortage of supply for the coarse products. 2040 is really tight right now. And I think that perhaps is driving some customers anyway to rethink how they're set up in terms of sand suppliers. So we see that as a positive for sure.

Okay and lastly for me, were there any startup costs in the quarter that might have impacted the P&L?

We had about $1.2 million worth of additional startup costs in the quarter. Which is a little bit lower than the first quarter and I would anticipate that to be much lower in Q3.

Okay great, thanks guys. Appreciate it.

Kurt Hallead, RBC Capital Markets.

So I guess the question that I'm kind of curious about on the contract you mentioned that toward the end of the third quarter your contract volumes may be satisfied. Can you give us some general sense as to what percent of your current contract volumes could be repriced once you exit the third quarter?

So Curt it's a great question and I think it's something that we will have to work with customers as we get closer to that. What we have seen in the past and it's probably the best way to kind of go back in and think about what might happen in the future, is that typically is some reasonable percentage of those volumes maybe call it 30%, 40% get repriced at higher levels, and then the rest is a bit of negotiation with the customers. Around how we service them and maybe other things that we might decide to trade-off for leaving prices where they are. So for example, we can trade off other terms in the contract like grade mix or length of the contract those kinds of things. So I think in practice what we'll do is kind of see where things are as we get to that point later in the year, and then try to make the best decision to make the best trade-off for us and also do what's right for our customers.

That sound fair. And now seeing things from both sides of the equation as we do, typically, when demand for a product exceeds a certain amount by 20% as you indicated, that does reflected a very strong marketplace and usually is conducive to getting price increases with less than typical pushback right? So let me just ask you this context with your service company customers still constrained on their ability to push pricing on their angle, how much of a constraint do you think it is to push pricing from where you sit?

Well it is certainly something that we are sensitive to Kurt, and the approach that we have taken is obviously we want long-term customers. We have customers on the industrial side of our business that we have served for 80 or 90 years literally. So we know how to manage relationships over the long-term. And I would say that whenever you get in these situations where there is kind of maybe more leverage on one side of a contract than the other, both parties have to think carefully about how they use that. And so I'm sure that's the approach it will take as we go forward here and look at the supply demand situation. And frankly because of the way that we have treated our customers we think they will do the same thing to us right and we are seeing out in the marketplace, and so it's a bit of give and take but I feel really good about where we are.

Just in that context too, there's more of maybe an educational item here more than anything else. But if you're willing to work with your customers and deliver 20% more volumes than what they originally asked for, shouldn't they be willing to work with you on absorbing some of those logistical costs?

Yes it's a great question. And I think part of it goes back to some of the points that you made before. We know that our customers in some cases are constrained on margins. And the way I look at it is if the customer's taking share and we are trying to take share, I'm willing to give a little bit on margins in the short term to be able to capture that share and drive that business through for the long-term. So it's a trade-off, and it's a day-by-day discussion with customers in some cases we have had customers come to us and say look, we have a new piece of work that we are bidding on and we'd like a special price for that piece of work, because we know it's going to be super competitive. And they lay out their reasons and we work with them. So there is a lot of give-and-take here. But I think in the end our position is really strong.

Right and then finally, can you help me understand the dynamic here. You had indicated the coarse sand, the 2040 is in tight supply but it is still in high demand. Yet you are still saying it looks like a greater mix of 100 mesh relative to what you maybe have seen throughout the course of 2012. So it's a two-part question. Can you give us a general sense of what the mix of sand grades were for the quarter vis-à-vis last quarter? And then, what is driving this dynamic on the 100 mesh based on your teams view of the market?

So it's really interesting. The 100 mesh sales for this quarter were down just a little bit versus last quarter. But still about 170% of the average quarter in 2012. So very robust demand, and we're out talking to customers in the marketplace all the time and I think the -- probably the best explanation that we have heard is that there is an increase in the slick water fracs that are going on. And so you need some lighter weight proppants to do that. But at the same time, and this is where you get kind of a mixed message, as WTI continues to increase and there's obviously a push for more oil completions, those completions need the 2040.

100 mesh does not really work there. So, you kind of get this odd message of 2040 is strong and it's really being driven by oil, but then some of the other work where you have liquids and some mixed hydrocarbons, that we are seeing more slick water fracking and that takes a lighter weight proppant. So that is kind of in short story it's a little complicated but that is the short story as to why we see this kind of weird dynamic going on right now.

So what was the mix in the quarter for 100 mesh versus 2040?

So we never talk about the mix specifically but like I said it was about the same amount of volume as last quarter or a little bit less of 100 mesh. 2040 volume I think we squeezed out a little bit extra in the quarter. But our volumes have pretty much been capped except for Sparta. As Sparta comes online there's a lot of 2040 there that we can sell and that's very positive for us.

That's great. Appreciate the answers.

Brad Handler, Jefferies.

I guess I would like to follow in the same vein only because I think it would be very helpful for us to get a feel for some of the moving pieces in the quarter. If you'll allow me I can sort of lay out what I think I'm hearing but it's not -- it drives to a conclusion I want to make sure of it. So the mix didn't change a whole lot from a grade of product perspective it sounds like. I think more volume was distributed versus last quarter, perhaps you can share with us that change. And the customer mix, it would be helpful to get that sense from you too.

I gather it's still at the upper end the 80% range of volumes. But you could please confirm that. Those would in the aggregate drive to a conclusion of higher pricing I think, right? Just the distributed piece alone? And so it does point to concessions which are interesting. Is that the right conclusion, is that the only conclusion that there were pricing concessions made?

Let me take a stab at that. I think I understand your question. First you asked about trans loads. We moved about 45% of our oil and gas sales via trans load in Q2. Versus about 40% in Q1. So there was a definite uptick there which would be contributing to average selling prices for sure. But at the end of the day, it's being offset by a couple of different things.

One is as Bryan talked about, a bit little bit weaker pricing in the quarter due to some of the pricing changes that we made at the beginning of Q1. So you have a hangover impact of that. And then you also have the customer mix issue. So because of the contract customers taking 30% or so of what we expected the pricing there is lower than spot. So you're seeing that offset that increase of ASP that would be due to the trans loads.

That makes sense. Can you phrase that differently? I think we heard last quarter that contracted volumes were about 80% of your total. In Q2 what -- can you share the proportion?

A little bit higher.

A little bit higher, okay. All right fair enough. So I guess that helps so there was a narrow window of pricing concessions made which I guess we heard about having a full-quarter effect.

Exactly. That's a pretty good sized piece of this. At the end of the day, the pricing changes that were made in Q1, we still had the impact of now a full quarter in Q2. I would not anticipate to see that in Q3.

Got you. All right. Maybe just a little bit more color on the Utica expansion. I suppose it's a modeling question as much as anything. But should we think about that, that first quarter is really being all startup. Are we talking about volumes from Utica really starting in the second quarter, and perhaps you would position this as having a phase 1 and a phase 2 so we would start with just half the capacity run rate starting in Q2 of '14?

It's a great question let me take a stab at that and maybe ask Don to fill in any details that I might miss here. So if you think about the volumes first off, it's on an annualized basis 1.5 million tons plus or minus of product that we see coming out of that new site. I think one of the important things here is that this site is going to be positioned to access what we believe is the absolute best logistics solutions in the country. If you look at where it is, it is just tremendously well positioned and so when we think about modeling and things like contribution margin per ton and where that's going to go, I feel like this site will rival our Ottawa site in terms of contribution margin per ton. So it should be very good there.

I would expect that by the end of first quarter, we will have the site online and then we'd ramp-up throughout the year, similar to what we're doing with Sparta. It depends on, obviously, on the kind of demand that we see out of there. But I'm hopeful that we would have a pretty rapid ramp-up and actually as we have talked about a couple of months ago at our investor day, this site is the key piece of getting us to the $250 million to $300 million EBITDA range, essentially doubling the size of the Company. And with the work that our team has been able to do, we're actually ahead of schedule for that so I think it's important for everybody to understand that. We talked about having this site fully online and contributing by 2016.

Well I think it is going to start to ramp in 2014 and we should probably see the full impact of it in 2015. So it could be a full 12 months ahead of what we originally planned. So great job by our mine planning and our operations team and I did also want to mention that as part of the work and some of the proprietary things that we have figured out in bringing plants online, we always keep a pipeline of sites ready. And in fact we have another much larger site in the development pipeline, that we think could actually rival Ottawa -- our Ottawa operation in term of size and low-cost capacity. So those are sort of exciting developments that I look forward to talking more about in the coming quarters.

Understood, so right, clearly stronger -- no question stronger volumes, higher capacity than we had been thinking previously for '14. Okay guys, thank you very much.

Blake Hutchinson, Howard Weil.

A lot of questions around margins and pricing here wanted to make sure we're thinking the right way about the actual nameplate capacity or potential for tonnage sold over the next couple of quarters. First of all, where were we in terms of the ramp of Sparta 1 for the quarter? In terms of utilization or just broad strokes on that?

Let me answer the question a little bit different -- a different way and I think this could be helpful to you. If you look at the ramp, it is going very well and I'll give you a little bit more of advanced information in July. We're actually at a run rate of about 50% of Sparta sold. If you remember we did Sparta phase 1, phase 2 that each phase was 50% of the plant. So essentially with where we think we're going to end up in July, we will already have phase 1 sold-out. And so we have questions from investors around well why did you folks bring phase 2 on? And while you can see it now because phase 1 of Sparta we think is going to be sold-out just here in July. So we expect the ramp to continue throughout the year, and I'm very optimistic that we will have Sparta essentially sold-out by Q4.

Okay and then I guess I will come back to this, but you also mentioned that you have a record backlog entering Q3. Does that backlog, when you are looking at that, does that suggest any change in first, either the volumes of 100 mesh you have been running the last couple of quarters? Or secondly, are there indeed increased probably increased volumes to the Bakan on a quarterly comparable basis?

So the backlog, is a lot of it is ex-100 mesh it's not really a 100 mesh issue. We are seeing some increases to the Bakan but I would say generally the Bakan has kind of under performed as a basin compared to perhaps what many of us across the industry thought it was going to do a couple of years ago. It is still going well, but we see much more demand in the Permian, Eagle Ford and in some places of MidCon. And we actually can serve certainly the Marcellus and the Utica pretty well from Sparta. So we see demand more in those areas than the Bakan, although certainly we are growing in the Bakan as well.

And so kind of putting this all together, I want to make sure I'm not pushing you too hard. But, could you be doing somewhere between an ultimate kind of nameplate volume 1.1 million to 1.2 million tons in oil and gas by the fourth quarter? Or is that too aggressive?

I think, for all intents and purposes we are 1 million now so as we take Sparta up to running at what is essentially sold-out, I think that is a fair estimate.

Okay. Great thanks a lot, I will turn it back guys.

Doug Becker, Bank of America.

Bryan I wanted to get a little more color on the transportation costs. Is it fair to say that the gross profit in dollar terms would be higher in the second quarter from the first quarter without the incremental transportation costs?

Yes that's fair to say.

But I'm speculating here, but not up on a gross profit per ton basis?

That's fair.

Okay. Also wanted to circle back on the slick water fracs we have been hearing the same type of commentary. What type of sand is that displacing then? If it's not the 2040, what is that displacing and how does that impact Silica's business?

Yes so I think that what you typically see is where there is more Gwar being used, you need -- you can use the larger proppants, so maybe 3050 or something like that. It's kind of hard Doug to plot any kind of trends there just because the market moves around so much. But I think what we have seen in the past is that there is more slick water fracs gaining traction. I was just talking recently to a couple of customers and they were saying that now they look forward they think that we maybe starting to see little bit more Gwar coming. So it swings all over the map. It's pretty hard to draw trend conclusions from that.

So I guess, you're not seeing a clear trend towards slick water, and you don't view it as having a positive or negative effect on the business?

Not really. I think it just depends on us, we sell one grade of sand versus the other. I would rather sell 3050 versus 100 mesh, because we make more money on that. But, I also if I can keep the rest of the grades sold-out, it's great to be able to sell more incremental hundred mesh because on a ton-by-ton basis, that is adding dollar contribution to the bottom line.

I'm on board, we don't pay for $1 per ton it is a total dollar amount. In terms of your capital investments, you are really expressing a pretty positive view on supply and demand going forward. Just any color that you are seeing on the supply side? Maybe updates on what you're seeing from a permitting basis so any just new announcements any color you can provide on that front from an industry standpoint?

Sure. So as we look at supply and demand, I would say that supply, our estimates have essentially been unchanged from what we made 6 to 12 months ago as we looked at 2013. Essentially the supply that's come along has been right on our outlook. But anything could change earlier in the year, I would say that demand was maybe just a little bit softer than we might have modeled it 9 to 12 months ago, as we thought about 2013. But we're really starting to feel the impact on the demand side of all the pad drilling pad drilling, other efficiencies, profit density et cetera, and I think that's reflected in the kind of order book that we have for August.

Thank you very much.

Matt Conlon, Wells Fargo.

What basins are you sending the most of the 100 mesh sand?

A lot of the 100 mesh is going into the Marcellus. Some in the Utica and then the rest is headed either south to Texas or a bit in the MidCon.

Okay. Thanks for that. I really want just to ask a couple of follow-up questions of the new Utica facility, which it looks like it's about 10 miles from Ottawa same rail line. Is it going to focus just on as a frac sand facility to produce 2040 and 3050? Or is it going to be an integrated facility to also do industrial volumes like you do at Ottawa?

That's a great question Matt, and the driver for the investment is oil and gas. And one of the cool things about that part of the country is that if you set your plant up right you have access to the UP, to the BNSF, to the CSX, Norfolk Southern you can hit all of the class one railroads essentially, all of the major ones. So we just love this location, it gives us tremendous flexibility and we think low-cost positioning almost anywhere we want to send the product. And given where it's located in Illinois, as you astutely observed, there's also the potential to serve our industrial customers and we're seeing a lot of demand there as well. And so our industrial guys are sort of salivating trying to get their hands on some of the capacity.

So it gives us a lot of options and advantages. And in some ways it lets you do things that you can't really do out of a Wisconsin plant. The Wisconsin sands typically has high iron and that's not suitable for most industrial applications. And if you look just geographically where the Wisconsin plants are typically versus where industrial customers are, it's just too far to deal with the logistics. So we're really excited about the Utica plant. It's a fabulous location, and we cannot wait to get it up in first quarter of 2014.

So for that 1.5 million tons, how would that break down between how much of that would be going into the oil and gas side versus how much into the industrial side?

So I would assume if I was going to model, I would assume it is an oil and gas site and to the extent that we find attractive opportunities or things to do with the product that are accretive to our profitability on top of what we can do with oil and gas, that's probably the way to think about it. It's not a primary driver. Industrial is not a primary driver of the site. So I tend to think of it as an oil and gas site, but with some of the creative things our guys are doing in the industrial sector, who knows. If we can come up with higher margins per ton out of that, we will look at that as well.

So I guess, is the 1.5 million, is that oil and gas with putting some of the smaller grains back into the mine? Or would you actually be able to raise the nameplate capacity if you have the demand for the grains that are not used for oil and gas?

So, that will be the drying capacity of the plant. So that's really the total throughput and typically you can think somewhere 10% to 20% of the volume being the smaller grains, ultra-small grains. But as we have been looking at technology, there's things you can do to leave those grains behind and select specifically what you want.

Great very helpful, thank you very much.

Brandon Dobell, William Blair.

A couple quick ones, the increase in the CapEx guidance I'm assuming that is really just for the ramp-up on Utica or is there anything else that you are contemplating in the back half of the year?

Yes that's exactly right.

Okay perfect. And any sense of, not that it is going to be that big, but any sense of volume in the quarter or volume expectations in the second half from Rochelle?

Not specifically. Our team is working with a lot of different customers at this point and we are making pretty solid progress there. I would say one interesting thing on the resin coated side is that we plan to introduce a curable resin coated sand. The products that we have to date in our portfolio are pre-cured products. We're seeing a lot of curable products being pumped out there Brandon, so I think our prospects are brightening particularly with that product in the portfolio to get some resin coated sales in the second half of the year.

Okay. And then I guess just back to the price versus volume equation. There must be some decent assumptions that you're making about your ability to either capture some of that upside on price, or really I guess reduce the transportation issues to kind of get from a first-half EBITDA number, $75-ish million to a second half number that is $25-ish million bigger than that. Maybe if there's a way that you can bridges from first half to second half on how we get there to your EBITDA guidance? Unless I'm missing something about how the contribution dollars a going to flow to EBITDA.

Yes I think it's a good question. The first-half EBITDA came in almost exactly at $80 million. So if you take the middle of the range that means we have to get $90 million in the second half of the year. A lot of things going on a we have more volume that we are going after, we are increasing market share, and we are looking at doing a better job, if you will, of distributing the products out of Sparta. Try to reduce costs so that we don't see the same type of impact in Q2. So all of those things pulled together I think will give us a lot of confidence going forward.

Okay. And then I guess just from a visibility point of view, obviously you said you have a pretty good backlog here going into August. Given how high the contracted part of the business is right now in oil and gas, how much visibility do you guys have out into the third quarter or early parts of the fourth? How much lift do you get from your customers? And how is that going to color how you negotiate with these guys as they start to bump up against their maximums?

So, I think what we have typically seen Brandon is that we can see 30 to 45 days out with a fair amount of clarity. As we get into the 60 to 90 day window, it is kind of 50-50 and then beyond that, it is more sort of directionally -- directional type comments from customers. We do supply chain planning but the reality is that a number of our customers are working their crews or more of the crews on the spot market. And so it is hard for them to know where they're going to be working their crews in say 90 or 120 days. So the whole strategy of putting product out in trans load being ready to capture the opportunistic business and helping our customers grow that way I think is being well appreciated by our customers and is one of the reasons that we are continuing to grow volumes pretty quickly.

A final quick one for me. The goal of 30 trans loads that is still an achievable one and where were you number wise at the end of Q2 or as you started Q3?

We were 26 at the end of Q2, and we have a number of agreements in progress right now I think we will blow through that 30 goal and we'll end up somewhere significantly north of that. I did mention in my prepared remarks that we will be talking probably in the coming weeks about some other logistics and other partnerships that we're working on right now. So I feel really good about where our trans load network will be by year-end.

Okay thanks a lot, appreciate it.

There are no further questions at this time. I will turn it back to management for closing remarks. Thank you.

Thank you very much. So in closing, let me just say that we're very pleased with our performance in the quarter. We sold record volumes in oil and gas and once again produced adjusted EBITDA at the upper end of our guidance range. We saw improved profitability in our ISP business, and we also have made significant strides as we continue to transform that business by making investments that will help enhance our product offerings and expand our portfolio. As I mentioned also earlier in response to some of the questions, we took a number of important steps this quarter towards our goal of doubling EBITDA by 2016. Probably one of the most important there is the announcement of our Utica facility, as well as bringing on the second phase of Sparta.

I was really pleased that we were able to enhance our financial flexibility, lowering our cost of capital and adding some dry powder if you will, to be able to strengthen our balance sheet. I think this will allow us to capitalize on any number of opportunities to grow the business, and enhance shareholder value. And we continue to follow through on our commitment to return excess cash to shareholders. We paid the first regularly scheduled quarterly dividend of $0.125 a share, and we announced a new dividend just on this call. So look bottom line is, we remain very excited about our prospects for 2013.

I want to congratulate our employees for their outstanding efforts in the first half of the year, and we certainly appreciate everyone calling in today. We appreciate the investment community's interest and certainly appreciate all of our investors who joined us today. So thank you for dialing in and we look forward to talking with you all on our next earnings call. Everybody have a great day.

This concludes today's conference. All parties may disconnect. Thank you.