US Silica Holdings Inc (SLCA) 2013 Q3 法說會逐字稿

Good morning and welcome to US Silica's third quarter 2013 earnings conference call. Just a reminder call 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.

Thanks, Brian. Good morning everyone, and thank you for joining us for US Silica's third 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 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 questions to one plus a follow-up to ensure that all that wish to ask a question may do so. If you have additional questions, we would invite you to get back into the queue we 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'll begin today's call by sharing highlights from our third-quarter performance followed with an update on our two business segments. I will then report on the progress we are making towards doubling our EBITDA by 2016 and finally give you a brief outlook for the business for the remainder of the year. Don Merril will then provide some color around our third-quarter financial performance, before we open up the call for questions and answers.

The third quarter of 2013 was again a record quarter for our Company for volumes, revenue and adjusted EBITDA. Specifically, on a year over year basis, quarterly volume increased over 12% to 2.1 million tons while revenue climbed 25% to $144.4 million. Adjusted EBITDA of $45 million increased 20% year over year and was up 10%, sequentially. Excluding one-time expenses related to the refinancing of our long-term debt, earnings per share for the quarter were $0.42 per basic and diluted share, compared with $0.36 per basic and diluted share for the third quarter of 2012.

Drilling down into our business segments, oil and gas had another outstanding quarter. Volumes were 6.5% higher, sequentially, with a 600 basis point increase in contribution margin dollars per ton. The contribution margin increase was driven by strong demand for [frac sand] across all grades as well as excellent execution by our operations and logistics teams. Contract customers have purchased 134% of their allotted volumes year-to-date and 75% of tons sold in oil and gas in the quarter went to these customers. I'm also pleased to report that we had our first resin coated sand sales in the third quarter.

Our commercial team continues to enjoy considerable success and our strategy to take share from less capable competitors with increased in basin sales, is working as plan. Transload sales increased 135% year over year as we opened a total of 7 new locations during the quarter in the Eagle Ford, the Rockies, in the Mid-Con and in the Northeast. I'll talk more about the progress we're making on the supply chain and logistics front a little later in the call. During the quarter, we saw relatively flat market pricing however, due to continued strong demand, we were able to leverage the strength of our business model and generate favorable customer and destination pricing. We continue to believe that our market growth strategy combined with a flexible approach to meeting customer needs will most effectively position the Company as one of the largest, most profitable long-term providers of profits.

Moving to the ISP side of the business, revenue declined slightly on both a sequential and year over year basis, driven by lower volumes, primarily in our lower margin glass business. However, contribution margin per ton increased 3% year over year due mostly to higher margin product line extensions and strong building products and chemical markets offset by lower volumes. During the quarter, we were also successful in negotiating multi-year contract extensions with some strategic ISP customers locking in significant profitability and positioning us well for future gains. Overall, Q3 was a very strong quarter for our Company and I'm extremely pleased with our results.

Let me move now to the future. As previously stated, we expect to double our EBITDA to approximately $250 million to $300 million by 2016. On our second quarter call I talked about emerging trend of oil and gas customers consolidating profit spend with fewer suppliers. Based on recent conversations with multiple customers, I believe that they may begin reducing the number profit suppliers in the coming years to minimize administrative costs and assure product quality and reliability. This trend clearly flavors the larger more capable sand suppliers like US Silica, with the volume and logistical scale to fulfill complex and rapidly changing customer needs across multiple basins, simultaneously.

Let me update you on the progress that we're making to expand our scale and scope to continue to increase our market share. During the quarter, we completed a multi-year agreement with Wildcat Minerals which provided us access to 17 additional transloads site located near several major shale basins. This arrangement is helping us expand in underpenetrated markets such as the DJ Basin, increase our footprint in existing markets, including the Bakken and the Permian, and better serve our customers by ensuring they have ample supplies of our sand, in basin, closer to the wellhead. We shipped a record level of tons out of our new San Antonio transload facility in September and year-to-date we've shipped more than 20 units trains from both Ottawa and Sparta to San Antonio. We continue to transition more sales downstream with 56% of our oil and gas sales in the third quarter being made out of a transload location. We also continue to increase the size of our rail fleet and expect to have approximately 3,600 cars under lease by the end of this year and 4,300 cars by the end of 2014. Finally, we're drawing upon internal and external resources to review are existing transportation expenditures and to identify opportunities to reduce costs and continue to improve efficiencies.

I'd also like to provide you with update on the progress of our new Greenfield mine and processing plant located near Utica, Illinois. As we stated on our second quarter call, this facility will have an annual capacity of about 1.5 million tons of raw frac sand. The capital budget for the project is approximately $40 million. This is a low-cost mine and plant and provides the logistical flexibility to transport products on three different class one railroads or by barge. Construction is about 35% complete and we anticipate bringing this new facility online in the spring of 2014.

As mentioned on last quarter's earnings call, we're also in the process of examining the potential for another day Greenfield site located in Eau Claire County, Wisconsin near the town of Fairchild. The proposed project is 650-acre site with on-site access to class one rail. We're currently in the initial stages of applying for a local mining permit. Depending on market conditions, this new facility could come online as early as late 2015 and could eventually add up to 3 million tons of incremental frac sand capacity to our network. I should also point out that the potential addition of this capacity is not factored into our assumptions around doubling EBITDA by 2016.

On the ISP side of the ledger, we're making steady progress on our plan to develop enhanced higher value, higher-margin products. These efforts are already paying dividends as you can see from our contribution margin increases this year in the ISP business and they further underscore the complementary nature of our two business segments. For example, we're leveraging our capability to resin coat sand and our Rochelle, Illinois facility for the oil and gas industry to into resin coated foundry market for ISP customers. This new higher-margin products will allow us to gain additional business at current foundry customers and also to grow at new accounts. I am very happy to report that we made our first sale of resin coated foundry in the past week.

Second, we are investing, this year in new state-of-the-art equipment to significantly increase production capacity of our finest ground, most differentiated industrial product. We recently successfully negotiated a new, long-term customer contract for purchase of the incremental volume. Further, this improved technology provides potential opportunities to produce new ultra fine products that could allow us to move into adjacent markets. As and added bonus, this project also allows us to increase production for our highest value oil and gas sand product, that's used in well cementing. Once again, this demonstrates the synergistic benefits of having both oil and gas and industrial customers.

Looking ahead to the fourth quarter, we're very encouraged by the secular demand trends we continue to see in the oil and gas industry. Specifically, increased pad drilling driving more wells per rig and overall greater profit use per well. These themes have been echoed by a number of service and energy companies over the last couple of quarters and we believe demand for frac sand should continue to stay strong as more and more companies adopt these best practices. In the short-term, while there is potential to experience some normal seasonal slowdown in Q4 completions activity related to E&P budgets weather and holiday schedules, we' have not seen any indication of this yet.

Demand is really strong. In fact, as we stand today, our 30 day oil and gas open order book is at an all-time high. For our ISP business, we expect to see the typical seasonal declines in volumes as customers take holiday shutdowns and prepare equipment for 2014 production campaigns. Longer-term, we remain very excited about the opportunities ahead of us and we believe we've strategically positioned the Company well for growth in both operating segments and are on track to double the size of the Company by the end of 2016 as planned.

With that, I would now like to turn the call over to Don to discuss our financial results in more detail. Don?

Thanks, Brian and good morning everyone.

From a volume standpoint, tons sold in the quarter of 2013 totaled 2.1 million, compared with 1.9 million tons sold in the third quarter of last year and up 3% versus the tons sold in the second quarter of 2013. Revenue in the third quarter was up 25% year over year, and increased 11% consequentially, over the second quarter of 2013. The increase in revenue was driven largely by higher volumes in our oil and gas segment and increased sales in basin via our vast transload network. On a year over year basis, revenue for the oil and gas segment grew by 46% to $94.2 million, while revenue of $50.2 million for the ISP segment represented a 2% decline year over year.

Volumes for the oil and gas segment were 1.052 million tons, an increase of 37% over the same period last year. Contribution margin from oil and gas was $40.1 million, compared with contribution margin of $34.2 million for the third quarter of 2012, a 17% improvement. Volumes for the ISP segment of 1.1 million tons were basically flat on a year over year basis. Contribution margin for the ISP segment of $14.5 million represented a 3% improvement over the same quarter-in the prior year.

SG&A expense was $12.8 million or 8.9% of revenue for the third quarter of 2013, compared with $10.1 million or 8.8% of revenue for the third quarter of 2012, and up $2.7 million sequentially from the second quarter of 2013. The increase in SG&A from the previous quarter is partly due to an additional $1.1 million of expenses related to refinancing our term loan and replacing our revolver. Additionally the increase reflects the continued investments in people and initiatives to support the growth of the organization. Depreciation, depletion and amortization expense in the third quarter was $9.2 million compared with approximately $6 million in the same quarter last year. The increase in the DD&A expense is being driven by our investments in capacity expansion initiatives, combined with increased depletion due to the additional volumes mined.

Looking at the other income and expense, interest expense for the quarter was $4.1 million, compared with $3.3 million in the third quarter of 2012. The increase in interest expense reflects the cost of additional debt after refinancing our senior credit facility. We also incurred approximately $0.5 million related to early extinguishment of our previous long-term debt. The effective tax rate for the quarter was approximately 21.2%, compared with 25.4% for the second quarter of 2013. The lower effective tax rate in the quarter is a result of additional R&D tax credits, claimed on the Company's 2012 federal tax return. We expect the effective tax rate for the fourth quarter of 2013 will be closer to 25%.

As a result of the refinancing, cash and cash equivalent in short-term investments totaled $153.7 million as of September 30, 2013, compared with $61 million in cash and cash equivalents at December 31, 2012. As of September 30, 2013, our working capital was $245.4 million and we had $40.7 million available under our revolving credit line. As of September 30, 2013, our long-term debt was $368.8 million compared with $253 million as of December 31, 2012. We incurred capital expenditures of $15.6 million in the third quarter of 2013. The bulk of our third-quarter spend was related to finalizing the second phase of our raw sand plant in Sparta, Wisconsin, the completion of our transload facility in San Antonio, spending on our new Greenfield site near Utica, Illinois and various maintenance capital requirements.

As we think about our capital deployment strategy, our first priority is to reinvest in the business to grow our capacity and logistics capabilities in the oil and gas segment and to continue to enhance the ability of our ISP segment to bring new value-added products to market. Our second priority is to look for opportunities on the M&A front which would compliment our existing businesses or add scale either from a mining or logistics standpoint. Finally, we look for ways to enhance shareholder value either through returning cash to shareholders through a quarterly dividend or buying back stock. In fact, our Board, this week approved an extension of our $25 million buyback program through December 11, 2014. This program had been scheduled to expire on December 11 of this year. Finally, we're anticipating full-year adjusted EBITDA at roughly the midpoint of our guidance issued earlier this year of between $165 million to $175 million.

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

Thanks, Don. Well, that concludes our prepared remarks for today. Operator, would you please open up the lines for questions and answers?

(Operator Instructions)

Your first question comes from Jack Kasprzak. Jack, your line is open.

Sorry, guys. Good morning.

Hello. Good morning, Jack.

Morning, Jack.

I apologize. The resin coated sales Bryan, I mean is that something we expect to continue? Is that -- I know that's a higher margin, a higher-priced average product. Has the pricing there stabilized? Can you just talk a little bit about the dynamic there? Do you expect that to ramp-up a little bit over the next four to five quarters?

Sure, Jack. So if we look at resin coated sand market in the industry, there's still a heck of a lot of it being pumped. It's still about 10% of the profit mix going downhole. We've seen, a bit of a rebound at least on a small way anyway in terms of a demand there. So I'm more optimistic on resin coated demand and sales then I was a couple of quarters ago.

We did make the first sales last quarter. Small but it's progress. And we have interest from a lot of customers. We've also developed a curable line of resin coated products which expands our product line. So I would classify myself as cautiously optimistic there. I think there's definitely an up arrow for the sales trend for resin coated products. And I'd expect that we'll continue to slowly increase that over the next few quarters here.

Okay. That is great. Second question is, I guess there's a little bit of a trade-off going on between your reported margin percentage, maybe trending down just a touch, but your margin dollars of have been trending up nicely.

How should we think about when that's going to stabilize? Is this a function of when you get to your goal of transload sales? Or is there anything else to think about there?

So I think, Jack I mean the last part of your comment there hit it on the head, right? So as we continue to increase our transload sales, the margin percentages will go down. And I think we've been pretty consistent in talking about that because those sales have a lot of additional costs associated with them, which are essentially pass-throughs, more or less to the customers, right? So if you look at where we were in the quarter, we were about 56% of our sales through transloads. We've actually seen an increase of that as we've gotten into October, right? So I think the good news is, it shows that the power of our model and customers increasingly want to buy the products from us at transload. So I think that is great.

The issue, though is if you're trying to model it, is that the contribution margin percentage will probably continue to decline just in the face of that fact that there's more sales out at transloads. But as you said, at the same time, the dollars will go up. Don, do you have a comment on that?

That's well said. It's our strategy to capture share. We're going to continue to do that as we sell more through basin.

Great. Thanks, guys. Appreciate it.

Thanks, Jack.

Your next question comes from the line of Brandon Dobell.

Thanks, morning, guys.

Morning, Brandon.

Morning, Brandon.

A couple of things. Any disruption this quarter from all the weather in Colorado, deliveries there, or stuff that should've gone in Q3 that maybe go in to Q4?

No. I tell you. We did not see any of that. Actually, we got some new customers out in the Colorado area. It was a very active set of basis for us in the quarter.

It sounds like you aren't seeing the normal seasonal slowdown, at least to this point in the quarter. Is the order book just from existing customers still staying above their contracted minimums? Are you seeing new guy step in to your point about accruing market share, Bryan? I'm just trying to get a feel for what the component of the order book looks like right now and your level of confidence around not seeing the usual seasonal slowdown?

Yes, so it's a really good question. I've spent a lot of time out talking to customers myself, just been talking in the last couple of weeks a lot with our sales guys. And the demand is off the charts right now, right? We've been keeping this metric for the last couple of years and this is the strongest demand that we've seen. So that's great news on a number of fronts.

It's certainly some of our existing customers but we've also got some new customers. The projects that I mentioned out in Colorado just a minute ago, that's a new customer that we don't do a lot of business with today or haven't historically, and we see them as a significant potential add to our portfolio. So I'm pretty encouraged on the mix going forward.

If you look at what we see in December, we're just not hearing any evidence yet of the slowdown. I've been pressing our sales team on that pretty hard because we know that can happen. But, last year, we didn't really see it either. So I'm feeling pretty good about the volumes in the quarter based on -- in fourth quarter based on what I see right now.

Okay. And as this ongoing shift in the contract structures work through the industry, maybe an update on what you're seeing people ask for? Is a grade specific pricing? Is it different ways or different time frames on delivering sand? I'm just trying to figure out how to think about your visibility on the contracted customers as we head into 2014 versus the last several quarters.

Yes, no, it's a really good question and it's a place that I've been spending a bit of my time, recently. So I've had a lot of conversations with senior folks out at our customers. And if I boil down what they want, I hear two things pretty consistently. The first is, that they want to pay a fair price. Not necessarily the lowest price, but a fair price. And then they want a supplier who's willing to help them be successful in the market, right? And so I think we check both of those boxes. On the fair pricing point, to me it's about value versus price, right? So we've invested a lot to bring additional value to our customer. Things like all our local storage infrastructure, collaboration we do on supply chain, quality, reliability, all that. So I think we get a lot of points with customers in terms of that.

And then from a flexibility standpoint and this really gets into the heart of your question, the things that our customers are asking for are flexibility around grade mix. The volume take rates. Destination flexibility and responsiveness, right? So I expect that future contracts that we negotiate will have more of those elements in them, perhaps, then we've had in the past. And we're actually working on a couple of contract extensions right now and we're working on a couple of new contracts.

So we have a lot of fresh perspectives, if you will, on what the industry is looking for. But certainly, as we look at providing flexibility to the customers in some of those situations, we'd also look to trade off some additional value for ourselves as well. So just pretty robust dialogue and I'm fairly optimistic that we'll continue to have a significant portion of our volumes contracted into the future.

Okay. Thanks. I'll jump back into the queue.

Okay. Thanks, Brandon.

You next question comes from the line of Trey Grooms.

Hello, good morning.

Morning, Trey.

First one is just on ASP. Bryan you mentioned favorable customer and destination pricing. Should that mix continue into 4Q or should we expect ASP to change any given -- any type of mix differences that we could see this quarter?

Yes, so the way I look at it, if [it all] played out in the third quarter, it was a great illustration, if you will, of the business strategy that we've put in place in oil and gas. So what we've said is that we want to continue to take share. We've said we wanted to take 1 to 2 points of share per year while maximizing or optimizing our margins, right? So if you look at what happened in Q3 in oil and gas, we increased sales volumes 6.5%, sequentially, while simultaneously increasing our contribution margin dollars per ton by 6%, right? So tremendous work by our commercial team. And that's exactly what we're trying to do in terms of our strategy, right?

So I think with the strong demand that we're seeing, it gives us a lot of flexibility around basin and customer mix. And allows us to prioritize some of the most attractive opportunities that we have out there. So I'm pretty excited about that. Certainly, I think, strength in-demand helps things like ASP's and margins.

Okay. That's helpful. Thank you. And Bryan, you mentioned last quarter, bringing Utica -- the Utica mine on earlier. And you said that, that could allow you guys to achieve this 2016 guidance maybe 12 months early, if we understood you right? And then, today, you said that you expect to have that mine or that plant up and going by spring of next year. So you continue to talk about doubling EBITDA by 2016, but just from a timing standpoint and for modeling purposes for us, given that this plant is coming on basically a year early, how do we think about that just from a modeling standpoint as we look at this guidance?

So I think the way to look at it, Trey, is that there's a couple of pieces here to what we have to do to get to the number that we talked about, this roughly doubling $250 million to $300 million of EBITDA. Obviously, just continued strong sales from our existing network. It's the addition of the Utica site and getting that up and fully sold-out. It's continuing to ramp up the sales at Sparta. And then it's also seeing strength back in the resin coated business and as well as hitting some growth targets on the industrial side. So all of those things are part and parcel of what it takes to get to that EBITDA range.

The good news is, that originally, I thought the Utica mine would be delayed and maybe coming online later. So I think the indications are certainly positive towards getting there sooner rather than later. At this point, I just don't want to get out in front of our headlights but I feel pretty good about that. And obviously, we also mentioned on the call today that we have the next site in development. And this one is a mega-site up in Wisconsin, which could bring another up to 3 million tons of capacity online, right? So and we talk about that having the potential to come online in late 2015 depending on market conditions. So that's how we think about the sequencing and what has to happen to get that additional EBITDA.

And on that new plant site you're talking about, that you went into more detail today, I think you said 3 million tons. Would that be in several phases, more than one phase, or is that something that you guys could do fairly quickly?

So, I think it would be in a couple of phases. We don't have that specifically all laid out yet. We have options to consider. The reality is, you just can't physically start something up that big, that quickly. So there is a ramp there, Trey. So I would think about two or three phases that we bring that capacity up -- in and certainly a lot depends on the demand in the marketplace as well.

Okay. Thanks a lot for answering my questions. I'll jump back in the queue.

Great, Trey. Thank you.

Your next questions comes from the line of Blake Hancock.

Good morning, guys.

Morning, Blake.

Just first looking here at Sparta, it looks like you guys were able to take some of the logistical costs out this quarter that you saw in 2Q. Are there still some opportunities for costs to come out there, here in 4Q? And how should we be thinking about that? And also, were there any volumes this quarter from Sparta II?

So I'm going to answer your second question first. I mean certainly, we've been ramping Sparta for several months now. So we had substantial volume from Sparta that we sold in the quarter. And as you've observed in your first question, our teams have been working diligently to optimize the cost not just out of Sparta but out of all of our plants. And I think that there is probably more optimization there that we can do in Sparta. And the folks are working real hard on that.

Okay. Great. And then as we look at this Wildcat deal, it is a large number of transload adds. How should we be thinking about what that contributes here on a margin front? We saw the nice gain year here in 3Q. Should we expect that to be given back in Q4 with just more volume being sold through these transloads or is it not that dramatic?

Yes, I don't think its that's dramatic. I actually look at it the other way. And I'll give you a specific example, this new large piece of business that we've gotten in the Colorado area, the reason we got that business was because of the Wildcat deal. We had the right footprint to serve the customers, right?

So I think the optionality or flexibility that we get from all of these different transloads gives us the ability to pick and choose where we sell products. Obviously, we still support our contract customers and sell many instances where they want it. But where we have choices, obviously we'll pick the locations that have the best margin dynamics, right? So I think it actually works in our favor having multiple transloads.

Okay. Great. So we shouldn't expect all 17 transloads to be used here right off the bat?

No. So it's more having the option, right? So when we sign a deal like that we have the rights to use facilities at those locations, but not necessarily the obligation to. Okay. Great. I appreciate it guys. I'll turn it back.

Okay, great. Thanks.

The next question comes from Mark Bianchi.

Hello this is Mark Bianchi. I have a question just to start on the supply/demand that you guys our seeing. It seems like demand is really, really strong in particular because of increased -- perhaps, sand per stage. But could you talk a little bit about what you are seeing on the supply side maybe in basin and also in the production region? And how you expect that to trend over the next couple quarters?

Sure. Sure. I think it's exactly as you said, Mark. Certainly on the demand side it's extremely strong. And I think most folks on the call are probably familiar with the trends in drilling efficiencies, and profit density and there's lots of headlines and news on that. So I think that's getting to be pretty well accepted and socialized.

On the supply side, we approach it a little bit differently from other folks. We've spent quite amount of effort and resources building what I think is the industry-leading supply model. So we know where each and every new facility is going to be located in the country. I mean down to the point where we know the serial numbers on the equipment that are going in there, literally, right? So we have a great feel for it and our model over the last couple of years has proven to be extremely accurate in predicting what is coming online.

And so what I see in 2014 is a supply demand dynamic that looks relatively similar to 2013. So I would say what we're seeing right now is a market that at a macro level balanced to maybe a little short on certain grades given certain day or month. But the really interesting part of your question is as you drop down to the local level, if you will, that's really where things get interesting. So what we're seeing is that there's a very small number of sand companies that can do what we do, which is play nationally and play locally, right? So, that's our supply chain mantra, national and local, we do both at the same time.

So I feel really good about the dynamics there. It's getting tougher and tougher to get some of these in basin locations and compete with folks like us. So I feel like there's probably going to be a favorable supply/demand dynamic, in the basins. We see that play out all the time. And the more choices we have as to where we send our product, certainly, we want to send it to places where we have a favorable dynamic and we lots of options to do that. Many of the smaller guys in our industry only have a few in-use destinations where they can send their products. So they don't have that flexibility.

So, the follow-on to that is with such a favorable balance there, why haven't we seen prices -- and I'm talking about spot prices, not your realized prices, move up with that balance that we have?

Yes. So look, I think it's a really, really good question. The reality is that we look at it in terms of FOB plant prices as well as local spot prices. And what we've seen across all of that is relatively flattish price environment. And I think a part of it is just driven by that balance in the market. You have to look and pick your spots.

We've seen some basins where the pricing is up. And obviously those are the places that we are trying to push to. But in our case, as well, we're also looking to grow share, right? So we're try to balance all of this. How do we grow share, optimize margins? And at the end of the day, we're solving for EBITDA, if you will, not for any of the other variables that contributes to that.

Got it. Thanks so much guys.

Thank you.

You next question comes from the line of [Steve Peschinova]

Good morning guys how're you doing?

Morning.

Good morning.

I was trying to get, trying to see we saw a big jump in ASP and gross profit per ton. Was it a function of lower 100-mesh sales or was it a function of you guys selling more in basins?

So it was much more in basin. We had slightly less 100-mesh sales in Q3 than we did in the previous two quarters but very small decline in 100-mesh sales. As we look forward, we see 100-mesh sales as pretty strong. And the good news is that's all incremental dollars drop that to the bottom-line. But certainly as we peel into the numbers and try to explain those externally, it complicates things a bit because the 100-mesh product typically sells for, I don't know, maybe 50% of the sales price of our other grades. But it's all incremental profit that drops to the bottom-line.

Okay. And, an unrelated question. So last quarter you had mentioned that many of the clients who have minimum take or pay contacts with you would be close to exhausting their minimal requirements by third quarter. And you may be able to charge higher pricing in the fourth quarter. Any update to that? Any color around that would be helpful.

So we certainly have seen that. As I mentioned in the prepared remarks, we're currently at I think about 134% year-to-date of those average customers as far as their take. And so many of them have reached or are close to reaching their annual limits in terms of the contract. In some cases the contracts have built-in mechanisms that deal with that in terms of pricing and pricing that goes up. In other cases we work with the customers on a one-off basis to deal with that. And so I think there's definitely the potential there for a tailwind in terms of pricing.

Okay. That is all for me. I appreciate your time. Thank you.

Thank you.

(Operator Instructions).

Your next question comes from the line of Matt Conlan.

Hello guys, I'd like to follow-up on those -- the fourth quarter contract negotiations that you're having now. Have you been able to formalize these higher volumes that the customers have wanted into contract extensions at higher guaranteed volumes?

So we've done some work with customers. A couple of them, in point of fact, where we have modified there contracts over time to allow them to take more volumes. One customer in particular that I can think of, we actually have now, in the contract either 45% or 50% of their total share. So those are the things that we are things that we're working on, Matt. And I think our commercial guys are doing a really good job with that.

Okay. So I mean at this point would you say that your contract commitments are keeping up with your increased production capacity? Or are we going to see some degradation -- I hate to say degradation, but lower amounts of contract coverage versus your volumes next year.

It's a really interesting question. To be frank, we have a lot of internal debates around what is the right number in terms of percent of capacity that's covered by these long-term contracts. We've been typically north of 70% for the last 1 year or 1.5 years. And we constantly look at the environment and see spot pricing substantially higher than contract pricing. And so I think that's a debate that we're having internally as to -- do we want as much contract coverage as we have today? Certainly it provides us security, but we haven't finished that debate internally. So I'm not sure what the answer is.

I would say that we certainly want to balance off the security of demand with the potential upside of selling more in the spot market. And I think the other point I'd make is that having the contracts is good because it allows us to do advanced planning, supply chain planning and that type of thing. So a bit of debate internally as to what the right number is and we'll see how that shakes out in the coming months here.

Okay. Thanks. That's very helpful. Unrelatedly, just wanted to make sure your 2013 EBITDA guidance is for your adjusted EBITDA number?

That's right.

Okay in the third quarter, you had $3 million of other adjustments that you added back.

Yes.

We know that $1.1 million is for the refinancing. What's the nature of the other $1.9 million?

There are other things that we have according to our financing agreement that we put below line. So there's things like one-time related litigation expenses, some expenses related to hiring of employees. And we also had another -- the actual expenses associated with our refinancing was $1.6 million. $1.1 million went to SG &A and another $500,000 flowed through other income expense.

Right. Okay, but that was broken out separately in the adjustment table. Okay. Great. That's very helpful. Thank you.

Okay.

Your next question comes from the line of John Daniel.

Hello guys.

Morning, John.

Bryan, I just wanted to get some clarification. On the 30-day order book being at an all-time high, is it therefore safe for us to assume that Q4 volumes and revs should both be up on sequential basis?

Well, look. I mean we're not giving specific guidance on that today, John. But I mean certainly, we have 1 month in the book here so we've got a good feel for Q4. And when I look at the orders that we have, I'm pretty encouraged about what is on the books right now.

Okay. All right. Next one, is you noted in the prepared marks an interest in possible in M&A. Can you just walk us through the opportunities that are out there? Is it more on distribution network type opportunities or mine type opportunities?

So we're seeing opportunities in oil and gas all along the supply chain. So when I think of M&A for oil and gas I tend to think mining, processing, transportation and logistics, and storage. And so we have looked and are looking at things all across the chain. I would say that if you start back at the beginning of the chain and just look at just the mining and the processing, the industry could potentially be right for us for some consolidation. And I think given that we're one of the largest players in the industry with a really strong balance sheet, we're one of the natural folks who could be involved in that. So you can imagine there's things there.

And then as we get to the other end of the spectrum and look at transportation and logistics, we have the opportunity to acquire things there. The question is, would you rather own that or would you rather in quotes -- rent it or lease it, right? Or have long-term agreement? So we look at those things back-and-forth, but we're pretty active in M&A. We're looking at things all up and down the chain.

Okay. If you were to proceed down the path of let's just call it mining consolidation, does that then change your view on that organic expansion that you laid out with the Greenfield projects and so forth?

I don't think so. I think it's all a plus-one. So I think we can take that capacity, potentially. And what it might do is it might accelerate the fill rates of our existing capacity because some of the capacity out there in the market is disadvantaged from a logistic standpoint.

So it might cause us to accelerate say our mega site in Wisconsin, for example. And it could be significant positive arbitrage between the cost structure of some of these new entrants in many cases who have really good contracts, but just bad infrastructure and ability to serve. So things like that I think could be extremely valuable to us.

All right. Just one final one for me. You noted your supply model has been pretty accurate. Any chance you can share with us how much supply you see being brought onto the market in 2014?

So we never give any specifics, right? But I would say that if I look out over the next 2 years, so 2014 and 2015. It feels like the first half of 2014 maybe into Q3 looks pretty much like 2013. We start to tighten up in terms of supply and demand late in 2014 and then into 2015. So said another way, it looks like from what we can see that there is less supply coming online over the next 2 years as compared to what came online over the last 2 years, right? We feel like as we get to the end of 2014 and into 2015, perhaps, things tighten up a bit.

Okay. Good. Thanks, guys.

Okay. Thank you.

Your next question comes from the line of [Bryant] Dobell.

Yes, just a quick follow-up guys. And it's a good segue from the last question. Any thoughts on what's going on a Wisconsin with all the new legislation? And does that enter into or change your thoughts on the potential fourth site up there? Or does it change your thoughts on, Bryan, your comments just a minute ago about capacity or supply coming online in the next couple of years if that legislative decision goes one way or the another?

Yes, so the short answer, Brandon, is it really doesn't change anything. We're very active up in Wisconsin. And we're actually the founding member of the Wisconsin Industrial Sand Association. So us and through that association we're pretty active with the legislators and a lot of the regulatory bodies there. And I actually like the legislation, at least as it is currently written. What's pending it feels like it'll bring some harmony to what today is a local patchwork of regulations and standards.

And so I think that's probably good for all of the high quality, responsible operators like US Silica who want to develop new properties up there. Our best information is that legislative action is probably sometimes next year, potentially. But I guess I would see it as probably a slight positive if the legislation gets passed as written. On the other hand, it doesn't, I mean we're still doing real well up there developing properties and we're pretty active one way or the other.

Okay. And then fInal follow-up for me. Historically, how predictive has your 30-day order book been, i.e, is there a big variance in forward conversion rates of that order book into actual orders? And would you expect any difference to that conversion here moving Q3 into Q4?

Yes, I would say that predictor is pretty accurate in my experience. The oil and gas industry things move, right their jobs get pushed and things happen. But at this point, it's just probably 80%, 90% certainty in terms of those orders actually materializing into sales.

Okay. Perfect. Thanks, guys.

Thank you.

Your final question comes from the line of Ben Swomley.

Hello, guys and congrats on the quarter.

Thanks, Ben. Good morning.

I might have missed this, you might have gone into it, but I was hoping you could just spend a moment discussing the schedule the pace at which contracts are scheduled to mature? How many contracts to you have -- I know you have eight total, I believe. How many roll off in the next 6 months? And can you just discuss where the pricing, the average pricing on these contracts is relative to your overall Company averaged realized pricing?

So if you look at our contracts, Ben, average roll off point is into 2015. And we're actively working to extend a couple of the contracts that I mentioned earlier. And also to find a few new deals as well. We have two moderate sized contracts that roll off in the next 6 months.

We never talk about pricing, specifically, on contracts, but I will say that the team has worked really hard to design our contract roll offs when taken in aggregate to make sure that we don't have any cliff in terms of margins or something like that. So, I think you can take it like that.

That's helpful. Thanks. On the ISP side, could you give us more color on some of the new product initiatives, how they're progressing? And are we still on track for an incremental -- I think it was $10 million to $15 million EBITDA by 2016 as part of the long-term target?

I think that we are. I'm very excited about ISP. We have several projects in the pipeline. And one that I mentioned specifically on this call is leveraging our Rochelle facility to actually make resin coated sand for the foundry industry. It's a pretty high-value product.

Not quite as high-priced or high-return as the oil and gas resin coated sand but it's still pretty good. So that's just one example of the things that we're doing. There's many, many products in the pipeline. And I remain very excited about that side of our business.

How high -- that $10 million to $15 million EBITDA target, if things went really, really well and you had a number of successful introductions, how high in your mind do you think that could get to by 2016?

Yes. I think, potentially, you could put a low single-digit multiplier on that if everything just went perfectly, right? So there's definitely upside optionality in there with some of the projects that we're working on. But with that said, we also want to be cautious because some of these involve market penetration, taking share from not in-kind competitors and things like that. And my experience is that those things never go as fast as you might think. So we factored some of that conservatism into our estimates of $10 million to $15 million.

And if I could just add, there's a lot of positive momentum going in ISP right now. For example, if you look at the contribution margin per ton on average in 2012 versus where we are year-to-date, it's up 11%. So there's a lot going on in that business right now and then add to that new products that we're working on coming in the near future. So it's a lot of momentum in that business.

Great. That is it for me. Thanks.

Okay, thanks, Ben.

And this concludes today's Q&A session of the conference. I would like to now turn it back to Mr. Lawson for closing remarks.

So this is Bryan. I just wanted to say a couple of things. I wanted to wrap up today by recognizing two very important groups. First our outstanding performance in the quarter would not have been possible without the hard work and dedication of US Silica employees everywhere. So thank you all for your many contributions to our success.

And for our shareholders, as always we appreciate your investment interest in US Silica and we look forward to speaking with in the future. Thanks for dialing in and have a good day everyone.

Thank you. Thanks again to all our participants for joining us today. We hope you've found this webcast presentation informative. This concludes our webcast and you may now disconnect. Have a good day.