US Silica Holdings Inc (SLCA) 2013 Q4 法說會逐字稿

Good morning and welcome to U.S. Silica's fourth-quarter and full-year 2013 earnings conference call.

Today's call is being recorded and your participation implies consent to this.

(Operator Instructions)

With that I will turn the call over to Mr. Michael Lawson, Director of Investor Relations and Corporate Communications. Please go ahead.

Thanks. Good morning, everyone, and thank you for joining us for U.S. Silica's fourth-quarter and full-year 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 who wish to ask a question may do so. If you have additional questions we would invite you to get back in the cue and would 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 brief highlights from our fourth-quarter performance and then discuss the progress that we're making in several key areas, including capacity additions, infrastructure build-out, and business process optimization, which includes improving efficiencies, reducing transportation costs, and increasing margins.

Finally, I will provide outlook commentary and share our views on some of the relevant market trends in 2014. Don Merril will then provide additional color on our fourth-quarter financial performance before we open up the call for questions and answers.

As previously announced, our fourth quarter of 2013 began as expected with strong sales, particularly on the oil and gas side of the business. By mid-December, however, we began to see significant order cancellations in oil and gas due to the severe weather that disrupted completion activity in many regions of the country late last year. In addition to this lost sales volume, we also incurred higher supply chain cost as a result of the demand disruptions.

While we experienced a rebound in January of oil and gas volumes, operations and supply chain costs continued to be negatively impacted by the extreme cold temperatures. We also experienced unfavorable product and customer mix in the fourth quarter, and finally we had a variety of other one-time headwinds including a customer bankruptcy that resulted in a meaningful charge for bad debt. Collectively, these issues adversely affected our profitability in the quarter.

Adjusted EBITDA for the fourth quarter declined approximately 8% year-over-year to $35.9 million and earnings per diluted share for the quarter were $1.41, a 24.5% decrease compared with the same period last year. The good news, however, is that despite some of the challenges we encountered late in the fourth quarter, we continued to grow the business. Specifically, on a year-over-year basis, quarterly volume increased by over 20% to 2.1 million tons, while revenue climbed almost 26% to $149.5 million.

Looking back at our annual performance by business segment, oil and gas volumes totalled 4.1 million tons, up nearly 40% for the year, as we continued to see strong demand for all frac sand grades. In our industrial segment, while total volume was slightly down year over year at 4.1 million tons, higher-margin product line extensions and strong building products and chemicals markets drove an increase in overall profitability.

During the year we also successfully negotiated multi-year contract extensions with several strategic ISP customers, locking in meaningful profitability and positioning us well for future gains. We introduced ten new ISP products during the year and have several more in the pipeline, making significant progress towards our stated goal of diversifying into additional specialty and performance products.

Demand for our products is clearly growing, especially on the oil and gas side of the business. As we talk to service company customers and energy companies, it's becoming obvious that they believe that using higher concentrations of sand with decreased crosser spacing is increasing completion quality and delivering higher EURs. In fact, it's been difficult recently to listen to energy company public comments and not hear about this topic.

It's a trend that more companies seem to be embracing, based on the significant successes of some of the early adopters. At the same time our industry is becoming more sophisticated and indeed, more competitive. We saw significant new frac sand capacity come online in 2013 as predicted, and create what was essentially a balanced supply/demand market for frac sand during much of the year.

We're watching the emerging trend of increased sand uses per well with great interest and stand ready to serve our customers as demand increases. To that end, our robust pipeline of new capacity continues to serve us well.

Our new state-of-the-art frac sand mine and plant near Utica, Illinois will deliver an additional 1.5 million tons of analyzed capacity. We expect sales from this greenfield site to begin late in the second quarter and ramp throughout the year.

I really like the versatility of this facility. With access to four class one railroads plus barge, we will have tremendous flexibility to place more product in economically favorable destinations. Utica also gives us our first large-scale frac sand production to ship on the Union Pacific railroad, providing an extremely cost-effective logistic solution to a number of major shale basins, including the Permian, where horizontal drilling activity continues to ramp and is expected to command a major share of completion activity in the coming years.

To help us grow share in the Permian, we also recently signed an agreement with the UP railroad to build a unit train-capable sand storage facility in Odessa, Texas. This $12 million, 20,000 ton world-class transload will be capable of accepting two unit trains at a time, and is expected to be operational by the end of 2014.

The combination of Utica and Odessa will help us get materials to the Permian more cost-effectively, but they're just one part of our plan to further optimize our network. As I previously noted, this phenomenon of selling sand in basin is relatively new.

Two years ago we were only selling approximately 5% of our oil and gas volumes through transloads. Today, over 60% of our oil and gas sales are occurring in basin. Our strategy from the very beginning was to move fast, respond as quickly as possible to our customers' needs, and focus on gaining share. In two short years we built one of the industry's biggest transload networks and today we're working diligently to improve the efficiencies of that network.

We took a major step forward in our efforts last December, when we promoted Mike Winkler to Vice President and Chief Operating Officer. While continuing his leadership of manufacturing, Mike now also has accountability for our supply chain and logistic operations. In his new role, Mike is drawing on his extensive Lean Six Sigma and process improvement expertise to ensure that we have optimum execution for mining through delivery to the customer.

Mike's team is implementing several key changes that are focused on reducing the overall costs of servicing customers through our extensive transload network. These changes include enhanced decision-making processes to more efficiently match shipping origins and destinations, additional in-depth analytics of customer order patterns, allowing us to more effectively preposition inventory, and establishing new leading performance indicators and more granular profitability metrics by in-use destination.

We're starting to realize benefits of our supply chain improvement efforts in the form of more cost-effective transportation solutions, reduce demurrage costs, and lower overall transportation costs per ton for similar shipments versus Q4 of 2013. In addition, we're focused on shipping more unit trains to further boost efficiency and lower per-ton transportation costs. We shipped a total of 44 unit trains in 2013, and expect to ship somewhere between 80 to 100 unit trains in 2014.

We believe that current trends within our industry dictate a simple truth. Companies that are able to build scale infrastructure with flexibility and reliability will be the long-term winners, and I believe that U.S. Silica is one of those companies. Our operating mantra for 2014 is speed, scale and strength.

As horizontal drilling penetrates new basins and completion technology continues to evolve, it has become crystal clear that speed matters a lot, scale matters a whole lot, and strength matters even more. U.S. Silica has drawn on its financial strength to expand production capacity and transportation infrastructure, allowing us to gain market share and establish our company as one of the industry's most significant suppliers of silica-based products. In the past 12 months, we've added meaningful scale to our business with the opening of two new production facilities, the first in more than four decades.

In 2013 we increased the speed with which we respond to customers by adding five new transloads in the first quarter, and later completing a multi-year agreement with Wildcat Minerals, adding 17 more terminals. And we're not finished building yet. Right behind Utica is a new Greenfield site in Eau Claire County, Wisconsin that we expect to have permitted later this spring, which could add an additional 3 million tons of high-quality Northern White frac sand capacity to our network, originated on a premiere rail line.

We're also looking to build scale and strength in our ISP business and we're selectively considering acquisitions that could add new products to our mix. We're also close to completing an expansion at our Pacific Missouri plant that will enable us to produce additional volumes of our most differentiated products for use in both ISP and oil and gas. I'm very excited about our prospects and believe that we're very well-positioned for a strong 2014.

That concludes my opening remarks today and with that, I'd like to turn the call over to Don to discuss our financial results in more details. Don?

Thanks, Bryan, and good morning, everyone.

From a volume standpoint, total tons sold in the fourth quarter of 2013 were 2.1 million, an increase of 20% when compared with 1.8 million tons sold in the fourth quarter of last year, and virtually flat with the amount of tons sold in the third quarter of 2013. Revenue for the total company in the fourth quarter of 2013 was up 26% year-over-year and increased 4% sequentially over the third quarter of 2013. The increase in revenue was driven largely by higher volumes and an increased number of tons sold in basin via transloads in our oil and gas segment.

Revenue for the oil and gas segment in Q4 of 2013 grew by 44% to $102 million, while revenue for the fourth quarter of 2013 of $47.5 million for the ISP segment was essentially flat when compared to the same period last year. Volumes for the oil and gas segment in Q4 of 2013 were 1.1 million tons, an increase of 42% over the same period last year. Contribution margin from oil and gas was $34.2 million, compared with a contribution margin of $37.5 million for the fourth quarter of 2012.

The decrease in contribution margin was due in part to severe winter weather late in the quarter, which reduced well completion activity, thus driving higher costs across our supply chain. Additionally, margins in the quarter were negatively impacted by customer and product mix issues.

Q4 2013 volumes for the ISP segment of 1 million tons increased 3% on a year-over-year basis. Contribution margins for the ISP segment of $13.8 million represented a 6% improvement over the fourth quarter of the prior year. The increase in ISP contribution margin was driven mostly by our ability to increase price.

SG&A expense for the quarter was $14.5 million, or 10% of revenue for the fourth quarter of 2013, compared with $11.5 million, or 10% of revenue for the fourth quarter of 2012, and up $1.7 million sequentially from the third quarter of 2013. One item of note was a $1.4 million bad debt expense taken in Q4 due to the bankruptcy of one customer in our oil and gas segment.

Depreciation depletion and amortization expense in the fourth quarter of 2013 was $10.1 million compared with approximately $7.2 million in the same quarter last year. The increase in DD&A expense is a result of our investments in capacity expansion initiatives, combined with increased depletion due to the additional volumes mined.

Looking at the other income and expense line, interest expense for the quarter was $4.1 million compared with $3.2 million in the fourth quarter of 2012. The increase in interest expense reflects the cost of additional debt after refinancing our senior credit facility.

The effective tax rate in the quarter was approximately 9% compared with 21% for the third quarter of 2013. Our fourth-quarter tax rate was lower than originally expected due to the revised and enhanced benefit of both our R&D tax credit and tax depletion deduction.

Cash in short-term investments totaled $153.2 million at December 31st, 2013, compared with $61 million at December 31st, 2012. As of December 31st, 2013 our long-term debt was $368 million compared with $253 million at December 31st, 2012, and we had $41 million available under our revolving credit agreement at the end of 2013. Both our increase in cash and debt were outcomes of our successful refinancing in 2013, which resulted in a much stronger balance sheet.

We incurred capital expenditures of $13.6 million in the fourth quarter of 2013. The bulk of our fourth quarter spend was related to the continued investment in our new Utica frac sand mine side as well as a process upgrade at our Pacific Missouri facility and various maintenance capital requirements.

On the M&A front, as Bryan said, we continue to carefully evaluate acquisition opportunities to expand our infrastructure and add additional mine production. We will also consider acquisitions to add capacity in new products in our industrial and specialty products business.

Finally, I'd like to reiterate our guidance for 2014. The company expects adjusted EBITDA in the range of $180 million to $200 million, capital expenditures between $75 million and $85 million, and a tax rate of approximately 25%.

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

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

(Operator Instructions)

Brandon Dobell, William Blair.

Let me start with a market question. You mentioned 2013 was pretty much in balance. How do you expect 2014 to play out between supply and demand, and particularly, if you could address, maybe, the rise of 100 mesh as part of that equation? How it impacts your thinking about the supply and demand balance in other grades, especially 2040 and 4070, maybe.

Sure, Brandon. It's one of the most important questions, I think; so I'm glad you asked that one first.

I would say that, right now, we see demand as being very strong. I was just remarking to somebody the other day that it feels a little bit like 2010, and the early parts of 2011, where there were really strong pulls out in the market. When we did our initial modeling for 2014, we had put in about 10% to 15% growth in demand overall. I would say there's a chance that it could be higher than that.

We've all seen the anecdotes out there from some of the energy companies talking about increased proppant use and the kind of results that they're getting from that. Certainly, we have seen completions with 25%, 30%, some of them even 50% more sand per well than were used last year. So, I think that's all a potential tailwind, for sure.

On the capacity side, I think there's certainly some new capacity that's coming online this year. It feels to us, though, as we look to our model and look to the details, that throughout the year we should probably be tightening up in terms of supply and demand. In 2013, we were roughly in a balanced market supply and demand, I would say, most of the year. I think that there's a chance, particularly if demand continues the way it is right now, that we could move towards the short side of balance as we get a bit further along into 2014.

Your other question was around the finer products. This is another interesting trend. We're certainly seeing more demand for 100 mesh, and, as you probably know, many energy companies now are using that as a lead-in proppant, which, under the short story there is that they've discovered that by putting the 100 mesh in the well first, it gets further out away from the well bore, and props open some of the smaller micro-fissures and cracks, and gives them better results. If you look at the numbers for us, we sold about 83% more 100 mesh in 2013 than we did in 2012.

One of the questions that folks ask us a lot is: How is that impacting your other grades? At the same time, we grew the other grades pretty significantly as well. We were up almost a third in the non-100-mesh grade. So, we see it as kind of a plus-one right now.

So, you see a lot of demand growth, some that's certainly coming from 100 mesh. It's good news because it's more demand, but the balance to that is that, typically, 100 mesh has lower margins, as you know, right? So, as you look at our contribution margin per ton, that sort of increasing amount of 100 mesh will push that down as well. So, there are sort of puts and takes all over this, but I would say there's probably more upside than downside to the supply and demand scenario, the way we see it.

Okay, and then one quick one. You mentioned that the transload progression there -- 60%-plus in the fourth quarter. Where do you guys expect to finish out 2014, or maybe the progression through 2014, of percentage of sales or percentage of tons through -- you sold in the basin as opposed to the mine?

So, we're well north of 60% in the first quarter of 2014 so far. I think there's -- it's kind of a natural cap somewhere, maybe, 75%, 80%. We know there's some customers that want to pick the product up at our plants, and so we're not sure exactly where that cap is, but I would say it's probably somewhere in the 70%s.

Okay, great, thanks.

Blake Hutchinson, Howard Weil.

Just calibrating the [model] for a starting point. Given the fact that you missed some volumes in the fourth quarter, and it seems like you're probably, given the demand for 100 mesh, pulling a little harder on what might be classified as the non-oil-and-gas system. If we're thinking, starting the year at more of an oil and gas nameplate of 1.2 million tons or something like that, is that in the right vicinity?

Are you talking per quarter?

Yes.

I think that's a little bit low. I think I would expect, on an annual basis, that we'd be around 5 million tons for oil and gas -- in that kind of range.

Keeping in mind that that's going to include Utica, right?

Right. I guess I was just trying to get a good gauge for where we start the year, given that fourth quarter offers a little bit of a false economy, and you're also, I guess, pulling from other facilities that we might not have as oil and gas nameplate to supply some 100 mesh.

1.2 million tons is probably a good nameplate, say, for Q1. (multiple speakers)

Okay. Great.

And then just your comments, again, just so we're starting off on the same page, around January and some of the extreme cold, Bryan, causing some extra costs in this system. I mean, is that just more of a cautionary tone, or in January did the system weigh on you similarly to where we were in 4Q?

What we saw in January was that demand picked up pretty well. So, we didn't see the same kind of issues that we saw in December around order cancellations. And I think some of that was the extra momentum as well, that we had from work that had gotten delayed out of December.

But the reality is that the record cold temperatures continued into much of January. We had temperatures, minus 20, minus 15 degrees up in our Sparta plant, for example, and that just plays havoc with not only our operations, but all the mining operations around sand that are up north. So, we did experience some additional costs in January. So, that wasn't a theoretical; I mean, that was what we saw.

And a little bit of that's supply chain cost, but a lot of additional, sort of, operational cost as well. We expect that's going to disappear. We've already seen that basically start to change as we've gotten into February, and as the weather has actually warmed up just a little bit. So, I think it's just some unusual costs in January that will probably impact first quarter a bit.

Okay, and then your experience with mix today pretty similar to 4Q?

Yes. 100 mesh mix is staying about where it was in 4Q. I will say, though, that there seems to be tremendous demand for 100 mesh. And so, there's not a day that goes by now that we're not getting requests. And we've actually had customers start to ask for unit trains of 100 mesh, which is something that, a year ago, we would have never thought anybody would be interested in that, right? So, it's definitely the product that's in very high demand in the market right now.

Great, appreciate the time, gentlemen. I'll turn it back.

Marc Bianchi, Cowen and Company.

Just following up on Blake's question for 100 mesh. If you start shipping unit trains, and some of the other producers start shipping unit trains, is it possible that 100 mesh could become tight? Or is it just such a massive byproduct that, really, no matter how much demand we get, it's unlikely that we get to that point.

So, 100 mesh is tight in the market today. And the interesting thing, though, is that 100 mesh, kind of, by definition, it doesn't have an API specification. But the reality is, when you go out and talk to customers, what they want is 100 mesh from frac sand mines, right?

So, we have 10, 11 mines where we don't sell frac sand. And when you talk to customers about those type of 100-mesh products, they're not really interested in that because of the grain size and shape. So, I think there is a somewhat limited supply of the, kind of, higher-quality 100-mesh product, and that seems to be what the market wants right now.

Is 100 mesh mostly on spot, or is it all on spot for you guys?

No, we have contracts for 100 mesh as well. If you look at our contracts with any of the major service companies, typically there's multiple grades in there, and certainly we have 100-mesh contracts as well.

Okay. Great.

And then just one follow-up, unrelated. On the ramp of Utica and the expected cost benefit as you're able to switch rail lines going into the Permian, can you help quantify that for us, or help us understand the benefit to margins?

Sure. So, as we think about that, the key is to give ourselves more options in terms of origin and destination pairings. And as we bring Utica online, we're going to have a great option to run unit trains on the Union Pacific rail right down into the Permian. And as I mentioned in my prepared remarks, we're also building out a really large unit train receiving facility down in Odessa, Texas.

So, I think there's several dollars a ton of advantage there for the products that we send by that channel. And then at the same time, we'll be able to place Sparta product perhaps into more cost-effective destinations, so you kind of get a double benefit from that. And I would expect that, as we go through the year and are able to optimize that, we'll see some substantial improvements in our cost to serve as we go forward.

Okay, great, thanks, guys.

Matt Conlan, Wells Fargo Securities.

I wanted to ask you a little bit about logistics. In the fourth quarter, it seems that you had some Sparta sand that was going down to the Permian pretty inefficiently. How do you seem to fix that going forward?

Obviously, when the Utica plant comes on, you have some more -- some easier volume to go to the Permian. But do you have takers for that Sparta sand to go someplace more efficiently?

It's another great question. When we designed the Sparta plant, our assumption was that we would send a lot of that product into the Bakken and up into Canada, Matt. The reality is that there's been such an overwhelming demand in the Permian, that we've been sending it there instead, right?

So, I think we'll have more opportunities to send it west and north, so into the Bakken and into Canada. And actually when you look at the logistics setup, the product out of Sparta actually goes pretty well east also; so, into the Marcellus and the Utica area. We have lots of good options there.

It's just that, right now, we have demand in places that just don't exactly fit perfectly with where Sparta serves effectively. The key here, I think, as well, is to work on the things that we can control. And it's one of the reasons that we created a Chief Operating Officer role. I mentioned in my prepared remarks, Mike Winkler, who's moved into that role for us.

Our teams are working on a lot of things to improve our cost to serve, if you will. So, more efficient origin/destination pairing, working on demurrage costs, which are the kind of rental costs that we pay every time a railcar sits somewhere downstream of our plant, different rail routings. So, our guys have come up with some really creative ideas there. So, there is lots of things that are within our control that we're going to work on, for sure.

Okay. So, to send more sand into those northern basins, are you relying on increased demand growth, or are you looking to perhaps take share from other competitors, or both?

We think there's opportunities to do both. And certainly, I expect, based on what's happening in the Bakken that we'll see some growth there. Canada is just going to take us a bit longer to penetrate because it's a much more, sort of, captive market, and you really have to have a transload network up there, which we're building, but we don't have it as built out as we need at this point. So, there's some things we have to have in place I think to really go after Canada.

That's great. And staying up in Wisconsin, what's the update on your Eau Claire County greenfield opportunity?

We're making really good progress on that. We've had our initial hearings with the community. It's all gone very well, and I think we're very close to getting our mining permit up there. I would expect that over the next couple of months.

We've been received very well by the local folks there. And I think that we're right on track, based on the schedule that we had talked about, of potentially having something up late 2015.

Terrific, sounds good, thank you very much.

Kurt Hallead, RBC.

That was a really good summary. A couple of things on my end here.

You guys indicated an overall industry demand growth for oil and gas sands at a roughly 10% to 15%, suggesting the market could be tighter, even with the new supply that's coming into the marketplace. If I heard you correctly, you suggested that oil and gas volumes for US Silica could be over 5 million tons in 2014. That would imply year-on-year growth rate of, like, 25% when the market is growing 10% to 15%, which then indicates some market-share grab.

I think I heard that all right, but could you help me understand the -- that's extremely successful market-share gains. Can you help me connect the dots on the marketplace, and what you guys are doing to really increase your share by that large a proportion?

Sure, Kurt. And it's our core strategy to continue to increase market share, right? So, if you look at 2013, we grew our share by about 2%. So, we came into the year around 8% share, and we exited at 10%. And so, 2013 was kind of a similar year.

There was growth in the industry, but we outpaced that for sure, and so we expect to do the same thing in 2014. I think it goes back, in large part, to our strategy of moving downstream. We're seeing tremendous demand at our transload networks.

We believe that we're favorably positioned in many basins, and we make it so easy for customers to do business with us that they're seeking us out to buy products from us. And I think customers really like the, kind of, convenience of knowing that, almost with no notice, they can just send their trucks over and get product from us since we maintain the inventory for them out in the basins. Some of the customers are actually almost outsourcing their logistics to us. We've had some customers turn their railcars over to us, and we're basically managing the logistics for them.

So, I think our strategy has been really successful, and I would expect to continue that in 2014. And if you look at the continued investments that we're going to make in expanding that footprint and the new facilities we're bringing online, the Odessa transload later in the year, and a variety of other things that our team is doing to make it easy to do business with US Silica, I believe we'll continue to take share in 2014 just like we did in 2013.

Thanks for that, appreciate that. The follow-up there is on the contribution margin per ton, specifically in the oil and gas sector. You go back to the first-quarter 2012, it was $51 per ton. First quarter of 2013, $39. You exit fourth quarter of 2013 at $31.

I think your most recent guide point for 2014 suggested the low-$30s for the year. Can you give us a little bit more color around that dynamic? I'm assuming that it's a mix shift related to this 100-mesh dynamic, but, again, I wanted a little bit more granularity on that.

So, there's a lot of issues kind of underneath that. But I would point to two. One is the 100-mesh shift, which we think is going to continue to occur based on the success that many of the energy companies are reporting using that product as a lead-in proppant.

But the other reality is that there's kind of a supply/demand dynamic. In 2013, we were in a more balanced market, and so we had continued pricing pressure throughout the year. In some cases, we made the choice to trade off price for additional favorable terms or contract extensions or things like that.

What we see in the market today, it feels like supply/demand is moving towards the shorter side. I think, as I said in my remarks and in answer to one of the earlier questions, 10% to 15% proppant growth seems like a pretty conservative estimate right now, in terms of demand, when you look at the kind of numbers that are coming from a lot of the energy companies. So, I think some of that pricing upside will certainly help us to recover some of the margin.

And then, I also tend to look at things that we can control as well. And I think we can do a better job in the supply chain area, reducing our transportation costs, doing a better job of really monitoring, tracking, and some of the choices that we make around how we ship product and how we do things internally. So, our teams are all over that. So, we want to absolutely optimize that to the extent we can.

And then, supply and demand will sort of go where it goes. Certainly, if things tighten up, then there's probably pricing upside. If it stays more like the 10% to 15%, there's maybe less opportunity to get pricing there.

That's great, thanks. Can you give us some insight as to what percentage of your volume is coming up for contract as the year progresses?

This year, we'll be at about 50% contract, 50% spot. Last year we actually sold -- I was just checking the numbers yesterday -- we sold about 72%, 73% to our contract customers. So, we will be more balanced this year, about 50/50.

We don't have any contracts that roll off through the year. And then, I think we've got a few that roll off towards the end of the year. But it'll be -- the next couple of years, we'll see a gradual roll-off of the initial contracts.

We're kind of in the process of deciding how much do we want to have under contract? I think 50/50 feels like a good place to be right now, given that there may be some pricing upside in the future. But we'll make a decision around where we would like to go with that based on how we think pricing may evolve.

Last one here: On ISP volume growth, what is your thought there for 2014?

Don, do you want to take that?

Yes. We're looking at our ISP business growing in volume in 2014. Typically we like to say that that's going to be a GDP-plus growth business. And I would anticipate that again in 2014.

Additionally, we've got some new products coming, so that's going to start to add to that. So, that's why we say GDP-plus. [That said we had] a great 2013, and we anticipate another good year in 2014.

Thanks a lot, appreciate it.

Christopher Butler of Sidoti & Company.

Just going back to the contract question. As we went through 2013, you had a high degree of contract sales earlier in the year, and there was thoughts on reaching caps when you got to the end of the year. I would assume that the December slowdown curtailed any benefit from that, but as we look to January, do we see a high degree of contract purchases again, much like last year?

It's another really germane question, and we're working very closely with our customers on, kind of, a case-by-case basis to look at how closely we're going to hold people to their contract numbers. Demand's very strong, and we're working to try and balance short-term gains versus long-term relationships. And so, I would say, the way the year started off, we're having to hold customers back versus their contract commitments.

We've had a couple of our larger customers who look to significantly overbuy their commitments in the first quarter. So, we're trying to work with them, and we understand that they have needs. But we can't let customers get too far out of their contracted range.

And with the follow-up changing directions a little bit. Could you talk about the regulatory environment with dust and other issues that may be popping up with -- as you go through this Eau Claire process?

Sure. So, there's one issue that's out there right now. I think we've talked about it, perhaps, on a previous call. But OSHA has put out a draft proposal to reduce workplace silica exposure by 50% versus their previous standard.

The good news for us is, we already operate at that sort of reduced standard anyway. In good, good practices, we have done that for years, so it's not going to impact us.

I think as we talk to our communities, US Silica is a low-dust operation, generally. Perhaps some of our competitors don't operate the way we do, but we don't have issues with dusting around our plants and our communities. So, we feel very good about that. And as we look at our track record around safety, health, and these type of issues, I think we're best in the industry around that.

And as it pertains to Eau Claire, sounds like no problems there then?

No, no problems there. The mine site -- it's a large site. It's 800,000 acres, something like that, maybe a little bit more. It's quite large.

It's in a very rural area. We have UP rail right on site, so there's no trucking involved. There's no issues at this point with the community. Folks have been very supportive.

Thank you for your time.

Brad Handler with Jefferies.

Maybe I can come back to a couple topics that you've touched on already. But the first, in terms of the -- first, in terms of the contracts. There were some contracts, I guess, that were coming up at the end of 2013. Should we infer from your 50% comments that you've let some contracts roll, and so that you're a little bit more exposed now to the spot market by virtue of letting some contracts fall away, so to speak?

That's exactly right. Although the interesting thing is that the two contracts that rolled, those customers are still buying from us, right? So, we wanted to see how things go in the marketplace here. But, yes, we let those roll.

Okay, interesting, thanks for that.

The other thing is maybe a question related to volume. Maybe as I understood the Business, I thought of your defining your own capacity in terms of courser grades. And 100 mesh was this -- it's a residual product, and obviously demand for it has proven to be much stronger than you expected.

But having said that, when we talk about whether it's 1.2 million oil and gas volume in the first quarter, and maybe your thoughts about 5 million for the whole year, does it suggest somehow -- are there some other constraints? Is it because of transload capacity or because of railcar capacity or something? Is there some reason why mix is the issue that it is?

Maybe if I ask it differently: I would have guessed that 100 mesh was simply additive to what are otherwise very underlying strong trends in courser grades. And so, I get it, but I would have expected you to have higher volumes if we were still talking about lower margins. Does that make sense, and do you have any thoughts around that topic?

As we think about the 100 mesh -- where the best 100 mesh comes from typically is also the plants where we have industrial products. So, if you look at Ottawa, our 100-mesh products get divided between oil and gas, and the industrial business as well, right? We don't have complete freedom to flex up the 100-mesh product. I would say that, certainly given the current environment, we're going to make as much as we can.

When we think about our capacity, we do tend to represent capacity with a sort of normalized level of 100-mesh supply, as well as knowing what our commitments are to our industrial customers. So, it's a little bit more complicated than the other grades, just because of that. Technically, if we didn't have any industrial business, or if we absolutely could maximize 100-mesh production in other ways, perhaps at the expense of other grades, the capacity could be different.

I think you picked up on a subtlety in the Business in the way we talk about the capacity, but it's kind of how we represent it, right, Brad. It's sort of with normal, in quotes, demand for 100 mesh here is what, here's what we make, and here's what we think our capacity is.

Okay, I guess I understand that. All right, and then maybe just, again, quickly touching on another contribution margin question. I appreciate your answer to Kurt's question about influences that press down.

Should we expect that it ramps up through the course of the year, though, by virtue of Utica, by virtue of other logistical improvements that Mike's working on right now and maybe some pricing dynamics or something? Does it start at 30%, and does it make its way up to the -- closer to the high-30%s later in the year? Is that how -- is that a logical progression?

I guess the way I look at it, Brad, is that there's more upside than downside in margin. I think that there's more favorable trends there than headwinds.

I would say last year it was the other way around. We saw more headwinds. A lot of our service company customers had margin issues; it was a more balanced market. And on top of that, we had negotiated some pretty aggressive pricing back in 2011, when some of these contracts were signed. So, it was sort of a different environment.

But I certainly feel like there should be upside there, both from the work that we're doing, as well as just some of the market trends. If demand stays strong, obviously that's an easier environment to get some price increases, right? So, there's certainly potential upside there.

But we've also seen, in 2013, some additional transportation costs come in that we didn't initially expect just because of where the demand played out. So, there's a lot of factors here. But like I said, I would characterize it as probably more upside than downside when I weigh it all out.

Okay, but -- right. Which I guess may take time to [develop]. Okay. All right, thank you.

And I would agree with the ramp-up. You kind of saw a low watermark, if you will, in Q4 of 2013. See a ramp up a little bit in Q1 and so on.

Right, okay, thank you, Don, appreciate that. Thanks, guys.

Marc Bianchi, Cowen and Company.

Just to follow up on the contract discussion. Were the contracts that you let roll off -- how were those priced relative to the spot market?

One of the contracts was probably at spot market pricing, and one was probably a little bit below.

Okay, that's great. And just an unrelated question. On the $180 million to $200 million guidance for EBITDA that you provided, can you offer your view of the adjustments that we need to be assuming to get to those -- that $180 million to $200 million guidance in your adjusted EBITDA?

The adjustment going from EBITDA to adjusted EBITDA?

Correct.

I would say they would run about the same that it did in 2013. So, we're seeing anywhere -- somewhere in the neighborhood of $2 million to $3 million of those adjustments on a quarterly basis.

Great, thank you.

There are no more questions. I would now like to turn the call over to Mr. Bryan Shinn for any closing remarks.

Thank you very much. In closing, I want to say that I believe that our investments in infrastructure, logistics and new products are going to continue to pay off going forward, as we've talked about on the questions and answers here. We estimate that our market share, as I said before, is about 10% coming into 2014, and we expect that to continue to ramp as we go throughout the year. We recognize that only the most efficient companies and those with scale production and transportation networks are going to thrive over the long term.

Also, we believe that, over the next couple of years, US Silica is going to sustainably increase that share. And as we get into 2014 here, we're going to focus on further improving the efficiency of our supply chain. We have made some pretty aggressive moves on that.

We are going to also carefully evaluate acquisition opportunities. We didn't talk much specifically about that today, but we continue to look to expand our infrastructure, and add additional mining and production capacity.

I also want to thank all of my colleagues at US Silica for their hard work and dedication in making 2013 an extremely successful year for the Company. For all of our investors, and our analyst community, we certainly appreciate your interest in our Company, and look forward to meeting you all and speaking with you at the many conferences which we'll attend this year. Thanks for dialing in, and have a great day, everyone.

Thank you again for joining us. This does conclude today's conference, and you may now disconnect. Have a great day.