US Silica Holdings Inc (SLCA) 2014 Q2 法說會逐字稿

Good morning and welcome to US Silica's second-quarter 2014 earnings conference call. Just a reminder, today's call is being recorded and your participation implies consent to such recording.

(Operator Instructions)

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 second-quarter 2014 earnings conference call. With me on the call today our Bryan Shinn, President and Chief Executive Officer, and Don Merril, Vice President and Chief Financial Officer.

But before we begin, I'd 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 question 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 queue and we'll be happy to take as many questions as time permits.

With that, I would now like the call -- turn the call over to our CEO, Bryan Shinn. Bryan?

Thanks, Mike, and good morning, everyone.

I'll begin today's call by reviewing highlights of our record performance in the second quarter, and then provide you with an update on the various strategic initiatives underway here at US Silica to drive long-term growth and enhance shareholder value, including a recent acquisition of Cadre Services. Finally, I'll provide our views on some of the current trends that are impacting our markets and business, as well as an outlook for both our Oil and Gas and Industrial and Specialty Products businesses.

I'm extremely pleased with the performance of both of our operating units in the quarter. Driven by robust demand from our Oil and Gas customers, total Company volumes were a record 2.6 million tons, a 27% increase over the same period last year. Oil and Gas volumes surged in the quarter to a record 1.5 million tons, a 53% improvement on a year-over-year basis and 13% up sequentially. Further evidence that a growing number of energy companies are increasing the amount of proppant that they are using per well. I'll have more to say about this later in my prepared remarks.

Demand continue to be very strong across all basins and frac sand grades, with approximately 68% of our Oil and Gas volumes sold during the quarter in basin by our transload network. On the ISP side of the ledger, volumes were only up about 3% on a year-over-year basis, largely as a result of the timing of production runs by some of our glass customers and the strategic shift of some ISP volumes to oil and gas customers.

Pricing was also up across the Company driving enterprise contribution margin per ton to an all-time record high of $28.68. As expected, we delivered a strong rebound in contribution margin per ton in the Oil and Gas segment. The market for frac sand remains extremely tight and we continue to be sold out of all frac sand grades. We increased prices further in the second quarter and believe that there's still pricing upside for future oil and gas spot sales.

Increased demand for finer grades of frac sand continued to have a positive impact on pricing and margins in our ISP business. Don will have more to say in his prepared remarks, but contribution margin for the ISP business was at a record level during the quarter and the business is on track to have its best year ever from a bottom line perspective.

Due to higher volumes and improved pricing, we delivered record revenue for the quarter of $205.8 million, a 59% improvement over the second quarter of 2013 and up 14% sequentially. Adjusted EBITDA for the quarter was a record $59.8 million, a 46% improvement year over year and up 43% sequentially.

Let me provide you now with an update on some of the initiatives underway at US Silica to drive the long-term success of the business as well. As I mentioned on our first quarter call, we've been approached by several of our Oil and Gas customers to negotiate new long-term supply contracts.

I'm pleased to report that, during the quarter, we signed four new take-or-pay contracts and modified one take-or-pay supply agreement with terms expiring between 2015 and 2019. The volume weighted average roll-off date of our contract portfolio is now in the second quarter of 2018. For one such take-or-pay contract, we received from the customer a $100 million prepayment, which will be netted against future sales.

Our decision to enter into additional long-term take-or-pay contracts was predicated on the fact that the new pricing under these contracts provides an excellent return for the business. Further, some of the new contracts have volume escalators, allowing us to pre sell a portion the new Fairchild plant, which we expect to come on line in the fourth quarter of 2015.

Locking in more volumes under long-term contracts also enables us to be more efficient from a production and supply chain and logistics standpoint. Most importantly, it provides us with an opportunity to better serve our customers, as energy companies are increasingly requiring that service companies have long-term sand and supply agreements in place before being qualified to bid on new work.

Demand for high-quality premium frac sand is being driven by increased drilling activity, especially in the fast-growing basins like the Permian and the Eagleford. In addition to the rise in activity, a growing number of energy companies are experiencing tremendous success with longer laterals, closer stages and higher volumes of profit. This phenomenon appears to be trending across all of the major shale plays and we expect that the market will stay reasonably tight for frac sand for the rest of this year and into next year as well.

As previously discussed, we're moving quickly to keep pace with this increasing demand. Our new state-of-the-art frac sand mine and plant near Utica, Illinois, has started up on schedule and we had our first sales in July. We're ramping up production and expect to be shipping at design capacity by September 1.

During the quarter, we also obtained a mining and developing agreement with the town of Fairchild, Wisconsin. We're now in the final stages of purchasing the land and have started preliminary engineering work on the new 3 million ton per year frac sand facility with direct access on the Union Pacific Railroad.

We're also closing tomorrow, July 31, on our acquisition of Cadre Services. This accretive acquisition aligns with our strategy to increase market share by expanding our footprint and product offerings in one of the fastest-growing basins in the country and provides their customers with a high quality, regionally produced proppant which effectively meets the demands of many of the Permian oil and gas wells. We welcome all of our Cadre employees to the US Silica team.

Moving onto ISP, we're witnessing a step change in this business. We continue to see strong demand for many of our offerings, especially our high-value ground products. We're successfully implementing price increases that were put into effect earlier this year and we're planning another increase on certain specialty products later this summer.

We're beginning to get meaningful contributions from our new product initiatives and have several other new offerings under development which are the expected to drive additional margin expansion. I want to thank and congratulate our industrial business team for the excellent work that they've done to both deliver strong bottom-line results in 2014 and to position this business for sustained future growth.

Finally, from a supply chain standpoint, our COO, Mike Winkler, and his team made exceptional progress during the quarter to take cost out of the system, both at the plants and at the transloads. Our production cost per ton Company wide were at a record low and we shaved meaningful dollars per ton off of our logistic costs by finding more profitable origins and destinations and by shipping more unit trains. We've shipped over 60 unit trains year to date and our railcar fleet of 4250 cars at the end of the second quarter is anticipated to grow to over 5100 cars by the end of the year.

With that, I'll now turn the call over to our CFO, Don Merril. Don?

Thanks, Bryan, and good morning, everyone.

As Bryan stated, total Company revenue for the second quarter of $205.8 million was up 59% year over year and increased 14% sequentially over the first quarter of 2014. On a year-over-year basis, revenue for the Oil and Gas segment grew by 92% to $149.3 million, while revenue of $56.5 million for the ISP segment increased 8% on a year-over-year basis.

Volumes for the Oil and Gas segment were 1.5 million tons, up 53% over the same period last year. Contribution margin from Oil and Gas was $57.1 million, an increase of 61% over the same period last year and up 37% sequentially from the first quarter of 2014. On a per ton basis, contribution margin for Oil and Gas in the quarter was $37.82, compared with $35.90 for the same period last year and $31.19 for the first quarter of 2014. Approximately half of the sequential increase in contribution margin per ton is due to price increases implemented earlier this year with the remaining half coming from a combination of lower transportation costs and a reduction in operating costs.

Volumes for the ISP segment of approximately 1.095 million tons were up 3% on a year-over-year basis. Contribution margin for the ISP segment was a record $17.6 million and increased 15%, compared with the same quarter in the prior year, and up 34% sequentially from the first quarter of 2014. Contribution margin per ton for ISP was $16.09 versus $14.48 in the second quarter of 2013 and $13.52 in the first quarter of 2014. The increase in contribution margin per ton in ISP in the quarter was driven largely by product mix and the price increases Bryan mentioned earlier.

SG&A expense for the quarter was $19.3 million, or 9% of revenue, compared with $10.1 million, or 8% of revenue for the second quarter of 2013. The increase in overhead was driven mainly by an increase in compensation expense of $6.1 million and $1.7 million in business development expenses related mostly to the Company's acquisition of Cadre Services. Going forward, we would expect SG&A as a percent of revenue to run closer to 8%.

Depreciation, depletion and amortization expense in the second quarter was $10.3 million, compared with approximately $8.9 million in the same quarter last year. The year-over-year increase in the DD&A was driven by continued capital spending associated with our growth in capacity expansion initiatives combined with increased depletion due to the additional volumes of sand mined. We would expect this expense to continue to grow due to the anticipated capital spending in 2014.

Looking at the other income expense line, interest expense for the quarter was $4 million, compared $3.5 million in the second quarter of 2013. 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 28%, compared with 25% for the second quarter of 2013.

Cash and cash equivalents and short-term investments at June 30, 2014, totaled $181.1 million, compared with $153.2 million at December 31, 2013. Additionally, as of June 30, 2014, we had $46.7 million available under our revolving credit facility. Long-term debt was $366.2 million as of June 30, 2014, compared with $368 million at December 31, 2013.

We incurred capital expenditures of $7.4 million in the second quarter of 2014. The bulk of our second-quarter spend was related to the continued investment in our new Utica frac sand mine and plant, a new transload facility under construction in Odessa, Texas, and various maintenance capital requirements.

As we noted in the press release, we are raising our full-year 2014 guidance. The Company now anticipates full-year adjusted EBITDA in the range of $215 million to $225 million, which includes a small contribution from our Cadre acquisition. Additionally, the Company now expects capital expenditures in the range of $95 million to $105 million, due to our accelerated growth focus.

Finally, we expect an effective tax rate of approximately 27% for the rest of 2014.

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

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

(Operator Instructions)

[Veb Zhevnov].

Good morning and congratulations on very good quarter.

Thanks, [Veb], good morning to you.

My first question is a two parts question on pricing. So it sounds like you have put more pricing increases beyond the mid single-digit increases we implemented at the end of first quarter. Any magnitude you can provide on pricing increases?

And B, if you think about fracs and market being under supplied or at least tight over the next 12 months, what kind of additional pricing increases can we put through?

Yet, thanks for the question, Veb. The first thing is the way I think about it is more in terms of contribution margin per ton, so I'll come back to that in a minute.

But specifically to your question, as we had mentioned before, we had raised prices in late Q1 and then we had additional price increases in early Q2. And so we're now in to the double-digit range for the year when we look at price increases. So we've moved up pretty quickly there.

But as we think about it, that's one side of the question. The other side is all of the efficiencies, both operational and supply chain pairing, if you will, from matching up origins and destinations.

And so when we put those together, we really I think are on a very successful trend here and hopefully expect some continued opportunities there. And specifically around the pricing side, we certainly have some product on the spot market and I think there's opportunity there for some additional pricing upside. And so we hope to see some of that as we go forward.

Okay. And my unrelated follow up is on the resin coated sand part of the business, that story doesn't get enough attention.

We are hearing of growth in resin coated sand demand and pricing as well. With that as a backdrop, if you can talk about what the current utilization is on your RCS plan, is it under 50% more and than 50%? And what are the thoughts about -- on bringing the second phase on line?

So resin coated sand is definitely growing. I think the market is strengthening. Of course, if you look back 12 months or 18 months ago the market was significantly oversupplied. We've seen that tighten up quite a bit and certainly that has helped both sales and pricing as you said.

And we're still under 50% utilized at the facility although sales continue to ramp. And so I would say that the second phase of Rochelle to our resin coated sand plant is certainly something that we have on the drawing board, but we're not ready to contemplate that just yet. We want to see continued stronger sales from resin coated sand and get the asset that we have on the ground filled up first.

And if I may squeeze in one last question on Fairchild. How long does it typical take for you guys to bring on a plant on line once you have all the permits and land purchased?

So we would expect at this point to have the Fairchild site up and running in Q3 of 2015. So we just received the critical permit from the Fairchild Township a few weeks ago, so you can kind of get a feel for how long it takes to get the site up from there. And then beyond that, for a site as large as that, it'll be as large as any of the sites that we have in our network, it'll take a good probably two to three quarters after start up to be able to ramp fully up to design rate.

Okay, thank you. And again congratulations on a good quarter.

Thanks, Veb, take care.

Your next question comes from the line of Jack Kasprzak.

The -- regarding the new contracts, can you tell us now how much of your volume will be under these contracts in 2015?

Sure. As we came into Q2, we had about 50% of our volumes contracted, so under the long-term take-or-pay contracts. As you can imagine, given the tightness of the market, we've had a variety of request from customers to both sign new contracts and to amend existing contracts.

As I mentioned in my prepared remarks, we signed four new contracts and amended and extended one other contract during the quarter. And the range of those is from one to five years. We really like the new contracts that we can signed, great product mix, great destination mix and really a strong customer base.

So if you look at the volumes of that, Jack, and the timing, we've actually moved our average contract roll off from about mid 2016 to mid 2018. So we've added two years to the average contract roll off and I'm really pleased about that.

So with all that said, when you do the math, we moved from about 50% under long-term contract to something more like 60% to 65% as we sit today. And certainly as we bring Fairchild on in 2015, we'll have the opportunity to capture additional contract sales we believe.

That's great, thanks for the color. Second question is maybe a mechanical question on how pricing works and has the dynamic changed over time in terms of you're getting price increases? Is this a situation where you send out an average increase per grade to customers or is it a negotiation by customer? How does the -- what are the mechanics of implementing price increases?

So we have two kind of sales, right. So our contracted sales, the prices are typically relatively fixed. In the contracts we will have some escalators for things on the cost side, like for example it natural gas price goes up, we have the ability to add some price. But those prices under the contracts are relatively fixed.

Then on the spot side, obviously, it's kind of as the name implies, right this literally almost a case-by-case basis that we offer price out there for a customer that comes to us and wants to buy 5000 tons of product at this location, we'll say okay this is the price at this point in time and then they either accept that or not, right? So it's a case-by-case and it gives us really good ability to move up with the market assuming that pricing continues to be strong.

Okay, great. Thank you, Bryan. Appreciate it.

Your next question comes from the line of Marc Bianchi.

Hey, good morning, guys. Excellent job of the margin progression during the quarter.

Thanks, Marc.

The volume increase over your nameplate is pretty interesting. I was hoping you could talk a little bit more about where you see that going, what's driving it. And maybe I suspect it might be 100-mesh, how to think about the impact to contribution margin per ton going forward as a result.

Yet, no, it's a really good question, Marc, and I think it's a critical point for us. And you're exactly right, a lot of it was additional 100-mesh.

But to take you through the progression. So after we brought Sparta online, our nameplate oil and gas capacity was about 4.5 million tons. So that's where we came into the year.

And so through a combination of excellent work by our operations team and being able to sell more 100-mesh. And not only sell it from our traditional oil and gas plants, but from our nontraditional sites, i.e, those that historically have supplied more into the industrial side of our business. It's pushed our run rate capacity now to more like 6 million tons when you add all that in there. And so that's everything fully utilized.

And then when Utica comes online, that's another 1.5 million tons -- or well sorry, on line, so theoretically now as it ramps up we'll be at something more like 7.5 million tons. So back to the question, about half of it was 100-mesh driven and the other half was continued operational efficiencies being able to squeeze absolutely everything out of our oil and gas plants.

Okay. The Utica previously was a 1.5 million ton before we started talking about 100-mesh. Does that mean there's upside to the 1.5 rated capacity? And then the same question with Fairchild at 3 million tons.

No, not really. I mean, basically the capacities are limited by the dryers in the plants. And so for Utica, we can dry and screen 1.5 million tons of product and we can make a mix of different grades dependent on what the customers want. But if we make more 100-mesh that means we make less of something else.

The difference was in the oil and gas -- or sorry, the non oil and gas plants, we had access capacity there. And these are the plants that serve glass customers and a variety of other industrial end uses and so we've always had access capacity there. It's speaking to the total demand for 100-mesh that customers are now reaching out to us and even those some of those plants maybe a little less logistically efficient now they're in play given the demand for 100-mesh.

Sure. Well thanks, guys. I'll turn it back.

Your next question comes from the line of Brad Hadler.

Maybe a couple questions on the distribution side of things and maybe to orient us. The first is, there's more conversation around constraints on the trucking side of the business, which I know is not your responsibility. But are you seeing signs of that, of trucking constraints? And if so, at some point does that become an issue for your business?

So to this point, Brad, we haven't seen those kind of constraints. I will say, though, that when you look at the total supply chain, we tend to think in terms of velocity of product through the chain. And to me this is a fascinating thing that's developed over the last few quarters here because of the large increases on a per well basis of sand that's needed, many of the supply chains in the industry just can't keep up with that, right?

And it's practical things like you now have to be able to load many more trucks out in a given period of time so you can have all the sand converged to well at the same time. And many of our competitors and others in the industry didn't build their networks to handle this, right?

So we're really focused on this velocity term and as we think about building our network out and continuing to do that, that's how we're thinking about it. I think it's one of the reasons that we've been taking share, quite honestly, because many of our competitors just can't keep up with the pace that sand is moving through the system these days.

Bringing it to the transloads you can keep up with the required pace is what you're saying?

That's exactly right.

Okay. And then presumably again the customers you're aligned with have the take away capacity from the transloads to allow you to keep bringing more sand into the transloads, right? So it all -- it's flowing well for you is what I hear you saying.

Exactly. And we take customer partnerships very seriously and so we have a pretty rigorous criteria that we look at when we think about who we're going to sign up with in terms of contracts. And so we'd be very fortunate that the partners that we're working with really haven't had the kind of logistics issues downstream of the transload, if you will, that you were talking about earlier.

Right, okay. Well fair enough. A related follow up in that it's still on distribution.

So I know you guys have been, you mentioned this earlier on the call, you've been aggressively adding railcar capacity into your network as you grow. I don't know whether you'd consider yourselves long railcars today or if you anticipate being long at some point soon, but do you sense as the industry -- presumably, you sense that that's an opportunity, right. And I'm hoping you can speak to that, but presumably not everybody is going to be long railcars.

And I guess I'm curious if that in and of itself creates a business model opportunity, is there -- does it mean you'd do more third-party distribution for example? Or how might -- if that's at all interesting for you and how that might all play out?

So the whole rail and transportation side is very interesting, right. If you'd asked me two years ago when we came out and became a public Company around how difficult is it to get into the business and successfully serve customers, I would have talked pretty extensively about how hard it is to open up a mine site. And while that's still true, the reality is there's two other issues that have emerged and you're right on top of them with your two questions.

One is the overall ability of the networks, the sand distribution networks to keep up from a velocity standpoint. But then the second one that's emerging is this whole railcar issue.

If you talk to the companies that build railcars, they'll tell you that new build sand card is out about 24 months now, 24 month lead time. We got way out in front of that and have massive amount of orders in place to support all the facilities that we're bringing online. I think perhaps some of our competitors did not do that based on what we're hearing.

So I don't expect it will be long in railcars. I think we're going to need all the railcars that we can get and we have enough to cover our needs, but I think perhaps others are not in that position.

Okay, fair. That's helpful, thank you very much.

Your next question comes from the line of Kurt Hallead.

Thanks for all the color and info. I want to follow up on, you guys made this brown sand acquisition. Wanted to get some additional insight as to what the driver behind that was?

Thinking about it in the context of when you guys first went public, one of the primary selling points for the Company was high end premium Northern white sand. I think the perception out there on brown sand is that anybody can big it up in their backyard and lower pricing, a lower margin. So I wanted to get some color around the thought process and rational as to your interest in getting involved in the brown sand market.

Yes, it's a really interesting question, Kurt. And I guess the way I look at it is that if you look in the Permian in particular, there's a subset of wells where the Hickory type products, Hickory sandstone is what's down in the Voca area. Those products are very technically suitable for those completions, and we currently see about 20% to 25% of the total sand being pumped into Permian as this Hickory or so-called brown sand.

And as we talk to customers, they're very happy with the performance of that sand in some of those more shallow wells. And places like upper and lower Spraberry and some of the other different formations where it works. And so we saw this as an opportunity to get into a product line, if you will, that we just didn't have any products in in the past.

So we're thinking about this as a complete plus one on top of our existing Northern white offerings. And it certainly doesn't dilute the Northern white in any way, but it gives us a brand-new product and also a platform to operate in in the Permian.

And I think that one of the other things that made this deal attractive for us is that even through the cycle as things balanced out a bit in 2013, we saw the demand for these type of Brady products be very strong and well accepted by the market.

Okay, great, thanks. And then maybe a follow up, when you look at -- you heard a number of different service companies discuss during the course of their second-quarter conference calls and continued challenge with logistics think some questions address the logistical nature of it.

So my question is really geared toward the volumes that you guys booked in the second quarter. Was this really -- how much of that increase in volumes in the quarter was driven by some of the logistical challenges and therefore is not repeatable as we move forward into say the third quarter or fourth quarter? Could you give us some color, maybe some hand on how to think about that, that'd be great? Thanks.

Yes, sure Kurt. Look I don't think hardly any of it was driven by other people's logistical challenges. I think it is being primarily driven by the increased sand that's being used per well.

And I mean quite honestly the demand level out there is just staggering, right. You listen to commentary from multiple sources and we get a lot of private conversations with customers and others, but just look at the public sources. And I was listening to an earnings call of a major service company yesterday and they said that their sand consumption in the first six months of this year has increased by 95% over the same period in 2013. So essentially doubled, right?

And that's the kind of demand dynamic that you see going on out there. So I think the primary driver far and away is just the increase proppant is being used per well wand there's a variety of technical factors for that, which I'm sure many people on the call are familiar with. I think that's really the driver.

Okay, great. Thanks, that's it for me. Appreciate it.

Your next question comes from the line of Blake Hutchinson.

First of all, I don't think we've heard anything in your commentary be it volume based, pricing based, logistical based, that would tend to persuade us that second quarter had anything that was a one-time benefit. And I relate that to your guidance, that keeps the run rate for the back half fairly similar to what we saw in 2Q.

Given that Utica is coming on and that was supposed to be the significant margin uplift perhaps for the year and the Cadre acquisition. Looks like G&A is in check. Is there anything to suggest or to talk us back down in terms of keeping that level of conservatism to the extent that we'd be flat with our outlook here?

Yes, Blake, this is Don. Look our outlook gives us -- is the best look that we have at the back half of the year.

And really if there's conservatism baked into our guidance it's going to be Q4. If you recall Q4 last year, things really tailed off right around the Thanksgiving time and it got pretty bad throughout December and we still remember that.

So really that's what we're looking at is maybe some reduction in volume as we go into the end of the third quarter and into the fourth quarter. And that's just again based on some historical looks that we've had at the business in the past. But there's nothing fundamentally around contribution margin per ton or anything like that that's baked into our guidance that would force that number down. It's more on the volume side.

Okay, great. So some late season activity transportation issues (multiple speakers). Okay, great.

Exactly, right.

Unfortunately, we remember all too well the cold weather in December, right?

Right, it happens every year. And then from a big picture perspective, Bryan, maybe you can help those of us that are more situated in the oil and gas world. We see your business model and the ability of your ISP base to help answer now that the industry accepts it some of the volume demand from the oil and gas space. What is a type of industry at large ability to start to pull from what up til now had been an industrial, segmented industrial production base and does that cause any disruptions to the 100-mesh story in your view?

No, I don't think so. And there's only a few of us that have that kind of historical industrial base. It's a couple of the older line sand companies like ourselves.

But I think we saw some of this coming and we also kept a lot of our 100-mesh product on the spot market and available. Based on some of the trends that we spotted last year, we were preparing for this as one of the alternatives. And we don't see hardly any of our competitors that are similarly positioned to be able to do that.

Okay, great. Thanks for the time, I'll turn it back.

Your next question comes from the line of Brandon Dobell.

The upward revision to CapEx, maybe a little color on I guess either what changed last quarter versus this quarter in terms of opportunities to put capital to work? And is -- within that is there any plans to I guess expand the nameplate capacity at Ottawa or perhaps even Sparta given the demand trends?

No, really, Brandon, the increase in the outlook for capital spending really relates to our Fairchilds facility. So really accelerating the long lead time items to maximize the capacity coming out of that facility as quickly as possible. So that's what represents the -- about $20 million uptick in our guidance in CapEx.

Okay. And then maybe back to the previous question around the ISP versus Oil and Gas crossover. How much more room is there, I guess, to shift some of the 100-mesh out of the ISP business into the Oil and Gas customer set? Did we see the biggest amount you can push there in the second quarter or do you think there's more room, i.e., is there more room over nameplate capacity for Oil and Gas versus what we saw second quarter?

Yes, so I think there's two pieces to that, Brandon, that there's maybe a little bit of extra capacity that's available over nameplate as we look at some of our other facilities that we still haven't brought online in terms of Oil and Gas at this point. And these are the nontraditional facilities I'm talking about.

But also, as you can imagine, we're in a variety of discussions with our industrial customers. And we have some ability there where we don't have long-term contracts and we're selling to customers on the spot market to have products be a bit fungible, if you will, between the segments. So I think there's some additional upside there, but not a tremendous amount.

Okay. And then back to your comment, Bryan, about matching up origin and destinations better. How do we get the size -- how do we size the impact of that relative to the contribution per ton performance we saw in the second quarter? And I guess the implication is was it, if it's small do we see another step up in the efficiencies from that effort push contributions per ton higher in Q3 or did you capture a lot of what you think you could do in Q2?

So if you look at -- I'm going to assume you're referencing the jump in Oil and Gas contribution margin per ton.

Correct.

And if you look at that, Brandon, about half of that $6 roughly increase was due to pricing. The other half was due to operational and distribution efficiencies. And then if you look at that, about half of that was -- I would say is more permanent, real cost savings associated with renegotiated barge rates, renegotiated transload fees and reduced to merge mostly is what's driving that.

And then the other half I would characterize more as variable. And that is efficiencies due to volume as we push our facilities more to a 24/7 operation to capture this upside in volume. We're really seeing some efficiencies from that. And then the rest of it is in transportation and distribution savings associated with us shipping to more efficient locations, we just happens to be where our customers want it.

So that's the piece that could move around a little bit. If our customers want sand in locations that are a little bit more difficult than that contribution margin per ton will be affected negatively by that. But as you know our mantra is the right product at the right place at the right time and we're going to continue to do that despite the increase in cost that we may see.

Right. Okay, great. Thanks a lot.

Your next question comes from the line of Christopher Butler.

If we're looking at your guidance for this year and the Cadre acquisition, has there been any change to accretion on the EPS level that you're expecting in the back half of the year?

No, there really hasn't. When you make an acquisition relatively late in the year, you're going to be affected by the purchase accounting and the dollars associated with implementing some of the synergies that you're going after. And we don't see any real EPS accretion and very little EBITDA accretion in 2014. However, we stick to the guidance we gave for 2015.

And shifting over to the ISP business again, did you talk to the success, it looks like you've had the success on the implementing the price increases you talked about last quarter? And could you talk about the effect on margin of the shift of 100-mesh if that was a positive or negative in the quarter from this business?

Yes, so Chris, there's a couple things there. Our team has been very diligently pursuing what I think are very appropriate price increases across the ISP business. And in some areas like our higher end grounds products where we have a very strong offering, I think we've increased prices there. Certainly on some of the 100-mesh within oil or within the ISP business we have as well.

And the interesting thing is that we managed to achieve a contribution margin per ton in the industrial business of over $16 and that's the best ever we've done in the history of the Company. And it was actually about 11% up versus our best quarter previously since the IPO. So the team's having tremendous success there and I think that we'll continue to see additional price increases come from the industrial side of the business.

And the mix shift on -- with the shift of 100-mesh. Does that help you or does that hurt you with -- in this quarter?

So 100-mesh just in general can be of little bit dilutive relative to the rest of Oil and Gas, so it depends how you want to look at it, right? But I look at it from a Company standpoint. The margins are clearly higher in Oil and Gas, right? So from a total Company margin standpoint, it's accretive, could be a little dilutive from an Oil and Gas standpoint if that makes sense.

But on the ISP side, that would -- sounds like it would have helped you a little bit on ISP is only from a utilization --

Yes, exactly.

Thank you.

Your next question comes from John Daniel.

Hey, guys, good quarter. First question, Bryan, if the capacity at your existing mines, is that limited to the processing capabilities?

Yes. Typically the rate limiting step is drying and also that's the most expensive and difficult to expand.

I guess the question then is as you look, maybe not to the balance of this year, but in the next year are you -- is there any efforts to get permits to add additional drying capacity at the existing mines? And hypothetically speaking, if you were to do something that's a Utica adds another processing plant, what could you then -- could you take that number up on terms of the production rate?

So there may be some limited ability to do that, but it's not big numbers, right. We're always looking at those kind of alternative. And the thing you find is that let's say you want to put another dryer or something in Sparta, well then you hit the next roadblock, which is maybe the ability to load out.

And then maybe they have a mining issue or then you hit a natural cash issue. So there's all kinds of different things that come up, but we're constantly looking at that. I think there may be a few opportunities around the system to squeeze that a little bit more over the next couple of years and certainly our operations and engineering teams are all over that as you can imagine.

Okay, fair enough. Are any of the recent contracts that you've signed with E&P companies? And are you taking any calls from E&P companies that are seeking to sell source?

So we typically look at our customer base as the service companies. I would say that the exceptions to that are energy companies that have their own service arms like a PTL or Pioneer or those kind of folks. But typically, we think that the service companies are the right customer set for us.

Right, I guess -- and I understand that better. Are you getting calls from E&P companies seeking to sell source?

Sure, we get those kind calls all the time.

Okay. All right, fair enough.

The last one for me because there's probably others in the queue. At Utica, can you walk us through what -- how much volume might be shipped by barge? And if so, what that might have on their contribution margin?

So we don't have a specific target by barge, but as you bring it up, Utica has multiple options. It's kind of our Swiss Army knife plant, so we have access to four Class 1 railroads and barge. And so we'll just make real-time calls, John, around where the product is needed and how we can maximize our system wide contribution margin per ton. So we don't have like a specific target for barging out of Utica.

I guess let me phrase another way. If you had the choice, would you prefer to barge it or would you prefer to use rail?

So the barging works pretty well. But it's limited, right.

So barging out of there we can get to certain locations in the Marcellus and we can get to the eastern part of the Eagleford, right. So it all depends on demand and our other options, our rail is very efficient going into the Marcellus as well out of our sight. So it just sort of depends.

Fair enough. Okay thanks, guys.

Your next question comes from the line of Matt Conlan.

Great quarter and nice commentary moving forward. To really try and pin you down here, can you tell us how much volume in the second quarter was 100-mesh?

Yes, so look we've never given that level of detail, Matt.

Okay. We can back into it based on your nameplate capacity, but wanted to try to eliminate any variability in that.

Sure.

Okay. So it's clear you're selling more and more of the frac sand in basin. And last year, neither you nor your competitors really seemed to garner much additional margin for that additional effort. Are you starting to see some premium profit for selling it in basin these days?

Yes, we do get additional profitability from selling it in basin. It's not step change profitability, it's a few dollars more per ton typically in doing that. But it's really more of a market share gain.

And as I was mentioning in one of the answers to a previous question, this sort of velocity through the transportation network and our ability to keep up in our networks ability to keep up, I think has served us extremely well as we've seen demand move up the charts here.

Okay, great. And just one cleanup question, would you expect your 2015 tax rate to be in that 27% range as well?

Yes, I would say next year is probably 27% to 28%.

Okay, great. Thanks a lot, guys.

Your next question comes from Ben Swomley.

Good morning and congrats on a great quarter.

Good morning, Ben.

Good morning, Ben, thanks.

So I had a couple of follow ups here. First on pricing, and I appreciate all of the color you've already given us, but I'm wondering did you see any difference in price moves for different types of grades? I've heard that 100-mesh has moved actually a lot on relative basis.

No, that's right, Ben. We've actually seen higher pricing increases on a percentage basis in 100-mesh then we have any other grade. And think that's partially because 100-mesh was a bit more depressed in terms of pricing in the past.

But of course, the other element to pricing is supply and demand, right. So demand has gone up a lot for 100-mesh. It's gone up a lot in other grades as well, but probably more in 100-mesh side.

So we're up about double digits for the course grade and then 100-mesh potentially more or is the double digit include that blended average?

Yes, I think it includes that blended average.

Okay. And we saw full quarter impact during 2Q?

Pretty much. I mean, there was some price increases that came in the end of the first month or something like that, but I would say it's pretty much fully in the quarter.

All right. On the cost improvement side, I definitely noticed cost -- average cost per ton came down a couple of dollars. Is that at all, and I know you gave us some color already, I'm wondering how much of your volume from Sparta is still going to the Permian or whether you've been able to ramp up sales into the Bakken or Canada from that facility?

We saw a lot of the volume going to the Permian. And the reality is, it's just where the demand is super strong right now. So we're still headed down there and we'll see how demand ramps in the Permian over the next several quarters.

Our hope was to be able to swap out some of the Sparta volume for Utica volume and rejigger the network. A lot of that will depend on the relative demand amongst the basins.

Okay, so it sounds like though we haven't actually seen that, that's still potential upside. So when I think about your guidance into the back half of the year, what I'm hearing so far, and correct me if I'm missing something is, you're assuming big repeat of negative seasonality in the fourth quarter, flat pricing with where you were in 2Q and minimal or no further cost improvement.

So in other words, you're holding everything flat. Am I getting that right?

Yes, I would say there's going to be some slight improvements as we continue to work through the rest of the year and cost takeouts. We're going to continue to work on that. I think there's opportunity for some pricing, but we are looking at the fourth quarter being reminiscent of last year's fourth quarter. So I would agree with your thoughts there.

Is that based on customer conversations or is that just in the spirit of being conservative?

That's in the spirit of being conservative and the understanding that, look, history tends to repeat itself a little bit as far as the weather goes. And look, we're trying to be as thoughtful as we can in our guidance.

Okay. And to remind me, so we're up about 10% total on price and that sounds like a pretty good start, but how does that compare to the price move you saw in the back half of 2011?

Yes, I don't know, Ben. I think if we look back, I don't have those numbers in front of me, but pricing went up more than that in 2011. But it was a bit of a different game as well, right?

I mean there were fewer of us in the industry at that time and I think everybody was a bit less sophisticated around looking at options and alternatives back in 2011. So it feels just as strong from a demand standpoint if not stronger. But I think the suppliers and the customers who have all gotten the more sophisticated, there's more product being delivered in basin, a lot of changes to the dynamics. So it's hard to compare.

Fair enough. And one last one for me, I know I've asked a few here.

Going back to the old MLP question. Any -- are you still thinking about potentially using an MLP structure for some of the new assets or is that off the table at this point? How are you thinking about it?

So if you go back, we've reviewed that a couple of times in the past internally and taken a hard look at it to see what may or may not make sense in terms of changing our corporate structure. And historically the analysis typically came out that the view wasn't worth the climb, especially because of the tax consequences of contributing fully depreciated assets into an MLP. So certainly, as we add new assets, taxes become less of an issue.

And I say the other thing that's interesting to me as I look at our industry and think that there's definitely potential for consolidation ahead, certainly having an MLP structure brings perhaps additional optionality and flexibility. So, look, we're always evaluating these things and our mantra is to continue to deliver best-in-class returns to our investors. So to the extent that considering an MLP or other kind of structuring options might improve that and have us deliver better results for investors, we're always open to that, always considering alternatives.

Great. Congrats again on a great quarter.

Thanks, Ben.

Your final question comes from the line of Trey Grooms.

Thanks, guys, and yes, congrats on a good quarter.

Thanks, Trey.

A couple to clear up and it goes back to the previous question. But with double-digit increases that you're seeing now, combined with the -- how much you have contracted plus any change that you're seeing in product mix. So ASPs, if I'm getting it right, were flat sequentially in Oil and Gas and are expected to continue to be flat. Is that being impacted by more of a push from into the 100-mesh or is it the mix playing role, what -- I'm trying to get my hands around it, if it's expected to be still be flat going forward in your guidance?

Well our ASPs did move up a little bit in the second quarter. And yes, I think your assessment is accurate, right? The more 100-mesh we sell clearly is going to have an impact there. But it is going to generate additional EBITDA dollars, right, as we sell more of the 100-mesh like we saw in Q2.

Okay. And then as far as in basin sales, is that maxed out or do you think that that mix will continue to move more towards in basin or are we where we -- as much as we can get to on that?

So it feels like we've stabilized around 65% to 70% for the last couple of quarters, Trey, and that feels like a pretty reasonable place to be for a while. The reality is that some of our customers, some of the larger, more sophisticated service companies, have their own logistics network. And they'll always be a percentage of sales that will be sold at the plant in my opinion.

Okay. And then, Bryan, this is a bigger part third question. You guys used to have a really good chart in your presentation materials outlining how you see the cost curve of the industry.

With the capacity that's come on and that you guys are expected to bring on and others, how do you see that cost curve? How has it changed and how do you see that changing as you look out over the next year or two?

Yes, it's a very interesting question, Trey, and we just did a refresh of that chart. We haven't put it out yet publicly.

But one of the key up shots of that is that in the past, we saw about 65% of the industry capacity low cash cost, like U.S. Silica. We think that's moved down to about 55%. So said another way, that there's now more capacity on a percentage basis, so it's in that moderate and high-cost region. So cost curve looks like it's getting steeper based on our work.

And you think that continues with, even though you guys are bringing on a big slug of what will be pretty good or low-cost capacity with Fairchild, I would expect and some of the others. Is the picture we have today, do you think that continues?

Well, look, I think the bottom line is it's just getting harder to find low-cost sites. And, look, we're bringing on some low-cost capacity, others probably will. But there's of it that's coming on out there where there's compromises that were made to bring the capacity online.

And so I think if you look, you asked a big picture question, if you step back and look over the next 5 years to 10 years, I believe it's going to be increasingly difficult to bring on low-cost capacity. And I really like our position being very heavy in the low-cost end.

Great. Thanks for the update on that, Bryan, and good luck with the current quarter.

Thanks, Trey.

Thanks, Trey.

Thank you, there are no further questions. I would now turn the call back over to Bryan for any closing comments.

Thank you very much. Well, look, clearly our Company is driving success with our mantra of speed, scale and strength. We've acted quickly and decisively to find and permit new high-quality frac sand reserves to assure our customers of adequate supply going forward.

We move very quickly but diligently to capture an acquisition, that's Cadre. It's a great opportunity that expands our capacity and product offerings in one of the fastest-growing basins in the country. And in relatively short time, we've built up one of the largest and most extensive logistics network in the industry.

To accomplish this, we've drawn on our financial strength and our top notch team. We've expanded production capacity and transportation infrastructure and it's enabled us to gain share as I mentioned today in a growing market. And I believe we've establish U.S. Silica as one of the industries most significant supplies of silica-based products.

I want to thank my colleagues for their dedication and hard work in making U.S. Silica the tremendously successful Company that it is today. And for all of all investors, we certainly appreciate your interest and support and look forward to speaking with you in the future.

Before we sign off today, I had one final note. Wanted to remind everyone about our upcoming Investor Day, which will be held September 9 and 10 in San Antonio, Texas. At the meeting we plan to refresh our long-term growth goals through 2017. And I'm also pleased to announce that we'll be joined by the head of a major Class 1 railroad who will provide his views on the current and future state of rail logistics as it relates to the frac sand industry.

So thanks, everyone, for dialing in today and have a great day.

Thank you. That does conclude today's conference call. You may now disconnect.