US Silica Holdings Inc (SLCA) 2014 Q4 法說會逐字稿

Greetings and welcome to the U.S. Silica fourth-quarter and full-year 2014 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Michael Lawson, Director of Investor Relations and Corporate Communications for U.S. Silica. Thank you, you may begin.

Thanks. Good morning, everyone, and thank you for joining us for U.S. Silica's fourth-quarter and full-year 2014 earnings conference call. With me on the call 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 question, we 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. And with that, I will now turn the call over to our CEO, Mr. Bryan Shinn. Bryan?

Thanks, Mike, and good morning, everyone. I'll begin today's call by reviewing our strong performance in the fourth quarter and some of our key accomplishments in 2014, followed by an update on current market conditions and the actions we're taking to manage through this current period of lower oil prices.

Certainly, 2014 seems like old news, but I think it's important to spend just a few minutes recapping our impressive results. Strong market demand in oil and gas drove fourth-quarter volumes for the Company of just over 3 million tons, a 43% improvement over the same period last year. Oil and gas volumes in the quarter grew to a record 2 million tons, a 79% increase on a year-over-year basis, driven largely by the continued adoption of new completion techniques, which employ more sand per well.

I'll speak in a moment about our thoughts on sand demand for 2015, but suffice it to say that we believe this trend is here to stay, and should offset some of the decline in the demand we expect to see as a result of the significant number of rigs that have been already laid down this year. ISP volumes in the quarter of approximately 1 million tons were up 2% over the same period last year, driven largely by new business in foundry and stronger demand for building products.

Pricing was strong in both operating segments, which produce an enterprise contribution margin per ton of $31.07. Don will have more to say about segment contribution margin in his prepared remarks in just a moment.

Higher volumes and stronger pricing drove record revenue for the Company in the quarter of $249.6 million, an increase of 67% on a year-over-year basis. Adjusted EBITDA for the quarter was $67 million, an increase of 87% over the same period last year.

Now, let me take a couple of minutes to review some of the major accomplishments our company achieved in 2014, because I think many of the actions that we took last year have put us in a better position to manage through the changes that we're seeing in our markets today.

Our acquisition of Cadre Proppants by any measure has been a home run. The premium Hickory sand provider has exceeded all of our initial expectations, and has been accretive to earnings for the two quarters under our ownership.

The integration is now complete, and we have had success cross-selling our northern white and resin-coated sands to Cadre customers, and we have also sold premium Hickory sand to U.S. Silica customers. Cadre today continues to be sold out, with firm pricing.

We shipped a record 125 unit trains in 2014, double the number we shipped in the previous year. In the past three years, we built a sophisticated supply chain that positions U.S. Silica as one of the most efficient, effective, and lowest cost suppliers in the industry.

We also continued to launch new value-added products from our industrial and specialty products segment, with 13 new products and over 30 more in the pipeline. The investments we have made in ISP have fueled revitalization in this important business segment, while at the same time, providing the steady growth and strong cash flow that it has had for more than 100 years.

Now, let me turn to our views on our markets today. In the ISP sector, markets remain strong in 2015, led by growth in housing starts and continued recovery in the automotive sector. Our products are used in many materials consumed by these two industries, including fiberglass insulation, roofing shingles, glass, and paints. Demand for fine industrial silica grades, similar to those used in the oil and gas sector, has remained strong as well.

In the oil and gas industry today, the reality is a bit different. When OPEC announced in late November of last year that it would not cut oil production in spite of high supply levels and weakening worldwide demand, the global reaction was swift. Yet, the immediate impact on our business was negligible.

Since then, we have seen US oil producers cutting their 2015 capital expenditure budgets by as much as 40%. In response to lower spend, drilling rigs are being laid down at the fastest pace in the history of the rig count, according to industry analysts, with some estimating that rigs could fall by more than 40% peak to trough this year.

What does all this mean for the proppant industry in general and U.S. Silica specifically? While many questions are still awaiting answers, what we do know is that the decline in drilling activity could lead to reduced demand for proppants in 2015.

For example, if we see a 30% to 35% reduction in average rig count, we estimate that raw frac sand demand could decline by as much as 15% to 20% from 2014 levels. The difference is attributable to higher rig efficiencies, smaller declines in horizontal drilling, where most proppant is used, and well designs with more proppant per well.

Some energy companies have commented on recent earnings calls that they intend to focus their efforts on completing existing wells, in an effort to maximize production. Conversely, other producers have stated that they do not intend to complete some of the wells already drilled, in an effort to reduce cost. Given all the uncertainties and this type of conflicting information, it's very difficult to know at this point in time just how total demand for frac sand will play out in 2015, but early indications point to lower demand sequentially.

Supply is challenging the forecast as well. Based on our analysis of announced and known capacity expansions, there were plans to bring approximately 30% more capacity online throughout 2015. What is not clear at the present time is how much of this new capacity will either be slowed or stopped, in light of current market conditions.

So how do we operate in this uncertain environment? First, we believe it's prudent to continue to plan for significant long-term growth, as drilling and completions activity will ultimately rebound. We also believe that it's critical to maintain flexibility and create optionality as we closely monitor customer needs and the market situation.

For example, our 2015 CapEx plan is designed to be extremely flexible, allowing us to speed up or slow down investment as market conditions dictate. We will also seek to use our war chest of cash to make strategic investments in additional capacity and capabilities.

We plan to be flexible with our customers as well. We're in active discussions with contract customers regarding how to best support their business plans in the current market environment.

We're considering numerous alternatives, including pricing flexibility, lengthening contract terms, increasing unit train shipments, improving response time, and closer aligning on supply chain planning to reduce total delivery costs. We also plan to be flexible from an operational standpoint. We have embarked on a Company-wide initiative to reduce our budgeted SG&A expenses by 20% in 2015.

We are also looking carefully at our work force requirements and ways in which we can operate our plants more efficiently. We're in discussions with our vendors to help take out cost, and we're concentrating on finding the best origin and destination pairings for product shipments, to ensure that we optimize profitability.

As we have seen in past oil and gas cycles, the key to success in a downturn is to act quickly and decisively, and to stay closely aligned with customers. We've already adapted to the current reality of lower commodity prices. Clearly, no one knows when the market will rebound, but I expect that when it does, it will come back quickly, and we will be very well-positioned to capitalize on investments made during the down cycle.

And with that, I'll turn the call over to Don.

Thanks, Bryan, and good morning, everyone. I'll begin by commenting on our two operating segments, oil and gas, and industrial and specialty products.

Revenue for the oil and gas business for the fourth quarter of 2014 nearly doubled on a year-over-year basis to $196 million. While revenue for the ISP segment of $53.5 million represented a 13% improvement over the same period in the prior year.

Contribution margin from oil and gas in the quarter was $80.4 million, an increase of 135% over the same period last year, and up 4% sequentially from the third quarter of 2014. On a per-ton basis, contribution margin for oil and gas was $40.27, compared with $30.57 for the same quarter of the prior year, and relatively flat with $40.65 reported in the third quarter of 2014.

On a per-ton basis, contribution margin for the ISP business of $13.14 represented a 4% decline from the same period in the prior year, and a 14% decline from the third quarter of 2014. The sequential and year-over-year decline in ISP contribution margin per ton was the result of higher production costs in the fourth quarter, partially offset by higher prices for our ground products.

Turning now to the total Company results. SG&A expense for the fourth quarter increased by $21.2 million to $35.7 million, compared with $14.5 million for the fourth quarter of 2013. The increase was driven mostly by increases in compensation expenses of $8.7 million, the majority of which was associated with our annual bonus incentive plan, and $6.4 million in business development expenses, as we continue to look for ways to glow the business.

Additionally, we incurred a $6.9 million increase in bad debt expense related to the overall assessment of our customer's ability to pay their obligations to us. In particular, the majority of this expense is due to one customer in our oil and gas segment.

Depreciation, depletion, and amortization expense in the fourth quarter was $12.7 million compared with $10.1 million in the same quarter last year. The year-over-year increase in DD&A was driven by continued capital spending in support of our growth initiatives, combined with increased depletion, due to the additional volumes of sand mined.

Continuing to move down the income statement and the other income and expense line, interest expense for the quarter was $5.4 million compared with $4.1 million in the same period last year. The effective tax rate in the quarter was 13.7%, compared with 9.2% in the fourth quarter of 2013. Our fourth-quarter tax rate was lower than originally expected, due to the revised and reinstated R&D tax credit, a larger than expected tax depletion deduction, as well as lower state taxes.

Turning now to the balance sheet. Cash, cash equivalents, and short-term investments at December 31, 2014, totaled $342.4 million, compared with $153.2 million at December 31, 2013. As of December 31, 2014, our working capital was $416.1 million and we had $46.8 million available under our revolving credit facility.

At December 31, 2014, total debt outstanding was $502.3 million, for a debt to adjusted EBITDA ratio of 2.0. Taking into account total cash and cash equivalents on the balance sheet of $342.4 million at year-end, U.S. Silica's net debt was $159.9 million for a net debt to adjusted EBITDA ratio of 0.6.

During 2014, our cash flows from operating activities exceeded our capital expenditures for the first time since the IPO. We incurred capital expenditures of $41 million in the fourth quarter of 2014, the bulk of which consisted of investments in various growth and maintenance initiatives.

During the quarter, we upsized our senior secured term loan by an additional $135 million to make a strong balance sheet even stronger, while providing additional flexibility to facilitate our disciplined approach to capital allocation, which includes organic growth opportunities, funding acquisitions, or returning cash to shareholders.

Regarding the latter, our Board late last year, authorized an increase to our share repurchase program up to $50 million. Between December 22, 2014 and February 12, 2015, we have purchased a little over 600,000 shares, at an average price of $25.99 per share.

We also plan to use our strong balance sheet to capitalize on unique opportunities created by this low oil price environment to enhance our speed, scale, and strength as an enterprise, looking mostly at mining or logistical assets that would complement our existing network.

Finally, as we noted in the press release, we think it prudent at this point in time, given how quickly the oil and gas industry has reacted to reduced drilling activity in response to lower oil prices, to temporarily suspend our financial guidance until such time as we can begin to see more clarity in customer demand trends. Obviously, we'll be watching this very closely, and we'll provide you with an update on our next earnings call, or sooner if practical.

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

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

(Operator Instructions) Our first question comes from Blake Hutchinson with Howard Weil. Please proceed with your question.

Taking all this commentary, and translating into more of a Silica-specific translation, and I guess it's something you can answer because there's some hard data behind it. Is the unwillingness to give a full-year forecast simply that -- up to date, results have actually, or what you have seen has been relatively stable with 4Q, which makes it difficult to diagnose the ultimate impact on Silica?

Or would you suggest that we need to look out at the industry, and start taking the type of volume -- potential volume declines and pricing declines that are out there, and start reflecting that on Silica's results immediately in the year? Just trying to get a better gauge of where we are starting from for your franchise.

Sure. Sure, Blake. And I think that most of the uncertainty that we see right now is obviously on the demand side. And as we said in our prepared remarks, I think most people in the industry, including us, are now expecting at least a 40% peak-to-trough decline in rig count. And some of the more recent estimates are suggesting something even a little bit south of that. If you put that on a year-on-year basis, it's probably a 30% to 35% year-on-year decline in rig count.

Now, the good news for the frac sand industry, and us specifically, is that we have some offsets to that. We still expect to see 15% to 20% more sand per well on a year-on-year basis. We get a little bit of a tailwind through a continuing improvement in rig efficiencies.

And the good news is that we're seeing more vertical wells drop off than horizontal wells in the decline in rig count. And I would say the verticals use less sand than the horizontal. All those are positive.

The other side of the coin is that we're starting to see some wells that have been drilled, but not completed, right? You hear a lot of energy companies talking now about potentially saving some money by holding back some percentage of their wells, and completing them later. So, it's just tough to know how all those puts and takes play out. I would say that -- you look at all that, and it's not unreasonable to see a scenario where maybe we have 10% to 15% less frac sand demand in the industry year on year.

But specifically to your question, that's the part that is really uncertain. It's hard to know how some of that demand plays out -- when things turn. Is this a V-shaped recovery, a U or an L, right? I think that is what is preventing us from giving really firm guidance, as we have done in the past.

And I guess just to follow up with that: I think my question was more around how abruptly this may be impacting you, in terms of -- because you -- there's mixed signals there. You're saying in some areas, like Hickory sand, you're sold out with firm pricing. You're considering pricing flexibility.

I guess, how does that all add up to what you have faced today or year to date. Are volumes backing up already? Is the delivery system becoming less efficient because of that? Or is the commentary more: Look, this may be something that occurs towards the end of the quarter or into second quarter, but we just don't know yet?

No, look, we have already seen some impact. And I think we said in our prepared remarks that we would expect declines sequentially, right? I would say that, as I look at, say, first half of 2015 for us, it is probably going to feel a lot more like the first half of 2014.

And so, if you look at last year, it was kind of a year of two halves. The first half -- demand was okay. But we really saw demand pick up in the second half of 2014, and pricing as well. But it feels like the first half of 2015 is more back to where things were in the early part of 2014 -- just to kind of give you a sense for what we are seeing out there.

Great. Thanks. I'll turn it back. Appreciate the time.

Our next question comes from the line of Brandon Dobell with William Blair. Please go ahead with your questions.

Maybe just take the conversations with the customers in a different way: How deep are the conversations getting around future supply from you guys? Are customers still worried about: We're just going to get shut out of the market if things come back?

I'm just trying to get a feel for how confident you are in capacity expansions, new mine expansions, those kinds of things, based on the conversations you are having with customers. And embedded within that, there's an obvious either market-share or wallet-share component to that conversation about how much demand you're going to see from [a particular] service company?

Yes, it's a really good question; and as you can imagine, we're having a lot of discussions with our customers on a variety of topics. I would say that most of the conversations today center around how we can support their business goals; and it really varies by customer, right? We see some customers out there that are aggressively taking share; some that are moving to new basins; some by their choice, and some by the fact that they are losing work in the basins where they currently have their crews situated.

And almost all the customers are talking about faster response time. One of the interesting things about the dynamics right now in the service industry is that customers are winning and losing work at a rapid pace. And so, we need to be in a position to respond to that.

And as you can imagine, customers are asking us for pricing flexibility, given the dynamics in the industry right now. We look at things like a longer contract length, and increasing our share, as you mentioned.

But there are a lot of things -- other things we can do for customers. For example, we shipped 125 unit trains last year. I think that is the most of any sand supplier in the industry. We'll probably do more than that in 2015. And so, it gives us that decreased response time that customers are looking for.

It's also important in this environment to more closely align on supply chain planning. Sand is obviously a high-volume product; and if we send a trainload of sand to the wrong location, it costs us a lot of money. We are trying to be very focused on our contract customers and meeting their needs. So, that gives you a bit of color as to what the conversations are typically like today.

Okay. And then a quick follow-up on that: As you guys think about the wallet-share component of the conversations, how much visibility do you guys get talking to the bigger service companies or even smaller service companies about -- let's call it vendor consolidation, vendor concentration. Are they accelerating those types of conversations? Is it more: Hey, we just don't know what is going on, so we are going to keep with the vendors we have and then address that later? What does that feel like to you guys?

So, we definitely see a vendor consolidation. We were talking with senior leadership at a very large service company not too long ago, and they said that, in 2014, that they purchased sand from more than 30 different suppliers. Their goal was to get down to four or five on a going-forward basis; and we're going to be one of those four or five. And so, that is pretty representative of the discussions that we're having.

I think the things that are playing out in the industry today really differentiate people like us, who have all the capabilities to serve customers quickly at good cost with a national footprint from many of the one-off entrants that we have had over the last couple of years. It seems like this might actually accelerate some of the consolidation efforts that were already under way, Brandon.

Okay, thanks a lot.

Our next question comes from the line of Marc Bianchi with Cowen.

The CapEx guidance that you provided seems a little bit lower than I was expecting. Is there some deferral of the Fairchild facility here, or can you talk to more specifically what you are planning on spending on in 2015?

Sure, Marc. So, our plan is to maintain a flexible approach that is really driven by the demand signals that we're getting in the market. If you look at how we have been running projects over the last 18 months to two years, we mostly have been optimizing for speed to market. So, the implications of that are that we are spending a lot of extra money on those projects, working nights and weekends, and doing a lot of premium-time things to bring capacity on faster.

I think now what we are looking at, with this more flexible approach, is to go back to more of a -- I guess what I'll call a normal schedule. You work Monday through Friday; you work daylight hours and things like that. The reality is, we can change back and forth very quickly between those two approaches. But as we run projects in more of a normal mode right now, that means that we'll probably push out some of the completion dates.

And so, for example, if we choose to, we can still have Fairchild up and running before the end of the year, as we had originally planned. If we scale back a little bit, and run in more sort of normal mode, it probably pushes the start-up into 2016. And the reality is, we're just looking for those demand signals out in the market.

And if I had to speculate, I think what is going to happen is when this market comes back, it's going to come back hard. And I think that's going to be exacerbated by the potential backlog of drilled but uncompleted wells. So, we want to make sure we're ready to respond to that. And I think we'll spend the CapEx that we need to spend, to make sure that we don't miss the upturn when it comes. With that said, we're still talking about $100 million to $120 million worth of CapEx this year, which is still a pretty substantial investment.

Sure. Sure. I guess, along those lines of capital investments and bringing on new plants -- even if you get back to margins, like you said, first half of 2014, you're still at a pretty healthy return on new investment. How much lower could margins go before you start to say: Well, the new investment doesn't look as attractive to us?

Yes, so, there's a long ways to go for that. I think it's more trying to maintain some discipline. And when you look at the supply, I would say that our forecasts were that we would see originally 25% to 30% supply increase coming online during 2015. So, that was the initial view.

Quite honestly, it would surprise me if almost any of that capacity actually makes it to market in 2015, given the current demand dynamics out there. But obviously, we'll maintain our options; and as we see alternatives to accelerate the CapEx program back up, we'll certainly do that.

Very good. Thanks, Bryan.

Our next question comes from the line of Brad Handler with Jefferies. Please go ahead with your questions.

Appreciating your -- we're all diving in the same directions, and appreciating the lack of visibility, I guess, a couple of areas of questions for me. Is your best guess that your contract customers will wind up taking all of your volume in 2015 -- the consolidation process you are talking about, and working with those customers? Whatever the volumes wind up being, is it your best guess that it just is a total contract story?

No, I don't think it will play out like that. We currently have eight take-or-pay contracts that, if you add up the volumes, it's probably in that range of 60% to 70% of our capacity. So, I think we'll be in that range. The rest of the volume obviously is on the spot market.

Now, with that said, we actually have a couple of customers that we're negotiating contracts with. One is another take-or-pay contract. The other is a very large contract that's structured a little bit differently, but still has a very high likelihood of take through that.

That could theoretically push up our percent under contract for the year, if those contracts get signed in the coming weeks here. But I think the base case, Brad, is that we still stay in that 60% to 70% contract range. And we'll see; if we sign other attractive contracts, then we're certainly willing to go higher than that.

Okay, that's interesting. So, in other words, you would think that some of the contract customers might take a little less. And again, I know you're not committing to how much -- how you compare to the industry -- but some of your contract customers take a little less and, therefore, your spot customers take a little less, but the balance stays roughly the same. Is that how I should interpret what you just said?

That's probably right. Although, the reality is that the volumes with the contract customers haven't really changed that much. We're still relatively on track there.

We've seen some declines in Q1; and I think part of that is just the uncertainty in the market, and this overhang of drilled but not completed wells. I'm still hopeful that we'll see some rebound as we get into the second half, but it's just too early to tell how that's going to play out.

Okay. Maybe just an unrelated follow-up -- and maybe it's a question for Don -- but how would you expect your SG&A costs to run in 2015? You talked about 20% reduction. I don't know if comp is part of that, and I don't know how business development expenses fit into that. But could you speak to -- where do you think we should put as a placeholder for SG&A?

We should probably start out the year in that $19 million to $20 million range per quarter. And then you're going to see that 20% reduction start kicking in. So, probably start reducing that over -- as the year progresses.

And I guess that's inclusive -- just to be clear, it's inclusive of comp, and inclusive of business development? (multiple speakers)

That's right. Yes.

All right. I'll turn it back -- maybe jump back in queue after. Thank you.

Our next question comes from the line of Blake Hirschman with Stephens.

This is actually Drew Lipke; we're on for Trey Grooms. I wanted to drill down into -- you talked about increasing unit train shipments, and you think you can get those up in 2015. When you look at delivered cost per ton for your customers, and you know everybody is working to increase shipments via unit train, and I think the industry is running 20% to 25% of frac sand volume on unit train -- how much do you think you can currently ship via unit train?

And as a follow-on to that: As more and more sand is delivered in the basin, do you have any concerns that that could create again an oversupply in the basin level?

Yes, so, a couple of great questions, Drew; and I think we roughly have the capability to probably double our current unit train shipments. And actually, we're just opening up a big new transload in Odessa, Texas, in the next few weeks here. That's going to be one of the largest unit train transloads in the country. It can actually take two unit trains simultaneously; and we have a number of customers that have been waiting for that to open up.

All the facilities that we built recently, and those that we will build in the future, will be unit-train-capable. I think we'll continue to increase the percentages of unit trains.

And just remind me again: What was your second question?

As the industry moves to more and more unit train (technical difficulty), and you see more sand delivered actually in-basin, and start storing more sand in-basin, do you have any concerns that, as we move in that direction, that we could see an oversupply at the basin level?

No, not really. Actually, if you look at our in-basin pricing, particularly our spot pricing, it's holding up fairly well. And I think it's a result of just all the difficulties to get product out into the basins. And even though rail cars aren't as tight as they were in 2014, given some of the drops in demand here, there are still a lot of challenges to get the product out into the right place. We haven't seen those kind of issues at this point.

Okay. I guess one more follow-up on that: As you talk with customers about price concessions, and you look to reduce delivered cost per ton, how much do you guys think that you can actually squeeze out, in terms of delivered cost per ton for your customer, and who do you think ends up reaping those benefits?

Well, I think we're actively looking at all kinds of costs along the chain. And some are vendor-related costs, and others are just continuing to work on efficiency improvements. And I think that there's clearly another 5% to 10% of costs that are there to potentially target. We'll see how successful we are ultimately in getting those costs out. But it would be my intention to share a part of those savings with our customers.

And at the end of the day, our core strategy in oil and gas really hasn't changed. We want to continue to grow share. Our share is up already in the first quarter, and I think we'll continue to grow share throughout the year. And to do that, we want our customers to take share as well.

One of the things we're trying to do is to support our customers in this uncertain environment. I think one of the reasons that customers continue to choose U.S. Silica is because of our logistics network, and the fact that we're easy to do business with, and certainly passing along some of the savings that we can get through our efficiency improvements.

And things that we're working on together, by the way. We have a lot of joint projects with customers to take out costs by working together more closely. I think all those accrue benefits to us, as well as benefits to our customers.

Got it. Thanks, Bryan.

(Operator Instructions) Our next question comes from the line of Chase Mulvehill with SunTrust. Please go ahead with your questions.

I guess some clarification on -- you said that first-half 2015 will look a lot like first-half 2014. Are you guys talking about oil and gas volumes, oil and gas contribution margin per ton, or all of the above?

Yes, so, it's all of the above but primarily just looking at the bottom line. If you look at the earnings that we generated in the first half of 2014, and just the environment, particularly around Q1 in oil and gas, Q1 this year feels the same as Q1 of last year.

And I think it's just important to differentiate that our business and the whole industry really accelerated in the second half of 2014. And so, if you were to take that run rate, second-half run rate or 4Q run rate, and try to extrapolate that into 2015, that is just not a realistic look at it, given the rig-count drops that we have seen.

Okay. General consensus seems to be that spot frac sand pricing can decline, call it, 20% to 30%. What I struggle with is what this means for your pricing, right? So, if we look at 4Q average oil and gas pricing of $98 per ton, if spot is down 20% to 30%, then what does that mean for your 4Q average oil and gas pricing, right?

You did -- some of that's term -- it's below spot. Not all of that was booked at the peak, right? So, I am just trying to understand the risk associated with that number.

Sorry, you said versus 4Q pricing? I wasn't exactly sure what time period you were referring to.

So, 4Q average oil and gas pricing was about $98 a ton, right?

Yes.

And if we -- the general consensus is that spot pricing can fall 20% to 30%, right? And so, I am trying to translate the 20% to 30% risk in spot pricing to your $98 per ton. Because that $98 per ton doesn't represent peak spot pricing, right? It represents term contracts; it represents some peak spot, but not a lot, right?

Yes. So, I get your question now. So, just generally, on pricing, it's hard to do compare and contrast, because it varies so much by basin and by grade.

I would say, generally what we are seeing so far in Q1 is a weaker pricing environment, not surprisingly, than we saw in the second half of 2014. I was going back and looking at some of the numbers again over the last week or so, and with service company work changing hands so quickly -- it's one of the odd dynamics has crept into this downturn.

It sometimes actually creates spot shortages out in the market, in ways that you wouldn't necessarily think. And that actually is a positive for our pricing. So, if you look at our spot transload pricing to start the year off, once again spot pricing at transload -- it's been relatively flat in Q1 versus Q4.

And one of the questions that we always get asked and we've talked about a lot is that we are still seeing spot pricing above contract. So, a lot of the same dynamics have held; it's just that, in some cases, pricing has reset to a little bit lower level. If that is helpful?

Okay. Thank you. One more follow-up: Could you just talk a little bit about the business development expense? What is that?

The business development expenses, for us, actually run a variety, but they are associated with us trying to grow the business. If we are looking at acquisitions, divestitures -- we're always looking at things like that. We pass those expenses -- if we were to use outside consultants, we pass those expenses through the P&L.

Okay. That's all I have got. Thank you.

Our next question comes from the line of Richard Verdi with Ladenburg Thalmann.

I had two quick questions. The first: I understand visibility is challenging. But a few months ago, you had laid out a really compelling EBITDA plan, to increase it significantly out to 2017 and then again to 2020. Given the current environment, and looking out -- accepting that visibility is tough -- how do you feel about this plan being achieved right now?

You're talking about our longer-term plan (multiple speakers)?

Yes, for 2017 and then again in 2020, to increase the EBITDA.

Our goals haven't changed in terms of what we want to achieve. I still think that this notion of doubling the size of the Company as our intermediate goal is the right one. Given the current challenging environment, it might take us a little bit longer to achieve that goal, but we're certainly not abandoning that at all.

And I think we're going to continue making substantial investments to get there -- things like this world-scale transload that we just opened. We have a pipeline of new capacity projects -- Fairchild is the first big one in the pipeline. But we have several more behind that that we are actively developing.

I think we'll be ready, and we're also very well positioned from a cash standpoint. We have over $300 million of cash on the balance sheet, and lots of other liquidity. We'll be able to do things in this down cycle that others won't.

One of those things is looking at M&A. Initially, when we talked about doubling the size of the Company by 2017, that was essentially all organic growth. I think there's a good chance we could still get there with a little bit of M&A, right?

So, getting there by purely organic growth may be a bit of a stretch right now, by 2017 anyway, given the current environment. But who knows? If we see a faster rebound, if it looks more like a V than a U or an L, I think that goal is not wildly unrealistic. Still, our goal to double the size of the Company as quickly as we can; and then, I still like the goal out there of getting to $1 billion in EBITDA, once again, as quickly as we can get there.

Okay. Great, that's super. That's very helpful. Thank you. And also, a little bit on strategy, and shifting over to the ISP segment: You had mentioned housing and auto were strong. Is there any kind of thought that with the challenging environment right now in oil and gas, that maybe there may be, a little bit more focus on that housing and auto, and maybe more of a look at water?

Given the secular water trend, it's a stable area to exploit. Is there thinking that to shift a little bit more of a focus over to that segment, to try to help the financials move along here?

No, it's a really smart observation, Richard, and it's something that we're taking a look at. We're actually funneling more investments into our ISP business now than we ever have. We're committed to growing in that sector, and we're not going to let whatever disruptions might happen in oil and gas stop us from growing there. We have a lot of really interesting projects in the pipeline. We're looking at M&A on that part of the Company as well.

And I think it's one of the things, quite honestly, that differentiates us from a lot of other companies in the oil and gas service space generally, and sand companies specifically -- we're this really nice industrial business which has a lot of growth options. And, quite frankly, probably we haven't paid as much attention to that in the past as we could have, given our focus on oil and gas. I think you'll definitely see us going more pedal to the metal on the industrial side, and continuing that diversification.

Super. Great. Thanks, guys. I'll jump back in the queue.

Thank you, and our next question comes from the line of Agata Bielicki with Simmons & Company. Please go ahead with your questions.

So, as you negotiate contracts with your customers today, do you get a sense or any difference in pain or possibly panic between the public frac customers versus the private frac customers?

So, are you talking about our service company customers?

Correct.

Not really. I would say the difference is more in terms of scale. You definitely get a different feel when you talk to the largest service companies, as opposed to some of the smaller ones. And sometimes that's a public/private delineation as well. Obviously, a lot of the smaller companies tend to be private.

I think the challenge is that the large service companies, with their scale, can come in and compete on price in a way that some of the smaller companies can't. And we frequently hear stories from our smaller customers of them losing work to the big guys. If you look at who we have our contracts with, and how we're situated, the majority of our volumes are sold to the larger service companies in the industry. So, I think we're advantaged there. But it feels like the gap between large and small could be exacerbated in this downturn.

Okay. And then, I guess sticking with the large/small customer base, could you tell us if the bad debt expense is tied to one customer or multiple? And if you can speak to those payment matters, and are they the large, or are they the small? And have you noticed a rise, possibly, in some of the slower payers?

Yes, so, we increased our bad debt expense in the fourth quarter almost $7 million. The majority of that related to one customer -- a relatively small customer that we had a large exposure to. We did a complete review, as we always do, of all of our AR, and to make sure that our allowance for doubtful accounts is set appropriately. So, we did adjust that a little bit as well, just to make sure that we were completely prepared for -- making sure that we protected our balance sheet as best we can as of the end of the quarter.

Okay. And I guess one final one from me: Given your previous comments about growth and product pipeline and ISP, would it be fair to assume that those increased manufacturing costs will continue into Q1 and to possibly Q2?

No, I would say: Look, we were hit by some unforeseen expenses -- manufacturing expenses in some of our ISP plants in the quarter. There's going to be a small overhang going into Q1, but nothing like the $4 million, $4.5 million that we saw in Q4.

Okay. All right, great. Thank you.

Thank you, and our next question comes from the line of Marc Bianchi with Cowen. Please go ahead with your questions.

You have talked about the cost curve for the mine [and] produced in the past, and maybe you could update us on where you think you sit there? And then, maybe address the cost curve for the industry for delivered sand, on an in-basin basis. If you look at all the transload and unit train capabilities that you are putting together, how does the cost curve look for the industry -- for the different players on the delivered basis?

So, I think, Marc, the kind of high-level view that I would have is that the cost curve is pretty similar to what we have talked about in the past, where we have maybe 60% to 65% of the capacity at the mine sites being low cost, and then the other 35% being moderate to high cost. Just on the FOB plant side, we're seeing -- when we look at the M&A market, and we have looked at a lot of different M&A candidates recently, almost all of them are situated in the moderate- or high-cost bucket. So, I think we have kind of solidified our understanding of what that looks like.

When you get on out into a delivered basis, which was, I think, the crux of your question, I think the amount of capacity that's low cost shrinks even further. Because some of the folks that can make it at a low cost at their plants don't have a logistics infrastructure. So, while I don't have a specific curve for that, I would say it's probably 50% or less that would fit into that low cost into multiple basins, and have a nation-wide footprint. So, in a downturn like this, where price is very important to our customers, I think it gives us a tremendous advantage to compete.

Sure, and I suppose that's been the focus of your M&A exploration. Is that what was associated with this most recent business development?

Yes, I would say that about half of it was associated with that. We also were able to buy out a tolling agreement that we had in one of our facilities as well, that shows up in that expense.

Got it. Okay, thanks, gentlemen; I'll turn it back.

Our next question comes from the line of Christopher Butler with Sidoti. Please go ahead with your questions.

I just wanted to get back a little bit to -- not necessarily the bad debt, but customer quality, and your understanding of where you stand versus the industry, and where their cost competitiveness might be versus the industry, and how that may affect your volumes for 2015?

Chris, I would say generally our customer base is very high quality. We tend to be overweighted towards the large service companies of the names you might expect if you were doing a list from largest to smallest, in terms of horsepower, for example.

What we are seeing though is kind of a new dynamic out there. This one particular bad debt expense that Don gave some color on just a minute ago -- this was a high-quality, small customer that was doing fine, and just lost their work to bigger, more efficient providers, right? And so, it happens very quickly in the current environment. And so, I think we have gone back and looked at some of our customers, particularly the smaller customers, with a bit of a different lens than we have in the past.

You have a customer who is doing fine, generating earnings, current on their receivables one week, and the next week they lose all their work to a competitor who is better positioned, and can offer lower prices, and they can't get their crews back to work. So, it's a different kind of scenario than what we have seen in the past, in terms of bad debt. So, we're certainly adjusting to that.

And one of the other things we talk about all the time from a commercial standpoint as well is to make sure that we are pricing appropriately to those customers who have higher risk. We expect that we'll get a risk premium if we sell to those customers that we feel are further out on the risk curve.

And with your description of temporary suspension of guidance -- as you sit here today, what would be your expectation as far as timing and being able to have a better viewpoint on the year?

So, I think that we'll just have to see how things play out. There are just so many uncertainties and moving parts right now. It feels like, once the rig count finds a floor, once I think most energy companies and others are convinced that we found some kind of a floor in oil pricing -- that will give us the base from which we can build.

Quite honestly, we need to hear from our customers, as well. None of our customers are giving guidance either. And so, I think it would be unwise for us to step out and give guidance, when our customers -- companies much larger than us with presumably better visibility -- haven't been able to do so. I think it's going to take a little bit of time for things to settle down, Chris.

I appreciate your time.

Our next question comes from the line of Brad Handler with Jefferies. Please go ahead with your questions.

I know Chase had a question about your comments about 1H of 2015 versus 1H of 2014. And I appreciate that I think the questions risk almost overreaching relative to your feeling comments. But if I may try to do the same, and you can push us around: Should we interpret it -- if I take it strictly speaking, it looks like your oil and gas volumes, for example, might be in the 1.4 million ton range in Q1, if I am trying to look at 1H of 2014, and think about it at the top-line level. That would imply a 30% fall in volumes sold in Q1 versus Q4.

Am I reading too much into that? Or is it a comment around: Well, at this point in time, everything is in free fall, and so it's falling in line with the rig count until things stabilize. Can you just help with that kind of context please?

Sure. So, I'm sort of talking about a couple of things. One is more -- how the market feels, right? In Q1 of last year, the market felt a little bit long. We didn't have as much pricing power. Volumes were a bit depressed.

And so, you look at the volume versus pricing and contribution margin, and you could look at that and say: Well, maybe we're a little bit higher volume, and maybe a little less margin. It feels like the same sort of environment.

When I look at what we delivered in terms of profitability in the first half of 2014, those are the kind of numbers and the ranges that it feels like we're in right now. I wouldn't read too much into any specific line on the earnings statement. I am just kind of talking about a macro.

And I know that a lot of our investors and our analyst community are looking for some kind of guidance, right -- something other than: Well, we can't tell you anything just because it's uncertain. I am just trying to give you a feel for where it's realistic to expect, in terms of our results right now.

I understand, and that's why I tried to couch my question that way. But that's helpful color, so I appreciate it.

Maybe just one housekeeping thing while I'm on -- expected tax rate, please?

Yes, I think the tax rate in 2015 is probably going to be 25% -- maybe a little sub that.

Okay. Again, thanks for the answers.

Okay. That sounds good. Well, I guess, maybe just a couple of closing comments. I have to say that when I think about 2015 and beyond, I am really very excited about our prospects as a company. It might sound strange to say it this way, but I expect that 2015 is actually going to be one of the best years ever for U.S. Silica.

I am not sure we'll be able to replicate the results that we did in 2014, given the rig count declines and other pressures out there, but I still think we're going to have a very good year as a company. We're going to sell a lot of frac sand. We're going to continue to take share in the oil and gas segment. And I think our industrial business will do very well, as we said before, driven by automotive, housing, and some of the new product pipeline items that we have coming.

We're going to continue to make substantial investments as well. We have a pipeline of new capacity projects that we will continue to invest in. And as we said, we're going to invest $100 million to $120 million of CapEx this year -- maybe more, if things start to recover.

We also see a lot of opportunities for business development and M&A, so we're pretty excited about that. We have a war chest of cash, which gives us a lot of optionality that most of our competitors don't have, and so I think that is going to be a positive for us as well.

More importantly, when the market turns, we're going to be ready. We still plan to double the Company EBITDA to more than $500 million, as we talked about in response to one of the questions this morning. We said that goal might be pushed out by more than 2017, which was the original goal. But I think we'll still get there, and I am really very excited about the prospects for the Company.

So, thanks, everyone, for dialing in today. I really appreciate it. And I look forward to speaking with all of you at the many conferences and events that we'll be doing over the next month or so. Everybody, have a great day.

Thank you, ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.