US Silica Holdings Inc (SLCA) 2015 Q1 法說會逐字稿

Greetings and welcome to the U.S. Silica first-quarter 2015 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, Operator. Good morning, everyone, and thank you for joining us for U.S. Silica's first-quarter 2015 earnings conference call. With me on the call today are Bryan Shinn, President and Chief Executive Officer, and Don Merril, Vice President and Chief Financial Officer.

Before we begin, I would like to remind all participants that our comments today will include forward-looking statements, which are subject to certain risks and uncertainties. For a complete discussion of these risks and uncertainties, we encourage you to read the Company's press release and our documents on file with the SEC.

Additionally, we may refer to the non-GAAP measures of adjusted EBITDA and segment contribution margin during this call. Please refer to yesterday's press release or our public filings for a full reconciliation of adjusted EBITDA to net income and definition of segment contribution margin.

Finally, during today's question-and-answer session, we would ask that you limit your questions to one, plus a follow-up, to ensure that all who wish to ask a question may do so.

And with that, I will now turn the call over to our CEO, Mr. Bryan Shinn. Bryan?

Thanks, Mike, and good morning, everyone. I will begin today's call with a review of our first-quarter financial performance, followed by market commentary for both of our operating segments and our outlook going forward. Don Merril will then provide additional color around our quarterly results before we open up the call for questions.

For the total Company, revenue in the first quarter of 2015 of $204 million was up 13% versus first quarter of 2014, but down 18% sequentially. Adjusted EBITDA for the quarter of $51.3 million represented a 22% increase from the first quarter of 2014, but a 23% decline sequentially. The sequential decline in profitability was driven primarily by lower volume and pricing in oil and gas, partially offset by favorable pricing and mix in ISP and lower overhead costs across the Company.

Volumes sold in oil and gas for the first quarter of 2015 declined 15% sequentially from the fourth quarter of 2014 as we began to experience greater impact from the steep decline in industry drilling and completion activity. As has been widely reported, the rig count has dropped approximately 50% from the peak in late November and has continued to decline into the second quarter. The pace and magnitude of activity reductions put substantial pressure on pricing, as our oil and gas customers sought concessions to stay competitive in their marketplace.

Compounding this issue was the tremendous amount of dislocation occurring in the oil basins as customers were winning and losing work at a faster clip than ever, making us less efficient from a production and supply chain standpoint. As a result, contribution margin per ton in oil and gas declined 23% sequentially to $30.91, approximately the same level as Q1 2014.

Approximately half of the sequential decline in oil and gas contribution margin per ton is attributable to lower pricing during the quarter. The remainder is due to unfavorable customer and product mix and higher transportation costs.

Relating to mix, a higher percentage of our sales volumes during the quarter went to our largest customers and we also sold a finer product mix, both of which typically result in lower product prices. In terms of transportation, we also absorbed higher freight costs during the quarter and, due to the volatility in the market, shipped more tons on a suboptimal basis.

Moving to ISP, we sold 983,000 tons in the quarter, up 1% versus Q1 of 2014. New customers, new products, and stronger pricing drove ISP contribution margin per ton 16% higher in the first quarter this year compared with the first quarter of 2014. ISP was successful during the quarter in penetrating new markets and taking share and continued to make good progress enhancing product mix profitability.

Now let me turn to our views on our markets, including the actions we are taking to control costs, grow our market position with key customers, and maximize contribution margin dollars in the current business environment.

I will start first with ISP. Our industrial and specialty products segment is off to a strong start in 2015. Price increases and new higher-margin products, along with market-share gains and new business opportunities, are expected to drive top- and bottom-line growth in ISP this year. Given the sector weakness in oil and gas, it is a testament to the strength of our business model to have a complementary portfolio that not only produces stable and consistent earnings and cash flows, but has the opportunity to significantly grow earnings in 2015.

The ISP business clearly differentiates U.S. Silica in a positive way from the vast majority of our competitors who are pure play frac sand companies with no industrial sales.

Turning to oil and gas, as I noted earlier the rig count has declined approximately 50% from its peak late last year and some third parties now estimate that the peak-to-trough decline could approach 60% before bottoming out. In our view, that level of reduction would most likely equate to a 25% to 30% decrease in market demand for proppant in 2015, assuming the decline in completion activity would be partially offset by the continued use of more proppant per well.

While currently a headwind, the growing number of drilled but uncompleted wells, which some parties estimate totaling upwards of 3,000, could provide a nice tailwind in the back half of 2015 or early 2016, depending on commodity prices, as operators work down their inventories of uncompleted wells. There are also purportedly thousands of wells that are potential candidates for re-fracturing, which could boost demand for our products as well.

On the supply side, as we discussed on our fourth-quarter call, we and others in the industry are moving more cautiously with plans to bring on additional capacity this year, given the current market environment. We do expect to see some new capacity come online in the market in 2015, but most likely a much lower increment than we had initially forecasted.

However, even with less new supply coming online, we believe that pricing and margins in the oil and gas sector will remain under pressure until drilling and completions activity fully rebound. Accordingly, we anticipate a sequential decline in our oil and gas contribution margin dollars and contribution margin per ton in the second quarter.

We believe that the best companies in cyclical industries set themselves up for long-term success by effectively managing both up cycle and down cycle. Our team is focused on three areas currently to do that.

The first is gaining share by selectively partnering with the right customers. We're making investments in those relationships today that will position us well for the future. Second, we are working to drive industry consolidation. And third, we are looking to acquire new capabilities.

We're also carefully managing cash flow to allow us to take advantage of these potential opportunities. I expect that we will continue to work closely with our customers during this severe downturn to help them be more competitive. We have temporarily reduced prices and taken additional costs out of the supply chain in exchange for extending contract terms or increasing sales volumes.

We also expect to continue to take share and to be positioned to emerge even stronger from the downturn. For example, recently working with a very large customer to help them reduce their input costs enabled us to capture substantial new volumes and earn the commitment from them to be one of their top suppliers going forward as they work to significantly consolidate their sand spend.

We believe that if we work together with our customers to help them manage effectively through this extreme downturn, they will win and so in turn will U.S. Silica.

From an internal cost-containment standpoint, we continue to actively manage costs and resources by streamlining overheads and staying keenly focused on operational excellence. As we talked about last quarter, we are targeting a 20% reduction in our budgeted SG&A expenses. We have numerous cost-improvement projects underway across our entire supply chain. Our logistics team is actively working to renegotiate freight rates, railcar leases, and transload fees, as well as deferring railcar deliveries.

At the plant level, we've shifted resources from growth projects to cost-saving programs to decrease our manufacturing costs and we have scale back operations at some of our higher total delivered cost facilities. As we have said in the past, we will remain flexible in our capital spend so that we can quickly add capacity when opportunities arise.

It is clear that we are operating in an uncertain environment right now. However, we believe it is prudent to continue to plan for significant long-term growth, as we expect that drilling and completions activity will ultimately rebound. We also believe that it is critical to maintain flexibility and create optionality as we closely monitor our customer needs and the market situation. We will also seek to use our strong balance sheet and cash position to make strategic investments in additional capacity and capabilities.

While we are clearly focused on maximizing near-term business results, we're also continuing to move forward on our longer-term goals. Specifically, we plan to continue to take share in the oil and gas proppant market and grow and diversify our ISP business.

With that, I will now turn the call over to Don. Don?

Thanks, Bryan, and good morning, everyone. I will begin by commenting on our two operating segments, oil and gas and industrial and specialty products, and I will focus most of my comments on the sequential changes in our quarterly results.

Revenue for the oil and gas segment for the first quarter of 2015 of $148.8 million declined 24% sequentially compared with the fourth quarter of 2014, while revenue for the ISP segment of $55.2 million represented a 3% improvement over the prior quarter.

Contribution margin from oil and gas in the quarter was $52.2 million, down 35% on a sequential basis compared with the fourth quarter of 2014. On a per-ton basis, contribution margin for oil and gas declined 23% to $30.91 compared with $40.27 for the fourth quarter of the prior year.

Contribution margin for our industrial and specialty products segment was $15.5 million, an increase of 15% when compared to the fourth quarter of last year. On a per-ton basis, contribution margin for the ISP business of $15.72 represented a 20% improvement over the fourth quarter of 2014. The sequential increase in ISP contribution margin per ton was driven by a combination of better pricing, improved mix, and the favorable impact of new products.

Turning now to total Company results, SG&A expenses for the first quarter decreased $8.7 million to $27 million, compared with $35.7 million for the fourth quarter of 2014. The decrease is attributable to lower compensation and bad debt expenses in the quarter, partially offset by a large business development expense of $7.6 million related to an adverse unanticipated arbitration ruling and a $1.4 million restructuring charge designed to help bring the business more in line with current market conditions.

Depreciation, depletion, and amortization expense in the first quarter was $13.2 million, compared with $12.7 million in the fourth quarter of 2014. The increase in DD&A was driven by continued capital spending in support of our operating facilities and growth initiatives.

Continuing to move down the income statement and the other income expense line, interest expense for the quarter was $6.8 million, compared with $5.4 million in the fourth quarter of 2014, which reflects the increase in our long-term debt. As you may recall, we upsized our term loan late in the fourth quarter of last year by $135 million to make our strong balance sheet even stronger.

Our first-quarter effective tax rate of 19% was lower than expected, due to a discrete tax benefit of $2.9 million booked in the quarter related to the aforementioned arbitration expense. Excluding the discrete tax item, our effective tax rate for the quarter was 25% and we now expect the full-year tax rate to be approximately 24%.

Turning now to the balance sheet, cash, cash equivalents, and short-term investments on March 31, 2015, totaled $327.8 million, compared with $342.4 million at December 31, 2014. As of March 31, 2015, our working capital was $404.5 million and we had $46.9 million available under our revolving credit facility. Total long-term debt on March 31, 2015, was $494.2 million.

We generated $19.8 million of net cash from operations and incurred capital expenditures of $13.4 million in the first quarter of 2015. The bulk of our first-quarter spend consisted of investments in various growth and maintenance initiatives. As stated in our earnings release, we now anticipate full-year capital spending to be in the range of $60 million to $80 million, due to demand conditions in the oil and gas marketplace.

As previously noted, we plan to use our strong balance sheet and financial resources available to capitalize on the unique opportunities that may be created by this low oil price environment in order to enhance the speed, scale, and strength of the Company.

Finally, as noted in the press release, we will continue to refrain from providing financial guidance until such time as we can comfortably see more clarity in the oil and gas market.

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

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

(Operator Instructions). Doug Becker, Bank of America.

Bryan, maybe you could talk a little bit about where the contract renegotiations stand on the eight contracts that do account for a lot of your volume.

Sure, Doug. Thanks for the question. We are in the process of talking, obviously, with all of our contract customers, working diligently with them to try and help them be more competitive in this down cycle.

And the way we have played it with almost all the customers is that we have temporarily reduced prices, typically in exchange for some other value. As we talked about in the past, things like more share or different product mix or a different destination mix or something like that.

Typically as we are talking to the customers in this environment, we start out with a conversation around how to support their business goals, and customers really are -- you would be surprised how different customers are approaching this, and these are service companies, as you know. Some are focused on taking share. Others are moving to new basins. Still others are looking to have faster response time from suppliers, things like that.

So, we are working with different customers in different ways, but for sure they are all looking for pricing flexibility. Obviously, what we are looking for is value in return. So, we are currently talking with all of the -- all eight of these customers and that process, I think, will just be ongoing throughout this downturn.

So as we think about margin per ton in oil and gas, there still will be some impact in the second quarter from these renegotiations, I assume. And then, maybe if you just talk about some of the other trends that you are seeing as it affects margin per ton, whether it's in basin sales, the unit trains, and it sounds like we're still seeing the mix shift a little bit to finer grains. Really, just summarizing that question, some of the moving parts on margin per ton as we think about second quarter.

Sure, sure, and, look, I think it's an astute observation on margins. There are just a lot of moving parts, and, quite honestly, that's the piece of the equation that makes it difficult for us to give firm guidance as we look forward here.

Generally I believe, as you stated, that we are going to see margins move lower in the second quarter and then hopefully bottom out as we get to the end of the second quarter.

And as we look at the factors that drive this, there are several of them. So the first is product mix, and as you said, Doug, we are seeing a finer mix out there, more 40/70 and 100 mesh. Typically, that's a negative for our pricing and margins because those products typically command less price in the marketplace.

We're also seeing a trend in customer mix. Our bigger customers are getting bigger in this downturn and, as you would expect, bigger customers tend to have lower prices, and so that's another kind of negative that weighs on pricing.

We're also seeing movement in destination. This one is overall probably a neutral. It moves up and down. Obviously, some destinations for us are more profitable than others.

Transportation costs are certainly an issue in this environment. Railroads have given back some of the increases that they have given us, but not all, so we're still working with our railroad and transportation partners. And certainly, as we think about the impact of the drilled but uncompleted wells, that tends to weigh a bit on volumes in the industry.

So, a lot of different things that we are looking at there. What we're trying to focus on is what is in our control, so the first thing is reducing our costs. And I'm sure we will talk more about that on the call here. We are trying to optimize every shipment that we can, create the optimal origin and destination. We're also taking rational pricing actions. I think that's important. And we're certainly focusing our sales efforts on our most profitable destinations.

So, there are things that we can control and we're working really hard to do all those to maximize our margins in this downturn.

Thanks, Bryan.

Connor Lynagh, Morgan Stanley.

I was wondering if you guys could talk about how your volumes have trended maybe March and April versus January and February, and just how we should think about your exit rate out of the quarter and how it's looking right now.

So as we went through the first quarter, I would say that demand stayed pretty strong through most of it. It was right at the end of the quarter that we really saw demand drop off, literally as we got into the last week of March and into the first week of April when we saw some significant reductions.

And I think there is still a lot of uncertainty around that demand number and where it goes. One of the issues for us is that our customers, i.e., the service companies, and their customers, the energy companies, are not providing a lot of forward-looking guidance. Certainly we have supply chain planning, but even that is relatively short term in this environment as we talk to our customers.

I think we can get a feel for where demand is going as we look at rig count, Connor. So the way we are calculating it right now, we are expecting something greater than 50% in terms of peak-to-trough decline, so you do some math on that and that gets you to probably a 40% to 45% average rig count decline year on year. That's what we are planning for.

In terms of how that impacts frac sand demand, we are still seeing good trends in terms of more sand per well, 15% to 20% on the average. There is a few folks who are using less, but it is pretty insignificant. So overall, the demand, the increased demand of sand per well is still intact.

We get some tailwind from rig efficiencies and the fact that more vertical wells have been laid down than horizontals. I mentioned earlier about the DUCs, the drilled but uncompleted wells. That's a bit of a negative for us.

So you do all that math and our current outlook is that we could see total industry demand for frac sand down 25% to 30% in 2015 versus 2014, and that's up probably 5% to 10% -- or, sorry, down 5% to 10% from where we thought it was going to be when we talked on the last quarterly call, and most of that is driven by the additional declines in rig count.

So you put all that down and say, what does it mean for U.S. Silica? Well, if the industry could be down 25% to 30%, we are taking share, we expect to take more share, so we should be down less than that. My hope is that we can offset that with somewhere in maybe 5% share gains. So if the industry is going to be down 25%, maybe we are down 20% or something like that.

But I think those are the numbers that people should be thinking about. Certainly that's how we are looking at it in terms of volume as we go forward.

And I guess just one last comment, that does not assume that there is any type of rebound in 2015. If we get some tailwinds in the fourth quarter, then, obviously, it gets a little better than that, but we are planning for things to probably not pick up until -- volume pick up until 2016.

Okay, that's fair. Maybe switching gears a little here, you guys have been talking about industry consolidation and you guys as the potential consolidator. So, how are conversations like that going? Are you seeing any opportunities and how are you thinking about that right now?

I think there are a lot of opportunities out there. One of the difficulties is that given that first quarter was still relatively good in terms of volumes and margins -- you can see U.S. Silica's results and what we delivered. I think others around the industry are probably going to have experienced at least some of that. And so, I am not sure that the full impact of the downturn has set in yet in people's minds.

So it feels like the bid/ask spread is still a bit wide in terms of acquisitions, but there are a number of things that we have on the radar screen right now and certainly we are working very diligently to see if we can help be a consolidator in this industry.

All right, thanks a lot. I will turn it back.

Blake Hutchinson, Howard Weil.

Bryan, first I wanted to get some of your thoughts around the half of the contribution margin decline that you would attribute to more pure pricing, rather than some of the mix changes.

As we look at that, I guess historically given your spot versus contract exposure, we might be able to assume that actually a great deal of that was due to significant declines in the spot market. Would that be the right way to characterize that? And, I guess, what does that mean for pure pricing declines going forward? Do you actually expect them to abate, given that you take a large spot market hit in the first quarter and then maybe some of your volumes move more towards contract? How does that relationship work on the pure pricing front?

So there is certainly a lot of moving parts in all that, Blake. If you look at Q1, we still saw significant volumes going to our contract customers, obviously, as you might expect in this environment. But with that said, because of the dislocations and disruptions, spot pricing was still fairly robust. For most of our grades in most locations, we still saw that $10 a ton plus or minus kind of uplift in terms of spot pricing.

I think that will probably get tamped down a bit going forward. As some of our larger customers continue to take share, more of the sales will come under the contracts themselves. So, that's probably a bit of a drag as we go forward on pricing.

Okay, and I guess how quickly -- when we have this conversation about the trade-offs between pricing and volumes, how quickly or do we -- did we see it in 1Q or do we see it in 2Q, or is it back half of the year where you start to see the benefits from the give and take in some of these contracts from a volume perspective?

It's a great question, you know. And so, we have already taken a few points of market share just in Q1. I think we will continue to take share throughout the year.

The question is, what's the size of the pie that you are taking the share on, right? So as the pie shrinks, even though you're taking share, volumes -- overall volumes may still go down. But we can't really do anything about the size of the pie. All we can do is to try and take share where it makes sense, but be rational and logical in terms of how we do our pricing and continue to look towards the future and realize that the people who are successful are those who know how to manage the down cycle, as well as the up cycle, and we certainly expect to be one of those companies.

Great, thanks for the time, guys. I will turn it back.

Robin Shoemaker, KeyBanc.

I wanted to ask -- go back to your market-share gains for a minute, and you have got a slide in one of your presentations that shows 10 large producers of frac sand that have about 65% of the market and over 40 smaller ones that have 35%. So, could you describe where your market-share gains are coming from within that competitive matrix?

I think that the early gains, Robin, have come from some of the smaller, less capable players who are struggling in this environment.

We have already seen some competitors that have shut down. We have seen others who have drastically pared back their asset portfolio and others that are in the process of doing that. And I think it's really at the expense of those folks that we made the initial gains and I think we will continue to gain from that pool, just because it's a fairly large group. When you look at the kind of moderate and high-cost competitors that we have, they are somewhere between 30% and 40% of the industry. So, there is a pretty large pool of supply out there that I think will just be increasingly challenged to compete, given the demands of our customers.

Okay, good. Thank you. So, on the -- on your customers as they try to reduce the delivered price of sand, you have got the rail piece and you have got the trucking piece of the equation. What do you think is -- I know it's not your business, but on the truck delivery of sand, how much of the decline in sand pricing, the delivered sand pricing, is coming from rail versus trucking, if you have a sense of that?

So I think as you have observed there are four or five buckets across that supply chain specifically around the trucking side. We have heard stories of many trucking companies having their margins squeezed, some of them shutting their doors as well. So I think there is definitely a squeeze there.

I think there is a squeeze on the transloading side itself. Obviously, there is costs associated with that.

The rail part is difficult because the railroads tend to be somewhat more immune to pricing pressure, but what we have seen so far is that with the kind of relationships that we have with the railroads, we're actually getting some movement there and some support from our railroad partners.

So, it's kind of -- all along the chain, it feels like margins are coming out, quite honestly.

Great. All right, thanks a lot.

Trey Grooms, Stephens.

Good morning, Bryan. This is actually Drew Lipke on for Trey. First question, a follow-up on the last one, you have been looking at M&A and looking at peers and you have talked about two-thirds industry capacity at the mines is low cost and the other one-third is higher cost. And you talked about these higher-cost players closing their doors. What does the current cost curve of the industry look like now, in your opinion, and as these guys struggle, how rational are they being in the market?

So, I think that obviously the higher end of the cost curve is starting to come off first, as you might expect. It's a little bit early to know exactly what the shape of that curve looks like, but I would expect that, as you might think, the high-cost guys come off first.

And then, sorry, what was your second question?

Just as these guys struggle, how rational are they being in the market?

Okay, so we see some irrational behavior out there. I think the part about being a disciplined pricing company in this environment is not to chase rumors and speculation. There may be low volumes of product out there available at very discounted prices and we sometimes get those numbers played back to us by our customers or by others in the industry.

An interesting thing is we have had several examples where we didn't go down to that level to match a price, and the customers would come back to us a week later and decide to buy from U.S. Silica because these low prices were either a phantom or was from a company who didn't have the capability to consistently deliver.

So, I think we just stick to our guns. We would be rational, reasonable, work with customers, and continue to take share out in the market.

Okay, and then just second question around Fairchild. I think your maintenance CapEx annually is around $20 million. You still got that flexible $60 million to $80 million CapEx guidance out there now. As you look at Fairchild and the return profile that you are seeing or the payback period you are seeing now, I think in the fall of 2014 that was around 1-1/2 to 2-year time frame. With current prices, what does this payback period look like and what is your thought process on bringing this capacity into the market?

So I would say that in this environment with pricing and margins down, the payback period is probably something more like 2 or 2-1/2 years instead of maybe 1-1/2 to 2. And I would expect, at least the way we are thinking right now, is that sometime in the first half of 2016, we would be ready to bring a Fairchild on.

We are maintaining a flexible construction approach there that we can turn up or turn down, Drew, but it is really going to be driven, in my mind, by our customers and what they tell us in terms of demand and how fast we see things pick up.

And to that if I was prognosticating, as things turn up let's say in 2016, I would expect that volumes would come back first and then price would come back later. So given that we know there will be some capacity sitting on the sideline where people are running partial shifts and things like that on their existing facilities, as well as if facilities are in some state of construction, as the industry rebounds like I said, we will probably get volume first and then pricing. So if I was modeling the business in the out years, say in 2016 and maybe early 2017, I would have volumes coming out, but not necessarily margins a lot, to begin with.

Okay, that's helpful. Thank you.

Marc Bianchi, Cowen.

I would like to go back to the margin discussion a little bit. I appreciate that second quarter is likely lower as we roll through negotiating through contracts, but can you talk a little bit more specifically about the exit rate on the per-ton margin, $30 in oil and gas during the first quarter? Where did that exit and maybe where does that stand right now? I'm trying to dial in second quarter a little bit better.

Sure, sure. So as I think about the exit rate for the quarter, we were probably a couple dollars a ton lower than the average for the quarter, and as I generally think about Q2 and where we go, my range of outcomes is something that's in and around that number down to something that could be as we exit Q2 a similar kind of price decline that we saw from Q4 to Q1.

And it's just all moving all over the place right now, Marc, and it's hard to nail down. Still sort of early days here in the quarter, so it's hard to know for sure. The one thing that I am confident in is that pricing and margins are going to be lower in Q2 than they were in Q1, for sure.

Sure, that makes sense. I think you previously mentioned on today's call that you are expecting a bottoming perhaps by the end of the second quarter in profitability for per-ton. What gives you confidence that it could be bottoming by the end of the second quarter?

I think we look at the rig count trajectory and where that goes. We look at conversations with our service company partners and others in the chain. And whether it's exactly the end of Q2 or sometime in Q3, it feels like there is a firming up there. But, once again, this is just to give folks some guidance, if you will, in terms of how we see it. It's difficult to project how it plays out right now.

Sure, okay. If I could just ask one more, on the industry capacity expansions being delayed or canceled. How do you see industry capacity growth this year, given the marketplace that we are in in terms of it? Could you put any (multiple speakers) around that?

I believe that most of the capacity and most of the companies that are bringing that capacity on will be approaching things very cautiously, right? I would expect that we are probably low to mid-single digits in terms of percent increase of capacity that actually comes online, or said another way, I think most of the things that were planned, including our expansions, will be delayed out into 2016 or perhaps beyond.

Great, thanks, Bryan. I will turn it back.

(Operator Instructions). Richard Verdi, Ladenburg.

Hi, good morning, and thank you for taking my call and great quarter, given the environment. You handled it [deep financings here].

So now that I've buttered you up here, I have a challenging question. On the Schlumberger conference call a couple weeks back, management had mentioned the company is having a lot of success with their HiWAY technology that helps customers increase production and recovery either with using less water on proppants through that. So I was wondering if -- how something like that could impact U.S. Silica near to long term?

It's a great question, Rich, and we have seen a couple of technologies come on the market like HiWAY. Of course, HiWAY has been around for a while now, and I would say that most of them from our experience have been niche, very focused technologies that wouldn't have a significant impact on U.S. Silica's frac sand business.

Okay, that's helpful. Thank you. And you had spoke a lot about rigs being laid down, and I apologize if I missed the following, but what about SUPERFRAC? Is Silica seeing this theme play out?

So we are still seeing substantial increases in sand per well. We had -- originally when we made our projections for 2015 back many, many months ago, we were expecting to see a 15% to 20% increase in sand usage per well, and actually that has held up pretty well.

We believe we are still in that kind of range, and as we survey our customers and talk to the energy companies, there are a few of them that in this environment for their own reasons, mainly cash flow in some cases, are deciding to absolutely minimize the cost in terms of proppant and everything else, but that's a very, very small percentage. I would say by and large we are seeing the large-scale large sand usage fracs that we predicted.

Okay, that's helpful. Thank you again and good quarter.

Tom Dillon, William Blair.

Just to piggyback off that Fairfield question, have you changed your plans for the Cadre mine in Texas at all?

We have not. Cadre is actually doing very well in this downturn. There is limited suppliers of that type of product in the Brady, Texas, area. And we have seen good demand from Cadre.

I would say that one of the things we had always talked about was potentially expanding that site, and depending on how demand plays out in that Permian Basin area, which is where the vast majority of it gets consumed, I think that's always a potential in the future as well, Tom. So we are very happy with the way Cadre is performing.

Okay, great. And then, can you just provide a little more detail around the arbitration charge and what that means for the other contracts?

Sure, sure. So this was a $7.6 million arbitration ruling that actually relates to a dispute that we had with a contract manufacturer which dates back to 2012. So this is not a dispute with an oil and gas customer. This isn't an oil and gas contract dispute. This is contract manufacturing for a product that we were developing. It was a dispute around that, and so this has absolutely nothing to do with ongoing operations.

We don't agree with the ruling. We are appealing it, and of course, as you might expect, we can't really talk about a lot, given that it is a pending litigation matter at this point.

Understood. Thanks, guys.

Chase Mulvehill, SunTrust.

Thanks for squeezing me in. Just so I can make sure that I'm hearing everything right, so here is what I am hearing so far. I hear that -- from you guys, I am hearing that 2015 oil and gas volumes could be down 20% for you guys and 2Q contribution margin per ton is probably in the mid to high 20s, bottoming by the end of 2Q. Is that what I'm hearing so far?

Yes, so I think that -- look, the margin is still uncertain, so I think there is wider error bars around that. The volume feels, in my mind, anyway, just because we can link that back to rig count and these are hard published numbers that you can do easy math off of, I think that one's easier.

The contribution margin per ton, I think, still has to play out. My intent was just to give folks a directional view as to where contribution margins might be going, and we said generally that it is going to be lower in Q2, but I am still concerned that we haven't really seen the bottom yet of our contribution margin. So we have to see how things play out over the next couple of months here.

Okay, all right. And then, so how much is pricing down at the mine and how much more pricing do you think that you have to give at the mine?

So it's really pretty consistent. There is not that much difference in the mine gate pricing, per se, as opposed to the transload pricing, even though some of the transload pricing is spot, right, but some is actually delivered under contract.

I would say that the biggest difference between the mine gate pricing and the transload pricing is that our larger customers who have their own railcars and transloads tend to be the ones to disproportionately take the mine gate products, right? So if you follow through with that, they tend to be the ones with the lowest prices. So it skews the plant pricing a bit just because of the customer mix. Does that make sense?

Yes, yes. And then also in the past, you guys have mentioned that about $5 per ton of contribution margin was attributed to logistics. So could we get an updated number on what that -- what the logistics accounted for for contribution margin in 1Q?

I think in the past we have said it's been roughly $3 to $5, right, and I think we're still -- we still see a premium when we do sell in basin, clearly.

Okay, okay, so that's not zero end of 1Q?

I wouldn't say zero, no.

No, and it's one of the reasons, Chase, that our spot pricing has held up higher than contract pricing generally, so that we extract that premium, right?

Absolutely. Okay. That's all I have. Thank you, fellas.

Agata Bielicki, Simmons & Company.

Thanks for squeezing me in. How many unit trains were shipped in Q1?

I think it was 23 unit trains.

Okay.

Maybe 23, 25, something like that. I don't have the exact number in front of me, but it was several.

And with your current buildout plans at the transload, how many could you expect to ship, let's say, for the remainder of the year?

Yes, so look, it depends a lot on volume, obviously, right? But I think we originally were thinking that we could be well over 100 unit trains this year, perhaps more, depending on how demand played out.

Okay. And then circling back to Blake's question, what percentage of your volumes were sold in contract Q1?

We were probably 60% to 70% of our volumes in Q1 sold to contract customers.

Okay. And then going back to the SUPERFRAC question, I would be curious to know if you are aware from any of your service customers if they are pumping, let's say, 10,000 tons or maybe even more of sand per well, if you have heard any of those anecdotes.

Yes, we have. There are still very large fracs being done, just as there were at the end of 2014.

Even more than 10,000.

Yes, we have seen -- I think 15,000 is the largest one that we have heard of so far.

Okay. Great, that's good color.

And I guess one more for me, just going back to ISP. I know you guys talk about the new products and the products in the pipeline and the mix being more favorable there, but wondering if you could speak to maybe what some of those products are and/or maybe some of the ones that are in the pipeline and when you expect those to come to market.

Yes, it's a great question, Agata. I am glad you mentioned ISP. It tends to get short shrift here with all the oil and gas interest that we have.

We have a very robust new product pipeline in ISP. We have actually 40 products right now, a few more than that, in the pipeline.

We launched 10 products in 2014. We launched five in Q1 of this year and we expect that we will probably have a total of 10 that we launch in 2015.

The current expectation is in 2015 that we generate somewhere between $7 million to $10 million of contribution margin from those products. And we would expect just with the pipeline that we have that it is probably worth $25 million to $35 million on an annualized rate of contribution margin out within the next couple of years as those products grow.

We have a number of different products that we have launched. Many of them are coated products, so we have a coated solutions platform that we are developing, and one of the products, just to give you an example, is a sand that is coated with an antimicrobial coating. It has a lot of different applications. We started in the water treatment industry.

But I really think we have got a hidden gem here in our industrial business, and there is acquisition opportunities here, too. We don't talk about that a lot, but I think there is some pretty neat things that will come out of ISP. And my guess is as I have talked to a number of investors over the last few years, almost nobody has any kind of upside in ISP in terms of their modeling, so if you invest in our stock, you get that for free, in some ways.

Okay, great. Thanks, guys. I will turn it back.

James Schumm, Oppenheimer.

So I think you said your in-basin sales were 63% in the first quarter. Is this -- do you expect that to fall more or do you think that's a good run rate for 2015?

I think it could fall a little bit, and what we are seeing is that some of our larger customers that have their own logistics infrastructure want to use that fully. And by logistics infrastructure, I mean railcars and transloads, and they did that for sure in 2014 as well, but as demand falls just on a percentage basis, the percentage of those sales that customers are picking up on their own at our plants will increase a bit, right, so it's a math issue. It's not that, in my experience so far, that customers are actually moving more tons so much with their own equipment; it's just a percentage -- just looking at the equation. Does that make sense?

Yes, yes, that makes sense. And then, also, I think you mentioned some suboptimal transportation this quarter. Could you quantify that? I'm just looking at cost per ton in your oil and gas segment and I was just wondering if you could quantify that. And then --

So if I had to put a number on it, I would say it is probably somewhere between $2 to $3 a ton of suboptimal shipments.

And just for color, for those on the phone who might not know exactly what we are talking about, typically every destination and origin pairing that we have in our system has a different level of profitability. And when products are moving and the network is full, it gives us a lot of opportunities to move things around.

We typically have had good lead time in terms of orders from our customers. That's the way things have been over the past many quarters. As we have gotten into the downturn, we have customers putting in orders at the last minute, canceling orders at the last minute, and all that can play a bit of havoc with our supply chain as we have unit trains moving around and lots of railcars, thousands of railcars, that we are trying to manage.

So that's what happens when we get into this kind of environment. Certainly our team is working extremely hard to take those costs down as low as possible, but we find ourselves frequently in the position of getting a last-minute order from a customer, and so our option is to either not serve that customer and don't incur the suboptimal shipment, but also don't get the profit from the sale, or be willing to take a lower net margin just because we know it will incur -- we will incur some additional charges because of that.

Yes, so thanks. That's helpful. And do you expect this to continue into maybe Q2 and Q3, just given the shifting landscape or do you think that was more of a one-off for Q1?

So I wouldn't necessarily expect it to get worse, but I'm not sure it's necessarily going to get any better, either, for the next couple of quarters as the industry is still settling and moving around. And really, it's these kind of short-term orders and short-term cancellations that give us those extra costs.

Okay, and then just finally, are there any other opportunities to reduce your costs? I know increasing unit shipments, but are there other opportunities to reduce cost per ton going forward?

There are a number of things that we are working on. We have committed to a 20% reduction in our overhead costs based on our -- based off our original forecast. In the whole logistics chain, there are lots of opportunities, and the way we manage our railcars, the type of contractual relationships we have with a variety of people in that chain, we are going back to all of our suppliers and asking for pricing concessions, how we handle things at our plant sites.

There is a number of things, James, that we are working on and I expect that we will be able to take out some significant costs in the coming quarters here.

Okay, great. Thanks for the time, guys.

Richard Verdi, Ladenburg.

Thanks for fitting me back in again. I had one follow-up question. I guess I'm having a hard time connecting the dots with something. And you know, you had mentioned earlier in your prepared remarks that expect maybe 25% weakness. You have some market-share gains at 20% weakness, but here is the thing. Our channel checks with the rail guys are saying that Silica is moving volumes that are quite substantial to what they have seen with other customers.

And so, I guess I'm having a hard time connecting the dots here with -- are you really having a hard time moving volumes or is it more of a pricing aspect? Could you just give me a little color there?

So, look, we are obviously trying to make every sale that we can in this environment, Rich, and certainly -- boy, if -- maybe we have a black hole somewhere that is swallowing our sand, I don't know. But, look, we are pushing very hard to get every sale that we can.

At the same time, as I said before, we also want to be logical and rational in the marketplace and realize that we are in this game for the long term. Could we ramp up volumes and make $1 a ton margin or something? Probably, but that's not going to be in our best interest in the short term or the long term.

So I am not really sure where the information is coming from, but certainly we are selling everything that we can in this environment at reasonable pricing.

Perfect. All right, that's good. Thank you very much, guys. I appreciate it.

Thank you. This concludes today's question-and-answer session. I would like to turn the floor back to Bryan Shinn for closing remarks.

Thank you. In closing, let me say that in spite of the short-term challenges that our industry faces in the oil and gas market, I continue to be optimistic about U.S. Silica's future growth prospects. I believe we are extremely well positioned to take advantage of an expected energy market rebound when that occurs, and I look at our industry-leading sand reserves, our mining facilities, transportation and logistics infrastructure, very strong balance sheet, and the outstanding team that we have, and I am extremely encouraged about our prospects for the future.

I want to thank our investors and our analyst community. We certainly appreciate your interest and your support, and I look forward to meeting and speaking with all of you at the many conferences and events that we plan to attend in the coming months. So thank you all for dialing in, and have a great day, everyone.

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