US Silica Holdings Inc (SLCA) 2015 Q2 法說會逐字稿

Greetings, and welcome to the US Silica's second-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 US Silica. Thank you, you may begin.

Thanks. Good morning, everyone, and thank you for joining us for US Silica's second-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 full reconciliation with adjusted EBITDA to net income and the definition of segment contribution margin.

Finally, during today's question-and-answer session, we'd 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. Brian?

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

For the total Company second quarter revenue of $147.5 million, decreased 28% sequentially compared to the first quarter of 2015. Adjusted EBITDA for the quarter of $23.4 million declined 54% sequentially. The sequential declines in both revenue and profitability were primarily driven by lower volumes and pricing in oil and gas as the rig count decline accelerated and we saw continued reduction in drilling and completion activity in all basins during the quarter. Volumes in oil and gas in the second quarter of 1.2 million tons fell 27% sequentially, driven by the significant reduction in land activity as North American rig count fell 40% in the second quarter versus the first quarter of 2015. Sale volumes dropped early in the quarter as we employed a disciplined pricing approach to preserve margins in a challenging market environment. However, in response to an increasingly competitive landscape, we reduced pricing late in the quarter to capture additional volumes. At the same time, our teams are working very hard to minimize the impact of lower volumes on plant and distribution network utilization. As I noted earlier, pricing came under tremendous pressure during the quarter as market conditions continued to deteriorate. Lower pricing, lower volumes and decreased fixed cost leverage drove oil and gas contribution margin per ton down 65% sequentially, to $10.83 per ton. More than half of this sequential decline was driven by price and about one-third resulted from decreased fixed costs leverage. Customer and grade mix also negatively impacted oil and gas contribution margin per ton as well in the quarter. For example, we sold a greater percentage of fine grade material and almost half of the volume sold in oil and gas during the quarter were for our two largest customers, while an increased percentage FOBR plants picking up the sand with their own railcars.

Turning to ISP, volumes increased 5% sequentially compared with the first quarter of 2015. I'm very impressed with the report that contribution margin for ISP was a record $19.5 million, up 11% on a year-over-year basis, an increase of 26% sequentially. New higher margin products, favorable mix and lower operating costs drove the significant improvement in ISP contribution margin in the second quarter. Looking ahead, we expect continued strong performance from our industrial and specialty products segment driven by a combination of increased sales from new, higher margin products, market share gains, new business opportunities and healthy end markets from many of our products. We're seeing strong demand this year from two of our larger end markets in ISP, building products and automotive. Many of the building products we produce are used in residential construction. According to the commerce department, housing starts rose 9.8% in June compared with the previous month, and new applications for building permits, a bell weather for construction in the coming months, increased 7.4%. Furthermore, according to industry analysts, the number of new cars sold in the US is expected to grow for a sixth consecutive year in 2015.

Unlike our ISP business, market fundamentals in oil and gas has significantly deteriorated in 2015. US rig count finished the quarter down about 55% for the peak in late November of last year and we've experienced additional reductions in well completions as energy companies drilled but did not complete a percentage of their wells. As our customers have continued to work aggressively to lower their input cost, we reduced our prices in the second quarter to remain competitive and protect our position in an over-supplied market. We believe that sales volumes are stabilizing but pricing is likely to remain fluid in the near term. One of our biggest challenge today is contending with the impact of lower volumes on our fixed cost leverage. In addition, we've incurred increases in freight rates and greater volatility in our markets has led to higher railcar demerge and storage costs. We continue to be labor focused on taking out costs all along our supply chain to offset these increases. One major opportunity area is rail transportation and logistics. For example, we've been able to successfully defer delivery of more than 2,500 new railcars to 2017 and 2018, thereby avoiding additional costs this year and in 2016. We're also working very closely with our rail providers to minimize transportation costs. In addition, we've had a lot of success working with other supply chain partners to garner additional pricing and contract concessions to help reduce costs. At the same time, we're leveraging five new transload facilities that will provide lower cost options for us and our customers and allow us to capture more opportunistic sales. In total, across the supply chain, there are currently over 200 cost reduction projects underway with plans in place to deliver several million dollars of benefit in 2015. This should substantially improve our fixed cost leverage by the end of the year.

We've also made significant strides in reducing overhead head costs through a reduction in force and by paring back on our discretionary spending. We're now on track to achieve our targeted 20% reduction versus planned SG&A expenses. Despite the current headwinds, we're continuing to advance our growth agenda, albeit at a slower pace. At our Odessa and San Antonio transload, expansion projects are now operational. We've added incremental, low cost supply at Sparta and Voca. We received a key reclamation plan permit during the quarter for a new Fairchild facility. And we continue to look for ways to use our best in class balance sheet to add meaningful speed, scale, and strength to our low cost operations. One way to accomplish this is through accretive acquisitions. We strongly believe that the fragmented sand supplier base will consolidate given our market positions and strong balance sheet, we're continuing to champion that effort in the industry.

Now let me turn the call over to our CFO, Don Merril, for some additional comments. Don?

Thanks Bryan, and good morning everyone. I'll begin by commenting on our two operating segments, oil and gas and industrial and speciality products, and due to the relevance, my commentary will be mostly focused on comparing results to the latest sequential quarter. Revenue for the oil and gas segment for the second quarter of 2015, up $90.9 million, declined 39% sequentially when compared to the first quarter of 2015. While revenue for the ISP segment of $56.7 million represented a 3% improvement sequentially. Contribution margin from oil and gas on the quarter was $13.3 million, down 75% on a sequential basis compared with the first quarter of 2015. On a per ton basis, contribution margin for oil and gas declined 65% sequentially to $10.83, compared with $30.91 for the first quarter of this year. Contribution margin for our industrial and specialty products segment was $19.5 million, an increase of 26% sequentially over the first quarter of 2015 and up 11% compared to the same period of the prior year. On a per ton basis, contribution margin of the IAP business of $18.89 represented a 20% improvement over the first quarter of 2015. The sequential increase in ISP contribution margin per ton was driven by a combination of a mix of higher margin business, including new value added products and lower operating costs during the quarter.

Turning now to total company results. SG&A expenses for the second quarter decreased by $20.4 million to $6.6 million, compared with $27 million for the first quarter of 2015. The decrease was attributable to an $8.8 million decrease in compensation expense, an $8.3 million decrease in business development expense and a decrease in bad debt expense of $1.6 million. As Bryan noted in his remarks, we're well on track to achieve our stated goal of reducing our budgeted SG&A's spend by 20% this year. Depreciation, depletion and amortization expense in the second quarter was $13.7 million, compared to $13.2 million the first quarter of 2015. The increase in DD&A was driven by continued capital spending in support of our growth initiatives. We expect depreciation, depletion and amortization expense to continue to grow due to anticipated capital spending in 2015.

Continuing to move down the income statement, and the other income and expense line, interest expense for the quarter was $6.2 million compared with $6.8 million in the first quarter of 2015. The decrease in interest expense was due to a decrease in the average interest rate on our debt and a decrease in our debt principal and deferred revenue. From a tax perspective, during the quarter we recognized an income tax benefit of $6.3 million. Considering the current market conditions, we adjusted our annual affected tax rate, excluding discrete items, to 0% during the quarter, which was driven by our estimated annual pretax income to be fully offset by the statutory percentage depletion deduction that we're afforded as a mining operation.

Turning now to the balance sheet. Cash and cash equivalents in short-term investments at June 30, 2015 totalled $322.2 million, compared with $342.4 million at December 31, 2014. As of June 30, 2015, our working capital was $390.3 million, and we had $46.9 million available under our revolving credit facility. At June 30, 2015, total debt was $493.4 million. Net cash provided by operating activities during the quarter totalled $18.7 million, which exceeded our capital expenditures of $13.8 million in the second quarter of 2015. The bulk of our second quarter CapEX spend was largely associated with the Company's investment in a new frac sand mine and plant located near Fairchild, Wisconsin, and various other growth, cost savings and maintenance capital projects. Based on current market conditions, we anticipate capital expenditures for 2015 will be in the range of $60 million to $70 million. From a capital allocation standpoint, we plan to use our strong balance sheet to pursue accretive acquisitions to enhance our speed, scale and strength as an enterprise. Consequently, in terms of uses of cash, our first priority will most like be opportunistic M&A activity as we strongly believe there will be consolidation opportunities in the fragmented sand space. We will also continue to spend cautiously on our green field growth projects in order to maximize our flexibility once our markets recover and invest in various cost improvement projects to enhance our operational efficiency.

Finally, as noted in the press release, we will continue to refrain from providing financial guidance until we can begin to see more clarity in our customer demand trends. We've been watching this very closely and will provide you with an update on our next earnings call. With that, I'll turn the call over back over to Bryan.

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

Thank you, the floor is now open for questions.

(Operator instructions)

Our first question is coming from Kurt Hallead of RBC Capital Markets. Please proceed with your question.

Good morning.

I think what I'd like to focus on and try to get some additional color is on some of the fixed cost dynamics of the business and kind of get a little bit better understanding on your ability to maybe reduce some of that fixed cost element, specifically as it relates to rail cars. Can you help us out with that?

Yes, sure, Kurt.

So we're working really hard right now to take out all the costs that we can in the business, we're obviously looking at every aspect of our spending in this environment. So, we have a couple different pieces. The first piece is around our general overhead spending, and we targeted 20% reduction there, and I'm happy to say that we're right on track for that. So I think we'll continue to see positive benefits from that. We continue to optimize our plant costs as well, things like origin, destination, pairing, to save as many shipping dollars as we can.

To look over the whole system, we've got more than 200 different projects and programs that we're working on to take costs out. Specifically, you asked about the rail car side, right now we have a little over 1,400 rail cars in storage, and we're looking at a couple of things there to help us offset those costs. The first and best way to do it is to get more volume flowing through the system. So we're aggressively going after new business and my hope is that we'll be able to get some cars out of storage just from getting more volume flowing through the network.

And the second, obviously, is looking for ways to delay, defer, push those rail cars off to others and we're pretty successful so far in finding people to sublease some of our cars and a lot of our programs and projects around improving our rail costs. So I think we'll definitely see that come down in the coming quarters.

So, just as a follow up in that context, if I understand correctly, the storage costs runs roughly what, $400 to $500 per month per car. And then, from a lease standpoint, can you give us an update on what the average lease term is that you're looking at for the 1,400 rail cars that you have in storage?

Yes, Kurt, this is Don.

The lease expense that we have on a per car basis per month averages about $550 per month per car. So if you use some of the numbers Bryan just shared with you, we have 1,460 cars that are sitting in storage today at $550 per month. That's about $800,000 per month or $2.4 million in the quarter. Those are the types of inefficiencies that we're talking about when we talk about fixed cost leverage. So if you take that and divide it by the number of tons that we sold in oil and gas, that's about $2 a ton.

So, when you look at the overall reduction in contribution margin per ton in oil and gas, $2 of that was just associated with the fact that we've got underutilized rail cars sitting in storage. So that $550 that we're paying out in lease costs, when they're in use, people are paying us to use those, so you can see the pretty dramatic impact of that.

Okay.

So, what are you targeting then in --that context? What can you reasonably accomplish from getting more railcars out or getting more volume out? And can you give us some insights on maybe how to think about that progression in the second half of the year?

Sure. So, Q2 was an interesting one for us. We started off the quarter with the aim to try and hold price out in the market to the extent that we could. And we worked that early in the quarter but as it became obvious that was going to be more and more difficult with the competitive environment out there, we pivoted to a motive of more volume. We're already seeing some of those additional volumes in June and in July. I think you'll see substantially higher volume run rates for us in Q3, and I believe that will necessitate us potentially taking some of these additional rail cars out of storage.

The sort of issue on the other side of that, Kurt, is that we do have some railcars coming online this year. We're able to defer most of them out for several years, but there are a few that we couldn't. Working that balance, and also, our customers have railcars that they have coming online as well. And many cases, they're asking us, reasonably so, to use the rail cars that they have leased. We're trying to run that balance but our team is working real hard to get the volumes up so we can get the cars out of storage.

And you know that's just one piece of this sort of fixed cost leverage that Don was talking about, there's a lot of other assets, mostly planned assets, that are underutilized as well. So volume cures a lot of things in terms of contribution margin per ton.

Okay. Great, thanks, I appreciate that color. Thank you.

Thanks for the question, Kurt, take care.

Thank you, our next question is coming from Ole Slorer of Morgan Stanley. Please proceed with your question.

Yes, thanks a lot and thanks for all the details.

I realize it's very difficult to make any kind of medium term type forecast, but just a little more color on how the quarter trended pricing wise. You gave us some volume indications, that it's picking up and some of the things that you're doing on the cost side and how, maybe costs per ton should have a bit trending down. But on the pricing side of it, average selling price or revenue per ton-- how did it end the quarter relative to where it started? And how do they model that throughout this quarter?

Just trying to get the oil and gas situation roughly in the right ballpark for the third quarter.

So June was a pretty good month for us, even though we increased volumes in June. I felt good about the way that we exited the quarter, Ole.

We sort of look at the drags on the margin, and think about how that might change going forward. If you look at the difference between Q1 and Q2, our oil and gas margins went from roughly $31 to $11, it was a $20 delta. But $7, $8, of that was all around a fixed cost absorption issue. That's a piece that we're working real hard to get as much of that out as we can in the coming quarters. The rest of it was sort of pure price or, in some cases, customer mix. And when I say customer mix, it's mix of customers or mix of products.

One of the things that we've also experienced, as we've gone on throughout the year here, is that our largest customers seem to be buying more and more product. Our top two customers accounted for more than 50% of our sales in Q2. And, as you can imagine, those large customers tend to have lower prices. So that's one factor in there. Also, we're seeing more fine grade products of 40, 70 and 100 mesh, as a percentage is growing a little bit.

So, there's lot of puts and takes, and it's kind of a flexible environment out there right now. But we're working real hard to try and maximize the contribution margin dollars that we can generate in this environment.

Is it possible that the contribution margin could expand into the third quarter? Or will it go down based on what you see? Or is it just to find a balance to make a call? It sounds like it could go up slightly but-- betting the bank on it.

My expectation is that it's going to go up. And if you look at all the work that we're doing, around the cost takeout, for example, we have several million dollars worth of cost projects that have not hit the take yet. I think those are going to benefit us. Obviously as we can roll more volume through the system here, we'll get more fixed cost leverage.

We're working real hard to be able to increase that margin. I don't think it's going to be a dramatic increase, so it all sort of comes back in one quarter, but I think we can get $1, $2, per quarter if we can hit on these programs, and if there's not another significant drop in pricing in the market. Which is always a risk given that WTI has not dropped down to high 40s, looked like it was going to settle out maybe in the high 50s, and now we're down a bit.

We're not really sure what the impact of that is going to be yet. It's too early to tell that. But we're certainly working hard to do everything we can do, control everything we can control, to maximize our margins and our profitability.

But the base of what you're saying, it sounds like there is a ferocious consolidation of market shares within your customer base, where the larger guys are squeezing out the smaller guys. Is that fair?

I think that's a pretty fair characterization. We've definitely seen growing sales to the largest service companies out in the industry.

Okay. Thanks a lot, I'll hand it back.

Thanks, Ole.

Thank you, our next question is coming from Blake Hutchison of Howard Wheel. Please proceed with your question.

Following on that market share thought. Bryan, I want to the make sure we're perfectly clear when you talk about gaining share. Are you measuring it by -- because not all always evident to us when we look at activity and adjust for intensity, that we're doing more than keeping pace with the market.

Are you taking share by your well by well model? Is it a feel you get from just your largest customer share or is there extreme evidence of tier one providers taking share from tier three providers that gives you that insight to share gains?

So we have a pretty detailed view on a basin by basin look, Blake, that really dives in and we know what the activity is in the basin, we know what our share was previously, so we can track that pretty well. We are gaining share in this market. I think it's related to the kind of national footprint that we have, the low cost operations, the scale, the logistics, the customer relationships, all the things we've talked about in the past. That's all coming back to pass a lot of dividends in this challenging environment.

Okay, but, it's more to your detailed model than just a feel for the market.

Oh, no, we definitely have details behind that. And we always check it against the macro just to make sure that it all makes sense. When you do it in the macro, it makes sense, and when you dive down, we look literally on a weekly basis of basin by basin to look at our sales versus a variety of other metrics to get a triangulation on that.

Okay.

And then just follow up on the pricing conversation. As we look at your customer base becoming more and more concentrated, I guess it would, even though those are lower price customers, I guess it would give us a sense that you actually have greater pricing visibility. But is the reality that, even your large contract customers, or all contract customers, are still working all spot all the time versus on contract? And is there visibility towards getting back on contract? How is that unfolding right now?

Yes, so, look, the reality is even though you've got maybe a little more consolidated customer base, things still move around quite frequently in this industry and it seems like there's always somebody who's short of some product somewhere and things kind of ebb and flow. So it's just hard to pin that down, to be quite honest.

We look at our sales, at our plants and we look at the sales out at the transloads. And one of the things that we have seen is we're seeing more balance between those two in terms of volume. So in the past, we've been 60% or 70% out at transloads, now we're more like 50/50. And there have been months where we've actually dipped under 50% for sales at transloads. It makes it very hard to forecast what the pricing is going to be on a forward-looking basis.

Great. Thanks, I'll turn it back, Bryan.

Okay, Blake, thank you.

Thank you, our next question is coming from Michael LaMotte of Guggenheim. Please proceed with your question.

If I could return quickly to the railcar question, specifically as it pertains to the deferral of deliveries. Can you give us a sense as to what the deliveries schedule looks like through 2016? And whether or not the deferrals into 2017 ended up creating more of a bullet delivery in that year? Or are you actually canceling the contracts for railcars that have not started to be built yet?

So we've cancelled some, and then there's a large chunk that we actually deferred out into the back half of 2017 and the first half of 2018. So we have quite some time yet, it's plus or minus two years before the first of those cars would start to show up in 2017. And these were cars that we had ordered back in mid-2014 when the market obviously looked like it was going to be very short on railcars, we wanted to make sure we got in the queue. And ultimately, I think we will still need those rail cars but we don't need them right now.

So does that mean there's really nothing coming in the next 12 to 18 months in terms of deliveries?

There's some cars coming for the remainder of this year. There's not much coming in 2016. And then, it will resume again in 2017 and 2018.

And one of the other things as well that we've looked at, existing cars that we have, we have a certain percentage of our leases that roll off every year. So we're going to have the ability to either renew those leases, and sort of increase our cars by the time we get to 2017 and 2018, or let those roll off. And that will give us the flexibility to choose how many railcars we end up with in 2017 and 2018.

I believe the last look at the numbers is that we could essentially be even in terms of railcars by the time we got to 2018, even where we are today, if we let leases that are about to expire through the end of 2015, 2016, and the first half of 2017.

Okay. That's great, that's very helpful.

If I could follow up on some of the nonoperating costs too, then. Guidance on SG&A, obviously second quarter very good, compensation expense being a big chunk of that reduction. It seems like in the second quarter there were a bit of one time adjustments on 2015 as it pertains to things like bonus accruals and even on the tax line as well.

The second half of this year, how do those normalize? If I could run Q2 SG&A rates out, it looks like a 50% year-on-year reduction versus 2014. So SG&A is actually going to go back up again in absolute dollars in the second half of this year?

Yes, I think that's fair to say. I would be modeling somewhere between $15 million and $15.5 million per quarter for Q3 and Q4 for SG&A.

Okay.

And then on the tax line, can we assume a zero income tax year? The depletion allowance has been about 10 percentage points to your effective tax rate the last three years. Can we use that as a proxy for what you expect profit before tax to be this year?

Well, what we've done is taken a look at the overall forecast and basically, like I said in my commentary that the statutory depletion deduction is going to offset our book pretax income, so that's what we're anticipating. That 0% effective tax rate, excluding discrete items, is where we anticipate to be for the full year.

Okay. Thanks, guys.

Thanks, Mike.

Thank you, our next question is coming from Robin Shoemaker of KeyBanc. Please proceed with your question.

Wanted to ask you, you indicated on your press release, 62% of tons sold in basin. And you're talking here on the call about a 50% delivered in basin. So should we expect this number to be around more like 50% in the second half of the year?

Yes, so, it moves around a lot, Robin, and so I would say 50/50 is probably a good way to look at it. 50% in basin, 50% from an FOV plant standpoint.

Okay.

And just in terms of the margin at plant and in basin. Clearly there's a difference there. How would you characterize that?

So I would say that typically our margins in the basins are a few dollars a ton higher, maybe $3, $4 a ton higher, something like that. It obviously depends a lot on the specific location, but historically we've always gotten a small premium for that and given the extra work and effort that has to go in to it, it makes a lot of sense. I think customers understand that.

Okay.

In terms of this big picture growth in prop intensity per well that we've seen for several years now, and I think continues to this year, what's your comment around that? Is the rate of growth in prop and intensity per well from your perspective, is that slowing, is it still continuing at the pace that it was? How would you describe that?

It's a great question, Robin, and it's one that I was watching with a lot of interest. You never know when the market goes through a big correction what changes, and so we were watching that pretty closely. I'm pleased to say, though, that really I have seen no let up in that trend.

We'd originally modeled 15% to 20% profit per well increase for 2015 and our own data indicated that we're on track for that. And also, a major service company on their earnings call last week said that they're seeing a proppant per well up about 19% so far this year. We've actually recently gotten a lot of feedback from a variety of customers who are talking about increasing their proppant per well.

I think that's a positive for the industry and certainly it seems like that's a long-term trend that we see no sign of abating.

Okay, great. Thank you.

Thanks, Robin.

Thank you, our next question is coming from Trey Grooms of Stephens. Please proceed with your question.

A couple of quick questions. Most of the questions have been asked, but you pointed to capacity utilization being low and a drag on the quarter, which I guess should be expected given what's going on with sales and demand. But, Don when you look at the inventory levels, it's down just slightly sequentially versus a much deeper decline in sales.

How should we be thinking about your approach to pulling those inventory levels down as we progress through the back half of the year? Should we expect that? And then, what impact could that have on capacity utilization as we look in the back half, do you think that that could still be --less or more of a drag as we go through the back half?

Yes, so, good question. I think the inventory levels that you're seeing at the end of June reflects the fact that, what Bryan said earlier, that June was a pretty good month. We started to see our sales ramp back up. So we wanted to make sure that we had the inventory in place in order to capture those sales.

So the inventory that you're seeing, a lot of that is in basin, which obviously comes at a higher cost. Because it includes the freight to get it there. That's what you're seeing there. And I would anticipate that inventory levels staying relatively flat throughout the rest of the year, again, as we try to capture more than our fair share of the growth in the market place.

Okay. Thanks for the color there.

And then on the M&A that you pointed to, Bryan. We've heard you talk about that several times, as kind of the primary use of cash as we look forward. What is -- couple things. One, I think the smaller players are definitely struggling, as you mentioned, a lot of the big guys are moving away from those guys, from the smaller players. Are you still seeing those smaller guys kind of go away, leave the market or are you still seeing some of that? Or do you think we've hit a bottom in that? And how does that look towards M&A, how do you take that this into consideration when you look at M&A, looking for targets?

And also, if you could comment just as a follow into that, your kind of comfort level around leverage? I know you guys just upsized some of your debt late last year, but looking at M&A, your kind of comfort level around that?

Sure. So, M&A is, I think, getting more interesting in oil and gas. It feels like the bid asked is tightening up a little bit here and it's sort of what we predicted as things progressed on and we got further into the trough here. So I think that could be very constructive for M&A.

As far as the small players, we have seen several of them leave the market. Certainly some are for sale. Unfortunately the reason those folks weren't competitive in the market typically goes back to things that you can't correct, right. So if they're on the wrong rail line or they have a high cost structure that you can't fix.

And so, those probably aren't the type of targets that we would be interested in. I think we would look more at folks who have low cost capacity. And I think having low cost is proven to be a key differentiator here in this downturn and so I really wouldn't want to bring anything into our portfolio that didn't meet that criteria.

As far as the leverage, maybe I'll ask Don to give his thoughts on that.

Yes, so even if you look at the Company today, we're still pretty comfortably levered. If you look on at a TTM basis we're on a net leverage basis, we're 1.2, 1.3 times levered. On a go forward basis, if we were to look at adding additional leverage to the Company for solid acquisition to help consolidate the industry, a 3.5 times leverage is something that I've consistently said I'm comfortable with. When it starts to get over that, you can bet we have a plan to pay down the debt pretty quickly based on the cash that could be delivered from this type of a business.

Great, thanks a lot for the color.

Thank you, Trey.

Thank you, our next question is coming from Marc Bianchi of Cowen. Please proceed with your question.

I'm interested in the comment on the strength in June. Curious if you can quantify how much that was up relative to the second-quarter average?

We saw good volumes come back in June and pricing was maybe a little bit better as well. I still haven't seen all the cost improvements roll through yet, so those will come I think in the next couple of quarters.

But I would say that, if I extrapolated the June run rate, that would probably put us more on a 6 million ton annualized rate, or something like that. And sort of, ironically, if you look where we were last year, we did about 6.8 million tons in oil and gas for the year. I think depending on how much volume improves in the back half, I don't think we can get all the way there, but we can still have a pretty good year in terms of volumes if things continue like they are in June, and now in July, we're seeing strength in July as well, Marc.

Great.

You mentioned market share gains being part of the driver there, but how much of the benefit would you say is market share with either existing or new customers versus underlying activity improvements as maybe some of the companies work through their drill done completeds or just start to increase activity? How would you separate that in terms of the benefit increase?

I think it's, it's a couple of things, obviously. If I looked at the difference between the share and the market improvement, it felt like in June and early July the market was definitely picking up. We obviously last week saw 19 rigs come back, there was a lot of positive commentary from our customers. It's maybe 60/40 towards share if I had to composite a split.

My concern going forward, though, is what's the reaction to oil back down in the 40s? If WTI hangs under 50, does that put a weight on this sort of activity coming back? I think that's one we'll just have to wait and see how it plays out.

Sure. Thanks, Bryan, I'll turn it back.

Thank you, Marc.

Thank you, our next question is coming from Agata Bielicki of Simmons and Company. Please proceed with your question.

I was wondering if you could compare and contrast the utilization in your Texas sand mine versus your other mines?

Our Cadre Mine is actually holding up quite well. Demand for that product is strong to the point where we're looking at potentially doing some capacity expansions there. That feels like it's been a great acquisition for us, those products do very well in the Permian and customers love them. Utilization there is higher than the rest of our network if you look at it in total.

Okay. I guess that, as you mentioned that, capacity expansion makes a bit more sense than maybe some of the acquisitions that you touched on earlier?

Yes, no, for sure, and I know that one of the concerns out there is running CapEX and how we might be spending that. Are we really going to spend, say, $60 million or $70 million in this environment? I think we're looking very carefully at that and shifting around instead of spending on a large new plant in Wisconsin, we're shifting our priority in terms of how we spend CapEX. We have a number of cost improvement projects, so we're focused on those.

We have some ability to do some more on the transload area, help us grow volumes, so we'll do that. And then on the capacity side, we're really focused in sort of incremental expansions where there are high demands. Voca is one, and the other is Mill Creek. Mill Creek is a 100 mesh plant and the demand there is very high for both oil and gas and industrials, so much so that we're almost on allocation right now between the two sets of customers. There's some incremental things we can do there.

And then the last piece, which is one that folks might not have thought about but, over the last few years, demand has been so strong that we kept pushing out to some maintenance projects that needed to be done. Once again, we want to continue to invest for the future and not shortchange our facility. We will continue to spend CapEX, but do it wisely, and not to blindly pursue a mega plant in Wisconsin. We have lots of other opportunities as well.

Okay, that makes sense, thanks.

Switching gears a little bit. Outside of those two larger customers, what proportion of your oil and gas volumes go to the lower tier frac players? And do you have any kind of concern that exposure to them is a risk as the large cap players continue to take market share?

No, we watch that very closely so we feel pretty good right now with where the balance sheet is, as far as accounts receivable and the allowance thereof. We feel pretty good about it. Most of our sales right now are going to the large and mid sized players. We're being very careful and cautious on who we sell to.

Okay, great thanks. I'll turn it back.

Thanks, Agata.

Thank you, our next question is coming from Adam Thalhimer of BB&T Capital Markets. Please proceed with your question.

On the ISP side, Bryan, you mentioned some positive demand trends there. We haven't seen a lot of growth in the volume side of that business. What would be your expectations for acceleration there?

It's a really interesting question, Adam, and in some cases that was our choice. We rationalized our customer base. We have a lot of industrial customers that really did not generate tremendous profit. We were able to take those tons and ship them over to more profitable customers and segments, and in some cases, they were also plungable with oil and gas. We are always trying to find the highest end use, or highest margin spot if you will, for our volumes.

I'm really excited about the industrial business. It's something that we've been talking more and more about over the last few quarters. We have a great pipeline of new products, and some of them are just knock your socks off things, and I believe that we have 10s of millions of dollars worth of incremental EBITDA that's in that pipeline. It's pretty exciting to see and I think it's going to be a very nice complement to our oil and gas business.

Okay. But some of the customer calling will flow through in the back half of this year as well?

I'm sorry, say that again?

I mean some of the-- you're saying you chose to move away from some customers in that business, which is why the volumes were down in the quarter. But some of that will flow through in the back half of the year as well? Or do we get to some kind of inflection point where you lack that?

We've been moving to more specialty and performance products. In some cases we'll direct the whole grain sand into some other processed product. So at the end of the day the volumes are less but the-- profitability and the pricing and the margins, as you see, it can go up substantially. We're up more than 20%, I think, quarter over quarter in margins. It's an example of what we're trying to achieve there, we want to emphasize more the specialty and performance products which tend to be lower volume, higher return products.

Got it, okay.

And then, lastly, just listening to you on this call it feels like, with the results that you saw in June, that business is pretty sensitive to WTI prices. That's obvious, completely obvious, but I'm trying to figure out because you're saying volumes went up in June because we got more rent from price, but then you said in June volume and price were up. I'm still trying to figure that out.

I think that -- there's an obvious sensitivity to WTI. Certainly internally, the way we're looking at it is there's a lot of sensitivity to our fixed cost leverage and, if we can't keep our assets fully utilized, then you start to drag on earnings pretty quickly. Don talked about the railcar example or if you look at just our plant sites in general, it gets pretty expensive to run the site at 50% of capacity on a per ton basis.

And of course, the problem is that the demand is not smooth in oil and gas. So it's kind of up one week, maybe down a little bit the next, and back and forth. So it's a challenge to optimize your operations for that.

Okay. Thank you.

Thank you, Adam.

Thank you, our next question is coming from Brad Handler of Jefferies. Please proceed with your question.

A couple of questions just to help me understand things a little better and then maybe to calibrate the potential, the risk reward a little bit.

So first, keying off of a couple of your comments in the prior questions. Is it possible that, in terms of a pricing dynamic, as you regain share at the end of the quarter and into July, was it perhaps related to favorable mix? I mean, if Cadre was running really well and you regained volumes, did you see mix shift favorably toward the end of the quarter and into the third quarter?

It could've been a little bit of that.

Is it -- okay. Or is it that plus what you're saying is, also apples to apples, for 100 mesh or for 20/40 mesh you actually had some better pricing than you had earlier in the quarter?

So Cadre has been holding up pretty well. I think that we've also got resin coated sand in there also, so it all sort of lumps together. And if you think about what we can do with the sand grains, we continue to work to maximize the pricing that we can get in the returns from it.

Okay. All right, thanks.

Second unrelated, but still in the same vein. Relative to comments that maybe more of the mix is 50 /50 in basin versus FOB. And perhaps also aligning the idea that you're probably, with new transloads, going to do that much more unit train shipments, which presumably is helpful. But-- if I go back to the railcars, what's the impact on perhaps unused railcars? Is there risk that -- you end the year with 2,000 or 2,500 railcars that are idle, for example?

I don't think so, Brad. We're actually pretty reasonably well sized for the kind of demand that we exited out in June and we're seeing in July. So, I think that, you know, it would just depend on how many additional customer cars come online and how much the customers want to push their cars versus our cars.

We don't have great visibilities on that as we look at set in the fourth quarter or something like that. It's kind of a quarter-by-quarter discussion with the customers. We continue to work on that. My hope is that we will actually be taking cars out of storage, not putting cars in to storage.

Right, with the higher volumes, perhaps you'll be pulling them out of storage.

Correct.

Interesting. Okay, thanks, I'll turn it back.

Thanks, Brad.

Thank you, our next question is coming from Chase Mulvehill of SunTrust. Please proceed with your question.

I just want to touch on the fixed calls, I think a lot of guys have talked about it, but can you just break down what percent of oil and gas cost against oil was related to fixed cost?

Yes, I think right now we'll probably running pretty close to 60%.

Okay. And does that include, DD&A or is that [cat] cost?

No, it would include DD&A.

And then, as we move into third quarter, if we can just walk through some of the moving parts. So if we can just talk about volume expectations. June and July seem to be pretty good, but it sounds like you expect those to be up. Do you know how much do you think those would be up? And if we walk through mix, you talked about transloads essentially being 50% and then pricing and also maybe on the cost side?

I think in terms of volumes, when I look at June and July, I was thinking about an annualized run rate basis. It would be over 6 million tons. And as I was saying earlier on the call, we actually sold 6.8 million tons in all last year, so it's not that far off last year's run rate. I feel like we can get back to a pretty reasonable volume level.

The challenge really is, on the margin side, the two big components. One is pricing itself, which also includes customer and destination mix. And the second is that the fixed cost absorption or lack thereof. We're trying to work hard on the things that we can control to get the margins up, but it feels like, and once again, there's always a caveat of nobody knows where WTI is going, but if we can stay in this level where we are now it feels like volumes have somewhat stabilized, which is good news.

Okay. And, 6.8 million tons for oil and gas. I mean that's some--

Correct.

--some pretty stiff increases in the second half, right?

Sorry, no, that was last year. So I'm just comparing that. So if you said, let's say we exited the quarter at 6 million ton run rate on an annualized basis, I was just saying, just for reference, that last year we were at 6.8 million to put it in context. That it's not 25% off of last year's sort of total, that is 25% off of the peak in 4Q. We were running at about 8 million tons, plus or minus, in 4Q of last year on a run rate basis.

So, just to give you some context, we exited the quarter probably 20% to 25% off of last year's peak run rate. But given where rate count is right now and how far things are down on a run rate basis, that's where you can see where we're taking share out there.

Okay, all right. So you have, I mean if you get, I think you said 6 million kind of this year that's greater than double-digit percentage increase in each quarter of the second half if you get to more third-quarter weighted or fourth-quarter weighted?

Sorry. Look, our business usually slows down a little bit in 4Q for a variety of reasons. Usually oil and gas slows down a bit just because budgets expire and some places like the Marcellus is tougher to do work in the winter. The industrial business always slows down in the fourth quarter, a lot of different factories like glass factories things that take annual shutdowns and people go on holiday vacations and all that kind of stuff. So 4Q is usually our slowest quarter across the Company.

Okay. So then you said about 50% of your volumes will be sold at the transload. Do you think that your transload volumes will be up, flat, or down in third quarter?

I don't know, I would say it's probably flattish. It moves around so much, Chase, its just hard to forecast. I mean literally, trying to know what our transload volumes are going to be two or three weeks from now is a challenge, let alone what it's exactly going to be like in the quarter. But I would say it's relatively flattish, but if I was putting a model together, I would assume it's 50/50 and you won't be too far off.

Okay. So significant increases of volumes at the mine gate. That's kind of the takeaway, right?

I think that makes sense.

A lot of that is driven by customer base. Because our bigger customers have their own supply chain networks and they would rather pick it up at the mine gate as opposed to invasive.

Okay. And then just real quick, if you can kind of walk us through the cost per ton as we kind of float through into the second half?

I think --.

For the oil and gas.

Yes, still on oil and gas. I think the opportunity for us is to decrease the cost per ton. As Bryan was saying earlier, there's millions of dollars out there in cost savings, so I think --to decrease the cost per ton or, said another way, increase contribution margin per ton, of about $1 a quarter is pretty reasonable to look at out there based on some of the cost savings programs we have in place.

Awesome. That's all I have. Thank you.

Thanks, Chase.

Thank you, our next question is coming from Tom Dillon of William Blair. Please proceed with your question.

I'll just get one quick one in here.

Can I talk about the frequency of the small guys selling at fire sale prices? Second quarter versus fourth quarter? And then any indication where they're at, what they're doing now?

It's interesting, we've seen some of the small guys start to exit the market. And I would say that, based on the input from our sales team, the fire sale prices are not as much now as you saw earlier in the year. It just feels like things have stabilized a bit and I also think it became pretty clear to some of our large customers that, even though they're making some fire sale prices out there the ability to deliver product consistently and with consistent quality just didn't seem like it was there.

So, in a way we're a pretty good feel for who's still in the industry and who's not, and who is trying to sell their assets. And so from all that, it just feels like the fire saling has gone down a bit.

Sounds good. Thank you.

Thank you, Tom.

Thank you, our next question is coming from Richard Verdi of Ladenburg Thalmann.

Thank you for squeezing me in here. Speaking high level, on the acquisition front for what you're looking at today, what's the size of the EBITDA contribution we can expect, as well as the timing?

In terms of EBITDA contribution from an acquisition specifically?

Correct. From what you're seeing, high level.

It depends. I think that when you look at who are the sort of low cost players in our space, and, you look at those folks, you kind of get a sense of what that might look like. Generally, people who are low cost tend to be larger like US Silica, so it's probably larger rather than smaller, but that doesn't mean that there's not a good sort of incremental small acquisition that pops up as well. It's just sort of a tough one to handicap right now, Rich.

Okay, and, on a timing perspective, could we maybe think about 12 months, 24 months, or is that a little bit too difficult right now to answer and put your arms around them?

In terms of when something might happen, you mean?

Yes.

I mean obviously we're out there pushing everyday to help drive consolidation in the industry. It's really hard to handicap an exact time but it does feel like the bid ask spreads may be closing just a bit here (inaudible) sees where the market has, you know, has landed here.

Okay. And then just one last question too. I've asked this before. Can you just give us an update on your adjusted EBITDA thesis?

We had spoken in the past about taking that mark from about the $250 million level to about $900 million to $1 billion in 2020 or 2021. Can you just maybe tell us a little bit about how you think about that idea, that notion now?

So we put two goals out there. One was to roughly double the size of the Company to about $450 million to $500 million in EBITDA by 2017 and then, as you said, double again by 2020. As I think about that interim 2017 goal, I really think that could still be possible but it certainly won't be through the path we had originally intended, which was heavy green field acquisitions. The reality is, it's going to be through M&A as opposed to building new sites.

But I really do believe that the market is going to recover sometime in the next 18 to 24 months, and when it does, I think we'll be extremely well positioned to be on the way to our aspiration of getting somewhere close to $1 billion in EBITDA. That seems like a bit of a stretch right now given where the market is, but when things come back, I think they can come back fast and come back hard. And if we're positioned with a lot of capacity and a lot of other assets and attributes that we've put together through a couple of acquisitions, it feels like we could be really strong player in the space.

Excellent. Okay, great, thank you guys.

Okay, Rich, thanks.

Thank you. This concludes today's question and answer session. I would like to turn the floor back over to Mr. Shinn for any additional or closing comments.

Thank you very much.

In closing, let me say that we're unquestionably in a very difficult oil and gas market today but I believe that US Silica will not only excel in this market but emerge stronger once the recovery happens. And my beliefs are based on our operational excellence, wide distribution footprint, low cost model, best in class balance sheet and not the least of which our exceptionally talented team.

And speaking of that, I want to thank all my colleagues at US Silica for their tireless efforts in staying focused on working through these tough times, while, at the same time, positioning our Organization for future growth as the oil and gas market recovers. I also want to thank our investors and our analysts community. We appreciate your interest and support and I look forward to meeting and speaking with you all at the many conferences and events we plan to attend throughout the rest of the year.

Thank you all for dialing in and have a great day, everyone.

Ladies and gentlemen, thank you for your participation. This concludes today's teleconference, you may disconnect your lines at this time and have a wonderful day.