US Silica Holdings Inc (SLCA) 2016 Q4 法說會逐字稿

Greetings and welcome to the U.S. Silica Holdings fourth quarter and full year 2016 earnings conference call. At this time all participants are in a listen-only mode. A question and answer session will follow the formal presentation. (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, Vice-President of Investor Relations and Corporate Communications for U.S. Silica. Thank you, you may begin.

Thanks. Good morning, everyone. And thank you for joining us for U.S. Silica's fourth quarter and full year 2016 earnings conference call. With me on the call today are Bryan Shinn, President and Chief Executive Officer; and Don Merril, Executive Vice President and Chief Financial Officer.

Before we begin, I would like to all to remind all participants that today's call contains forward-looking statements which are subject to certain risks and uncertainties. For 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 for the 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. With that, I would now like to turn the call over to our CEO, Mr. Bryan Shinn. Bryan?

Thanks, Mike. And good morning, everyone. I will begin today's call by reviewing our fourth quarter performance and highlighting a few of our key accomplishments in 2016. I will then comment on the market outlook for both of our operating segments, and discuss some of the actions we are taking to meet the growing demand that we see for both raw frac sand and last mile logistic solutions in our oil and gas business.

I am pleased to report that for the fourth quarter, total Company revenue was $182.4 million and adjusted EBITDA was $20.7 million, delivering sequential improvements of 32% and 150% respectively. Fourth quarter contribution margin in oil and gas was $18.5 million, up $20.4 million sequentially on sales volumes of 2.1 million tons, representing a 29% sequential increase in volume, and outpacing US rig count growth by about 6%. Improved quarterly results in the Company and oil and gas were largely driven by higher oil field volume, increased fixed cost leverage, accretive margins from our new businesses, and some pricing recovery.

Our industrial and specialty products segment had a very strong quarter as well, which resulted in the best year ever in its 116-year history. Quarterly contribution margin of $19 million improved 25% on a year-over-year basis and increased 45% on a per ton basis. New higher margin products, favorable customer and product mix, and lower operating costs contributed to ISP earnings growth in the fourth quarter and for the full year.

Despite many challenges, we seized upon numerous opportunities in 2016 to make our Company leaner, stronger, more flexible, and ultimately easier for customers to do business with; all of which I believe will enable U.S. Silica to further extend its industry-leading position as an innovative, end-to-end frac sand Company. In 2016, we also eliminated almost $60 million in annual costs. Some of these costs are cyclical in nature and are expected to come back as the business improves, but many of our cost improvement projects are structural and should support margin expansion going forward.

We became a stronger Company in 2016 by making the best balance sheet in the space even better, through disciplined capital spending and by raising over $650 million via two successful public equity offerings. We used most of the proceeds from one of those offerings to extend our industry lead to two strategic, highly accretive acquisitions; NBR Sands and Sandbox Logistics.

NBR, now our Tyler operation, has exceeded our initial expectations and has enabled us to take increased share in the growing market for regional frac sand. Sandbox, the leading containerized last mile logistics solution has also exceeded our initial expectations, and continues to add new customers and grow market share including being named last month by Haliburton as its preferred provider for containerized sand delivery. I will talk more about the outlook for Sandbox later in my prepared remarks.

We also became a more flexible Company in 2016 by making prudent investments across all our supply chain. We expanded capacity and improved operational efficiencies at many of our regional mines to keep pace with the growing demand for regional sands, and in particular the finer grades that are so highly sought after today. We expanded our logistics footprint and added more unit training capability to our network to offer our customers increased speed and flexibility, while at the same time driving down our overall logistics costs.

We shipped a record 64-unit trains in the fourth quarter and reduced the number of railcars we have in storage to just under 1700, a 20% decline from the third quarter. As volumes in oil and gas continue to ramp in 2017, and cars roll off leases, we expect to have all railcars out of storage by the end of this year.

Finally, we became an even easier Company to do business with in 2016 through enhancements to our customer portal and improved automation and streamlining of processes for customers. We conduct regular surveys with our customers using a ratings model similar to the one developed by the ratings website Yelp to provide realtime customer feedback and ideas on how we can improve our service. We are consistently rated as the category service leader by many of our customers, and recently a top customer awarded us their highest score ever for a proppant supplier.

Now let us turn to the market outlook for this year. We are seeing surging demand for sand proppant and last mile logistics, driven by the continued increase in US horizontal rig count, longer laterals, and a double digit increase in proppant per foot drilled. If these trends continue, 2017 demand for sand profit may be greater than our current forecast of 60 million tons.

The significant increase in sand demand is also driving higher overall sand pricing and a tightening of the last mile trucking market, making efficiency gains associated with Sandbox even more valuable to our customers. We have a comprehensive strategy to win in the current market environment and we are responding aggressively to deploy capital and resources to support our customers.

Let me give you a few examples. First, we plan to have all of our oil and gas sand assets operating at maximum capacity in the near future.

Second, over the next 12 to 18 months we expect to invest in a mix of expansions at existing sites, new greenfield sites, and acquisitions that will collectively approximately double our low-cost oil and gas production capacity to more than 20 million tons per year.

Third, we will make additional capital investments in Sandbox this year. We continue to add new customers and expand existing customer relationships and we are quickly ramping up capacity to meet the growing demand. Our expectation is to have more than 80 total Sandbox fleets online by the end of 2017. I believe that, as the market leader, U.S. Silica is well-positioned to capitalize on the current favorable market trends in oil and gas completions and with our unique combination of low costs, Northern White facilities with advantage logistics, low-cost regional mines located near the most active basins in Oklahoma and Texas, and the best-in-class last mile delivery system with Sandbox.

We plan to continue to invest wisely to further enhance our oil and gas capabilities in the future. For industrial segment, demand in most end use markets is expected to stay strong in 2017 and we expect to see continued opportunities to roll out new higher margin products. We also plan to acquire new capabilities this year to support this initiative through potential bolt-on acquisitions. The ability to generate even stronger bottom line results as always for ISP will be contingent on our overall customer and product mix.

And with that, I would now like to turn the call over to Don Merril. 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. Revenue for the oil and gas segment for the fourth quarter of 2016 of $137 million improved 58% sequentially compared with the third quarter of 2016, driven by a combination of higher volumes, including the impact of a full quarter of our two acquisitions and higher pricing.

Revenue for the ISP segment of $45.4 million declined 11% on a sequential basis from the previous quarter following typical seasonal patterns in the business. Contribution margin from our oil and gas segment in the quarter of $18.5 million jumped to positive territory on a sequential basis compared with a loss of $1.9 million in the third quarter of 2016. On a per-ton basis, contribution margin for oil and gas was a positive $8.88 versus a negative $1.17 for the third quarter of 2016.

The return to operating profitability in our oil and gas business was driven by increased volumes and the associated favorable fixed cost leverage, and accretive margins from our Sandbox and our new regional mine site in Tyler, Texas and rising prices. Contribution margin for the ISP business for the quarter of $19 million improved 25% on a year-over-year basis, and contribution margin for the full year 2016 of $79 million increased 13% when compared with 2015.

On a per ton basis, contribution margin for the ISP business of $24.03 improved 45% from the same period a year ago. The year-over-year improvement in ISP profitability was driven by improved pricing, increased new high-margin product sales, and lower production costs.

Turning now to total Company results. Selling, general, and administrative expenses in the fourth quarter of $19.2 million were up 4% compared with the $18.5 million in the third quarter of 2016. The sequential increase in SG&A expense is largely due to additional compensation expense and having a full quarter of expense from the two newly acquired entities, partially offset by lower Business Development-related expenses and a recovery of a previously reserved receivable.

Depreciation, deletion, and amortization expense for the fourth quarter was $21.2 million compared with $17.2 million in the third quarter of 2016. The increase in DD&A was mainly driven by incremental investments related to our acquisitions as well as other capital spending.

Continuing to move down the income statement, interest expense for the quarter was $8 million, compared to $6.7 million for the third quarter of 2016. The increase was due to additional debt assumed in connection with our acquisitions.

From a tax perspective we recognized an income tax benefit of $6.6 million in the fourth quarter of 2016, compared to $12.2 million in the third quarter of 2016, due to a lower pre-tax loss.

Now turning to the balance sheet. Cash and cash equivalents as of December 31st, 2016 totaled $711.2 million compared with $277.1 million at the end of 2015. During the fourth quarter cash provided by operating activities turned positive at $300,000, and in November we executed another successful equity offering of 10,350,000 shares of common stock, resulting in net cash proceeds of $467 million.

As of December 31st, 2016 our working capital was $783 million, and we have $46 million available under our revolving credit facility. As of December 31st, 2016, our total debt was $513.2 million compared with $491.7 million at December 31st, 2015. The increase was due to additional debt assumed in connection with our acquisitions. During the fourth quarter, we incurred capital expenditures of $13.7 million, largely associated with the Company's investment in Sandbox and various other maintenance, expansion, and cost improvement projects.

For the full year 2017, we expect our capital expenditures to range between $125 million and $150 million and could be higher based on the pace of investment in our greenfield opportunities. Finally, while we are starting to see some signs of improved visibility in our oil and gas business, we will continue to refrain from providing any additional financial guidance until we begin to see more clarity and consistency in our customer demand trends. With that, I will turn the call back over to Bryan.

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

Thank you. We will now be conducting a question and answer session. (Operator Instructions).

Our first question comes from the line of Marc Bianchi with Cowen. Please proceed with your question.

Thank you. Impressive plan that you have laid out here, with doubling the Sandbox fleet again, and doubling capacity in oil and gas. I guess maybe first on the oil and gas capacity plans, can you talk to maybe how much of that growth you have from just expanding your existing facilities? And then how much you are expecting to come from greenfield and M&A.

Sure, Marc, and thanks for the question. As we said in our prepared remarks, we expect to add fairly substantial new oil and gas capacity over the next 12 to 18 months. And maybe just give you a little more color on the plan itself. There is three components to it. As you mentioned there is expanding existing kind of low-delivered cost mines, and those fall into two categories in my mind. So the first category of mine expansion is for those that are drilling -- near the drilling activity. That is like Mill Creek, Oklahoma; Tyler, Texas; Avoca in Texas, mines like that.

And the second category of expansion is our low-cost Northern White mine. So Ottawa, Pacific, Missouri, those types of mines. So in total I would expect that we will have expansions at seven of our existing mine sites. And I would think that we would probably get 40% to 50% of the additional capacity increase that we are looking at from that part of the project.

Then of course you have greenfield and M&A. From a greenfield perspective we are going to focus on sites that are near the Delaware and Midland basins, and we have got several opportunities in the pipeline there. And of course we will continue to pursue attractive M&A when we can find assets at reasonable pricing. So we are really excited about the strategy, and I believe that even though we have given guidance of $125 million to $150 million for CapEx this year. Depending on how fast some of these projects proceed, the number could be even higher.

With that expansion, Bryan, how do you anticipate the mix of sort of grades that you have to offer changing, if at all? And can you also remind us what that mix is right now?

Sure. So I would expect that the mix would get finer. If you look at the actions that we have taken recently, the last two mines that we bought with Boca, Texas and Tyler, both of those have been focused more on the fine side. Traditionally our mix has been maybe 30% coarse and 70% fine. I would say it would move finer with these expansions, although as we expand Ottawa, you know, that has a much broader mix.

Okay. Thank you. I will turn it back.

Thanks, Marc.

Thank you. Our next question comes from the line of [Olaf Laura] with Morgan Stanley. Please proceed with your question.

Thank you very much. Exciting times in the (indiscernible).

Thanks, it certainly is.

Hearing a little bit of noise around pricing increases and I think there is a little bit of confusion around mine gate, but also getting some increased sense that people are starting to get really worried about logistics. Maybe not right now, but what they see just around the corner. So can you give us your sense of what is happening at the mine gate? Is it just certain grades that are getting very tight and kind of hearing doubling of prices? Or is it also somewhat of what was previously residual products? What is going on, in a nutshell?

Sure, Olaf. So let me give you some of I my thoughts, and then I will ask Don Merril to comment on this. He has a lot of details on the pricing side. I would say generally we are starting to see positive momentum in pricing. We saw that from Q3 to Q4 of last year, and that trend is continuing in Q1, and I would say probably accelerating.

So I think we will see some pretty substantial increases in price as we go through Q1 here. And I would expect, based on everything that we are seeing, that the market is going to continue to tighten in terms of supply and demand over the coming quarters.

I guess just one word of caution -- I want to be a bit careful about some of the numbers that we see thrown around. I have seen reports out there issued by various industry sources talking about $45 or $50 a ton mine gate pricing. And certainly we are not seeing that. We have gotten some good price increases but we are not at that level at this point.

Don, do you want to comment on that and maybe add some more color?

Yes, thanks, Bryan. I would say, first of all, it is important to note when we talk about pricing, we always talk about mine gate pricing. And we also take into account all of the impacts of customer mix of in-basin sales, etc. Right? So we pretty much scrub all of that out. And what we were seeing in Q3 to Q4, on average we were seeing high single digit price increases rolling into the end of the year.

And what we have seen so far between -- from the start of the year until today, is probably in the low teens. So put it all together and we are seeing in that 15% to 20% price increase since October 1st.

Okay, very helpful. When it comes to the tightening up to logistics, that market seems to be changing by the day right now. Can you give us your latest thoughts on the position of Sandbox? And you signed a big contract at Haliburton. Has that deterred other operators from using it, or has it been an endorsement; easier to get more customers? Or what is going on at the moment there?

Thanks for the question, Olaf It is pretty exciting times in Sandbox. The customer demand quite frankly is just sort of off the charts for Sandbox. We certainly see the last mile logistics continuing to tighten, and that is being driven by the increasing sand per well. So if you look at the amount of sand that a frac crew has to transport out to the well to get it down hole these days, it has gone up easily 10%, 15%, in some cases 20% compared to the last few quarters. So we are seeing the sand go up pretty substantially in terms of volumes.

And one of the neat things about Sandbox is the more the intensity goes up, the better advantage we have versus conventional trucking. So we decided to substantially expand Sandbox in light of those market dynamics and just kind of level set and take everybody back.

When we bought the Company -- bought Sandbox back last year, they had 23 crews. About 18 of those were active. So that is kind of the baseline.

We previously announced a $25 million CapEx expansion to essentially double the business going from 23 to 46 crews. That is going so well, and we expect that to be essentially all sold out in the this near future here. We decided to double again, which will take us up to about 90 Sandbox fleets, and I would expect that we will spend somewhere in the neighborhood of $35 million or $40 million this year to bring those additional fleets online.

And expectation is, as I said in my prepared remarks, that we would be up to 80 fleets or more in terms of equipment deployed by the end of 2017. And if you do some quick math, looking at the number of frac crews out there and some reasonable growth projections, that would put us at about a 25% share position.

You may recall in one of the previous earnings calls, we talked about having a target of getting the 40% share in terms of sand that is moving through our system. So that would be 40% of all the frac sand moving through Sandbox's. We expect to be around -- somewhere around 25% of that in 2017. So we are making great progress there, so very exciting times at Sandbox and looks like that is going to be a fantastic performer for U.S. Silica.

It sounds like it. And from a financial standpoint, is it still -- it was generating $10 a ton, I think, or something in that neighborhood, of EBITDA. Have you backed off that a little bit? Or is it tightening? How do you see the kind of profitability on the market share? Are you willing to talk about that?

So I feel like we continue to make attractive margins. Certainly margins that support our reinvestment economics and then some. So we feel really good about that. And I have been involved in a lot of industries in my career, and in an industry where demand for your product is going up exponentially, prices rarely go down a lot, right? So we are holding the line on that.

Okay. Thank you. I will not push you anymore on that. But thank you very much.

Okay, thanks Olaf.

Thank you. Our next question comes from the line of Chase Mulvehill with Wolfe Research. Please proceed with your question.

Hey, good morning.

Morning, Chase.

Can we just talk about 1Q outlook a little bit? You talked about having 10 million tons of capacity. Is that a 1Q number or was that a year-end 2016 number? What does 1Q capacity look like, and do you think that we can ship all that capacity out?

So, what we have said in the past is that if everything is turned on and we are also selling a bit from our traditionally industrial mines, that our capacity is somewhere between 12 million and 12.5 million tons of oil and gas product. We are not running at that rate today. We are having to ramp up, obviously. So we do not have everything turned on, but I would expect in the next 60 days, plus or minus, we will have everything turned on.

So we will not see that full run-rate in Q1, but certainly we have the intention to get as much capacity into the market from our existing assets as far as we can.

Okay, so looking at 2Q, assuming that all prices remain here, 12 million to 12.5 million tons is probably a good number as we go into 2Q. Correct?

So that is certainly our goal. You know, unfortunately sometimes life intervenes but that is how much we could make if we literally make every single ton and all the grades matched up. I would say that probably one caveat to be careful of there is we are still lower demand for 20/40, our coarsest grade, compared to the others.

We are starting to move some of that product now as the supply and demand tightens, but that is probably 5% to 10% hit to our overall capacity, if we can not move all of that. So there is some puts and takes in there.

But certainly as I talk to our operation, supply chain, and sales team, my challenge to them is to get as close to a that 12 million ton run-rate number in terms of production sales as we possibly can.

Okay. Could you help us with Sandbox and maybe talk about pro forma revenue growth or something like that, to help us dial that in?

Yes, what we have said in the past is that, look, Sandbox is becoming a very integral part of our oil and gas business. So we are going to continue, as Bryan said, continue to expand that business upwards of 90 crews by the end of the year. But we really have not gotten into a lot of the detail of what that would extrapolate into.

Maybe you would be able to help us with kind of legacy frac sand contribution margin per ton, you know, what that looked like in 4Q. And then as you see this progressing through 2017 and 2018, do you think you can get back well above that $20 per ton?

Let me answer that question just as a pertains to Q3 to Q4, and clearly we went from a negative contribution margin to a positive margin in the legacy business. There is no doubt about it, right? As we saw price increases, as we saw the volume increase and then the impact of our fixed cost absorption against that. So clearly we are moving in the right direction. And of course it was helped by the Sandbox contribution margin as well.

Okay. That is all I have. I will turn it back over. Thanks.

Thanks, Chase.

Thank you. Our next question comes from the line of Blake Hutchinson with Howard Weil. Please proceed with your question.

Good morning.

Hey, good morning, Blake.

Just -- I want to make sure -- I hate to revisit it again but I want to make sure we have got the thoughts on capacity correct, because as you lay out the cross bars of expanding over 12 months to 18 months. But at the front end of it, you outlined a lot of things that were kind of already in the works, and would suggest very quick turn times. So as we think about you hitting or ramping to full capacity by 2Q, when would you expect kind of your early brownfield initiatives to start to be more added, or meaningfully additive? And I do not know how you want to couch this -- maybe there is a good exit rate, or mid-2018, something like that to help us ensure we are dialing this in properly.

Sure, Blake. I would expect that we would start to see impact from the kind of brownfield expansions, if you will, by Q4 of this year. So the target that I have asked our operations and project teams to hit is to try to get us to a 1 million to 2 million-ton incremental run-rate in Q4.

So it is dependent on a lot of different things. There is still some permitting that has to be done. There is equipment that has to be ordered. A lot of things, as you can imagine here. But I would certainly expect that we would start to see some meaningful impact by Q4 from those projects.

Okay. That is great. Thank you very much. And then I just want to kind of step back, and you guys have done a great job in this down cycle of not only acquiring, but kind of being ahead of the market in terms of trends. I am hearing a bit more chatter about more complex and dense completion programs moving to even finer grades than 100 mesh. Looking back at your Analyst Day, you spent a lot of time talking about how 100 mesh is not really necessarily a grade. I just wanted to get your thoughts on whether that is a realistic market, going forward, going to even finer grades, and how you may be considering addressing that. Or is it just, in your mind, a micromarket at this point?

It is a great question, Blake. And I would say what we have seen so far is that the trend has been focused pretty much on the Permian. And we see it a little bit in some of the other basins in the south.

But it has been a Permian trend. And it is a real one. If you talk to energy companies who are some of the biggest supporters of the finer proppant completion technology, they are seeing good results and are very pleased with the well performance there. So I think it is a real trend. I think it is a market that is here to stay.

But with that said, I also think that there is other -- there are other energy companies who have different views and want different kinds of proppants. Coarser grades or Northern White versus a regional. And then you have got all the other basins that are not the Permian, where these other grades are being used. So it feels to me like it is just a question of where the overall share settles out for these 100 mesh completions versus some of the other coarser types of completions.

And I would say that certainly we have seen more of the finer completions taking hold in the industry, and it is one of the reasons that, as we think about our expansions, for example, we are focused on mines that are near where the drilling is going on, which tend to be more 100 mesh mines like Mill Creek, Oklahoma or Tyler, Texas.

Great. Thanks for that. I will turn it back.

Thanks, Blake.

Thank you. Our next question comes from the line of Brandon Dobell with William Blair. Please proceed with your question.

Thanks. Maybe, Bryan, a crystal ball question. But if you were sitting in a seat of a smaller producer, what kinds of things are you looking at or kind of planning or thinking about that would give you the confidence to restart -- or I guess a greenfield develop capacity. And I guess some of the factors I am thinking about is price, customer mix, maybe location, et cetera. What I am trying to get at is the guys that have mines that are 500,000 tons, a million tons, that maybe are not logistically advantaged; what are they looking for to get more confident that they should be back in the market?

It is a great question. What we have seen is that the vast majority of the mines that have been sidelined were mostly higher-cost Northern White mines, and in -- as I said in my response to Blake, what the market seems to want more of right now is fine product, and regionally-produced product which has a lower delivered cost. So I think that is a bit of a challenge.

Also when you think about restarting a mine site, there is a big capital infusion that you have to make, and most of the mine sites that have been idled, particularly those in Wisconsin, do not have any stockpile of in-process mined inventory. So the first thing you have to do is restart your mining process. Typically that means waiting until the weather warms up, and then you have to build this big stockpile.

There is a lot of working capital, all kinds of issues associated with starting up a new mine. So if I owned one of those mines and I was thinking about starting it up, those are the kind of things that would be weighing on my mind.

Okay. And then you commented, I think, in the opening remarks about railcars. As you take a little bit of a longer-term view in the context of you guys doubling potential capacity, how do you think about railcar utilization or efficiency relative to what you guys saw back in 2013 and 2014? I guess I am trying to get a feel for -- do you need more railcars after you bring the remaining ones out of storage? Do you think you can get to a $20 million kind of throughput number with kind of what you have under lease right now?

Well, it is a great question, and I would say that as we look at the cars that we have in storage today, assuming the market continues to grow as expected here, we will probably have all of our cars out of storage by the end of 2017. And we continue to work closely with a number of railcar providers, but given the industry surplus of the small cube covered hopper cars, which is what the sand industry uses, I certainly would not expect that car manufacturer would be looking to build any new ones anytime in the near future.

That puts a lot of pressure on the lease rates in the industry, which would be fine by me. But if you are a manufacturer or a leasing company, you probably would not like that. So it will be interesting to see how the industry dynamics play out. Certainly there is more unit trains that are being used today, which means fewer cars than what we have had in the past with manifest shipping.

So a lot of puts and takes. We will watch it closely and see, but if we needed more railcars there is certainly a lot of them out there to get.

Okay, thanks.

Thanks, Brandon.

Thank you. Our next question comes from the line of John Daniel with Simmons & Company. Please proceed with your question.

Hi, guys. I have a few for you this morning. I do not know if you are willing to do this but I would love for you to try to just speak to the pricing arrangements with Haliburton on the Sandbox relative to what the arrangements are with other customers.

Well, you know John, we can not really talk about specific terms of a contract, whether it is with Haliburton or anybody else. But as we announced in our press release, Haliburton has selected us to be their preferred provider of containerized sand for their last mile delivery. As always, we are very excited to work closely with Haliburton and help them achieve their business goals.

The doubling of the Sandbox box systems out there; can you say how much of that is directed towards Haliburton?

We can not say specifically but the reality is we see growth from a number of different customers. Haliburton contract is a piece of it, but there are a lot of other customers out there that want the technology as well.

Okay. I understand the desire to not give specific financial guidance but I am going to try to pin you down and follow and chase these questions. I mean, we are at the end of February now. You have got your January volumes in the book. Can you just give us a sense for where -- it sounds like basically anything you can sell, you are selling today. Just a reasonable range for where you expect Q1 volumes to be?

I think. Yes, Q1 volumes are going to be up from Q4. And right now, based on what I am seeing, I would say they are somewhere in the range of upwards of 10% to 15%.

Okay. Thank you. And then sort of a -- last one from me and I will turn it back over, and not to be a jerk with this question, but just given generous valuation levels that are out there and what seems to be a relatively easy process to add new capacity, and to expand existing capacity, why focus on acquisitions right now?

It is a great question, John, and I believe that M&A is part of our overall strategy. When I think about bringing new capacity into the Company, I like the fact that we have the optionality to expand existing mines, do greenfields, or do M&A. And as we have done with Sandbox and as we do with Tyler, I think we will try and cherry-pick the very best opportunities; and where we find attractive assets at reasonable pricing, we will not hesitate to pull the trigger on that.

Fair enough. Thanks, guys.

Thanks, John.

Thank you. Our next question comes from the line of Will Thompson with Barclays. Please proceed with your question.

Good morning, Bryan.

Morning, Will.

Being sold out at the bottom of a cycle is kind of a unique situation. I want to hash on this again. But what is a limiting factor to do brownfield expansion?

Well, when you look at existing sites, some of which, like Ottawa, are over 100 years old, right? There is certainly limitations there. So, if there is rail involved, you have got to look at the practicality of how many cars you can take away.

Certainly there is a mining aspect to it as well. How much can you mine from the deposits? There is a footprint of the processing facilities and what is reasonable there.

So there is lots of different things that we look at. I would say that if you had asked me a year or two ago how easy it would be or how many quote unquote brownfield expansions that we had, I would say not a lot. But actually the genesis of this most recent capacity expansion program was kind of born out of our cost-out and simplification work that we did in 2015 and 2016.

And you can imagine as we tried to get our costs down, we had engineers and other folks crawling all over our operations, thinking about how we could take cost out. And along the way they found some really interesting kind of clever, creative opportunities to increase capacity. And so we filed all those away, and now that we have got the kind of tremendous demand signals that we have in the market, we think it is time to move forward with those.

But it is not like we just sort of woke up one morning and said, great, let us go expand these seven facilities. It is a lot of time and thinking and it can be challenging to get it done.

And then greenfield development, would that be financed through royalties? Or how should we think about that?

I am sorry, ask that question again, Will.

Greenfield development, is that financed through acquisitions or would we be doing royalties again?

I think it could be a number of different ways. We could just purchase the land outright and just develop the mine sites. And typically we do not pay royalties. But we would not say no to that if the opportunity was really good. In some cases we have also used third parties to develop the sites for us, and then we will pay them a small premium for doing that. So we can kind of leverage our resources. There is lots of different ways we can do it, and all those things are in play for us right now.

And just one last one. The 75% mix in basin delivery, can you tell us what is driving that? Is that a function of smaller service companies coming back in the market, or direct sourcing from E&Ps?

So, I think there is two things. One is that we are seeing smaller service companies, the kind of small and medium-sized guys who depend heavily on our logistics network. We are seeing them come back in the market, and you are seeing kind of a surge of new companies, some of which are thinking about doing IPOs and kind of being capitalized through private equity and other sources.

The other thing is that we would count Tyler in that equation now, so between Tyler and the small and medium-sized service companies, that accounts for the bulk of that change, Will.

That is helpful. Thank you.

Thanks.

Thank you. Our next question comes from the line of George O'Leary with Tudor, Pickering, Holt & Company. Please proceed with your question.

Good morning, guys.

Good morning, George.

Just curious to hear, you mentioned some greenfield projects potentially over near the Permian basin and specifically mentioned the Delaware. Curious as to what those reserves look like, kind of how you came about finding that opportunity. It is my understanding that to date there is not much there. So that would be a pretty unique asset for somebody to have.

So we have a few opportunities that we like in that area. And we are doing a lot of work to evaluate the deposits and the quality of the deposits. I would say in those areas it is primarily 100 mesh deposits. You do not see much of the coarser products. But of course that is what the demand is in that area.

So it feels like if you could find one or two things this there, that would be a great fit with the completions technologies that are being practiced in the Delaware right now, specifically.

Okay. That is helpful. I thought that the color you gave on fine sand demand versus coarse was interesting as well. Just curious, more broadly, given your attractive footprint both regionally and from a Northern White perspective, how you have seen that mix evolve as a percentage of your overall sales volume or overall revenues over the last two quarters or so? As the market tightens, does more Northern White come into the mix, just given some of those mines are having to be reactivated to meet this incremental demand? Or on the other end of the spectrum, has regional just still continued to take share as we have run up pretty quickly from a rig count perspective?

Yes, it is a really good question, George. And I think the answer is just a little more complicated than regional versus Northern White. I think a lot of it depends on the transportation and logistics set-up at your mine. And so for example, through the downturn in 2015 and 2016 we saw our Ottawa facility which is Northern White on the BNSF stay completely sold out because we had all kinds of great options and great places to sell it.

On the other hand, our Sparta mine in Wisconsin which is on the CP, was a bit more challenged to get down to the Permian, just kind of because of the logistics set-up there. I think what we will see as things turn up here is all of our assets will be in strong demand. And as we have added regional assets like Tyler, for example, that is going to increase the percentage of regional sand sold versus the sort of quote unquote Northern White.

But a lot of that is due to the M&A that we have done over the last couple of years. We have added two big regional mines. Just take being the math into account, it is going to skew the percentages in that direction.

Great, guys. Thanks for the color.

Okay, thanks, George.

Thank you. Our next question comes from the line of Ken Sill with SunTrust Robinson Humphrey. Please proceed with your question.

Good morning.

Morning, Ken.

Much more fun calls than we have had in the last couple of years. You know, I was wondering if you could take a minute to walk us through the benefits of Sandbox versus brand X or other containerized sand systems. You know, the concept of focusing on getting the last mile, we think is -- it is obviously going to help margins and help deliverability over the course of the cycle. But what about the competing options that are out there? Seems to me like money is flowing into them too.

Sure. It is a really good question. And we feel like when you do all the math, that Sandbox is the best option out there today. And a lot of it is tied up in the trucking.

Our trucking is much more efficient. We do not have to use specialized trucks like you use for pneumatics. And we have built-for-purpose equipment which kind of optimizes the total cost. I think we have also sized our boxes appropriately so that it minimizes the amount of handling that is required on the well site; and customers tell us that they really like that.

I also think that we have seen some of our customers move away from their silo-based systems, because typically they run into all kinds of issues with footprint and also with reverse logistics. So if you stop a job in the middle of it and you have a silo full of sand, what do you do with it? So there are a number of different benefits.

And I think our customers take all of that into account. And given that we are on a pace for pretty rapid market penetration, I would say that customers are voting with their wallets and more often than not they are choosing Sandbox.

Yes, and I guess I was more interested in the other containerized sand solutions. You know, I have seen where one where they just use flatbed trailers and load their boxes on to flatbeds. Whereas yours are specialized containers. So what is the pluses and minuses of having a dedicated trailer system versus what these other guys are using?

So I think there is a couple of things. What we have seen is that some of the systems use much smaller boxes. So we talked to our customers. What they tell us is they have to handle things twice as often. So if you have a box that is half the size, you have to handle it twice as much, right? And customers hate handling things on the well site.

We have also heard that, by having the customized trailer that we do, with a single box on there versus multiple boxes, you basically, when you go to load it, you just pull it up to the loading spout and you load it once at the trans load and it is off. If you have multiple boxes on the site, you have to move the truck and load multiple boxes.

There have also been some issues with how boxes on flatbeds are anchored. Are they anchored securely? Once again we have a fit, kind of a made-for-purpose system to do that. So I think you have got a lot of advantages. And quite frankly a lot of intellectual property around that as well.

And that is my last question on that. I do not really understand how broad your IP is, so I do not know whether you are willing to talk about that, at this stage. Whether the -- the Haliburton settlement was interesting and obviously good for you. Are there any more press releases like that out there, that we should expect?

So we have a pretty extensive intellectual property portfolio. We have more than 70 patents that we have filed and more than 24 that have issued. So there is a lot that is still in process. And we have a lot of additional IP that is going to be coming out.

So what we have seen is that those who have come after us have had to work around our IP and make compromises in their designs. So I think that gives us a pretty good advantage.

Certainly as you can imagine, in this industry there is a lot of copy-catters and a lot of imitators. So we are vigorously defending our intellectual property. But I think the real win for us in Sandbox is to scout quickly and have the best solution out there and have customers vote with their wallets. If we can get to 25% share by the end of 2017, with our eyes on 40% share in the market, that is an ultimate win.

All these other things, you know IP, and talking about advantages and disadvantages of this system and that system -- what really matters is who is taking share and who is winning in the market. And I think we are clearly doing that.

All right. Thank you.

Okay, thanks, Ken.

Thank you. Our next question comes from the line of Scott Gruber with Citigroup. Please proceed with your question.

Good morning.

Morning, Scott.

Bryan, I just want to circle back on Sandbox and an earlier comment you made. I think you mentioned that you are holding the line on pricing for Sandbox. Can you just put that comment in the context of the environment here where last mile trucking costs are starting to rise? I would just think that holding pricing on Sandbox should be somewhat easy given the asset term benefit, and given the rising rates for the competing system. Is that fair, or are the competing containerized systems pricing aggressively for market penetration?

Well, if you think even holding the line on pricing is easy these days, you have not met our customers. Everyone wants a discount for everything, Scott. But look, we are working very hard with our customers to have a fair pricing arrangement.

I think that it is a challenge to significantly penetrate a market if you are also increasing prices substantially. I feel like there is a lot of benefits here that customers see, and leaving some of those benefits for the customers while taking share and getting good contracts set up feels like it is a pretty good trade-off for us.

With that said, we are out there raising prices in some locations, given the rise in trucking costs. And some of that is having to raise price just to stay even. So if we really kept true pricing flat, as trucking costs rise, our margins would decline, right? So we have to have some increase just to stay even. But certainly we are aggressively trying to get price there where we can. But our focus is on overall margins and trying to penetrate this market for sure.

So if you put the Haliburton agreement to the side, are margins then generally stable in Sandbox?

Yes, I would say that they are stable. And like Bryan said, we are taking every opportunity we can to raise prices where it makes sense, where trucking is becoming very tight. Right now, again, to reiterate, this is a share game for us and we are going to be steadfast in that.

Got it. And how are your variable and fixed costs splitting today, given that volumes are starting to rise rapidly? Are you starting to see inflation on the variable side, particularly (indiscernible) --

Yes, we are. Normally I would answer that question 50/50, but I think we are starting to trend more to the variable side. I do not think we are quite to 40/60 yet but clearly going that direction.

Okay. Appreciate it. Thank you.

Okay, thanks, Scott.

Thank you. Our final question comes from the line of Kurt Hallead with RBC Capital Markets. Please proceed with your question.

Hey, good morning.

Good morning, Kurt.

So just as a quick reference point, your stock is down 4% on the day despite all the good news that you happen to be bringing on the call. So I just figured you guys might want to be aware of that. So the dynamics that are at play here, everything that I have heard so far suggests that demand for frac sand continues to accelerate off the fourth quarter run-rate. And you guys would generally agree with that. Is that correct?

Yes, that is right, Kurt.

So then your volumes were up 30% sequentially in the fourth quarter, and if demand is accelerating, then by definition should not we be looking at a potentially higher -- or a similar kind of growth rate that you had maybe in the third and fourth quarter where you are at 20% to 30% growth? And I know you guys kind of indicated maybe 10% to 15% growth in frac sand volumes. So if things are accelerating, I just want to try to connect the dots on the growth rates.

Kurt, you know us well enough that typically we are going to be conservative when we give you numbers. We are seeing increases in demand here into the first quarter. So my 10% to 15% -- look, I think that is a number we can beat.

Okay. And then I was looking at it in the context like you are not capacity-constrained in that context. So your growth rate at 10% to 15%, you would not be kind of maxed out on your ability to deliver product to the market. Right? So you can grow faster than that. Given your current capacity levels. Is that fair?

That is right, Kurt. And I think the other reality, though is that we are turning up a couple of the facilities, or turning them back on if you will. Adding back crews, and getting more staffing in places where we had de-staffed a bit during the downturn.

So there is a little bit of that, but we have not bumped up against the capacity limit yet of what is staffed, that is for sure.

Got it, okay, great. Now then on a pricing dynamic, you did a very fair job to try to kind of clarify some of the discussion that has been out in the market place about mine gate pricing and so on. When we look at the pricing mix, you have $65 per ton pricing in the fourth quarter. How would you kind of split that between mine gate and logistics?

Okay, that is a good question. I think clearly, having our trans load -- or sorry, our in-basin sales go up in the fourth quarter versus the third quarter, certainly impacts that ASB number. But, I would say that about half of that increase would be due to the things, the pricing and so on. And the other half probably is related to the sales that we are doing in basin.

Got it, got it. Okay, all right. Now, the context on the increase in your capacity is a big number doubling capacity. Half of that coming from existing sites. So once you go down that path and once you start the process, if the market demand dynamics -- if the main curve does not accelerate to the extent that your supply curve would, how quick can you adjust and slow down that process if needed?

It is one of the advantages of doing this kind of work, is that we can modulate that, Kurt, depending on the demand for sure. One of the other things I really like, the plan that we have laid out here, with these three components of expansion, greenfield, and M&A; is that anchoring it with expansions, they tend to be the highest probability of success. We know the mine sites, we know the equipment there, we know the transportation arrangements, and so we typically would feel really good about those.

I also like the fact, by doing expansions, greenfield, and M&A, we are going to lower the overall cost of adding capacity. And I think that was part of John Daniels' question that he asked earlier. I also like the fact that we are spreading a risk amongst several sites and basins and customers.

We have not talked about that on the call here, but there is an element of risk here, which you brought in. This "what if the market turns down", right? So if you look at what we are talking about here, expanding seven sites, you thrown in a couple of greenfields, maybe an M&A -- I mean, we could be investing in ten or more locations. Which could be serving multiple basins.

And so I really like spreading the risk around. I am not a fan of sort of putting all our chips on one big bet, given the unpredictability and volatility of this market, once again as you pointed out Kurt. So I feel like this puts us in a really good position to respond and react, as basins get -- it is either more demand or less demand, we will have a larger of network of sites that we can turn up or turn down to respond to that.

Okay, and then I just maybe follow up on this in the context of the -- I guess, I think the market was spooked by your commentary about doubling capacity and the investor based freak-out on oil service companies when they start talking about increasing whatever kind of rate count, or frac count, or whatever. Now, are you getting signals from your customer base that kind of prompted you to make this move, or are you doing this on, lack of a better term, more of a speculative basis?

So, we are definitely getting signals from our customer base. We have got a lot of ongoing discussions as you might imagine, with customers. And they are sort of begging us to get this online faster, given the pace of demand increase right now. So I am not worried about that part of all; it is more the technical aspects of getting all this done. And certainly, greenfields are less certain than the expansions, and the M&A is less certain than the greenfields and the expansions, you know, back to my earlier comments.

But, certainly we see strong interest in the market for these tons and for this strategy.

Okay, thanks for clarifying all those points. Appreciate it.

Thank you. There are no further questions at this time. I would like to turn the call back over to Mr. Bryan Shinn for closing remarks.

So I would like to close the call with a few key thoughts. First, the market has clearly upward as we talked about many times during the call today, and we certainly expect substantially higher sand demand in 2017. Second, I want to reiterate about that I am very excited about the opportunity that we have over the next few quarters to support our customers as we invest in capacity expansion and greenfield sites, as well as potential M&A.

And lastly, I want to thank all of my colleagues at U.S. Silica for their outstanding efforts so far in 2017, in meeting the tremendous opportunities that are available to us. I also want to thank our Investors for their interest and support, and I look forward to meeting and speaking with all of your in the near future. Thanks everyone for dialing in and have a great day.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a nice day.