US Silica Holdings Inc (SLCA) 2020 Q2 法說會逐字稿

Greetings. Welcome to the U.S. Silica Second Quarter 2020 Earnings Conference Call. (Operator Instructions). Please note, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Arjun Sreekumar, Manager of Treasury and Investor Relations for U.S. Silica. Thank you. You may begin.

Thanks. Good morning, everyone, and thank you for joining us for U.S. Silica's Second Quarter 2020 Earnings Conference Call. With me on the call today are Bryan Shinn, Chief Executive Officer; and Don Merrill, Executive 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 today's press release or our public filings for a full reconciliation of adjusted EBITDA to net income and the definition of segment contribution margin. And with that, I would now like to turn the call over to our CEO, Mr. Bryan Shinn. Bryan?

Thanks, Arjun, and good morning, everyone. I'll begin today's call with an update on our response to the various challenges presented by the COVID-19 pandemic and how we continue to prioritize the health and safety of our colleagues. I'll then review the key factors that drove our strong second quarter performance despite the unprecedented decline in oilfield activity and a deterioration in general economic conditions.

Next, I'll discuss the tremendous progress our operations and logistics teams have made in swiftly aligning our cost structure with current market realities. Finally, I'll conclude my prepared remarks with an outlook for both our Industrial and Oil and Gas segments and share thoughts on why we remain excited about the opportunities ahead despite a challenging macro environment.

First and foremost, I hope you and your families are staying safe and healthy during this difficult time. The nationwide lockdowns and the resulting effects of the COVID-19 pandemic have upended many business models, and oil and gas sector, in particular, has been heavily impacted. I'm extremely proud of my colleagues for the resilience and fortitude displayed in navigating this volatility while continuing to meet the dynamic needs of our customers and remaining good members of the communities in which we operate.

The health and safety of our colleagues remains a top priority. Our COVID-19 action team has been instrumental in providing employees with regular communications and best practice plans. As an essential supplier to key industries, including energy, food and beverage and medical, we continue to safely operate across our nationwide production facilities in accordance with local and federal guidelines. I'm also pleased to report that year-to-date, we're delivering the best safety performance in the history of the company with a recordable injury rate of 0.59.

Now turning to the second quarter. Total company revenue of $172.5 million declined 36% sequentially. Solid execution on key cost reduction initiatives helped us deliver strong adjusted EBITDA of $40.8 million, which included customer shortfall penalties of $16.7 million in our Oil and Gas segment.

Our Industrial and Specialty Products segment generated $35.1 million in contribution margin, representing a 19% sequential decline. Volumes in this segment fell 17% quarter-over-quarter due to the temporary idling of some glass customer plants in the month of May and generally weaker demand from housing and automotive end markets as a result of the impacts of COVID-19.

In addition to reduced volumes, the segment's contribution margin was impacted by lower fixed cost absorption across mixed-use plants and unfavorable customer mix. In our diatomaceous earth and specialty clays business, however, volumes and margins were flat sequentially as demand for filtration media, particularly for the food and beverage industry remained robust.

We also had several exciting new commercial developments during the quarter in our industrial business, including signing 2 new long-term contracts with multinational building materials companies for both whole grain and ground silica products. I'm also pleased to share that we initiated multiple trials and bench scale testing for our blood plasma filtration product line with key multinational biopharma customers that yielded promising initial results. We continue to make solid progress on our pipeline of new products, and we'll share more information on that in the coming quarters.

In our Oil and Gas segment, we sold 1.1 million tons, down 65% sequentially doing slightly better than the overall estimated 70 decline in well completions. Quarterly sales were mostly in the Permian Basin and the Northeast as activity in other basins was minimal. Oil and gas contribution margin of $26.2 million was much better-than-expected due to strong execution on our cost-out initiatives and $16.7 million in customer shortfall penalties. Despite the sharp decline in well completions, we experienced minimal pricing pressure, with proppant pricing down approximately 3% sequentially, a testament to the strength of our contract portfolio and the quality of our customer base. We expect low single-digit pricing declines in the third quarter.

SandBox Loads declined 71%, in line with the reduction in completions activity, but are expected to increase meaningfully in the third quarter as key customers return to work and add more frac crews.

During the quarter, SandBox was awarded full-service work with 3 leading operators in the Permian and Eagle Ford basins. We also signed a new delivery to the well agreement with a leading energy customer. With the recent addition of Arrows Up offering to our portfolio, we believe that we now have a roughly 1/3 share in the last-mile logistics market.

Let's move now to an update on our progress on cost reduction initiatives. We responded swiftly to the sudden change in market conditions that became apparent in early March due to the combination of COVID-19-led demand reduction and the sharp decline in crude oil prices. We rapidly rightsized our oil and gas segment by idling 7 higher cost plants and derating capacity at 6 others, which resulted in a 75% reduction in our active oil and gas capacity. We also made the difficult decision to significantly reduce our staffing to match market demand. Since the first quarter of 2019, we have reduced company headcount by approximately 50%. As a result, we expect our SG&A expense to approach an annualized run rate of $85 million by the fourth quarter of this year, down from $150 million in 2019.

We believe this is the appropriate level of staffing for our enterprise in the current environment. Our operations and logistics teams continue to work diligently on ringing out costs wherever possible, while continuing to ensure the safety of our colleagues and the high-quality of our products. Our primary goal is to continue to make cost variable as variable as possible to maximize flexibility and responsiveness to changing market conditions. Our 2020 cost improvement plans are now targeting over $40 million in cost reductions, up from $25 million previously as our teams identified additional opportunities through in-depth plant and department cost center reviews, purchasing initiatives, property tax savings and the execution of plant efficiency plans. As part of this effort, we're actively working to reduce railcar lease costs given the dramatic decline in frac sand demand and the shift towards in-basin sand.

We are in the process of determining which lessors will be our long-term strategic partners and have been pleased with the engagement and results thus far having executed initial lease modifications in the second quarter. We're optimistic that in the third quarter, we will complete the remaining lease modifications required to lower ongoing railcar costs to a sustainable level. I'd like to emphasize that we view the railcar lessors that are working with us as important strategic partners, and I believe they see the value in having U.S. silica as a key long-term customer as well.

Now let me conclude with market commentary starting with industrials. In the third quarter, we expect a rebound in whole grain and higher-margin ground silica volumes as customers that temporarily shut down in May ramp back up. We forecast continued strength in our filtration business, where market demand remains robust. As a result, we expect the ISP segment's contribution margin to be up 5% to 10% sequentially.

Looking further ahead, unlike in the past where we have experienced seasonal declines later in the year, we expect the fourth quarter this year to look more similar to the third quarter. However, we do acknowledge the heightened economic uncertainty ahead, given the possibility of a resurgence of the virus and the imposition of additional lockdowns as well as the lingering effects of higher unemployment.

In our Oil and Gas segment, we expect activity to remain below first quarter levels for the rest of the year, but we are forecasting a Q3 mid-single-digit percent increase in our proppant volumes and a meaningful increase in SandBox loads as well. Due to the second quarter benefits from customer shortfall penalties, we expect that Q3 contribution margin will be down sequentially, but that the underlying business should be stronger. For the fourth quarter, we're presently expecting another mid-single-digit sequential increase in both proppant volumes and lows. But once again, visibility is limited. Unlike the past 2 years, where E&P budget exhaustion has resulted in a drop-off in fourth quarter activity, some customers have indicated to us that there's a potential for a modest sequential increase in activity in the fourth quarter.

In summary, we've acted decisively to prudently manage risk and minimize the impact of lower oilfield activity and weaker economic conditions. We successfully executed our key cost-out initiatives, further improving our position as the leading low-cost proppant provider. Our industrial businesses continue to thrive, led by our diatomaceous earth and specialty clay product lines that have remarkably seen little to no impact from the economic contraction.

And finally, while many industry peers pursue financial restructuring, we're keenly focused on serving customers and maintaining a strong balance sheet despite the unprecedented macro challenges, we are actively working to maintain strong liquidity and through our cost-out efforts, recent tax legislation and other work underway, we're aiming to end the year with more cash on the balance sheet than we started with. We will continue to control what we can, act in the best interest of our stakeholders and remain good neighbors in the communities where we operate. And with that, I'll now turn the call over to Don. Don?

Thanks, Bryan, and good morning, everyone. First, I would like to reiterate Bryan's comments on our team delivering strong second quarter in which we generated $40.8 million in adjusted EBITDA despite the well documented and unprecedented downturn in North American energy market and weaker economic conditions.

Moving on to the results of our 2 operating segments. Second quarter revenue for the Industrial and Specialty Products segment was $100 million, down 12% from the first quarter of 2020, caused by the negative effects on the economy due to the COVID-19 disruption. The Oil and Gas segment revenue was $72.5 million, down 53% for the first quarter of 2020 due to a dramatic decline in tons sold as a result of sharply lower frac activity and well completions during the quarter. Contribution margin for the Industrial and Specialty segment came in at $35.1 million representing a 19% decrease from the first quarter, mostly due to a 17% reduction in tons sold due to COVID-19 disruptions mentioned earlier.

However, the ISP segment generated $44.32 on a per ton basis, down only 2% when compared to quarter 1 of this year. The Oil and Gas segment contribution margin on a per ton basis was $23.53 compared with $10.27 for the first quarter of 2020. The increase was largely due to $16.7 million in customer shortfall penalties, which offset dramatically lower volumes. Additionally, both segments benefited from very difficult but necessary decisions that were made swiftly by our business leaders, which allowed for lower plant costs and reduced spending across the company during the quarter.

Let's now look at total company results. Selling, general and administrative expenses in the second quarter of $39.1 million represented an increase of 30% from the first quarter of 2020. The actual results were higher than the estimate provided last quarter due entirely to $15.7 million of onetime charges associated mostly with the write-off of $11.8 million of legal fees related to the unsuccessful defense of a few of our patents in the Oil and Gas segment and severance payments related to the latest reduction in staffing. As Bryan stated, we expect our SG&A expense to approach an $85 million annualized run rate by the fourth quarter.

Depreciation, depletion and amortization expense in the second quarter totaled $37.1 million, a decrease of 4% from the first quarter of 2020, driven by a decrease in total depreciable assets due to idle plants, subsequent asset impairments and reduced capital spending. We expect DD&A to be up slightly in the remaining quarters of 2020. Our effective tax rate for the quarter ended June 30, 2020, was a benefit of 42%, including discrete items. The company believes our full year effective tax rate will be a benefit of approximately 24%.

Moving on to the balance sheet. As of June 30, 2020, the company had $158.7 million in cash and cash equivalents and $63 million available under its credit facilities, including $12 million allocated for letters of credit, resulting in total liquidity of $221.7 million. The company increased the cash balance by $14 million during the quarter, thanks to a tax refund related to the Cares Act of $36.7 million, a laser focus on reduced spending and reduced capital expenditures versus the first quarter of this year.

Additionally, the company's net debt was under $1.1 billion at the end of the quarter. Capital expenditures in the second quarter totaled $7.1 million and were mainly associated with maintenance, cost improvement and growth projects. We maintain our prior expectation that capital spending will be approximately $30 million for the full year 2020.

I would now like to focus on our cash and liquidity position. As I reminded everyone during the first quarter conference call, we have no near-term obligation as their term loan doesn't mature until 2025, and our revolving credit facility expires in 2023. Additionally, we have identified incremental income tax refunds of $33 million related to the net operating loss carryback attributable to the Cares Act provision that we expect to recover in 2020. This brings the total estimated refunds to $78 million and will help support our business and our cash flow goals for 2020.

Finally, despite the collapse in oilfield activity and sharply lower economic growth, we still expect to end the year with a cash balance higher than that it was at the end of 2019. And with that, I'll turn the call back over to Bryan.

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

Yes. (Operator Instructions)

Our first question is from Kurt Hallead with RBC Capital Markets.

So Bryan, maybe start off with the Industrial segment today. You gave some good directional commentary with respect to the second half of the year on the contribution margin front. So I was just kind of curious how you think the volumes are going to rebound after the substantial decline that occurred in the second quarter?

So I think we'll see volumes up pretty substantially in industrials, particularly on the sand side. Where we saw the decline in the second quarter, Kurt, it was really a few of our large glass customers that, for lack of demand idled some facilities, and they've already restarted those facilities. And so we started to see some of that come back in June, and July looks pretty strong. So I think we'll see a really nice volume ramp in the industrials. And as we look to the rest of the year, I believe we'll have pretty strong performance out of that business.

So maybe in the context, like a 20%-plus volume ramp and then in the fourth quarter kind of moderates a bit?

Yes. So I think something like that, let's say, 15% to 20% volume up in Q3 and then kind of at that level for Q4.

Yes. That's great color. I really appreciate that. So on the frac oil and gas side and frac sand side, just initially, so your comments about the fourth quarter, right, that providing a lot more visibility than a number of other oil service companies we're comfortable in providing so that kind of split out to me for sure. So can you just give me a general sense of the customer mix in which you're getting that sense with that your -- those customers that you do the most business with are kind of telling in the fourth quarter, they're going to accelerate their completion activity?

So what we've seen is a really interesting sort of trajectory, Kurt. So just kind of wind the clock back in April, things are going pretty well. May, things dropped off substantially in terms of completions. I believe that we hit somewhere in the neighborhood of 50 frac crews active at that point, maybe a little bit less. We saw that start to rebound in June, and it's come back even faster in July. So I believe today, we're somewhere between at least 75 to 80 crews, maybe a few more. And we think we could get back to 100 frac crews working by the end of the year. So on one hand, it's kind of simple math when you think about the sand demand out there and the share that we have, as frac crews come back, we feel like we will get our share of that business. And then to your question, specifically, we've obviously had a lot of conversations with our customers and we've got really excellent blue-chip customer base, and I think our folks -- the folks that we serve will tend to come back faster perhaps than others. So we know with relative certainty that some of our larger customers are going to be adding frac equipment, adding frac crews coming back throughout the remainder of the year. So we're pretty optimistic that we'll see a strong rebound in terms of our sand demand into oil and gas. And you never know with the fourth quarter, but it doesn't feel like a standard year to us just based on what we're hearing directly from customers.

One additional follow-up, just to make sure I understand the nature of your commentary on, again, the oil and gas contribution margin. So when you back out the shortfall payment, I think you come up with something around 17% contribution margin percentage. Your commentary said that should get better in the third quarter. So first and foremost, do I -- am I using the right number at 17% contribution margin? And then what kind of improvement would you expect from there?

Yes. Yes, you're right, Kurt. If you back the numbers out, we just talk about contribution margin per ton for a second. We did $23.53 in Q2. If you back it out, you're roughly at $8.50 cN per ton and we're saying, as you roll into Q3, I think it's Q2 plus. I mean -- I think just to add a little more color on that, Kurt, we talked about sand demand, but we're seeing SandBox sales ramp up pretty substantially in Q3 extent than the sand demand actually. So I think we'll see a big bounce in SandBox for the remainder of the year as well.

Our next question is from Stephen Gengaro with Stifel.

There was a study pretty recently that talked about the benefits of Northern White versus in basin and with a little more history and some of the longer-term production benefits of Northern White, have you -- what have you been seeing there hearing from the customers as far as the demand for Northern White versus in basin?

So it's a really interesting point, Stephen. And I think what we maintained all along that there's always going to be a place for Northern White in certain basins and with certain customers. And I think that the study that you referenced and kind of customer behavior and choices that we're seeing out there would indicate that we do have some subset of customers who want Northern White in certain locations and for certain wells. And I think in some cases, it's kind of for the general benefit that you referenced, in other cases, it's well specific. So I feel like Northern White will definitely have a home out there and we saw that in the second quarter. Things were down pretty substantially. We still had a decent amount of Northern White sand sales. And surprisingly, the pricing for Northern White quarter-on-quarter was only down about 2%, right? So we held pricing very well there. I think it speaks to the fact that certain customers want that. They recognize the value of it, and they're willing to pay for that.

And then just as a follow-up, and I'm not sure how much color you can give on this. But the shortfall revenue in the quarter, based on your contracts that are in place, are you expecting -- I mean you're giving us sort of kind of adjusted clean expectations for the third quarter and going forward. Are you expecting? Or is there potential for any more shortfall revenue over the next couple of quarters? It's just hard to gauge?

Well, there's definitely the potential, I would say, it's sort of a wide range, but our estimates would put it between somewhere $5 million to $10 million worth of kind of probability weighted potential. But the actual upside to that is much higher. But look, you never know, or hope that the customers buy the tons that they're contracted to buy. But if they don't, I think we've proven that our contracts have good teeth and we're willing to enforce those contracts and get the shortfall penalties. So I feel like one way or another, we'll get the benefit.

All right, great. And then just 1 follow-up for me. Can you -- how much visibility do you have into sort of the inventory of sand out there? And we've heard some things about frac companies kind of working through some sand inventories. And have you seen that at all? Has there been any disconnect between activity and your sales volumes? And is there any kind of restocking phenomenon we might see over the next several quarters if activity ramps?

So I feel like the amount of what I'll call sort of "stranded inventory" out there that has been speculated is a bit overblown based on our understanding of the details of the situation. And the reality is most of that inventory is in locations where there's just not activity going on right now. So it's not like -- you can move it 500 miles to someone to sell it in a different part of a basin or in a different basin. It just is too expensive. So we really haven't seen much out there in terms of that impacting our ongoing business. And I feel it's one of these things that it's like an interesting discussion point. But from a practical standpoint, we just haven't seen much impact.

Our next question is from Connor Lynagh with Morgan Stanley.

I wanted to actually touch on the G&A cost savings, we're using the 2019 run rate a good 40%-plus reduction in the overhead cost there. I was wondering if you could just give a little more color as to what the big drivers of that were. And I guess on the flip side of things here, if you need to reactivate the capacity, which is, I suppose, high-class problem to have. Would you need to add cost back there?

No, it's a really good question. We spent a lot of time working to get our SG&A cost down, for sure. And if you look at the work that the team has done, we were at $151 million in SG&A last year. We think we'll be at a run rate of about $85 million as we exit this year. So really, really big changes there. And a lot of that, obviously, is headcount related. Will be down as a company, about 45% to 50% in headcount over the last 12 months or so. So we've had to make some pretty tough decisions there. But the team has really looked some of the other places. And on top of all that, we've got another $40 million plus of other operational cost reductions in process. And those are all kinds of things from sourcing to yield efficiencies at our sites and a variety of other things. Some of those won't necessarily show up in G&A because they're happening at our mine sites. But it really doesn't matter wherever you can say the dollar at all counts. I think what our team has done really well at the end of the day, Connor, is variabilize our cost structure. It's amazing what they've been able to do. And I think Don has done a lot of work on this. And Don, do you want to talk about the sort of cost structure and where we are variable versus fixed right now.

Yes. So if you look at the oil and gas business, and it's hyper cyclical, and what we've done is we've gone out and really reduced our fixed costs, which really protects us in a down cycle. And then when the business turns around, like you mentioned, a high-class problem, things start to move around. Our business operates a little bit differently there as well because typically, when our business turns around, we get price as well, right? So it's just -- to be able to drive fixed cost out of this business, it really helps us on both ends of the equation. So the team has done a fabulous job there. And really it's protecting the P&L in each 1 of the cycles.

And I guess, maybe just one last point there, Connor. We've also worked really hard on getting our railcar cost down. And so while others are going through bankruptcy and things to accomplish that, I think we're able to work with our lessors in a way that we can get substantial cost out until that cash will drop right to the bottom line.

Got you. That's all helpful. Don, I was wondering if you could just walk us through the big sort of sources and uses on the cash flow side of things for the rest of the year here. It sounds like tax is probably going to be a tailwind. But maybe you could just sort of bridge the gap from where we are to see increase in cash implied by your sort of flat year-over-year guidance either.

Yes. You're right. The big tailwind for us is going to be the cash from the care back. We got $38 million in Q2, and we anticipate another $40 million by the end of the year. And we also expect working capital to be a source by the end of the year as well. And look with all these cost savings, you're going to see that as a tailwind as well. So those 3 things add up to us being relatively confident that we're going to end up with a cash balance at the end of this year greater than where we ended up at the end of last year.

And I think, Connor, what we set out as an objective as a company, and we're pretty much there as we get into Q3 and Q4, is that kind of at the worst of the worst times to be cash flow neutral. And as we start to turn up, I think we'll turn cash flow positive in the coming quarters. And to me, it's remarkable to be able to do that with the kind of issues that we've had just in general, with the economy and things falling off the table in oil and gas, at least in Q2. So that's the way we think about it, would be cash flow neutral in the sort of worst of times. And then I think that will serve us well in terms of building cash when things get better.

Our next question is from Lucas Pipes with B. Riley FBR.

This is actually Matt Key here asking a question for Lucas today. So while Silica's kind of guided to positive cash flow in 2020, I was wondering if management had kind of any additional levers it could potentially pull to increase liquidity further in the event that kind of the business environment gets a bit worse or extends longer than expected. Like kind of, for example, asset sales or other further overhead reductions they could do to kind of bolster this balance sheet?

So Lucas (sic) [Matt] as I was saying just a minute ago, I think our commitment is to try and variabilize the cost as much as possible. And I think the playbook that we used over the last couple of months here to get costs rightsized to kind of fit the economic conditions can be useful in any other conditions as well. So I think we're appropriately sized for where our businesses are today. If things are going to get worse, we'll take further actions and do what we need to do to rightsize our cost and try to get as much of that out as possible. In terms of asset sales, there's always opportunities, we have things that we are working on continuously, the properties that we own that we don't have a use for anymore or, for example, when we ended up taking over the Arrows Up business there was a lot of equipment that came with that, many, many forklifts, for example, that the team decided we didn't need in SandBox because they were excess so we can sell that equipment. So we're always looking at opportunities to do other sort of one-off cash generation things as we need to. And I think we're a pretty scrappy team, and we're committed to figure things out if it does get worse.

Got it. That's very helpful. Just one more quick one for me. What percentage of the contribution margin in the industrial business is from kind of the legacy EP is like right kind of acquisition?

Yes. I think we're about 50-50 between what I'll call the sort of "old" U.S. Silica and then EP Minerals coming in. It does feel a bit different, though. If you look at the markets that we serve with the new EP Minerals businesses that we acquired a couple of years ago as we found out in this downturn, that business held up extremely well. So our filtration business, where we do a lot in food and beverage, and we're also getting more into medical applications there. All those things, I think really kind of helped counterweight some of the older industrial parts of U.S. Silica that are more tied to housing and automotive. So this is the first time, obviously, since we've owned EP Minerals that we have this kind of an economic contraction in the country, and it's held us extremely well. So I love that part of the business. And I know we've got a lot of questions from investors around, did you -- are you happy that you took on some leverage to add that business to your portfolio? And as I look at it now, this is why we wanted to diversify and add more industrial assets for these kind of economic scenarios. So I'm really excited and happy about the EP Minerals businesses and the assets that we added there.

Great. This is all very helpful color. Very much appreciate it and best of luck going forward.

(Operator Instructions)

Our next question is from J.B. Lowe with Citigroup.

This is actually Stephen on for J.B. So it looks like based on the outlook commentary, you guys are expecting ISP contribution margin dollars down 12% per year now, still kind of in that previous guidance range of 10% to 15%. I don't want to get out of myself here, but given that it's been a GDP-plus business and still appreciating the large amount of economic uncertainty here, do you guys have any sort of target growth rate where those contribution margin dollars can go next year? Could you continue to appreciably outpace GDP growth on the revenue line?

So I think we can. And if I kind of look at the base case that I have in my mind there, I believe that somewhere between a 7% to 8% CAGR in terms of contribution margin dollars is what I would target for those businesses. And the underlying business grows pretty well with GDP, and then you put on top of that, all the things that we have in the new product pipeline. And I think you can pretty easily get to that kind of a level. And we're already starting to see a lot of pretty exciting things on the industrial side, like we didn't talk about it specifically in the -- in our prepared comments, but just to give you a flavor for the kind of things that are happening on the industrial side that sort of backstops that GDP plus sort of growth. And for example, new diatomaceous earth additive product for consumer products started shipping in Q2. We just signed a new long-term agreement, actually 2 long-term agreements with 2 international building products customers in the quarter. As I did mention in my prepared remarks, we've had some very successful initial trials and qualification runs with a plasma -- blood plasma filtration and some of our key biopharma customers. And we've actually got some new products for the solid surface courts countertop market that are moving forward with the key trials with a number of customers. So that's just kind of a short sampling of the pipeline, but I feel really good about what's coming in the industrial business. And I think our investors will be surprised to the upside with the amount of contribution margin power that we have to grow that piece of our company.

Got you. Appreciate that. And then, I guess, on the oil and gas side, you guys gave some pretty good color as to where you think activity is going to go. I was just curious if you see, I guess, any -- just regionally where you guys see activity coming back, if it's different proportionally than what you had seen previously?

So as we look at Q2, the vast majority of the activity in the country, I would say, approaching 90% within the Permian and the Northeast. And we are starting to see some life in a couple of the other basins. I think we might see a little bit coming back in the Bakken and maybe a bit in the Mid-Con.

And then we'll see, obviously, growth in the Permian and the Northeast as well. So Stephen, that's what I see in the short term, obviously, I think longer term, we'll see some of the other basins come a lot again as well Eagle Ford and out net DTA, probably as we get further into 2021.

We have reached the end of the question-and-answer session. I would like to turn the call back over to Bryan for closing comments.

Thanks, operator. I'd like to close today's call by reiterating a few key points. First, we delivered another strong financial quarter and substantially beat expectations on the strength of our cost reduction, some of which we talked about in detail on the call today, a strong execution in oil and gas and a resilient ISP business.

Second, I believe that continuing to prioritize the health and safety of our colleagues is critically important. And I just want to say again, our team has done a great job this year, and we're on track for the best company safety performance in history. So I'm very excited about that. Third, we saw sales volumes rebound in both of our operating segments in July, and I believe we're lined up for another good Q3. And finally, we continue to carefully manage our cash and liquidity. And despite the unprecedented macro challenges, we do expect any year with more cash on the balance sheet than we started with. I'm very proud of our team, and I want to thank everyone for dialing in today to our Q2 earnings call. So have a great day and please stay safe, everyone. Thank you.

This concludes today's conference. You may disconnect your lines at this time and have a wonderful weekend.