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Edited Transcript of CRR earnings conference call or presentation 25-Jul-19 3:30pm GMT

Q2 2019 CARBO Ceramics Inc Earnings Call

HOUSTON Jul 30, 2019 (Thomson StreetEvents) -- Edited Transcript of CARBO Ceramics Inc earnings conference call or presentation Thursday, July 25, 2019 at 3:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Ernesto Bautista

CARBO Ceramics Inc. - VP & CFO

* Gary A. Kolstad

CARBO Ceramics Inc. - Chairman, President & CEO

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Conference Call Participants

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* Benjamin A. Carl

Simmons & Company International, Research Division - Research Analyst of oil services

* William J. Dezellem

Tieton Capital Management, LLC - President, CIO and Chief Compliance Officer

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Presentation

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Operator [1]

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Hello, and welcome to today's CARBO Ceramics Inc. Second Quarter 2019 Earnings Conference Call. Please be advised this call is being recorded today, July 25, 2019, and your participation implies consent to our recording this call. If you do not agree to these terms, simply disconnect.

Some of our comments today may include forward-looking statements reflecting the company's views about future prospects, revenues, expenses or profits. These matters involve risks and uncertainties that could cause actual results to differ materially from our forward-looking statements. These statements reflect the company's beliefs based on current conditions that are subject to certain risks and uncertainties that are detailed in the company's press release and public filings. Our comments today also include non-GAAP financial measures. These non-GAAP measures include EBITDA and adjusted EBITDA, are not a substitute for GAAP measures and may not be comparable to similar measures of other companies. A reconciliation of net loss to EBITDA and adjusted EBITDA as discussed on this call is presented in the company's earnings release, which is available on its website.

Your host for today's call is Mr. Gary Kolstad, Chairman and Chief Executive Officer of CARBO Ceramics Inc. Mr. Kolstad, please begin your call.

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Gary A. Kolstad, CARBO Ceramics Inc. - Chairman, President & CEO [2]

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Good morning, and welcome, everyone, to our second quarter 2019 earnings call. As I did last quarter, I'll spend time discussing where we're at in the transformation process and then also highlight what we're doing to accelerate that.

The strategy to just transform the company is not an easy task nor is it a quick one, but we believe our strategy to diversify is the correct one for the long-term sustainability of our business given the extreme volatility of the oil and gas market. You might ask why do we believe we will be successful in our transformation strategy? In short, it will be by leveraging CARBO's 4 core strengths, which are material science, technology solutions, manufacturing expertise and marketing and sales and client expertise. We're a very unique company in that our technology skills and products can be transformed and sold into other industries. That really sets us apart from other companies. We are well along the way in executing our transformation strategy to diversify our revenue streams into more profitable businesses and reduce our reliance on oil and gas activity.

For the first half of 2019, our industrial and environmental revenues made up approximately 25% of our total revenue, which is up from 20% in the first half of 2018. In addition, we continue to see better margin results from cost reductions and an improved product mix. In addition, in recent months, we have started to accelerate our strategy through inorganic opportunities. Myself and several other members of the management team are spending a majority of our time looking for opportunities ranging from joint marketing agreements to partial investments to acquisitions. These efforts are evidenced by our recently announced agreement with FracGeo to enhance our FRACPRO software offerings. This agreement will allow revenue sharing opportunities and a larger addressable market opportunity with these enhanced technology offerings.

We believe this opportunity could expand into an ownership investment. We're also in the process of making additional enhancements to FRACPRO, whereby individual well data will be available on the cloud for use by operators. This will allow operators to assess and analyze completion data real-time, allowing modification real-time as well as an integration of completions data into common platforms for further analysis. We are targeting our software revenues to grow approximately 20% plus in 2020 primarily driven by our FRACPRO -- FracGeo agreement and our cloud enhancements for FRACPRO.

Additionally, we signed an exclusive marketing agreement with DAKOT, an industrial ceramic grinding media manufacturer, to expand our suite of CARBOGRIND grinding products to include larger ceramic media sizes and heavier densities. These products are needed for certain milling equipment specifications as well as certain raw ore requirements. These are offerings we did not have in our product suite previously. It increased our ability to address a wider range of client needs and geographies. We expect this agreement alone to provide an approximately 10% revenue growth in our industrial ceramic revenue in 2020.

In addition to these 2 examples, we are in active discussions regarding acquisition opportunities to further diversify and expand product offerings across multiple markets, including bringing value-added technologies to the industrial and agricultural markets. We expect to have something to announce here by the end of the year. So to sum things up, we're pleased with the progress made on accelerating our transformation strategy during the quarter from expanding our product offerings in the industrial markets to enhancing our software offering, agreements that were signed will pave the way for future growth.

Now turning to a recap of our second quarter results. Revenues for the second quarter of $43 million decreased 9% sequentially and 27% year-on-year. The difficult North American oilfield market was the primary reason for both the sequential and the year-on-year decline.

Although revenue was down 9% sequentially due to the continued challenges and volatility in the oil and gas markets, our adjusted EBITDA loss of $5.8 million improved $4.3 million sequentially as the revenue mix favored higher-margin technology products. There were a few large jobs that were delayed during the quarter which, if completed, could provide a meaningful uplift in the EBITDA for the second half of 2019.

Our oilfield sector revenue for the second quarter of 2019 comprised approximately 76% of consolidated revenue. We are pleased that even in this difficult market, we continue to find success for our ceramic technologies in the oil and gas market. Revenue for those products increased 26% sequentially. Additional details of these highlights can be found in the technology and business highlights of our press release this morning.

Our industrial sector revenue for the second quarter comprised approximately 7% of consolidated revenue. We're very focused on getting our underutilized plant capacity back to producing products. In this regard, we did see some success with contract manufacturing revenue increasing over 700% year-on-year. The growth in contract manufacturing results is in improved fixed cost absorption at our manufacturing facilities and benefits our profitability.

During the quarter, we executed the definitive agreements that will govern our previously announced strategic partnership with PicOnyx for the production of M-Tone, a new family of functional pigments for the plastics, paints, ink, coatings and adhesive markets. We continue to work with PicOnyx on the commercialization of the product, and we should start to see benefits in late 2019 with expansion in 2020 as PicOnyx expects to ramp up M-Tone product sales in the market. We are excited for PicOnyx to start getting this product out in the market. Recall this product is targeting the high-performance black pigment market, which is estimated to be close to a $1.5 billion or $2 billion market.

Our environmental sector revenue for the second quarter comprised approximately 17% of consolidated revenue. The difficult NAM oilfield impacted our environmental business. We've been very focused on growing our sales into other industrial applications and are seeing some success. Sales of our products into industrial applications grew approximately 250% year-on-year. We're continuing to build a solid foundation of industrial sales with our ASSETGUARD products, which aligns with our overall corporate strategy to diversify our revenue streams across many markets.

Now turning to the outlook. The CARBO of the past will not be the CARBO of the future. Our recently signed agreements to expand our product portfolio in the industrial market and enhance our oil and gas software offering is just the beginning. As mentioned in our release this morning, late-stage discussions are underway to capitalize on additional opportunities, including potential contract manufacturing opportunities with other companies.

For context, these opportunities vary in size, but in aggregate could provide incremental EBITDA of $3 million to $20 million annually if we execute on all these initiatives. We believe these opportunities will set CARBO on a new path by continuing to reduce reliance on oil and gas activity and provide a platform for growth for many years to come.

Although the first half of 2019 revenues were weaker than expected, we expect the revenue for the second half of 2019 to be stronger as delayed oil and gas projects from the first half are completed as well as we expect to capitalize on some industrial opportunities. As a result, we believe EBITDA should continue to prove as we work to produce consistent, positive cash flow. In addition, the recently signed agreements previously noted and possible additional opportunities should accelerate our path to achieve this consistent cash flow EBITDA and profitability.

In the oilfield, we expect a stronger half in the second half, given the delays experienced for technology ceramic products during the second quarter. Both KRYPTOSPHERE HD and LD sales should see continued growth and contribute meaningfully to revenue. In addition, we anticipate technology sales of SCALEGUARD and CARBONRT to also have good results as we close out the year.

In the industrial sector, as mentioned previously, we experienced a temporary reduction in industrial sales due to clients' equipment process change during the quarter. As this client resumes normal activity and we are able to capitalize on the positive results from a number of our industrial product trials, we anticipate industrial sales to grow in the second half compared to the first half.

We continue to put an immense amount of effort into closing contract manufacturing opportunities. The process is long, but we're optimistic recent successful manufacturing field trials will result in project awards. These projects vary in size, but some opportunities at hand could absorb a very substantial amount of our idled assets. This is important, considering our profit and loss statement has been burdened by more than $14 million of under absorption and idling cost already in 2019. I won't discuss specifics of these projects due to strict confidentiality agreements we have in place, but when these projects are awarded, they provide predictable and profitable work utilizing our idled assets. These opportunities are key to overcoming the profitability challenges we face today. It's imperative we get our assets back to work.

In the environmental sector, additional industrial sales resources were added during the second quarter of 2019. We expect these additions to lead to increased industrial sales for ASSETGUARD products over the remainder of the year. In addition, our client count is growing through our e-commerce platform, CARBODIRECT, which over time will lower client acquisition costs and improve working capital. Maintaining healthy cash levels is a high priority as we continue our transformation process. Excluding any potential M&A transactions and assuming oil and gas activity stabilizes, we anticipate our cash levels to remain fairly flat for the remainder of the year.

And with that, I'll turn it over for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from Ben Carl of Simmons Energy.

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Benjamin A. Carl, Simmons & Company International, Research Division - Research Analyst of oil services [2]

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Just a couple of quick ones from me. First, can you just talk about maybe cost absorption? And what that may look like with higher activity in Q3, Q4? And how that may affect margins?

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Ernesto Bautista, CARBO Ceramics Inc. - VP & CFO [3]

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Right. So it's -- I guess, really, it's going to depend on the production cadence as we're managing inventory. So I would say as we're producing at a higher level, that particular under-absorption goes down. That's sort of the way the math works. At the moment, I would say we would estimate that given activity at least into the third quarter that, that under-absorption would side some as we are able to capitalize more into the inventory. Ultimately, the margins sort of flattened, I guess, because you are either absorbing it in inventory or you're taking it as a period cost. But at least for third quarter, I think we would see a little bit of a benefit.

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Benjamin A. Carl, Simmons & Company International, Research Division - Research Analyst of oil services [4]

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Great. And then just one more, I guess on technology product mix and how that helps margins in Q2. And just with adding technology to the portfolio. Can this be more of a sustained margin tailwind in Q3 second half going forward? Or just kind of what does that look like going forward?

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Gary A. Kolstad, CARBO Ceramics Inc. - Chairman, President & CEO [5]

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No. I think we think the second half will be better than the first half for sure. And the second quarter was better than the first quarter in oilfield technology. And in the industrial world, our products there have of course much better margin than let's say a lot of the products in the oilfield, the base ceramic or sand and stuff like that. So any growth in industrial ceramic is very, very good for us. And environmental business actually has decent margins too. So we would expect it to be better in the second half.

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Operator [6]

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Our next question comes from Bill Dezellem of Tieton Capital Management.

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William J. Dezellem, Tieton Capital Management, LLC - President, CIO and Chief Compliance Officer [7]

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I have a group of questions here. And if I go too long, please just cut me off. First of all, would you please discuss the -- is it DAKOT grinding agreement, however that is properly pronounced?

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Gary A. Kolstad, CARBO Ceramics Inc. - Chairman, President & CEO [8]

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Yes. It's a manufacturer of industrial ceramic media. We've made an agreement and also manufacturing suppliers agreement as well as a regional exclusivity marketing and sales agreement with them. Our portfolio, while pretty good, needed to expand to get to larger sizes and heavier densities, and they were in that business, so we were fortunate to develop a relationship and it could go farther than what we're at today, like a lot of these things we're looking at. We talk about -- I think I threw out the words joint marketing agreement, initial investment or acquisition. That's kind of the model we're looking at a lot of these projects we're working on in the background. But these guys produce a good product, and we're going to take it to market.

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William J. Dezellem, Tieton Capital Management, LLC - President, CIO and Chief Compliance Officer [9]

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And is this product that you are not able to produce in your facilities? Or that you believe your facilities are better suited for other products that you think you're going to be filling them with?

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Gary A. Kolstad, CARBO Ceramics Inc. - Chairman, President & CEO [10]

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No. Bill, it was just a matter of the size and the density. So you have a combination of both the raw material as well as the processing side of it and we didn't have that capability. So it's a nice little marriage.

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William J. Dezellem, Tieton Capital Management, LLC - President, CIO and Chief Compliance Officer [11]

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And the timing of when you're going to be able to begin selling these products? And just how big this - that market is that they address?

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Gary A. Kolstad, CARBO Ceramics Inc. - Chairman, President & CEO [12]

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Yes. We're in business right now. And I think we kind of -- we don't want to spell too much of that out. But what we did say is that they'll probably increase our industrial ceramic revenue next year by 10% because of that agreement alone. So that's kind of how we've characterized it.

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William J. Dezellem, Tieton Capital Management, LLC - President, CIO and Chief Compliance Officer [13]

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Great. Let me shift then to your comments in the release about contract manufacturing field trials. Provide some details around that and fill in as many of the blanks as you can, please.

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Gary A. Kolstad, CARBO Ceramics Inc. - Chairman, President & CEO [14]

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Yes. We recently done a trial or 2 with some companies. And in this case, they are fairly large companies and what they are looking for is additional capacity to increase the volume of products they can put out. So you can come and see us. We can make them. You don't have to put in capital to build plants and all that stuff, so it's kind of the essence of contract manufacturing.

And like I said, we can't tell you what product it is nor the company because of the agreements. So that's one of them. On the second part, we're also trying to get in with just pure raw processing of, let's call it more raw material. So not necessarily taking it all the way to a finished product type of level. And so any of those, if we can get into high volume and start to consume a line at one of the plants, it really makes a material difference. And the sales cycle is long, but if we get these things worked out, I think the -- just the general agreements are pretty long as well. The client's stickiness is pretty good. And we're pretty darn good at manufacturing, and we've got some wonderful folks sitting at these plants. And so the relationship we've had with clients is very good, and we've got a lot of know-how there. So I think it's starting to work and I -- we'll communicate more after we land some of these.

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William J. Dezellem, Tieton Capital Management, LLC - President, CIO and Chief Compliance Officer [15]

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And to what degree do you think there is a chance to land -- land either of them by the end of the year?

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Gary A. Kolstad, CARBO Ceramics Inc. - Chairman, President & CEO [16]

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I think we -- on the one, we'll probably know within the third quarter. The second one, I think we'll know within the fourth quarter.

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William J. Dezellem, Tieton Capital Management, LLC - President, CIO and Chief Compliance Officer [17]

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And the -- it's the large company for that -- with the undisclosed product, it would be Q3 and the raw material production in Q4?

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Gary A. Kolstad, CARBO Ceramics Inc. - Chairman, President & CEO [18]

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Probably. Although the raw material might do a trial in Q3, which will determine the Q4.

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William J. Dezellem, Tieton Capital Management, LLC - President, CIO and Chief Compliance Officer [19]

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Right. Understood. And then did we hear correctly that the oilfield technology product sales were up 26% sequentially?

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Gary A. Kolstad, CARBO Ceramics Inc. - Chairman, President & CEO [20]

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Yes, yes. From Q1, they are up. And we expect a little stronger performance assuming that a couple of -- there's a couple of large jobs that got pushed. So if they complete those, you will see -- we should see a better second half too. And that should take place. Some of these big jobs are really -- can move around a lot though just given the complexity of the wells.

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William J. Dezellem, Tieton Capital Management, LLC - President, CIO and Chief Compliance Officer [21]

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And would you talk about kind of what you're seeing on that front and that push and pull? And why the pushes took place out of Q2 and the risk of pushing further?

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Gary A. Kolstad, CARBO Ceramics Inc. - Chairman, President & CEO [22]

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Yes. In the offshore world and into very complex wells that a lot of things can happen. We never disclosed client names, but we had one well, not last year -- well, actually we completed it last year and it supposed to be completed the year before. So almost a delay of 1 year on a well. And they're unbelievably expensive wells or unbelievably critical. So that's one that can move around a lot. I would also characterize that we're seeing a lot of success internationally with our oilfield technology products. Everybody knows the difficulty of the low-quality rocks in U.S. onshore and partial of Canada too. So everybody is trying to see how they can possibly make these lower-quality rocks work. But internationally, where you have more conventional reservoirs, we're seeing more adoption of our technology and actually our base ceramic too. So our guys have done a good job that way.

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William J. Dezellem, Tieton Capital Management, LLC - President, CIO and Chief Compliance Officer [23]

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And then a couple of financial questions. To what degree is the Wilks credit agreement supportive of or encouraging acquisitions versus -- this is more your strategy and I guess I'll say they're going along with it?

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Ernesto Bautista, CARBO Ceramics Inc. - VP & CFO [24]

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Bill, I think I'd characterize it as one, the refinancing allowed us some room in the form of cash to really pursue some of these opportunities in earnest that those funds would otherwise -- would have had to been repaid. In addition, we have some latitude built into the existing credit facility that allows us to pursue certain types of acquisitions. Maybe by that I mean size, maybe even be a little creative on how we fund them. We were -- as we continue to identify opportunities, there's a likelihood that we would turn to our senior lender and involve them in certain cases where an opportunity may be bigger than what we are maybe eligible to do or allowed to do and see if there is some creative way of working through it to allow us to exploit that opportunity.

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Gary A. Kolstad, CARBO Ceramics Inc. - Chairman, President & CEO [25]

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I'd say they've been very supportive. A good deal is a good deal, Bill. So if we can come up with something that financially makes sense, I think they will be very supportive.

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William J. Dezellem, Tieton Capital Management, LLC - President, CIO and Chief Compliance Officer [26]

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And I pose the question in the spirit of them having the warrants and the agreement expanding their ability to purchase -- to purchase more stock. So I mean -- just on the surface, it seemed as though this was something different than your typical bank relationship where all they want is their interest and money back. These guys -- it appears as though they might be looking for more [it], that's what I was trying to capture with the question.

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Ernesto Bautista, CARBO Ceramics Inc. - VP & CFO [27]

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Yes. I think I would make the statement that it's been a very constructive relationship, and we believe it will continue to be constructive.

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William J. Dezellem, Tieton Capital Management, LLC - President, CIO and Chief Compliance Officer [28]

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And then did I hear correctly that the new initiatives that you're working on could increase your EBITDA by $3 million to $20 million? And if I did hear that correctly, would you talk about kind of that difference? It's a pretty wide gap. Because $20 million would actually take you up to net income breakeven. So walk through that if you would, please.

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Gary A. Kolstad, CARBO Ceramics Inc. - Chairman, President & CEO [29]

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Yes, Bill. So when I said during the commentary there, joint marketing agreements, initial investment or acquisition, that's why we put such a broad range on it. I think what we've -- couple of things that we landed will have positive EBITDA ramifications, some of the things we think we're going to capture will have positive and if the projects that we are -- myself and the entire management team working on right now, if we landed all of those you'd probably see it at that high range. So we wanted to put bookends on both sides of that. And it's one of the things that excites us and that we're working hard on that. So I can tell you that it's -- every day we're trying to get more of these across the finish line.

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William J. Dezellem, Tieton Capital Management, LLC - President, CIO and Chief Compliance Officer [30]

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And these are initiatives that would carry past the end of the calendar year? Am I understanding correctly that you're not expecting to have all of these done by the end of the year or at least decisions by the end of the year?

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Ernesto Bautista, CARBO Ceramics Inc. - VP & CFO [31]

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I think that's an appropriate characterization, Bill. Some of these -- maybe to put it this way, some as we've noted with FracGeo, there was step one, which is joint development, joint marketing. Step two, we're looking at potential investment or acquisition on some of the larger opportunities. That may be the same courtship, right? It may be that we start with a contract manufacturing arrangement, joint marketing arrangement, as Gary has indicated. And then the broader step would be some type of M&A. And those unfortunately don't happen overnight. Especially, as some of these might be very large, it could take -- it just takes time from a diligent standpoint. And obviously back to having to be creative in how we approach them from a structure standpoint.

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William J. Dezellem, Tieton Capital Management, LLC - President, CIO and Chief Compliance Officer [32]

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Right. That's helpful. I do have additional questions, and I can either requeue or follow-up one on one. What is your preference?

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Gary A. Kolstad, CARBO Ceramics Inc. - Chairman, President & CEO [33]

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Please go ahead, Bill.

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William J. Dezellem, Tieton Capital Management, LLC - President, CIO and Chief Compliance Officer [34]

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So let's talk about the large jobs that were delayed from the second quarter. Can you talk about -- I believe these are offshore that you're talking about. And what is the current schedule now?

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Gary A. Kolstad, CARBO Ceramics Inc. - Chairman, President & CEO [35]

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One of them is offshore. And we think that it's potentially at the end of the third quarter. Could roll into the fourth. The other one is an onshore well, and -- what you're seeing a little bit in -- it's not just U.S. onshore, but probably North America onshore. Clients are making some decisions to delay completion. And so there is means for us to sometimes get the cash if they change their mind and decide not to complete it in a quarter, so we wait. And having said that, I think Ernesto had characterized this correctly, as we won't record revenue, but if indeed we got the material paid for, that would just sit on the balance sheet.

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Ernesto Bautista, CARBO Ceramics Inc. - VP & CFO [36]

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That's right. That's right. I think this is in keeping with something we've discussed in the past, Bill, where to the degree we can, we're trying to change a model. And that is where we're going to make an upfront investment in the form of inventory or production, that we try and recoup that upfront in addition to reducing the terms on our receivables. So as Gary mentioned, we look to try and get payment even though -- upfront, even though the revenue itself may not be recognized until a later point.

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William J. Dezellem, Tieton Capital Management, LLC - President, CIO and Chief Compliance Officer [37]

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That's helpful. And then you did see a blip here in your grinding media sales. Would you talk about that process -- equipment process change that led to that? And please take it back to the real basic level because I don't think I fully understand how the product is used, and therefore what an equipment change really means.

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Gary A. Kolstad, CARBO Ceramics Inc. - Chairman, President & CEO [38]

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Well, at the end of the day, the CARBOGRIND products are put into mills, and they may be horizontal mills, meaning like a tube that sit there and rotating. And our beautiful round CARBOGRIND pellets are put in there to grind up Earth's minerals. And they just go round and round until they grind it up. It could be a vertical mill, too. So whenever clients go through things such as changing out those mills or having to replace the liners of those mills or just those type of things, it's not like a refinery downtime, but there's a certain amount of time that's down. This -- I'm not going to say their name obviously, but this is a mining company internationally, and it's our largest client. So -- but things are back to work now. So it's just those things that happen.

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William J. Dezellem, Tieton Capital Management, LLC - President, CIO and Chief Compliance Officer [39]

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And so you just really -- you could as much characterize this as a turnaround if we think about it in the refinery terms for the mining operations -- the mining process operations rather than any sort of wholesale change?

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Gary A. Kolstad, CARBO Ceramics Inc. - Chairman, President & CEO [40]

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Yes. It's not -- obviously nothing as complex as a refinery turnaround. But yes, it would be like us losing the kiln at a plant. That's probably a better way to characterize it. You're down for a while, right? While you fix things.

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William J. Dezellem, Tieton Capital Management, LLC - President, CIO and Chief Compliance Officer [41]

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And is this a change that they have done going to lead to either more or less ongoing sales of product from CARBO to them?

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Gary A. Kolstad, CARBO Ceramics Inc. - Chairman, President & CEO [42]

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I will say this client has been a wonderful client and as we've introduced new products in this past year with higher performance standards, they have been someone that adopts that. And usually, if you adopt the higher performance product, both sides will win on that. They will get better performance, we'll probably get a little bit more money, right? So it's been a nice marriage for a lot of years now, and so the answer is yes.

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William J. Dezellem, Tieton Capital Management, LLC - President, CIO and Chief Compliance Officer [43]

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Congratulations. Then let me shift again, if I may. The pigment and paint market, that's a new one. At least for me. Would you talk about that -- talk about the opportunity? And how that even came about?

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Gary A. Kolstad, CARBO Ceramics Inc. - Chairman, President & CEO [44]

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Well, they approached us and this is PicOnyx. They approached us, and we had idled equipment and we have an extreme amount of know-how at the plants. So with some modifications, a small amount of investment, certain trial and error, we both worked together to be able to produce the product. There are certain amount of permits, all that stuff that's needed, everything because it's a new product for the market. It's an incredible product. It's going to go into the high-performance black pigment market. And it will outperform literally anything on the market. So we made an arrangement. We -- the assets we contributed gave us a certain amount of equity. We have a manufacturing contract with them and an equity ownership, and so we're anxious. I think we'll get product, I think late Q3 or early Q4.

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Ernesto Bautista, CARBO Ceramics Inc. - VP & CFO [45]

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Correct.

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Gary A. Kolstad, CARBO Ceramics Inc. - Chairman, President & CEO [46]

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Out in the market. And so the sales process is a little bit long as well. But we're very appreciative of the PicOnyx management, and they've been over and gave us their marketing and sales plans. So they have identified the clients they're going to go to, and it's literally kind of waiting on us to get the product out the door and away we go. And for us, I mean this is the kind of thing we really like. A high-performance, high-value product. We have an equity investment in the future. If things are successful, we may want to expand that. So this is a kind of product we like. This is like KRYPTOSPHERE HD, right? That's how you should think about it, Bill. This is the KRYPTOSPHERE HD of the black pigments.

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William J. Dezellem, Tieton Capital Management, LLC - President, CIO and Chief Compliance Officer [47]

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That's helpful. And then speaking of KRYPTOSPHERE. Let's talk about KRYPTOSPHERE XT. It's interest -- I don't have a lot of familiarity with it and yet it seems as though the unconventional wells have shunned anything technology really at the expense of just having the lowest cost possible. And yet you referenced in the release, XT being used in unconventional wells. Would you please bridge the gap between what we think of as the conventional well usage of technology and XT being incorporated in?

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Gary A. Kolstad, CARBO Ceramics Inc. - Chairman, President & CEO [48]

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Well, XT is in between KRYPTOSPHERE LD and KRYPTOSPHERE HD. So it's in between, meant to handle those stresses in between there. And it's probably much more a high-profile well than your unconventionals. You are correct, the economics when you have to deal with low-quality rocks such as shales, they're just trying to figure out how they can economically make it work and it's impacting the entire oilfield service industry as well as the E&P on the U.S. and part of Canada. So that's -- well, we may do a job or 2. That's probably really very deep, very high-stress wells if it's on onshore. And internationally it probably has much more applications. Offshore it has much more applications. But it's a product that's in between LD and HD.

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William J. Dezellem, Tieton Capital Management, LLC - President, CIO and Chief Compliance Officer [49]

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And you just said you think it has more application offshore than it does onshore?

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Gary A. Kolstad, CARBO Ceramics Inc. - Chairman, President & CEO [50]

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Yes. Yes. I -- none of us are too happy with North America onshore, right? And the economic challenges of dealing with low-quality rock and trying to make it work. So I kind of need to characterize a little bit. If the oilfield picks up, we are there. But having said that, our focus is on oil field, technology, ceramic, the software business in oil field and the rest of it will be what it may. But we absolutely want to move as much of the company as we can into more of the industrial world. And -- because it's a different value, right? People are struggling to make North America onshore work.

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William J. Dezellem, Tieton Capital Management, LLC - President, CIO and Chief Compliance Officer [51]

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Right. So -- let me follow up with this. KRYPTOSPHERE HD has primarily been used in those deep tertiary wells, and yet there are a number of wells that are being drilled offshore that are not going into that zone. So are you -- what proportion of the non-HD wells, say in the Gulf of Mexico that are being drilled, do you think that XT could be addressing?

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Gary A. Kolstad, CARBO Ceramics Inc. - Chairman, President & CEO [52]

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It's got to be fairly deep wells. We're selling some KRYPTOSPHERE LD for the shallower wells. We even sell CARBOLITE, one of our older products in the shallower wells. But you get that kind of close to tertiary type of depth and some people will be trying the XT for sure.

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Operator [53]

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Our next question comes from [Fritz von Carp] of (inaudible) Capital Management.

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Unidentified Analyst, [54]

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One question, let me ask on the industrial business. You had one customer doing their -- the process of maintenance or whatever they were doing you talked about. How was the trend of revenue growth excluding that? It's been a terrific growing business, it's mid-double digits on -- aside from this sort of temporary issue, are you still on that trajectory or has something changed?

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Gary A. Kolstad, CARBO Ceramics Inc. - Chairman, President & CEO [55]

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Yes. I think the expansion of our product portfolio in the grinding products, CARBOGRIND really is going to help us because that's held us back a little bit. Sometimes clients want to have the entire breadth of products. So when they do contracts, if you can't supply the whole portfolio, sometimes you're excluded.

Secondly, in the foundry business, we had hoped that would work faster given the OSHA issues regarding the permissible exposure limits and things like that. But that's moved slower than we thought. And our next path on here, which will be a multiyear path is moving into other categories. And in particular, filtering, catalyst support or catalysts. And we're in the process of actually adding -- trying to add people -- experienced people in those places. So that's a long-term growth, and I think we're in the first inning.

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Unidentified Analyst, [56]

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Okay. And the KRYPTOSPHERE wells that were delayed that you talked about, is it -- just so I understand, is it the case that your clients -- client or clients is going forward with those wells, but it's like the drilling is taking a little bit longer, one of those things or was it delayed prior to a final investment decision?

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Gary A. Kolstad, CARBO Ceramics Inc. - Chairman, President & CEO [57]

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The one is -- yes, definitely just drilling operational delays. The second one, the well has been drilled, but they're just waiting to complete. And you're going to -- you're seeing a lot of that right in gas areas, stuff like that. The commodity price is still low. Oftentimes things are called DUCs, right? Drilled but uncompleted. This is a much more high-profile well, but it was the same methodology. They just didn't complete it right now.

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Unidentified Analyst, [58]

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Oh, I understand. Okay. And then just going to ask you to discuss generally your strategy regarding the balance sheet. I see you paid some debt down in the quarter, but unless I missed it, it didn't really -- it's not a detailed breakdown of what you paid down. So what debt did you pay down? What -- are all the near-term maturities, [the serial] maturities paid off for? Just in general, what's your strategy for the balance sheet?

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Ernesto Bautista, CARBO Ceramics Inc. - VP & CFO [59]

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Right. So I'll take that. On the beginning of the quarter, we did pay down some debt, approximately $22 million -- I'm sorry, $27 million that was due, that came due. We also during the quarter made a payment on our senior note and then subsequently refinanced that. So the senior debt remains at $55 million, but that gave us some additional liquidity to work with -- as mentioned earlier, to work on some of these growth initiatives.

We continue to have a very constructive relationship with our senior lender. And I think on top of that, maybe reiterating some of the things that we're doing just from a practice standpoint to help bolster cash reserves and the balance sheet, we are approaching our clients when there are large orders and asking them to at a minimum cover our cost of a particular product, maybe cash cost of a particular product and -- as opposed to running the risk of having to hold the inventory for an extended period of time, which has happened in the past. I think we're seeing some benefit from that as well as some benefit from our initiative to reduce downturns as opposed to what we've seen historically with respect to DSO.

Every client is treated a little bit differently just given certain circumstances, but that's the general trend that we're pushing for. I think that's where we are. We're going to continue to push hard at reducing cost, which will also help bolster cash. And as we've mentioned I think consistently throughout, the goal is to continue to push hard on this diversification strategy, this sort of growth -- these growth opportunities and where we may need to go back to our lender and think about creative ways to get some of them down, we will.

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Unidentified Analyst, [60]

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Okay. So you have a pretty substantial amount of cash on the balance sheet. Was the -- if I just look at the cash and debt, it would say the cash burn was about $5 million in the quarter, which is reasonably small. Is that about what it was or was a little bit more because of refinancing?

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Ernesto Bautista, CARBO Ceramics Inc. - VP & CFO [61]

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No. That's probably in the ballpark.

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Unidentified Analyst, [62]

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Okay. Super. And just one last question. There were some new line items, some operating leases that were -- so I'm not sure if those are sort of like on the balance sheet. Is that new? Is that related to the recent accounting change? Or what were those?

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Ernesto Bautista, CARBO Ceramics Inc. - VP & CFO [63]

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It's simply the accounting change where you now have to book both the liability and an asset for any leases that you have, be it office lease or whatever it might be, but it's (inaudible).

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Operator [64]

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This concludes the question-and-answer session. Mr. Kolstad, I'll turn the call back to you for closing remarks.

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Gary A. Kolstad, CARBO Ceramics Inc. - Chairman, President & CEO [65]

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Okay. Thank you, everyone, for joining us this morning. A couple of -- summarizing some key points for you. The management team, we're working tirelessly to find new growth opportunities to help us diversify away from the highly cyclical oil and gas industry. We're a pretty unique company with our 4 core strengths and that really allows us to transform our technology and our products into other industries relatively quickly.

And the other unique thing about us is that we have all these assets, people, plants, everything, so we don't need a lot of capital, let's say, to transform the company. Now we just need to get these assets back to work.

So I thank you for joining us, and we'll see you again next quarter.

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Ernesto Bautista, CARBO Ceramics Inc. - VP & CFO [66]

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Thanks.

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Operator [67]

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The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.