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Edited Transcript of SLCA earnings conference call or presentation 29-Oct-19 12:30pm GMT

Q3 2019 U.S. Silica Holdings Inc Earnings Call

Frederick, Oct 31, 2019 (Thomson StreetEvents) -- Edited Transcript of U.S. Silica Holdings Inc earnings conference call or presentation Tuesday, October 29, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bryan A. Shinn

U.S. Silica Holdings, Inc. - President, CEO & Director

* Donald A. Merril

U.S. Silica Holdings, Inc. - Executive VP & CFO

* Michael K. Lawson

U.S. Silica Holdings, Inc. - VP of IR and Corporate Communications

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Conference Call Participants

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* Chase Mulvehill

BofA Merrill Lynch, Research Division - Research Analyst

* George Michael O'Leary

Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - MD of Oil Service Research

* John Booth Lowe

Citigroup Inc, Research Division - VP

* John H. Watson

Simmons Energy | A Division of Piper Jaffray - VP & Sr. Research Analyst

* Marc Gregory Bianchi

Cowen and Company, LLC, Research Division - MD

* Matthew Alexander Key

B. Riley FBR, Inc., Research Division - Research Analyst

* Stephen David Gengaro

Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst

* Thomas Allen Moll

Stephens Inc., Research Division - Research Analyst

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Presentation

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Operator [1]

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Greetings and welcome to the U.S. Silica Third Quarter 2019 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Michael Lawson, Vice President of Investor Relations and Corporate Communications. Thank you, Mr. Lawson. You may begin.

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Michael K. Lawson, U.S. Silica Holdings, Inc. - VP of IR and Corporate Communications [2]

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Thanks. Good morning, everyone, and thank you for joining us for U.S. Silica's Third Quarter 2019 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 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.

(Operator Instructions)

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

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Bryan A. Shinn, U.S. Silica Holdings, Inc. - President, CEO & Director [3]

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Thanks, Mike, and good morning, everyone. I'll begin my comments today by sharing the headlines from a challenging third quarter given the weakness in the oil and gas completions market. I'll then outline the actions we're taking to execute on 3 strategic priorities for U.S. Silica.

Finally, I'll conclude my prepared remarks with an outlook for both of our operating segments before turning the call over to our CFO, Don Merril, to review quarterly financial highlights.

For the total company, third quarter of $361.8 million declined 8% sequentially, driven mostly by an 11% decline in oil and gas sales. Adjusted EBITDA for the quarter was $58.4 million.

Contribution margin for the Industrial and Specialty Products business declined 9% on a year-over-year basis due to lower volume, product mix and unfavorable manufacturing costs in the quarter. Energy markets deteriorated further and faster than expected during the quarter as E&P budget exhaustion slowed completion activity, resulting in lower demand and pricing pressure.

We started to experience this midway through the quarter at about the same time we saw many of the new mines in West Texas reach full production capacity exacerbating sand market oversupply. Despite the pressure, our oil and gas sand sales volumes in the quarter of 3.9 million tons were essentially flat sequentially, but pricing was significantly lower.

SandBox load volumes declined in line with overall market demand, and as expected, prices and margins held up better in SandBox than in the sand business.

Overall, our Oil and Gas segment margin was $50.6 million, representing a 29% sequential decline.

Next, I'd like to discuss 3 of our top priorities for the business today and those are: accelerating organic growth in the ISP business; effectively deploying our oil and gas assets; and finally, prioritizing free cash flow. On our priority to accelerate organic growth in our ISP business, we continue to make good progress. Our focus is on increasing our presence and our product offerings in specialty end markets, optimizing our product mix and further developing value-added capabilities to maximize margins. This initiative is yielding impressive results and let me give you some examples.

Over the last 6 years, our Glass market cash margin dollars have grown at a 6% CAGR and our Fillers & Extenders product margins have grown at a 14% CAGR. At the same time, cash margins in our Building Products businesses have outpaced volume growth more than fourfold. While we've run these established products at an impressive rate, many of our new product opportunities are in their infancy and have tremendous growth potential.

For example, our White Armor cool roof granules and our heat-treated cristobalite used in high-end surfaces are just ramping up. These are the first 2 products we are scaling up at our new Millen, Georgia facility. Millen is a converted ceramic proppant manufacturing plant that provides us with a brand-new capability to coat and heat-treat specialty products. We hosted customers and the Governor of Georgia recently at Millen's grand opening and received very positive customer feedback on the facility, our team and outstanding production capabilities. We also recently completed a small expansion of our fine ground silica capacity at our facility in Columbia, South Carolina, to serve a 5-year contract with a global fiberglass manufacturer. And we started production earlier this month.

Looking ahead, I would expect that in the next 2 or 3 years, we should be able to add substantial additional annual EBITDA to the company from these and other new products in our industrial business.

Our second operating priority is to effectively deploy our oil and gas capacity, supply chain network and logistics capability to optimally and profitably serve our customers. We've been effectively executing all year on our playbook for capacity management. Over the past few months, we've taken approximately 5 million tons of Northern White and regional sand capacity off-line through a combination of reducing hours worked, or completely idling plants. We're also increasingly coupling SandBox, our industry-leading, last-mile, full-service logistics solution with U.S. Silica Sand with a goal of doubling company direct sand sales to the wellsite blender to 20% of overall sand sales.

We're also working to reduce the number of transloads in our network and to optimize our origin definition pairings. At SandBox, we further reduced headcount and third-party carrier costs to align with activity levels and protect margins, and we're partnering with other sand suppliers to bid work where it makes sense from a geographic standpoint.

As we make all these changes, we're having a lot of success winning new business. In fact, we added 15 new oil and gas customers during the quarter and 6 of those customers include our sand and SandBox services fully delivered to the well.

Our third operating priority is generating free cash flow through a focus on managing working capital and CapEx. We're improving collections and extending term with vendors, and we've implemented additional spending controls and are keenly focused on conserving our cash. For 2019, we expect to be below our previous annual CapEx estimate of $125 million, and we've decreased our expected 2020 budget for capital expenditures to the low end of the range of $40 million to $60 million. And further, we remain committed to using our free cash flow to delever the balance sheet through the repurchase of long-term debt, the first tranche of which was completed during the third quarter.

Now let me conclude with market commentary starting with industrials. As we noted in our press release today, a few of our industrial customers are delaying purchases to manage their year-end raw material inventories in preparation for a potential business slowdown. It's unclear to us if these actions are being taken in response to a real slowdown or just in anticipation of one.

As is typical, our fourth quarter will be seasonally slower, with profitability expected to decline approximately 10% sequentially. Looking ahead to 2020, the heightened level of uncertainty in global industrial markets, fueled by tariffs, political uncertainty and the rising risk of an economic slowdown make it difficult to forecast, but our initial views are that sales and profitability will be flat to up slightly above 2019 levels. For oil and gas, we expect industry frac sand volumes pumped in Q4 to be down at least 10% sequentially due to the expected seasonal slowdown, and pricing will be under further downward pressure.

We believe that SandBox will also see lower volumes driven by fewer well completions in the fourth quarter. Despite some pricing pressure, SandBox margins held up well in the third quarter with improved third-party carrier rates, and we would expect that to be the case in Q4 as well.

For 2020, we expect to see a rebound in oil field completions by mid-Q1 as operator budgets reset. We also believe that some less capable sand competitors may shut down over the coming months helping to rationalize capacity, which should improve margins in 2020 versus 2019 exit levels. Finally, SandBox is expecting a strong start to 2020 with an extensive pipeline of new customer opportunities.

And with that, I'll now turn the call over to Don. Don?

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Donald A. Merril, U.S. Silica Holdings, Inc. - Executive VP & CFO [4]

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Thanks, Bryan, and good morning, everyone. I'll begin by reviewing our operating segment results. Third quarter revenue for the Industrial and Specialty Products segment of $119.1 million was down 1% compared with the same quarter last year. The Oil and Gas segment revenue was $242.7 million, down 11% sequentially and a decline of 20% compared with the third quarter of 2018. As Bryan noted, we encountered significant headwinds in our proppant business, starting midway through the third quarter that drove sales and profitability lower in the oil and gas segment.

On a per ton basis, contribution margin for the Industrial and Specialty segment was $46.52, down 10% sequentially and 6% when compared with the third quarter of 2018. A combination of unfavorable product volume and mix, coupled with higher plant costs, including an inventory write-off of $1.3 million negatively impact the third quarter of 2019.

Looking ahead to the fourth quarter, we'd expect the contribution margin of our ISP segment to decline about 10%, which represents a typical seasonality of the segment. The Oil and Gas segment contribution margin on a per ton basis was $12.98 compared with $18.17 for the second quarter of 2019. Unfavorable pricing of both the proppant and SandBox businesses as well as reduced SandBox loads were clear headwinds during the quarter. Additionally, less activity in our SandBox business led to higher logistics costs. However, cost savings, especially with third-party carriers lessened the impact.

Finally, we did recover an incremental $5 million in customer shortfall penalties and other contractual fees that were settled during the quarter.

Let's now look at total company results. Selling, general and administrative expenses in the third quarter of $40.2 million represented an increase of 4% over the second quarter of 2019. The increase in SG&A was primarily due to increased legal expenses related to our SandBox litigation and expenses associated with the closing of our Frederick, Maryland office. We expect SG&A expenses to decline about 5% in the fourth quarter as we reduce our overall spending to better match current and expected market conditions.

Depreciation, depletion and amortization expense in the third quarter totaled $47.1 million, an increase of 5% over the second quarter of 2019, driven by the final stages of our West Texas mine completions, our growth projects in both SandBox and our ISP segment as well as maintenance capital. We expect depreciation, depletion and amortization to be flat with the fourth quarter compared with the third quarter.

Our effective tax rate for the quarter ended September 30, 2019, was a benefit of 25%, including discrete items. The company believes its full year effective tax rate will be a benefit of 29%.

Turning to the balance sheet. The company had $187.3 million in cash and cash equivalents and $93.5 million available under its credit facilities. Cash flow from operations during the quarter totaled $33.9 million and our net debt under our credit facility was under $1.1 billion. As previously reported, during the quarter, we completed a voluntary loan repurchase offer for $10 million of principal of the term loan portion of our senior secured credit facility, reaffirming our commitment to reducing leverage. The debt was retired at a discount to par using cash flow from operations. Capital expenditures in the third quarter totaled $19.5 million and were again mainly for the completion of our West Texas mine sites, next-generation equipment for SandBox and several growth products in our Industrial and Specialty Products segment.

We are still in our budget process for 2020, but our initial expectation is for capital expenditures to be in the range of $40 million to $60 million. As I've noted in the past, we intend to keep our capital expenditures within our operating cash flows, staying laser-focused on generating free cash flow and delevering our balance sheet over the next several years.

And with that, I'll turn the call back over to Bryan.

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Bryan A. Shinn, U.S. Silica Holdings, Inc. - President, CEO & Director [5]

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Marc Bianchi with Cowen.

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Marc Gregory Bianchi, Cowen and Company, LLC, Research Division - MD [2]

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First question from you guys, the comment for the fourth quarter about the oil and gas contribution margin per ton being down sharply. I was hoping you could just put some more numbers around that. I mean our first swag at it was that it's maybe down 50% from the 13% that you did in the third quarter but curious if you could provide some more detail.

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Bryan A. Shinn, U.S. Silica Holdings, Inc. - President, CEO & Director [3]

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Marc, thanks for the question. I think you pretty close when we look at October, so early indications show we're tracking about 45% down in terms of contribution margin per ton. That's 45% versus the Q3 average number. So your sort of swag of 50% is pretty close.

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Marc Gregory Bianchi, Cowen and Company, LLC, Research Division - MD [4]

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Okay, Bryan. I guess kind of flowing that through, we get to $27 million of adjusted EBITDA based on the updated G&A, which doesn't leave a whole lot of free cash flow or kind of keeps you guys around breakeven if we're thinking about the CapEx that you're talking about for 2020.

Appreciate that maybe there is some seasonal recovery, but it's possible that we kind of stay flat with this level. What kind of opportunities do you have in terms of major cost-cutting? And maybe more significant strategic alternatives that you could pull to try to lower some of the overhead and improve the margins in the business if activity doesn't pick back up?

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Bryan A. Shinn, U.S. Silica Holdings, Inc. - President, CEO & Director [5]

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So we're certainly looking hard at our oil and gas business and how we can be more efficient and effective there. I think that there's a number of things. We want to optimize our sand mining and production capacity. We've already done some rationalization of our production network. And I think that we will look hard at more of that if the market doesn't pick up, which -- by the way, I think, our base case is that we do get a recovery in 2020 once budgets reset in the first quarter. And I think the sort of rhythm that we're in now as a North American land completions industry, it is first quarter starts off slow, picks up, Q2 looks pretty good, Q3 early on looks good and then drops off for the remainder of the year. We've been in that rhythm 2 years in a row now and I feel like we'll see that again in 2020. So I certainly don't expect to multiply Q4 by 4 and have that be the 2020 outlook. But we do have a lot of things that we can do in the supply chain if necessary.

I think we also are looking hard at variabilizing as much of our costs as we can. So for example in SandBox, we have a lot of third-party carriers that do our sand hauling now. It used to be we had the majority of our drivers and the majority of our loads moved by our own employees. But over the past several quarters, we've moved to a more leveraged model there. So there's lot of different alternatives and things that we can do and certainly we're looking hard at all of those. And I think we have the playbook in place to deal with whatever comes in terms of the market. But as I said, our base case is that things certainly improve in Q1 versus where we'll finish the year here in Q4.

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Marc Gregory Bianchi, Cowen and Company, LLC, Research Division - MD [6]

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Right. If I could just follow up on that, Bryan. The -- I think you guys mentioned $100 million to $110 million of total kind of industry demand for 2019. So assuming we have kind of a mirror image in '20, things are kind of picking back up seasonally like you said and we get to that 110 -- $100 million to $110 million demand level.

Is that what your cost structure is sized for right now? Or if we were in this $100 million to $110 million world for the foreseeable future, can you quantify what sort of cost-out opportunity there might be?

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Bryan A. Shinn, U.S. Silica Holdings, Inc. - President, CEO & Director [7]

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So we've already taken costs out. So for example, as we said in our press release, we have about 5 million tons of capacity that's currently off-line either from a couple of facilities that we've shut down or another handful that we have, basically turned back capacity by limiting shifts and reducing work hours. I think within our mining facility, we have a lot of capacity -- a lot of ability to turn back production and certainly across the enterprise we'll look hard at whatever costs that we need, either up or down, although in this case it's probably more down than up depending on the market conditions.

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Operator [8]

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Our next question comes from the line of Stephen Gengaro with Stifel.

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Stephen David Gengaro, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst [9]

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So I guess 2 things. I think just to start with, when you think about the sort of medium term and you think about the oil and gas business and your cost position relative to some of the competition. I mean do you still think when we look out that a -- what kind of a normalized contribution margin per ton, purely on the oil and gas side without SandBox, could look like? I mean do we still think it's -- I know you have that sort of $5 to $10 plus in that range cost advantage?

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Bryan A. Shinn, U.S. Silica Holdings, Inc. - President, CEO & Director [10]

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Yes. I believe that's exactly where we are, Stephen. And the good news is that nothing is changed in terms of our position on the cost curve when it comes to just purely the sand business, take -- let's take SandBox out of it for a minute. We're right at the bottom of the cost curve and I think we see a number of other sand operators out there, especially those that have gotten into the business lately, they're struggling.

We know there are a number of mines that have been shut down in West Texas. Those folks were very high on the cost curve. I think there is more capacity that needs to come out, and I think it will over the coming quarters. A lot of our less capable competitors, quite frankly, are running at a cash loss per ton. And that just can't continue.

So I feel like the advantage is that we have with our position on the cost curve will definitely show themselves over time, particularly if the market stays lower longer in terms of some of the dynamics that we've seen here recently with pricing pressure and capital discipline ultimately by the energy companies. That's going to -- of course, to shake out on the sand mining side of our business. And I think we'll be one of the long-term winners for sure.

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Stephen David Gengaro, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst [11]

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And then second on the ISP side. I mean you gave some preliminary thoughts on 2020. When you look at some of the opportunities you have in the pipeline. I think you've identified $200 million of sort of contribution margin opportunities over a 5-year period. Is it -- do you have any updates on sort of how that unfolds over the next couple of years? And when we will start to see maybe the bigger impact of that?

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Bryan A. Shinn, U.S. Silica Holdings, Inc. - President, CEO & Director [12]

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Yes. It's a really good question. And we have a number of opportunities in that pipeline. And it's a very robust set of new business opportunities and products. And so I think what we'll see is that the front end of that pipeline or some of the products that we've talked about here on the prepared remarks for this call. So products coming out of our Millen, Georgia facility, that's sort of the prototype with what we want to do with some of the other things in our pipeline. So the cristobalite, cool roof granules, coated silica and other coated products, there is a whole suite of the things there. I think we also have coated diatomaceous earth. Diatomaceous earth is a mineral that we brought in through our EP Minerals acquisition. There's all kinds of opportunities there. You'll see us also grinding and sort of manipulating some of the physical properties of other minerals that we have. I think those products launch over the next 1 to 2 years. We've talked about ultrahigh infiltration, things like blood plasma and biotech. Those products, I believe, will begin to launch in 2020. And so over the next couple of years, you'll see a number of new products. I'm hoping, 6 to 10 new products that launch and -- then those products will get in the market and hopefully grow.

And so as we branch off into some of these different markets, end uses and product families, you'll see them launch and we'll obviously be able to talk in more detail as we get closer to that.

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Operator [13]

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

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George Michael O'Leary, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - MD of Oil Service Research [14]

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Nice to see the 2020 CapEx guide. I realize it's early and you haven't finished budgeting, but coming in that $40 million to $60 million range is quite a cut year-over-year. I guess could you frame what portion of that is maintenance CapEx? And then on the growth side, where that growth CapEx is allocated to between ISP and SandBox. I assume there is not much on the oil and gas side, if any, outside of SandBox?

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Bryan A. Shinn, U.S. Silica Holdings, Inc. - President, CEO & Director [15]

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Sure, George. So if I look at that, let's say we're kind of at the low end of the range call that $40 million, I would expect about $15 million to $18 million would be maintenance and then the rest would be growth -- the growth CapEx so that's $20 million to $25 million, so something like that is primarily going to be allocated towards the industrial business with some in SandBox. So I don't have the exact numbers in front of me, but I would say it's something like 75% industrials, 25% SandBox, roughly, of that growth CapEx.

Now I know we will probably going to get asked by some investors the question about are we limiting our industrial growth with this big pipeline that we have by cranking back on capital. And the good news is that I don't think we are at all. Most of the ISP growth opportunities that we have are not capital intensive. It's one of the things I like about our pipeline and even with our reduced CapEx in 2020, I think we can fund all of the essential growth programs that we need for the company.

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George Michael O'Leary, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - MD of Oil Service Research [16]

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Great. That's very helpful color. Then it seems just given the magnitude of the declines in completions activity in September and it looks like October is coming in relatively soft, to your point, to your original answer from Marc's question. So the volume guidance of potentially down just 10% quarter-over-quarter actually doesn't look that bad to me.

Does that reflect how much you believe frac activity will be down sequentially? Or do you guys contemplate some market share capture given your lower cost position in that guidance?

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Bryan A. Shinn, U.S. Silica Holdings, Inc. - President, CEO & Director [17]

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I think we'll continue to capture share. I believe we captured some share in Q3. And as you said, given our position on the cost curve, I think we'll continue to do well from a share perspective. The issue is that as demand falls off, there is more of a fight in the market for that share. And so that's going to drive prices down, however, given again, where we're positioned from a manufacturing cost standpoint, we have the ability to still be profitable and go after those tons. And I think many in our industry will not be able to do that.

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Operator [18]

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Our next question comes from the line of Tommy Moll with Stephens Inc.

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Thomas Allen Moll, Stephens Inc., Research Division - Research Analyst [19]

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Wanted to start on oil and gas pricing. If you could give us any context on the potential divergence and trends you've seen in Northern White versus Texas in Q3 and/or Q4? And then you mentioned earlier that a number of the competitors are now mining at a cash loss per ton. Should we anticipate that some of that is really seasonal where maybe people are trying to stretch through the end of the year, keep utilization up with the hope of a rebound next year and that if that doesn't materialize, that maybe some of that capacity will come out? Or do you think the pricing you're seeing is more a pure reflection of the actual fundamentals at this point?

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Bryan A. Shinn, U.S. Silica Holdings, Inc. - President, CEO & Director [20]

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Thanks for the question, Tommy. And to your first question around pricing declines, as we've said in our prepared remarks, Northern White sand held up pretty well. It was only down about 6% sequentially in Q3. And it's really interesting. I think we've written -- many people have written the demise of Northern White sand sort of over and over again. But it's still -- it's holding in pretty well in the market. I was looking back at some of the data for us over the quarter and we actually, believe it or not, hit a new Northern White sand volume record sold in July. And we saw a pretty robust demand before things cooled off in the back half of Q3. And just to put that in context, our year-to-date Northern White volumes we sold about 92% of what we sold in 2017 year-to-date. And our all-time record year of 2018 we're actually at 75% of that year-to-date in Northern White. So there is a lot of Northern White volume out there, and I think we're extremely well positioned to continue to be successful there. West Texas, your question around what would price look like there. More pressure for sure. It was down about 15% sequentially. So I think that's the trend that's really making it difficult on some of these new mines and new operators that have come into the industry.

And when I look at the cash losses that are piling up for some of these competitors, I just don't see how they continue to operate. And quite frankly, even before we saw some of the decline in completions demand in the back half of Q3 and we're seeing it obviously into Q4 here, even before that, many of them were operating at a cash loss for a variety of reasons.

So I feel like there is capacity that has to come out there in West Texas. My expectation is that we'll see another 10 million to 15 million tons come off-line. By our math, it's already 7 mines that are closed and I think there's more to come over the next couple of quarters here.

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Thomas Allen Moll, Stephens Inc., Research Division - Research Analyst [21]

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And then shifting to ISP. You mentioned that for some of the major end markets, your strategy has been to lift margins on some volumes that are actually in decline. Can you take us through the thinking there and maybe give an example or 2 of what that looks like?

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Bryan A. Shinn, U.S. Silica Holdings, Inc. - President, CEO & Director [22]

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So one of our key strategies in the industrial business is to understand where the value is for our products by application and by customer. And then really make sure to push and direct our volumes to the customers that have the most value for it. And I think our team -- our marketing team has done a great job of understanding that value and having us be able to price our products accordingly.

So for example, we, every year for the last several years, have put out a general price increase across all our noncontract tons in the industrial business. And those prices have stuck very well. And I know many people look at our sand business and think it's a commoditized business while on the industrial side for sure, it behaves much more like a specialty business. So we routinely get price across a wide set of customers and industries. And I think our team has really done a fantastic job in managing that, finding the places where we can extract a lot more value for the capabilities that we have.

And the other side of that coin is allowing our competitors to take their less profitable customers. So that's a point we've made a couple of times. And you just said it a second ago, in many of our markets, the volume's gone down but our contribution margin dollars have gone up because we've eliminated the less profitable customers, quite frankly.

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Operator [23]

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Our next question comes from the line of Chase Mulvehill with Bank of America.

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Chase Mulvehill, BofA Merrill Lynch, Research Division - Research Analyst [24]

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I guess the first I want to hit on -- just want to hit on ISP. And if I recall, I think previously, you guys had told maybe you could get a 10% CAGR on contribution margin growth on a annual basis. If I heard you correctly on the call and correct me if I wrong but it was kind of more flat to slightly up in 2020.

So if that's what -- if I heard correctly, could you maybe just kind of bridge the gap between kind of what you saw previously versus kind of what you're seeing out there today and what you think will happen in 2020? Is it a slower kind of growth? Is it more EP Minerals or the legacy I&SP business?

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Bryan A. Shinn, U.S. Silica Holdings, Inc. - President, CEO & Director [25]

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So it's really none of that per se, Chase. I feel like it's conservatism on our part given the kind of a global macroeconomic backdrop. I feel like it's that more than anything. We mentioned in our prepared remarks that we started to see some handful of customers on the industrial side in Q3 and it's persisting into Q4. Customers who are being cautious with their orders, trying to manage their inventory and manage their cash. And as we bore into that, it seems like most of those customers are just concerned about the sort of the macro that's going on right now with the tariff issues out there and Brexit and election coming up in the U.S. next year and 5 other things that we'd all agree on are sort of unsettling trends out across the broader industrial landscape.

So I think there is a lot of that. And so when we said in our comments, we expect the industrial business to be sort of flat to slightly up, it's really with that kind of the macro backdrop. Look, I think we have a lot of new products coming. We have lot of things to be excited about here. But if that sort of a scenario unfolds where the sort of global economy is sluggish or starts to head towards a recession, we're in so many different end uses and so many markets we would certainly be impacted by that and it'd be hard to fight that headwind even with all the growth and new opportunities that we have.

So it's not really sort of specific to one product line. It's more just kind of a macro sentiment right now. Look, I think there's also a chance that turns the other direction depending on where interest rates go and some of the other things that could change very quickly in the environment out there. If we get a trade deal done and all of a sudden, some of the macro malaise disappears, you will hear us to be a lot of bullish around the opportunities for growth in the industrial business. So I guess the other thing too to recognize is, when we said 10% CAGR, that's over a period of time, right? So if you look at where we've been over the last 6 years, we've been well north of 10%. But some years, we might be up 15%, some years we might only be up to 5%. So there's some puts and takes in there as well.

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Chase Mulvehill, BofA Merrill Lynch, Research Division - Research Analyst [26]

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Okay. Great. That makes sense. Appreciate the color there. And I guess if we think about the write-downs and I&SP had some inventory write-downs. Was that EP Minerals or legacy I&SP?

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Bryan A. Shinn, U.S. Silica Holdings, Inc. - President, CEO & Director [27]

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Yes. That was a legacy ISP plant where as we uncover more ore, mine planning came back to us and said that, look, we're not getting as much ore out of this mine as what we originally thought. So it really was a geological issue that we had to write-down some of the reserves.

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Chase Mulvehill, BofA Merrill Lynch, Research Division - Research Analyst [28]

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Got it. That makes sense. And real quick one if I can squeeze one more in? If we think about the potential to accelerate debt pay-down, is there any asset sales that you could -- that you see out there for you that could maybe accelerate some debt pay-down?

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Bryan A. Shinn, U.S. Silica Holdings, Inc. - President, CEO & Director [29]

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So we're always looking for opportunities to monetize assets that might be worth more to somebody else than they are to us. I think a great example of that was a couple of years ago, we sold 2 of our transloads for about $75 million, right? So we buy things. We'll sell things. Certainly, all that is in play. I think also there is a -- probably a backlog of legal settlement opportunities out there. I think everyone is aware that we have a large outstanding judgment about $45 million from Arrows Up, a SandBox competitor and others -- a few others out there percolating as well.

So there is lots of different opportunities to find extra cash that's not sort of normal -- within a normal operating rhythm. With that said, I think the way we're viewing the chase is we're committed to paying down our debt, we're committed to delevering the company and given this kind of quarterly rhythm that we're in with oil and gas, there'll be some quarters where we generate a lot of cash, some quarters where we might not generate any cash. And so I think the debt repurchase will almost be a quarter-by-quarter activity depending on the free cash flow that we have.

And so that's how we're looking at it and certainly, asset sales or these other one-timers that could net us some windfall cash are certainly things that we have in mind as well.

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Operator [30]

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(Operator Instructions) Our next question comes from the line of John Watson with Simmons & Company.

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John H. Watson, Simmons Energy | A Division of Piper Jaffray - VP & Sr. Research Analyst [31]

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On the SandBox front, is there an update that you can share regarding some of the opportunities outside oil and gas you're exploring?

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Bryan A. Shinn, U.S. Silica Holdings, Inc. - President, CEO & Director [32]

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Sure. It's a great question. Glad you brought it up. We didn't have a chance to talk about that yet. We've got the next opportunity for SandBox lined up and we're starting to do some field trials for that. I would expect that in the coming months, we'll be able to talk about that in more detail. So far, it's been met with very strong interest from our customer base. And I expect that -- as I've said, we'll have an opportunity to talk more about that perhaps on the next earnings call if not sooner. So great job by the SandBox team doing that.

We're also looking at -- beyond that next opportunity what else could be in the pipeline across a variety of different markets and end uses. So stay tuned for that. I think there is more opportunities for SandBox than what it does today for sure.

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John H. Watson, Simmons Energy | A Division of Piper Jaffray - VP & Sr. Research Analyst [33]

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Okay. Understood. On the Q4 guide front, contribution margin per ton was on, oil and gas, deciding as you discussed with Marc. Do you expect your average price in West Texas to decline from the $20 number you cited in Q3? I understand you expect it to rebound in 2020, but should we be modeling that moving lower in 4Q?

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Bryan A. Shinn, U.S. Silica Holdings, Inc. - President, CEO & Director [34]

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No. I think what you heard us say on this is on the $20 average price. We believe that's where it could stabilize and then as we move into Q1, Q2, we can actually see a little uptick there. So I think we're starting to see bottom of pricing in West Texas.

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John H. Watson, Simmons Energy | A Division of Piper Jaffray - VP & Sr. Research Analyst [35]

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Okay, okay. Got it. And then one quick follow-up on that front. The release talks about margins in SandBox holding up despite pricing pressure. Is that different in 4Q given the trajectory of loads and thinking about Q4 as somewhat anomalous given the holiday slowdown, et cetera?

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Bryan A. Shinn, U.S. Silica Holdings, Inc. - President, CEO & Director [36]

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Yes. Look, we are seeing some pricing pressure in SandBox, but again kudos to the SandBox team where they were able to offset about 75% of that price decline in Q3, and I would anticipate that they continue to do that into Q4.

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Donald A. Merril, U.S. Silica Holdings, Inc. - Executive VP & CFO [37]

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And just to add on to that, John. I think there's been a lot of debate amongst our investors as to whether SandBox is going to be able to sustain the margins that it's held for the last couple of years. And I think what's happened in Q3 and what we're seeing in Q4 it's just a great example of how SandBox behaves perhaps a bit differently than the oil and gas sand business. Pricing pressure was much, much less in SandBox in Q3. And I think the team has a lot more levers there to offset any additional pricing pressure that we get and try to keep margins per ton as flat as possible.

The competitive intensity there is obviously much different than the sand market as well. When it comes to containers, really there is much less competition and a lot of our customers [that] want containers are moving in that direction. And so I think we're very well positioned to be able to maintain margins there in a much different way than we are in the sand business quite honestly.

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Operator [38]

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Our next question comes from the line of J.B. Lowe with Citi.

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John Booth Lowe, Citigroup Inc, Research Division - VP [39]

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Just a quick follow-up on the SandBox discussion. You're able to pull some levers to take some costs out of the business. Part of that's being your third-party hauling. Is that -- I guess the question is what percentage of your loads do you think you're running through that third party? I guess I'm trying to get a sense of how much more you could take away from those guys and do more internally?

And I guess on the flip side, once that business starts to expand if completion activity comes back, is there kind of a baseload of internal hauling that you guys want to keep and kind of have that flexibility on the third-party side? Or are you kind of trying to move in a different direction?

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Bryan A. Shinn, U.S. Silica Holdings, Inc. - President, CEO & Director [40]

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So it's a very good question. And I think the -- when I talked to the SandBox team, they're looking to keep a baseload of maybe 30% or 35% of the tons that we haul ourselves and then the rest, we work with third-party partners. And the kind of agreement we have with over third-party partners is to have profitability go up and down a bit. Certainly, when things are tighter, they're willing to give some cost back. I would also expect that as the market picks up, will allow more profitability to flow to our partners. I think that keeps everybody happy throughout the cycle. And so we have some really good relationships there. And I feel pretty confident about our ability to manage that. The team over there just does a fantastic job looking at the carriers.

I think the other key to our success in SandBox in terms of profitability is, we look at each of our districts as kind of its own "profit center," if you will. But the head of each of our districts sort of views that as their own business locally and they sort of run it that way. So that they've got a -- just an eagle eye, if you will, on costs and margins and everybody that works in that district knows what the business specifics are and they're driving hard to make it a success within that district. So that's part of the secret sauce that's really helped us be successful at SandBox.

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John Booth Lowe, Citigroup Inc, Research Division - VP [41]

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All right. That's helpful. And given that kind of geographic segmentation, are there any areas that you're seeing more pricing pressure on SandBox than others? And is it more from competitor container systems or from silo systems? Just any color you could provide there would be great.

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Bryan A. Shinn, U.S. Silica Holdings, Inc. - President, CEO & Director [42]

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I would guess that there's probably. Just because of the competitive intensity and the amount of competitors, the prime -- Permian is a little bit more pressure than some of the other basins. But I really don't view a lot of the other side of folks out there as competitors. We tend to be back and forth more over the silo systems. And as I remarked before, it seems like when we go out and talk to customers in the oilfield space, it's almost like a political climate today, 40% like boxes, 40% like silos and then we all sort of battle for the 20% in the middle. And where that pricing pressure tends to come is when ourselves and some of the silo providers go after the same account, one of those folks in the middle, prices tend to go down. But for the dedicated box folks, the customers who really want boxes, I felt like we've been able to hold pricing pretty well there.

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Operator [43]

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Our next question comes from the line of Lucas Pipes with B. Riley FBR.

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Matthew Alexander Key, B. Riley FBR, Inc., Research Division - Research Analyst [44]

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I'm Matt Key here asking the question for Lucas. Just a quick industry question from me. How much total capacity do you think needs to be taken off-line across the industry for frac sand pricing to kind of begin to stabilize? I'd appreciate your color.

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Bryan A. Shinn, U.S. Silica Holdings, Inc. - President, CEO & Director [45]

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So I think it's -- there's Northern White and then there is, let's just say, Permian because those are the 2 big areas. I feel like we need to have another 20 million tons of Northern White come out to really balance things and another probably 15 million tons of Permian sand to tighten things up. So let's say, 35 million maybe 40 million tons in total across the industry to bring things back into balance.

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Matthew Alexander Key, B. Riley FBR, Inc., Research Division - Research Analyst [46]

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Got it. That's very helpful. And you mentioned Silica would potentially make additional curtailments if pricing doesn't improve. Would those cuts be primarily in the Northern White or kind of Permian or would it be a combination of both?

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Bryan A. Shinn, U.S. Silica Holdings, Inc. - President, CEO & Director [47]

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So we're taking a look across our system and it's -- as you might imagine, it's more complicated than just sort of looking at mines in a specific basin. You have to really think about where each mine is located and what the transportation and logistics are from that mine. So if you have a Northern White mine, you think about which railroads it's located on, what transload networks are you connected to, et cetera. And then we also have to -- when we think about Northern White, we have to remember that those tons use railcars, which we lease and that's pretty much a fixed expense. So you have to take that into account as well.

So it's pretty complicated analysis. Our team has a -- I think a really good rubric to do that, and we continue to monitor that very closely. And we'll take whatever actions we need to take depending on where demand is.

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Operator [48]

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

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Bryan A. Shinn, U.S. Silica Holdings, Inc. - President, CEO & Director [49]

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Thanks, operator. I'd like to close today's call by reemphasizing that we're focused on a few key priorities: Namely accelerating organic growth in the ISP business, we talked about that on the call today. The second is effectively deploying our oil and gas assets, and we get a lot of questions around our network and what we may or may not close or changes we may decide to make. So that's obviously important for us. And then the third is maximizing profitability and prioritizing free cash flow. I think we've recommitted again to delevering our balance sheet and buying back debt.

So those are 3 key priorities that almost everyone in the company is focused on right now. I'm very confident in our ability to execute against those priorities and deliver on the important aspects of those. And I have to say I remain very excited about the prospects for our company in both the short and long term. Thanks, everyone, for dialing into our call, and have a great day.

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Operator [50]

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