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US Silica Holdings Inc (SLCA) Q4 2018 Earnings Conference Call Transcript

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US Silica Holdings Inc  (NYSE: SLCA)
Q4 2018 Earnings Conference Call
Feb. 19, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the U.S. Silica Fourth Quarter and Full Year 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operation Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr. Michael Lawson, Vice President of Investor Relations and Corporate Communications for U.S. Silica. Thank you. You may begin.

Michael Lawson -- Vice President of Investor Relations and Corporate Communications for U.S. Silica.

Thanks. Good morning, everyone, and thank you for joining us for U.S. Silica's fourth quarter and full year 2018 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.

Finally, during today's question-and-answer session, we would ask that you limit your questions to one, plus a follow-up, to ensure all that who wish to ask a question may do so.

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

Bryan Shinn -- President, Chief Executive Officer, Director

Thanks, Mike, and good morning, everyone. I'll begin today's call by reviewing our fourth quarter performance and highlighting key accomplishments in 2018. I'll then comment on our outlook for 2019 and beyond as we evolve to a more balanced portfolio by expanding our Industrial & Specialty segment with a focus on Specialty Minerals and Performance Material sales, while substantially growing our SandBox Logistics business. Don Merril will then provide additional color on segment results and review key quarterly financial metrics before we open the call for your questions.

For the total company, fourth quarter revenue of $357.4 million and adjusted EBITDA of $68 million represent sequential declines of 16% and 36% respectively. Our Industrial & Specialty segment had a very solid quarter, more than doubling its contribution margin dollars on a year-over-year basis, driven by strong sand sales and a meaningful contribution from EP Minerals.

In our Oil & Gas segment, sand proppant sales were negatively impacted by the well-reported industry headwinds related to budget exhaustion and lack of takeaway capacity, as well as further pricing pressure from a combination of low demand and additional local sand capacity coming online in the Permian.

Given that the business dynamics around increasing local sand supply displacing incumbent capacity are likely to continue for the foreseeable future, we made necessary decisions regarding a few specific sand proppant assets and the treatment of goodwill in this business during the quarter. The effect was a non-cash accounting charge of almost $266 million. We will continue to manage this important situation as the market evolves.

SandBox, our industry-leading last-mile logistics solution, had a strong finish to 2018. We ended the year with 90 crews, within the range we guided to earlier in the year. We estimate that in Q4 we had approximately 24% market share, based on the amount of sand moving through our equipment.

As sand per well has continued to rise, we believe that the most accurate way to evaluate SandBox performance and market share is to look at the volume of sand move through our SandBox system, instead of just the number of crews.

Looking at 2018 in retrospect, I believe that we did what we said we would do. And we hit a number of key milestones and achievements that I'm very proud of including record revenues and adjusted EBITDA for the company, record contribution margin dollars and contribution margin per ton for our Industrial business, record volumes of sand proppant sales as we essentially doubled our effective manufacturing capacity for these products.

We repurchased approximately 7.9 million shares for $148 million during the year, reducing our share count to approximately 73.1 million shares. In Q4 alone, we repurchased approximately 4.5 million shares for $58 million. We acquired EP Minerals in May which doubled the size of our Industrial business and expanded our product offerings, our distribution network and global footprint.

We grew SandBox as promised ending the year with 90 crews and 24% market share. We also brought a new leadership, added substantial talent and invested significantly in SandBox in 2018. SandBox also won a decisive legal battle against Arrows Up. We believe the ruling together with our recent victories against PropX challenge of some of our patent claims reaffirms the strength of SandBox intellectual property and broad patent portfolio, which we will continue to vigorously defend.

We also invested to grow several new product offerings by acquiring a former ceramic proppant plant that we're retooling to produce high-end ISP products. This acquisition enables us to lower our cost and expand our capacity to meet the growing demand for some of IP's most successful and most profitable new products. Adding this new capacity will accelerate product launches, improve product quality and facilitate important product customizations required by our industrial customers.

And finally, in Oil & Gas sand, we made significant progress in building out our two new in-basin frac sand mines and plants in West Texas. Our 4 million ton Crane County facility is now fully operational and our 6 million ton mine and plant at Lamesa will be mechanically complete by the end of the first quarter.

Let's turn now to the future which I have to say looks very bright for U.S. Silica. We expect to continue with our strategic plan to substantially grow our Industrial segment by focusing on Specialty Minerals and Performance Materials offerings. We plan to launch and expand the sales of several new offerings this year while growing the underlying base business through GDP plus, market expansion and continued price increases.

For example, we see an increased market penetration for some of our higher growth products like White Armor, an industrial roofing product that is in very high demand and both legacy ISP and EP Minerals have announced price increases for 2019 in the range of 2% to 9% depending on the product and the grade.

I'm also very excited about the prospects for SandBox in 2019 and beyond. Our existing equipment is 100% sold out for 2019 and we're building new equipment as fast as we can to meet very strong customer demand. Many of our existing and new customers are embarking on substantial high-efficiency well-completion programs and believe that SandBox is the only system that gives them the required combination of efficiency, flexibility, low NPT and the throughput capacity to achieve their objectives.

Given that, as well as our ability to offer turnkey service with sand delivered directly to the blender, I believe that we're developing very sticky customer relationships, which will result in significant volume and profitability growth. Given our current level of customer demand, I believe that our original projections of reaching 25% market share in 2019 are conservative and we should be able to do better.

We're also continuing to innovate and have developed next-generation equipment and logistical models, which should further enhance efficiency and deliver numerous additional benefits to our customers. In addition, as I previously mentioned, we expect to utilize our infrastructure and expertise to transport other products and serve other industries.

I expect that we could launch our first new SandBox offering in 2019. Regarding, our Oil & Gas sand business, we expect that annual demand for proppants in 2019 will be up 5% to 10% at around 110 million tons at $50 per barrel oil, but could increase to over 130 million tons annually at $70 per barrel oil. We expect that most in-basin sand supply under construction will start-up, but we do not forecast significant additional mine developments in the industry this year. We believe that by the end of 2019 two-thirds of the total U.S. sand proppant demand will be supplied by in-basin sand with one-third supplied by Northern White sand.

With those dynamics in mind, our recently added local Permian sand mines should operate at capacity while our Northern White mines will continue to be pressured with lower utilization and pricing. Even with these expected headwinds, we see the Oil & Gas proppant market as attractive and given our low-cost position, scale, service and product quality, we plan to continue to be one of the industry leaders in sales and profitability going forward. Given all the puts and takes across our market sectors, I expect that in 2019, we'll realize approximately 25% of company profitability from sand proppants and 75% from a combination of industrials and SandBox.

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

Donald Merril -- Chief Financial Officer, Executive Vice President

Thanks, Bryan and good morning everyone. The reported adjusted EBITDA for the fourth quarter was $68 million and excludes a significant impairment charge in our Oil & Gas segment related to goodwill and specific segment assets. As Bryan stated, the decline in demand for Northern White sand impacted our business significantly in Q4 and caused us to make difficult decisions concerning the future of some of our higher cost oil and gas specific plants.

In the fourth quarter, we impaired a $102 million of assets related to facilities in our Oil & Gas segment. Additionally, the challenging pricing environment that continued throughout the quarter coupled with our customer demand shift to local sand gave rise to a goodwill impairment. In the fourth quarter we impaired a $164.2 million of goodwill attributed to our Oil & Gas segment. The remaining $86.1 million of Oil & Gas goodwill is specifically related to our SandBox acquisition which was not impaired.

Moving on to the results of our two operating segments. Fourth quarter revenue for the Industrial and Specialty segment was $113.8 million, down 6% from the third quarter of 2018, due to the normal seasonality in the markets served by the segment. The Oil & Gas segment revenue was $243.5 million, down 19% from the third quarter of 2018. This drop was not due to volume as we remained relatively flat versus the third quarter, but mostly due to a 23% reduction in proppant prices versus the third quarter of 2018.

On a per ton basis, contribution margin for the ISP segment of $47.78 represents a 4% decrease from the third quarter, again, as a result of normal seasonality. Oil & Gas segment contribution margin on a per ton basis was $14.65 compared with $23.43 for the third quarter of 2018, largely due to the pricing discussed earlier.

Let's now look at total company results. Selling general and administrative expenses in the fourth quarter of $32.2 million represented a decrease of 15% from the third quarter of 2018. This decrease was largely the result of lower business development and optimization project expenses and lower non-cash equity stock compensation expense.

We believe that SG&A expenses will approximate $34 million in Q1 of 2019. Depreciation, depletion and amortization expense in the fourth quarter totaled $46.5 million, up 25% from the third quarter of 2018. The DD&A increase was mostly due to a quarterly true up of purchase accounting for the EP Minerals acquisition. We estimate DD&A to be roughly $46 million in Q1 of 2019.

Our effective tax rate for the quarter and year ended December 31, 2018 was 13%. At this point of the year, we anticipate a tax benefit in the neighborhood of 30% in 2019.

Moving on to the balance sheet. Cash and cash equivalents as of December 31, 2018 was $202.5 million in total liquidity, including the revolving credit facility was $297.7 million. Our net debt at year-end was $1.06 billion and our term loan B has a maturity date of 2025.

Capital expenditures for the quarter were $119 million primarily associated with our Permian Basin mine sites and other growth projects, such as, additional assets for our SandBox business and the former proppant plant that Bryan mentioned earlier for specialized products within our ISP segment. We expect to keep capital expenditures in the range of $100 million to $125 million in 2019 and be funded from cash flow from operations.

Finally, we spent approximately $58 million on share repurchases during the fourth quarter bringing our total expenditure in 2018 to $148.5 million. As of December 31, 2018, we had $126.5 million available under our board-approved $200 million repurchase plan.

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

Bryan Shinn -- President, Chief Executive Officer, Director

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

Questions and Answers:

Operator

Thank you. We will now be conducing a question-and-answer session. (Operator Instructions) Thank you. Our first question comes from the line of Marc Bianchi with Cowen. Please proceed with your question.

Marc Bianchi -- Cowen -- Analyst

Hey, thanks. Bryan I just want to confirm did you -- did I hear you say that you anticipate Oil & Gas to represent 25% of contribution margin in 2019?

Bryan Shinn -- President, Chief Executive Officer, Director

So just to be clear, Marc, and good morning by the way, that is Oil & Gas sand, that's not the Oil & Gas segment, right? So, obviously, Oil & Gas segment includes sand plus SandBox and so that's going to be a substantially larger percentage of the total. So we're just referencing Oil & Gas sand in that comment.

Marc Bianchi -- Cowen -- Analyst

Certainly. Okay, great. So, I guess from here that could imply either a pretty sharp growth in your ISP and Sandbox business or some deterioration in your Oil & Gas sand business, which I'd suspect is maybe not what you're expecting? Could you talk through, how you get from that current mix right now that you reported in the fourth quarter to what you're talking about for 2019?

Bryan Shinn -- President, Chief Executive Officer, Director

Sure. So, I would expect that -- as I said in my prepared remarks that we're going to see substantial growth in Sandbox this year. The business is off to a very fast start, demand is just off the charts for Sandbox right now. So I think that's going to be a real positive for us.

If you look on the Industrial side, that's growing quickly as well. And you have to remember compared to where we were in 2018, we'll have a full year of EP Minerals in those Industrial numbers. So that substantially increases the industrial business in terms of contribution margin dollars. So, there are big improvements and growth on Sandbox and the Industrial side.

On the Oil & Gas sand side, obviously, we're seeing margins being pressured a bit. I think we'll see pretty nice growth in volumes, but pricing will be down a bit and margins will be down a bit as well there. So if I had to ascribe some weighting to it, it's probably 75% Sandbox and Industrial is growing in 25% of the Oil & Gas sand business being under a bit more pressure in terms of margins and pricing but not volume.

Marc Bianchi -- Cowen -- Analyst

Okay. And overall, would you say -- as you look to the first quarter that you see the dollars of profit from the Oil & Gas sand business continuing to decline?

Bryan Shinn -- President, Chief Executive Officer, Director

I think it may decline a little bit Q4, obviously, is always a tough quarter. So as -- just because of all the typical slowdown this year, we saw budget exhaustion and a variety of other things. So my expectation would be that there could be some deterioration in Oil & Gas profits as I look at the elements of that. We believe that volume on the sand side will be flattish from Q4 to Q1, and I would expect there will be a couple dollars per ton of price deterioration, but I will say that the local sand pricing is holding up very well.

We are seeing more pressure on the Northern White side. But on a positive note, we're actually in the last week or so starting to get some pricing traction on Northern White sand. I was talking with some of our sales team just a few days ago and it seems like things are firming up a bit on the Northern White side. So we'll wait and see but it wouldn't surprise me if contribution margin through mostly prices down $1 or $2 in Q1 versus Q2 just on the Oil & Gas sand side.

Marc Bianchi -- Cowen -- Analyst

Right. Okay, great. And then Don, if I could just ask on the CapEx here, $100 million to $125 million expected to be funded through cash flow. Can you put some buckets around how much is maintenance, how much is going toward Sandbox, maybe how much is discretionary and what the expectation would be if perhaps profitability declines more than you anticipate and maybe you have to make a decision about using cash in the credit facility to fund some of this?

Donald Merril -- Chief Financial Officer, Executive Vice President

Sure. So first of all, I don't think we have any plans to start digging into the credit facility here, but I would say -- Marc, I would say we're right around the $20 million to $25 million of maintenance capital for the year. Right now we've got about $25 million to $30 million to finish up our West Texas facility.

So all the spending there should be done in the first half of the year. And because of that our CapEx tends to be a little bit more heavily weighted toward the first half of the year than the second half of the year, right. We've got to finish up those projects.

And then the rest of it is growth capital. So right now take the difference there, the rest of that and split it between SandBox and our industrial business. And I would say, look, as we look to the year, we start to put our plans together. We always have contingency plans in place, and I would say that, we've got about $20 million-or-so -- $20 million, $25 million of what I'd call discretionary capital, that if things do not workout the way we have anticipated right now, we can ratchet capital spending back.

Marc Bianchi -- Cowen -- Analyst

Great.

Bryan Shinn -- President, Chief Executive Officer, Director

Yeah. And Marc just to add to that question, we're definitely going to manage the business within cash flow. I do expect that we will be cash flow positive this year. And -- but as Don said, if things turn worse for some reason, we have knobs to turn, my expectation though is that we will be in the enviable position again of having cash and having to decide how we allocate that whether we continue to do more growth projects, whether we continue the substantial share repurchases that we did in 2018 or variety of other options that we have to employ the capital.

Marc Bianchi -- Cowen -- Analyst

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

Bryan Shinn -- President, Chief Executive Officer, Director

Thanks, Marc.

Operator

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

Ken Sill -- SunTrust -- Analyst

Yeah. Good morning, guys.

Bryan Shinn -- President, Chief Executive Officer, Director

Good morning, Ken.

Ken Sill -- SunTrust -- Analyst

Two questions really kind of unrelated, but one on SandBox. What are the trends right now in terms of driver availability inflation on that side? And are we seeing further inflation in kind of the cost of the fleets just because last quarter you talked about how they had gotten bigger and the capital requirements a little bit higher, but I'm wondering if things slowing down have eased any labor issues that you guys might be having on the driver side?

Bryan Shinn -- President, Chief Executive Officer, Director

Well, it's really interesting Ken, you asked that question, because for us things haven't really slowed down. We're taking share like crazy in the market right now. We believe that as we enter the year, we're up to 24% market share and I think that's the right way to look at this business. So we think about how much sand volume is actually pulling through our equipment, and we have put a goal in place this year to be at 25% market share, but I think we're going to blow right on through that.

So, for sure, we have a lot of sand, lot of drivers moving. We really haven't had much trouble recruiting drivers quite honestly. I think SandBox is a very desirable driving job in the oilfield just because of the predictability of the employee schedules. So we tend to be able to recruit and hold drivers very well.

Just to give you a sense of the sort of intensity out there right now, we're loading a SandBox somewhere in the U.S. every 25 seconds, 24 hours a day. So just kind of step back and think about that and I was talking to our SandBox team a week or so ago, and they said, in February, it's even faster.

So we're seeing massive increases in the SandBox volume, and I think, the reason for that is as more and more energy companies really take a hard look at the last mile and have experienced the various solutions out there, they're figuring out what we knew all along and that's that SandBox is the best solution out there when you look at efficiency, flexibility, low NPT and throughput capacity. So I couldn't be more excited about the trajectory that the SandBox business is on and what the future holds for that, a really exciting part of our company.

Ken Sill -- SunTrust -- Analyst

Yeah. And my unrelated follow-up question is, you guys have talked about having 75%, 80% of your volumes Northern White and in-basin contracted, but it seems like a contract isn't a contract in this business. So how much price erosion have you seen in the Northern White stuff, that's theoretically under contract?

And your sand in-basin pricing is holding up well. We hear a lot of anecdotal stuff and I think that kind of depends on whether you're early or later when you signed your contract, but talk about how you can make some of their -- or how sticky is some of the pricing for some of these contracted volumes?

Bryan Shinn -- President, Chief Executive Officer, Director

Yes. It's a great question. And I would say, generally, we're finding that things are pretty sticky, particularly where we've signed our latest generation of capacity reservation fee contracts, where customers have given us millions of dollars and we basically already have their cash. So we don't have to sort of beg for penalty payment or something, because we already have their money, if they don't perform.

Now, look, with that said, as we see continued pressure on Northern White volumes, there's going to be a lot of customers who look to renegotiate or find a better price. I think one of the advantages we have, though, is that in many cases, we're working with the customers to deliver that sand out to the wellhead with SandBox. So it gives us a bit more negotiating leverage. So we'll wait and see, but for sure there's going to be more pressure Ken on the Northern White side in terms of pricing than what we see on the local sand side, for example.

Ken Sill -- SunTrust -- Analyst

All right. Thank you.

Bryan Shinn -- President, Chief Executive Officer, Director

Thanks, Ken.

Operator

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

George O'Leary -- Tudor Pickering Holt -- Analyst

Good morning, guys.

Bryan Shinn -- President, Chief Executive Officer, Director

Good morning, George.

George O'Leary -- Tudor Pickering Holt -- Analyst

As you guys think about capital allocation in organic versus inorganic growth, on the M&A front, where kind of are you most acutely focused across your business segment? Is it in line with how you characterize the general growth of the company, and the ISP and maybe logistics are where the big focus is? Or is there more kind of inorganic growth you can do in one of those buckets and the other might be the growth CapEx bucket?

Bryan Shinn -- President, Chief Executive Officer, Director

So, I think about it in a couple of different categories, George. The first is, to continue diversifying our Industrial business. So we made a big acquisition in 2018 with EP Minerals and we're still in the process of really fully developing the potential of that business. So we'll continue to do that.

I think you saw in December, we acquired for a pretty reasonable price, a ceramics proppant facility that wasn't being utilized. And so we're turning that into high-end industrial products facility. So things like that where it's a fairly small investment, but we can make big profitability gains out of it.

We have those kind of things in the pipeline that we're looking at. We're not at this point looking at some kind of transformational acquisition necessarily on the Industrial side of the business. I think we've got plenty to do with kind of blowing out the EP Minerals business and doing a few of these, sort of, one-off things, lot like we did with the ceramics facility.

On the logistics side, I'm really excited about the opportunity there. I mentioned in my prepared remarks that we're looking to take the Sandbox sort of technology and know-how and systems that we built to other products and other industry and so I think you could see us making some investment there. And my hope is that we'll have the next sort of new product line in the Sandbox portfolio rolled out sometime this year.

In terms of Oil & Gas sand, I think the investments there are more around maintaining our competitiveness, trying to reduce cost, and better serve customers in what is more of a challenging market. So, we have all kinds of different opportunities, but it's very different kind of business-to-business George.

George O'Leary -- Tudor Pickering Holt -- Analyst

Right, that's super helpful. And then just as you think about your portfolio of assets going forward, clearly some opportunity to transform some facilities maybe on the Oil & Gas side into Industrial-type facilities.

As you think about potentially shutting in mines going forward where is your focus there? Are there some kind of non-in-basin regional mines that you might shut down or is it more on the Northern White side of the equation?

Bryan Shinn -- President, Chief Executive Officer, Director

So, I think we're looking at all that as you can imagine and we pay very close attention to what's happening at the different mine sites and, of course, it's a bit different when you look at Northern White versus regional.

I would say that at this point what we're seeing is at least for our Northern White mines, there's a shift here or a shift there that we're not staffing. So, for example, in some of our mines where we used to run a 24/7 with four shifts, maybe we're running at three shift or two shifts just depending on demand. And these are typically the Northern White mines like our mine in Wisconsin, for example, that really is not suitable for the Industrial business. So, there's no sort of trade-off there where you can take tons that aren't being purchased by our Oil & Gas customers and move them to Industrials like we can, let's say, our Ottawa mine in Illinois or something like that. So, we have those kind of situations.

The regional mines we're looking at much more closely -- and -- so, for example, we have a mine in Voca, Texas which used to be in a great position to truck products into the Permian, but now it's substantially further away than the new local mines that are coming up much closer to the well. So, that's the kind of mine that we're looking at very carefully.

And quite frankly that's probably a mine that in the coming months we'll have to close just because the demand is being taken by the new mines that are coming in and I don't think that's a surprise to anybody given the position of that mine.

So, it's kind of a different situation all the way across, but we're looking at it very carefully and taking the appropriate actions as we need to.

George O'Leary -- Tudor Pickering Holt -- Analyst

Thanks very much for the color Bryan.

Bryan Shinn -- President, Chief Executive Officer, Director

Okay. Thank you.

Operator

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

Stephen Gengaro -- Stifel -- Analyst

Thanks. Good morning gentlemen.

Bryan Shinn -- President, Chief Executive Officer, Director

Good morning.

Stephen Gengaro -- Stifel -- Analyst

Two questions, if you don't mind. Let's start with the ISP business. Can you give us a sense just kind of an update in its current form right without additional growth how should we expect just the general seasonal trends to play out? And also within the business sort of the part two was what are the biggest drivers to that business as we look at the next year plus?

Donald Merril -- Chief Financial Officer, Executive Vice President

Sure, Stephen. Two great questions. And if you look at our industrial business going back I mean literally, we've been doing this business really a big piece of it on the sand side for 119 years. Q4 is usually the lowest quarter. Many of our products are bought seasonally, so you didn't say it's Q2 and Q3 you tend to get the highest sales. But then as we get into Q4 there's seasonal impacts and then also many of our major customers like say our glass customers, they typically take holiday outages between Thanksgiving and Christmas much like the oilfield does. So Q4 is usually the lowest. Q1 is kind of the second worst and then Q2 and Q3 are typically the better quarters there.

In terms of drivers for the business, it's a fascinating business in that is frequent on the sand side you sort of look from the outside and you say geez this seems like it's a commodity business, but if you look at how we have been able to grow this business over the last six years since we really started trying to grow the Industrial business our profitability CAGR so contribution margin dollars over six years is 19%, but that's not a commodity business.

The CAGR of our contribution margin per ton in Industrials over the same period is 21%. And so that's from a combination of a couple of things, one is being very aggressive in price, we get price every year, and two we've introduced a number of new offerings. And so for example, between our Industrial sand business and EP Minerals about 15% on average of our revenue is coming -- sorry of our contribution margin is coming from products that have been introduced in the last two years.

So this -- when you're inside that business, it has a very sort of specialty performance materials kind of feel, high-end products, very sticky with customers. And we're serving a number of industries. Used to be that, we're a bit more concentrated when we just had the sand business but now with EP Minerals, we have added several growth industries a lot of things like chemicals a lot of food applications. They're just sort of in everything paints and coatings. So we really diversified the business and that was one of our goals was to diversify across more end-uses, but we want to focus much more on Specialty Minerals and Performance Materials. And so it's a very exciting business and one that I think we're going to see great things from just based on this trend and track record and all the things that I see in the pipeline.

Stephen Gengaro -- Stifel -- Analyst

That's helpful color. And just one quick follow-up as you think about the CAGR going forward for the business in general over sort of a five-year time frame is that a double-digit kind of number or is it more like sort of 5%, 6%, 7% would that be a reasonable target?

Donald Merril -- Chief Financial Officer, Executive Vice President

Well, look we've just -- we just had the sand business for the last six years. We've been growing at 10% CAGR, right? So for me internally that's my benchmark for the team. I'm pushing the team to keep our track record intact for the next many years of growing at 10%. And I'll just give you one last fact here we also have a massive amount of new business opportunities and new products. Our pipeline currently has more than 100 new projects and offerings in it. So it's a very robust pipeline and I feel like that sort of the sky is the limit for this Industrial business over the next couple of years.

Stephen Gengaro -- Stifel -- Analyst

Thank you for the color. It's very helpful.

Donald Merril -- Chief Financial Officer, Executive Vice President

Thanks, Steve.

Operator

(Operator Instructions) Our next question comes from the line of John Watson with Simmons. Please proceed with your question.

John Watson -- Simmons -- Analyst

Good morning guys.

Donald Merril -- Chief Financial Officer, Executive Vice President

Hey, good morning, John.

John Watson -- Simmons -- Analyst

Bryan, you mentioned outstanding demand for SandBox in the release and you recently press released the Chesapeake contract, so clearly impressive results there. How should we think about profitability for some of these new jobs that you've won or do you expect to win? Is the prior guidance of around $1 million of annualized contribution margin the right framework?

Bryan Shinn -- President, Chief Executive Officer, Director

So it's really interesting. A lot of the work that we've won are directly with energy companies who we're looking to source their proppant. And what we're finding is that the size of a lot of these customers wells and the work that they are doing is just substantially bigger than what we have done in the past. So when you look at the tons that we're actually moving through some of these wells, it's just an amazing amount of volume to the statistic I quoted earlier, we're now at the point of loading a SandBox every 25 seconds in the U.S. So I think that's going to drive really good profitability. And as I mentioned also the way we're thinking about this internally is not so much in terms of crews, but sand demand that we're serving.

So for example, if the market, let's say is 100 million tons of sand as we annualize as we enter the year, we think we have 24%, so that's says that 24 million tons of sand is flowing through our system. Now we expect the sand demand to grow and we're going to grow share in that growing market. So I think we'll see substantial improvement in profitability in SandBox and at the same time, we're looking to improve our efficiency there and take out cost and get more sort of streamlined in terms of operations by focusing on sort of a district-by-district model. And I think that as well is going to help us continue to improve our profitability. So I feel like there's definitely two thumbs up for SandBox growth and the profitability of that growth, John.

John Watson -- Simmons -- Analyst

Okay. That is great. Thanks, Bryan. Maybe as a follow-up thinking about Q1, you gave helpful guidance for frac sand contribution margin per ton. More SandBox systems deployed for the quarter versus Q4 and it sounds like flat or improving profitability per crew. Is -- are those puts and takes do those level out to flat contribution margin per ton quarter-over-quarter on a consolidated oil and gas basis? Is that the right way to think about that?

Bryan Shinn -- President, Chief Executive Officer, Director

Look, I think we're probably -- when you level it all out, my hope is that we'll be sort of flattish in terms of contribution margin per ton. We'll see. I mean, obviously we're still fairly long way to go in the quarter. Trend looks very positive, but my hope is that we can see the positive from SandBox offset some of the headwinds perhaps that we got in Oil & Gas sand and certainly that's what we're trying to do.

John Watson -- Simmons -- Analyst

Okay. Perfect. And then just a quick follow-up. You mentioned price increases for Northern White. We've heard about potential shortage of in-basin 40/70 in the Permian. Is that something that you have seen from your competitors and do you think that's helping to drive more Northern White demand in the Permian specifically?

Bryan Shinn -- President, Chief Executive Officer, Director

Well, I think there is a couple of things going on here. The first is that, I believe there's not going to be quite as much 40/70 produced in the Permian as some of the early models might have indicated as we survey the marketplace, I think perhaps some of our competitors were a bit overly optimistic in terms of how much 40/70 they can get out. So that's one thing.

The second thing that is bit of a challenge right now is that for some of the Northern White grades depending on where the mines are in the country it is winter right and so the mines don't run as well and there's logistics issues and things. So I think we're seeing some flow-through impacts of that. And I know you asked specifically about the Permian, but in some locations let's say the Eagle Ford in particular the 40/70 is really poor quality and we're starting to get numerous inquiries from energy companies and having conversations with them and they're all just kind of in the same vein which is we really don't want to pump this local 40/70. We tried it in a couple of wells and the well results were very poor. So I think that's a developing trend in the Eagle Ford and we'll see how that plays out.

John Watson -- Simmons -- Analyst

Thanks very much, Bryan. I'll turn it back.

Bryan Shinn -- President, Chief Executive Officer, Director

Thanks, John.

Operator

Our next question comes from the line of Chris Voie with Wells Fargo. Please proceed with your question.

Chris Voie -- Wells Fargo -- Analyst

Good morning.

Bryan Shinn -- President, Chief Executive Officer, Director

Hi, good morning, Chris.

Chris Voie -- Wells Fargo -- Analyst

Just few questions. So first on Sandbox just curious, if you have a year-end target for crews at your current bill rate in 2019?

Bryan Shinn -- President, Chief Executive Officer, Director

So we really don't. To me the concept of a crew is becoming less and less meaningful. And so just for example, we have one customer that we're working for, who has some very large acreage in one of the basins. And we're doing some special things for that customer. We're building a local transload on that property that they're going to be drilling and completing. And so on the transload we're going to have hundreds and hundreds of boxes and so that -- I don't even know how to count those as a crew. So we're doing things more and more like that to serve customers. We're customizing our offering. And so I think the right way to look at it and what you'll hear us talking about more and more is what kind of market share we have how much sand is flowing through our system and we're already at about 24%, I think a good target for us say by middle of 2020 is to get to 30% to 35% and recognize that we think the market is going to be growing. So we're growing share in a growing market, I expect we'll be very pleased with the results here in 2019.

Chris Voie -- Wells Fargo -- Analyst

Okay. And if you're transitioning to thinking about it that way are your pricing models also evolving that way where it's more oriented toward the tonnage and therefore there are new metrics that you can give us to think about what kind of profitability to do on a per ton basis instead of a per crew basis or something like that?

Bryan Shinn -- President, Chief Executive Officer, Director

So it's an interesting question. And our pricing models are very substantially on a customer-by-customer basis. And so if you look at the spectrum on one end, we still do a rent equipment -- equipment sets and equipment that we have to our customers and so that's kind of the low end where we just get money from a rental model.

And if you look at some of the other competitors in this space, mostly the silo competitors, that is their model. They rent the equipment, that's it. But we have much more sophisticated models all the way up to kind of at the other end of the spectrum, us doing everything for the customers.

We provide the sand. We provide the equipment. We run the equipment on the well sites. And so for those models, for example, we get a much larger profit and make much better returns. And so, the challenge of trying to give guidance around this is, those things flex back and forth depending on the customers and how many of which you have.

And so, it makes it a challenge to give guidance that's meaningful, but we understand that our investment community and our analyst community is looking for that. And so, we continue to think about how we can give the right kind of guidance without sort of giving away all the trade secrets and some of the confidential information that we don't want to share. So I appreciate the question and we continue to think about that, Chris.

Chris Voie -- Wells Fargo -- Analyst

Yeah. Fair enough. And then maybe one more. You put in the release that you expect about two-thirds of demand by the end of the year to be in-basin. You view the business still as attractive for proppant, but I think you previously said that you're not looking to deploy additional capital in the proppant. Can you talk about how you see that two-thirds evolving across different basins and why you would or would not deploy additional mines into basins other than the Permian?

Bryan Shinn -- President, Chief Executive Officer, Director

Yeah. It's a good question and I would say that in terms of the kind of local supply, let's take the Permian for example, I think, by the end of 2019 the Permian's probably 100% supplied by local 100 mesh, but probably more like somewhere between 50% to 60% supplied by 40/70. So it's kind of one end of the spectrum.

The Eagle Ford is probably 90% supplied by 100 mesh, but much less by 40/70 because of the low quality there. I think, maybe its only 30% or 35% of the 40/70 is supplied locally. So it does vary a lot by basins and we continue to watch those trends.

And, I think, for us we look at capital deployment and we have some really good projects on the industrial side. We have SandBox to invest in, we've got return of cash to shareholders through share repurchases and dividends. And so, for me those are probably the top three places that we might want to allocate capital going forward based on attractiveness.

Chris Voie -- Wells Fargo -- Analyst

Okay. That's helpful. Thank you.

Bryan Shinn -- President, Chief Executive Officer, Director

Okay. Thank you.

Operator

Our next question comes from the line of Lucas Pipes with FBR. Please proceed with your question.

Lucas Pipes -- FBR -- Analyst

Hi. Good morning, gentlemen. I wanted to ask a high-level industry question as well, kind of follow-up, in terms of Northern White, how much more supply do you think has to come out of the market over the course of this year, given your demand assumptions and such. Thank you very much for your perspective.

Bryan Shinn -- President, Chief Executive Officer, Director

Thanks, Lucas and it's a question that we've looked at extensively. And so, look, I'll give you a lot of different numbers here and you can sort of draw your own conclusions from this. But what we've seen at this point is, about 15 million tons that's already off-line and those are some of the higher cost mines in the industry and my expectation is that that capacity probably never gets started back up.

There's another 10 million to 15 million tons which is what I'll call idled, but it's hard to get your hands around because it's a shift here or shift there instead of working 24/7 at a mine, perhaps you're only working five days a week, those kind of things. So, we think that represents about 10 million to 15 million tons.

And then my personal belief is that we need to get out about another 10 million tons of capacity to start to rebalance things a bit. I think that today as we stand with that sort of 15 million tons idled -- sorry 15 million tons shut and 10 million tons to 15 million tons idled that puts us somewhere around 50 million tons to 55 million tons of Northern White supply. And then if we take out that extra 10 million tons that I talked about, that gets us to 40 million tons or 45 million tons and that seems like a kind of a sustainable level based on industry demand.

And when we look at Northern White demand, and I apologize for the long answer here, but I think this is important and I know a lot of people are interested in this, Northern White demand assuming we're at $50 oil is probably about 20 million tons to 25 million tons. So, said another way that Northern White capacity of 50 million tons to 55 million tons is about 50% utilized at $50 oil. We think the demand goes up at $70 oil and probably is -- capacity is about 70% utilized.

So, long story short, if you want the really short version here, $50 oil equals 50% utilization, $70 oil equals 70% utilization. That's the shorthand that I use to remember it, but I just want to give you all the kind of the math behind that so you can compare that to your own models and what you're hearing from others out in the industry.

Lucas Pipes -- FBR -- Analyst

Both the long and short version is very helpful. A quick follow-up. How soon would you expect those additional 10 million tons to come out and what's the trigger? Is it contracts rolling off either on the customer side or say like there's a transportation provider with rails? Is it pricing related? Does pricing have to drop further in order to disincentivize that capacity? How do you see this playing out over the course of this year?

Bryan Shinn -- President, Chief Executive Officer, Director

So, I think there's a couple of things. Obviously, pricing and margin pressure, but I feel like some of that capacity is just kind of companies and mines that are sort of hanging out by their fingernails at this point. So, I think time alone will drive a lot of that.

I feel like there are some mines today that are operating for short periods of time at cash losses. And my experience is in most industries especially when there's not, sort of, a ray of sunshine out there that says boy in six months or 12 months, we can see the obvious driver that's going to bring this capacity back online. Usually in those situations, people kind of fold their tent eventually. So, I feel like we just need a few more quarters of pain and we'll see that capacity come out.

Lucas Pipes -- FBR -- Analyst

Very helpful. I appreciate all the color. Thank you.

Bryan Shinn -- President, Chief Executive Officer, Director

Thank you, Lucas.

Operator

Thank you. Due to time constraints, our final question comes from the line of Saurabh Pant with Jefferies. Please proceed with your question.

Saurabh Pant -- Jefferies -- Analyst

Hi, good morning Bryan and Don.

Bryan Shinn -- President, Chief Executive Officer, Director

Good morning.

Saurabh Pant -- Jefferies -- Analyst

So, again, I think pretty much everything was answered, but I wanted a little more clarification on the volume guidance on the Oil & Gas side. So, I think you said pretty much flat volumes 4Q to 1Q, right. If I were to pass that out across different sand times, right, I think the West Texas volume is still ramping up and based on what you suggested on the last quarterly call right, I think Don you were talking about $4 million run rate in the fourth quarter, going to $6 million run rate in the first quarter right, so on a quarterly basis maybe a 500,000 ton increase 4Q to 1Q right, so does that mean that everything else declines by 500,000 tons roughly speaking 4Q to 1Q? Is that how we should look at it?

Donald Merril -- Chief Financial Officer, Executive Vice President

Yeah. So I think that's generally -- look it's a zero-sum game right, so if we say flattish volumes -- if the local sand volumes are going up then everything else is going down. And so I think that's approximately right. Obviously there's lot of puts and takes here and a lot of time left to go in the quarter, but that will be my expectation.

Saurabh Pant -- Jefferies -- Analyst

Okay, OK, OK. And again without getting into the specifics, but thinking about what margins we should expect in West Texas tons, but secondly we know that one of your competitor just renegotiated its contract side and that's implying about $16, $17 per ton contribution margin, is that a reasonable place to be if you were to think about what you should be getting out of your West Texas tons?

Bryan Shinn -- President, Chief Executive Officer, Director

Yeah. So I feel like that's not unreasonable place.

Saurabh Pant -- Jefferies -- Analyst

Okay.

Bryan Shinn -- President, Chief Executive Officer, Director

We are constantly talking with our customers. We haven't done much or anything I think in the way of renegotiations per se. So I feel like prices are holding pretty well. The other thing that helps us is we've got Sandbox, so a lot of our West Texas customers are either currently using Sandbox or planning to use it in the near future.

So all that helps and I also think that the service that we can provide with Sandbox and the lack of nonproductive time is really a big benefit and that's a major cost advantage for our customers.

For example, I was talking with an energy company customer about two weeks ago and they told me that all the vendors they have across their entire company, they felt like Sandbox was the best vendor that was serving them.

So to me that's the kind of service that we bring and that's real money, real benefit for our customers, and so I think it gives us a bit of an advantage too, sometimes customers are willing to pay a little bit more if in the end of the day for example that they have zero NPT, which we've had with a number of our Sandbox crews that's worth millions of dollars a year to those customers. So I think we have an advantage versus a lot of our competition out in West Texas.

Saurabh Pant -- Jefferies -- Analyst

Right. No, that's totally -- I totally agree with that. I think that's showing up in your 24% market share right. That's higher than anybody would have expected at this point, I think. Okay. So, I think that's it for me guys. Thank you. I'll turn it back.

Bryan Shinn -- President, Chief Executive Officer, Director

Okay. Thanks.

Operator

Thank you. We have reached the end of the question-and-answer session. Mr. Shinn, I would now like to turn the floor back over to you for closing comments.

Bryan Shinn -- President, Chief Executive Officer, Director

Well, thank you very much. I'd like to close today's call by thanking everyone who helped us deliver on our key objectives in 2018. I think, we had a strong year and we're off to a good start in 2019. Certainly we have a lot of exciting opportunities ahead. We got a chance to talk about many of them on the call today. And I look forward to talking with all of you next quarter. Thanks for dialing in and have a great day everyone.

Operator

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.

Duration: 56 minutes

Call participants:

Michael Lawson -- Vice President of Investor Relations and Corporate Communications for U.S. Silica.

Bryan Shinn -- President, Chief Executive Officer, Director

Donald Merril -- Chief Financial Officer, Executive Vice President

Marc Bianchi -- Cowen -- Analyst

Ken Sill -- SunTrust -- Analyst

George O'Leary -- Tudor Pickering Holt -- Analyst

Stephen Gengaro -- Stifel -- Analyst

John Watson -- Simmons -- Analyst

Chris Voie -- Wells Fargo -- Analyst

Lucas Pipes -- FBR -- Analyst

Saurabh Pant -- Jefferies -- Analyst

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