Q3 2019 Earnings Call
Greetings and welcome to the U.S. Olga third quarter 2019 earnings call.
At this time, all participants are in listen only mode.
Brief question answer session will follow the formal presentation, if anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded it is now my pleasure to introduce your host Mr., Michael losses, Vice President Investor Relations and corporate communications. Thank you Mr. Wilson you may begin. Thanks, good morning, everyone and thank you for joining us for U.S. Silicas third quarter 2019 earnings Conference call with me on the call today, our brand Chen.
<unk>, Chief Executive Officer, and Don Merril, Executive Vice President and Chief Financial Officer.
Well, we began the electrified all participants that our comments today will include forward looking statements, which are subject to certain risks and uncertainties are complete discussion of these risks and uncertainties encourage you to read the company's press release and her documents on file with the FCC.
Additionally, we may refer to the non-GAAP measures of adjusted EBITDA and segment contribution margin. During this call. Please refer to todays press release or a public filings for a full reconciliation of adjusted EBITDA net income and the definition of segment contribution margin.
Finally during today's question and answer session would ask that you limit your questions to one plus a follow up to ensure that all who wish to ask a question that may do so.
I'd now like turn the call over to our CEO Mr. Bryan Shinn Bryan.
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.
Well then outline the actions, we're taking to execute on three strategic priorities for U.S. silica.
Finally, I'll conclude my prepared remarks, well the outlook for both of our operating segments before turning the call over to our CFO , Don Merril to review quarterly financial highlights.
So the total company third quarter revenue $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 billion.
Attributions 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. It even p. budget exhaustion slowed completion activity, resulting in lower demand and pricing pressure.
We started to experience its 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 then 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 three of our top priorities for the business today.
Those are accelerating organic growth in the eyes P. business.
Effectively deploying our oil and gas assets.
And finally prioritizing free cash flow.
On a priority to accelerate organic growth and our eyes P. business, we continue to make good progress.
Focus is on increasing our presence and our product offerings, especially 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 six years, our glass market cash margin dollars have grown at a 6% CAGR and our fillers and 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 four fold.
Well, we well we 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, all worked granules and our heat treated christodoulides used in high end services are just ramping up.
These are the first two products were scaling up at our new Millen, Georgia facility.
No. One is a converted ceramic proppant manufacturing plant that provides us with a brand new capability to code and heat treat specialty products.
We hosted customers on the Governor, Georgia recently at Melons Grand opening and received very positive customer feedback on the facility our team an outstanding production capabilities.
We also recently completed a small expansion of our find ground silica capacity.
At our facility in Columbia, South Carolina to serve a five year contract with a global fiber glass manufacturer and we started production earlier this month.
Looking ahead I would expect that in the next two or three 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 her playbook for capacity management.
Over the past few months, we've taken approximately 5 million tons of northern white and regional sand capacity offline through a combination of reducing hours worked for completely idling plants.
We're also increasingly coupling sandbox, our industry, leading last mile full service logistic solution.
With U.S. silica sand with a goal doubling company direct sand sales to the Wellsite blender, 20% overall sand sales.
We're also working to reduce the number of Transloads in our network and to optimize our origin destination pairings.
That sandbox, we further reduced head count 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 were having a lot of success, winning new business. In fact, we added 15, new oil and gas customer during the quarter at six 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 are improving collections and extending terms with vendors and we've implemented additional spending controls 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.
Further we remain committed to using our free cash flow to de lever the balance sheet, who 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 potential business slowdown.
It's unclear to us if these actions are being taken in response to a real slow down 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 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 but 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, we'll 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 oilfield 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, sandboxes expecting a strong start to 2020 was an extensive pipeline of new customer opportunities.
And with that I'll now turn the call over to Don Don.
Thanks, Brian and good morning, everyone.
I'll begin by reviewing our operating segment results.
Third quarter revenue for the industrial and specialty product 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 a third quarter of 2018.
As Brian 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 <unk>.
On a per ton basis contribution margin for the industrial specialty segment was $46.52.
10% sequentially and 6% when compared with the third quarter 2018.
The combination of unfavorable product volume and mix, coupled with higher plant costs, including an inventory write off of $1.3 million negatively impacted the third quarter of 2019.
Looking ahead to the fourth quarter, we'd expect the contribution margin their IP segment to decline about 10%, which represent the typical seasonality of the segment.
The oil and gas segment contribution margin on a per ton basis was $12.98 compared with $18 in 17 cents for the second quarter 2019.
Unfavorable pricing in both the proppant sandbox businesses as well as reduced inbox loads were clear headwinds during the quarter.
Additionally, less activity, our sandbox business led to higher logistics costs, however, cost savings, especially with third party carriers lessen the impact.
Finally, we did recover an incremental $5 billion and 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 SGN, a was primarily due to increased legal expenses related to our sandbox litigation and expenses associated with the closing of our Frederic Maryland office.
We expect SDMA expenses to decline about 5% in the fourth quarter as we reduced 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 line completions, our growth projects in both sandbox and our IP segment as well as maintenance capital, we expect depreciation depletion and.
Andy amortization to be flat for the fourth quarter compared with the third quarter.
Our effective tax rate for the quarter ended September Thirtyth, 2019 was a benefit of 25%, including discreet 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 principle 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 might sites next generation equipment for sandbox and several growth products in our industrial 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 stay 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 Brian .
Thanks, Don Operator would you. Please open the lines up for questions.
Thank you will now be conducting a question and answer session and the interest. This time, we ask that you. Please limit yourself to one question and one follow up.
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From the Q for participants using speaker equipment, maybe necessary to pick up your hands that before pricing. Mr. Parties. One moment. Please poll for your question.
Our first question comes from the line of Marc Bianchi with Cowen. Please proceed with your question.
Hi, Thank you.
First question for me guys. The a comment for the fourth quarter about the oil and gas contribution margin per time being down sharply I was hoping you could just put some puts a more numbers around that I mean, our first swaggart. 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.
Hi, Good morning, Mark and thanks for the question I think you're pretty close when we look at October so early indication show.
We're tracking about 45% down in terms of contribution margin per ton, that's 45% versus the Q3 average number so you're you're sort of slag of 50% is pretty close.
Okay. Okay. Thanks for that Brian and I guess kind of flowing that through.
You know, we we get to.
2020 $7 million of of adjusted EBITDA.
Based on the updated DNA, 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 I appreciate that maybe there's some seasonal recovery, but but it's possible that.
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 you could pull too.
To try to lower some of the overhead and improved margins in the business if activity doesn't pick back up.
So we're certainly looking looking hard at our oil and gas business and how we can be more efficient and effective there I think there's a number of things we want to optimize our sand mining in production capacity, we've already done some rationalization of our production network.
I think we'll look hard at at more of that if the market doesn't pick up which by the way look I think our base case is that we do get a recovery in 2020 ones budgets reset in the first quarter and I think that's sort of rhythm that we're in now as a.
North American land the completions industry.
His first quarter starts off slow picks up Q2 looks pretty good cute Q3 early on looks good and then drops off for the remainder of the year. It we've been in that rhythm a two years in a row now and I feel like we'll see that again in 2020. So I certainly don't expect it to multiply Q4 by four and have.
But the 2020.
Outlook, but.
We do a lot of things that we can do in the supply chain if.
If necessary I think we also are looking hard at variabilizing as much of our cost as we can so for example in sandbox.
We have a lot of a third party carriers that do our sand hauling now that used to be we had done a 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 leverage model. There. So there's a lot of different alternatives and things that we can do and certainly are working hard at all of those.
I think we have other playbook in place to deal with that whatever comes in in terms of the market, but as I said our base case is that I think certainly improve in Q1 versus where we'll finish the year here in Q4.
Right, if I could just follow up on that Brian the.
I think you guys mentioned 102 110 million of total cutting industry demand for 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 to 110 demand level is that what your cost structure is sized for right now or if we were in this 100 to 110 world for the foreseeable future.
Can you quantify what sort of cost out opportunity there might be.
So we've already taken taking cost out there for example, as we said in our press release, we have about 5 million tons of capacity that currently offline either from a couple of facilities that we shut down or another handful that we have.
Basically turned back capacity by limiting shifts and reducing work hours I think within our mining.
Facilities, we have a lot of Japan, a lot of ability to to turn back production and certainly across the enterprise.
Well look hard at whatever cost that we need.
Either up or down although in this case is probably more down that up depending on the market conditions.
Got it thanks, very much I'll turn it back.
Thanks Mark.
Thank you. Our next question comes from the line of Stephen Gengaro with Stifel. Please proceed with your question.
Hi, Thank you good morning.
Sure.
I guess two things I think just just to start with weight. When you think about the true medium term and you think about the oil and gas business in Europe .
Your your cost position relative to some of the competition I mean do you do you still think when we look out that.
No one kind of a normalized contribution margin for Tom purely on the oil and gas side without sandbox could look like I mean, do we still think it's no you have that sort of five to 10 dollar plus in that range cost advantage.
Yes, I I believe that's a that's exactly where we are Stephen and now the good news is a that nothing's changed in terms of our.
Position on the cost curve, but when it comes to just purely that the stand 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.
We're struggling we know there a number of mines that have been shut down in west, Texas, those folks who are very high on a cost curve I think there's more capacity that needs to come out and I think it will over the coming quarters.
A lot of our let capable competitors quite frankly are running at a cash loss per ton and I. Just can't continue so I feel like the advantages that we have with our position on a cost curve, but we'll definitely a 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 that energy companies.
That's going to of course of shake out on the sand mining side of.
Of our business and I think will be one of the long term winners for sure.
Hi, Thank you and then.
Second on the on the IP side I mean, you gave some preliminary thoughts on 2020.
When you look at.
Some of the.
Opportunities, you're having a pipeline I think you've identified 200 million of.
Sort of contribution margin opportunities over a five year period is do you have any updates on sort of how the unfolds over over the next couple of years and when we start to see maybe bigger impact of that.
Yes, it's a really good good question and.
We have a number of opportunities in that pipeline and it's a it's a very robust set of new business.
Kennedy's and products and so I think what we'll see is that the front end to that pipeline or some of the products that we talked about here on the on the.
Paired 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 thing in our pipeline. So the CRE subway core granules uncoated silica and other coated products, but there's a whole suite of things. There I think we also have coated.
Tomatoes Earth to may serve as a mineral that we we brought into our ERP minerals acquisition, there's all kinds of opportunities there you'll see it's also.
Grinding and that sort of manipulating some of the physical properties of.
Other minerals that we have I think those products launch over the next one to two years, we've talked about.
Ultra high end filtration things like blood plasma biotech other 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 six to 10, new products that launch and then those products will get in the market and hopefully grow and so as.
We as we branch off into some of these different markets and uses and product families.
We'll see them launch and we'll obviously be able to talk in more detail as we get closer to that.
Okay. Thanks, Thank you for color.
Thanks.
Our next question comes from the line of George O'leary with Tudor Pickering, Holt and company. Please proceed with your question.
Hi, Good morning, good morning Guy.
Good morning, George.
Nice to see that 2020, Capex guide I realize it's early in your based 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 I SP and sandbox I assume there's not much on the oil and gas side at many outside of sandbox.
Oh sure George So if I look at that let's say, we're kind of with 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 the growth Capex. So that's 2020 5 million set 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 that growth Capex now.
No we were probably going to get asked but by some investors.
Good question are we to limiting our industrial growth through this big pipeline that we have by cranked back on capital on the good news is that I don't think we are at all.
Most of the IP growth opportunities that we have our are not capital intensive it's one of things I like about our pipeline and even with our reduced capex in 2020, I think we can fund all of the central growth programs that we need for the company.
Great Thats very helpful color.
It seems just given the magnitude of that declines and completions activity in September and it looks like October is coming in a relatively soft to your point you originally as or from marks question, the volume guidance and 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 or do you guys contemplates a market share capture given your lower cost position in that guidance.
I think we'll continue to capture share I believe we captured some share in Q3 and as you said it given our position on the cost curve I think we'll 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 to still be profitable and go after those tons and I think many in our industry will not be able to do that.
All right I'll turn it back over thanks to the color Brad.
Thanks George.
Thank you. Our next question comes from the line of Tommy Mall with Stephens Inc. Please proceed with your question.
Good morning, and thanks for taking my question.
Hi, good morning Tommy.
Wanted to start on oil and gas pricing.
If you could give us any context on the.
Potential divergence and trends, you've seen and northern white versus Texas.
In Q3, and or Q4, and then you 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 is really seasonal where maybe people are trying to stretch.
Through the end of the year keep utilization up with the hope a rebound next year and that if that doesn't materialize. It maybe some of that capacity will come out or do you think the pricing you're seeing is this.
More a pure reflection of the actual fundamentals at this point.
Okay. 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.
It's really interesting it I think weve.
Weve written or maybe people have written the the demise of northern white sand sort of over and over again, but but it still is holding in pretty well in the market was looking back at some of the 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 .
We saw 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 2018 were actually at 75% of that.
Year to date in northern White, so so there's a lot of northern white volume out there and I think we're extremely well positioned to continue to be successful there west Texas. So your question around what did price look like they're more pressure for sure it was down about 15% sequentially.
So I think that that's the trend that's a 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 Oh. So 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, we're operating at a cash loss.
For a variety of reasons, so I feel like Theres capacity that has to come out there in west Texas. My expectation is that we'll see another 10 to 15 million tons come offline by our math is already seven mines that are closed and I think there's more to come over the next couple of quarters here.
Thank you and then shifting to high ASP you mentioned.
That for some of the major end market your strategy has been.
To lift margins.
On some volumes that are actually and decline.
Can you take us through the thinking there and maybe give an example are two of what that looks like.
So one of our key strategies in the industrial businesses to understand where where the value is for our products by application and by customer and then really make sure to push and direct our our volumes to the customers that have the most value for it and.
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.
Every year for the last several years have put out a a general price increase across all our non noncontract tons in the industrial business and as prices have have stuck very well and I know many people look at our sand business and think it's a commoditized business, but on the industrial side for sure it'd be.
Hey, it's much more like a specialty business since we routinely get get price across a wide set of 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 haven't and the other side of that coin is allowing.
And our competitors to take their less profitable customers. So that's the point we've made a couple of times and you just said at a second ago in many of our markets the volumes going down, but our contribution margin dollars have gone up because we've eliminated the less profitable customers quite frankly.
Great.
Appreciate it and I will turn it back.
Okay. Thanks Thomas.
Thank you. Our next question comes from the line of Chase Mulvehill with Bank of America. Please proceed with your question.
Hey.
Good morning, I guess, the first point ways to hit on really good morning, I just wanted to hit on the Inst.
And if I recall I think previously you guys adult maybe you can get a 10% cagar.
Oh contribution margin growth Sona on annual basis, if I heard you correctly on the call and correct me, if I'm 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.
It is the you know the slower kind of gross is it more ETP minerals or the legacy items tea business.
So it's really none of that per Se chase I feel like it's it's just conservatism on our part given its kind of the global macroeconomic backdrop I feel like it's that more than anything we mentioned in our prepared remarks that we started to see some a handful of customers on the investor.
Real side in Q3, and its persisting into Q4 customers are being cautious with their orders trying to manage their inventory and managed our cash and as we bore into that it. 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 and Brexit and the election coming up in the U.S. next year in five of the things that we'd all.
I agree on our sort of unsettling trends out across the broader industrial landscape. So I think theres a lot of that and so when we said in our comments, we expect industrial business to be sort of flat to slightly up its really would that thats kind of the macro backdrop look I think we we have.
A lot of new products coming we have a lot of things to be excited about there, but if if that sort of a scenario unfolds, where the sort of global economy is the sluggish or or starts to head towards a recession. We're we're in so many different end uses of so many markets, what we would certainly be impacted by that.
And to be hard to to fight that 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 of just kind of a macro.
Sentiment right now.
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 in all of a sudden so some of the the macro Malays disappears, you'll hear us be a lot more bullish around the opportunities for for growth in the end.
That's true business.
I guess the other thing to to recognize it when we said no 10% CAGR that's over over a period of time right. So if you look at where we'd been over the last six years, we've been well north of 10%, but now some years, who might be up 15% some years or might it will be up 5%. So there's some puts and takes in there as well.
Okay that makes sense I appreciate the color there and I guess, if we think about the write downs in NSP had some inventory write downs was that 18 minerals or legacy I NSP.
Yeah, there was a legacy IP plant, where you know as we as we uncover more or.
Mine planning came back to us and said that look we're not getting as much or out of this mindset is what we originally thought so it really was a geological issue that we had to write down some of the reserves.
Got it makes sense and one real quick one if I could squeeze one more in.
If we think about you know the potential to accelerate debt pay down.
Is there any you know asset sales that you could did you see out there for you that could maybe accelerating debt paydown.
So we're always looking for opportunities to to monetize assets that might be worth more to somebody else spent than they are to us.
I think a great example of that was a couple of years ago, We sold two of our Transloads for $75 million right. So.
We buy things will sell things certainly all that is in play I think.
Also there was 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 sandbox competitor and others, a few others out there a percolating as well so there's lots of different opportunities too.
To define extra cash that's not sort of normal.
Within our normal operating rhythm.
That said I think I think the way we're viewing to chase is we're committed to to paying down our debt. We're committed to delevering the company and given this kind of quarterly rhythm that were 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 it quarter by quarter activity, depending on the free cash flow that we have and so that's how we're how we're looking at it and certainly asset sales are these other onetimers that could netis.
Some some windfall cash are certainly things that are that we have in mind as well.
Okay, perfect and I'll turn it back over thanks, Brian .
Okay. Thanks, Jason.
Thank you once again.
Your question. Please press star one on your telephone keypad for participants using speaker equipment, maybe necessary to pick up your hands that the four pressing the star Keys. Our next question comes from the line of John Watson with Simmons and company. Please proceed with your question.
Thank you good morning.
Hi, good morning, John .
Hey, Brian .
On the sandbox front is there an update that you can share regarding some of the opportunities outside oil and gas you're exploring.
Sure. It's a great question I'm glad you brought it up we didn't have a chance to talk about that yet.
We've got to 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 very strong interest from our customer base and I expect that as I said, we'll have an opportunity to talk more about that.
Perhaps on the next earnings call if not sooner so.
Great 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 users so stay tuned for that I think there's more opportunities for sandbox than than what it does today for sure.
Okay understood.
On the Q4 guide front <unk> contribution margin per ton within oil and gas declining as you discussed with Mark do you expect your average price in West Texas to decline from the 20 dollar number you cited in Q3 I understand you expected to rebound in 2020, but should we be modeling that moving lower.
Yeah in Fourq you.
No I think what you heard as day on the done the $20 average price. We believe that's where it's going to stabilize. The then you know as we move into Q1 Q2 get actually the a little uptick there.
So I think we're starting to see a bottom of pricing in west Texas.
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 fourq you given the trajectory of of loads and thinking about Q4 is somewhat anomalous given the holiday slow down et cetera.
Yeah look where we are seeing some pricing pressure in into inbox, but again kudos to the sandbox team, where they were able to offset about 75% of that have that price decline in Q3, and I would anticipate that they continue to do that it into into Q4.
And just the just to add on to that John I think there's been a lot of debate amongst our investors this too.
Whether sandbox is going to be able to sustain other margins that that it's held for the last couple of years and I think what's happened in Q3, and what we'll see in Q4. It 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 too.
Offset any additional pricing pressure that we get and try to keep margins per ton as flat as as possible.
The competitive intensity, there's obviously much different than than the sand market as well when it comes to containers.
Really there's there's much less competition and a lot of.
A lot of our customer one containers are moving in that direction and so I think we're very well position to be able to maintain margins there in a much different way than we are in the and the sand business quite on.
All right that's helpful. Thanks, Brian Thanks, Don.
Thanks, John .
Thank you. Our next question comes from the line of JP, while with Citi. Please proceed with your question.
Hi, good morning, guys.
Just wanted to Jay.
Just a quick follow up on the on the sandbox discussion.
You know you're able to pull some levers to take some costs out of the business part of that's being third party hauling is that I guess the question is what percentage of your loads do you think.
You are 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 induced do more internally and I guess on the flip side once that business starts to expand the completion activity comes back.
There is there kind of a base load of internal hauling that you guys want to keep.
And kind of how about flexibility in the third party side or is are you kind of trying to move into different direction.
So it's a very very good question and I think that when I talk to the sandbox team, they're looking to keep a base load of maybe 30 or 35% of the of the tons that we hall ourselves and then the rest we work with third party partners.
And the kind of agreement that we have with their third party partners is to have profitability go up and down a bit certainly when when things are tighter they're willing to give some cost back I would also expect that as the market picks up.
Will will allow a lot more profitability of flow to our partners I think that that keeps everybody a happy throughout the cycle and so we have some really good relationships, there and I feel pretty confident about our ability to to manage that.
The team over there just as a fantastic job.
Looking at at the the carriers I think the.
The 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 have put profit center in quotes but.
The head of each of our districts sort of view that as their own business locally and they sort of run it that way so that they've got to the just the eagleeye. If you will on costs and margins and everybody that works in that district knows what the business specifics, our 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.
That's helpful. Thanks, and given that kind of geographic.
Segmentation are there any areas that you're seeing more pricing pressure on sandbox.
Than others and that is it more from.
No competitor container systems are from silo system, just any color you could provide there would be great.
I would guess that other probably just because of the competitive intensity and the amount of competitors are probably in the Permian is a little bit more pressure than some of the other basins, but.
But.
I really don't view a lot of the other silo folks out there as competitors, what we tend to to be.
Back and forth more where the silo systems and.
As a as I remarked before it seems like when we want and talk to customers in the oilfield space almost like the 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 a box of folks the customers it really want boxes.
We've been able to hold up pricing pretty well there.
Okay, that's what I figured I'd. Thanks, so much guys.
Thanks JB.
Thank you. Our next question comes from the line of Lucas pipes with B. Riley.
Your question.
Good morning, everyone on Mackie, you're asking the question for Lucas just a quick industry question for me Hi is gone how much total capacity do you think needs to be taken offline across the industry for frac sand price into kind of begin to stabilize I. Appreciate your color. Thank you.
So I think it's.
There's northern White and then there's.
Let's just say Permian because those are the two big areas.
I feel like we need to have another 20 million tons of northern white come out to really balance things and another upright.
15 million tons of up Permian sand to tighten things up so, let's say, let's say 35, maybe 40 million tons in total across a across the industry to bring things back into balance.
Got it that that's very helpful. Thank you and you mentioned silica would potentially make additional curtailments of pricing doesn't improve would those cuts be primarily in the northern white or kind of Permian or would it be of combination of both thanks.
So we're taking a look across our system and its as you might imagine it's more complicated than just sort of looking at.
Mines in a specific basin you have to to really think about where each mine is located and what the transportation and logistics are from from that mine.
So if you have a northern White mine, you think about which railroads that located on what Transload networks for you connected to et cetera, and then we also have to when we think about northern white, we have to remember that that those tons, you 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 of our team has a I think it really good.
Rubric too to do that and we continue to monitor that very closely and we'll take whatever actions, we need to take depending on where where demand is.
Got it well, that's very helpful and best of luck and going forward.
Thanks, Matt.
Thank you there no further questions at this time I would like to turn the call back over to Mr., Bryan Shinn for any closing remarks.
Thanks, operator, I'd like to close todays call by Reemphasizing that we're focused on a few key priorities, namely accelerating organic growth in the IP 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.
We may or may not close or changes we might not we may may decide to make so that's obviously important for us and then the third is.
Maximizing profitability and prioritizing pre cash flow I think we've re committed again to delevering, our balance sheet and buying back debt. So theres a three to three key priorities that almost everyone. 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 have to say I remain very excited about the prospects for our company, both short and long term.
Thanks, everyone for dialing into our call and have a great day.
Thank you. This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.
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