Q4 2019 Earnings Call

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Greetings and welcome to the U.S. silica fourth quarter and full year 2019 earnings conference call.

At this time all participants are they listen only mode. A question and answer session will follow the fall 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.

I would now like turn the conference over to your host Mr., Michael Lawson, Vice President of Investor Relations in corporate communications for U.S. Olga thinking that you may begin.

Thanks, Good morning, everyone. Thank you for joining us for U.S. Silicas fourth quarter and for your 2019 earnings Conference call with me on the call today, or Brian Chen 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.

<unk> 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 FCC.

Additionally, we may refer to non-GAAP measures 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 to net income and the definition of segment contribution margin.

Finally during today's question and answer session, we'd 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.

With that I'd now like to turn the call over to our CEO Mr. Bryan Shinn Bryan.

Thanks, Mike and good morning, everyone I'll begin today's call by reviewing our fourth quarter performance and highlighting key accomplishments in 2019.

Ill then provide updates on our three strategic priorities for 2020, and our commitment to sustainability and environmental stewardship.

I'll conclude my prepared remarks today with a market outlook for two operating segments, industrial and specialty products and oil and gas.

Don Merril will then provide additional color on our financial performance before we open the call for your questions.

For Q4 total company revenue were $339.1 million represented a sequential decline of 6%.

Adjusted EBITDA for the fourth quarter was $73.6 million, which included a net $52.3 million other customer shortfall penalty.

Compared with $58.4 million of adjusted EBITDA in the third quarter of 29 team.

And our industrial especially products segment, we experienced a normal seasonal decline plus overall weaker demand due to market conditions and the ongoing Asia trade dispute.

Customers slowed purchases at the ended the year to manage inventories.

This customer cash generation effort was more focused perhaps than in past years. As a result contribution margin. In this segment was down approximately 12% on a year over year basis sales and margins are rebounding in Q1 as expected.

Oil and gas proppant volumes declined 14% sequentially in response to lower activity levels and normal seasonality related to holidays and S&P budget exhaustion.

Pricing continued under pressure throughout the quarter, particularly in West Texas.

We have however seen prices improve in the first two months of this year.

Given that local sand continues to displace legacy capacity, we prudently idled additional sand proppant capacity in the quarter, bringing our total capacity currently offline to approximately 8 million tons.

We will continue to manage our capacity as the market evolves.

I believe that the stand industry is behaving, though in a disciplined manner as we have not seen additional capacity reactivated in response to stronger than expected demand to start 2020.

Expect that U.S. silica will continue to prioritize higher prices over additional sales volume in Q1.

Sandbox load volumes declined 18% sequentially in line with lower completion activity in the market.

As a result, we experienced modest downward pricing pressure in the quarter.

We ended the year with approximately 24% market share of delivered oilfield sand and a robust pipeline of new business opportunities to pursue in 2020.

For a broader perspective in 2019, we continued to build invest and transform U.S. silica for long term success.

We converted a former ceramic proppant plant in Millen, Georgia to manufacture new high margin high performance products to meet growing customer demand.

We expanded milling capacity at our industrial facility in Columbia, South Carolina, which enabled us to secure new business and the long term contract with a major customer in fact, we nearly doubled capacity to produce our finest ground specialty products last year, we just $2.5 million of Capex, a great example of how.

We can organically grow our IP business with modest capital investment.

We invested in next generation equipment for sandbox, expanding box payloads and offering customers a new gravity fed stand that is quieter required less maintenance and is less expensive to make and we signed several new long term contracts with blue chip customers and our energy segment, which will provide a springboard for growth going for.

Forward.

We also took significant steps towards rightsizing, our oil and gas proppants business, reducing the size of our logistics footprint headcount and capacity to better align our business with the current market structure.

And perhaps most proud of the fact that our team in 2019 recorded the safest year during my tenure at U.S. silica.

We achieved a total recordable incident rate of 0.86, a 38% reduction from 2018 as well as the last time rate 0.18, a 19% reduction from the previous year.

I'd like to congratulate my 2000, plus colleagues, who completed our belief based safety workshops across the enterprise and achieve the stellar accomplishment well done.

Let me now turn to the progress, we're making on our three strategic priorities for 2020.

Generating free cash flow.

Repositioning, our oil and gas business and growing our industrials business.

Late last year, we announced a 10% reduction in headcount to improve efficiencies and better align operations and support staffing with the current challenges in our energy businesses, delivering annualize SDMA savings of approximately $20 million.

We minimize our planned capital expenditure for 2020 to a range of $30 million to $40 million.

We've increased asset efficiency and are driving to the lowest cost on basic products through increased automation and weve right sized plants, while continuing to shift the mix of our industrial business to higher margin products.

From a cash management perspective, we have an intense focus on optimizing working capital, including accelerating collections negotiating better terms with key vendors and improving inventory management as well as monetizing noncore assets wherever possible.

We've also made good progress on our second strategic priority, which is to reposition our oil and gas business.

As I stated earlier, we've executed steps to rightsize production.

We're continuing to optimize our network by eliminating sub optimal shipments and exiting high cost transload sites, while renegotiating transload fees and rail rates.

We also staggered railcar leases with 1100 cars rolling off this year and 900 more rolling off lease next year. Moreover, we're developing new low cost rail routings and our maximizing barging keep us on the very low end to the cost curve.

In terms of our third priority growing our industrials business I'm very pleased with the work better ice P. team had done delay a path for growth.

Once again, we've implemented price increases for most of our non contracted silica sand aggregate died tenacious earth and clay products.

We continue to shift our IP business towards higher margin products and are pursuing several growth platforms. For example, we using new milling technology that delivers expanded capabilities. We're also targeting new high value not in kind markets, where customers are looking for an effective alternative to existing offerings.

We have several new products in various stages of customer trials in many cases, the sales cycles for these new products, our long, but we're getting traction and making very good headway.

Our plan is to increase the base business through price and share gain focus on launching our new higher margin products and grow opportunistically to small tuck in adjacent acquisitions.

Let me now provide you with an update on our major SG initiatives.

Being a leader in sustainability and environmental stewardship is core to use silica and the value that matters deeply to our employees, our stakeholders and to me personally.

This commitment to sustainability includes stewardship of water one of our most precious resources, we continue to advance our water conservation and recycling efforts. For example, we invested over $5 million last year, and our Jackson, Mississippi facility and reduced our water consumption by 37 million gallons annually.

We're also committed to reducing energy consumption for example in Lovelock, Nevada, we shifted to energy efficient lighting technology and variable frequency drives for key equipment.

These changes substantially lower energy cost and we'll save approximately 1 million kilowatt hours of electricity annually and left to power about 100 households for a year.

We have a terrific team at U.S. silica and they're well being continues to be a primary focus also.

In 2019, we partnered with.

Oh gosh, the National Institute of Occupational safety and health identify unexpected dust sources and reduce exposure for our employees.

Finally, we continue to develop low environmental impact products for our customers. For example, our organic pesticide defect has helped us branch out into the commercial agricultural business showing significant success over the past two years.

Because it's made up of minerals rather than chemicals.

SEC is not harmful to the environment and doubled as a soil amendment to improve organic plant growth.

Let me conclude my prepared remarks today with the market outlook for both of our operating segments starting with industrials.

Based on recent reports from the Federal reserve and others, we believe that downside risks to the us economy have receded.

The U.S. job market and consumer spending remains strong and were relatively optimistic but the overall strength of the us economy in 2020.

Further strong job market continued us population growth are constructive for homebuilding and remodeling both important positive indicators for our industrial business.

On the flip side light vehicle sales in the us beer and wine markets are forecasted to contract in 2020, creating headwinds for some of our silica sand and died tenacious earth product offerings.

Further we're carefully watching for potential impacts from emerging global health and trade issues.

All in we believe that our industrial business can grow profitably at a rate of two to three times GDP in 2020, driven by a combination of higher volumes continued price increases and new product introductions.

Oil and gas we're off to a good start in Q1, we expect to continue to prioritize pricing and profit per tonne over incremental sales volumes for oilfield sand and do not plan to return idled capacity to the market.

Accordingly, I think we'll sell between 13 and 14 million tons of Frac sand in 2020.

For sandbox, we anticipate that low volumes will be flat to slightly down year over year and that pricing pressure will persist, but not worsen.

I also expect their energy energy business in total to mirror. The last two years in terms of the seasonality of profitability as customers continue to stay disciplined and spend within their cash flows throughout the year.

After taking all these factors into account I expect that the current street consensus adjusted EBITDA outlook of 165 to 170 million.

Is it reasonable, but conservative estimate for total company profitability in 2020.

We expect update our 2020 outlook as the year progresses.

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

Thanks, Brian and good morning, everyone.

The adjusted EBITDA for the fourth quarter was $73.6 million and as Brian stated. This figure includes a net 52.3 million dollar customer shortfall penalty that was recorded in the quarter. The amount recorded is an estimate based on current negotiations and could increase or decrease we cannot comment further on this but we will keep you.

Informed as changes occur.

During the fourth quarter of 2019 like the fourth quarter of 2018, we experienced a sharp decline in customer demand for northern White Frac sand and for regional non in basin Frac sand has more tons were produced and sold and based.

Unfortunately, this contributed to a significant decrease in frac sand pricing.

Given the changes in demand and customer preferences for in basin sand. We also experienced a decline in the utilization of the sand railcar fleet in our Transload network and the overcapacity industry wide of this type of railcar grew even more.

As a result of the triggering events described above we impaired $363.8 million of assets in the fourth quarter, consisting of 243.1 million related to property plant and equipment 115.4 million related to operating lease rate of use assets and 5.3 million related to it.

Inventories and intangible assets.

The bulk of the property plant and equipment impairment charges were related to facilities that have been idled or our operating at reduced capacity, including Tyler, Texas, Sparta, Wisconsin, and Utica, Illinois.

The operating lease rate of use asset impairments are entirely related to railcar leases.

As of December 30, Onest 2019, we maintained a fleet of 6979 leased railcars of which 2271 we're in storage.

In 2020, we expect approximately 1100 railcars to roll off lease.

Moving onto the results of our two operating segments fourth quarter revenue for the industrial and specialty products segment was $104.8 million down 12% from the third quarter of 2019 due largely to the typical seasonality we see in that segment.

As mentioned earlier the IP segment is off to a good start in 2020 and the first quarter should look like quarter three of 2019.

The oil and gas segment revenue was 234.3 million down 3% from the third quarter of 2019, due largely to a 14% decline in frac sand volumes of pricing reduction of 20% offset by the previously mentioned shortfall penalty.

On a per ton basis contribution margin for the IP segment of $46 in 45 cents was essentially flat versus the third quarter. Despite the 12% reduction in volume.

The oil and gas segment contribution margin on a per ton basis was $20.22 compared with $12 a 98 cents for the third quarter 2019.

The increase is due to the customer shortfall penalty offsetting the impacts of lower volumes and pricing.

Let's now look at total company results.

Selling general and administrative expenses in the fourth quarter of $37.3 million represented a decrease of 7% from the third quarter of 2019.

This decrease was largely the result of lower employee costs due to headcount reductions, partially offset by higher noncash equity based compensation expense.

We believe that SDMA expense will total approximately 125 million for the full year 2020, due to the head count reductions announced in 2019 and our other cost cutting initiatives.

Depreciation depletion and amortization expense in the fourth quarter totaled $42.8 million down 9% from third quarter of 2019.

The decrease in DDNA was mostly due to the reduced depletion expense driven by idled plants.

We estimate that DNA to be roughly $185 million for the full year 2020.

Our effective tax rates for the quarter and year ended December 30, Onest 2019 were 24% and 23% respectively.

At this point in the year, we anticipate a tax benefit of about 23% in 2020.

Moving onto the balance sheet.

As of December 30, Onest 2019, the company had $185.7 million in cash and cash equivalents and 93.5 million available under its revolving credit facility, resulting in total liquidity of $279.2 million.

Our net debt at year end was 1.05 billion and our term loan has a maturity date of 2025.

Capital expenditures in the fourth quarter totaled $20.5 million and were mainly related to growth projects in our ISP segment as well as spending on equipment to expand our sandbox operation and other maintenance and cost improvement projects.

We expect to keep capital expenditures in the range of $30 million to $40 million in 2020 and be funded from our cash flow from operations.

Lastly, I'd like to comment on our capital allocation policy as you know, we recently elected to reduce our quarterly dividend to two cents per share. We did this to better align with our strategic priorities and felt that this action was appropriate as it will free up additional cash that can be used to reduce our leverage and grow our higher margin industrial and logistics businesses.

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

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

Thank you we will now be conducting a quite low enough more louder.

We are now conducting a question and answer session and the interest of time, we ask that you. Please limit yourself to one question and one follow up if you would like to ask a question. Please press star one on your telephone keypad.

Information tonal indicate your line is in the question Q. You May proceed start to if you'd like to have your question from the Q for participants using speaker equipment, maybe necessary to pick up your hands before pressing the star Keith one moment. Please we pull for your question.

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

Thanks, Good morning, gentlemen.

Thanks, David.

I guess two things well, let's start with is.

I know we're hearing a lot.

About in basin capacity right now I know you mentioned in the press release that.

The two mines on there are among the highest utilized.

In Texas can you talk about what you're seeing from a from an m. basing capacity perspective, and also sort of how that's impacting the pricing situation down there.

Sure, Steve and so if I think about the Permian, which is where we usually.

Speak to when we're thinking about in basin capacity, given that's where most of it is no I sort of think of it. This way I think the for total supply that got installed is something like maybe 75 million tons.

What I would call the kind of capable supply the sort of realistic supply that could be out there is more like 60 million tons and what we've seen today is that what's active is probably closer to 50 million tons.

So if you look at that opposite the demand I think.

As we exited Q4 and entered Q1 demand was probably in the 40 to 45 million ton range. So we're starting to get the pretty tight relative to the the active supply that's out there in the Permian today.

Okay. Thanks. Thank you and then as we think about the I ISP business and.

The contribution margin per Todd numbers, as we as we kind of roll forward here.

Sure does that number advance a bit as some of these new new product lines are introduced and is that more of a 2021 event or or is that going to impact 2020 much.

So I think what we'll see is that we'll continue to launch a series of new products all of which have very high contribution margins at the same time. There is some legacy demand that is rebounding a bit and that legacy business tends to be at a bit lower margins than the average that we see today.

Okay. So I think we'll see kind of a balancing act going forward and it really depends on.

How fast the new products get launched and how much extra demand we get from some of our legacy customers. We've had a couple of big contracts on the legacy side that we signed recently and so that would be.

Obviously very accretive to overall contribution margin, but somewhat dilutive to the total so I think it will be sort of plus or minus is I model. It I would say, it's it's pretty flat going forward for the next.

Several quarters as we kind of play out this balance between new products and some some legacy products.

Great. Thank you.

Hey, Thanks, David.

Thank you. Our next question comes from the line of Tommy Mall with Stephens Inc. Please proceed with your question.

Hey, Good morning, this is actually Cameron on for Tommy.

Cameron How're you doing this morning, the well thank you.

I wanted to start with high SP and some of the growth opportunities you guys are going to be investing in going forward.

It looks at right now I speeds about a third revenue how do we see that.

Growing going forward.

Into 2020 and 21.

And any color you can give there will be helpful.

Sure. So I think over the next.

Two years, we'll see a number of of new products get launched and that's really what's going to drive.

A big chunk of our revenue growth in the industrial business. If you look to the pipeline that we have today for new products, it's about $200 million an annualized contribution margin per ton. So these are all things that are kind of working their way through.

In the last 12 months, we've launched products, which we think have the potential to generate about 20 million tons of annualized contribution over the coming years as they scale up and then we've got another about $18 million of annual contribution margin generation in what we recall scale up they are close to being law.

Launch, but not officially launched yet and I was actually looking back at the at the products that have been launched I do we get a lot of questions from investors on what what's actually come out and just to give some examples.

We've got a consumer product.

It looks really interesting.

It's actually causing us to add some new production equipment at one of our facilities that we have a long term contract there with a leading consumer product company and I think thats going to be very interesting product.

We've launched a high end filtration product a new one a new specialty filler on the de side, when we say fillers, we're talking about.

Products that go into the compounding market. So resins polymers paints coatings those type of things are still light for the courts countertops, we've talked about that quite a bit and we'll see that ramp up over the next couple of years. Then we have a couple are really cool high end specialty products one for high end ceramic manufacturer and one for the aerospace.

Industry. So I think we'll start to see more of an impact from these products in the second half of this year and then it should ramp up as we go through.

2021, so very excited about the the product that we have fared products that we have here Cameron and we'll definitely start city effects in the coming quarter. That's great. Thank you.

And then flip into oil and gas.

Up in demand looks like it'll be about 5% year over year in 2020.

If you could maybe talk about some of the things that are giving you confidence in that and then do we think that could be accretive to contribution margin per ton.

Into 2020.

The proppant market is is really interesting.

As you kind of step back in and look at it I think theres several several positive starting to emerge we've certainly seen at west Texas capacity.

A lot of it get get idle that we've seen other capacity come out of the market over the last couple of quarters. You. A silica for example is idled about 8 million tons of capacity in lot of our competitors have done the same thing.

And so I think that will help drive some rationalization in the market and certainly from our perspective, we're prioritizing higher sales prices over incremental sales volumes here in Q1.

Just generally across the industry I see a lot of discipline.

In the San space, right, now, which I think is good.

But to your point, we're seeing demand pick up a pretty strongly here in Q1, we think completions and stages are headed higher we've seen some estimates that suggest that 10% increase plus or minus in Q1 versus Q4 in terms of completions and stages. So thats all positive for proppant demand.

I think we'll see our our volumes up a few percent sequentially here as we go from Q4 to Q1 again, we're really trying to focus on pricing as opposed to getting that last.

Incremental sales ton I guess, the other comment I would have on on 2020 is that we'd expect to see the same kind of seasonality of NP spend as we've seen in 2018 and 2019. So so just to be specific I would expect that spend in Q1 will be okay Q2 in Q3 will be much higher.

Okay, and then as we get into the fourth quarter things will fall off we've seen that trend for a couple of years now and my guess is that persists here in 2020.

Great all right. Thank you so much and I'll turn it back.

Thanks Cameron.

Our next question comes from the line of Kurt Hallead with RBC capital. Please proceed with your question.

Hey, good morning.

Hi, Karen good morning.

I appreciate that great summary, there.

Hey, Brian.

Question for you just on the competitive dynamics.

Within the oil and gas business, especially as you look at sandbox.

I understand that there are few different.

Dynamics out there that are altering the way that sand is being distributed on a.

In basin dynamic you have I guess, some conveyor belt system that supposedly out there and any of this mobile processing unit. That's that's out there.

Just wanted to kind of gauge get your get your feel on how that's impacting sandboxing, what you may be doing to combat that.

No. It's a really good question Kurt.

I think is as we step back and look at at Sandbox. We've we've gained share a very quickly in the market. We think we're at about 24% today market share and so the step back and think about that that means about one out of every four tons as being consumed in the oilfield today is being run through a sandbox system. So we've grown pretty rare.

Rapidly the loads that we delivered in 2019 were up about 30% versus 2018, so kind of massive increase year on year 2020 feels like it may be more of a flattish year as we work to hold onto that share and also the competitive dynamics that you mentioned I still feel really.

Optimistic about sandbox I think.

When you look at the benefits that it brings they're just enormous and I saw a recent survey that was done by.

Leading leading bank and.

For the first time ever the respondents in this survey and these were all.

Energy Company and service company customers of ours and out of the market for the first time ever those customers expressed more of a preference for box systems versus silos. So the survey said that 48% of these respondents.

Like boxes, and only 44% like silo, so and particularly in some of the basins, where the pad sizes are the smallest light like in the Marcellus or the terrain is tough sell Marcellus Rockies midcon and some other areas. There is an overwhelming preference for.

We're box solutions and we're the leader in that in that sector. So I think that benefit is going to accrue to us and there's numerous advantages over the the silo system. So I feel really good about sandbox and our prospects.

And I think we'll have a good year in in 2020, I just don't expect to take a whole lot more share. This year. We're currently working on that but.

Just given the share we took to come into 2020 feels more like kind of a flattish year to me.

Gotcha Gotcha. Thanks, and then just just follow up on the commentary about the pricing again, staying within the oil and gas proppant side I. Appreciate the fact that you're going to look to maximize that dynamic.

Same token in the prepared commentary you mentioned that.

And land phrases differently. So in the context I was wondering if you can give us some relative magnitude of what kind of pricing improvement you could expect given that discipline that you've already indicated that was underway in the market.

But when we look at what's already occurred here in Q1, we're seeing spot pricing up significantly, particularly in west Texas.

I would say that what we've seen so far.

At quarter to date.

We're up about two to $3 a ton in overall pricing versus our Q4 exit pricing rate and if you look at spot pricing in West, Texas, where it was some cases 10 or $12 a ton or something like that at the very end of last year. It's now backup in the low to mid Twentys.

Yes.

And I think over time as more capacity comes offline and things rationalize I think we could end up with pricing in the in the mid to upper Twentys quite honestly it may take a several quarters to get there, but again with the industry looking like it is going to be pretty disciplined here I think there's a chance that we settle out in a pretty good spot.

Thats great Awesome I appreciate that color. Thank you.

Thank you Kurt.

Thank you. Our next question comes from the line of Joe George O'leary with Tudor Pickering Holt. Please proceed with your question.

Good morning, Good morning, guys I want to George.

No just following on to that prior question on the Frac sand pricing front I wondered if you could maybe bifurcate between northern white pricing on innovation pricing and how those are both trending on a quarter over quarter basis, and kind of relative to each other I know there any differentiation in the pricing between.

Grain sounded match 2040, we even our.

30, 50 is getting a little bit alive at this point, but just.

If you walk through any pricing deltas across those various buckets.

So George I would say what we've seen so far is that the west Texas pricing is is up the most and it's really just because it got depressed. The most at the end of last year, Northern White sand is been a bit more steady certainly a phone at an out of favor a bit.

As we went through 2019, and it's come back some but not as much as the west Texas pricing. So I think thats where were seeing the most increase right now and to your point there are certain grades that 30 50, which.

Seems like it's the is the grade that goes in and out of favor. The most there's times, where it's really really hard to sell 30, 50 and times, where we just don't have enough of it for demand. So a lot of its relative to specific energy company customers and what they like to pump. Some some customers love 30 50. So.

It's all over the map as usual, but I would say most of the pricing rebound right now is in West Texas.

Okay. That's super helpful. And then on the cost reduction side, historically, making good headway in reducing costs costs across the board and the $20 million SGN a reduction is nice to see.

Just a logistics and that Cogs side equation, given the incremental mine the idle there anyway to frame how much you've taken out of the system and how much you will take out.

Ongoing cost reduction efforts continue.

From $1 perspective anyway to frame that for us.

Yes look we've taken out a lot of cost your point, I think where we're going to see the the cost really started the bottom line is one of the logistics side.

Theres really not a good way to frame that we're really not talking about contribution margin per ton.

As you know for full year impact I think Brian hit it fast saying that.

As we go forward.

We're going to see incremental impacts a favorable impacts to cost of on our RCM per ton as we go forward.

I'll sneak in one more if I said and I appreciate that prior response as well on that.

So pricing has started to move to begin the year.

Well, we see more of the realization of that pricing is materialize in the second quarter for life results perspective or are there some as spot pricing did it rise early enough in quick enough in the year to date Q1, we'll see some benefit over Q4.

On the oil and gas out of the business.

I think we'll definitely see some benefit in Q1 over Q4, and if we stay disciplined as a company and if.

The market continues to be disciplined I think we could certainly see that hanging over into Q2.

Thank you guys very much okay. Thanks George.

Thank you. Our next question comes from the line upon alumni with Morgan Stanley. Please proceed with your question.

Thanks, Good morning, guys.

Morning Connor.

So I was wondering if we could just tie all these different moving pieces together. It seems like you will have a bit of a pricing tailwind in first quarter, probably have some lower costs in the oil and gas business. After you finish idling somebody's mind. So would you be willing to hazard a guess as to how much contribution margin per tire contribution margin dollars Harvey.

For the frame it could be up also for the fourth quarter.

Oh look were you said it very good in a very beginning of your question Theres a lot of moving parts right now.

And look we've got some as Brian talked we talked we've got some really nice tailwinds. We've got some we've got some costs that are coming out.

Right now volumes look good but look in a relatively gets a chronic market, it's really hard to tell and give any guidance on that.

Maybe as we move into the into the following quarter, we'll have a little bit more insight to that but right now it's difficult to do that just because we really don't know on the volume side, where this is headed.

Okay. That's fair I mean, maybe maybe if we could just talking about things you do know.

How big of a cost tailwind do you have it seems like there was a lot of idling actions and things like that in the fourth quarter and your slowly starting to roll off some railcars. So.

On that side of things.

How much of the benefit would you expect.

Yes, I think from the idling of of railcars the railcars coming off lease is where we're going to start to see the cost.

Come out I think where we are going to have a benefit I would say.

If you look at the overall benefit to the cost, let's say contribution margin per ton, you're probably looking at somewhere between two to $2.50 a ton.

And Thats, a full year benefit or the first quarter.

Its full year.

Well it'll it'll start hitting in Q1, yeah, youre going to start to see that benefit in Q1, So you've got $2 ish, a ton that youre going to see from an overall cm per tonne impact for these these cost takeouts in Q1, and then it will follow every quarter after that.

Got it Okay. One last one here just just on the higher level supply demand picture here, how do you think about what the incentive prices to bring back some of the capacity that you've called out or or more broadly in the industry. How much higher just pricing as you move before before you think that makes sense to bring back.

Well the way we look at it there's I think there's two components to it counter there's how much higher and for how long right. So let me start with the second one.

Me personally I would need to see several months of of sustained profitability of sustained higher prices before I'd be at all excited about bringing capacity back online because there's a there's definitely cost to do that and if you look across the industry there.

Two kinds of capacity takeout, Theres, takeouts, where sites have been completely shut and there's a big hurdle there too to reactivate and then there's places where maybe you've taken out of shift or too and you would just need to go out and hire people.

So in the second case that the barriers little bit lower in the first case, it's much higher and a lot of what we've seen so far is pretty hard to take out across the system. So if you look in our case for example, we've shut our local mine, we shut our Tyler minus two to restart those mines.

We'll take a lot in terms of what we have to see in the market in.

I believe this based on the actions that we've seen here in the first quarter with no ones are rushing to reactivate capacity that the industry in general is kind of coming around at the start of let's just not rushed out and get more tons online when we see a spike for a week and pricing. So I think is going to take much more sustained pricing.

Over longer period of time to entice most of the rational people in the industry to to restart capacity.

All right thanks very much.

Thanks Connor.

Thank you. Our next question comes from the line of John Hunter with Cowen and company. Please proceed with your question.

Hey, good morning, and thanks for taking my questions.

Good morning, John.

So first one I had is on the overall EBITDA outlook for the year 165 to one seven day, if I take your 13 to 14 million tons of oil and gas volume expectation for 2020.

And assuming some growth rate and I ask you.

Do you have to assume kind of high single digit contribution margin per ton within the oil and gas business.

To be able to achieve that kind of level of EBITDA for the year and I know you mentioned some of these cost out opportunities and some pricing.

But I guess I'm wondering.

What are what are the exact moving pieces and kind of a cadence to getting to that level of profitability in 2020 as you see it today.

So I think.

Obviously, there are lot of moving pieces here and there's a lot of ways that that this can can play out I think what we're trying to do is to give an indication when we sort of mid that altogether recognizing that some pieces are going to move up and down.

We felt like this 175 or 165 to 170 number for the year was.

Appropriate, but but perhaps conservative I think theres, some upside to that particularly given the early so it's sort of pricing positives that we're seeing.

Got it and then as it relates to kind of free cash flow for the year.

I'm curious how much of this 52 million shortfall revenue was.

Cash benefit or is expected to be cash benefit and kind of whatever you are correct what are your expectations for.

Working cap and 2020.

Yes, so the the shortfall penalty about little less than half of that is going to be cash, but thats not baked in right now into our expectation of being free cash flow positive next year.

Our goal is to continue to push on on on our every button, we can from cost savings to working capital I'm glad you brought that up.

Working capital was it was a big source of our cash in 2019, and I think we've got more to squeeze out of that in 2020. So we're going to continue to focus on that.

Okay.

Got it thank you.

Thanks, John.

Thank you. Our next question comes from the line of John Watson with tenants Energy. Please proceed with your question.

Thank you good morning.

Good morning, John.

Brian I wanted to start on I SP, It's obviously, a fluid situation, but could you talk us through how the krona virus could potentially impact that segment, how you're thinking about it today understanding that it's subject to change.

Sure John a very very good question I would say.

As of this point, we haven't seen any impact from the current of Iris.

Think there's sort of two sides to that going for us one on one hand, we have.

Some of our customers across the industrial sector, who have parts of their supply chain in China.

So those are customers ultimately could be impacted to some degree depending on how this plays out so it's on the sort of negative side on the other side of the coin we have an emerging competitor in China is relatively small.

But aggressive aggressive competitor out there in the market and so I would expect that.

They may face some challenges as well so I look at all that sort of on balance and.

It's hard to to see a real positive a real negative for us just.

Just sort of back way up from it and if theres, a massive sort of disruption to global business. As a result of this will certainly will be will be pulled into that our industrial business sales too.

More than 10000 customers across all kinds of value chain. So I would say, we would we be impacted proudly at an.

Average of a variety of of industries were not overly concentrated in any sort of specific area. At this point in terms of an industry or geography, and we still have probably 85% of our sales and profitability coming domestically. So I think we're not tremendously reliant on sale.

Sales outside the U.S., but as I said before some of our customers definitely have global supply chains.

Sure. Okay. That's helpful.

Secondly, I wanted to follow up on John's question with respect to the shortfall.

And I appreciated the pricing and demand dynamics you outlined.

What would have to change in terms of the pricing demand environment for you to realize more shortfalls. This year is that something you're anticipating.

And that you're baking into the adjusted EBITDA commentary that you made earlier.

No we don't have a lot actually baked into that at all.

Looking at my expectation in my Hope is that we continue with a strong oil and gas environment and all of our customers through a by product to to their contract levels I think what.

What I would say, though is that our expectation at the same time is that customers do live up to their contractual commitments no matter, what and I think.

This discussion on the shortfall penalty is a good example of of US holding customers accountable for.

For the contracts that they signed up for.

Right. Okay. Thanks for that brand I'll turn it back.

Yes, John.

Thank you. Our next question comes from the line of JB Lowe with Citi. Please proceed with your question.

Hi, good morning, guys.

JB.

Just to wrap up that last line of questioning on the 13 to 14 million tons you guys.

Looking at 2020, how many of those are actually under contract.

We have about 80% of our sales this year under contract for oil and gas.

And so.

Is there potential that we do see further.

Shortfall payments as we move throughout the year.

Based on what you've been the discussions you've been having with your customers.

That's not our expectation.

But certainly it's a great backstop for US is should something change the market looks was pretty robust in the oilfield right now so thats not the anywhere in our base case, but as I said is always the Backstopping case.

Yes, things don't go well in the market this year.

Okay, Great and then just my other question was on on Sandboxing, you, saying that you don't think pricing is going to get.

Too much worse is that.

Is that unfortunately, the competitors in the market just being a little bit more discipline, because I know that there's there's pushes.

In two.

Both types of systems.

From some of your competitors just wondering what what there with the kind of pricing behavior has been.

In recent weeks and months.

So I think what we're starting to see is is somewhat of a settling out of the market and.

You kind of get a sense of which customers like boxes, which customers like silos and it feels like the market share is starting to kind of level out and so I think some of the aggressiveness that we've seen out there from from some competitors no perhaps moderates a bit this year just as.

If you continue to try to take share it from certain customers are in certain regions or something and you don't have success at some point you probably give up and you become happy with the share that you have and so I think perhaps some of the aggressive.

Actions and pricing that we've seen from our competitors, which frankly is unsustainable in some cases, maybe that moderates a bit in 2020, and it's hard to tell for sure but it is a relatively small competitive set it's not like there's 20 players like in the sand industry sandbox has a much more kind of narrow set of.

Of competitors and quite frankly, there's only and maybe three or four out there, including ourselves that really really matter in terms of share.

All right great. Thanks much.

Youre welcome. Thank you. Our final question comes from the line of Lucas pipes with B. Riley FBR. Please proceed with your question.

Hey, Good morning, guys. This is actually down on for Lucas I just had a quick question on the oil and gas contribution margin.

I'm remembering correctly back in November you had guided that pretty significantly lower sequentially.

And looking at a number of I think it actually came in like 35% higher so.

If you could just give some color on maybe what happened there if it was just like.

Pricing on on contracted volumes came in a lot better if there were some costs you're able to take out from the idled mines that would be great.

Look I think we're starting to see some of the impact of idle mines and lower costs, but you have to take into the into consideration the shortfall penalty that in there as well and that's what's impacting that's the most dramatic upside of the of the contribution margin per ton in the oil and gas segment.

Got it and then just one follow up on a higher level.

Maybe if you could break out the demand outlook by basin.

You know.

Especially curious about you know maybe what's going on in the more natural gas heavy plays like the Marcellus swear.

Pricing is really fallen often and some of those players are having a bit harder time financially. Thanks.

Yes, I don't have a specific breakdown in front of me by basin, but by the can comment on the Marcellus.

We've seen pretty strong demand up there quite honestly, we're extremely well position there we can deliver by barge or by rail and I think were the lowest landed cost supplier into the Marcellus. So we've had.

Pretty good luck there in terms of sales over the last few quarters now like I do take your point, we know that natural gas pricing has come down substantially will perhaps the under further pressure so watch that closely but on the Marcellus has been as a pretty pretty strong for us.

Midcon as has been strong and we actually do really well out west. So we're we're in all the basins and so whether you want local sand or northern white I feel like we can.

Be one of the most sort of effective total supplier across the country.

Great. Thank you.

Thanks, Dan.

Thank you there are no further questions at this time I'd like to turn the call back over to Mr. Chen for any closing remarks.

Thanks, operator, I'd like to close todays call by Reemphasizing that we continue to focus on a few key priorities, namely accelerating organic growth in our industrial business effectively deploying our oil and gas assets to maximize profitability and then of course generator of free cash flow.

Im confident that we have the right strategy the rate plan and the rate resources for success and I'm very optimistic that 2020 will be a strong year for us silica.

So with that thanks for dialing into our call and have a great day everyone.

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