Q3 2022 US Silica Holdings Inc Earnings Call
[music].
Okay.
Good morning, and welcome to the U S silica third quarter 2022 earnings conference call.
At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.
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As a reminder, this conference is being recorded.
It is now my pleasure to introduce you to Patricia Gill Vice President of Investor Relations. Thank you you may begin.
And good morning, everyone I'd like to thank you for joining us today for U S. Silica is third quarter 2022 earnings conference call, leading the call today are our Chief Executive Officer, Brian Chin, and Don Merril Executive Vice President and Chief Financial Officer before we begin I would like to remind you of our stand.
Third cautionary remarks regarding the forward looking nature of some of the statements that will be made today.
Such forward looking statements, which are predictions projections or other statements about future events are based on current expectations and assumptions, 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.
So you see we do not undertake any duty to update any forward looking statements.
Additionally, we may refer to the non-GAAP measures such as adjusted EBITDA segment contribution margin net debt and our net leverage ratio during this call.
Please refer to today's press release or our public filings for a full reconciliation of adjusted EBITDA net income and discussions of segment contribution margin net debt and the net leverage ratio and with that I will hand, the call over to Bryan Shinn.
Thanks, Patricia and good morning, everyone. We delivered another exceptional print in Q3, resulting in our best quarterly financial performance in the last four years.
These tremendous results were driven by continued robust customer demand in both business segments and outstanding execution by our talented team.
We enjoyed a full quarter of price increases to flight to fight inflationary impacts in our industrial segment realized greater contract coverage at improved prices in sand proppant.
And delivered further margin expansion in sandbox last mile logistics.
This resulted in sequentially higher revenue earnings and strong cash generation across the company affording us the opportunity to repurchase an additional $50 million of debt earlier this month.
So far this year, we've used our strong cash flow generation to repurchase a total of $150 million of debt and expect to generate substantial operating cash flow in the fourth quarter and in 2023, which should further strengthen our balance sheet and help us achieve our objective of meaningfully reducing net debt.
Dan will discuss the details of Q3 performance in just a moment, but first I'd like to review some of the important trends that we saw during the quarter.
And our oil and gas segment, the supply and demand balance was very tight and sand proppant and last mile logistics and we remained effectively sold out due to strong well completion demand, particularly in west Texas.
Spot prices range from approximately 40 to $50 per ton.
Contract sand and sandbox sales prices and margins continued to expand.
During the third quarter, we achieved new business milestones in the month of August with record sand production in West, Texas and record sandbox delivered loads.
So the current energy cycle anticipated to last for multiple years, our customers have been determined to secure sand supply and continue to sign attractive multi year contracts.
These contracts have recently included paying cash upfront in the form of a capacity reservation fee or Crs the latest of which was signed a few weeks ago.
Overall, our oil and gas segment finished the quarter with positive momentum and we expect continued underlying demand strength in the fourth quarter balanced against the potential for weather disruptions.
And the level of holiday seasonality.
In our industrial segment customer demand remained robust across end uses and market segments and third quarter results improved sequentially versus a very strong second quarter.
Volumes persisted at record levels in Q3, and we reported the second highest contribution margin segment history.
These strong results were driven by improved product mix continued operational efficiency gains and price increases and surcharges across all major product lines to combat inflation.
In September we announced another round of price increases ranging from 9% to 20% for most of our non contracted industrial products effective for shipments beginning November one.
And finally, many of our facilities continue to operate at record utilization rates to keep pace with industrial segment demand.
With the remainder of my time. This morning, I want to give an update on a few of the exciting growth opportunities in our industrial portfolio and then finish with a summary of our outlook for the fourth quarter and for 2023.
New product innovation and the profitable growth of our industrial product portfolio remain important priorities for U S silica.
During the quarter, we had numerous successes and made further progress toward the expansion of future contribution margin dollars, including receiving our first purchase order for our newest patent pending white pigment product.
Amping up sales of our diatomaceous Earth filtration products into the renewable diesel market.
Signing a key purchase agreement for the first significant sale of our new high purity filtration product.
Executing a long term contract for our ultra low iron silica that will support the increasing demand for U S solar panel glass manufacturing.
And finally, we have multiple customers across different markets enquiring about long term contracts for diatomaceous Earth filtration and clay absorbent products.
Given that the supply for both of these products is expected to be tight for the next several years.
Now, let's turn to our business and market outlook for the fourth quarter, starting with oil and gas.
Energy sector demand continues to be robust and we remain effectively sold out with.
With Q4 off to a really strong start in fact October is tracking to be our highest profitability month of 2022, so far.
Typically we expect seasonally weaker demand in the back half of Q4 in the oilfield part of our business, but it is unclear to what extent this will happen in 2022.
Meanwhile, we expect to continue securing new customer contracts at attractive pricing.
In our industrial segment demand continues to be strong in Q4, so far and we're not experiencing specific economic driven weakness.
Historically, our Q4 profitability declines around 10% to 12% sequentially due to a combination of seasonal demand customer facility maintenance and customer year end inventory management.
We expect that Q4 'twenty to profitability for industrials will be in line with those historical norms.
Looking out to 2023, our oil and gas segment is in an excellent position for further sequential growth and cash generation.
We are committed to efficiently running our operations and maximizing our production levels without adding incremental capacity.
Additionally, we believe that the industry forecasted 9% year over year profit supply additions will be easily absorbed by the market as supply and demand is projected to remain tight.
More importantly, our customers appear to believe this as well given the attractive multi year contracts that we've signed recently.
We expect to continue to maintain competitive discipline and further enhance our strong reputation as a reliable low cost sand and logistics provider.
We believe that a combination of constructive crude oil pricing and strong sand proppant customer contract coverage and mix coupled with higher sandbox margins will continue to generate significant free cash flow from operations in 2023 and help further strengthen our balance sheet.
Turning to our industrial and specialty products segment, we are continuing to carefully evaluate a variety of factors to develop our 2023 outlook. Currently our base case 2023 forecast is for increased sales volumes with improving margins.
We have not yet seen meaningful indications of potential recession, recessionary impacts, but obviously theres a lot of noise in the market right now.
I'm encouraged that several key customers are relatively bullish regarding demand next year and that they are continuing to sign attractive long term contracts with us.
While we will have more to say on our 2023 IC outlook on the next earnings call. Our focus remains on margin growth through a combination of new customer acquisition, new product development and productivity improvements and we plan to continue to invest in high return high certainty growth projects.
And with that I will turn the call over to our CFO , Don Merril, who will discuss our financial results in more detail Don.
Thanks, Brian and good morning, everyone as Brian stated, we reported another strong quarter in Q3 as both of our segments were supported by robust customer demand higher pricing margin expansion and favorable product mix compared to the prior quarter total revenue increased 8% to $418 8 million <unk>.
<unk> EBITDA increased 10% to $102 7 million overall.
Overall tons sold remained elevated but decreased marginally by 1% to $4 6 million tonnes.
The total company contribution margin increased 7% to $131 8 million.
Selling general and administrative expenses for the quarter decreased 3% sequentially to $33 $9 million, driven mostly by lower insurance costs and stock based compensation in the quarter.
Depreciation depletion and amortization expense decreased 1% sequentially to totaled $34 5 billion in the third quarter.
<unk> tax rate for the quarter ended September 32022 was 24% including discrete items.
Now let me move on with a detailed review of our operating segment results.
The oil and gas segment reported revenue of $267 5 million for the third quarter, an increase of 10% when compared to the second quarter volumes for the oil and gas segment decreased marginally by 1% compared to the prior quarter and totaled $3 5 million tonnes, while sandbox delivered loads increased 9%.
Compared to the prior quarter.
Segment contribution margin continued its expansion improving 10% quarter over quarter to $85 3 million, which on a per ton basis was $24 38.
These positive results were driven by ongoing strength in customer demand and improved pricing for both proppant and last mile logistics.
Our industrial and specialty products segment revenues increased 5% sequentially to $151 4 million when compared with the second quarter.
Volumes for the ISP segment was slightly higher compared to the prior quarter and totaled a new historical record of $1 million 126000 tons and segment contribution margin increased 1% on a sequential basis due to our continued inflation offsetting price increases favorable product mix and operational efficiencies.
On a per ton basis contribution margin for the industrial and specialty products segment increased 1% sequentially and totaled $41 32 per ton.
Turning to the cash flow statement during the third quarter, we delivered $66 $3 million of cash flow from operations and we invested $11 1 million of capital primarily for facility maintenance and growth projects.
The company's cash and cash equivalents on September 32022 totaled $267 $1 million after completing a $100 million loan we purchased in July .
At quarter end, our $100 million revolver had $0 drawn with $78 $9 million available under the credit facility after allocating for letters of credit.
Our actions to strengthen the balance sheet have been successful and at the end of the third quarter, our net debt to trailing 12 month adjusted EBITDA ratio was two nine times already below our 2023 target of 3.0 times Levered.
Given our meaningful levels of free cash flow generated year to date, coupled with our internal projections for future operating cash flow, we seized the opportunity to once again repurchase a portion of our outstanding term loan earlier this month.
This latest $50 million term loan repurchase was oversubscribed and our debt was retired at a discount to par utilizing cash on hand.
So far this year, we have repurchased a total of $150 million of our term loan, which we view as the best immediately accretive option of providing returns to our shareholders, especially considering the current rising interest rate environment.
Looking forward, we forecast that we will continue to generate robust operating cash flow for the remainder of the year, allowing us the flexibility to further de lever our balance sheet.
We remain committed to organically funding our business growth and we will continue to be disciplined in our capital spending managing accordingly, with an emphasis on effectively maintaining operating levels at our facilities and investing in selected growth projects for the ISP segment to maximize future profitability.
Our capital spending forecast for the full year remains in the range of $40 million to $50 million.
We guide full year 2022, SG&A expenses to be up 15% to 20% year over year, primarily due to the supplier contract termination in the first quarter merger and acquisition related expenses for <unk> for the strategic alternatives review in the first half of the year and other costs, mostly related to increased activity and inflation.
Full year 2022, DD&A expense is still anticipated to decrease approximately 15% due to past investments, which became fully depreciated at the end of 2021 or.
Our estimated effective tax rate for the full year 2022, it's 23%.
In conclusion, our main priority is to continue strengthening our balance sheet by focusing on free cash flow generation.
The pricing and contracting actions that we've taken are allowing the company to effectively manage inflation issues and provide visibility and stability for the future quarters for our two business segments for.
For the remainder of this year and heading into 2023, we aim to balance our capital investments with cash flow, including further improving our net leverage ratio and with that I'll turn the call back over to Brian .
Thanks, Don I'm very proud of the results that our team delivered in Q3, and we expect continued excellent performance in Q4 <unk>.
While strengthening our balance sheet and expanding our industrial product portfolio and profitability. We also continue to drive numerous initiatives to extend our market leading positions and pave the path to meaningful growth over the next three to five years.
With that operator will you. Please open the lines for questions.
Thank you, ladies and gentlemen at this time well be conducting a question and answer session. If you'd like to ask a question you May press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if he would like to remove your question from the Q4 participants using speaker equipment, it may be necessary to pick.
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Our first question comes from the line of Steven Chin Garro with Stifel. Please proceed with your question.
Thank you and good morning, everybody.
Good morning, Steven.
So I have two things for me if you don't mind. The first would be you know obviously demand on the oil and gas front is good it's very good when you look at your current capacity and efficiency your facilities.
Hi.
Volumes can you.
The lever on a quarterly basis.
I'm just trying to get a sense because obviously this has been a good year I'm just trying to get a sense of what kind of volume upside is there if the market remains as tight as it is.
It's a great question Steven.
As we've said before we're essentially sold out on our sand proppant right now and we've got somewhere around 14, and a half maybe a little bit more million tons per year of capacity turned on and so we're running pretty close to that rate right. Now so I don't see a lot of additional volume upside at least.
Nameplate perspective that said our teams are always sort of tinkering thinking about ways that we can do some incremental capacity squeezing out to make sure that we.
Are you able to satisfy our customer demand. So I'm sure our team will come up with some creative ideas, but basically the capacity. We have is sort of what we have and we're pretty close to that right now.
Great. Thanks.
You mentioned.
Yeah.
Contract coverage.
And obviously pricing has been extremely good this year when you look out into over the next two to four quarters.
Based on what kind of what's embedded in your in your contract coverage should should contribution margin per ton in oil and gas continue to trend higher.
So if you look at our our contract coverage is really interesting I was just talking with our sales team about this the other day.
Where we are right now if you project that forward say into 2023.
I believe that we've already got 85% to 90% of our capacity sold for 2023 and pushing upwards of 70% under contract for 2024. So we have really good visibility along the way here I would say that throughout the year, we've had increasing price on a quarterly basis.
If you look at this past quarter for example prices were up.
Amazingly out there.
Across all the basins prices range up from about five 5% to more than 30% across across basins. So we had a lot of pricing tailwind in Q3, and I think you can expect to see some of those embedded in future contracts, obviously as we're as we're signing contracts over the next couple of quarters and extending key.
Contract prices and some of those older contracts will be updated so I feel like pricing will be a tailwind for us in the future.
Great. Thank you I will get back in the queue.
Okay. Thanks Steven.
Our next question comes from the line of Samantha Hoh from Evercore. Please proceed with your question.
Hey, good morning, guys congrats on the great quarter.
Thanks, Samantha and good morning to you.
And thanks, and just to maybe continue the last line of questioning but where.
Where are you seeing pricing go up.
Yeah.
So we had a couple of basins, where we saw that going up and.
Northern White sand was up a lot. This is a big quarter for northern white sand in terms of our pricing so.
Great job by our team negotiating contracts and getting those price increases out in the market.
Okay great.
One of the things I've been thinking about lately was.
Sand intensity per well.
And one of the big pressure pumper there.
Recently about how that trend is still going up.
I was just wondering how that impacts you guys. When you think about what your customers are contracting for it and how you think about sandbox.
Our sandbox business for example.
Are you guys tie to that trend line, where your caps or if they can.
Like I mean, how do you think about that in terms of your capacity and how you're correct with your customer.
It's a really really timely question, we were just talking about this the other day and.
It's actually a big advantage for us quite frankly, particularly out in the Permian.
If you think about what it takes to serve one of these gigantic wells with a similar these days.
Having a very large sand capacity and being able to.
Do that whole well from one facility as we can do say with our Lamesa mine.
Like that a lot and it's one of the reasons that we've been getting some additional business out in the Permian and also our sandbox solution has proved amazingly resilient I know initially there were some doubters around whether sandbox could keep up with some of these high intensity wells, but we've demonstrated that we can actually customers are coming to us now.
Because of that some of the other solutions out in the market are.
Are proving to be not as effective for these big simulcast <unk>. So it's really kind of a double advantage for us with our large capacity say out in the Permian backed up by sandbox.
Okay, and then you know I'd love to hear just a little bit more about this.
All that glass part.
Our new product growth.
Alright, thank you differently, but I think the one that interests me. The most these days are assessed.
So the panels and the gross domestic manufacturing for that so if you could share any more information.
Right.
Sure no. It's a very interesting one as well as we mentioned in prepared remarks, we just.
<unk> actually extended a big contract with a key customer and.
I think as I look at some of our planned growth in the industrial business solar panels is one of the sort of very interesting areas.
We have a really low iron silica today that our customers like a lot and the reason that's important is that if you use low iron silica to make the glass for the solar panels.
It basically increases the solar transmissivity.
Transmissivity basically to make the solar panels more efficient. So we're currently we project.
In about 50% of new solar panel manufacturing here in the U S through the glass.
As we said in the funding provided by the inflation reduction Act I think will turbocharge a lot of the solar capacity in the U S.
Some of the data I've seen recently indicate that solar installations are going to be up somewhere in the neighborhood of 60% to 70% in the coming years. So.
Thats, a really a good tailwind for us in the business.
But similarly on the sort of renewable energy side, we're big in the wind energy as well.
So we're about 80% of U S wind turbine blades today.
And the domestic wind energy as the industry is projected to double by 2026, So a lot of really interesting tailwind for us on the renewable energy side Samantha.
A quick delivery for those type of products.
Are you going to be making deliveries and sales I mean, well before installation begins.
Hum.
Time that growth in terms of delivery of your products versus you know when we would expect.
It does.
Capacity.
So if you think about what we're doing we're making the glass that has to go into the assembly of the panels to protect a photovoltaic cells. So obviously, we're well before the installed so I think we'll we'll see of the positivity for that.
Probably six to 12 months before the actual solar panels get installed out on someone's House for example.
Okay, great. Thanks, so much and congrats again thanks.
Thanks meta.
Our next question comes from the line of Derek part Hazer from Barclays. Please proceed with your question.
Hey, I wanted to hit on the fourth quarter, a little bit more you talked about the typical seasonality between the weather and some.
Holiday slowdowns.
Sounds like budget exhaustion won't be much of an issue this quarter.
Relative to lot I was wondering if you could just talk about that what youre seeing in this fourth quarter versus last fourth quarter, and maybe help frame us what that short term air pocket could mean from a contribution margin of our contribution margin per ton perspective for oil and gas and then separately. If there is no budget exhaustion and things remain pretty tight how what does that mean for the first quarter were <unk>.
Covering that typically as it comes off a little bit slower start, but now it seems like you might get a pretty strong snapback, just given that fourth quarter is not as low.
Light as it typically is just your thoughts around that would be helpful.
Sure Derrick, it's very interesting and a bit sort of off trend quite honestly what were seeing.
In the oilfield business right now October is coming in Super strong and.
I think October might be our strongest months of the year to date anyway.
So we're watching that very carefully and I do agree with you that we haven't heard much right to this point around budget exhaustion, so that doesn't seem to be a factor this year it feels more like.
In terms of fourth quarter potential headwinds for us and really for the whole oilfield industry, it's more about whether in certain locations and then what happens around the holidays. So I think thats, probably overall a positive.
I think that.
As we finished 2023 of 2022 here.
We continue to see very strong demand, obviously for our products and services into the oilfield. So I think that's going to be.
Positive I also believe that.
Q1 is going to start off strong if you look at.
Our earnings last year, and I think most companies earnings.
Lower than Q1, and then have ramped up throughout the year. It seems to me like will probably start off much stronger in Q1 of next year.
Also as we kind of think about all these things.
There is lots of ways to look at it lots of experts out there and people with opinions on what's going to happen in <unk>.
Tend to pay more attention to what our customers say.
But more importantly, what they do and what our customers have been doing is coming to us wanting to sign multi year long term contracts at very attractive pricing. So <unk>.
With me that customers believe that things are going to be tight and I would expect a good start to 2023 as a result of that.
Got you and those kind of does that insulate you from any headwinds in the fourth quarter are considered a bit of a spot spot might might drive earnings download just could you help give us any color around where you could see contribution margin going in fourth quarter.
So I think that.
There is obviously some insulation there historically, though we do see Q4 down a little bit not just in the oil and gas side, but obviously in our industrial business as well. So there always tends to be a bit of seasonality. There. So if we just have a kind of a normal year, we might see.
Down slightly in Q4, but boy it sure started off pretty strong right. Now so we are waiting and watching to see exactly how demand plays out and we're obviously poised and ready to serve customers at whatever level they need.
Got you great. That's encouraging and then just a quick one on ISP in your opening comments I know you talked about how you're not really seeing the indicators right now this macro recession, but obviously its still looming out there.
I think previously you talked about how you might be one of the last to now just given where you are in the supply chain can you just help us what would be that Canary in the coal mine as far as ISP and actually seeing the recessionary risk weigh on your way on your contribution margin weigh on your earnings I know right now everything looks great, but what are the signals that youre looking forward that would make that would make you think differently.
The profitability profile as you move into 'twenty three.
So again I think it goes back to our customers.
Diving in pretty deeply at our customers not just with the sort of normal and sourcing contacts that we might have but.
We're mining a much deeper.
Senior level contacts to really understand what might be happening in their supply chains and so to.
To me that's the thing that we're studying very carefully to make sure that.
As you said and certain supply chain, we're pretty far down the chain. So we are we might be a little bit late to the party understanding what's happening in that chain. So we're doing everything we can to make sure that that doesn't happen and that we have as good visibility as we can possibly have and in the meantime.
We are continuing to think about if something does occur if there is some slowdown.
The case of a slowdown what actions do we take in.
The good news is it's pretty much the same playbook, we had in 2020 when things slowed down very rapidly because of the pandemic. So we know what to do we know how to take out costs, we know how to how to deal with that we have the playbook ready and if we see any signs of weakening or softening, we'll pull that playbook off the shelf and start to implement.
Great I appreciate all the color I'll turn it back thanks Derek.
Our next question comes from a lot of dead cuts with Morgan Stanley . Please proceed with your question.
Hey, Thanks, good morning, and congrats on the quarter everyone.
Thanks, Dan.
Well I just wanted to revisit your comments on the oil and gas supply picture.
From the macro and I guess even questions.
On silicon capacity I, just wanted to confirm that.
So about 14 5 million tons is part of that.
That's filling up I guess, you guys said.
There could be some tinkering that.
There could be some upside around the margin, but I just wanted to confirm that that's all thats kind of contemplated or available from a capacity perspective, and then from an industry perspective I just wanted to confirm I think I caught at 9% supply growth quote.
From earlier and I wasn't kidding.
In 2022 industry supply growth number and I guess, just get your thoughts on that.
I think.
We supply that trends from here.
So on that.
So the market.
Regarding our capacity to $14 5 million tons is correct and as we talked about the kind of margin at the margins. It's the type of thing where <unk> have to replace a pump if <unk>.
Greece, the capacity put into new pump, that's 10% more something you can squeeze a little bit out if those kind of things that we'll continue to look at but no no substantial incremental sort of on purpose capacity increase investments contemplated at this point.
And in terms of the industry capacity that 9% was a 2023 number so thats increase from 2022 2023.
<unk>.
That 9% translates into something like 10 million tons, plus or minus of capacity and we tend to look obviously capacity and demand and based on what we see on the demand side, we think that that capacity increase that projected increase will be easily absorbed into the market and in terms of.
The source of that it's a couple of third party data points in our own work and just kind of understanding what's happening in the industry Dan.
Great that's really helpful and appreciated that.
That outlook.
I guess, John going back to some of the comments you made about delevering. The debt retirement, you guys have done.
This year I mean, you flagged that you've already hit your interim leverage target of three times.
At the end of the third quarter and kind of net debt retirement has been the most attractive.
Use of free cash flow from your guys' perspective, so far how how are you guys thinking about that moving forward.
You know given that interest rates are increasing the calculus between whether to look at opportunities to maybe re fi and extend the maturity until 2025, one or or just kind of continue.
Taking bites out of it with the cash they generate.
Yes look we're really pleased with the with the cash flow profile of the company today.
And we took the opportunity to buyback debt Delever the company and again it was at a discount to par.
The two I think it was roughly $5 billion worth of savings from an old from a par versus what we bought it back at so I think it is very attractive for us to continue to do that if we can do it at something less than par.
<unk> done that are very good and an interest rate environment today.
Interest rate is about seven 7%. So the more we can pay off the better off we're going to be going forward now having said that we also have some attractive investments obviously on the growth side of ISP. So we're kind of we're analyzing that all the time, Brian and I have this discussion all the time on where the best place to put the money.
Along with the board so.
I think Youll see continued net debt leverage go down and Opportunistically buying.
Buying back some debt to reduce gross leverage.
That's really helpful. Thanks, a lot I'll turn it back.
Thanks, Dan.
Our next question comes with a lot of job Danielle with Daniel Energy. Please proceed with your question.
Hey, good morning, guys good morning, Jonathan.
I'm just curious I think you mentioned that 85 or 90% of the volumes for next year are committed.
Do you have a sense as to.
Where that goes I mean, I'm, just trying to get a feel for how you see activity outside the Permian next year.
So we do obviously we have.
Several contracts with.
Various customers.
I don't see a big shift in activity compared to where we are today, probably the biggest thing. We saw this year was that some of the basins out west.
Jay et cetera have picked up a bit with northern white sand and we have seen prices increase going out west some but in terms of the fundamental split I still feel like that the Permian will be somewhere in the 50% to 55% range in terms of the volumes and then it's.
Got it up amongst the other basin is pretty much the way it is today.
So nothing to suggest one based in genus step change higher next year.
No, we really havent havent seen that.
On the customer contracts that we sign.
Okay.
It gives me for asking what I'm sure all the other people that have dialed in now but.
I knew what happens under the typical contract if a committed customer.
I can't take the sand for an operational issues, such as well incident or just any other job related inefficiency, how do you guys get protected.
So there's a there's no provision in the contracts for those type of things.
And the customers are on the hook.
In these contracts to either take the sand or typically pay a penalty.
We also have a number of contracts that we've signed that are kind of latest generation capacity reservation fee contracts. So basically.
Customers are paying kind of paying the penalty upfront and then we give it back to them on a quarterly basis as they purchased tons and but we just signed the latest when a couple of weeks ago and got got upfront money from our customers. So those are the most secure contracts and we have several of those now and it feels like the this whole question around what happens.
Take or pay contracts is has been somewhat resolved over the last few years theres been.
Several.
Lawsuits in settlements and in every case.
<unk> when we had that was the big one the sand companies have.
Come out victorious in that so I feel like customers are pretty much well aware of what they are signing up for these days and we don't get into a lot of arguments and discussions anymore around paying penalties.
Got it fair enough.
Last one Don and non sand question, but can you just give us your views on just.
What you see in the commercial bank market. These days for LFS any signs some of the banks here that may have stopped calling you are now calling you again or just give us an update yes.
I know the banks are calling right and.
We're constantly looking at the market.
For an attractive time to get in and look at our refi on our loan.
Market is a little choppy right now for a lot of reasons.
But we've got a couple of things working for US right. Now we just got we got an upgrade from Moody's not too long ago, we have the industrial side of the business. So they don't necessarily look at it doesn't Ofm's company. So.
And folks like the story a lot and the more cash flow that we are driving the more we can drive down that the more banks get interested in talking to us. So.
I think things will get a lot more active here as we roll into the first quarter.
But right now it's.
It's not the most opportune time to go out there.
Things will turn around as we as we get into the new year.
Okay, great. Thank you all for including me.
Yes, Thanks, John Thanks, Sean.
As a reminder, it is star one to ask a question.
There are no further questions in the queue I'd like to hand, the call back to management for closing remarks.
Thank you very much operator first I don't want to say thanks to my approximately 2000 colleagues around U S. Silica for all their hard work and dedication to make 2020 to what looks like an outstanding year here with a strong sales profitability.
Love expectations, great cash generation and meaningful improvements in numerous areas of ESG.
I want to reaffirm as it came up a couple of times on the call here regarding capacity that we are committed to market and capital discipline.
And we're also delivering big time on our promise to further strengthen our balance sheet and we expect to continue to sustainably generate significant positive cash flow from operations next year as we talked about a bit on the call as well.
And finally as we look ahead, we remain confident that our industry, leading business segment's robust product portfolio focused strategy best in class execution and continued emphasis on creating a diverse and inclusive culture here at U S silica will deliver substantial value for our shareholders and other stakeholders.
Thank you again for joining our call today, and we look forward to speaking with you all again next quarter stay safe and be well.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.