Q2 2019 Earnings Call
If anyone should require assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded I would now like to turn the conference over to your host Mr., Michael Lawson, Vice President of Investor Relations and corporate communications for U.S. silica.
Thank you you may begin.
Thanks, Good morning, everyone and thank you for joining us for U.S. Silicas second quarter 2019 earnings Conference call.
With me on the call today are Bryan Shinn, President and Chief Executive Officer, and Don Merril Executive Vice President and Chief Financial Officer.
Before we begin I would like to remind all participants that our comments today will include forward looking statements, which are subject to certain risks and uncertainties.
For a complete discussion of these risks and uncertainties. We encourage you to read the company's press release and our documents on file with the FCC.
Additionally, we may refer to the non-GAAP measures of adjusted EBITDA and segment contribution margin. During this call. Please refer to today's press release or our public filings for a full reconciliation of adjusted EBITDA to net income and the definition of segment contribution margin.
Finally during today's question and answer session. We would ask that you limit your questions to one plus a follow up to ensure that all who wish to ask a question. They do so.
With that I would now like to turn the call over to our CEO Mr. Bryan Shinn Bryan.
Thanks, Mike and good morning, everyone.
I'll begin todays call by reviewing the highlights that drove our strong second quarter performance and then I'll provide an update on changes, we're making to our capital allocation plans and priorities as we start to generate an increasing amount of cash flow going forward.
I'll conclude my prepared remarks, with a market outlook for both our industrial and oil and gas segments and explain why we remain very excited about the opportunity to continue to grow and diversify our company while at the same time enhancing our sustainable business model.
For the total company second quarter revenue of $394.9 million represented a sequential improvement of 4%.
Solid execution from both operating segments generated better than expected adjusted EBITDA of $85.5 million.
Our industrial and specialty products business delivered 21% year over year improvement in contribution margin in the second quarter to a record $50.1 million.
Even though total tons sold declined 5% from Two Q1 8 to two to 90.
We believe this clearly illustrates that our strategy of repositioning to deliver more higher value higher margin products is clearly working.
This is why our volumes have remained relatively flat while our contribution margin has been growing at double digit rates over the last five years.
We also had several exciting developments during the quarter and industrials, including signing a long term supply contract with a leading consumer products company to provide a high value custom product for a new product launch.
Initial sales of ground silica to a large new customer under long term contract and we started up and began production at our new Millen, Georgia facility, where we will produce specialty heat treated products like ever White for high end courts Countertops and also our next generation of cool granule.
In our oil and gas segment, we sold a record 3.9 million tons up 2% sequentially as we continue to ramp our new west, Texas capacity exiting the quarter at a 7.2 million tonne annual run rate.
Volumes in oil and gas were negatively affected in the quarter due to the flooding in the Midwest, which took our festus, Missouri plant offline for nearly two months.
Well oil and gas contribution margin of $71.5 million was better than expected due to strong performance from sandbox are leading industry, leading last mile logistics solution and a rebound in northern white sand pricing.
We continue to experience pricing pressure in west, Texas during the quarter, which was more than offset by reduced operational costs, some of which may not repeat in the third quarter.
We signed several new oil and gas contracts during the quarter, including two with the energy companies for northern White sand illustrating the rebounding demand for high quality, northern white sand through our industry, leading distribution network.
[noise] sandbox delivered another quarter of record performance with loads up 14% sequentially and June exit load volumes hitting an all time high.
We continue to grow market share an estimate that we ended the quarter with approximately 27% market share of delivered sand.
During the quarter. We also completed one of the highest volume jobs and sandbox history for a major MP in Texas delivering over 8000 loads, while driving nearly 1.4 million miles with zero safety incidents and zero nonperformance time at the well site due to sand.
Quite an amazing accomplishment and a testament to the strength of the sandbox value proposition.
Let me now provide you with an update on your silk as capital allocation plans.
Historically, we've taken a consistent and balanced approach to managing our capital and I think we have a very good track record when it comes to our uses of cash.
We have strategically invested in M&A with acquisitions, such as sandbox logistics and EPA minerals, and we successfully invested back in the business by expanding our oil and gas capacity.
We've also been very diligent and returning cash to our shareholders either through meaningful share repurchases for a quarterly cash dividend, which we have now paid out for 25 consecutive quarters.
After successfully executing a significant growth and diversification strategy over the last three years, we're transitioning to a more targeted growth plan, which will take us from a net cash consumer to a net cash generator as a company.
For example, you could begin to see the cash generating power of this plan in Q2, as we generated $32.8 million, our free cash flow after capex and dividend payments.
Going forward, we're modeling substantially lower capex minimal investments in oil and gas sand and stable dividend payments.
Given that we expect to have the ability to use some of our free cash flow to reduce debt over time.
We're targeting a reduction of our gross debt to adjusted EBITDA leverage ratio to three times or less by the end of 2021 through a combination of debt retirement and profitable growth.
We intend to continue to invest in bolt on type growth projects for I.S.P. business that have high returns and low risks like our new milling facility and we'll also continue to invest in next generation equipment for sandbox like our bigger boxes and solar powered stand to continue to grow share.
We will of course continue to be opportunistic about share repurchases, but when it comes to choosing between the two we think that is currently more prudent to de lever the balance sheet and we expect to start retiring debt in Q3.
Now, let me conclude with market commentary starting with industrials.
Some analysts have worn recently of potential economic difficulties ahead, but we've yet to see any shifts in customer demand that would indicate a slowdown or imminent recession.
We are experiencing strong demand for our basic and performance materials products across a wide range of industries and continue to expand our capacity in both ground silica and functional coatings.
As I indicated on our last earnings call, we've installed new management at Sep minerals and plan to drive organic growth above historical rates through the introduction of new products and entry into new market segments.
For example, we're currently pursuing several potential growth platforms in areas like high purity filtration in the pharmaceutical rubber and polymers industries.
Our current outlook for industrials is for a strong Q3 with a normal seasonal slowdown in Q4.
Moving to market commentary for energy last mile logistics market continues to be competitive with the recent new entrants into the silo space.
Our sandbox unit is thriving by providing a differentiated full service offering to operators and service companies alike.
Moreover, sandbox continues to make efficiency gains that drive substantial savings for our customers.
Examples of this include bigger boxes, minimal NPT and technological improvements that boost operational efficiency and reduce labor cost.
We also continue to explore other new oilfield segments and new industries for sandbox expansion.
Finally, turning to the outlook for our oil and gas segment.
Third quarter oil and gas contribution margin dollars are expected to be relatively flat, we expect stronger overall sequential volume with some further pricing weakness in the Permian, although some of that pressure may be offset by the rebound in northern white sand pricing.
Our cost per ton continue to come down, especially in West Texas.
U.S. silica is at the very low end of the cost curve and we will continue to differentiate our frac sand business on logistics partnering with sandbox and targeting customers, who continue to demand higher sand volumes driving a need for value added logistic services.
We do expect to see some softening in the fourth quarter as oilfield activity levels are anticipated to moderate as producers focus on living within their cash flows.
And with that I'll now turn the call over to Don Don.
Thanks, Brian and good morning, everyone.
First I'd like to reiterate Brian's comments on delivering a very strong second quarter in which we generated $85.5 million of adjusted EBITDA with improved operating performance across the company.
As far as our segment results are concerned second quarter revenue for the industrial and specialty segment was $121.8 million up 3% from the first quarter of 2019, and an increase of 18% when compared to the same quarter last year.
The oil and gas segment revenue was $273.1 million up 5% from the first quarter of 2019 due mostly to continued growth in our sandbox operation and an increase in proppant tons sold.
On a per ton basis contribution margin for the industrial specialty segment set a record of $51.61, representing a 12% increase in the first quarter lower plant cost price increases and the normal seasonal mix of higher margin products sold during the quarter contributed to the increase in contribution margin per ton in that segment.
Looking ahead third quarter contribution margin for the industrial and specialty segment should be very similar to the margins achieved in the second quarter has historically these are the two most profitable quarters of the year.
The oil and gas segment contribution margin on a per ton basis with $18.17 compared to $15.16 for the first quarter of 2019.
Largely due to strong performance from our sandbox business, a rebound in northern white sand pricing and reduced operating costs, some of which may not repeat partially offset by slightly weaker pricing in west Texas.
As Brian noted, we would expect the segment's contribution margin dollars to be relatively flat versus the second quarter of 2019.
Let's now look at total company results.
Selling general and administrative expenses in the second quarter of $38.7 million represent an increase of 12% from the first quarter of 2019.
The actual results were higher than the guidance given last quarter due mostly to increased compensation expense and expenses related to our Frederick office facility closure.
We expect SG and expenses to be similar in the third quarter when compared to the second quarter of 2019.
Depreciation depletion and amortization expense in the second quarter totaled $44.9 million, an increase of 1% from the first quarter of 2019, driven by our plant capacity expansions and our acquisition of the team.
We expect DDNA to be flat to slightly up in the third quarter when compared to the second quarter.
Our effective tax rate for the quarter ended June Thirtyth, 2019 was a benefit of 28% including discrete items.
The company believes our full year effective tax rate will be a benefit of about 36%.
Moving on to the balance sheet as of June Thirtyth 2019, the company had 189.4 million in cash and cash equivalents and 95.2 million available under its credit facility for a total liquidity amount of $284.6 million.
The company increased the cash balance by $27.8 million during the quarter due to strong cash flow from operations of $71.6 million and reduced capital spending versus the first quarter of this year.
Additionally, the company's net debt was under $1.1 billion at the end of the quarter.
Capital expenditures in the second quarter totaled $34.1 million and were mainly for engineering procurement and construction of our growth projects, primarily at our the Mesa, Texas mine as we near completion of that project equipment to expand sandbox operations several growth projects in our industrial and specialty segment and other maintenance and cost improvement capital projects.
At this point, we expect capital expenditures of approximately $125 million for the full year 2019.
As I've said in the past of these expenditures will be within our operating cash flow and the remaining quarters of the year are expected to be free cash flow positive.
As we evolve into a more industrial focused cash generation company, we should have the flexibility to de lever our balance sheet and make it even stronger with a target leverage ratio of three times or lower by the end of 2021.
With that I will turn the call back over to Brian Okay.
Thanks, Don Operator would you please open the lines for questions.
Thank you at this time, we'll be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone and indicate your line is in the question queue.
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To allow for as many questions as possible. We ask that you. Please keep to one question and one follow up.
Our first question comes from the line of Marc Bianchi with Cowen. Please proceed with your question.
Thank you.
I wanted to start by discussing the the Capex plan and kind of your overall cash reduction plan.
Hi.
I'm looking at the 125 for this year and I think in the past we've discussed.
A maintenance level closer to $50 million overall for the company.
Could you help bridge from the 125 to that maintenance, maybe what to think about for 2020.
If I'm doing the math right it looks like you're kind of in the 20 to 25 million per quarter here in the back half.
Of the year, but just kind of curious how you guys are thinking about that progression.
Good morning, Marc and thanks for the question as as we look at maintenance Capex were typically more in the $25 million range. So I think that that's kind of forms the base. If you will of our Capex and as I look forward to 2020, I would say that we'll probably be somewhere in the $60 million to $80 million range. We've got a few things that will continue to invest in on the industrial side of the business.
Building out some facilities that we need to satisfy a new contracts and new products that we're currently developing and obviously, we'll still continue to invest a bit in sandbox as well, but I think $60 million to $80 million in that type of range is probably the right number for 2020.
Okay. Thanks for that Brian and then I guess, maybe looking more specifically to.
Just a quarter here.
If I have the guidance kind of right in my calculation here, you're looking for essentially flat EBITDA about 85 million Bucks on an adjusted basis interest expense is 25 million. So.
We could have cash from ops approximately $60 million curious if there is any other other things we should be considering and then again the capex.
Being in the low twentys.
Yielding something in that.
Maybe $35 million to $40 million of free cash for third quarter am I thinking about all those components right or is there anything else we should be considered as we do the bridge to third quarter.
I think as usual mark you're right on it.
You know that that is probably our base case, obviously with the oil and gas markets being what they are.
And I have a third quarter is going to end up so I would say to the extent. There is there is any risk it's in a deterioration in oil and gas volumes on the sand side and maybe to a lesser extent on the sandbox side as we get into the back half of the quarter, we haven't really seen much of that so far the quarter started off pretty well, but as you know things can change pretty quickly in that part of our business. So we're keeping a close eye on that.
But I think the way you describe it is pretty accurate from my perspective.
Okay, great. Thanks, Bryan I'll jump back in the queue.
Others come up.
Thanks Mark.
Thank you. Our next question comes from the line of Scott Gruber with Citigroup. Please proceed with your question.
Yes, good morning.
Good morning, Scott.
Staying on the third quarter.
Brian you mentioned that the contribution margin dollars oil and gas would be flattish.
Volumes are still see up about 10%.
Can you just talk about the different moving pieces in there as sandbox volumes do you expect to be down on sort of completion activity.
Pricing.
That's good.
For oil and gas.
And sandbox as well some of the components around that that Threeq, you guys, especially with volumes expected to be up.
Sure. So as you said, we'll expect to see volumes up in oil and gas I think.
Low volumes in sandbox should be up just a little bit.
We're baking in the fact that there will probably be some pricing deterioration.
As we talked about just a minute ago with Mark.
We're sort of assuming the worst that perhaps things get a little bit a little bit dicier as we get to the back.
That part of the quarter here as I said, we haven't seen that yet but.
It seems like there's a lot of talk on a street around some deterioration in Q3, so we'll see how that how that plays out. So generally that's that's how we're thinking about it but the business looks pretty strong on the oil and gas side quite frankly sandbox is going extremely well.
Sand volumes are up northern white sand seems to be rebounding volumes and pricing are actually up there. So I think there's a lot to be optimistic about as well.
And so the the pricing concern that's primarily on oil and gas volumes, primarily in the Permian or is there any concern around logistics pricing at this point.
Not really logistics, it's more just sand pricing volatility what what what spot pricing will do in the Permian. Obviously, we have a lot of our business locked down under contracts on the oil and gas side. So that provides a good.
Chunk of stability, there, but spot prices can move pretty dramatically is interesting, though I feel like we're starting to see some stability in pricing, particularly in the Permian.
If you look at some of the competitors that we have out there today some of them have reduced shifts at their minds. We're hearing that there might be some mines that actually shut down in the Permian in Q3, and I think perhaps into Q4, particularly if things deteriorate in Q4 as they typically tend to do and oil and gas that's really going to put a lot of pressure on some of the folks out there who might be just sorta teetering on the ability to operate and.
And generate any kind of earnings or cash. So we'll see we'll see how that how that plays out but that's based on what we're hearing I would expect to see some some mine closures and some consolidations out in the Permian mind landscape, which I feel it will be constructive to pricing and margins as we go forward here.
Just just stepping back I mean that the pieces.
Sounds better than flat margin dollars, there's just kind of a lack of visibility that lead you to that forecast.
I think thats a piece of it and just just caution quite honestly.
We we haven't seen much deterioration yet, but you just talk on the street is that things are going to get worse in the back half of Q3, we've listened into other earnings calls that have gone before us here in the quarter and most people are talking about.
Things get worse in the back half year, So I feel like we're better positioned than most but.
Want to be a bit conservative in our forecast.
Okay. Appreciate the color I'll re queue. Thank you.
Okay. Thanks, Scott.
Thank you. Our next question comes from the line of Stephen Gengaro with Stifel. Please proceed with your question.
Hi, Thank you and good morning, gentlemen.
I guess two things that are really follow ups I wanted to ask but you mentioned.
I believe two northern white contract extensions or new contracts during the quarter and can you can you speak to kind of work that pricing looks like versus versus where the spot market is.
Sure sure happy to happy to do that Steve We we had some pretty exciting developments on contracts this quarter for oil and gas a two contracts. We signed were extensions of large contracts that we already had and then to a brand new the two that were brand new were northern white sand direct contracts with energy companies and so.
Feel feel really good about that.
There's been a lot of debate around how faster if northern white is going to make a comeback and I think we're definitely starting to see the early innings of that and I, particularly like that the northern white sand contracts, we signed with energy companies might experiences that energy companies have a much better visibility as to what they are they're going to use in terms of proppant.
As opposed to the service companies, who obviously move around a lot and work for different energy company. So it was important to me that that.
As an indicator that these two contracts got signed in terms of pricing that we're happy with the pricing in these contracts, obviously, we can't talk specifics for competitive reasons, but.
I think that.
Northern White is definitely starting to make a bit of a come back here.
Can you say, if they're going east and west versus south.
In terms of basins, you mean or.
Currently in terms of basins here in terms of basis.
So.
It's not a lot in the in the south at this point, it's more sort of east and west in terms of these contracts I think.
One of the other items that's been widely discussed is northern white sand in the in the Eagle Ford. So if you get into South Texas.
We're starting to see some early signs of northern white demand. There. It's interesting a lot of the completions that are being done there are in the in parts of the shale, where the closure stresses are pretty darn high and.
Several energy companies are not having success would be local sand there. The quality is not very good. So I think we'll see.
The next leg up in northern White demand fee driven by that trend in the Eagle Ford.
Great. Thank you and then just.
As a follow up when you when you think about sandbox.
I mean, we increasingly here about kind of more integration of.
Okay transportation with wells like solutions could you just remind us kind of sandbox is positioning as it as it pertains to that sort of sort of.
Kind of a larger opportunity on the well site logistics right.
Sure. So if if you look at sandbox and how we're positioned we have a we have a wide range of offerings to customers, but the one that's most popular is our full service offering which basically means we provide essentially everything for the customer. So we have our our people it's our sand.
It's our folks on the wealth side, it's our drivers it's a in many cases, our trucks as well.
And we also have the logistic solution and of the backbone that we built to go with that and we work hand in glove with is the energy company or the service company and and literally I think we're the only company out there who is doing this that has our own full time employees on the well sites integrating with the crews and that gives us tremendous visibility and also helps us drive better efficiency, which means lower cost for our customers.
Very good thank you.
Thanks, Steve.
Thank you. Our next question comes from the line of Connor Lynagh with Morgan Stanley . Please proceed with your question.
Thanks morning, guys.
Good morning Connor.
Wondering if we could.
Talk a little more about about the outlook on pricing for for Permian sand in particular, so when you. When you are talking about pricing being lower in the third quarter versus second quarter. How much of that is pricing that you already gave up in the second quarter like a run rate effect versus just.
Some conservatism or expectations of further pricing declines.
So I think it's more conservatism on on things to come quite honestly.
You can sort of see our run rate from Q2 already cooked into the numbers I feel like it's more on things to come as opposed to things that have already been solidified Connor.
Okay, that's fair and.
Are you guys do a fair bit of tracking of supply so.
Are we at a point where.
Supply is flat to down in the Permian I mean, you're you're pointing out potential for mine closures, because they're more supply sort of ramping as we move through the year.
Just generally from you and your competition.
That's certainly not what we've seen I think it's going in the other direction I believe that we're going to see supply come offline.
As I said earlier.
I think we'll actually see some mine sites close we've already heard rumors of a couple of those and particularly if things get a little bit tougher here in the back half for for some period of time, it's going to make it a difficult decision for.
For current competitors are actually losing cash on every time they produce so that's when it becomes tough when you have to.
Attach a $20 Bill every ton that you ship out.
My experience is that people don't continue to operate very long and that kind of environment.
That's fair sort of makes sense. Thanks, guys.
Thanks Collyn.
Thank you. Our next question comes from the line of Chase Mulvehill with Bank of America. Please proceed with your question.
Hi, Good morning, I guess I wanted to come back and talk about the balance sheet, a little bit and you put some nice leverage ratio targets out there three times at the end of 2021 could you maybe help us kind of understand what's the implied gross debt target in that three times leverage ratio.
Yes Chase is Don look let me give you a little bit more detail around the thought process there.
Our assumption is that we are going to require somewhere between 200 and $250 million cash available to to buy down our debt.
And the high end of that range assumes that we're not going to see any growth from Q2, right. So we think thats relatively conservative.
And if we look at historical growth rates in the growth side of our business IP and the sandbox business.
That's what drive that lower number closer to 200 so.
At the end of the day, that's what we're looking at as far as.
Our gross debt.
Okay, all right Thats helpful. I appreciate the color.
The follow up.
You've got a few charges that showed up in the quarter.
No one was merger and acquisition.
Related charges of about $6.1 billion. So maybe if you can kind a you know a highlight then kinda talk to kind of what that actually was and then on the facility closure cost of those go away in Threeq you and then you know the startup and expansion cost of 3.7 when did those go away.
Sure. So on the M&A charges of 6.1 million 4.5 of that approximately is a charge that runs through the TNL associated with the step up value of the inventory when we purchased 18 minerals. So it's a noncash charge that artificially reduces your overall margins, though so we add that back to show the real earnings power of that business.
The other roughly one and a half million.
As Bryan stated earlier, we did do some management changes edp minerals.
And there was some severance charges that we put in that line as well so that goes away in Q3, but that $4.5 million of minerals step up value of inventory probably sticks around until maybe halfway through the first quarter. So I would anticipate four and a half in Q3, maybe a little bit lower in Q4, and then into $2 million range in Q1, and then that line as far as those charges go we'd go to zero.
You also asked about plant capacity of the plant capacity charge of 3.7 million really was made up of two different things, we still have some startup charges out in Harlem Eightth, the Texas facility.
That was about two and a half million and Thats just the inefficiencies of getting that up we are in the last stages or phases of that so I could see that being roughly cut in half.
In Q3 and gone in Q4, and then we also had some startup costs associated with the milling facility, which I'm very happy to say came up ahead of schedule and under budget. So there's only a few of those in my career I can talk about but that was very very well done by the team on the industrial side.
And I believe the other question you asked was about facility closure.
The majority of that was related to our Frederick office facility.
We had let's just say about half of that was was Frederic and the other half of it had to do with with our Voca facility closure.
The Voca facility should experience very little charge in Q3.
But we should have roughly the same amount of the facility closure for Fredrik in Q3, and Thats, mostly related to the stay bonuses that we offered all those great great people up in Frederick.
Who chose not to relocate here to Katy so and when we move into Q4 that line should be again approaching zero.
Okay, all right very helpful ill turn it back over thanks, Doug.
Yes.
Thank you. Our next question comes from the line of George O'leary with Tudor Pickering Holt. Please proceed with your question.
Good morning, guys.
Good morning, George.
Good quarter I, just curious that the oil and gas volume guidance for the third quarter stands out is pretty impressive.
Frac market, where it feels like activity may had the wrong direction. So just curious what drives the primary drivers of the confidence there is that mostly.
And box market share capture is that some of the weather issues that you guys experienced in the second quarter abating or did you guys. Just have a good volume level in June that you can kind of extrapolate out to get to 10% growth quarter over quarter. It is just curious are there other drivers because that isn't an impressive volume growth number that you're guiding to.
So it's a number of things George up, particularly on the the sand volume side, we continue to ramp up at.
Low Mesa Crane is basically running at full rate or pretty close to it.
[noise], unlike almost all of our competitors out in West, Texas, We stayed pretty much fully sold out and if we can make a ton out in west, Texas, We can sell it and I think it's a testament to the location of our sites and the the very quick turn times that we have we have some of the fastest turn times for trucks in the industry.
So that's one second is as you mentioned that the weather last year impacted us somewhat our festus, Missouri site, which is just outside of St. Louis for example was actually a shut down for two out of the three months in Q2 and that was because of either water flooding at the site or the level of the Mississippi River, which is too high to ship out barges, which is our primary outlet outlet. There so that alone add back in a pretty substantial amount of volume those tons are in high demand that's really good northern white quality sand. So those two things that taken together give us a lot of confidence plus all the contracts that we have so the new contracts that we just signed those are all kicking in.
So we feel pretty good about our volume level.
As I said earlier.
Pricing is outside of the contract is always a bit of of uncertainty and so we'll watch that closely as we get through the quarter here.
Okay. That's super helpful. Thank you, Brian and then my second question actually follows on the end of your response.
On the northern White Frac, clearly a really strong first six months of the year versus what we saw in the fourth quarter last year, what would you say you've seen so far in the third quarter on a leading edge basis around northern white frac sand pricing our understanding is.
Maybe starting to turn down as Frac activity trend down, but given you guys have boots on the ground curious for your thoughts there.
Yeah, that's not really what we've what we've seen we were up in Q2, three and a half 4% in northern white sand pricing and.
I feel like.
Pricing was pretty strong in Q3 here.
Again, I think it depends on how you are situated from a logistics standpoint, we happened to be particularly advantage. So we can get to more places than than most of the.
Most of the competitors that we have and and also we are starting to sign more and more northern white sand contracts and so it gives us I think better visibility into into the pricing there so feeling pretty good about both the volume and the pricing for northern White sand as we.
Head into Q3 here.
That's great I'll sneak in one more if I could it.
Seems like that the contracting commentary you gave is.
Certainly promising.
Do you have any instances you can point to and I'm not looking for specific customers.
You can point to where our customers are actively shifting away from certain grades of in basin sand and.
Maybe they walked away from northern white once upon a time and now they're walking back to it.
Are you guys seeing that at all in any basin stand out in particular, where that's where that's playing out.
Well I think the one where it's it's just starting is in the in the Eagle Ford as I mentioned earlier, that's the one where.
If you look at the volumes that northern white sand volumes actually declined a little bit for us in the Eagle Ford in Q2, and I think Thats in response to all the start up of the new mines that.
That happened in the Eagle Ford recently, and as customers have tried that product and seeing the results from their wells.
It feels like they are starting to come back to northern white sand and.
We've had conversations with a couple of IDT energy companies Big players in the Eagle Ford in particular are now, saying that they only want northern white sand for their wells. So I feel like northern White will definitely make a pretty nice rebound in south Texas.
Thank you very much for the color Brian good quarter.
Thanks George.
Thank you. Our next question comes from the line of John Watson with Simmons Energy. Please proceed with your question.
Thank you good morning.
Morning, John .
Brian I thought the new initiatives you called out on sandbox and the release were interesting and I was wondering if you can elaborate on the bigger boxes you mentioned.
How many tons to those holding can you also just speak to what opportunity increasing the size of your box presents.
So the the boxes.
Typically hold 10%, 12% more volume that's our older boxes and the benefits there are a couple.
Obviously your trucking expenses relatively fixed so you pay the driver the same amount yet.
Pay the same amount for the chassis into to rent the.
Cab and all that so to the extent you can increase your your sand for that sort of fixed cost. If you will that goes around transporting the sand.
It improves efficiencies dramatically and we work closely with our customers too.
Also cut down the delivery times as much as possible. So when you put all that together it just makes us that much more efficient for our customers and we're all about preventing nonproductive time and given the low as possible.
Cost to our customers and so I think.
Having that as another arsenal.
Another sort of.
Got in our Arsenal, if you will really makes it.
Easy for us to go out and continue to penetrate the market and gives us even a bigger advantage versus a lot of the competitive offerings out there.
Right makes sense and am I correct to assume that it's a low percentage of loads today that are in the bigger boxes that you expect to grow over time.
Yes, that's a that's correct.
We don't have a lot of the new boxes deployed yet so that's where the boxes and we also have a ascent work our sand Stan and so essentially instead of having a box to sit on top of a conveyer that has a lot of moving parts. The buckets sit on a stand which has very few moving parts.
Lower lower cost to build the boxes and lower potential for for failure. So we're deploying that second generation box and the other stands right now.
Okay, great and switching gears to I.S.P. I apologize if I missed this I I think I heard Don say that.
You are expecting a strong third quarter.
But I don't know if I heard a volume number.
What should we be expecting for volumes in the third quarter and specifically what type of contribution should we be expecting from the the mill on site.
So I think the.
When you look at the volumes in the third quarter, they're going to be up just slightly and I think you'll see the contribution margin per ton, perhaps be down just a little bit.
We had some.
Some onetime benefits maybe for dollar per ton or something like that for some energy surcharges that we passed through to customers in Q2.
Which won't repeat in Q3, so when you do the math on that is sort of net net it's a it's neutral. So I think we'll see flat contribution margin dollars in industrials in Q3 in terms of Millen, We've just started that facility up.
We start to produce some of the initial tons. There. So I don't think you'll see a whole lot of additional contribution margin in Q3, but going forward as we get into Q4 and Q1 I think you'll start to see some some benefit from milling in there now in some cases, we were already selling these products, but we were having them toll manufactured so what you'll see is not necessarily volumes go up but you'll see our costs come down dramatically in many cases, we were having these products toll manufactured in Europe . So you can imagine the added cost after two ship raw materials, there should finished product back and deal with all that so.
I think you'll see some good cost takeout on the.
Industrial side of our company.
Very helpful. Brian . Thank you I'll turn it back.
Okay. Thanks, John .
Thank you. Our next question comes from the line of Lucas pipes with B. Riley FBR. Please proceed with your question.
Hey, good morning, everyone I wanted to follow up a little bit on the potential closures in the Permian Frank could you kind of share your thoughts as to what distinguishes pass on behalf not that transportation as mesh size.
On location, what do you think makes the difference between a mine that is going to stay open and one that is going to be closing I assumed cost curve is pretty pretty flat. There. So would appreciate.
Sure. It's a great question Lucas I think Theres, a couple of things the first and probably most important is location. So thats one of the things that you can't change and you can't really improve and so if you pick the wrong location in terms of proximity to to the well activity, it's hard to fix that and it's not just proximity but you have to think in terms of driving distance and and so if you have to drive an extra hour or two hours on a round trip basis. It adds substantial cost to your tier offering ultimately of the customers perceive it.
I think also the ability to.
Turned trucks and get them through your site very quickly customers are looking at that closely right now because at the end of the day. If the truck has to sit for an extra half hour or an hour at at a mine site waiting to be loaded the customer ends up paying for that in terms of demurrage I think we've also seen some pretty inconsistent operation from a number of the sites.
Some cases, the quality has not been good properties like a turbidity, which kind of measures that if you will the ducting as of.
Of the San has has not been good and some of the cost structures that our competitors have.
I have just aren't very competitive they haven't been able to figure out how to get their mining cost down.
Maybe they leased the land is that have bought it so maybe to have a four or $5 per ton lease payment.
That have to add on things like that so there is a lot of things that differentiate as you said the haves from the have nots.
Very helpful. Thanks, Thank you for that and then.
In northern White.
You mentioned that the.
Region is experiencing somewhat of a comeback and in your opinion is it is it.
Specific mesh size that is seeing a resurgence in demand.
Or do you think it is.
Wholesale related to maybe some other factors I would I would appreciate your thoughts and then lastly, you've seen a lot of production cuts.
In northern White do you expect any of that production to come back. Thank you very much.
Sure. So I wouldn't say, it's a particular mesh size it tends to be different by basin. So if you look at.
Let's say the northeast 100 mesh and 40 70 are very popular there if you get out into the Bakken or the DJ basin.
And maybe it's 30 50 or 2040, so it kind of varies by.
Slide basins and in terms of capacity cuts there and we've already seen about 30 million tons of northern white sand capacity be idled.
I think depending on how this resurgence goes.
Either things kind of stay where they are perhaps as another five to 10 million tons that come out and those are still the noncompetitive tons and I think one of the things to emphasize here is we have multiple mines. So we can take advantage of that and be competitive to all these different basins. If you just have one mine site like a lot of these kind of lingering competitors do it's very hard for them to be broadly competitive we can move things around.
And in particular some of our northern White sites also have industrial businesses that we've cultivated over the years so that gives us.
The ability to flex things up and down in oil and gas in a way that.
If you're a single single mining oil and gas focused you just can't you just can't do.
Very helpful. I appreciate that.
All the color and best of luck.
Thank you.
Thank you. Our next question comes from the line of SAP Handy with Jefferies. Please proceed with your question.
Hi, guys good morning.
Hi, good morning.
I wanted to talk a little about sandbox. So you guys talked about increasing competitive pressure.
Potential of some pricing in the back half of the year to date with that as the backdrop just strategically how do you think about yes.
One strategy, what do you think if pricing is down whatever 5%, 10% kind of number I just theoretically speaking would you like to jay's that spacing down and maintained markets you at all or would you rather be willing to sit out and lose a little bit of mockingjay, because that would I would assume bite of that loss would be tempered.
Yes, so it's a really interesting question.
The competitive pressure that were seeing ironically is not in the containerized area Tenerife sand delivery, it's more on the silo side. So we've seen a couple of new entrants into that space and I would say that in general is sort of pressuring prices, but what we found is that most customers, who like containers will sort of maybe threaten that.
That they're going to.
Switch to silos, but at the end as they really won't do it. So we've seen some pricing pressure customers always want to have a lower price but.
I think we have.
Value to offer to our customers on the containerized side in a way that the silos can't really match and so that's why more and more customers are converting to silos, we picked up another two points of share.
This quarter so.
I'm not really interested in chasing price down with that said.
We have looked at doing business with and have started to do business with some very large energy companies and the kind of volumes that they bring and the overall value of those accounts.
Would potentially.
Command, a lower price and so I know there is a relationship between the amount of business you do have the customer and the type of price. They expect so I think thats more the type of pricing that we're interested in looking at as opposed to just chasing.
Competitive pressure from silos or something like that they come in and make a lowball offer.
It I don't think were going to chase that down we want to maintain our margins on the sandbox side.
Right. Okay, no that's helpful and then.
I know you haven't given a lot of call. It on the contracting side, but you have you have potentially some of the large contract that you won again on the sandbox side. The Halliburton contract side I know in the last year or so just to be contract started early this year, but again, we don't have a lot of color as to the terms and conditions of those items sensitive to that you cannot disclose everything but how should we think about the potential risk of some of these contracts and some of the other contract that you have signed potentially rolling all coming up for the new way to back off of the early next year at eight and some associated pricing risk along with that how should we think about that.
So our contracts to have held up remarkably well given the the ups and downs in the oilfield over the last year or two I think that.
We there have.
Capacity reservation fees that most of these customers have paid to us and we already have them their money in the bank. If you will in the way they get it back is by buying sand from us. So that's the most secure.
But then we also have a number of contracts with a pretty firm.
Take or pay penalties and what we're seeing so far is that.
That structure in both of those contracts has has kept us in the customers have very well aligned and that's really the purpose of the contract.
And occasionally we do collect a take or pay penalty or or someone has to forfeit a CRM, but I feel like we sort of both lost if we have to do that so we're always looking for ways to to stay aligned and work together, but I think the contact contract structure that we have.
Is it the best that we've had in the 10 years that I've been here at U.S. So it goes so I feel pretty good about it.
Right right and just to be clear I was thinking more on the sand bauxite, you're right I'm, assuming all of that.
Certainly applies to the sandbox contracts.
Yeah, no. It's similar I think on sandbox.
The other thing is that we have an offering that is somewhat more unique I believe on the on the sand side, it's harder to differentiate in some ways.
We have better service and we have the right network and all those things, but now at the end of the day the sand sort of relatively is the saying that our sand in some cases and not that much differentiated from our competitors Sandboxes is a very different animal.
So for example, the big job that we called out in South, Texas in the press release or in the press release or sorry in the earnings call My prepared comments.
It was a massive job one of the biggest ones it's ever been done in the industry and the energy company told us look.
We could not have done this job without you you're the only last mile provider because of the way the company is structured and the value that you bring you are the only one that could have done. This so those are the kind of relationships that we want and I think continuing to delight the customers and on the sandbox side and do things that no one else can do.
It's probably our best assurance of continued business as opposed to.
Contract and we have contracts and that but what I really like about sandbox is we have a.
A much better ability to differentiate our service and our offering as compared to just the sand side of the business.
Right right that makes sense one last one from me quickly on domestics. Aside you pointed to pricing continue to come down if I remember correctly, I think 80% on more than 80% nothing sticks to the volume is under contract. So I'm, assuming the pricing that you are getting on your volumes are significantly higher than the spot pricing with a base to a fall in at least 100 mesh and that low to mid teens range of eight I'm just trying to think how much more are you getting worse the spot and whats the risk that over the next couple of what is your pricing comes down to at least close though do with one thing I guess I just think with best address.
So I would say the contract pricing is generally a bit above spot, but but the spot moves around quite a bit and again I think it comes down to the to the value.
As long as we continue to be the.
The low cost provider, there and as long as we continue to have say the fastest truck turn times will command a premium in the market also our teams are working very diligently to continue to reduce our cost in west, Texas I think we have more to go on that and so.
My hope is that even if there is some downward pricing pressure over time, we'll be able to continue to take out costs. So that our margins stay relatively flat.
Okay. Okay. That's helpful I'll turn it back thank you.
Thank you.
Thank you, ladies and gentlemen that concludes our question and answer session ill turn the floor back to Mr. Shinn for any final comments.
Thanks, operator, I'd like to close todays call by Reemphasizing, our confidence in the strength of our business and in our ability to generate free cash flow in the coming quarters. We remain very excited about the prospects for our company and are committed to reducing our leverage as discussed today and I look forward to discussing our plans with our investors and analysts at the many conferences that will be attending in the coming weeks.
Thanks for dialing in 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.