CARBO Ceramics Inc. Q3 2008 Earnings Call Transcript

| About: CARBO Ceramics (CRR)

CARBO Ceramics Inc. (NYSE:CRR)

Q3 2008 Earnings Call Transcript

October 30, 2008, 11:00 am ET

Executives

Gary Kolstad – President and CEO

Paul Vitek – SVP, Finance & Administration, and CFO

Analysts

James West – Barclays Capital

Dan Pickering – Tudor, Pickering, Holt

Steve Ferazani – Sidoti & Co.

Mark Thomas – Simmons & Company

Jeff Spittel – Natixis Bleichroeder

Brian Uhlmer – Pritchard Capital

Robert Christensen – Buckingham Research

Sean Boyd – Westcliff Capital

Neil Gore [ph]

Luke Lemoine – Capital One

Operator

Hello and welcome to today’s CARBO Ceramics third quarter 2008 earnings conference call. I would like to remind all participants that during the course of this conference call the company will make statements that provide information other than historical information and will include projections concerning the company's future prospects, revenues, expenses or profits. These statements are considered forward-looking statements under the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995 and are subject to risks and uncertainties that could cause actual results to differ materially from these projections. These statements reflect the company's beliefs based on current conditions but are subject to certain risks and uncertainties that are detailed in the company's press release and public filings. Your host for today's call is Mr. Gary Kolstad, President and Chief Executive Officer of CARBO Ceramics. Mr. Kolstad, please begin your call.

Gary Kolstad

Good morning, everyone, and thank you for joining us to discuss our third quarter results. For those of you that would normally turn to your computer or be multi-tasking while I read parts of the press release, I want to tell you I’m going to do something little bit different this quarter and just start right in on comments. So with that, just want to start off by saying that the third quarter was a phenomenal quarter for CARBO in a number of respects.

The success of our technical marketing campaign and extremely strong demand for CARBOHYDROPROP continued during the quarter, and as a result, we operate our North American plants at full capacity. We are currently in a sold out position, as third quarter North American sales volume exceeded our domestic production capacity. Reflecting this strong demand, the average selling price for our ceramic proppant has increased 6% versus the previous quarter. We initiated construction of line three at Toomsboro, Georgia. This expansion will increase our global capacity by 20%.

In July, we increased our dividend for the eighth consecutive year. We sold our fracture and reservoir diagnostics business to Halliburton and on October 10th received $144 million in cash on the closing of this sale. Our Board of Directors approved the repurchase of up to 2 million shares of our common stock. We made an initial repurchase of shares in September and have continued the repurchases in October.

Last but certainly not least, we’ve reported record third quarter net income of $18.4 million or $0.75 per diluted share. Our net income from continuing operations for the quarter was $15.3 million or $0.62 per diluted share on revenues of $102.6 million.

Looking at the third quarter results, from operations, I’ll focus on continuing operations, which include our ceramic proppant business, software, consulting services and geotechnical monitoring businesses. Driven by the record proppant sales, revenue for the quarter increased 38% compared to last year’s third quarter. Our total proppant sales volume for the quarter was a record 306 million pounds, which is a 35% increase from last year’s third quarter. Our proppant revenues for the quarter also reached record levels.

The sales volume in North America increased 47% compared to the third quarter of 2007 due to strong demand in areas that have traditionally used ceramic proppants. The increasing acceptance in ceramic proppant in reservoirs that have previously used sand-based proppants, and the development of new reservoirs such as Haynesville in which the high-stress, high temperature operating environment is conducive to the use of ceramic proppant. Our overseas sales volume decreased 6% compared to the same period last year.

You may recall at the start of the quarter we indicated that the market for all proppant was relatively tightly. We believe we are in a better position to increase price than we have been historically. In fact, the average selling price per proppant increased approximately 6% compared to the second quarter. Notably, CARBOHYDROPROP pricing improved by more than 10% from its introduction in the first quarter. The improvement in proppant pricing resulted in an increase in gross profit margin in this business compared to the second quarter of this year.

SG&A expense for the third quarter of 2008 increased compared to the same period last year, but declined as a percentage of revenue. The increase was primarily related to increased marketing and sales activity supporting the growth in our proppant sales, engineering cost associated with enhanced plant design, and increased costs with supporting the company's new enterprise resource planning system, SAP.

There were three items that impacted net income during the quarter that make it difficult to compare operating results year-over-year. So let me walk through each one of them with you briefly and provide you some basis for normalizing the comparison to last year. First, we had a write-off of approximately $1.4 million related to a prepayment for proppant inventory we made to a third-party Chinese proppant manufacturer in 2005. Due to inflationary pressures in China in recent years, this manufacturer has been forced to liquidate his assets, and we impaired our asset accordingly.

Second, the recent strength of the US dollar resulted in a non-cash loss of $500,000 on foreign currency exchange translation on inter-company US dollar obligations for a Russian subsidiary. This compares to a gain on foreign currency exchange translation of $1.6 million in the third quarter of 2007.

Finally, we had a reduction in income tax expense of approximately $2.1 million to adjust our accrued tax liability to reflect the actual tax liability we incurred on filing prior year tax returns, and to recognize depletion deductions from mining of the kaolin reserves that supply our lightweight ceramic proppant operations. We had a similar adjust in the third quarter of 2007, but it totaled only $500,000.

So, when you add up all three of those, the net impact for Q3 was effectively a $0.03 gain. Going forward, we expect our effective tax rate to be approximately 34.5% to reflect a lower anticipated liability.

Looking at technology and business highlights, we continue to focus our efforts on expanding the use of ceramic proppant in the fracture intensive resource plays in North America. Our products continued to penetrate these North American resource plays with a high quality ceramic proppant currently being utilized in the Bakken, Haynesville, Woodford, Deep Barnett and Marcellus shales.

At the recent Society of Petroleum Engineer's Annual Technical Conference, we successfully introduced the concept of Economic Conductivity. The E&P industry traditionally used simple formulas and basic models to try and predict a well's production capacity. Economic Conductivity analysis draws upon significant advances in technology and detailed case studies, enabling a determination of which proppant will yield a maximum financial payout.

For a future outlook, there are currently a number of uses in the marketplace regarding the potential impact of the credit crisis on commodity prices and drilling activity in the coming months. While we have not seen a slowdown in demand to date, we believe it is more likely than not that we will see a slowdown in drilling activity particularly in the first half of 2009.

What is important to remember is that while CARBO is not immune to downturns in the industry, we tend to weather the downturns better than most in the industry due to the fact that we can continue the displacement of sand-based proppants as drilling activity contracts. We believe the steep decline curves in the resource plays, providing much of the incremental natural gas supply in North America will result in any decrease in drilling activity being relatively short lived.

Accordingly, we are committed to moving forward with our previously announced capacity expansion in Toomsboro, Georgia. In fact, we will continue to look for ways to expedite completion of that facility, currently scheduled for completion in the first part of 2010. For the fourth quarter, we expect demand to remain strong, but we may see a slowing of activity around the Thanksgiving and Christmas holidays. In the past, this has resulted in a reduction of 5% to 10% in sales volume compared to the third quarter. Pricing has improved and may improve slightly in Q4. However, we will pay a slightly higher price for natural gas in Q4 and Q3. And as a result, we do not anticipate an improvement in operating margins, excluding the impact of the asset write-off we’ve previously mentioned.

Having provided some specific short-term guidance, let me return to a broader perspective. Our current situation can best be characterized by saying that we are sold out, increasing price, and adding capacity. This completes our prepared remarks. At this time, we’ll be happy to address any questions.

Question-and-Answer Session

Operator

Thank you. We’ll now begin the question-and-answer session. (Operator instructions) And your first question comes from James West from Barclays Capital. Please go ahead.

James West – Barclays Capital

Hi, good morning, Gary.

Gary Kolstad

Good morning, James.

James West – Barclays Capital

Gary, no doubt you guys are undersupplying the market perhaps significantly right now, but if we look into 2009, and let’s assume in the first half we see E&P spending drop in the double-digit range, perhaps 15%. I guess the real question is, from the way you look at your demand, how much are you undersupplying the market right now? I mean, if we do see that decline next year, could you continue to be sold out really for the whole first half, maybe the whole year?

Gary Kolstad

Well, if you would ask me today, James, I’d say it probably wouldn’t have that much of an impact, that much of a drilling rate decline. Having said that, we don’t know exactly what will happen with drilling rig count. We have to offset that with the fact that these new plays, particularly the Haynesville, the Bakken are much more frac intensive. The volumes we’re putting into there are probably three to four times the amount of ceramic proppant versus a vertical well. We are really struggling to keep up. We are importing proppant from our China plant into North America. So right now, we are definitely under-serving and undersupplying. But I don’t know what the rig count will take to get it down there. In a little bit of a strange way, this isn’t such a bad thing for us because it will allow us to better supply our customers if we have a little bit of a downturn here and allows us to get Toomsboro line three up and running. I’d to like to – I’ve mentioned already, we’re trying to push that, accelerate that so that we can better serve and supply our clients. I don’t know exactly how we shake up, James, but the new plays where our proppant is being used is lot more intensive in volumes.

James West – Barclays Capital

Okay. And if you think back to 2006, the last time you were pretty much sold out, there was a shift. Some of your customers who couldn’t get ceramics shifted back to sand. And it took some time I think or some field trials or some extra marketing tip to bring those customers back into the fold. Do you sense that that’s happening right now?

Gary Kolstad

Well, only in probably the – not in a new place so much because – to give for an example the Haynesville, the pressure in temperature at which the reservoirs are at, the wells are at, you just – you really need to be using ceramic. The Bakken, we’ve proven what happens when our EconoProp is used up there in a production standpoint. And I would also combine that with the fact that CARBOHYDROPROP, which we introduced beginning this year, serves a different market. Right? It was to address a slick water market. So there we’ve taken away the lower conductivity resin coated sand and replaced it with higher conductivity. So there are some macro things that have changed there that will help us as we get capacity unlike the period you are talking about, which was really 2004, 2005, in which we had much more of a vertical sandstone type of business.

James West – Barclays Capital

Okay, that’s very helpful. Just one last follow-up, given the Haynesville, which will be ramping up next year and the following year and that’s going to be a great market or great area for ceramics, when do you make the call on Toomsboro line four?

Gary Kolstad

We are certainly discussing it as we speak with the Board. And we are doing some things, in particular the engineering design and everything right now that will help us speed up the process once we do push the button. So it’s being discussed at the Board level right now.

James West – Barclays Capital

And would there be synergies to do that as you do in line three?

Gary Kolstad

Yes. And that’s one of the reason we are doing the engineering upfront so that as the construction starts to move on on Toomsboro line three, we can keep the same people, the same companies employ there and just move on to line four.

James West – Barclays Capital

Okay, nice sense. Thanks, Gary.

Operator

Next question is from Dan Pickering from Tudor, Pickering, Holt. Please go ahead.

Dan Pickering – Tudor, Pickering, Holt

Good morning.

Gary Kolstad

Good morning, Dan.

Dan Pickering – Tudor, Pickering, Holt

Gary, strong results from the HYDROPROP business, so clearly good market penetration there. You talked about pricing, I think you said up 10% relative to where you had introduced the product in Q1. Where does HYDROPROP now stand kind of relative to resin-coated sand? Is it more expensive? Is it still less expensive? How does that shape up competitively?

Gary Kolstad

Well, we said greater than 10%, but I would say that we are still in that ballpark because the resin-coated sand price has had moved up as well. I would say we’re probably still in the ballpark. It’s probably a little bit more expensive, but what’s happening, Dan, is that people are starting to really understand CARBOHYDROPROP and in what it will do for them. And any time you can get more conductivity for a similar price and the transportability in all these things, the inherent qualities of ceramic versus sand-based, this is becoming a no-brainer for people. And we have one of the top independence has adopted it. And so I do need to say that while we had been limiting in the past the production of CARBOHYDROPROP working in conjunction with them, we’re actually going to increase that a little bit more and try and get more throughput there. That’s one of the reasons we anxiously await getting Toomsboro line three built.

Dan Pickering – Tudor, Pickering, Holt

Okay. You are taking up volumes. And do you care to discuss sort of where – how much volume that represents as a percent of the total right now?

Gary Kolstad

We try and stay away from that – we would say our lightweights as a whole probably are moving up because of that. I don’t know, probably we’re up, but 80% lightweights now, something around that versus in the past, we had 70%. It is – we are limited only by ourselves, Dan.

Dan Pickering – Tudor, Pickering, Holt

Okay. So it sounds like it is a solid new product introduction. That’s great.

Gary Kolstad

Yes, we had limited the geographic coal distribution of it to the reservoirs that we thought to be most applicable. And so there are some people waiting for us to open up that too.

Dan Pickering – Tudor, Pickering, Holt

CapEx question. Toomsboro, remind us again the total cost and has that changed much in the last a little bit?

Gary Kolstad

That hasn’t changed. Dan. It’s still $70 million in total and we would expect that to be a solid number. Our capital spending for all of 2009 will probably be about $70 million. About $50 million of that we will in fact be spending on line three and the balance would be maintenance cap, which is actually going to be less than our estimated depreciation next year.

Dan Pickering – Tudor, Pickering, Holt

Okay. Perfect. And then obviously – I guess, Gary, walk us through – I know you discussed it, but you sold the Pinnacle business, and just give us a 30-second view of why sell the business and I know you’ve been repurchasing shares to sort of offset that dilution. How aggressive do you plan to on the share repo?

Gary Kolstad

Well, just a summary of why we sold it, just to reiterate what we said in the past there, we monetized the value of that high-growth business. We eliminated a source of conflict with our value proppant customers. I always said we’d retain the intellectual capital of the software business and the consulting businesses because that’s important for us with our E&P operators to have more touch points there. And we also established that multi-year proppant agreement with the largest provider of hydraulic pressuring services. So we thought it worked out very well. I think it’s a win-win thing with them as well. And that’s just been good for us. As far as the share repurchases, I think I’ll let Paul comment on that.

Paul Vitek

Yes. Dan, the full details of the buyback activity will be in our Q, which we will file next week. But I can say that we did in fact initiate repurchases under the plan during the third quarter We’ve stated when we announced that plan that we would be opportunistic with our purchases, and I think it’s safe to say that with what’s going on in the market, opportunity has come knocking sooner and perhaps more loudly than we thought it might. So I would expect that we will be more aggressive in this market than we would have been at the time of the announcement.

Dan Pickering – Tudor, Pickering, Holt

Great. One last question, sorry to monopolize, but I’m going to do it anyway. Gary, could you just discuss – as you look at the proppant business in general, could you talk a little bit about in the competitive dynamics around imports, foreign layers manufacturing proppant? I mean, how is the competitive dynamic changing in a sold out and proving price market?

Gary Kolstad

Well, we – as a whole, we know our past moving forward. We are going to invest, we are going to remain a leader, expand that hopefully. We’re moving in some product from our China plant into North America to feed this demand right now. So for us the path is pretty clear. We haven’t really seen too much of a change from the two main competitors. We’re certainly aware that people are looking at the China proppant. We’ve watched that over time, and our experience that moving proppant around the world is not the most highly profitable thing to do. And you combine that with the fact that the lower quality of the product coming from the Chinese suppliers where we know that this is a short-term phenomena, that’s why in a strange way a reduction in activity may not be that bad for CARBO because it will allow us to get the time we need to add capacity.

Dan Pickering – Tudor, Pickering, Holt

Keeping out of the market essentially. Great. Thank you very much for the discussion.

Operator

Next question comes from Steve Ferazani from Sidoti & Co. Please go ahead.

Steve Ferazani – Sidoti & Co.

Hi, good morning. Of the 360 million pounds you sold this quarter, do you think that’s the max you can do? I mean, could you have excess inventory from the slower Q2 that you were able to sell this quarter? What do you think the max you can do moving forward will be, including I guess using some of the China capacity for the US market?

Gary Kolstad

Steve, I would say, given our current situation on production, yes, that’s probably the max we did. The importing from China will probably be balanced out by the fact that we did draw down inventories during Q3. Paul, do you want to make another comment on that or –?

Paul Vitek

No, I think that’s pretty close to our stated capacity, and we have drawn down inventories. Likely, we’re going to be limited on our ability to do that again going forward. So I think you are correct in assuming that as pretty close to what we can max out at.

Steve Ferazani – Sidoti & Co.

But the slight softening internationally, is that because you were sending product back here? Is that the way we should look at it or –?

Gary Kolstad

That’s part of it. Russia sometimes goes through a little bit of cycles too, and we would expect that to pick up as the winter months set up – set in too.

Steve Ferazani – Sidoti & Co.

Okay. Are you turning away a lot of business at this point?

Gary Kolstad

Yes.

Steve Ferazani – Sidoti & Co.

That does mean we should expect more price increases, or is that likely, or you’re going to be more cautious in a slowing market or –?

Gary Kolstad

Well, I would just go back to my earlier comments. We would expect the pricing to be up slightly in Q4 because some wheels already set in motion. And one of the other things is that – we should probably say is that we’re having conversations about a plant that we idled earlier this year, the New Iberia plant. So if those progress and everything, that may provide us with some more production.

Steve Ferazani – Sidoti & Co.

Okay. And then last question that just hadn’t come up before was, strength in Russia, any chance you’re going to expand the production line in there?

Gary Kolstad

Our – what we look at today is expanding the production in North America first and foremost, and let the Russia production kind of stay where it’s at. So our focus is much more on investing in North America right now.

Steve Ferazani – Sidoti & Co.

Thanks, guys. Nice quarter [ph].

Gary Kolstad

You bet.

Operator

Next question is from Mark Thomas from Simmons & Company. Please go ahead.

Mark Thomas – Simmons & Company

Good morning, guys.

Gary Kolstad

Good morning.

Mark Thomas – Simmons & Company

Just a quick question on the Toomsboro facility, you mentioned expediting the completion of that facility. How quick do you think you can get that project online versus I guess early to mid 2010 estimate now?

Gary Kolstad

Yes, Mark, I don’t think that we are in a position to cite a specific date other than what we’ve already cited, which is the first half. There are a number of things that we’re attempting to do both on – with respect to the construction schedule and permitting schedule that we’re hopeful we can expedite that. But we don’t have information in hand at this point, but we’d be willing to give you a closer date than what we’ve already identified.

Mark Thomas – Simmons & Company

Okay. And then just with the economy slowing and the material cost coming down, could you not realize some benefits in construction costs?

Gary Kolstad

That’s absolutely possible and another one of the things we’re looking at on that project.

Mark Thomas – Simmons & Company

Okay. The rest of my questions have been answered. Thanks, guys. Good quarter.

Gary Kolstad

Thank you.

Operator

Next question is from Jeff Spittel from Natixis Bleichroeder. Please go ahead.

Jeff Spittel – Natixis Bleichroeder

Those are some tough names. Good morning, guys. I guess following up on Dan’s question regarding HYDROPROP, you’ve implemented some nice pricing increases there with the uptake in North America. Could you walk us through, I guess understanding that you don’t want to kill the golden goose with pricing, how you approach subsequent price increases as we walk through 2009 based on the uptake of that product?

Gary Kolstad

Yes. For competitive reasons, we’re not going to get too deep [inaudible] on that. We kind of explained last quarter the things we used to look at in price, everything from the fact that we are replacing much lower cost products with ceramics. At that time, we were trying to maximize our throughput and efficiency of plans we just brought on Toomsboro line two, the growing competition. Today I would say that we look at it more from, okay, make sure that we cover all the inflation cost increases, which are going to mitigate right now. I think we all know that.

Jeff Spittel – Natixis Bleichroeder

Sure.

Gary Kolstad

We are in good position on lightweights. So we have to take that into account. We have good margins. We are working on improving our heavy weight raw materials position. So it was a pretty big move and a little bit bigger than CARBO had ever done in Q3 in subsequent trail in Q4, which you’ll get to see three months or so. So we may be about where we are at here, and we’ll launch the market and once again try and get the capacity up.

Jeff Spittel – Natixis Bleichroeder

Okay. Switching gears to capacity that you mentioned it. Understanding that you are turning down a fair amount of business in Q3, you had to draw down some finished good inventory. Has that accelerated your re-evaluation of restarting New Iberia potentially? And is there any update on where you are in looking at that?


Gary Kolstad

Yes. We are right in the middle of that. As I mentioned earlier, we’ve had some conversations with some folks. And I would just characterize that as stay tuned and you’d probably hear more relatively soon.

Jeff Spittel – Natixis Bleichroeder

Okay. Understand. Thanks very much.

Operator

Next question is from Brian Uhlmer with Pritchard Capital. Please go ahead.

Brian Uhlmer – Pritchard Capital

Good morning. I have a couple of quick questions. Just on a – just for a modeling basis, you said you’ve got $144 million from Halliburton in October, what’s that number net of taxes?

Gary Kolstad

The tax number would be roughly $30 million, Brian.

Brian Uhlmer – Pritchard Capital

Roughly $30 million, so we have $114 million. And with the share price where it’s at right now and your buyback, are you expecting that you will finish the buyback within the next couple of quarters or pretty soon?

Gary Kolstad

No, I don’t think so. I think the comments we made at the time we announced the plans to hold, we’re going to be opportunistic. We are not going to rush out and repurchase the entire 2 million share allotment that was approved by the Board. We think there is going to be other opportunities that will present themselves to us in 2009. And we think on the acquisition front, valuations have come down and may stay down. Some of the buyers that have been financed by debt historically have probably disappeared from that market. And there may be some real opportunities for us to grow the business through acquisition. So we’ll take a look at that as well.

Brian Uhlmer – Pritchard Capital

Okay, great. And as far as the imports coming in from overseas of bauxite-based ceramics, how do you see that as competitors in the market to your bauxite products?

Gary Kolstad

Well, you have to differentiate between intermediate strength and a heavyweight. So the lower quality Chinese proppant that comes in, that is not the heavyweight, that’s an intermediate strength. And so the heavyweight still remains very tight around the world. We truly think that given the collapse of commodities and various other business challenges around the world that we may get an opportunity to address that. And we’ve recently addressed a situation where we’ve with a domestic supplier on our intermediate raw material source where we’ve locked in about 30% of what we need for multiple years ahead. So we are – that is a big issue that we’ve been talking about for couple of years now. We intend on fixing that and moving that position just like our lightweights. And then we’ll be stepped – we don’t worry too much about what’s happening right now. We just want to fix our position.

Brian Uhlmer – Pritchard Capital

Great. Thank you very much.

Operator

Question is from Robert Christensen from Buckingham Research. Please go ahead.

Robert Christensen – Buckingham Research

Yes. When you sell proppant in North America, is it just by the ton or are you selling and getting pricing based on more long-term kind of understandings or contracts? Has that changed?

Gary Kolstad

No, it’s actually sold by the pound. What we’ve done especially in the last little bit and it has to do with economic conductivity we talked about earlier. We’re really highlighting the benefits of the volume factor of our lightweights. The industry in the past was just bought by the pound, and sometimes that doesn’t make any sense because if you buy 100,000 pounds of one thing, lightweight, and 100,000 pounds of a heavyweight and your reservoir will fit the lightweights, you’re going to get 20% more volume down hold. So we’re educating the industry on that, but it’s still – today, Bob, it’s still by the pound.

Robert Christensen – Buckingham Research

But people don’t come out to you and say I want to buy so many pounds in the future? I’m trying to get a little – is term coming into the purchase request?

Gary Kolstad

Well, I’ve never had so many phone calls in my life, quite honestly, from all of our clients, both the ones we sell to as well as the end user. And we’re still working through the same business model and we’re trying to work through all these challenging issues on the demand side of things like the Haynesville and the Bakken. So I had more conversations on it, but nothing has changed today.

Robert Christensen – Buckingham Research

What does it cost to bring proppant in per pound from China?

Gary Kolstad

I don’t think we’ll still let out. Paul, do you want to make a comment on that or –?

Paul Vitek

No, other than to reiterate, which you’ve already said, Gary, which is – Bob, as you know, we have a plant in China. We import product from China as well. And Gary’s earlier comment was, it has not proven to be a highly profitable venture for us, given the export taxes that we pay in China and the ocean freight rates that we incur.

Robert Christensen – Buckingham Research

One more if I may. The New Iberia, would that plant be reoriented to a different product?

Gary Kolstad

It certainly could and we might have various levels of production levels based upon on that.

Robert Christensen – Buckingham Research

Thank you very much, guys. Good quarter.

Paul Vitek

Thank you.

Gary Kolstad

Thank you.

Operator

Next question is from Sean Boyd from Westcliff Capital. Please go ahead.

Sean Boyd – Westcliff Capital

Thank you. Just a couple quick follow-ups here. Gary, on New Iberia yet, just for perspective from someone who has not been following the company quite closing, how quickly could New Iberia come on line?

Gary Kolstad

In just a few months. Three months, let’s say, upon the time we push go.

Sean Boyd – Westcliff Capital

Right. And would this be a similar capacity to the old 120,000 a year?

Gary Kolstad

Probably not. We – as Bob's earlier question, if we reconfigure it with a particular type of product and particular type of ore source and some other things, no, it would probably be less.

Sean Boyd – Westcliff Capital

Got it. And just earlier in your prepared comments you talked about a 5% to 10% seasonal drop in Q4. Was that referring to proppant revenues, volumes? Can you clarify that?

Gary Kolstad

Well, we tend to always talk in volumes. So I think we would stick with that. It always happens every year, Christmas holidays and Thanksgiving holidays. We’re obviously in a little bit different situation this year. And we might be as much impacted by drawing down inventories in Q3 as anything. But yes, it’s pretty typical in Q4.

Sean Boyd – Westcliff Capital

Got it. Got it. And on the share buybacks, Paul, did you comment early on what the amount that you’ve done so far out of that 114 million in that proceeds?

Paul Vitek

I did not. Sean, I did indicate that the numbers will be published in our 10-Q, which we expect to publish early next week.

Sean Boyd – Westcliff Capital

Got it. Okay, good enough. Great to see you guys moving forward with the thoughts on New Iberia and of course Toomsboro four. Thank you.

Paul Vitek

Thank you.

Gary Kolstad

Thank you.

Operator

Next question is from Mark Thomas from Simmons & Company. Please go ahead.

Mark Thomas – Simmons & Company

Just a quick follow-up on New Iberia, guys. Would you expect to close the facility once the new Toomsboro line begins producing?

Gary Kolstad

You know, that would still be open for discussion because remember in Toomsboro we’re going to be producing lightweight products.

Mark Thomas – Simmons & Company

Okay. And then refresh me on New Iberia, is that high strength?

Gary Kolstad

Yes. We had always in the past produced high-strength proppant out of there.

Mark Thomas – Simmons & Company

Okay. All right. Thank you very much.

Gary Kolstad

You’re welcome.

Operator

(Operator instructions) And we have a question from Neil Gore [ph], private investor. Please go ahead.

Neil Gore

Your operating profits ex-ing out the one-time losses coming in at about 21.4%, do you have any comments into what you think you can do going forward? That’s with revenue of course.

Gary Kolstad

I’m sorry, Neil, I didn’t hear the last part of your question?

Neil Gore

Your operating profit as a percent of revenue ex-ing out the one-time losses comes in at about 21.4%. Do you have any comment as to what you expect you can bring that number up to?

Paul Vitek

Yes. Neil, we’ve been very consistent in saying that long-term you should not look for margin expansions or drive earnings growth in this business. It should be revenue growth that comes from volume growth that drives earnings growth. And nothing has changed there. And more of a short-term outlook, I would say that for Q4 we expect margins – once you adjust for the three items that Gary identified that we don’t expect to recur in Q4, those being the write-off, the foreign exchange fluctuation, and the tax adjustment, once we adjust for those three things, we think margins in Q4 will be very similar to Q3. Pricing will probably be up slightly, but we also expect to be paying more for gas in the fourth quarter than we paid in the third, and those two should offset. But long-term I wouldn’t look for a significant margin expansion.

Neil Gore

And in Russia there seems to be a change in the political situation every time we look in the newspaper. Has this affected you people at all?

Gary Kolstad

No. You know, we are a small part in the big Russia oil and gas industry, and we act that way accordingly. And we still sell through much more of a traditional Western style we sell to the service companies, and our people just stay low-key and everything. So we really haven’t seen anything there. And I think on a very positive note, if you watch the – start to see the production declines in Russia, what they are trying to do on taxes for oil and gas, all those things, I think the long-term outlook for Russia still is tremendous. And you combine that with the one thing that I think we all hope happens eventually, and that is that gas problem gets to fracturing their gas wells, that potential is very big. I think they are going to a tumultuous time right now, but it doesn’t really impact us that much.

Neil Gore

Thank you. And lastly, you usually see that at any given time your 50% hedge on your future gas purchases, are you at that level right now and at what price are these hedges?

Gary Kolstad

Yes. Neil, we don’t disclose the actual price at which we purchase gas for future delivery. I will say that our purchasing activity has obviously been much more active in recent months as gas costs have come down. And we are presently about 75% covered through the second quarter of 2009, about 50% covered for the balance of 2009 and actually have about 30% covered in 2010 at this point. Of the gas we have under contract, we will pay a higher price in the first half of 2009 than we did in the first half of 2008, but we will see that flip in the second half of the year and we’ll be paying lower year-over-year cost in the second half based on what we currently have under contract.

Neil Gore

Thank you.

Gary Kolstad

You’re welcome.

Operator

Question from Luke Lemoine from Capital One. Please go ahead.

Luke Lemoine – Capital One

Hi, good morning. Is there any estimation at this point on what it would cost to restart and kind of retool the New Iberia plant?

Gary Kolstad

Yes, we have worked through all that, but we won’t provide that because we’re currently in discussions with our clients on that. So, as I mentioned to the previous person, just stay tuned on that.

Luke Lemoine – Capital One

Okay. But would it be fair to assume that it’s kind of more than a shutdown cost?

Gary Kolstad

I think it would be –

Paul Vitek

No, it would be considerably less than the shutdown cost.

Luke Lemoine – Capital One

Okay. Thank you.

Operator

(Operator instructions) At this time, there are no more questions. I’ll turn it over to you, Mr. Kolstad, for any closing remarks.

Gary Kolstad

Okay. Thank you. And thank you all of you for joining us this morning. I want to just summarize a few key points as we leave today. Results for technical marketing program and the successful introduction of CARBOHYDROPROP have us in the sold-out condition, as I mentioned. The strong demand for ceramic proppant has resulted in an environment where our pricing is actually improving. And despite the short-term concerns about a decline in drilling activity, we still remain committed to the long-term objective of growing our capacity and increasing our sales. And we will continue to look for ways to expedite the completion of line three in Toomsboro. We are continuing to evaluate the New Iberia facility restart. And we have an extremely strong balance sheet, and we believe that will provide us an opportunity to produce some attractive acquisition opportunities in the coming year. I want to thank you all for joining us, thank all of our employees for this record quarter both on sales and profit, and hope you all have a good day and look forward to speaking to you next quarter.

Operator

Thank you, ladies and gentlemen. This concludes today’s conference. Thank you for your participation. You may now disconnect at this time.

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