Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

CARBO Ceramics Inc. (NYSE:CRR)

Q1 2009 Earnings Call

April 30, 2009 11:00 am ET

Executives

Gary Kolstad - President and CEO

Ernesto Bautista - VP and CFO

Analysts

James West - Barclays Capital

Steve Ferazani - Sidoti & Company

Jeff Tillery - Tudor, Pickering and Holt

Brian Uhlmer - Pritchard Capital

Bob Christensen - Buckingham Research Group

Roger Read - Natixis Bleichroeder

Mark Thomas - Simmons & Company

Mike Mazar - BMO Capital Markets

Mark Rogers - Gagnon Securities

Operator

Hello and welcome to today’s CARBO Ceramics First Quarter 2009 Earnings Call. I would like to remind all participants that during the course of this conference call, the company will make statements to 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.

(Operator Instructions). Please note that today’s conference call is being recorded. Your host for today’s call is Mr. Gary Kolstad, President and Chief Executive Officer of CARBO Ceramics. Mr. Kolstad, you may begin your call.

Gary Kolstad

Thank you and good morning everyone. Thanks for joining us to discuss CARBO’s first quarter results and the outlook for the remainder of 2009. I’ll start off with reading the script and then we’ll go to questions.

This morning we reported first quarter revenues of $90.6 million along with income from continuing operations of $16.4 million or $0.70 per diluted share, an increase of 28% and 35% respectively from last year’s first quarter, and a decrease of 20% and 18% on a sequential basis. We repurchased and retired approximately 445,000 shares at an average cost of $32 per share and an aggregate cost of $14.3 million in accordance with our previously disclosed Board of Directors approved share repurchase program. Since the inception of the program in August of last year, we have repurchased and retired approximately 1.5 million of the 2 million shares authorized under the program.

The details of the first quarter results; revenue for the quarter was flat compared to last year's first quarter and down 14% compared to the fourth quarter of 2008. Total profit and sales volume for the first quarter was 253 million pounds, a year-over-year decrease of 11% and a sequential decrease of 14%.

Sales volume in the U.S. and Canada decreased 8% compared to the first quarter of 2008 and 16% sequentially, despite the significant decrease in natural gas prices and reduction in average number of drilling rigs experienced both year-on-year and sequentially.

Overseas sales volume decreased 46% compared to the same period last year and decreased 30% sequentially. Improvements in profit pricing made in the second half of 2008 benefited our gross profit margins compared to last years first quarter.

SG&A expenses for the first quarter of 2009 increased compared to the same period last year, both in absolute terms and as a percentage. The increases in SG&A are primarily related to higher spending for marketing and sales activities, certain relocation initiatives, SAP enterprise software implementation and CARBO's allowance for doubtful accounts. Income from continuing operations for the first quarter of 2009 increased $3.6 million compared to the first quarter of 2008.

Under business highlights, CARBO's penetration in the tight gas and shale resource plays continued to grow. Year-over-year growth was experienced in the Rockies region, and in the North Louisiana and East Texas region, including the Haynesville shale reservoir. In spite of overall low commodity pricing, the E&P community continues to recognize the economic benefits that highly conductive ceramic proppant bring to both conventional and unconventional plays.

CARBO's geotechnical monitoring company Applied Geomechanics, assisted the Colorado Department of Transportation in an important rockfall netting and support structure designed project. The controlled experiment utilized a series of fiber optic strain gauge sensors to evaluate the effectiveness of various combinations of rockfall mitigation devices.

CARBO has rebranded its fracture consulting group. StrataGen, with global coverage and expertise in fracture optimization and effective reservoir drainage, is assisting E&P organizations in maximizing the flow capacities of their reservoirs.

The future outlook. Although our first quarter results were commendable given the poor market conditions, we were not immune to this significant decrease in global upstream activity, as our global sales volume was down 11% year-over-year and 14% sequentially. The rate and magnitude of the deterioration in North America drilling activity that occurred over the last several months, fueled by low natural gas and oil prices and the continued weakness in the U.S. credit markets has presented our customers with formidable financial challenges.

So what does this mean for CARBO? Although there shouldn't be any question as to the economy benefit that has achieved by using ceramic proppant over other alternative proppants, the state of the current market is one driven by cost reduction, sometimes at the sacrifice of production and ultimate recovery.

As such, we started to negotiate reduced pricing arrangements in an effort to mitigate some of our anticipated sales volume erosion. While we recognize that the significantly reduced natural gas drilling activity will bring the natural gas fundamentals back into balance, we do not see any significant recovery before 2010.

We continue to believe that steep decline curves in the resource plays, providing much of the incremental natural gas supply in North America, will help in bringing supply and demand more into balance as rig activity continues to decline. The unknown is how detrimental an effect the U.S. economic crisis will have on natural gas demand.

We are confident that the strength of our balance sheet will provide us with the means to weather this downturn. And in fact, we remain to our committed capacity expansion efforts at our Toomsboro, Georgia facility and our technology development activities and continue to investigate strategic acquisition opportunities. Nonetheless, we continue to implement prudent cost control initiatives in certain areas of the business, including discretionary and capital spending.

I want to close these prepared remarks by commenting briefly on our financial strength as the industry goes through this dramatic downturn. First, we have no debt and have about 95 million in cash or cash equivalents sitting on the balance sheet. We pay a dividend and have been increasing it for the last eight years; we have continued to fund all of our manufacturing capacity increases with internally generated cash. And finally, the Board of Directors’ share buyback authorization gave us another tool to use for our shareholders, and we bought about 6% of our shares back since it was initiated in August.

What this also means is that our management team gets to focus our time on satisfying our client needs and developing new products, and does not have to spend time on trying to resolve balance sheet concerns, which given today's market conditions is as important as ever.

This completes our prepared remarks, and at this time we’ll be happy to address any questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question today comes from James West from Barclays Capital.

James West - Barclays Capital

Gary, when we think about you moving pricing down for Ceramics, do you think given the declines for resin-coated sand pricing that you’ll still have your historic premium to resin-coated sand or are you going to have to become more aggressive?

Gary Kolstad

Well, I think there will always be a premium to it. But I don’t think we will follow in lockstep. Historically, our price has kind of stayed within a narrow band if you looked at it over the years, but of course we've never had a downturn of this magnitude in quite some time if ever. And of course, our customers are experiencing extraordinary financial challenges and lot of them are operating on short term cash flow needs instead of maybe thinking about the PURs, let's say.

I’m not going to be specific as to what percent we're decreasing, but I would say that it won't be as bad as some of the other energy related companies. But I would probably also add for those that are modeling that the price increases we've put on the second half of 2008 will probably be gone. I think you should look more around the Q1 area for looking it forward.

James West - Barclays Capital

Okay. That’s very helpful. Second question for me, I’m sure you're aware of this debate within the investment community right now about the Haynesville shale and the property use of Province in that market, whether its going to be a ceramic market or whether resin-coated sand is as good. I think you have E&P companies saying kind of both things on either side. And so, I was wondering if you could perhaps comment on that and how you see that market trending and what the current prospects are for CARBO?

Gary Kolstad

First of all, I think we have to make sure we quantify that its not really a technical debate, right. I think we all understand that Ceramics, due to their roundness, their [solidity], their strength and all those other things have higher conductivity than resin-coated sand or any sand or any of that. So let's make sure we differentiate between a technical debate, which I don’t think is there, versus more of an economic debate. And I would also add though that we understand why IP's are very high with either product.

We have an incredibly tight pressure reservoir down there that we are poking a hole in and everything else. But when you look at the Haynesville, there is a couple of factors there and we are not going to go into individual clients. We value the confidentiality of our E&P clients and we just wont go there. But from a technical standpoint, you know, you have these high temperatures which of course sand doesn't like. And you have these closure stresses that go beyond what sand or resin-coated sand are capable of handling.

So these closure stresses are sitting it [down there] 10,000 and in some cases, probably running up around 12,000 or 13,000 PSI. So what happens as we drain these wells and the bottom hole pressure goes down, the closure stress continues to increase and ultimately you crush it. You combine that with the temperature problem that sand doesn't like, where we run 315, in some cases we have heard 360, 370 Fahrenheit, it just doesn't work. Okay.

Now, as far as a trend for CARBO, once again we are not going to be too open on that since we are the only public company. But I can say, Q2 was very pleased, our Q1 was very pleasing for us in the trends we see happening there, both in the number of clients, and the volume is very favorable in our opinion.

James West - Barclays Capital

And on the technical side two, is the difference between the Ceramics and say, resin-coated sand, is that noticeable within the first year? I guess I've heard that perhaps the IP rates are fairly similar, and that's something that might show up in the later years. Is that accurate or is that just kind of industry talk?

Gary Kolstad

I think you will definitely see it as time goes on. And quite honestly, we don't have a lot of wells that are a year old.

James West - Barclays Capital

Sure.

Gary Kolstad

We will be modeling some of that production data ourselves. So, I think you have to give it some time. They are still trying figure out the decline rates, which of course are very high, right, and they want to see that breaking out. So, it will take time. We understand the IP issue, but fundamentally, it's like my analogy of building I-10 in Houston. Do you build it out of blacktop and hope it lasts for a year to run semis up and down or do you build it with reinforced concrete and drive on it for 20 years. That's really a simple analogy of using sand or resin-coated sand in the Haynesville versus Ceramics?

Operator

Our next question comes from Steve Ferazani from Sidoti & Company.

Steve Ferazani - Sidoti & Company

Can you comment a little bit on the decline internationally. Is that simply a result of slowdown in Russian drilling?

Gary Kolstad

Yes, it predominantly is. That’s what dominates it. Conversely, we saw tremendous growth in Mexico for example. So, it really was kind of limited. China was higher for us than this time last year. So we saw growth in some spots, but Russia is of course very problematic in the industry and the economy there right now.

Steve Ferazani - Sidoti & Company

Okay. Any change in plans with New Iberia given the general industry slowdown?

Gary Kolstad

We’re still producing the proppant that’s predominantly going into the Haynesville there. And it’s not a big plant, but we will evaluate that as the year goes on.

Steve Ferazani - Sidoti & Company

Okay. Last one was just on the -- you mentioned in passing the allowance for doubtful accounts. Any concerns there with your receivables?

Ernesto Bautista

Steve, hey, it’s Ernesto here. The increase in allowance was really driven specifically by a couple of receivables in Russia. In addition to that we did have instituted an increase in our general reserve as we see things changing in the industry, but that’s really what drove that. Outside of that we are pretty comfortable with where we are.

Operator

Our next question comes from Jeff Tillery from Tudor, Pickering and Holt.

Jeff Tillery - Tudor, Pickering and Holt

Pricing is as you said, coming down; your costs are also coming down with both natural gas and transportation. Could you help us how we should think about that impacting the net margin percentage? For you guys obviously dollars will come down. I'm just trying to understand the percentage impact.

Gary Kolstad

It will, but you also have to offset that with us slowing down the manufacturing plants, and maybe brining a line or two offline. So the reduction, we kind of categorized it as, the gas price in the second half of '09 is going to be less than the gas price in the second half of '08. That is how we characterized it in the past. But the depreciation, the non-cash of course, but depreciation effect, producing less volume will have a bigger impact than the cost reductions you've mentioned.

Jeff Tillery - Tudor, Pickering and Holt

I was thinking about it on a kind of pre DD&A, so pure just direct cost. Is that still the case if you think about it that way?

Gary Kolstad

Well, I would say, our raw material cost for the lightweights is pretty well fixed, right. Our heavyweights, we have bought enough to handle this calendar year. What we're seeing happening is that finally and we expected this to happen that the suppliers of that are lowering the price fairly rapidly, but once again we are looking at 2010 on that, because we kind of brought all of purchases for 2009. So, I think we will see a benefit there in 2010. The gas is a component, but its not an enormous component when you factor in the fact that we're talking about the second half of '09, not the first half of '09.

Jeff Tillery - Tudor, Pickering and Holt

Okay. And then, as shipping costs were essentially moving anything with bulk around the world, have come down a lot, what are you seeing in terms of imports of proppant either to the U.S. or Mexico? Are you seeing more Chinese and/or any Russian province show up?

Gary Kolstad

Yes, you are going to see some of that, and we did see some of that Q3, Q4, because we couldn’t supply the industry. What we see happening, and anecdotally what we hear from clients is that you probably see a slowdown of the Chinese proppant for the reasons that they wouldn't want to use it, which is the variable quality, the fact that they don't have a distribution system like, say a CARBO or some of the established players have. And then, just some of product itself causes some problems for service companies that have to do with wear-and-tear on iron and things like that.

Jeff Tillery - Tudor, Pickering and Holt

Okay. And my last question, understanding you don't want to get too specific about markets. In the press release you addressed the Haynesville volume as being up year-on-year. Is that the same case quarter-on-quarter? Did you see an increase in volume sequentially? I know you said you were happy with volumes and the trends there.

Gary Kolstad

We definitely saw sequential increases in the Haynesville. Absolutely.

Operator

Our next question comes from Roger Read from Natixis Bleichroeder.

Gary Kolstad

Roger?

Operator

And sir, is it possible that your phone is on mute.

Gary Kolstad

Roger.

Operator

Mr. Read, you may go ahead with your question. Our next question comes from Brian Uhlmer from Pritchard Capital.

Brian Uhlmer - Pritchard Capital

I had a quick simple question, first on Applied Geomechanics and this job that you did. That is two quarters in a row where you have reported some kind of other job, and we haven't really got an idea of what this actually means to the company in terms of, is it a growing segment? Will it continue to grow? Are these jobs going to be material at any point in time in 2009 or 2010?

Gary Kolstad

Well, because they are not material, we don't have to break it out. What we hope to see from Applied Geomechanics is, we have a pretty broad range of technologies there. The industry itself is fairly fragmented and ownership is often private; and the industry in the past has shown more of a disposition to selling products. What we are trying to do with Applied Geomechanics is self-service in combination with products, but turn it into more of a service business and be able to supply any and all technologies if they want, including tilt, including fiber optic strain, you name it.

So, we think it may be time in the industry for that to grow when you look at the macro effects in the U.S. and the world on infrastructure, whether it be aging infrastructure or new infrastructure, the need to monitor it we believe is growing. So, we’re going to spend some time trying to grow that business.

Brian Uhlmer - Pritchard Capital

Okay. But for 2009, should I just leave it as something immaterial?

Gary Kolstad

I wouldn’t use that word, but it won’t be reported, I can tell you that.

Brian Uhlmer - Pritchard Capital

Okay. That’s enough, to tell me that. And going to the Haynesville, are you shifting the products that you are trying to sell into there? And we've heard a lot about moving primarily to slickwater, and were you previously selling HSP or a different product and you are shifting to some of your lighter weights there or could you just go into details a little bit more about technically what you are selling there?

Gary Kolstad

I think historically since we've started here, we experimented with a lot of our products at the start. It got to be a very strong movement towards HYDROPROP, and there still is today. But there’s also an increased interest in heavyweights. So, I think some of -- I don’t know, it’s possible some of the experimentation done by E&P has possibly come in the full loop now, but it’s dominated by HYDROPROP.

Brian Uhlmer - Pritchard Capital

Okay. And I guess looking forward, are you more concerned about maintaining volumes or maintaining pricing throughout 2009?

Gary Kolstad

Oh, it’s an equation we understand very well and we will work that and we wont broadcast that. But we have a lot of manufacturing capacities, so we need to watch the volume. I've kind of indicated where pricing is probably being negotiated at already. But it's something we look at every month, and I wouldn’t given either one of them more credit right now.

Brian Uhlmer - Pritchard Capital

Fair enough. All right. That’s all I have for now.

Operator

And our next question comes from Bob Christensen with Buckingham Research Group. Please go ahead with your question.

Bob Christensen - Buckingham Research Group

Yes, the Toomsboro line three, can you tell us what's transpired so far the way of construction and then is there any possibility of slowing it down and trying to save costs there? What are your thoughts please?

Gary Kolstad

I think, we're not doing anything to speed it up, I can tell you that and I would say we'd probably characterize completing it in the second half of 2010 now versus, I think we used to say, the first half of 2010. And, you know, we had a lot of those parts (inaudible) owned, stuff like that are very long lead time, so we had actually ordered them last year of course. And some of that starts to arrive now. So, I would just say 2010 and we are not in as big a hurry as we were before. We are very logically going to see some benefits as we bid out the actual construction of it as you might imagine with the economy and the shape it's in.

Bob Christensen - Buckingham Research Group

And I may have may missed your comments about New Iberia. I think you touched on that. What were the terms related to [demothballing] that and potentially for shutting it down? I can't recall what was working there.

Gary Kolstad

I think, Bob, the reason you can't recall it is, because we never said them. But, the…

Bob Christensen - Buckingham Research Group

I'll try.

Gary Kolstad

I know, nice try. No, we have mechanisms in there. But it's still producing proppant today, so those are discussions that will be held later.

Bob Christensen - Buckingham Research Group

All right. And when you say you started to negotiate price, negotiate means to me that you have something to trade for that. What does the company have in its favor when it comes to helping yourselves on price a little bit in this kind of sharp downturn?

Gary Kolstad

The broadest product range to fit any reservoir; the highest consistent quality anywhere on the planet; a distribution second to none; technical people that can help design jobs and also we have physical people out in the field that make sure the service quality and everything gets done well. So, all historical strengths still exist. And one again, when you think about something such as HYDROPROP and things like that that exists that the others don't have. It's a balance, Bob.

Operator

Our next comes from Roger Read from Natixis Bleichroeder.

Roger Read - Natixis Bleichroeder

All right. No idea what happened the first time. but every one (inaudible)? A lot of the stuff's been hit, I just wanted to ask specifically on international sales you had some increased competition in the fourth quarter that was not Russia. How does that play out in Q1?

Gary Kolstad

Can you get a little clear there, Roger?

Roger Read - Natixis Bleichroeder

Well, I remember you said you had like five or six regions internationally, one off, you’d had significantly lower sales. I mean, I sort of backed into it being maybe the Middle East or the Asia-Pac area. You saw international sales down rather significantly. I heard earlier you said, Russia. I’m just trying to understand what happened in these other regions? Are you seeing…

Gary Kolstad

Okay. I understand. Yes. No, Latin America was better for us because of Mexico. Asia-Pac was higher. Russia is really the one. I think maybe I was relating more when I made that comment a quarter or two ago was probably what we call Europe, Africa, Middle East is probably, I’m guessing.

Roger Read - Natixis Bleichroeder

Okay. And how did that region do sequentially? I mean, did you see the same issues, or did it come back up or…

Gary Kolstad

Nothing like Russia, but it was down year-on-year, yes.

Roger Read - Natixis Bleichroeder

Okay. As you go through the price negotiations, re-negotiations, whatever you want to call it, and you seeing, or would you expect to see significant differences within North America on a regional basis, on a by-product basis, in other words, the products seem to be working best, or the ceramics seem to be working best in the Haynesville. I mean, they would not be as likely to see a price decline as maybe in a more conventional area or an area where the difference between resin-coated sand and ceramics is not quite as wide?

Gary Kolstad

Well, I mean they are all handled independently, and some of them were handled way before this period, right. So, it’s very individual, you know, a Russia or a China or a Middle East and in some other countries of course where plants don’t exist, your transportation cost factors in a lot. So, yes, it’s a different world and they are all handled separately, and most of them have been handled already.

Roger Read - Natixis Bleichroeder

Okay. So, no uniform answer to that then?

Gary Kolstad

No, not at all.

Roger Read - Natixis Bleichroeder

Okay, tax rate was a little lower than, I guess guidance or whatever in the quarter. Was that something we should look for going forward or is it a one-time issue there?

Gary Kolstad

No. Actually, I think we will revise that forward looking expectation to arrange a 34% to 35%. There was some benefit that we did not take into consideration previously that we will see throughout the year.

Roger Read - Natixis Bleichroeder

Okay. And then final question, coming back to it for the last time, patent exploration is up in June. You've talked about the Chinese product coming in here, some Russian product coming in here. Is there anything that, you fear is sort of waiting out there just to offshore, that will come in here in July?

Gary Kolstad

No. I think we know what's waiting out there. I think we are very aware of that, and everything from the manufacture of it to everything. So, I think we're aware of that. I don’t think things will surprise us now.

Roger Read - Natixis Bleichroeder

Increased competition though seems pretty likely?

Gary Kolstad

Yes. I mean, but we've been saying that all along. So, that wont surprise us at all.

Operator

The next question comes from Mark Thomas from Simmons & Company.

Mark Thomas - Simmons & Company

Gary, I just wanted to circle back around on the foreign source ceramic proppant. Can you give us a sense as to how much is entering the U.S. now and how that would compare to a year ago?

Gary Kolstad

Gosh. I think what you're seeing right now is a slowdown in what is entering the U.S., because quite honestly several of us have all the supply that’s needed. And when you factor in the things that don’t work so well, I think the volumes are slowing down right now. I think if you looked at our old graph when we talked about the market share worldwide for '08, if we said 16% of the world is others.

That's dominated by the Chinese. We know what the Russians produce and things like that. So, in the terms of volume, you are talking total manufacturing capacity of the others, something around hundreds of millions, right. So, it's not a big number, and there are just some inherent problems with at least what we are hearing anyway about the Chinese proppant. So, we suspect that will slow down right now.

Mark Thomas - Simmons & Company

And how do you see that playing out, sort of in the rest of the year and maybe into '10. Do you think volumes coming into the U.S., increase from foreign sources?

Gary Kolstad

Not from the Chinese, I don't. No. And I think probably what happens in 2010 is, if the world normalizes, you will see transportation costs go back up. I think I've repeated it in the past, right, but we don't have a long-term business plan of importing from Russia or China into North America. That's not the best economic plan to have. So, I don't know, why it would be any different for the others. I think two, our business in China actually grew year-on-year. So, I suspect that the internal side of that will keep growing.

Operator

Our next question comes from Mike Mazar from BMO Capital Markets.

Mike Mazar - BMO Capital Markets

A quick question. I mean, I don't want to be overly optimistic if it's not warranted. But, is there some element of sort of a cause for optimism here in the sense that now that the market has loosened up and you can provide and meet demand. And that you lay the groundwork so to speak with a wider customer base, perhaps with customers who weren’t able to get product before, and are you seeing any evidence of that?

Gary Kolstad

Well, we were maybe our own worst enemy in Q3 and Q4 for sure. And I think I would also comment, there was a backlog built up in Q3, Q4 and including Q1, right, which of course everything has been fulfilled now. And of course in some cases operators aren’t even completing wells. But I think we are absolutely trying to get the message out there to the client base that, hey, we have supply, we’ve got more supply than anybody needs. And the next cycle that we have, we’re getting ready for that because we just assumed not to repeat Q3 and Q4 again.

But you have to offset that with the fact that this is just a miserable market. And we always say, hey, you can kind of judge our volumes a little bit by whatever the rig count’s down, you kind of take something around half of that historically for CARBO and that’s kind of what we go down. So, we have a rig count that’s down well over 50% here. And I think all of us, and I think you’ve heard from the others, don’t see too much gaining there for the rest of 2009. So we don’t want to create false optimism about the industry turning around by any means. I think that will be a 2010 event. And I think that our volumes very much will probably go along that historical path where, you know, take the rig count and then put a margin of air on it, but whatever that percentage down, you got to take us down about half of that.

So, we are getting the message out to clients, but we don’t want to give the impression that the storm’s over. I think it’s in its bottoming process, but then I think you have to wait a while. And I’m in the camp that I think you’re going to see production declines in Q4.

Mike Mazar - BMO Capital Markets

Sure. Okay. It's fair enough. Yes, I understand you don’t want to get kind of too optimistic here, but is there, I guess have you gotten inquires from customers who previously would have just not bothered to call because it wasn’t available, that are maybe new clients or new regions where they are thinking: A, because there might be price reductions, the value proposition may change in a particular region or for them or just because they now know that its more available. So recognizing it's not going to offset the decline in the industry in general, but it does help lay the ground work if the customer base is expanding. Is there any evidence to that?

Gary Kolstad

Yes. The answer would anecdotally, yes. And, you know, as it shifts between we have more supply than there is demand of course, we have a network of technical sales people that get out there and try and contact all the clients. So, I hope we are touching everyone and making sure they know that we have it, and we are, for example, we are moving HYDROPROP to places where we couldn't move it last year, that’s another example of taking a product where it hasn’t been before, because we can now. So we're trying all the things that we can, but I just don’t want people to get too optimistic about the industry right now.

Mike Mazar - BMO Capital Markets

Understood. That’s helpful. Thanks.

Operator

Our next question comes from Jeff Tillery from Tudor, Pickering and Holt.

Jeff Tillery - Tudor, Pickering and Holt

Hi guys. Just one follow-up question. On the volume side, Gary, you talked about the equation of CARBO's volumes typically down about half of what rig count is down. That works in the first quarter domestically. Rig count is going to be down about another 30% or so sequentially. So, is that kind of the order of magnitude of volume decline you would expect for the second quarter?

Gary Kolstad

I think you have to add on the fact my point I just said and that’s that, I think we saw a lot in Q3, maybe even more in Q4 and somewhat in Q1, the catch up factor.

Jeff Tillery - Tudor, Pickering and Holt

Okay.

Gary Kolstad

Where us, service companies, everybody was trying and I hear that from our people, I hear that from service companies that, hey, we've got caught up with that backlog. Because you know, quite honestly, the rigs in Q1 were down tremendously from the peak, and yet we didn't follow that pattern.

Operator

Our next question comes from Mark Rogers from Gagnon Securities.

Mark Rogers - Gagnon Securities

Thank you. I was just wondering how you structure your contracts with some of your largest customers, and if you've considered locking in pricing in return for large volumes going forward?

Mark Rogers - Gagnon Securities

We tend not to describe our contracts at all, because like I said, we are the only public proppant company. We are communicating with people all the time. We have arrangements in places we like to call them, but other than that I don't think we'll disclose too much our strategy on that.

Mark Rogers - Gagnon Securities

Thank you.

Operator

(Operator Instruction). And our next question comes from Bob Christensen from Buckingham Research Group.

Bob Christensen - Buckingham Research Group

The rig count dedicated to Haynesville has gone from what, 16 rigs onwards to 90 rigs. So, there might have been 30 wells drilled in 2008, maybe 300 wells this year, and if you extend that rig counts out, just keep it working. That's 500 plus wells in 2010. Do you think the producer community is considering pre-ordering any HYDROPROP in this environment, given that kind of trend? It'd seem the population of wells would be going up considerably.

Gary Kolstad

Well, Bob, if you hear of anybody please give him our phone number, but I think that right now they are so busy as everybody in the industry is, trying to figure out how to handle what still is a declining industry. I think everybody just is way too busy on that. I see more people caught up in the moment or the day or the month than I do on the long-term planning side. I think what you’re describing is one of the reasons why we are optimistic about the future and why we’re going to continue with the investment in Toomsboro three. So, we understand what you’re saying Bob, and I think you’re correct. But right now, no, I wouldn’t characterize anything other than very short term and very cash flow oriented.

Bob Christensen - Buckingham Research Group

Have you ever revealed how much HYDROPROP can be made by your current plans as a percentage of total production? You got five product lines; how much HYDROPROP could be when you retool and back away from some to create more HYDROPROP?

Gary Kolstad

I think, our plants in the U.S., most of that capacity could be turned to that. But Toomsboro alone, right. You know, at the end of 2010, we’re going to have a 750 million pounds of capacity. So, the demand’s going to have there before that will get consumed.

Bob Christensen - Buckingham Research Group

But could that all be HYDROPROP? Can you -- we all took the plant to Toomsboro and I don’t recall, but could the whole plant be producing one type of product if you wanted to like HYDROPROP?

Gary Kolstad

Absolutely.

Operator

And at this time, I would like to turn the conference call back over to Mr. Kolstad for closing remarks.

Gary Kolstad

Okay. Thank you and thanks everyone for joining us this morning. Just thought I'd say a couple of closing points here and that’s it. You know although we experienced solid results in the first quarter, the overall decline in the oil and gas market will affect our annual sales volume and product pricing to the extent -- it will be determined by the duration and the ultimate magnitude of the downturn. And despite the significant decline in drilling activity experience since the fourth quarter of '08, we're committed to the long-term objective of growing our production capacity and we will continue on its planned construction of line three in Toomsboro. And as I mentioned, we'll complete that in probably the second half of 2010.

And as we've stated in the past, we have a strong balance sheet that allows us to focus our time on our clients, new product development and expansion of our business, and we believe this financial strength allows us to pursue attractive opportunities in the future year and the years after that. So I thank you, have a good day and we look forward to seeing you next time.

Operator

The conference is now concluded. We thank you for attending today's presentation. You may now disconnect your telephone lines.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: CARBO Ceramics, Inc. Q1 2009 Earnings Call Transcript
This Transcript
All Transcripts