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CARBO Ceramics Inc. (NYSE:CRR)

Q1 2013 Earnings Call

April 25, 2013 11:30 am ET

Executives

Gary Kolstad – President and Chief Executive Officer

Ernesto Bautista – Vice President and Chief Financial Officer

Analysts

John Daniel – Simmons & Co.

James West – Barclays Capital

Jeff Tillery – Tudor, Pickering, Holt & Co.

Blake Hutchinson – Howard Weil, Inc.

Trey Stolz – IBERIA Capital Partners

Stephen D. Gengaro – Sterne Agee & Leach, Inc.

John Keller – Stephens, Inc.

Darren Gacicia – Guggenheim Securities LLC

Trey Cowan – Clarkson Capital Markets

Brian Uhlmer – Global Hunter Securities

Brandon B. Dobell – William Blair & Co. LLC

John Daniel – Simmons & Co. International

Robert L. Christensen – Buckingham Research Group

Operator

Hello and welcome to today’s CARBO Ceramics Incorporated First Quarter 2013 Earnings Conference Call. At this time, all participants are in listen-only mode. After management’s remarks, we will conduct a question-and-answer session and instructions will follow at that time. Please be advised this call is being recorded today April 25, 2013 and your participation implies consent to our recording this call. If you do not agree to these terms, simply disconnect.

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 Incorporated. Mr. Kolstad, please begin your call sir.

Gary Kolstad

Thank you and welcome everyone to our first quarter 2013 earnings call. I will provide a briefly overview of activities in the first quarter, followed by a few marks in our financial performance, and then provide an update on our outlook. The industry environment remains challenging in the first quarter. On the positive side, we continue to build upon our technology leadership and production enchantment. We made gains in key shale basins, work on our new proppant technology continued, and we made progress in the resin-coated sand market.

CARBO’s ceramic proppant volumes were up 7% year-over-year, despite the average U.S. rig count being down 12%, over the same period. Given the down cycle we’re in this implies we maintained a strong position in the ceramic proppant market. Ceramic proppant pricing was down approximately 14% year-over-year. On a sequential basis, ceramic proppant volumes were down approximately 1% and its respective pricing was down approximately 1%, even as additional pricing pressures emerged and E&P operators continued to focus on reducing well costs.

Other proppant volumes were up 13% sequentially. In the first quarter, the majority of this volume became sand based products, whereas in the past is primarily ISP. Separately, pricing pressures by lower-quality Chinese ceramic imports continued to cause disruptions in the market. However, imports during the first quarter of 2013 remained at lower levels than the peak witnessed in the fourth quarter of 2011. We remain focused on educating E&P operators on the risks that using low conductivity Chinese ceramic proppant poses to their well production and EUR.

Distribution costs remained at elevated levels in the first quarter of 2013. Our investments in distribution continue with the focus on reducing the costs and continuing to meet the needs of our clients. During the first quarter, StrataGen, Fracpro, and Falcon Technologies, all experienced growth year-over-year, driven mainly by expansion both their respective client bases and geographical footprint.

Notwithstanding the challenging industry environment we experienced during the first quarter, our confidence in the long-term demand for our ceramic proppant remains, given that E&P operators continue to see increased EURs when using our industry-leading, highest conductivity ceramic proppant. To that end, construction is progressing on our next ceramic proppant plant in Millen, Georgia.

Look at the financial results. Revenues for the first quarter of 2013 decreased 10%, or $15.5 million, compared to the first quarter of 2012. The decrease is mainly attributed to a decrease in the average proppant selling price, partially offset by an increase in proppant sales volume. The decline in the average proppant selling price is due to price decreases and an increase in the sale of sand-based products. North American which we defined as Canada and the U.S proppant sales volumes increased 13% while international proppant volumes decreased 3%, compared to the same period last year.

Operating profit for the first quarter of 2013 decreased 46%, compared to the first quarter of 2012. The decrease in operating profit was primarily the result of a decrease in average selling price, a change in the product sales mix and higher distribution costs, partially offset by an increase in proppant sales volume. In addition, we accelerated spending on our new proppant technology product, which reduced the first quarter’s earnings per share by approximately 6%.

Net income for the first quarter of 2013 decreased 42% compared to the first quarter of 2012. During the quarter, the company repurchased 30,000 shares of our stock at an average price of $89.44. Since September 2008, 1.9 million shares have been repurchased at an average price of $42.45 per share.

Now turning to the outlook, move forward, we are very pleased with the industry leadership positions that our portfolio of technology businesses, which include Fracpro, StrataGen in CARBO Ceramics have that position us a leader in production enhancements. The value we bring E&P operators is clearly measurable and increased EUR and in reduced finding and development cost is expressed in dollars per BOE. With the recent advancements we have made in frac design with Fracpro, the expertise we offer and completions design an execution with StrataGen, and the new products we are commercializing in proppant, we firmly believe we’ll maintain our strong market position in North America and other key basins around the world.

While we have operated in an industry down-cycle over the last several quarters, we are pleased to have grown our sales volumes, over the short-term, activity will be driven by E&P operators being focused on the reduction of AFE costs and a continued over-supply in the proppant market. Given the cyclical nature of the industry, we believe market conditions will improve. Today our view is that sales volumes are dropping as conversations with our clients lead us to believe, we will see sales volume increase in the second half.

Of importance to CARBO is that remains steadfast and continue to show how we can approve E&P operators EUR by using our industry leading technologies. With respect to the second quarter of 2013, seasonality due to the Canadian spring break up and associated weather in the Bakken region, will likely impact sales volume.

Our low pricing on low-quality Chinese proppant has reached historic lows. We’re also witnessing the emergence of aggressive pricing by other ceramic importers. Currently, we expect to see continued pricing pressures until the market conditions improved.

We remain excited about our recently announced breakthrough innovation in proppant technology. We are targeting a launch of the new product at the SPE annual meeting in September of this year. This innovative product offering will increase the production and ultimate recovery in ultra-deep reservoir completions by increasing conductivity of the fracture.

As mentioned last quarter, the initial application will focus on the lower tertiary formations in the Gulf of Mexico where depths can reach greater than 30,000 feet, as well as other high stress completions areas. Construction at our Millen, Georgia location is progressing. At this point, planned completion is anticipated near the end of the second quarter of 2014.

Reducing our distribution costs and maintaining a high level of customer service remain a key focus. We plan to improve our distribution infrastructure during the year. These improvements should generate cost efficiencies as we exit 2013. And although we are experiencing a challenge environment, our confidence remains intact on the long-term demand for our high-quality products, which increase production and recovery in client's oil and natural gas wells.

Furthermore, we continue to maintain a strong balance sheet in a fiscally conservative approach to managing our business. And now we’ll now turn it over for questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions) Your first question is from John Daniel, Simmons & Company. Please go ahead.

John Daniel – Simmons & Co.

Hey, Gary, thanks for taking my call.

Gary Kolstad

Good morning.

John Daniel – Simmons & Co.

You guys had previously discussed an expectation that you should be able to get sales volumes back to something close to stated capacity levels in the second half of this year. Is that still the expectation?

Gary Kolstad

I think we can certainly do it. We think Q2 will still be difficult for all the reasons we explained including the seasonality, but I think the second half definitely has that potential.

John Daniel – Simmons & Co.

Okay. And actually you mentioned the pricing pressures by other form of players. I know you’re not going to name specific companies, but can you at least say are they the Russians, the French or the South Americans?

Gary Kolstad

I’ll help you out there is Brazilians

John Daniel – Simmons & Co.

Okay, thank you. And then last one and hopefully (inaudible). So the distribution cost issues, I think, continue to be a little bit of pain. Can you quantify for us what the drive on margins what they are and once you get pass this there is only lighter this year what all off being equal recovery would be from a margin perspective?

Gary Kolstad

Yes, so maybe taking it kind of at a high level, the impact that distribution has had is several 100 basis points to a drag on our margin. Our expectation is as we exit and that’s the incremental drag, expectation would be as we exit the year that will be able to recoup half of that, right. So, we obviously don’t get very specific as to what the exact amount is, but several hundred basis points divide that by half and that’s what we would anticipate, that we would benefit, exiting the year.

John Daniel – Simmons & Co.

Okay. All right, thank you. I’ll turn it over to others.

Operator

Our next question is from James West from Barclays. Please go ahead, sir.

James West – Barclays Capital

Good morning, Gary. Good morning, Ernesto.

Gary Kolstad

Good morning.

Ernesto Bautista

Good morning.

James West – Barclays Capital

So the lower-priced proppants that was in the market in the first quarter. I just want a quick clarification there. Is this, I mean on the Chinese side, is this proppant that had been around since last year, or is this proppant that was actually entering the market and coming in at kind of far sale prices?

Gary Kolstad

No, I would say when we look at the mass balance over last few years, which you know, we track in. When we look at the U.S. consumption and demand, and the Canadian consumption and demand and what’s been coming in, I think most of the oversupply came in 2011, and those inventories came up a lot. In 2012, we saw a very nice reduction on the import side and in 2013, that trend continues. So I think a lot of our overhang, some of the stuff maybe is old. The Q4 2011 was really the peak and it was quite a peak and I think you probably likely seeing some pressures on people that have held onto inventory and dealing with extra dollar cost of that.

James West – Barclays Capital

Right.

Gary Kolstad

So, we like the micro tend and when we look at the mass balance, we take think things will work themselves towards equilibrium, but a lot of the hangover actually goes back to the latter part of 2011.

James West – Barclays Capital

Okay, okay, that’s very helpful. And then the comment on the Brazilians (inaudible) I guess, is that their imports now into the U.S., or it is similar to the Chinese where it’s old inventory?

Gary Kolstad

No, I think that’s a recent phenomenon for sure.

James West – Barclays Capital

Okay. And then, one just final question for me. You took, you had I guess $0.06 in kind of new product development cost this quarter. You obviously caught it out being that’s probably higher than that kind of expense normally. Should we expect that to becoming down in the next several quarters, or is this a run rate for the next few quarter until you commercialize in September?

Gary Kolstad

We’re going to have some additional cost for the next couple for quarters. Yes, for sure. And it will probably be a little volatile, I’m guessing it could be a little bit less in some quarters, may be a little bit more in others. But we’re obviously very pleased with the results, we wouldn’t be doing this. So pleased it would be an understatement by me, and I’m not going to say I’m so excited so that you want to rename the product again this quarter like you did last quarter.

James West – Barclays Capital

I understood. I’m going to...

Gary Kolstad

If things are really going in our way there and so we’re trying to push that as fast as we can.

James West – Barclays Capital

Okay.

Ernesto Bautista

And James just to add a little more color to that. The spend would continue for few quarters as we take the technology and apply it to the broader platform as well and not just the first product offering that we’re working on, but beyond that.

James West – Barclays Capital

Okay.

Ernesto Bautista

So, that’s why I don’t know that we’re going to necessarily see that amount go away altogether.

James West – Barclays Capital

Okay. Fair enough, thanks guys.

Operator

Our next question is Jeff Tillery, Tudor, Pickering. Please go ahead.

Jeff Tillery – Tudor, Pickering, Holt & Co.

Hi, good morning.

Gary Kolstad

Good morning.

Jeff Tillery – Tudor, Pickering, Holt & Co.

Just one quick question on technology R&D investment; what is that flow through is that SG&A?

Gary Kolstad

Mostly COGS.

Ernesto Bautista

That's correct, it's mostly in cost of sale, yeah.

Jeff Tillery – Tudor, Pickering, Holt & Co.

I know it's tough to call, I mean inflection point when inventories get reduced, but when I think about what may have changed since the last call, we've had little bit more sluggish rig count you mentioned some of our long-standing competitors getting more competitive on price, anything else changed, kind of with regards to how you think about where your business can go right this year and into next year?

Gary Kolstad

I think we're still extremely confident the base ceramic proppant business, I think continue to do very well as you can tell by what's happened sequentially on price, sequentially on volume year-on-year on volume. So the base ceramic proppant business is very good and then of course I get excited about the future of that business given once we’re going to put out there in the market. And I would also say our base businesses; Fracpro, StrataGen and Falcon are extremely strong in fact growing in the down market.

So I think overall it's pretty good, I think the sand-based businesses are of course oversupplied, and then we have to deal with all these lower quality ceramic guys, but I like the macro trend on the Chinese, imports as I mentioned to the first caller. So it just takes time, we’ve been through this before.

Jeff Tillery – Tudor, Pickering, Holt & Co.

And then the last question you gave some details around pricing and also indicated the Fracpro and Falcon businesses up year-over-year, and trying to drive that with kind of flat volumes and down revenues, if the piece missing there is just a material lowered price realized in kind of the non-CARBO produce, I (inaudible) non-CARBO produced -copper ceramics, is that what I’m looking?

Gary Kolstad

Right. Yeah, you hit the nail on the head there. You absolutely hit the nail on the head there, and you just need the factor in. We told you that ceramic proppant price was down 14% year-on-year, which of course is a large number, right.

Jeff Tillery – Tudor, Pickering, Holt & Co.

Yes.

Gary Kolstad

And then you have the other proppant, which given the market in sand-based proppants, you know, that’s pretty tough on spot market and I think everybody knows that, but yeah. And prior to, as I think, I mentioned, prior to Q1 that the other proppant used to be made up of mostly ISP, now that’s switched.

Jeff Tillery – Tudor, Pickering, Holt & Co.

Okay, all right, thank you guys.

Operator

Our next question is Blake Hutchinson, Howard Weil. Please go ahead.

Blake Hutchinson – Howard Weil, Inc.

Good morning.

Gary Kolstad

Good morning.

Ernesto Bautista

Good morning.

Blake Hutchinson – Howard Weil, Inc.

Gary, just from a longer term perspective here, we talked a little bit about the new product introduction, new technology, and the release, but really mentioned precious little in your commentary. While we are looking at a near and a intermediate term markets that looks pretty intimidating, can you help us in terms of what – is this a practical path, if successful into the new product being a meaningful or full percentage of your output? Is it a couple of year path, are we are talking five-year path where we are not kind of having these near and intermediate term conversations about, what looks pretty tough market in that timeframe?

Gary Kolstad

Yeah. So, first of all, remember what you just said there, a tough markets. So, we are in the down-cycle, right. And so, those things come and go, so that’s the first thing. Now, addressing your broader question, the first product we told people about, you know that will be something that will be producing right or near and it will be a very, how should I say, high valued product, therefore you might imply as the higher revenue product.

So that will have an impact and it will have a great impact on E&P in these deep wells. As Ernesto said there we have a broader application of this technology and we have a team of people looking at that to help define your other question there, as it two years, as it five years like you’re saying. Our whole purpose here, today our ceramic proppant does extremely well because it’s better than everybody else is and so the only thing they can compete on this price, which is what they do.

But what we will do in the future, we will make it markedly better, okay so we are working in the background to figure out timeframe, so and all that stuff, and the execution of that. So we’re going to have something that’s just, fundamentally better and maybe in September, if you shot up there would tell you about some of the things and you would get to realize what that may mean, because quite honestly a lot of this stuff, the existing stuff shouldn’t be around in the future given how good the conductivity is going to be on this product.

Blake Hutchinson – Howard Weil, Inc.

Is it all possible, I’m taking this little further and you probably want to comment on, but is at all possible that you have a broader, a product that can be applied more broadly ready in tandem with 2Q 2014 start for Millen?

Ernesto Bautista

I’m going to hold off a little bit for answer that.

Blake Hutchinson – Howard Weil, Inc.

Okay.

Ernesto Bautista

The direction you’re talking about, is correct.

Blake Hutchinson – Howard Weil, Inc.

Okay.

Ernesto Bautista

The timing, I’m reserving comments on.

Blake Hutchinson – Howard Weil, Inc.

Gotcha, gotcha. Thanks. That’s all I had guys, I’ll turn it back.

Operator

Our next question is from Trey Stolz, IBERIA Capital Partners. Please go ahead.

Trey Stolz – IBERIA Capital Partners

Good morning guys, thanks. First question, with the additional capacity coming online Emirates, Pyramax transaction, you guys are adding capacity it seems like for pretty affordable prices and [various] thing pretty low, do you have any comment on what that might mean for longer term pricing realizations or what your thoughts might be there with respect to this additional domestic competition directly?

Gary Kolstad

Well, I think that they will probably try and displace the Chinese assuming I get the quality up and step, I’m assuming that they would be trying to displace the Chinese. And so, I don’t – it’s more players in the market, but the U.S. and Canada actually the reason we keep building one is, that we have better products than anybody else. Two, there is a shortage of quality products in North America. So, we tend to look at the market and we know where we sit and the rest of them can do what they want to do, but I think that’s probably their strategy is to try and target the Chinese.

Trey Stolz – IBERIA Capital Partners

We’re seeing…

Gary Kolstad

I don’t think of such, I think your comment on the price that was actually not how we will think about it.

Trey Stolz – IBERIA Capital Partners

Got you. Well, we’re also seeing business plans from startups, you have pretty low production cost versus what we’ve seen previously, any kind of comment on that, because it seems like, continue to put further downward pressure on pricing in the near term?

Gary Kolstad

One thing is that we’ve seen those for the last, certainly since I have been at CARBO’s since 2006, we always see this. Very few have come to fruition. Most of them struggle with the quality side of it. So, what they are trying to produce is a very lower end product. We’ve experimented probably with 99% of those different type of mixtures that they are talking about. And we’ll compete with anybody anywhere on the manufacturer cost of our product.

So as we look forward, the improvements we will make on distribution, the leap forward we will make on technology which is always based on EUR and some of the other forays we’re going to be putting on in terms of really getting focused as a production enhancement company, including technology on proppant that will make wells and fields produce with – and prevent some of the normal production problems that they have. I think we’re talking about different things here.

So, we can’t control that. We’re certainly aware of it all. We looked at most of it before, but I think EURs will always end up winning in the long run and you shouldn’t underestimate focus and how the teeter-totter works in the E&P world, right. Down cycle is much more focused on the AFE, as we move into up cycles, we tend to think more about AFE and EUR.

So, we’ll be just fine.

Trey Stolz – IBERIA Capital Partners

All right. Gotcha. And then, talking about EURs, you had some of these field trials going on, should we interpret anything from volume progressions this year in association with those field trials at all?

Gary Kolstad

Well, I think we need some more time on a lot of them, but the early data looks positive on a couple of clients. So, we do expect some conversions, yes. But we will need more time on that. That factors into the way we think about H2 for sure. But we’ve actually gained new clients without field trials in some of these basins too. We were extremely pleased with Eagle Ford in Q1, and couple of client gains in the Bakken. And so our core ceramic business is doing very well in a very difficult market.

Trey Stolz – IBERIA Capital Partners

Would you give any color on that with the new clients, looking at 1Q versus 4Q volumes, how we might put that in perspective?

Gary Kolstad

We generally don’t get to that granularity, no.

Trey Stolz – IBERIA Capital Partners

All right, then the new product in the Gulf of Mexico, what can we think of the potential market for this? Is this relative, maybe the current volumes – is this major potential volume increase or just more of a niche product? How can we weigh that?

Gary Kolstad

Yeah, it’s not the volume site, when people have asked us the question about offshore versus onshore over the years. We’ve always said, well, offshore is whatever – its 95:5 type of thing, 5% of our volume goes offshore. But we do extremely well offshore because of the critical nature of wells.

The big thing about this product will be EURs it brings us, because literally there isn’t any product in the market today that can last in these reservoirs. And so, what will happen is this product will have a, I’m sure we can say much higher selling price, much higher value, and so the revenue will be a lot different than what our normal volume revenue relationship will be. But it’s going to be very interesting product and like I said, it has more broad-based applications for our business moving forward.

Trey Stolz – IBERIA Capital Partners

All right, well, I guess that’s it for me, thank you.

Operator

Our next question will be Stephen Gengaro, Sterne Agee. Please go ahead.

Stephen D. Gengaro – Sterne Agee & Leach, Inc.

Thanks, good morning. Getting back to a similar question, we think about the supply demand for ceramics in the U.S. market in the second half of 2013 and 2014 is obviously capacity growth. Do you see the impact continuing to drag price over the next several quarters or how do you see that supply demand balance of working out and maybe talk to the impact of not only the overall market, but your specific product and how you continue to work to differentiate?

Gary Kolstad

I think we’re trying to stay away from pricing to point out. But if you look at as you know when I said year-on-year Q1 was down 14%. And then we said sequentially from Q4 to Q1 it was down 1%. That should probably tell you what’s happening in the trends there. We think you too will be challenging as we’ve outlined in the press release and things like that.

But I think we would eco the calls at all, if you were saying as well as some of the people that have released earnings already that we’re probated to all further inflection points or in Q2. So I think we like others to think the second half will be better, and so that kind of implies probably the pricing trend.

Stephen D. Gengaro - Sterne Agee & Leach, Inc.

But you don’t worry – you don’t think there is enough capacity worth to hold back pricing despite raising activity?

Gary Kolstad

Well, there is another component there, right it’s when that E&P their business gets better and after they’ve done their normal thing they do during cycles to the service industry, the drilling industry et cetera, et cetera. And there is more focus on EURs than there is on AFEs or at least a balanced approach. You have a natural tendency where we will do better.

Stephen D. Gengaro - Sterne Agee & Leach, Inc.

Okay, thank you.

Operator

Our next question is John Keller, Stephens. Please go ahead.

John Keller – Stephens, Inc.

Yeah, thanks guys. All my questions have been answered.

Gary Kolstad

Okay.

Operator

Our next question is Darren Gacicia, Guggenheim, Please go ahead.

Darren Gacicia – Guggenheim Securities LLC

Hey, thanks for taking my questions. I wanted to get a sense of, somebody I know that mentioned field trials in this call. When you look at kind the field trial on the average put in there, what kind of drag on margin is that producing if any? Is there any way to kind of look at that may be fading over some period of time?

Gary Kolstad

It’s a drag on margins in that we offer a lower price in gold, basically hand in hand with the services company and offer a lower price to the consumer and its always for x number of wells things like that. So it has a finite period and I would say as the second half rolls on there will be less of it done.

Darren Gacicia – Guggenheim Securities LLC

I mean is that – is there an order of magnitude to put around to frame how we should think about that?

Gary Kolstad

No, I don’t – what do you think Ernesto, is there?

Ernesto Bautista

From a typically how we’ve addressed it is really just with respect to price. So if you go back in prior press releases, we’ve actually discussed what the component was of the field trials. We had a nominal, almost a very small decrease from 1Q, so that impact was relatively small in the first quarter, comparatively speaking.

Darren Gacicia – Guggenheim Securities LLC

Got it, okay. And then kind of changing gears a little bit, if you think about it, I think there is a fair bit of kind of recomplete work that seems to be entering the market as people kind of are focusing more on EUR. Is that something that you see kind of picking up and maybe is favorable for your ceramics? Or is that something that maybe too small those kind that really quantify?

Ernesto Bautista

I think it’s too small to quantify and I would have said that now for 25 years, there is a lot of opportunity out there. But on basis of how many wells we drilled in step, it still a small percentage.

Darren Gacicia – Guggenheim Securities LLC

Got it. But if I get to squeeze one more in, I know there has been a lot of talk of your new product coming in September, when you look at it from just a share kind of capacity of plant, what’s the cost – have you kind of figured out the cost of converting plant maybe to run that on bigger scale? And is there kind of a timing of how longer will it take to completed a single line, just a kind of to give some orders of magnitude and some scale to what may come from things over the future?

Ernesto Bautista

Yeah, one the previous callers kind of asked the same question in different way. But we are right in the middle of that and have a team of people looking at that right now. So it would pretty mature for me to tell you that all I’m telling you is that we’re in the process of looking at it, and we know that we will move forward on that, but we just really can’t give you the timing right now until we get little bit farther down

Darren Gacicia – Guggenheim Securities LLC

Great, I really appreciate your time.

Ernesto Bautista

You bet.

Operator

Our next question is Trey Cowan, Clarkson Capital Markets. Please go ahead.

Trey Cowan – Clarkson Capital Markets

Hi, good morning.

Ernesto Bautista

Good morning.

Trey Cowan – Clarkson Capital Markets

Just quickly I want to switch gears and ask you guys what you think about the newer market that being the Eagle buying and what you see as far as what you’ll be delivering to that market will it be more sand or more ceramics or mix of both, how are you guys looking at that?

Ernesto Bautista

We generally don't go down to that granularity. We’d like to stay in the world of like Eagle Ford, Bakken, West Texas or Permian next we go to West Texas. So sufficed to say that with the folks we have out there and our client contacts and our good friends at the service company that we stay in tune to all these opportunities then we don't like to talk about little things and fairly good to be big things.

Trey Cowan – Clarkson Capital Markets

Understandable. But with this one, do you think it from what I’m hearing anecdotally the world economics are pretty good, are you guys seeing something that could be another Eagle Ford in the next five years or so?

Ernesto Bautista

I think we reserve comment. I think it's too earlier days.

Trey Cowan – Clarkson Capital Markets

All right. Thanks a lot guys.

Operator

Our next question will be Brian Uhlmer, Global Hunter. Please go ahead.

Brian Uhlmer – Global Hunter Securities

Good morning.

Ernesto Bautista

Good morning.

Brian Uhlmer – Global Hunter Securities

One quick question for you. In your view, what is a decent balancing number for a quarterly and for run rate from China, where you don't think, where you think if there is not going to be major pricing pressures still on here?

Ernesto Bautista

I think I'd go back to my comments, a large inventory was built up in the latter part of 2011 and that's been declining since then and the number you put out this morning, I don't think we’d agree with as far as how our Q1 looks, but I think that today, we would say they’re trying to balance out the inventory that exist in other words, I think we are seeing declining inventory balances at the current and past few quarter run rates. So we like the macro trend that’s happening there and some of these prior sales, like I’ve said, might be due to people having [stuff sitting] around so long and baring the cash burden of that.

Brian Uhlmer – Global Hunter Securities

Now, if you think of that, the number that I put out that you’re referencing was too high or too low?

Gary Kolstad

I think you can talk offline with Ernesto and Mark, and you guys get that figured out.

Brian Uhlmer – Global Hunter Securities

Okay. Have you publicly disagree with that (inaudible) going to answer in public, but we’ll talk offline. Thanks.

Operator

Our next question will be Brandon Dobell, William Blair. Please go ahead.

Brandon B. Dobell – William Blair & Co. LLC

Thanks. You guys mentioned some new clients both for field trials as well as without field trials. Maybe two questions there. One, the kinds of price points you are getting from those new clients, how they look relative to, A, what you thought kind of going into those negotiations, and Billion, kind of relative to market prices, and what kind of duration, magnitude those kind of things are you seeing with those new client deals?

Gary Kolstad

Well, whenever we have new clients, we generally have agreements made up. Remember we invoice the service company. So generally speaking it just falls into our standard type pricing. It’s only in field trials, sometimes we’ll offer an economic incentive. So as far as the magnitude, just given those two plays, whatever they do in those wells is usually fairly big, and, but I probably say we’ve been very pleased with the Eagle Ford and the Bakken as a whole continues to use more and more ceramic. Now we don’t have real time statistics on that, but as we’ve looked over the years, the Bakken continues to consume a higher percentage of ceramic year-after-year of the total proppant type. So, we really like the trends of both of those big plays.

Brandon B. Dobell – William Blair & Co. LLC

Okay. And then given what’s happening in the ceramic part of the market was supply and pricing, how do you think about the outlook for the Resin-Coated part of the market? Do you expect to get squeezed on one or both sides from sand and/or ceramic? Do you think you can take the place of lower end ceramic stuff or maybe the higher end sand or should it?

Gary Kolstad

I don’t think it should, and I think that if we see an improvement in natural gas and drilling and the biggest market for it in the past has been the Haynesville. When you see natural gas start to come back, which you know were, whatever 14 or 15 year loads on gas rigs now, I think then you will see some of that excess capacity consumed. And it’s our job to, no different that we educate about the difference in the quality of ceramics, it’s our job to educate on the difference in the quality of sands. And so we are trying to explain that if you are not using Northern White sand you know you’re obviously not getting the conductivity or the EURs that you would with using the second or third tier of sands. So it’s the same eduction process, but I think you have to wait for gas to pick up before resin-coated sand really picks up.

Brandon B. Dobell – William Blair & Co. LLC

Okay, and then final one for me. You mentioned earlier about recovering some of the distribution expenses you put on to out of the P&L by year end, should that trend continue into ‘14 or is it, hey we are going get this back and by the end of the year and then there is kind of no more leverage on that unless volumes come back, and I guess I’m just trying to give gage, the tail on that, kind of expensive pavement through the end of the year into 2014?

Gary Kolstad

Yeah. There is a lot of cost drivers in there. I mean we tend to talk about the bigger items like storage, or transloads or fixed capital investments, but the whole issue about railcars, the whole issue about trucking cars, all that stuff will come down. And so, we’re working numerous vectors on this. We probably in the past have just talked to you about the bigger stuff. But I think, you probably see the trucking and all those things. Those costs come down certainly by the end of the year, you know, that’s probably done by then. But some of the investments could wander into the first half of 2014, I’m sure. No problem there. But it’s – where a bunch of things we’re working on.

Brandon B. Dobell – William Blair & Co. LLC

Okay. Thanks a lot. Appreciate it.

Operator

The next question is from John Daniel, Simmons & Co. Please go ahead.

John Daniel – Simmons & Co. International

Hi, guys. Thanks for putting me back in. Just two questions, Gary. If I missed this, I apologize. But on the Millen plant being sort of being pushed to Q2 next year, is that related to manufacturing challenges, or is it just you guys taking a slow plane given the sloppiness at the market right now?

Gary Kolstad

It’s not manufacturing challenges, you mean construction challenges mainly?

John Daniel – Simmons & Co. International

Yeah. Constructions – I’m sorry.

Gary Kolstad

Yeah, we’ve had a this slight bit of that and we just have to do with where we’re digging dirt and doing all that stuff, but I would characterize the other part of that as we’re not going to spend any extra money to accelerate it. So it’s probably the beset way to capture that. Because we can always do that as time goes on, but at this point in time in the market, we don’t see the need to spend excess money accelerating things.

John Daniel – Simmons & Co. International

Okay. Fair enough. And then the last one I’ve got is. I know the preference for maintaining a conservative financial structure, but given your longer-term confidence in the business and contrast network sort of the market and skepticism when you look at the stock down 15% a today, is there region you guys are willing to maybe accelerate the buyback program or do you maintain the capital structure as if?

Gary Kolstad

Yeah. I don’t know that we would necessarily change the capital structure, John, I think for us, one kind of reiterating what we talked about in the past at a minimum work in the buyback, we’ll get issued during the year to avoid share creep and then beyond that, be opportunistic, those conversations occur and if there is a point in time where we see opportunity that may be better than another, we’ll taken under advisement, but historically we remain debt-free and at this point, that’s how we intend to remain.

Ernesto Bautista

I think John, I’m going to add that the other thing we’re quantifying right now is relates to a couple of questions asked during the day and that’s we want to know what, let’s say some modifications to plants might cost us. so we’re kind of in the middle of that too.

John Daniel – Simmons & Co. International

Okay. Thanks for all your time today.

Gary Kolstad

You bet.

Operator

The next question is Robert Christensen, Buckingham Research Group. Please go ahead.

Robert L. Christensen – Buckingham Research Group

Thank you. On your new product, about how many deals in the Gulf of Mexico would it apply to I mean we’ve had 15 maybe 20 discoveries out there. That about the right number of fields it might take on this new product.

Gary Kolstad

I think that in our recently Bob, some of those announcements and some of those well names and some of the companies, that’s really the focus for us and the request that was made several years ago by a super major does to do this really involve what they saw ahead in that time and when we talk to these fellows, I think they tend to tell us the future is going to get bigger in that arena and so, I think what we do today, we’ll get bigger and bigger as time goes on, but we’re really I think I put it on in conference slide the other day where at some place, basically the client gave us a specific request and that was to have twice the conductivity at 20,000 PSI closure as our industry leading bauxite product can do back then and we’ve hit that.

So, that’s kind of a real game changer for the E&P and it isn’t just conductivity there is other things involved with those big offshore completions as you might imagine there is other parameters that proppant need to have and we’ve managed to capture those two. So, I would say as we, when we look at 2013, it will be a small amount and I think we will grow, grow, grow.

Robert L. Christensen – Buckingham Research Group

Very good and I guess it has applications around the globe.

Gary Kolstad

Yeah.

Robert L. Christensen – Buckingham Research Group

Perhaps I guess the exception would be Brazil, their local content rules. So, we shouldn’t anticipate that I guess that market, is that…

Gary Kolstad

Yeah, I think any place, we just told you, we’re targeting the lower tertiary, but we also make statements in there that anything that’s deep and high closure stress and then once again, this will have broader application, so that will open up a whole other opportunities for us.

Robert L. Christensen – Buckingham Research Group

Second question, if I may and I think you’ve answered it four times, but perhaps you can help me a fifth time and that is the Chinese proppant in this country. Just some more guidance as to timing as for it’s give ammunition, I guess as a competing product, I don’t have this set of resources, somehow as to the amount of imports monthly that have been occurring. Just, can you give me a little more hand holding on the sort of...

Ernesto Bautista

Yeah, I would say…

Robert L. Christensen – Buckingham Research Group

… activation of Chinese proppant from the U.S. market. I think I know what the root of the problem for years ago, but just a little more handhold that would be very helpful to me on the Chinese side of things?

Ernesto Bautista

I would say – the [bubbles] in last couple of quarters, we’re consuming inventory, maybe three quarters we’re consuming inventory. In other words the balance sitting in North America is declining, but once again it isn’t just that. It’s an absolute must for us to educate E&P service companies and really show how bad this stuff is, and because as people become more and more aware, I don’t think people are going to take these risks on it, because it’s a risk to you all, and it’s quite remarkable and it takes a long times, its’ no different than what we done for the first 33 year, trying to educate people on ceramics versus sand or resin-coated sand, but we will continue on that and we see it in a lot respects from all avenues that people are trying to reduce their inventories. But they had to make decisions back in late 2010 and 2011, and so we’ll fight the battle on both fronts.

Robert L. Christensen – Buckingham Research Group

Thank you, Gary.

Gary Kolstad

You bet.

Operator

I will now turn the call back over to Mr. Kolstad for any closing remarks.

Gary Kolstad

Thank you again for joining us this morning. And once again we tend to try and run the business very long-term and well downcycles are tough. They always do go away. Overall, we’re very pleased with the industry leadership positions that our portfolio technology businesses have as I mentioned before, the Fracpro, the StrataGen, the CARBO Ceramics and we really are becoming a leader in production enhancement, we are not just talking about CARBO Ceramics anymore. And the value we bring is in the increased EURs and lower dollars per BOE, our F&D cost.

We’re focused on engaging with E&P operators to show the technology platforms we’ve recently developed, can bring even higher production in EURs. And originally, we build CARBO’s reputation on being the worldwide leader in ceramic proppant and we are still committed to expanding our ceramic leadership with our new proppant technology. However, we’d now gone beyond that and are building upon and expanding our reputation into an industry-leading production enhancement company.

And as I mentioned before, the recent advancements we’ve made in frac design, with Fracpro, the expertise we have in completions and design and execution with StrataGen and this new products and technologies we’re going to be putting on proppant make us believe that we will maintain our strong market share in North America and other places around the world. We’re also very pleased with our industry-leading position in Falcon Technologies and that business continues to grow as we gain clients and expand geographically. Their technology leads the industry and we’re working on future products that should positively impact that business.

We continue invest in organic growth as we mentioned before in our plans, in our proppant new technologies, as well as the Falcon business. We also mentioned that we maintain a strong balance sheet and fiscally conservative and those are the things that will carry us forward into the future. And with that I thank you for joining us today. And we will see you next quarter.

Operator

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.

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