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US Silica Holdings, Inc. (NYSE:SLCA)

Q1 2013 Earnings Call

April 30, 2013 10:00 am ET

Executives

Michael Lawson – Director of Investor Relations and Corporate Communications

Bryan Shinn – President and Chief Executive Officer

Donald A. Merril – Vice President and Chief Financial Officer

Mike Winkler – Vice President of Operations

William A. White – Retired Chief Financial Officer

Analysts

Jack Kasprzak – BB&T Capital Markets

Brandon Dobell – William Blair & Company

Trey Grooms – Stevens, Inc.

Blake Hutchison – Howard Weil

Bradley Handler – Jefferies LLC

Travis Bartlett – Simmons & Company International

Operator

Good morning, and welcome to US Silica's First Quarter 2013 Earnings Conference Call. Just a reminder, today's call is being recorded, and your participation implies consent to such recording. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation.

With that, I would like to now turn the call over to Mr. Michael Lawson, Director of Investor Relations and Corporate Communications. Please go ahead.

Michael Lawson

Thanks, Brenda, and good morning, everyone. And thank you for joining us for US Silica's first quarter 2013 earnings conference call. With me on the call today are Bryan Shinn, President and Chief Executive Officer, and Don Merril, Vice President and Chief Financial Officer.

Before we begin, I would like to remind all participants that our comments today will include forward-looking statements, which are subject to certain risks and uncertainties. For a complete discussion of these risks and uncertainties, we encourage you to read the company’s press release and our documents on file with the SEC

Additionally, we may refer to the non-GAAP measures of adjusted EBITDA and segment contribution margin during this call. Please refer to this morning’s press release or our public filings for a full reconciliation of adjusted EBITDA to net income and definition of segment contribution margin.

Finally, during today’s question-and-answer session, we would ask that you limit your question to one plus a follow-up question to ensure that all who wish to ask a question may do so.

If you have additional questions, we would invite you to get back in the queue and we will be happy to take as many questions as time permits.

With that, I would now like to turn the call over to our CEO, Mr. Bryan Shinn. Bryan?

Bryan Shinn

Thanks, Mike, and good morning, everyone. I will begin today by sharing highlights from our first quarter performance followed by an update on our two business segments, Industrial and Specialty Products, or ISP, and Oil and Gas Profits. I will also provide a progress report on our strategic initiatives and discuss key market trends going forward in 2013. Don Merril will then provide color on our first-quarter financial results and outline our guidance for the second quarter of 2013.

The first quarter of the cutting was very strong for our company and we posted record revenue driven by strong performance in oil and gas and we again delivered EBITDA at the high end of our guidance range specifically on a year-on-year basis. Quarterly volume increased by 8% to 1.9 million tons while revenue climbed over 19% to $122.3 million. On a sequential basis volume was flat in ISP and up 17% in oil and gas. Adjusted EBITDA of $38.8 million increased 4.9% year-over-year and was flat sequential.

First-quarter earnings per share were $0.33 our EPS in Q1 was negatively impacted by $1.9 million or $0.03 a share due to extraordinary expenses related to a recent secondary stock offering and MLA activity. Don will review this more fully during his comments. I take down in our two segments in further detail. Sales and contribution margin from ISP segment in the quarter were up approximately 2% on a sequential basis, reflecting our continued focus on higher value higher margin sales.

Further contribution margin dollar were up 7% versus the same period last year, we expect this segment to continue to be a positive contributed to 2013 earnings growth due to continue the bounce in the housing, chemical, automotive end markets and a focus on developing and marketing higher value offerings.

In our oil and gas segment demand continues to be very strong, driven by efficiency gains in drilling and hydraulic fracturing. Volumes and revenues increased 17% and 4% sequentially. Oil and gas contribution dollars declined by 3.6% sequentially of a very strong Q4.

Our contribution margin was down due to three main factors. The first and largest was product mix. We experienced unusually strong demand for our lower priced 100 match product. While profitable on an absolutely basis, the contribution margin per ton of 100 match is significantly below our other products thereby diluting the quarterly average. If not for this unusual demand, we believe that contribution margin per ton would have resembled that of other quarters in 2012.

Second was customer mix. Our contract customers purchased volume significantly in excess of their commitments in Q1, given the stock prices remained well above contract, this negatively impacted contribution margins. This shift should reverse itself through the balance of the year. Third as discussed on our last call, we made some contract modifications, trading pricing adjustments for longer terms and increased volumes, which took effect at beginning of 2013. Those factors were partially offset by higher spot prices, which rebounded in the quarter.

Let’s move to an update on strategic growth initiatives starting with our new Sparta plant. We had a very successful start up of the new facility earlier this month and had completed initial sales to U.S. and Canadian customers. Our products have been well accepted by the market, and we expect sales to ramp during the rest of the year. Additionally, due to market demand, our board has authorized the acceleration of the construction and commissioning of Sparta Phase II, which will add an additional 850,000 tons of annualized capacity, of course, high quality Northern White Sand to our portfolio.

Once this expansion fully comes online later this year, our total annual frac sand capacity will be approximately 4.6 million tons more than a 50% increase versus last year. We also made significant progress at our new Rochelle facility with the launch of our resin coated sand product line. We don’t have two products under commercial production that have been certified by independent third party testing and several potential customers are currently conducting their own internal qualification testing. We are also starting to ship initial product volumes to our transloads in anticipation of sales in late Q2 or early Q3. Finally, as many of you are aware, U.S. Silica has been at the forefront of utilizing in-base and transloads to improve customer service and growth share.

We further expanded our source network in Q1 by commissioning 5 new transloads bringing our total network to 21. In addition, our new state-of-the-art unit train capable transloads in San Antonio to serve the Eagle Ford has just been completed and the first unit train of sand is in-bound as we speak today. We set a goal of having 25 to 30 transloads online by the end of the year and given that San Antonio is number 22, I’m highly confident that we will meet or exceed that goal.

Let me take a moment to talk about how our logistics capabilities are improving our competitiveness and positioning us to grow share. Every transload we add expands our addressable in basin market by putting us within driving distance of additional rigs. We spend a lot of time thinking about how to get the most leverage out of each new location. The point of sale for our products is moving from the plant to the basin and we are leading the way. Spot contracts for multi-well pads are creating acute needs for large amounts of profit; smaller service providers with limited logistics capabilities are partnering with us to forward stage and carry the cost of inventory.

Larger players want to eliminate complexity and administrative challenges by partnering with fewer vendors that have broad geographic reach, reliability and logistics. Our national transload network gives us an advantage for both types of customers. To replicate this network, a new competitor needs to develop the system of plants with direct access to every major railroad. Simultaneously, they also need to build out a national network of transloads in every major basin. Further, they need a balance sheet to support the delivery cost of inventory at each transloads. Finally, to bring all together, they need a world-class supply chain organization to forward stage inventory in advance of demand and then shift on the play when plans changed. We see no new entrance and only a few existing competitors that are able to accomplish this.

I also wanted to take a few minutes this morning and talk about the market trends that we expect to impact our business over the next several quarters. Generally, I’m optimistic about what we’re seeing in the oil and gas sector, despite reduced overall rig activity, horizontal rig counts were up sequentially and most of our customers are expecting this trend to continue especially in areas like the Permian. We also expect continues strong demand in Marcellus where we believe that we have on of the best transload networks in the industry.

We expect profit demand growth to outpace rig count growth as the enhanced efficiency of those rigs drive growth in both wells drilled and stages per well. Additionally, we continue to hear from our customers about the superior returns they achieve by investing in greater profit density across more closely spaced stages. We are filling this demand growth and it was one of the reasons that March 2013 was the single highest volume demand month that we’ve ever experienced for frac sand.

It’s also important to note that increasing service intensity will impact drillers, service companies and providers of consumables differentially. We believe that frac sand providers will be direct beneficiaries of increasing service intensity and that sand based proppants will continue to grow at the expense of other products. Further, we are not facing competitive pressure from imports and put simply the market dynamics we experienced at the top tier Northern White sand provider are very different from those supplying manufacturing proppants in second tier sands.

Our strategy for the oil and gas segment going forward is to continue to add and profitably sell out new capacity to a mix of contract and spot customers to an increasingly robust distribution network. We plan to accomplish this through a combination of organic growth, Greenfield development and select acquisitions that complement our business model of being a low cost, high quality producer with outstanding logistics capability and strong customer service.

On the ISP side of the ledger, we will continue to work to transform this segment to a technology driven enterprise, by developing capabilities and products that enable us to penetrate more profitable markets. We have a robust opportunity pipeline with several new offerings under development, the first of which we anticipate in launching into the water treatment market later this year. We expect to generate at least $10 million in incremental EBITDA from new industrial products by 2015.

The last topic that I want to discuss today is capital allocation. We frequently received questions from investors on this and I want to update you on our current plans. Management in close consultation with our board spend significant amount of time considering capital allocation alternatives. In addition to investing our cash in high return projects such as our recently constructed Greenfield sites, we’re also carefully evaluating options for highly accretive acquisitions within our current supply chain for oil and gas and to build capabilities in ISP. As noted earlier in my remarks, we incurred Q1 charges associated with potential M&A activity.

Beyond growth projects and M&A, we’ve also considered options to return cash directly to shareholders. Our board is committed to pursuing a rigorous and disciplined approach to capital deployment and to achieving best-in-class total shareholder returns, including a valuating return of capital initiatives and policies. After completing a thorough analysis of our forecasted cash flow and need for growth capital.

I’m pleased to announce today that our Board of Directors has approved initiation of regular quarterly cash dividend. Initial quarterly dividend will be $0.125 per share for shareholders of record as of June 19, 2013.

Future dividend payments are core subject to Board approval and initiation of this dividend reflects the confidence that we have in our future business prospects and our ability to generate cash beyond our needs for growth investments.

Now I’d like to turn the call over to Don Merril, our Chief Financial Officer to discuss our final results in more detailed and update you on our guidance. Don?

Donald A. Merril

Thanks Brian and good morning everyone. As Brian mentioned tons sold in the first quarter of 2013, totaled a record 1.9 million compared with 1.7 million sold in the first quarter of last year and approximately 1.8 million ton sold in the fourth quarter of 2012,

Revenue in the first quarter was up 19% year-over-year, an increase 3% sequentially over the fourth quarter of 2012. The increase in revenue was driven largely by volume growth in our oil and gas segment. On a year-over-year basis revenue for the oil and gas segment grew by almost 37% to $73.6 million. While revenue for the ISP segment was essentially flat from the prior year totaling $48.7 million versus $48.8 million in the first quarter of 2012. Volumes for the oil and gas segment were 920,569 tons and the contribution margin was $36.2 million compared with 678,982 tons and the contribution margin of $35.1 million for the first quarter of 2012.

Volumes for the ISP segment totaled 964, 956 tons and the contribution margin for the ISP segment was $13.2 million compared with 1,63,900 tons and a contribution margin of $12.4 million for the same quarter in the prior year.

SG&A expense was $12.4 million for the first quarter of 2013 compared to $9.9 million in the first quarter of 2012 and up $1.2 million sequentially from the fourth quarter of 2012.

As Bryan noted the increase in SG&A in the quarter is largely the result of extraordinary charges related to the secondary offering that was completed during the quarter and additional expenses associated with M&A and other business development activities related to the company’s growth initiatives.

Depreciation, depletion and amortization expense in the first quarter was $8.3 million compared with approximately $6 million in the same quarter last year. The increase in DD&A expense is being driven by increases in capital spending associated with our growth and capacity expansion initiatives combined with increased depletion due to the additional volumes.

We expect depreciation, depletion and amortization expense to continue to increase right along with our capital spending in 2013. Interest expense for the quarter decreased 6% to $3.6 million compared with $3.8 million in the first quarter of 2012.

The decline in interest expense year-over-year was due primarily to the conversion of an equity note and prior to our IPO in the first quarter of 2012.

Turning to the balance sheet cash and cash equivalents totaled $42.9 million at March 31, 2013 compared with $61 million at December 31, 2012. The majority of the reduction relates to the payment of a special dividend in Q4 of last year. As of March 31, 2013 our working capital was $101.3 million, and we had $29 million available under our revolving credit line. As of March 31, 2013, our debt increased by $10 million to $265.4 million compared with $255.4 million at December 31, 2012. We incurred capital expenditures of $22.7 million in the first quarter of 2013.

The bulk of our first quarter spend was related to our raw sand plant in Sparta, Wisconsin. The acquisition of an existing Silica sand processing facility near our Ottawa operations and the construction of three new transloads, one in Texas, one in West Virginia and one in Ohio.

Turing to our outlook for the second quarter of 2013, we expect revenue to be in the range of $132 million to $140 million, we expected adjusted EBITDA for the second quarter of 2013 to range between $39 million and $42 million, at this time based on our strong start to 2013, we are re-performing our full year 2013 guidance for adjusted EBITDA in the range of $165 million to $175 million and capital expenditures in the range of $50 million to $60 million. With that, I would like to turn the call back over to Bryan.

Bryan Shinn

Thanks Don, before taking questions, I did want to mention that we look forward to hosting many of you next month at our First Investor Day at our Flagship facility in Ottawa, Illinois. We believe that the program that we have planned will be very beneficial in helping you better understand our company and our business and the specific strengths and advantages that U.S. Silica enjoys in the marketplace. That concludes our prepared remarks today. Operator, would you please open the call up for questions.

Question-and-Answer Session

Operator

Thank you. We will now conduct a question-and-answer session.(Operator instructions) Our first question comes from Jack Kasprzak with BB&T. Please state your question.

Jack Kasprzak – BB&T Capital Markets

Thanks. Good morning, everyone. Were there any start-up costs that might have related to Sparta One that might have impacted margins in the quarter?

Unidentified Company Representative

Sparta One was up and running by the end of Q4 into Q1. So any of the start-up cost would have been handled in Q4.

Jack Kasprzak – BB&T Capital Markets

Okay. So nothing unusual in terms of the margin performance there?

Unidentified Company Representative

No.

Jack Kasprzak – BB&T Capital Markets

And I just want to make sure I understand one of the three issues or items that you -- Bryan, in your comments, you said impacted the oil and gas segment. That is, customers buying in excess of their commitments in Q1. So does that imply that later in the year that when there's a contract – when the contract is fulfilled, they'll be buying it at spot prices, and if spot prices are still higher than contract prices, you'll kind of realize the benefit, if that's the way to say it, or later in the year? Is that sort of what you were saying?

Unidentified Company Representative

Yes. It’s a great question, Jack. And may be just to add a bit more color around that, we saw extremely strong demand from our contract customers. Actually, if you do the math, they purchased more than 120% of their contract minimums. And as you observe, if we’ve sold those excess volumes at spot, we certainly would have improved our margins. As in the previous quarters, the spot price remains above contract and actually the spot prices were up in Q1 versus Q4 that’s the first time we’ve seen an quarter-over-quarter increase in spot pricing actually in Q1 of 2012.

So as we thought about this during the quarter, we made the decision to support our contract customers and to allow them to purchase extra volume, but certainly the spot demand was available. Just to give an example the March was busiest month that we’ve ever had in our history for frac sand sales at least a request for sales for sure. We turned down over 50,000 tons of business in March alone. So I expect that as customers reach their contract levels throughout the year that this will balance out as you said, but we view it as a positive that we had such strong customer demand in Q1.

Jack Kasprzak – BB&T Capital Markets

Thanks for that color Mike.

Mike Winkler

Okay, thank Jack.

Operator

Our next question comes from Brandon Dobell with William Blair. Please state your question.

Brandon Dobell – William Blair & Company

Thanks. May be that to take away from that one, Bran you mentioned the mix issue in the quarter, maybe a little bit of color around how much of a Delta between the lowest quality and highest quality I guess or how much of an impact that 100 mess had on contribution margin of the quarter versus your expectations. And it sounds like you are relatively confident if that would in the reverse or go away as the year progress and I guess some color on your components will be helpful too?

Bryan Shinn

Sure, Bran and thanks for the question. We sold massive volumes of 100 match during the quarter it was actually 2x our highest quarter in 2012. And as we commented even though in every ton we sell there is profitable on an absolute basis it’s pretty dilutive to contribution margin per ton. And if you do the quick math on that one, if we’d sold kind of a normal amount of 100 mesh, our contribution margin per ton would have been in the range of where we were in 2012. I think another important note about the excess 100 mesh sales is that it didn’t cannibalize our other sales. We still had extremely strong demand for the other grades and we actually set a record volume for those other grades. And my expectation is that this will probably balance out over the year. We’re seeing less 100 mesh demand in Q2 here in April. But that’s kind of one of those factors that’s a little bit out of our control. The well engineers will decide to use whatever product mix that they choose to. But I would expect that quarter one was a bit of an anomaly there based on what we’re seeing so far.

Brandon Dobell – William Blair & Company

Okay. And as a follow-up, just to make sure I got your comments around the new capacity correct. Any sense of how quickly Sparta and then the second line should kind of reach capacity, should we think of that happening in 2014 or would that extend out to 2015?

Bryan Shinn

So, it’s a great question, right, and so we have our folks working on that quite a bit right now as you can imagine. We have our engineering and our construction teams working on the exact schedule so we can get a start-up done. It’s something our sales team is out working in the market right now. I would say that we’re relatively encouraged by the strong demand in Q1 and that’s one the major factors that led us to meet with the Board and request the approving acceleration of this project. I think it would definitely ramp over time. It won’t be sort of a step function where it’s also that they won.

Brandon Dobell – William Blair & Company

Right.

Bryan Shinn

So it will ramp, I think, as we go through towards the end of 2013 and then into 2014, but certainly if we see the current demands that are in the market right now and if that continues, I feel really good about our ability to sum most of that product by the time we get into 2014?

Brandon Dobell – William Blair & Company

Okay, great. I appreciate it.

Unidentified Company Representative

Sure, thanks [Brendan.]

Brandon Dobell – William Blair & Company

Thanks.

Operator

Our next question comes from Trey Grooms with Stevens. Please state your question.

Trey Grooms – Stevens, Inc.

Hey, good morning. So on San Antonio coming online first off; was there any cost in the quarter associated with that that you could point out that would have impact? Secondly, how do we think about the impact from that because it’s a rather large transload facility for you guys in basin sales, kind of how we think about that -- that roll out could impact sales in margins just kind of going forward, that one particular facility?

Unidentified Company Representative

Yeah sure, Trey and so to your first question; we didn’t have significant costs in the quarter associated with that. So that really wasn’t an issue. Around San Antonio, generally, we’re extremely excited about that. As you said, it’s a quite large facility and we have the capacity to put probably in excess of 50,000 tons through that facility on an annual basis.

So with the kind of demand that we’re seeing down in the Eagle Ford, we would expect that facility to be very busy. And it has two main advantages that we like. One is that obviously, it gives more efficient logistics out to the basin and the costs per ton to deliver out into the transload is significantly reduced versus more traditional type of rail shipping scenario.

I think the other and perhaps more important thing is it gives us great flexibility and responsiveness. So when we ship a unit train, say from around Ottawa facility to San Antonio, we can literally have the sand there in a couple of days versus a couple of weeks shipping it the sort of old fashioned way, if you will. And really what our customers are coming to use and talking a lot about is responsiveness. We see more and more of the stimulation crews that are working on the spot basis and our customers are tending to get awarded large jobs with very short notice, so partnering up with US Silica and have an additional sort of rapid response capability in San Antonio. I think we’ll service extremely well.

Trey Grooms – Stevens, Inc.

But just kind of looking at just to be clear on your guidance for the year, that assumes all of the roll-out of all of these kind of in-basin facilities that you’re planning for the year at any kind of impact on the margin, dollars or a percentage I guess that you would see as a result of those?

Unidentified Company Representative

Yeah, that’s correct.

Trey Grooms – Stevens, Inc.

Okay, thanks. I’ll jump back in queue. Thank you.

Unidentified Company Representative

Okay. Thanks, [Greg].

Operator

Our next question comes from Blake Hutchinson with Howard Weil. Please state your question.

Blake Hutchison – Howard Weil

Good morning, guys.

Unidentified Company Representative

Good morning.

Blake Hutchison – Howard Weil

Just getting back to kind of the 100-mesh market in itself, we saw an uptick in your volumes delivered in the back half of last year as well and leading into this. Should we start to read anything into that in terms of that market, perhaps getting back into a little better balance or do you think that this point it’s more of a regional advantage playing up for Silica?

Unidentified Company Representative

You’re talking about the 100-mesh sales in particular Blake?

Blake Hutchison – Howard Weil

yeah. I mean at this point given the volumes you guys work through in the back half of last year and this year, I would suggest that if the industry is doing the same, maybe even that portion of the markets getting back into a little better balance and is it too much to read into that a little healthier 100-mesh for the industry large or is this just kind of Silica’s regional advantages playing out some extent?

Unidentified Company Representative

Okay, I got it. I think it’s a couple of things. Obviously, we have the advantages and the customer contacts and relationships. But I think there is just a lot of experimenting going on right now with different proppants mixes and we believe that this sort of serves in (inaudible) demand was, at least in some part attributed to folks trying to use less guar in their fluid systems and meeting a lighter weight proppant as they did some different kind of trials there. So it’s not necessarily saying that gas market is coming back in (inaudible), is going to go great, great [gun to gas]. I wouldn’t read that into it. It’s not the best intel that we have from the market right now.

Blake Hutchinson – Howard Weil

Great, that’s really helpful. And then, just in terms of realizing that the first quarter might have been abnormally high in terms of the contracted volumes versus spot market, you did go through a healthy process of you making some adjustments to customer contracts. If we had tracked in the past, maybe in the 70% to 80% of volume range, do you think the natural tendency post your rearrangement of some of these contracts is just going to be a little bit higher?

Unidentified Company Representative

So we’ll have to see how it plays out. I think that being in the 70% to 80% range is the right kind of sweet spot for us right now. If you look at what we did on the contracts, we had customers approach us and we actually had multiple customers that extended their contract term sort of the length of the contract. We also had multiple customers that ask for increased volume. And we really said that we'll trade value for value, and I think we’ve got a lot of value in the trades that we made there. So for example it’s going to allows us to bring the Phase One of Sparta on and still have 70% or greater of that product contracted out. We believe that our 2013contract volume will probably increase by around 30% as a result of the great work that our sales team has done, and the other thing that I really like is that with these contract extensions that we achieved for the volume weighted contract roll off has moved out from about mid 2014 out into 2015. So a lot of win for us, and a lot of value that we got out of doing that work with our customers.

Blake Hutchison – Howard Weil

Okay, and then just sorry if I can just fit in a point of clarification, did you fit or deliver any meaningful volumes from Sparta in 1Q as you said it was actually functional?

Bryan Shinn

No, we didn’t, we’re ramping up as we start here in April, the plans come up flawlessly we had an initial sales in the U.S. and the Canada products have been really well accepted by customers and we expect to continue to ramp as we go forward here.

Blake Hutchison – Howard Weil

Great, thanks so much for your time, I will turn it back.

William White

Okay, Blake thank you.

Operator

Thank you. Our next question comes from Brad Handler with Jefferies. Please state your question.

Bradley Handler – Jefferies LLC

Thanks good morning guys.

Bryan Shinn

Good morning Brad.

Bradley Handler – Jefferies LLC

Maybe coming back around on an couple of items, but maybe I missed this, forgive me if I did, but did you actually share what percentage of your oil and gas volume was sold through contracts in Q1, if you didn’t can you?

William White

We did not and never disclose that number to that detail, I would say that our goal was to be between 70% and 80% so we were in the neighborhood of 40%.

Bradley Handler – Jefferies LLC

Okay, versus something around the 35% range for the fourth quarter?

Bryan Shinn

Yeah we’re up a little bit. Brad, I would say sort of quarter-on-quarter I would call it flattish as we continue to bring new transloads online I think that percentage will track up.

Bradley Handler – Jefferies LLC

And through the course of 2013 that should retire.

Bryan Shinn

Yes we believe that will move higher through the course of 2013 and you could imagine San Antonio alone right have the capability to put 500,000 tons a year as I said, so just that will make a meaningful impact in the percentage.

Bradley Handler – Jefferies LLC

Sure, that makes sense. I am not sure this cancels the third question or not, if does I am sorry but maybe I’ll just like flip in another one. Your comments about acquisitions were interesting to me, maybe I should have thought about out, but as you look at the landscape, perhaps you could comment on which appears to have maybe more opportunities would it be other transloading facilities or other things in the distribution side relative to the source of sand side.

Bryan Shinn

Yes so I guess as we look at acquisitions in the oil and gas space, I think that the most of our energy has been spend on coal and that kind of value chain. So if you walk it through from the mining to the processing, to the transportation piece, which includes the transloads. We sort of looking along that chain and I can say that we look at things in all of those categories and the attractiveness piece other they has two elements, to right one is how is it with our strategy and the second is how is it priced and would it be highly accretive right so. Now what we’ve looked down the chain, we obviously found different answers there I would say we do a lot of reserves in the ground right now. So it’s going to acquire additional reserves per may less attractive, so I like the immediacy of having the ability to process and transport those reserves, so probably further downstream, may be a bit more attractive, and when we talk all about the investor side of our business we’re obviously looking at potential for M&A there and there is more sort of capability building acquisition in terms of developing our new products our Specialty performance product line.

Bradley Handler – Jefferies LLC

Got it. Okay, thanks guys.

Unidentified Company Representative

Okay, thanks, Brad, take care.

Operator

Our next question comes from Travis Bartlett, with Simmons & Company. Please state your question.

Travis Bartlett – Simmons & Company International

Hey guys good morning.

Unidentified Company Representative

Good morning Travis.

Travis Bartlett – Simmons & Company International

Looks like it was pretty strong sales volumes from the Oil and Gas Proppant segment in the quarter up 17% and it sounds like most of the volume increases were not from starter during the quarter, so I was wondering how much of the increase would you attribute in the new processing plants that you guys required during the quarter if any?

Unidentified Company Representative

Yeah, it was almost none that we’ve been gained some output from tat processing plant in the past on a contract basis, so there really wasn’t much impact there as specifically, the increased sales that saw came to a large extent from 100-mesh but then in our teams have been working on the series of operational efficiency to try and squeeze more and more out of our existing assets and we were able to do that on the course of rate product as well.

Travis Bartlett – Simmons & Company International

Okay. And just wanted to clarify that and then speaking with Sparta here, the total annual capacity from the first phase is 800,000 tons annually or 200,000 tons quarter and I guess it’s ramping up over the course of the year, but how close the full capacity and do you think you can get in Q2 from that side?

Unidentified Company Representative

Yeah, so look at me we don’t have sort of specific numbers to share on that today, but I’d say we’ll ramp up and our sales team is doing a great job out in the marketplace, you saw the kind of demand that we talked about in the market and some of the sale that we haven’t turn down because we just didn’t have capacity, so I think we do a really good job of ramping those sales up, and I expect we'll start to see some significant volumes from Sparta in Q2.

Travis Bartlett – Simmons & Company International

Okay. Perfect. And then last one from me here, just shifting gears towards pricing. I thought it was interesting that you guys noted that spot prices for frac sand actually increased during the quarter, so I just kind of wanted to get your thoughts on the outlook for spot market pricing going forward. And I know it's still largely basin-specific, but just kind of wanted to get the outlook there?

Unidentified Company Representative

Yeah. So as you said it moves there a lot. I would call it sort of flattish. We're not calling the bottom in pricing here, but just kind of relaying to you what we saw I also think that because of our network of distribution points, we can kind of cherry pick some of the best spot pricing and our team works lot on that to make sure that we maximize our spot pricing. So as we also said in our remarks, you can’t necessarily take the shared results that we are achieving and translate those to you know what others might do.

Travis Bartlett – Simmons & Company International

Right. And did you guys quantify the spot market pricing increase that you guys saw during the quarter?

Unidentified Company Representative

We did not, but I would call it sort of low single digits.

Travis Bartlett – Simmons & Company International

Low single digits. Okay. Perfect. That is – that is it for me. Thank you very much.

Unidentified Company Representative

Okay, Travis. Thank you very much.

Operator

Our next question comes from Brandon Dobell with William Blair. Please state your question.

Brandon Dobell – William Blair & Company

Thanks. A quick follow-up. Guys, you've talked in the past about some of the barriers in this business driven by access to rail lines, things like that. As this country and Canada continues to build out more rail networks for takeaway capacity from some of these basins, would you expect that some of the reserves from a variety of people small or large that are – have not been closed to railways and now all of a sudden maybe closer just given how much new rail capacity is being put up. Does it change the dynamics or change your thinking about who maybe the low-cost providers or who could be a low-cost provider at the rail network changes to mature over the next two or three years?

Bryan Shinn

Yeah, it’s a great question, Brandon. And we spent a lot of time thinking about the kind of realities on the ground in Wisconsin, Minnesota, and Illinois. And I would say just generally what we see is that it’s getting more difficult for a lot of reasons. There is certainly are some rail capacity additions that are coming, but we are pretty closely with the major railroads like the BNSF and the UP in. And I don’t think we are going to see any kind of step change in their ability to put new tracks in that they are going to reach some of these locations at least based on what we see today. What we do see though is that, there is a lot more community opposition.

There is a bill pending in the Minnesota space senate right now to ban new sand mining probably in all state, which you are probably aware off. And so if I’m going to characterize it, I would just say it’s generally getting more difficult and what we see is that the majority of new mines that are coming on line today are from moderate to high cost versus (inaudible) which are low cost. So, for us that means somewhere 1.5 to 2 times or more that the cash cost of production prefer the majority of the mines that are coming on right now.

Brandon Dobell – William Blair & Company

Okay. And then switching gears for a second to the industrial side, you guys have talked all the initiatives around, both I guess increasing value, but also driving more volume and how do we think about that part of the business for the remainder of this year from a revenue perspective given how I guess how tough it is for us to have kind of arms around where the revenue versus volume is going?

Unidentified Company Representative

Yeah. So I think that the business is going to remain strong throughout the year from what we can see. We have a number of new customers that we think will come online throughout the year and certainly, the work that the team is going to try and move our mix if you will to more a specialty and performance type products, we are putting focus on those type customers. So what you might see is less volume, but higher net margins out of that effort. So I think we are having lot of success there, we’ve also got a number of products in the pipeline, the first of which will come out later this year into the water treatment industry. So that will be brand-new product for U.S. Silica. So I’m really optimistic about our industrial business and I think we’re going to be very successful in our mission to kind of change the growth trend line of that part of our business.

Brandon Dobell – William Blair & Company

Okay.

Unidentified Company Representative

If I may just add some color to that, our tons were down 100,000 in the ISP business. However, the contribution margin was up 7%. So I think that goes to show that we’re going to more value-added products in that side of the business.

Brandon Dobell – William Blair & Company

Okay. And it sounds like that trend should, I don’t think it accelerate would be the term you would use, but continue that kind of modest switch and volume types through the remainder of the year…

Unidentified Company Representative

Yeah.

Brandon Dobell – William Blair & Company

From a (inaudible) volumes…

Unidentified Company Representative

Yeah. I would think we would continue to see that type of modest growth on the contribution side as well as there was a couple of things that happened in the quarter as well that were timing related particularly in our glass market where some of our customers have pushed off some volumes into later quarters. So we’ll see that come back a little as well.

Brandon Dobell – William Blair & Company

Okay, great. Thanks guys.

Operator

Thank you. There are no further questions. I’ll turn it back to management for closing remarks.

Bryan Shinn

Okay. Well, I just wanted to thank everybody for dialing in today and we look forward to talking with you all again next quarter. Thank you very much.

Operator

Thank you. This concludes today’s conference. All parties may disconnect. Have a great day.

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