U.S. Silica Holdings Management Discusses Q2 2013 Results - Earnings Call Transcript

Aug. 1.13 | About: U.S. Silica (SLCA)

U.S. Silica Holdings (NYSE:SLCA)

Q2 2013 Earnings Call

August 01, 2013 10:00 am ET

Executives

Michael Lawson

Bryan A. Shinn - Chief Executive Officer, President and Director

Donald A. Merril - Chief Financial Officer, Principal Accounting Officer and Vice President of Finance

Analysts

Benjamin Swomley - Morgan Stanley, Research Division

Trey Grooms - Stephens Inc., Research Division

John F. Kasprzak - BB&T Capital Markets, Research Division

Kurt Hallead - RBC Capital Markets, LLC, Research Division

Brad Handler - Jefferies LLC, Research Division

Blake Allen Hutchinson - Howard Weil Incorporated, Research Division

Douglas L. Becker - BofA Merrill Lynch, Research Division

Matthew D. Conlan - Wells Fargo Securities, LLC, Research Division

Brandon Burke Dobell - William Blair & Company L.L.C., Research Division

Operator

Good morning, and welcome to U.S. Silica's Second Quarter 2013 Earnings Conference Call. Just a reminder, today's call is being recorded and your participation implies consent to such recording. [Operator Instructions] With that, I will now turn the call over to Mr. Michael Lawson, Director of Investor Relations and Corporate Communications. Please go ahead.

Michael Lawson

Thanks, operator. Good morning, everyone, and thank you for joining us for U.S. Silica's second 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'd 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 [ph] measures of adjusted EBITDA and segment contribution during this call. Please refer to yesterday's press release or our public filings for a full reconciliation of adjusted EBITDA to net income and definition of segment contribution margin. [Operator Instructions]

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

Bryan A. Shinn

Thanks, Mike, and good morning, everyone. I will begin today by sharing highlights from our second quarter performance followed by an update on our two business segments: Industrial and Specialty Products or ISP, and Oil and Gas Proppants. I will also provide a product report on some of our strategic initiatives and discuss key market trends as we move into the second half of the year. Don Merril will then walk through our second quarter financial results and update our guidance for the remainder of 2013.

The second quarter of 2013 was again a record year for our company with all-time [indiscernible] volumes, revenue and adjusted EBITDA. Our results in the quarter have been largely by another strong performance in our Oil and Gas business, as well improved profitability in our ISP segment. Specifically, on a year-over-year basis, quarterly volumes increased by 15% to 2 million tons, while revenue climbed over 24% to $129.8 million. Adjusted EBITDA of $41 million increased 10.4% year-over-year and was up 5.6%, sequentially. Don will provide more color on our financial performance for the quarter during his comments.

Let me review our 2 segments in further detail. Oil and Gas once again drove most of our growth as we saw higher volumes at a slightly lower contribution margin per ton, which equated to adjusted EBITDA at the end of our guidance range and at a pickup of 1 to 2 points of market share versus last year.

We experienced strong demand overall for high-quality, Northern White frac sand during this quarter, with coarser short and the finer grades on the long side of balanced. This robust demand has continued into quarter 3 and we're seeing a record order backlog in August.

Volumes and revenues increased 9% and 6%, sequentially. Contracts customers took over 120% of their expected volumes in the second quarter, proving the [indiscernible] contracts and positive impact of our expanding transload network. Total sales increased 165% year-over-year and we continue to refine and grow our transload facilities to increase market share. I'll discuss this in more detail during the call.

Our contribution margin during the quarter was negatively impacted by lower pricing for fine frac sand grade's increased transportation expense incurred to move product to higher cost destinations contract customers. In particular, the majority of the sales from our new Sparta facility were directed to higher delivery cost basins as we supported contract customer growth. Sparta gives us an advantage in serving customers in the Bakken in Canada. However, growth in those areas was not enough to absorb a new capacity due to rig movements and the spring breakup.

Our confidence is growing, however, to be able to sellout Sparta volumes by the end of 2013. We expect pricing to remain under pressure minor grades as the market absorbs the increased supply that's come online this year, offset by pricing of coarse products driven by continued shortages of this grade. Coarse sand deposit are confined to a small geographic region in the U.S. and the large grains are preferred for more oil and liquid completions.

I guess this backdrop, we're experiencing relatively [indiscernible] average spot prices with essentially flat overall spot pricing for the last 4 quarters.

Moving to the ISP segment. We saw sales and contribution margin up approximately 7% and 16%, respectively, on a sequential basis, reflecting our continued focus on higher value, higher-margin sales. Contribution margin dollars were up 9.5% versus the same period last year. Margin expansion in ISP is being driven by strategic price increases, mixed improvement manufacturing efficiencies. We expect this segment to continue to be a positive contributor to 2013 earnings growth driven by strength in residential construction and repair and remodel activity.

As we've discussed, our key ingredients in the housing industry in applications such as roofing, window glass, granite and paints. We also expect to continue our margin expansion in ISP by developing marketing higher value product offerings.

Let's talk a bit more about our intentions over the next few quarters for the business. Our Oil and Gas customers continue to require flexibility around delivery points and noted in the past, they prefer to buy in-basin versus FOB to plants. We expect this trend to continue and to drive a more segmented raw sand market going forward. We anticipate that we will see a move to consolidate their spend and we believe that top-tier companies like U.S. Silica with plant production capability, logistics scale and flexibility, as well as in-basin availability continue to take share going forward.

Our strategic growth initiatives are designed to help after new opportunities in this changing marketplace, starting with our new Sparta plant. This quarter, we brought online the second phase of Sparta, adding another 850,000 tons of annual capacity of coarse, high-quality Northern White sand to our portfolio. Our total frac sand capacity now stands at approximately 4.6 million tons, up more than 50% versus last year.

We also made significant progress at our new resin coated facility. We now have 2 products at inventory in multiple transloads and at our Rochelle plant. We're also working on development of a new curable product and expect commercial availability late third quarter or early fourth quarter of this year. The resin coated sand market is oversupplied right now, but we're focused on driving commercial sales and are pursing more opportunities with customers. I also wanted to take a few minutes this morning and talk about the marked trends that we expect to impact our business over the next several quarters.

In spite of a flat to declining rate count this year, there's been a meaningful increase by well pad activity and ample evidence that pad sizes are getting much larger, driving efficiency, service intensity and a significantly higher well count.

Recent market feedback, supported by commentary on second quarter earnings calls also indicates that more of our customers are working 24-hour operations. We've also seen indications that operators continue to increase the number stages on horizontal wells. It is our view that the resulting increased well and stage count will drive increased demand for profit well into the foreseeable future. As market commentary suggests that we're just in the early days regarding the number of operators who are utilizing the technology to drill more stages with tighter spacing and more profit intensity. We're also cautiously optimistic about the prospects for increased drilling activity that may be supported by higher WTI pricing. Turning to supply chain and logistics. As I noted earlier in my remarks, we incurred additional transportation expenses in the quarter related to moving product for contract customers to areas where we presently have higher per ton logistical cost. We're working with our supply chain partners to offset this by [indiscernible] out costs and adding new transloads to optimize our existing network. We've seen some early payback from this work as margin strengthened throughout the quarter.

I'm also pleased today to announce that we made an initial investment in a new greenfield site near Utica, Illinois with annual capacity of approximately 1.5 million tons of raw frac sand. We're working with a third-party to develop a site and construct a wet processing plant along with drying and screening operations. Site work is currently underway and we would expect the mine and plant to come online in Q1 2014. The site is focused on enhancing our competitive position in the Permian and Eagle Ford basins, currently 2 of the most active and growing markets in North America. We believe this new greenfield site will be a significant contributor to achieving our stated goal of double EBITDA by 2016.

We also expect to announce some significant new partners in the coming weeks that will bring additional low-cost capabilities to our supply chain network. On the ISP side of the ledger, we're making excellent progress expanding our high-margin, especially in performance product portfolio. We're on track to launch 2 new products in the second half of 2013.

The first is an antimicrobial sand for use in the water treatment industry. The second is a coated sand innovation that will leverage our capabilities at Rochelle for a new product that we intend to launch into the industrial space. Additionally, we recently invested in a new proprietary technology that will enable us to expand the breadth of our fine ground sand portfolio and we're pursuing a number of other exciting opportunities that we'll share in the coming quarters.

While we're in the early innings of our transformation of this business, we're very excited about the progress being made to date and the opportunities to enrich our product mix and diversify our company going forward. For the company as a whole, the bottom line is that our business is very strong and we expect robust second half performance, driven by record Oil and Gas demand and continued margin expansion in our Industrials business.

In the midterm, I'd like to confirm that we're right on plan to achieve our 2016 target of $250 million to $300 million EBITDA with a potential for additional growth by M&A.

Before turning the call over to Don, I do want to mention 2 other things. The first is our new senior secured credit facility. Last week, we closed on a $425 million facility, and as a result, we were able to add approximately $110 million of additional cash to our balance sheet. Don Merril and his team took advantage of the current low interest rate environment to bolster our balance sheet and reduce our cost of capital. Pricing on the new term loan is very attractive and the loan is covenant like.

We believe that having an extra on our balance sheet provides us with additional financial flexibility to execute on our long-term strategy with respect to organic growth opportunities and shareholder-enhancing initiatives, including acquisitions, investments, dividends and share buybacks.

The second item is to announce that our Board of Directors has approved a dividend of $0.125 per share for the third quarter, reaffirming the strength of our business model and our commitment to improve total shareholder returns through direct return of cash.

With that, I'd now like to turn the call over to Don to discuss our financial results and refinancing in more detail and to provide an update on our 2013 guidance. Don?

Donald A. Merril

Thanks, Bryan, and good morning, everyone. As Bryan mentioned, tons sold in the second quarter of 2013 totaled over 2 million tons, compared with 1.8 million sold in the second quarter last year, approximately 1.9 million tons sold in the first quarter of 2013. Revenue in the second quarter was up 24% year-over-year and increased 6%, sequentially over the first quarter of 2013.

The increase in revenue was driven largely by volume growth in oil and gas segment. On a year-over-year basis, revenue for the Oil and Gas segment grew by almost 43% to $77.7 million, while revenue of $52.2 million for the ISP segment represented a 4% improvement year-over-year.

Volumes for the Oil and Gas segment were 988,120 tons and the contribution margin was $35.5 million compared with 684,992 tons and a contribution margin of $33.2 million for the second quarter of 2012.

Volumes for the ISP segment totaled 1,060,448 tons and a contribution margin for the ISP segment was $15.4 million compared with 1,098,425 tons and a contribution margin of $14 million for the same quarter the prior year.

SG&A expense was $10.1 million for the second quarter of 2013 compared with $9.7 million for the second quarter of 2012 and down $2.3 million sequentially from the first quarter of 2013. Going forward, we would anticipate SG&A expense to be in the range of $11 million to $12 million per quarter for the remainder of this year. Depreciation, depletion and amortization expense in the second quarter was $8.9 million compared with approximately $6 million in the same quarter last year. The increase in DD&A expense is being driven by our investments and capacity expansion initiatives, combined with increased depletion due to the additional volumes mined.

We expect depreciation, depletion and amortization expense of approximately $9.3 million per quarter for the rest of the year. Interest expense for the quarter was $3.5 million compared with $3.4 million in the second quarter of 2012. The effective tax rate in the quarter was 25.4%. However, we still expect our effective tax rate to be closer to 27% for the remainder of 2013.

Turning to the balance sheet. Cash and cash equivalents totaled $47.1 million at June 30, 2013, compared to $61 million at December 1, 2012. As of June 30, 2013, our working capital was $118.8 million and we had $33.1 million available under our revolving credit line. As of June 30, 2013, our long-term debt was $251.8 million compared with $253 million at December 31, 2012.

Subsequent to the end of the quarter, we successfully completed the refinancing of our senior secured credit facility. As you may know, this transaction came on the heels of a corporate ratings upgrade from S&P to BB-. The refinancing consists of a new $425 million senior secured credit facility comprised of $375 million term loan and a $50 million revolver.

Pricing on the new term loan was set at LIBOR plus 300 basis points. The current credit market and low-interest environment provided us with the opportunity to further enhance our financial flexibility and lower our cost of capital and we believe this transaction complements our long-term strategy with respect to growth opportunities and shareholder enhancing initiatives.

We incurred capital expenditures of $8.5 million in the second quarter of 2013. The bulk of our second quarter spend was related to engineering, procurement and construction of the second phase of our raw sand plant in Sparta, Wisconsin, transload facilities and various plant maintenance capital requirements.

As Bryan mentioned, our board has declared a regular quarterly cash dividend of $0.125 per share to common shareholders of record at the close of business on September 19, 2013, payable on October 3, 2013.

Turning to our outlook. We're reaffirming our full-year 2013 guidance for adjusted EBITDA in the range of $165 million to $175 million. We are adjusting upward our guidance of capital expenditures to a range of $60 million to $70 million compared with our previous range of $50 million to $60 million.

With that, I'd now like to turn the call back over to Bryan.

Bryan A. Shinn

Thanks, Don. That concludes our prepared remarks today. Operator, would you please open up the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Ben Swomley with Morgan Stanley.

Benjamin Swomley - Morgan Stanley, Research Division

In Q1, I believe your average contracted price was below average spot market price. Can you give us an update on whether that's still true in Q2 heading into July?

Bryan A. Shinn

Sure, Ben. Pricing is actually really interesting in Q2. Obviously, there's a lot of interest in the investment community around that and I would say that we're seeing is that pricing is holding up very well. Total price for Oil and Gas tons was relatively flat. It was down about 1% or 1.5%, that sort of total price. Most of that was customer mix and a few other things. What I thought was more interesting and sort of to your question around spot pricing is that spot pricing actually increased mid single-digit sequentially if we hold 100 mesh constant across Q1 and Q2. And actually, it was the highest spot pricing we've seen since Q3 of 2012 on absolute basis. And of course spot pricing still remains substantially above contract, specifically to your question. So I was really pleased with pricing in the quarter.

Benjamin Swomley - Morgan Stanley, Research Division

I guess with that backdrop then, when you think about -- and when you consider how placement of Sparta volumes have gone so far, do you think you'll be able to place the incremental volumes from Utica -- from the new Utica facility at comparable levels to what you're selling at today?

Bryan A. Shinn

So, it's kind of interesting, right. I think as most folks on the call probably know, for the last several quarters we've been essentially sold out in Oil and Gas capacity. So as we've had new demand come in from customers this year, it's mostly been out of Sparta that we've been serving that. And we kind have a range of logistical places out of Sparta, some have more profit, some have less. One of the things that we saw in the quarter was that we had a lot of request for customers to shift to destinations where we had a little bit less favorable logistics. Examples are some of the places in the Permian where there's high growth right now. So now if you have contribution margin per ton for the quarter and that was sort of the primary issue for us was serving those kind of non-favorable destinations. But the good news is that we did that to support our customers as they were taking share and as we were taking share. The Utica plant is really interesting. We designed that and picked that location specifically to target some of the destinations today where Sparta would be kind of a higher delivered costs, if you will. So Utica is going to be low delivered cost to places like the Permian and Eagle Ford and particularly to some spots of those basins where we think there's substantial long-term growth. We're really excited about that, the Utica project it's going to fill in a really nice piece in our network. And as we said, we expect that to be up and running in 1Q '14.

Benjamin Swomley - Morgan Stanley, Research Division

Great. And are you're going to bring the full 1 million, 1.5 million tons at once or you're going to do it in stages.

Bryan A. Shinn

So, we haven't made a final decision on that yet. We have the ability to bring it up quickly, if we choose to. If I had to guess at this point, I think we'll probably bring it up like we did Sparta, kind of one piece at a time. But you know as we did Sparta, if we see the demand out in the marketplace. We designed our facility so that we can accelerate the construction and the engineering so that we can develop quicker.

Operator

Our next question comes from Trey Grooms with Stephens.

Trey Grooms - Stephens Inc., Research Division

So kind of thinking about the shipments that you're talking about to nonfavorable destinations -- the increased shipments there. When we're looking at that and also kind of the current customer mix and it sounds like having more contracted customers in that mix impacts the ASP just slightly. But how do we think about kind of the puts and takes there and how it goes into your thinking for your EBITDA guidance for this year. Are we going to stay or expected to stay at a kind of a similar levels as we saw in 2Q? Or what's your thinking there as it relates to that guidance?

Bryan A. Shinn

Are you thinking in terms of contribution margin per ton, Trey? Was that your question? Or...

Trey Grooms - Stephens Inc., Research Division

Yes, per ton.

Bryan A. Shinn

So, yes -- we don't have specific guidance obviously around contribution margin per ton today. But let me tell you how I think about it. There's, as you said, the puts and takes. So I think that the positive things that we're seeing is stable to kind of increasing spot pricing. This is the first time we've seen that in a few quarters. So that's great news. We're seeing very strong demand for our 2040 product, which is our highest priced product, so that's certainly a tailwind there. We're actually seeing increased 100 mesh pricing. We had some pretty substantial increases in 100-mesh price in Q2 as a result of some of the strong demand that we see on the market. So that's great news. We're also working with our logistics providers in some of this kind of less favorable destination to take out costs and work to improve our margins there. So I see all those as very positive. As you mentioned, the strong contract sales, although it was a bit of a negative in this quarter and maybe kind of a negative again in terms of margin in Q3, I think that could turn into a positive later in the quarter as our contract customers run out of their total contract volumes and then perhaps end up with some higher prices there. I think that we'll continue to make some pricing adjustments with customers as we take share. So that could be a headwind on contribution margin per ton. So overall, 100-mesh demand is very strong, and even though we're getting some increased pricing there, every ton of 100-mesh we sell, although it's additive to EBITDA dollars, it's dilutive to EBITDA margins. So we don't see that trend changing based on the recent feedback that we've gotten from customers. And so those are the kind of puts and takes. I would say that at the end of the day, the demand that we're getting as we take share in the market and we're well on our way to meeting our target of taking 1% to 2% share again this year. Most of that is going to come from Sparta and so it depends on where the customers want it. In some cases it's more favorable, in some cases less. So lots of puts and takes there. I could say when I add it all up, I'm relatively optimistic about where contribution margin per ton is going to go. Over the next couple of quarters, I think we have more tailwinds than headwinds.

Trey Grooms - Stephens Inc., Research Division

All right. You mentioned a lot of the things that you guys are benefiting from and service intensities was one of the main things you touched on. But one of the EMP guys came out last night and mentioned that they were doing additional testing, kind of expanding into deeper wells in the Eagle Ford -- additional testing with sand and expanding into kind of deeper wells and that sort of thing, which I guess could bode well for you guys over time with higher substitution of the higher-priced proppants out there. But what are you guys seeing as far as trends there? Are you seeing any increased usage as far as just from a substitution standpoint in any of the basins out there?

Bryan A. Shinn

So we are, for sure. And you've heard several of the EMPs out there being -- and fairly vocal about substituting ceramics or sorry, substituting high quality Northern White sand for ceramics. And so I think that trend is going to continue. Well, I mean, that's a tailwind for us. The volumes there are relatively small. So ceramics in total are only about 10% of the volumes in the market. So even if we take some share there, it helps, but it's probably not going to drive results. But I certainly like to be selling the product that customers want to use more of, as opposed to one that they're trying to use less of, right?

Operator

Our next question comes from Jack Kasprzak with BB&T Capital Markets.

John F. Kasprzak - BB&T Capital Markets, Research Division

Just following up on the margin questions. You also said in your comments that margins, Oil and Gas margin, strengthened throughout Q2. So given that there are more headwinds and tailwinds and that they strengthened throughout Q2, looking at Q3, should they be on a slightly better trajectory or kind of flat? I mean, could you add some color there?

Bryan A. Shinn

Yes. So what we saw, Jack, is June was the highest contribution margin per ton month per quarter -- in the quarter. And so that's great news. And then as I was answering Trey's question, all those sort of puts and takes, I feel like we've got more tailwinds than headwinds, right. So I think we've got more positives when I add all those up. There's probably 5 or 6 positives and 2 or 3 negatives, right? So net-net, it just feels like we're going into Q3 with a positive tailwind. With that said, we certainly don't control all the end use destinations for our products. And just to give you a feel, right? I mean it's important to kind of understand this. It's gotten a lot more complicated. When we were selling everything FOB plant, we had 8 contracts times 4 grades, and so we had sort of 8 times 4, 32 kind of possible price permutations out there amongst our Oil and Gas contract customers. Now with all the selling and destination and bringing Sparta online, you do the quick math and that's up over 1,600 origin-destination combination, right? So there's a lot more ability for that to move around on a monthly or quarterly basis. And so I think we'll probably see -- we'll see more variability. But overall, it feels like things are moving in a positive direction.

John F. Kasprzak - BB&T Capital Markets, Research Division

Okay, great. Secondly on -- can you update us on your contracts. Were you able -- have you extended any, added any, where do we stand in terms of contracted -- percentage of contracted volumes versus Q1?

Bryan A. Shinn

Yes. So it's a great question. We're right on track in terms of customer contract, pretty much where we were in last quarter, strong demand from our contract customers. They bought over 120% of their contract levels again in Q2. We haven't, at this point, added any new contracts, but I'll say in the last few weeks, we've been approached by another customer, someone we don't serve today who is interested in potentially signing a take-or-pay contract with us. So that's good news. And I think it's kind of indicative of some of the things that we see out in the market, particularly around shortage of supply for the coarse products. 2040 is really tight right now. And I think that perhaps is driving some customers any way to kind of rethink how they're set up in terms of sand supplier. So we see that as positive a for sure.

John F. Kasprzak - BB&T Capital Markets, Research Division

Okay. And lastly for me, were there any startup costs in the quarter that might have impacted the P&L?

Bryan A. Shinn

Yes, we had about $1.2 million worth of additional startup costs in the quarter, which is a little bit lower than the first quarter. I would anticipate that to be much lower in Q3.

Operator

Our next question comes from Kurt Hallead with RBC Capital Markets.

Kurt Hallead - RBC Capital Markets, LLC, Research Division

So I guess the question that I'm kind of curious about here. On the contract, you mentioned that towards the third quarter, your contract volumes may be satisfied. Could you give us some general sense as to what percent of your current contract volumes could be repriced once you exit the third quarter?

Bryan A. Shinn

So, Kurt, it's a great question and I think it's something that we'll have to work with customers as we get closer to that. What we've seen in the past, and probably the best way to kind of go back and think about what might happen in the future is that, typically some reasonable percentage of those volumes, maybe call it, 30%, 40% get repriced at higher levels and then the rest is a bit of negotiation with the customers around how we service them and maybe other things that we might decide to trade off for leaving prices where they are. So for example, we can trade off other terms in the contract like grade mix or length of the contract, those kind of things. So I think in practice what we'll do is kind of see where things are as we get to that point later in the year and then try to make the best decision -- to make the best tradeoff for us and also do what's right for our customers.

Kurt Hallead - RBC Capital Markets, LLC, Research Division

That's all fair. Now seeing things from both sides of the equation as we do, typically when demand for a product exceeds a certain amount by 20% as you indicated, that does reflect a very strong marketplace and usually it's conducive to getting price increases with less than typical pushback, right? So let me just ask you this context. With your service company customers still constrained on their ability to push pricing on their angle, how much of a constraint do you think it is to push pricing from where you sit.

Bryan A. Shinn

Well, it's fairly something we're sensitive to, Kurt. And the approach that we've taken is obviously we want long-term customers, right? And we had customers in the industrial side of our business that we serve for 80 or 90 years literally. So we know how to manage relationships over the long term. I would say that whenever you get in these situations where there's kind of maybe more leverage on 1 side of the contract and the other. Both parties have to think carefully about how to use that. And so I'm sure that's the approach that we'll take as we go forward here and look at that supply demand situation. And frankly, because of the way we treat our customers, we think they'll do the same thing to us, right? And we're seeing that out in the marketplace. It's a bit of give-and-take, but I feel really good about where we are.

Kurt Hallead - RBC Capital Markets, LLC, Research Division

Just in that context, too. Just more of a -- maybe an educational item here, more than anything else. But if you're willing to work with your customers and deliver 20% more volumes then they originally asked for, shouldn't they be willing to work with you on absorbing some of those logistical costs?

Bryan A. Shinn

Well, yes, it's a great question. I think, I mean, part of it goes back to some of the questions -- or some the points you made before. We know that our customers, in some cases, are constrained on margins. The way I look at it is, if a customer take and share and we're trying to take a share, I'm willing to give a little bit on margins in the short-term to be able to capture that share and drive that business through for the long term. So it's a tradeoff, right. And it's a day-by-day discussion with customers. In some cases we've had customers come to us and say, look, we have a new piece of work that we're bidding on and we like a special price for that piece of work because we know it's going to be super competitive, and they lay out the reasons and we work with them, right? So there's lots of give-and-take here, but I think in the end our position is really strong.

Kurt Hallead - RBC Capital Markets, LLC, Research Division

Right. And then finally, can you help me understand the dynamic here. You indicated that the coarse sand, the 2040, is in tight supply, but it's still in high demand. Yet, you're still seeing -- it looks like a greater mix of 100-mesh relative to what you maybe have seen throughout the course of 2012. So it's a 2-part question. Can you give us a general sense of what the mix of sand grades were for the quarter vis–à–vis last quarter and then what is driving this dynamic on 100-mesh based on your team's view of the market?

Bryan A. Shinn

Yes. So it's really interesting, right? The 100-mesh sale for this quarter were down just a little bit versus last quarter, but still about 170% of the average quarter in 2012, right? So very robust demand. We're out talking to customers in the market all the time and I think the best explanation we've heard is that there's an increase in slickwater fracs that are going on and so you need some lighter weight proppants to do that. But at the same time, this is where you get kind of a mixed message as WTI continues to increase and there's obviously a push for more oil completions. Those completions need the 2040, right? 100-mesh doesn't really work there. So you kind of get this odd message of 2040 is strong, and it's really being driven by oil, but then in some of the other work where you got liquids and some mixed hydrocarbons, we're seeing more slickwater frac-ing and that takes a lighter weight profit. So I think that's the kind of a short story. It's a little complicated, but that's a short story as to why we see this kind of weird dynamic going on right now.

Kurt Hallead - RBC Capital Markets, LLC, Research Division

So what was the mix in the quarter for 100-mesh versus 2040?

Bryan A. Shinn

So we never talk about the mix specifically, but as I said, it was about the same amount of volume as last quarter, a little bit less of 100-mesh. 2040 volume, I think, we squeezed out a little bit extra in the quarter. But our volumes have pretty much been capped, except for Sparta, right? As Sparta comes online, there's a lot of 2040 there that we can sell and that's very positive for us.

Operator

Our next question comes from Brad Handler with Jefferies.

Brad Handler - Jefferies LLC, Research Division

I guess I like to sort of follow in the same vein, only because I think it would be very helpful for us to get a feel for some of the moving pieces in the quarter. And if I can -- if you'll allow me, I can sort of lay out what I think I'm hearing, but it's not -- it drives to a conclusion, I want to make sure of it. So the mix didn't change a whole lot, from a grade of product's perspective, it sounds like. I think more volume was distributed versus last quarter, perhaps you can share with us that change. And the customer mix, it would be helpful to get that sense from you too. I gather it's still sort of at the upper end, the 80% range of volumes, but if you can please confirm that. Those within the aggregate drive to a conclusion of higher pricing I think, right? Just the distributed piece alone? So it does point to concessions, which are interesting. Is that the right conclusion? Is that the only conclusion, that there were pricing concessions made?

Bryan A. Shinn

Well, let me take a stab at that. I think I understand your question. First, you asked about transload. We moved about 45% of our Oil and Gas sales via transload in Q2 versus about 40% in Q1. So there was a definite uptick there, which would be contributing to average selling prices for sure. But at the end of the day, it's being offset by a couple different things. One is, Bryan talked about a little bit weaker pricing in the quarter due to some of the pricing changes that we made at the beginning of Q1. So you've got a hangover impact of that. And then you also have the customer mix issue, right? So because of the contract customers taking 30% more or so of what we expected, the pricing there is lower than spot. So you're seeing that offset, that increase of ASP that would be due to the transloads.

Brad Handler - Jefferies LLC, Research Division

That makes sense. Can you phrase that differently? I think we heard last quarter that contracted volumes were about 80% of your total. In Q2, can you share the proportion?

Bryan A. Shinn

A little bit higher.

Brad Handler - Jefferies LLC, Research Division

A little bit higher. Okay. All right, fair enough. So there were no -- so I guess that helps. So there's an element of pricing concessions made, which I guess we heard about having a full quarter effect.

Bryan A. Shinn

Exactly. That's a pretty good-sized piece of this, right? At the end of the day, the pricing changes that were made in Q1, we still have the impact of now a full quarter in Q2. I would not anticipate to see that in Q3.

Brad Handler - Jefferies LLC, Research Division

Got you. All right. Maybe just a little bit more color on the Utica expansion. I suppose it's a modeling question as much as anything, but should we think about that first quarter as really being all startup. I mean are we talking of volumes from Utica really starting in the second quarter and perhaps you positioned us as having a Phase I and a Phase II so we would start with just kind of half the capacity run rate starting in Q2 of '14.

Bryan A. Shinn

Yes. So it's a great question. Let me take a stab at that and then maybe ask Don to fill in any of the details that I might miss here. But -- so if you think about the volumes first off, it's on an annualized basis, 1.5 million tons, plus or minus, of product that we see coming out of that new site. I think one of the important things here is that this site is going to be positioned to access what we believe is absolute best logistics solutions in the country. You know that where it is, it's just tremendously well positioned. And so if you think about modeling, you think about contribution margin per ton and where that's going to go, I feel like this site will rival our Ottawa site in terms of contribution margin per ton. So it should be very, very good there. I would expect that by the end of first quarter, we have the site online and then we'd ramp up throughout the year, similar to what we're doing with Sparta. It depends on obviously on the kind of demand that we see out of there, but I'm hopeful that we have a pretty rapid ramp up. And actually, as we talked about a couple months ago at our Investor Day, this site is the key piece of getting us to the $250 million to $350 million EBITDA range, essentially doubling the size of the company, right? And with the work that our team has been able to do, we're actually ahead of schedule for that. So I think, it's important for everybody to understand that. We talked about having the site fully online and contributing by 2016. Well, I think it's going to start to ramp in 2014 and we should probably see the full impact of it in 2015, right? So it could be a full 12 months ahead of what we'd originally planned. So great job by our mine planning and our operations team. And I did also want to mention that as part of the work and some of the proprietary things that we've figured out in bringing plants online, we always keep a pipeline of sites ready. And in fact, we have another much larger site in the development pipeline that we think that actually rival Ottawa -- our Ottawa operation in terms of size and low-cost capacity. So those were exciting developments that I look forward to talking more about in the coming quarters.

Brad Handler - Jefferies LLC, Research Division

Understood. Right. So clearly, stronger -- no questions, stronger volumes or a bit stronger -- higher capacity than we have been thinking previously for '14.

Operator

Our next question comes from Blake Hutchinson with Howard Weil.

Blake Allen Hutchinson - Howard Weil Incorporated, Research Division

A lot of questions around margins and pricing here, I wanted to make sure we're thinking the right way about the actual kind of nameplate capacity or potential for tonnage sold over the next couple of quarters. First of all, where were we in terms of the ramp of Sparta 1 for the quarter in terms of utilization or just broad strokes on that?

Bryan A. Shinn

So let me answer the question a little bit different -- a different way. I think this could be helpful to you. So if you look at the ramp, it's going very well. I gave you a little bit more advanced sort of information in July. We're actually at a run rate of about 50% of Sparta sold, right? So if you remember, we did Sparta kind of Phase I, Phase II that were kind of each phase was 50% of the plant. So essentially, with where we think we're going to end up in July, we'll already have Phase I sold out. And so we've gotten questions from a few investors around, well, why did you folks bring Phase II on, and well, you can see it now because Phase I of Sparta we think is going be sold out just here in July. So we expect the ramp to continue throughout the year and I'm very optimistic that we'll have Sparta essentially sold out by Q4.

Blake Allen Hutchinson - Howard Weil Incorporated, Research Division

Okay. And then, I guess -- and I'll come back to this, but you also mentioned that you have a record backlog entering Q3. Does that backlog, when you're looking at that, does that suggest any change in first, either the volumes of 100-mesh you've been running the last couple of quarters. Or secondly, are there indeed increased -- probably increased volumes to the Bakken on a quarterly comparable basis.

Bryan A. Shinn

So the backlog is, a lot of it is x 100-mesh, so it's not really a 100-mesh issue. We're seeing some increases for the Bakken, but I would say generally, the Bakken is kind of underperformed as a basin compared to perhaps what many of us across industry thought it was going to do a couple of years ago. It's still going well, but we see much more demand in the Permian, the Eagle Ford and in some places of MidCon. And we actually can serve the Marcellus and the Utica pretty well from Sparta. So we see demand more in those areas than the Bakken, although -- I mean, certainly we're growing in the Bakken as well.

Blake Allen Hutchinson - Howard Weil Incorporated, Research Division

And so, I mean, kind of putting this all together, I want to make sure we're not pushing it too hard, but I mean, could you be doing somewhere between -- in ultimate kind of nameplate volume, 1.1 million to 1.2 million tons in Oil and Gas by the fourth quarter or is that too aggressive?

Bryan A. Shinn

I think -- we're, for all intents and purposes, 1 million now. So as we take Sparta up to running at what is essentially sold out, I think that's a fair estimate.

Operator

The next question comes from Doug Becker with Bank of America.

Douglas L. Becker - BofA Merrill Lynch, Research Division

Bryan, I just wanted to get a little more color on the transportation cost. Is it fair to say that the gross profit in dollar terms would be higher in second quarter from the first quarter without the incremental transportation costs?

Bryan A. Shinn

Yes. That's fair to say.

Douglas L. Becker - BofA Merrill Lynch, Research Division

But I'm speculating here, but not on a gross profit per ton basis?

Bryan A. Shinn

That's fair.

Douglas L. Becker - BofA Merrill Lynch, Research Division

Okay. I also want to circle back on the slickwater fracs. We've been hearing the same type of commentary. What type of sand is that displacing then if it's not the 2040, what is it displacing and how does that impact the Silica's business?

Bryan A. Shinn

Yes. So, I think that what you typically see is where there's more guar being used, you need -- you can use the larger proppants, right? So maybe say, maybe say 3050 or something like that. It's kind of hard, Doug, to plot any kind of trends there just because the market moves around so much. But I think what we've be seen in the past is that there's more slickwater frac gaining traction. I was just talking recently to a couple of customers and they were saying now they look forward -- they think that we may be starting to see a little bit more guar coming, right? So it slings all over the mat. It's pretty hard to draw trend conclusions from that.

Douglas L. Becker - BofA Merrill Lynch, Research Division

So I guess, you're not seeing a clear trend towards slickwater and you don't view it as having a positive or negative effect on the business?

Bryan A. Shinn

Not really. I think it just depends on us. Okay We saw 1 grade of sand versus the other, I mean, I'd rather sell 3050 versus 100-mesh because we make more money on that. But I also like to keep the rest of the grades sold out, it's great to be able to sell more incremental 100-mesh because on a ton-by-ton basis, that's adding $1 contribution to the bottom line.

Douglas L. Becker - BofA Merrill Lynch, Research Division

I'm onboard. We don't pay for $1 per ton, it's a total dollar amount. In terms of your capital investments, you're really expressing a pretty positive view on supply and demand going forward. Just any color that you're seeing on the supply side. Maybe updates on what you're seeing from a permitting basis or just new announcement. Any color you can provide on that front from an industry standpoint?

Bryan A. Shinn

Sure. Sure. As we look at supply and demand, I would say that supply, our estimates have essentially been unchanged from what we made 6 to 12 months ago as we look at 2013. Essentially the supplies that has come has been right on, on our outlook. But if anything has changed kind of earlier in the year, I would say that demand was maybe just a little bit softer than we might have modeled it, 9 to 12 months ago as we thought about 2013. But we're really starting to feel the impact on the demand side of all the pad drilling, other efficiencies, proppant density, et cetera. And I think that's reflected in the kind of order book that we have for all of it.

Operator

Our next question comes from Matt Conlan with Wells Fargo.

Matthew D. Conlan - Wells Fargo Securities, LLC, Research Division

Just a quick question. Where -- what basins are you sending the most of the 100-mesh sand?

Bryan A. Shinn

A lot of the 100-mesh is going into the Marcellus, some into Utica. And then the rest is headed either south to Texas or a bit in the MidCon.

Matthew D. Conlan - Wells Fargo Securities, LLC, Research Division

Okay. I really want, just to ask a couple of follow-up questions on the new Utica facility, which it looks like it's about, what, 10 miles from Ottawa, same rail line. Is it going to focus just on -- as a frac sand facility with -- to produce 2040 and 3050? Or is it going to be an integrated facility to also do industrial volumes like you do at Ottawa.

Bryan A. Shinn

Look, it's a great question, Matt. The driver for the investment is Oil and Gas. And one of the cool things about that part of the country is that if you set your plant up right, you have access to the UP, to the BNSF, to the CFX, Norfolk Southern. You can hit all the class 1 railroads essentially, all the major ones. So we just love this location. It gives us tremendous flexibility and we think low-cost positioning almost anywhere we want to send the product. And given where it's located in Illinois, as you astutely observed, there's also the potential to serve our industrial customers and we're seeing a lot of demand there as well. And so our industrial guys are sort of salivating trying to get their hands on some of the capacity. So it gives us a lot of options and advantages. In some ways it lets you do things that you can't really do out of a Wisconsin plant. The Wisconsin sand typically has high iron and that's not suitable for most industrial applications. And if you look just geographically where the Wisconsin plants are typically versus where industrial customers are, it's just too far to deal with the logistics. So we're really excited about the Utica plant. It's a fabulous location and can't wait to get it up in first quarter of 2014.

Matthew D. Conlan - Wells Fargo Securities, LLC, Research Division

So for that 1.5 million tons, how would that break down between -- how much of that would be going into the Oil and Gas side versus how much into the industrial side?

Bryan A. Shinn

So, I would assume, if I was doing a model, I would assume it's an Oil and Gas site. And to the extent we find attractive opportunities or things to do with the product that are accretive to our profitability on top of what we can do with Oil and Gas. That's probably way to think about it. It's not a primary driver -- industrial is not a primary driver of the site. And so, I tend to think of it as an Oil and Gas site. But with some of the creative things that our guys doing in the industrial sector. Who knows? If we can come up with higher margins per ton out of that, certainly we'll look at that as well.

Matthew D. Conlan - Wells Fargo Securities, LLC, Research Division

So I guess, is the 1.5 million, is that oil and gas with putting some of the smaller grains back into the mine or would you actually be able to raise the nameplate capacity if you have the demand for the grains that aren't used for Oil and Gas.

Bryan A. Shinn

So, that will be the drying capacity of the plant. So that's really the total throughput. Typically, you can think somewhere 10% to 20% of the volume of being the smaller grains, ultrasmall grain, but as we've been looking at technology, there's things you can do to kind of leave those grains behind and select specifically what you want.

Operator

Our next question comes from Brandon Dobell with William Blair.

Brandon Burke Dobell - William Blair & Company L.L.C., Research Division

Couple of quick ones. The increase in the CapEx guidance, I'm assuming that is really just for the ramp up on Utica over anything else that you're contemplating in the back half the year?

Bryan A. Shinn

Yes. That's exactly right.

Brandon Burke Dobell - William Blair & Company L.L.C., Research Division

Okay. Perfect. Any sense of -- not that it's not going to be that big, but any sense of volume in the quarter or volume expectations in second half from Rochelle?

Bryan A. Shinn

Not specifically. Our team is working with a lot of different customers at this point and we're making pretty solid progress there. I would say one interesting thing on the resin-coated side is that we plan to introduce a curable resin coated sand. The products that we have to date in our portfolio are pre-cured products. We're seeing a lot of curable products being pumped out there, Brandon. So I think our prospects are brightening, particularly with that product in the portfolio to get some resin coated sales in the second half the year.

Brandon Burke Dobell - William Blair & Company L.L.C., Research Division

Okay. And I guess just kind of back to the price versus volume equation. There must be some decent assumptions that you're making about your ability to either capture some of that upside on price or really I guess reduce the transportation issues to kind of get from a first-half EBITDA number, $75-ish million to second half number that's $25 million-ish bigger than that, maybe if there's a way you can bridge us from first half to second half on how we get there, to your EBITDA guidance, unless I'm missing something about how the contribution dollars are going to flow through to EBITDA.

Bryan A. Shinn

It's fine. I think -- it's a good question. The first-half EBITDA came in almost exactly at $80 million. So if you take the middle of the range, that means we have to get $90 million in second half of the year. A lot of things going on. We've got more volume that we're going after. We're increasing market share. And we are looking at doing a better job, if you will, of distributing the product out of Sparta, trying to reduce cost that we don't see the same type of impact in Q2. So all of those things will, together I think, give us a lot of confidence, going forward.

Brandon Burke Dobell - William Blair & Company L.L.C., Research Division

Okay. And then I guess from just a visibility point of view. Obviously, you said you've got a pretty good backlog, you're going into August. Given how, I guess, high the contracted part of the business is right now on Oil and Gas. How much visibility do you guys have out into the third quarter or early parts of the fourth? How much look do you get from your customers? And how does that going to kind of I guess color how you negotiate with these guys as they start to bump up against their maximums?

Bryan A. Shinn

So I think what we've typically seen Brandon is that we can see 30 to 45 days up with a fair amount of clarity. As we get into the 60 to 90-day window, it's kind of 50-50. And then beyond that, it's more sort of directional type comments from customers. We do supply chain planning, but the reality is that a number of our customers are working their crews or more of their crews on the spot market. And so, it's hard for them to know where they're going to be working their crews in, say, 90 or 120 days, right? So the whole strategy of putting product out of transload, being ready to capture the opportunistic business and helping our customer grow that way, I think, is being well appreciated by our customers and it's one of the reasons that we're continuing to grow volumes pretty quickly.

Brandon Burke Dobell - William Blair & Company L.L.C., Research Division

And final quick 1 for me. The goal of 30 transloads, that's still an achievable one and where were you number-wise at the end of Q2 or the start of Q3?

Bryan A. Shinn

We were 26 at the end of Q2 and we have a number of agreements in progress right now. I think we'll blow through that at 30 goal and wind up somewhere significantly north of that. I did mention in my prepared remarks that we'll be talking probably in the coming weeks about some other logistics and other partnerships that we're working on right now and so I feel really good about where our transload network will be by year end.

Operator

There are no further questions at this time. I'll turn it back to management for closing remarks. Thank you.

Bryan A. Shinn

Thank you very much. So, in closing, let me just say that we're very pleased with our performance in the quarter. We saw a record volumes in Oil and Gas and once again, produced adjusted EBITDA that's at the upper end of our guidance range. We saw improved profitability in our ISP business and we also made significant strides as we continue to transform that business by making investments that will help enhance our product offerings and expand our portfolio.

As I mentioned also earlier in response to some the questions, we took a number of important steps this quarter towards our goal of doubling EBITDA by 2016. Probably one of the most important there is the announcement of our Utica facility, as well as bringing along the second phase of Sparta. I was really pleased that we're able to enhance our financial flexibility, lowering our cost of capital and adding some sort of dry powder, if you will to be able to strengthen our balance sheet. I think this will allow us to capitalize on any number of opportunities to grow the business and enhance shareholder value. And we're continuing to follow through on our commitment to return excess cash to shareholders that we paid the first regularly scheduled quarterly dividend of $0.125 a share and we announced a new dividend just on this call. So look, bottom line is we remain very excited about our prospects for 2013 and I want to congratulate our employees for their outstanding efforts in the first half of the year and we certainly appreciate everyone calling in today. We appreciate the investment community's interest and certainly appreciate all of our investors who joined us today. So thanks for dialing in and we look forward to talking with you all on our next earnings call. Everybody have a great day.

Operator

This concludes today's conference. All parties may disconnect. Thank you.

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