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U.S. Silica Holdings (NYSE:SLCA)

Q4 2013 Earnings Call

February 26, 2014 10:00 am ET

Executives

Michael K. Lawson - Director of Investor Relations & Corporate Communications

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

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

Analysts

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

Blake Allen Hutchinson - Howard Weil Incorporated, Research Division

Marc G. Bianchi - Cowen and Company, LLC, Research Division

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

Kurt Hallead - RBC Capital Markets, LLC, Research Division

Christopher W. Butler - Sidoti & Company, LLC

Brad Handler - Jefferies LLC, Research Division

Operator

Good morning, and welcome to U.S. Silica's Fourth Quarter and Full Year 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 K. Lawson

Thanks. Good morning, everyone, and thank you for joining us for U.S. Silica's Fourth Quarter and Full Year 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 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'll begin today's call by sharing brief highlights from our fourth quarter performance and then discuss the progress that we're making in several key areas, including capacity additions, infrastructure build-out and business process optimization, which includes improving efficiencies, reducing transportation costs, and increasing margins. Finally, I will provide outlook commentary and share our views on some of the relevant market trends in 2014. Don Merril will then provide additional color on our fourth quarter financial performance before we open up the call for questions and answers.

As previously announced, our fourth quarter of 2013 began, as expected, with strong sales, particularly on the oil and gas side of the business. By mid-December, however, we began to see significant order cancellations in oil and gas due to the severe weather that disrupted completion activity in many regions of the country late last year.

In addition to this lost sales volume, we also incurred higher supply chain costs as a result of the demand disruptions. While we experienced a rebound in January oil and gas volumes, operations and supply chain costs continued to be negatively impacted by the extreme cold temperatures. We also experienced unfavorable product and customer mix in the fourth quarter. And finally, we had a variety of other one-time headwinds, including a customer bankruptcy that resulted in a meaningful charge for bad debt. Collectively, these issues adversely affected our profitability in the quarter.

Adjusted EBITDA for the fourth quarter declined approximately 8% year-over-year to $35.9 million, and earnings per diluted share for the quarter were $1.41, a 24.5% decrease compared with the same period last year. The good news, however, is that despite some of the challenges we encountered late in the fourth quarter, we continued to grow the business. Specifically, on a year-over-year basis, quarterly volume increased by over 20% to 2.1 million tons, while revenue climbed almost 26% to $149.5 million.

Looking back at our annual performance by business segment, oil and gas volumes totaled 4.1 million tons, up nearly 40% for the year, as we continued to see strong demand for all frac sand grades.

In our Industrial segment, while total volume was slightly down year-over-year at 4.1 million tons, higher-margin product line extensions and strong building products and chemicals markets drove an increase in overall profitability. During the year, we also successfully negotiated multi-year contract extensions with several strategic ISP customers, locking in meaningful profitability and positioning us well for future gains. We introduced 10 new ISP products during the year and has several more in the pipeline, making significant progress towards our stated goal of diversifying into additional specialty and performance products.

Demand for our products is clearly growing, especially on the oil and gas side of the business. As we target service company customers and energy companies, it's becoming obvious that they believe that using higher concentrations of sand would decrease cluster spacing, is increasing completion quality and delivering higher EURs. In fact, it's been difficult recently to listen to energy company public comments and not hear about this topic.

It's a trend that more companies seem to be embracing based on the significant successes of some of the early adopters. At the same time, our industry is becoming more sophisticated and, indeed, more competitive. We saw significant new frac sand capacity come online in 2013, as predicted, and create what was essentially a balanced supply-demand market for frac sand during much of the year. We're watching the emerging trend of increased sand uses per well with great interest, and stand ready to serve our customers as demand increases.

To that end, our robust pipeline of new capacity continues to serve us well. Our new state-of-the-art frac sand mine and plant near Utica, Illinois would deliver an additional 1.5 million tons of annualized capacity. We expect sales from this greenfield site to begin late in the second quarter and ramp throughout the year. I really like the versatility of this facility. With access to 4 Class I railroads, plus barge, we will have tremendous flexibility to place more products in economically favorable destinations.

Utica also gives us our first large-scale frac sand production to ship on the Union Pacific Railroad, providing an extremely cost-effective logistics solution to a number of major shale basins, including the Permian, where horizontal drilling activity continues to ramp, and is expected to command the major share of completion activity in the coming years. To help us grow share in the Permian, we also recently signed an agreement with the UP Railroad to build a new unit train capable sand storage facility in Odessa, Texas. This $12-million, 20,000-ton world-class transload will be capable of accepting 2 unit trains at a time, and is expected to be operational by the end of 2014.

The combination of Utica and Odessa will help us get materials to the Permian more cost effectively. But they're just one part of our plan to further optimize our network. As I've previously noted, this phenomenon of selling sand in-basin is relatively new. Two years ago, we were only selling approximately 5% of our oil and gas volumes through transloads. Today, over 60% of our oil and gas sales are occurring in-basin. Our strategy for the very beginning was to move fast, respond as quickly as possible to our customers' needs and focus on gaining share. In 2 short years, we built one of the industry's largest transload networks, and today, we're working diligently to improve the efficiencies of that network.

We took a major step forward in our efforts last December when we promoted Mike Winkler to Vice President and Chief Operating Officer. While continuing his leadership of manufacturing, Mike now also have accountability for our Supply Chain and Logistics operations. In his new role, Mike is drawing on his extensive Lean, Six Sigma and process improvement expertise to ensure that we have optimum execution from mining through delivery to the customer.

Mike's team is currently implementing several key changes that are focused on reducing the overall cost of servicing customers through our extensive transload network. These changes include: enhanced decision-making processes to more efficiently match shipping origins and destinations; additional in-depth analytics of customer order patterns, allowing us to more effectively pre-position inventory; and establishing new leading performance indicators and more granular profitability metrics by end-use destination.

We're starting to realize benefits of our supply chain improvement efforts in the form of more cost-effective transportation solutions, reduced demurrage costs and lower overall transportation cost per ton for similar shipments versus Q4 of 2013. In addition, we're focused on shipping more unit trains to further boost efficiency and lower per-ton transportation cost. We shipped a total of 44 unit trains in 2013, and expect to ship somewhere between 80 to 100 unit trains in 2014.

We believe that current trends within our industry dictate a simple truth: companies that are able to build scale infrastructure with flexibility and reliability will be the long-term winners; and I believe that U.S. Silica is one of those companies. Our operating mantra for 2014 is Speed, Scale and Strength. As horizontal drilling penetrates new basins and completion technology continues to evolve, it has become crystal clear that speed matters a lot, scale matters a whole lot, and strength matters even more.

U.S. Silica is drawing on its financial strength to expand production capacity and transportation infrastructure, allowing us to gain market share and establish our company as one of the industry's most significant suppliers of silica-based products. In the past 12 months, we've added meaningful scale to our business with the opening of 2 new production facilities, the first in more than 4 decades. In 2013, we increased the speed with which we respond to customers by adding 5 new transloads in the first quarter, and later, completing a multi-year agreement with Wildcat Minerals, adding 17 more terminals.

And we're not finished building yet. Right behind Utica is a new greenfield site in Eau Claire County, Wisconsin that we expect to have permitted later this spring, which could have an additional 3 million tons of high-quality Northern White frac sand capacity to our network, originating on a premier rail line.

We're also looking to build scale and strength in our ISP business, and we're actively considering acquisitions that could add new products to our mix. We're also close to completing an expansion at our Pacific, Missouri plant that will enable us to produce additional volumes of our most differentiated products for use in both ISP and oil and gas. I'm very excited about our prospects, and believe that we are very well positioned for strong 2014.

That concludes my opening remarks today. And with that, I'd like to turn the call over to Don to discuss our financial results in more detail. Don?

Donald A. Merril

Thanks, Bryan, and good morning, everyone. From a volume standpoint, total tons sold in the fourth quarter of 2013 were 2.1 million, an increase of 20% when compared with 1.8 million tons sold in the fourth quarter of last year and virtually flat with the amount of tons sold in the third quarter of 2013.

Revenue for the total company in the fourth quarter of 2013 was up 26% year-over-year, and increased 4% sequentially over the third quarter of 2013. The increase in revenue was driven largely by higher volumes and an increased number of tons sold in-basin via transloads in our oil and gas segment.

Revenue for the oil and gas segment in Q4 of 2013 grew by 44% to $102 million, while revenue for the fourth quarter of 2013 of $47.5 million for the ISP segment was essentially flat when compared to the same period last year.

Volumes for the oil and gas segment in Q4 of 2013 were 1.1 million tons, an increase of 42% over the same period last year. Contribution margin from oil and gas was $34.2 million compared with a contribution margin of $37.5 million for the fourth quarter of 2012. The decrease in contribution margin was due in part to severe winter weather late in the quarter, which reduced well completion activity, thus driving higher costs across our supply chain. Additionally, margins in the quarter were negatively impacted by customer and product mix issues.

Q4 2013 volumes for the ISP segment of 1 million tons increased 3% on a year-over-year basis. Contribution margin for the ISP segment of $13.8 million represented a 6% improvement over the fourth quarter of the prior year. The increase in ISP contribution margin was driven mostly by our ability to increase price.

SG&A expense for the quarter was $14.5 million or 10% of revenue for the fourth quarter of 2013, compared with $11.5 million or 10% of revenue for the fourth quarter of 2012, and up $1.7 million sequentially from the third quarter of 2013. One item of note was a $1.4 million bad debt expense taken in Q4 due to the bankruptcy of 1 customer in our oil and gas segment.

Depreciation, depletion and amortization expense in the fourth quarter of 2013 was $10.1 million, compared with approximately $7.2 million in the same quarter last year. The increase in DD&A expense is a result of our investments in capacity expansion initiatives, combined with increased depletion due to the additional volumes mined.

Looking at the other income and expense line. Interest expense for the quarter was $4.1 million, compared with $3.2 million in the fourth quarter of 2012. The increase in interest expense reflects the cost of additional debt, after refinancing our senior credit facility.

The effective tax rate in the quarter was approximately 9%, compared with 21% for the third quarter of 2013. Our fourth quarter tax rate was lower than originally expected due to the revised and enhanced benefit of both our R&D tax credit and tax depletion deduction.

Cash and short-term investments totaled $153.2 million at December 31, 2013, compared with $51 million at December 31, 2012. As of December 31, 2013, our long-term debt was $368 million, compared with $253 million at December 31, 2012, and we had $41 million available under our revolving credit agreement at the end of 2013. Both our increase in cash and debt were outcomes of our successful refinancing in 2013, which resulted in a much stronger balance sheet.

We incurred capital expenditures of $13.6 million in the fourth quarter of 2013. The bulk of our fourth quarter spend was related to the continued investment in our new Utica frac sand's mine site, as well as a process upgrade in our Pacific, Missouri facility and various maintenance capital requirements.

On the M&A front, as Bryan said, we continue to carefully evaluate acquisition opportunities to expand our infrastructure and add additional mine production. We will also consider acquisitions to add capacity and new products in our Industrial and Specialty Products business.

Finally, I'd like to reiterate our guidance for 2014. The company expects adjusted EBITDA in the range of $180 million to $200 million, capital expenditures between $75 million and $85 million, and a tax rate of approximately 25%.

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

Bryan A. Shinn

Thanks, Don. Operator, would you please open up the phone lines for questions?

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of Brandon Dobell, William Blair.

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

May we start with a market question? You mentioned '13 was pretty much in balance. How do you expect '14 to play out between supply and demand? And particularly, if you could address maybe the rise of 100 mesh, as part of that equation, how it impacts your thinking about the supply and demand balance in other grades, especially, I guess, 20/40 and 40/70, maybe?

Bryan A. Shinn

Sure, Brandon. Yes, it's one of those important questions, I think, so I'm glad you asked that one first. I would say that right now, we see a demand as being strong. And I was just remarking to somebody the other day that it feels a little bit like 2010 and the early parts of 2011 where there was really strong pulls out in the market. When we did our initial modeling for 2014, we have put in about 10% to 15% growth in demand, overall. I would say there is a chance that it could be higher than that. We've -- and we've all seen the anecdotes out there from some of the energy companies talking about that increased proppant use and the kind of results that they're getting from that. Certainly, we've seen completions with 25%, 30%, some of them even 50% more sand per well than were used last year. So I think that's all a potential tailwind for sure. On the capacity side, I think there is certainly some new capacity that's coming online this year. It feels to us, though, as we look through our model and look at the details that throughout the year, we should probably be tightening up in terms of supply and demand. In 2013, we were roughly in a balanced market, supply and demand, I would say, most of the year. I think that there is a chance, particularly if demand continues the way that it is right now, that we could move towards the short side of balance as we get a bit further along into 2014. Your other question was around the finer products. This is another interesting trend. We're certainly seeing more demand for 100 mesh. And as you probably know, many energy companies now are using that as a lead-in proppant, which -- the short story there is that they discovered that by putting the 100 mesh in the well first, it gets further out away from the wellbore and props open some of the smaller micro-fissures and cracks, and gives them better results. If you look at the numbers for us, we sold about 83% more 100 mesh in 2013 than we did in 2012. And one of the questions that folks ask us a lot is, "How is that impacting your other grades?" And at the same time, we grew the other grades pretty significantly as well. We were up almost 1/3 in the non-100 mesh grades. So we see it as kind of a plus 1 right now. So we see a lot of demand growth, some of it's certainly coming from 100 mesh. It's a good news because it's more demand. But the balance to that is that, typically, 100 mesh has lower margins, as you know, right. So as you look at our contribution margin per ton, that sort of increasing amount of 100 mesh will push that down as well. So. there's sort of puts and takes all over this, but I would say there is probably more upside than downside to the supply and demand scenario, the way we see it.

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

Okay. And then one quick one. You mentioned that the transload progression there, 60-plus percent in the fourth quarter. Where do you guys expect to finish out '14, or maybe the progression through '14 of percentage of sales or percentage of tons through -- sold in the basin as opposed to the mine?

Bryan A. Shinn

So we are -- we're well north of 60% in the first quarter of '14 so far. I think there is -- it's kind of a natural cap somewhere, maybe 75%, 80%. We know there is some customers that want to pick the product up at our plants, and so we're not sure exactly where that cap is, but I would say it's probably somewhere in the 70s.

Operator

Your next question comes from the line of Blake Hutchinson of Howard Weil.

Blake Allen Hutchinson - Howard Weil Incorporated, Research Division

Just kind of calibrating the model for a starting point. Given the fact that you missed some volumes in the fourth quarter; and it seems like you're probably, given that demand for 100 mesh, pulling a little harder on what might be classified as the non-oil and gas system. If we're thinking starting the year at more of an oil and gas nameplate of 1.2 million tons or something like that, is that in the right vicinity?

Donald A. Merril

You're talking per quarter?

Blake Allen Hutchinson - Howard Weil Incorporated, Research Division

Yes, yes.

Bryan A. Shinn

Okay. yes. I think that's a little bit low. I think, I would expect on an annual basis that we'd be around 5 million tons for oil and gas, in that kind of range.

Donald A. Merril

Keeping in mind that, that's going to include Utica, right?

Bryan A. Shinn

Right.

Blake Allen Hutchinson - Howard Weil Incorporated, Research Division

Right. I guess, I was just trying to get a good gauge for where we start the year given that fourth quarter offers a little bit of a false economy, and you're also, I guess, pulling from other facilities that we might not have as oil and gas nameplate, to supply some 100 mesh.

Bryan A. Shinn

Yes, 1.2 million is probably a good nameplate, say, for Q1.

Blake Allen Hutchinson - Howard Weil Incorporated, Research Division

And then just -- your comments -- and just so we're starting off on the same page, around January and some of the extreme cold, Bryan, causing some extra cost in the system. I mean, is that just more of a cautionary tone, or in January did the system kind of weigh on you similarly to where we were in 4Q?

Bryan A. Shinn

So what we saw in January was that the demand picked up pretty well. So we didn't see the same kind of issues that we saw in December around order cancellations, and I think some of that was kind of the extra momentum as well that we had from work that had gotten delayed out of December. But the reality is that the record cold temperatures continued in the month of January and we had temperatures minus 20, minus 15 degrees up in our Sparta plant, for example, and that just played havoc with not only our operations, but all the mining operations around sand that are up north. So we did experience some additional cost in January. So that wasn't a theoretical. I mean, that was what we saw on -- and a little bit of that supply chain cost, but a lot of additional, sort of, operational cost as well. We expect that, that's going to disappear. We've already seen that, basically, start to change as we've gotten into February and as the weather has actually warmed up just a little bit. So I think it's just some unusual cost in January that will probably impact first quarter a bit.

Blake Allen Hutchinson - Howard Weil Incorporated, Research Division

And then just your experience with mix today, pretty similar to 4Q?

Bryan A. Shinn

Yes. 100 mesh mix is staying about where it was in the 4Q. I will say, though, that there seem to be tremendous demand for 100 mesh, and so there's not a day that goes by now that we're not getting requests and we've actually had customers start to ask for unit trains of 100 mesh, right, which is something that, a year ago, we would have never thought anybody would be interested in that, right. So it's definitely a product that's in very high demand in the market right now.

Operator

Your next question comes from the line of Marc Bianchi of Cowen and Company.

Marc G. Bianchi - Cowen and Company, LLC, Research Division

Just following up on Blake's question for 100 mesh. If you start shipping unit trains and some of the other producers start shipping unit trains, is it possible that 100 mesh could become tight? Or is it just such a massive byproduct that, really, no matter how much demand we get, it's unlikely that we get to that point?

Bryan A. Shinn

So I mean, 100 mesh is tight in the market today. And the interesting thing, though, is that 100 mesh kind of, by definition, doesn't have an API specification. But the reality is, when you went and talked to customers, what they want is 100 mesh from frac sand mines, right. So we have 10, 11 mines where we don't sell frac sand. And when you talk to customers about those type of 100 mesh products, they're not really interested in that because of the grain size and shape. So I think there is a somewhat limited supply of the, kind of, higher-quality 100 mesh product, and that seems to be what the market wants right now.

Marc G. Bianchi - Cowen and Company, LLC, Research Division

Is 100 mesh mostly on spot, or is it all on spot for you guys?

Bryan A. Shinn

No, we have contracts for 100 mesh as well. If you look at our contracts with any of the major service companies, typically, there is multiple grades in there, and certainly, we have 100 mesh contracts as well.

Marc G. Bianchi - Cowen and Company, LLC, Research Division

Okay, great. And then just one follow-up, unrelated. On the ramp of Utica and the expected cost benefit as you're able to switch rail lines going into the Permian, can you help quantify that for us or help us understand the benefit to margins?

Bryan A. Shinn

Sure. So as we think about that, the key is to give ourselves more options in terms of origin and destination pairings. And as we bring Utica online, we're going to have a great option to run unit trains on the Union Pacific rail right down into the Permian. And as I mentioned in my prepared remarks, we are also building out a really large unit train receiving facility down in Odessa, Texas. So I think there is several dollars a ton of advantage there for the products that we send by that channel. And at the same time, we'll be able to place Sparta product, perhaps, into more cost-effective destinations, so you kind of get a double benefit from that. And I would expect that, as we go through the year and are able to optimize that, we'll see some substantial improvements in our cost to serve as we go forward.

Operator

Your next question comes from the line of Matt Conlan of Wells Fargo Securities.

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

So I wanted to ask you a little bit about logistics. In the fourth quarter, it seemed that you had some Sparta sand that was going down to the Permian pretty inefficiently. How do you seem to fix that going forward? Obviously, when the Utica plant comes on, you had some more -- some easier volume to go to the Permian, but do you have takers for that Sparta sand to go someplace more efficiently.

Bryan A. Shinn

Yes. So it's another great question. And when we designed the Sparta plant, our assumption was that we would send a lot of that product into the Bakken and up into Canada, Matt. And the reality is that there has been such an overwhelming demand in the Permian that we've been sending it there instead, right. So I think we'll have more opportunities to send it west and north, so into the Bakken and into Canada. And actually, when you look at the logistics setup, the product out of Sparta actually goes pretty well east also, so into the Marcellus and the Utica area. So we have a lots of good options there. It's just that right now, we can -- we have demand in places that just don't exactly fit perfectly with where Sparta serves effectively. And now the key here, I think as well, is to work on the things that we can control, and it's one of the reasons that we've created a Chief Operating Officer role. I mentioned in my prepared remarks, Mike Winkler, who has moved into that role for us. And our teams are working on a lot of things to improve our cost to serve, if you will. So more efficient origin, destination pairing, working on demurrage costs, which are the kind of rental cost that we pay every time a rail car sits somewhere downstream of our plant, different rail routings, so our guys have come up with some real creative ideas there. So there is lots of things that are within our control that we're going to work on for sure.

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

Okay. So to send more sand into those northern basins, are you relying on increased demand growth; or are you looking to, perhaps, take share from other competitors; or both?

Bryan A. Shinn

So we think there is opportunities to do both. And certainly, I expect, based on what's happening in the Bakken, that we'll see some growth there. Canada is just going to take us a bit longer to penetrate, because it's a much more sort of captive market and you really have to have a transload network up there, which we're building, but we don't have it as built-out as we need at this point. So there are some things we need to have a place, I think, to really maybe go after Canada.

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

That's great. And staying up in Wisconsin, what's the update on your Eau Claire County greenfield opportunity?

Bryan A. Shinn

Yes. So we're making really good progress on that. We've had our initial hearings with the community. It's all gone very well. And I think we're very close to getting our mining permit up there. I would expect that over the next couple of months. We've been received very well by the local folks there. And I think that we're right on track, based on the schedule that we had talked about, of potentially having something up late 2015.

Operator

Your next question comes from the line of Kurt Hallead of RBC.

Kurt Hallead - RBC Capital Markets, LLC, Research Division

A couple of things on my end here. You guys indicated industry -- overall industry demand growth for oil and gas sands at roughly 10% to 15%, suggesting the market could be tighter even with the new supply that's coming into the marketplace. If I heard you correctly, you suggested that oil and gas volumes for U.S. Silica could be over 5 million tons in 2014. That would imply year-on-year growth rate of, like, 25% when the market is growing 10% to 15%, which then indicates some market share grab. I think I did -- I think I heard that all right. But could you help me understand the -- you know, that's extremely successful market share gains. So can you help me kind of connect the dots on the marketplace and what you guys are doing to really increase your share by that large proportion?

Bryan A. Shinn

Sure, Kurt. And it's our core strategy to continue to increase market share, right. And so if you look at 2013, we grew our share by about 2%, right. So we came into the year around 8% share and we exited at 10%. And so 2013 was kind of a similar year. There was growth in the industry, but we outpaced that for sure. And so we expect to do the same thing in 2014. And I think it goes back, in large part, to our strategy of moving downstream. We're seeing tremendous demand at our transload networks. We believe that we're favorably positioned in many basins, and we make it so easy for customers to do business with us that they're seeking us out to buy products from us. And I think customers really like the kind of convenience of knowing that almost with no notice, they can just send their trucks over and get product from us since we maintain the inventory for them out in the basins. And some of the customers are actually almost outsourcing their logistics to us. We've had some customers turn their rail cars over to us, and we're basically managing the logistics for them. So I think our strategy has been really successful, and I would expect to continue that in 2014. And there'll clearly be continued investments that we're going to make in expanding that footprint and the new facilities we're bringing online, the Odessa transload later in the year, and a variety of other things that our team is doing to make it easy to do business with U.S. Silica. I believe we will continue to take share in '14 just like we did in '13.

Kurt Hallead - RBC Capital Markets, LLC, Research Division

So the follow-up there is on the contribution margin per ton, specifically in the oil and gas sector. You go back to the first quarter of '12, it was $51 per ton; first quarter '13, $39; you exit fourth quarter of '13 at $31. I think your most recent guide point for 2014 kind of suggested low 30s for the year. Can you give us a little bit more color around that dynamic? I'm assuming that it's a mix shift related to this 100 mesh dynamic, but again, wanted a little bit more granularity on that.

Bryan A. Shinn

Yes. So -- I mean, there's a lot of issues kind of underneath that, but I'd point to 2. One is, it is 100 mesh shift, which we think is going to continue to occur based on the success that many of the energy companies are reporting using that product as a lead-in proppant; but the other reality is that there's kind of a supply-demand dynamic, and in 2013, we were in a more balanced market. And so we had continued pricing pressure throughout the year. And in some cases, we made the choice to trade off price for additional favorable terms, or contract extensions, or things like that. What we see in the market today, it feels like supply-demand is moving towards the shorter side. I think, as I said my remarks and in answers to one of the earlier questions, 10% to 15% proppant growth seems like a pretty conservative estimate right now in terms of demand, when you look at the kind of numbers that are coming from a lot of the energy companies. So I think some of that pricing upside will certainly help us to recover some of the margin. And then I also tend to look at things that we can control as well. And I think we can do a better job in the supply chain area, reducing our transportation costs, doing a better job of really monitoring, tracking, and some of the choices that we make around we ship product and how we do things internally. So our teams are all over that, and so we want to absolutely optimize that to the extent we can. And then supply and demand will sort of go where it goes. Certainly, if things tighten up, then there is probably pricing upside. If it stays more like the 10% to 15%, there is maybe less opportunity to get pricing there.

Kurt Hallead - RBC Capital Markets, LLC, Research Division

That's great. Can you give us some insight as to what percentage of your volume is coming up for contract as the year progresses?

Bryan A. Shinn

So this year, we're -- we'll be at about 50% contract, 50% spot. Last year, we actually sold -- I was just checking the numbers yesterday -- we sold about 72%, 73% to our contract customers. So we'll be more balanced this year, about 50-50. We don't have any contracts that roll off through the year. And then I think we've got few that roll off towards the end of the year, but it will be... The next couple of years, we'll see gradual roll-off of the initial contracts. And we're kind of in the process of deciding how much do we want to have under contract. I think 50-50 feels like a good place to be right now, given that there may be some pricing upside in the future. But we'll make a decision around where we'd like to go with that based on how we think pricing may evolve..

Kurt Hallead - RBC Capital Markets, LLC, Research Division

And just last one here. On ISP volume growth, what's your thought there for '14?

Bryan A. Shinn

Yes, Don, do you want to take that?

Donald A. Merril

Yes. We're looking at our ISP business growing in volume in 2014. Typically, we like to say that, that's going to be a GDP-plus growth business. And I would anticipate that again in 2014. Additionally, we've got some new products coming, right, so that's going to start to add to that. So that's why we say GDP-plus. So that's, as I said, a great 2013, and we anticipate another good year in '14.

Operator

Your next question is from the line of Christopher Butler of Sidoti & Company.

Christopher W. Butler - Sidoti & Company, LLC

Just going back to the contract question. As we went through 2013, you had a high degree of contract sales earlier in the year, and there was thoughts on reaching caps when you got to the end of the year. I would assume that the December slowdown kind of curtailed any benefit from that. But as we look to January, do we see a high degree of contract purchases again much like last year?

Bryan A. Shinn

So it's another really germane question, and we're working very closely with our customers on kind of a case-by-case basis to look at how closely we're going to hold people to their contract numbers. Demand's very strong and we're working to try and balance short-term gains versus long-term relationships. And so I would say, the way the year has started off, we're having to kind of hold customers back versus their contract commitments. We've had a couple of our larger customers who looked to significantly overbuy their commitments in the first quarter. So we're trying to work with them and we understand that they have needs. But we can't let customers get too far out of their contracted range.

Christopher W. Butler - Sidoti & Company, LLC

And with the follow-up kind of changing directions a little bit, could you talk about the regulatory environment with dust and other issues that they may be popping up with -- as you go through this Eau Claire process?

Bryan A. Shinn

Sure. So there's one issue that's out there right now. I think we've talked about it, perhaps, on our previous call, but OSHA has put out a draft proposal to reduce workplace silica exposure by 50% versus their previous standard. The good news for us is, we already operate at that sort of reduced standard anyway. And just sort of in good practices, we've done that for years, so it's not going to impact us. I think, as we talk to our communities, U.S. Silica is a low-dust operation generally. Perhaps, some of our competitors don't operate the way we do, but we don't have issues with dusting around our plants and our communities. So we feel very good about that. And as we look at our track record around safety, health and these type of issues, I think we're best in the industry around that.

Christopher W. Butler - Sidoti & Company, LLC

And as it pertains to Eau Claire, it sounds like no problems there then?

Bryan A. Shinn

No, no problems there. The mine site, it's a large site. It's I don't know 800, 1,000 acres, something like that, maybe a little bit more. It's quite large. It's in a very rural area. We have UP Rail right on site, so there's no truck involved. There is no issues. At this point with the community, folks have been very supportive.

Operator

Your next question is from the line of Brad Handler with Jefferies.

Brad Handler - Jefferies LLC, Research Division

Maybe I can come back to a couple of topics that you've touched on already, but the first in terms of the contracts. There were some contracts, I guess, that were coming up at the end of '13. Should we infer from your 50% kind of comments that you've let some contracts roll, and so that you're a little bit more exposed now to the spot market by virtue of letting some contracts fall away so to speak?

Bryan A. Shinn

No, that's exactly right. Although the interesting thing is that the 2 contracts that rolled, those customers are still buying from us, right. So we wanted to see how things go into the marketplace here. But yes, we let those roll.

Brad Handler - Jefferies LLC, Research Division

Okay, interesting. The other thing is maybe a question related to volume. Maybe as I understood the business, I thought of your -- you're defining your own capacity in terms of coarser grades, and 100 mesh was sort of this -- it's a residual product, and obviously, demand for this has proven to be much stronger than you expected. But having said that, when we talk about, whether it's 1.2 million with oil and gas volume in the first quarter and maybe your thoughts about 5 million for the whole year, does it suggest somehow -- are there some other constraints? Is it because of transload capacity or because of railcar capacity or something? Is there some reason why mix is the issue that it is? And maybe if I ask it differently, I would have guessed that 100 mesh was simply additive to what are otherwise very underlying strong trends in coarser grades. And so I kind of get it, but I would have expected you to have higher volumes if we were still talking about lower margins. Does that make sense, and do you have any thoughts around that topic?

Bryan A. Shinn

Yes. So as we think about the 100 mesh, where the best 100 mesh comes from, typically, is also the plants where we have industrial products. So if you look at Ottawa, our 100 mesh products get divided between oil and gas and the industrial business as well, right. So we don't have sort of complete freedom to flex up the 100 mesh product. I would say that certainly, given the current environment, we're going to make as much as we can. And when we think about our capacity, we do tend to represent capacity with a sort of normalized level of 100 mesh supply, as well as knowing what our commitments are to our Industrial customers. So it's a little bit more complicated than the other grades just because of that. So I mean, technically, if we're didn't have any industrial business or if we absolutely could maximize 100 mesh production in other ways, perhaps at the expense of other grades, the capacity could be different. So I mean, -- I think you picked up on a subtlety in the business in the way we talked about the capacity. But it's kind of how we represent it, right, Brad. It's sort of with "normal" demand for 100 mesh here is what -- here is what we'd make and here is what we think our capacity is.

Brad Handler - Jefferies LLC, Research Division

I guess, I understand that. All right. And then maybe just again quickly touching on another contribution margin question. I appreciate your answer to -- it was Kurt's question about influences that pressed down. Should we expect that it ramps up through the course of the year though by virtue of Utica, by virtue of other logistical improvements that Mike's working on right now, and maybe some pricing dynamics or something? I mean, is that -- does it start at 30 and does it make its way up to the -- closer to high 30s later in the year? Is that how -- is that a logical progression?

Bryan A. Shinn

So I guess the way I look at it, Brad, is that there's more upside than downside in margin. I think that there is more favorable trends there than headwinds. I would say, last year it was the other way around, right. We saw more headwinds. A lot of our service company customers had margin issues. It was kind of a more balanced market. And on top of that, we had negotiated some pretty aggressive pricing back in 2011 when some of these contracts were signed. So that was sort of a different environment. But I certainly feel like there should be upside there, both from the work that we're doing as well as to some of the market trends. If demand stays strong, obviously, that's an easier environment to get some price increases, right. So there's really potential upside there, but we've also seen, in 2013, some additional transportation costs come in that we didn't initially expect just because of where the demand played out. So there is a lot of factors here, but like I said, I would characterize it as probably more upside than downside when I weigh it all out.

Brad Handler - Jefferies LLC, Research Division

Right, which I guess may take time to develop.

Bryan A. Shinn

And I would agree with ramp-up, Brad. I think you kind of saw a low watermark, if you will, in Q4 of '13, so you ramp up a little bit in Q1, and so on.

Operator

Your next question is a follow-up from the line of Marc Bianchi of Cowen and Company.

Marc G. Bianchi - Cowen and Company, LLC, Research Division

Just to follow-up on the contract discussion. Were the contracts that you let roll off, how were those priced relative to the spot market?

Bryan A. Shinn

So one of the contracts was probably at spot market pricing, and one was probably a little bit below.

Marc G. Bianchi - Cowen and Company, LLC, Research Division

Okay, that's great. And then just an unrelated question. On the $180 million to $200 million guidance for EBITDA that you've provided, can you offer your view of the adjustments that we need to be assuming to get to those -- that $180 million to $200 million guidance in your adjusted EBITDA?

Donald A. Merril

So the adjustments going from EBITDA to adjusted EBITDA. Yes, I would say that it would run about the same that it did in '13. So we're seeing -- somewhere in neighborhood of $2 million to $3 million of those adjustments on a quarterly basis.

Operator

There are no more questions. I would now like to turn the call over to Mr. Bryan Shinn for any closing remarks.

Bryan A. Shinn

Thank you very much. Look, in closing, I want to say that -- I believe that our investments in the infrastructure, logistics and new products are going to continue to pay off going forward as we've talked about on the questions and answers here. We estimate that our market share, as I said before, is about 10% coming into 2014, and we expect that to continue to ramp as we go throughout the year. We recognize that only the most efficient companies, and those with scale production and transportation networks, are going to thrive over the long term.

Also, we believe that over the next couple of years, U.S. Silica is going to sustainably increase that share. And as we get into 2014 here, we're going to focus on further improving the efficiency of our supply chain. We made some pretty aggressive moves on that. We're going to also carefully evaluate acquisition opportunities. We didn't talk much specifically about that today, but we continue to look to expand our infrastructure and add additional mining and production capacity.

I also want to thank all of my colleagues at U.S. Silica for their hard work and dedication in making 2013 an extremely successful year for the company. And for all of our investors and our analyst community, we certainly appreciate your interest in our company, and look forward to meeting you all and speaking with you at the many conferences which we'll attend this year. Thanks for dialing in. And have a great day, everyone.

Operator

And thank you again for joining us. This does conclude today's conference, and you may now disconnect. Have a great day.

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Source: U.S. Silica Holdings Management Discusses Q4 2013 Results - Earnings Call Transcript

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