CARBO Ceramics Q2 2010 Earnings Call Transcript

Jul.30.10 | About: CARBO Ceramics (CRR)

CARBO Ceramics (NYSE:CRR)

Q2 2010 Earnings Call

July 29, 2010 11:00 a.m. ET

Executives

Gary Kolstad - President & CEO

Ernesto Bautista - CFO

Analysts

Jeff Tillery - Tudor, Pickering, Holt

John Daniel - Simmons & Company

Blake Hutchinson - Howard Weil

Steve Ferazani - Sidoti & Company

Brian Uhlmer - Pritchard Capital

Jeff Spittel - Madison Williams

Roger Read - Natixis Bleichroeder

Craig Stone - Kayne Anderson

Mike Mazar - BMO Capital

Operator

Hello and welcome to today's CARBO Ceramics Second Quarter 2010 Earnings Conference Call. At this time, all participants are in a listen-only mode. After management's remarks, we will conduct a question-and-answer session and instructions will follow at that time. Please be advised, this call is being recorded today, July 29th, 2010, and your participation implies consent to our recording of this call. If you do not agree to these terms, simply disconnect.

I would like to remind all participants that during the course of this conference, the company will make statements that provide information other than historical information, and will include projections concerning the company's future prospects, revenues, expenses or profit.

These statements are considered forward-looking statements under the Safe Harbor Provision of the Private Securities Litigation Reform Act of 1995 and are subject to risks and uncertainties that could cause actual results to differ materially from these projections. These statements reflect the company's beliefs based on current conditions, but are subject to certain risks and uncertainties that are detailed in the company's press release and public filings.

Your host for today's call is Mr. Gary Kolstad, President and Chief Executive Officer of CARBO Ceramics. Kolstad, please begin your call.

Gary Kolstad

Good morning, I want to thank you for joining us to discuss CARBO's second quarter results along with our outlook for the remainder of 2010. This morning, we reported second quarter revenues of 111.5 million along with net income of $18.7 million or $0.81 per diluted share, an increase of 61% and 100% respectively from last year's second quarter.

Global proppant sales volume totaled 314 million pounds for the second quarter of 2010, representing a year-over-year increase of 45%. North American proppant sales volume increased 42% year-over-year, while international proppant sales volume increased 61% compared to last year.

Demand for our products has been maintained by the economic success that our clients have experienced when using our highly conductive proppant in both oil and natural gas plays. Several operators continued to report excellent production results in both of Bakken and Eagle Ford plays and the well is utilizing CARBO Ceramics proppants.

Demand for high-quality Ceramics proppants in these two plays continue to grow as operators realized the benefits of economic conductivity particularly in the presence of multi-phase flow. Although we were able to marginally draw down from our finished goods inventory during the second quarter, we remain capacity constrained, and as mentioned on last quarter's conference call, we expect proppant sales volumes to track closely with our production capacity over the next several months.

Construction is progressing well on the third 250 million pound production line at our Toomsboro, Georgia facility, and we still expect this line to commence startup in November of this year. We continue to see solid revenue growth in the Falcon Technologies business. Falcon is well-positioned to benefit from the increase focused on global environmental stewardship in the oil and gas industry, in particular, Falcon's products provide E&P operator to build either reduce the business risk of sales.

During the second quarter, our commitment to technology development continued as we expanded our iProp family of detectable proppants with the introduction of CARBONRT, an innovative, environmentally responsible, non-radioactive traceable proppant. In addition, we contained a ramp up the production of CARBOBOND, our resin-coating ceramic proppant, at our New Iberia resin-coating facility.

CARBOBOND is being successfully deployed in wells and client interest remains high. We experienced the year-over-year increase in operating profit of 101% due to increases in sales volume and average selling price. SG&A and other operating expenses for the second quarter of 2010 increased $3.6 million on a year-over-year, largely due to the inclusion of the Falcon Technologies business which was acquired in October 2009.

Net income for the second quarter of 2010 increased 100 percent, or 9.3 million, compared to the second quarter of 2009.

We are pleased to have announced an 11% increase in our quarterly dividend, illustrating the Board of Directors' confidence in our current and future financial strength of the Company.

Now moving to the outlook. Our near-term outlook on natural gas, like many in the industry, remains cautious given the backdrop of weak natural gas fundamentals. However, we are encouraged by the price of oil which may keep activity at healthy levels for the second half of 2010. Demand for our products is strong and we continue to anticipate that our ceramic proppant sales volumes will closely match our production capacity for the remainder of the year. As a reminder, our current capacity is approximately 300 million pounds per quarter. As stated previously, we were able to marginally draw down our finished goods inventory in the second quarter, but we do not anticipate being able to replicate this strategy during the second half of 2010.

Production on Line 3 at our Toomsboro location is anticipated to be startup in November of this year and we are excited to add additional capacity with Line 4, which is expected to be complete in 2011. When combined, these two lines will increase our productive capacity by 40 percent or 500 million pounds. As we mentioned in the past, in addition to our commitment to grow our production volumes, CARBO's growth will come from our ability to remain a leader in the development of technologically advanced proppant systems. As such, the opening of our new CARBO Technology Center in Houston during the third quarter is a key step in that process, and will allow us to better collaborate with our E&P clients in the development of products that enhance Economic Conductivity.

Our financial position remains strong and our balance sheet remains debt free. In fact, our annual dividend is more than double than the last five year and along with our share repurchases program, has allowed us to return a significant amount of value back to our shareholders. This completes our prepared remarks and at this time, we'll be happy to address any questions.

Question-and-Answer Session

Operator

We will now begin the question-and-answer-session. (Operators Instruction). We will pause momentarily to assemble our roster. The first question is from Jeff Tillery of Tudor, Pickering, Holt. Please go ahead.

Jeff Tillery - Tudor, Pickering, Holt

Hi good morning.

Gary Kolstad

Good morning.

Jeff Tillery - Tudor, Pickering, Holt

As I looked at the Q2 results for the proppant business, it looks like realized price was up something like 5% sequentially and I know there's mix factors that can influence that, but I'm just trying to understand if there was additional pricing realized in the quarter of that magnitude and if not, just understand some color behind that.

Gary Kolstad

Well, if you go back to our fourth quarter announcement I had, I announced that -- I said that our pricing would probably increase in the first half by 3% to 5% by the end of the first half. Now, I probably should have said 3 plus 5% because that's kind of where it ended up. In the first half of H1, we ended up about 8% from the Q4'09 pricing. So we did get to enjoy some pricing this quarter.

Jeff Tillery - Tudor, Pickering, Holt

Any commentary on pricing outlook for the second half of the year?

Gary Kolstad

Well, I think I'm going to back to what we consistently said and I would start off by saying we expect any additional price increases to be minimal, given the fact that we're now four months away from starting up Toomsboro Line 3 with additional 250 followed by another 250 of Toomsboro Line 4. We kind of strategically think it does not behoove us to raise prices aggressively. Our financial returns are very good; we have a history of trying to keep stable pricing during the cycle of the industry which helps us manage business for the long-term.

And finally, we have a long-term strategy and successful history replacing lower conductivity, cheaper proppants with our higher conductivity, higher value proppants, and for just an enormous amount of years its proven to be a good strategy. So I think that's the summary on that. So any increases we see, it would probably be minimal.

Jeff Tillery - Tudor, Pickering, Holt

For the CARBO NRT product, could you just talk about what the sales proposition is there; is it the same model where you sell by the pound? I'm just trying to understand kind of proposition for the customers there, how you market and sell that product?

Gary Kolstad

We're very excited about that because probably a year ago I start talking about technology adds that we would put on proppant and so this is a non-radioactive traceable proppant that obviously has some advantages, especially in some overseas countries. So we will have an additional price per pound if you like cost on it.

Jeff Tillery - Tudor, Pickering, Holt

Okay. It's marketed and sold similar to the other proppants; it's just at a different price point?

Gary Kolstad

Correct, correct.

Jeff Tillery - Tudor, Pickering, Holt

And then my last question just on Line 3, you updated the timing on that. For Line 4, should we think about that as following 12 months after Line 3, six months, nine months? I'm just trying to get a feel for when in 2011 we should expect that to be on line.

Gary Kolstad

Well, Toomsboro Line 3 starts up in mid November; I'm going to say less than 12 months.

Jeff Tillery - Tudor, Pickering, Holt

Okay. Mid year? Can I get to pin you down any closer on the timing?

Gary Kolstad

You want the date of the months? Or -- No, I think at this time it probably behooves us to just say it's going to be in the fourth quarter and just leave it at that and then as the quarters roll in we'll update you.

Jeff Tillery - Tudor, Pickering, Holt

Okay, thank you very much.

Operator

The next question is from John Daniel of Simmons & Company. Please go ahead.

John Daniel - Simmons & Company

Hi guys, another great quarter. Just on the Line 3 first; if it comes online in November, can you just give a -- do you take the annual volumes and divide and basically say two months worth of volume or is there any timing issues in ramping it up? How should we think about volumes?

Gary Kolstad

There are two things there. One is that plants don't just go from zero to 100% of course, right, so they go from zero to 50% and things like that. So I think from a timing and a logistic standpoint, if we startup around mid November, you're probably going to have some type of proppant that you can start to ship at the end of November. And then it's probably the middle of December before it gets to the stocking points and then of course, just like every year and I'll repeat this December always slowed down during Christmas.

What we expect to see is a benefit starting January 1st because we want to get our inventory levels to up of the stocking or distribution points. So I wouldn't count on a lot it in December and I think it will play well into our strategy of increasing our inventory of the distribution points to get ready for 2011.

John Daniel - Simmons & Company

All right. So then you've got call it quarterly capacity of 300 right now, so that's a reasonable number hopefully for Q3 and then we should assume a slight step down again in Q4, as what happened in 2009?

Gary Kolstad

Yes, I accepted that -- I don't -- I think right now we're just going to say look at our productive capacity for the next two quarters. There is a lot of demand for us right now but I just don't think we'll probably get that benefit of Toomsboro Line 3, other than we'll get to stock up some inventory during that holiday period, hopefully and get ready for January 1st.

John Daniel - Simmons & Company

Okay and as you stock up inventories, well, actually let me just turn to one last thing and I'll turn it back over to other people. When you're running your facilities full out, which is presumably what you're doing now, one would think that there might be increased risk of downtime at some point next year for more maintenance. Can you walk us through implications --?

Gary Kolstad

Not at all. In fact, during literally every calendar year, we're doing maintenance on plants and some of it's planned, some of it you handle when it shows up, so we went through this year, right, and done our normal maintenance programs and it's really invisible to the people on the outside. It's one of the great things about CARBO have in this many production lines around the world that if a single kiln goes down it's really a small speed bump versus a catastrophic event. So we've been doing business, it's normal and throughout 2010 and we would expect this same thing in 2011.

John Daniel - Simmons & Company

Okay, let me ask one, one last one just real quickly. From Q3 to Q4 if you start ramping inventories in Q4, is it reasonable to assume a slight step down in operating margins versus Q3?

Gary Kolstad

Well, the inventory won't make any difference on the operating margin. I don't think that you would necessarily see that.

John Daniel - Simmons & Company

Okay, thanks guys, good quarter.

Gary Kolstad

You bet.

Operator

The next question is from Blake Hutchinson of Howard Weil. Please go ahead.

Blake Hutchinson - Howard Weil

Good morning guys.

Gary Kolstad

Good morning.

Blake Hutchinson - Howard Weil

Quick question just regarding or may be not quick. Regarding mix from first quarter to second quarter, Gary, you cautioned us not to associate higher average price with higher average margin, so is it safe to assume as we went into the second quarter the mix shifted towards lower price points but we still achieved that higher margin despite that shift?

Gary Kolstad

You're somewhat correct. It's a combination of what we answered on the first question, meaning price was somewhat sequentially up, yes, and then you have the mix and yes, that's why we don't too caught up in price, right. We like it just look at our volumes and in the margins and that kind of explained it.

Blake Hutchinson - Howard Weil

Okay, and kind of adding onto that, would it be safe to assume if that mix shifted somewhat that pricing is better at the lower price points than the higher price points or is that assuming too much at this point?

Gary Kolstad

You should probably think of them as more consistent throughout all our product lines.

Blake Hutchinson - Howard Weil

Okay, that's great. And given that we didn't have too significant inventory overhand going out the door, is today's quarter reflective of a current just-in-time market and therefore we should think about these margin levels being sustainable going forward?

Gary Kolstad

In this, I think the margins will be similar, right?

Ernesto Bautista

Margins would be similar, yes. That's a fair.

Blake Hutchinson - Howard Weil

Okay, great. And then understanding the tradeoff theoretically between price and volume here and not pushing too much pricing in the second half due to the volumes coming on; is the tradeoff for us as investors that you feel like without pushing pricing your model could withstand, given your natural gas outlook, a couple of hundred rigs coming out of the market and still feel pretty confident that you can fulfill your volume goals for a year like 2011?

Gary Kolstad

You are hitting it really close there and I appreciate that. You seem to understand what we're talking about, prevent the business for the long-term, we're not necessarily that interested in how a quarter's volumes or whatever turned out so that's exactly what we're thinking.

Blake Hutchinson - Howard Weil

But it's a couple of hundred rigs of a downturn a good sensitivity, plus or minus?

Gary Kolstad

We actually think for the health of the industry that there would be very good if some gas rigs are dropped. Secondarily, we are unable to meet the needs of our good clients today and with what you're seeing from the oil side of the business, it would be very healthy if gas rigs are dropped and then moved over to the natural oil plays and we, in that case, would not skip a bit.

Blake Hutchinson - Howard Weil

Great. Quickly on freight costs, you pointed that out; how does that work? Is that more or less an immediate pass-through to the customer so we don't have to worry about actually losing net pricing on that basis?

Ernesto Bautista

Blake, can you repeat that once again?

Blake Hutchinson - Howard Weil

You singled out increased freight cost as something your increase freight costs, something you're dealing with right now. Is that more or less kind of an immediate pass-through to the customer in your just-in-time system so we don't necessarily have to worry about net pricing decline based on increased freight cost?

Gary Kolstad

Yes, I think it is kind of real time, so the results you saw in Q2 reflected any and all freight increases and offset by price increases, all that stuff, so we don't have something hanging out that happened in Q2 that will show up in Q3, in other words --

Ernesto Bautista

Back to that relatively consistent margin coming.

Blake Hutchinson - Howard Weil

Okay, great. And just finally, can you give us some idea, I guess of just to try to peg where Falcon is, maybe top line growth from first quarter to second quarter of that business?

Gary Kolstad

Yes, and by the way, I thought you said you're going to ask on question.

Blake Hutchinson - Howard Weil

I apologize.

Gary Kolstad

Okay, I'm just kidding.

Blake Hutchinson - Howard Weil

One question and 27 parts.

Gary Kolstad

No, we appreciate that. I think I'm just going to do a general summary on Falcon. We did see an increase in Q2 and we benefited from a refinery project in which the job was over a $1 million, so we would not expect to reoccur and whatever Q3 or things like that. So we benefited from a $1 million plus job. And when we bought the Company we told you that the annual run rate was less than $20 million, okay? Now, this year start off a little bit better, we kind of give you general guidance that we would expect 20% plus annual revenue increases overtime. This year startup a little bit better, so what we are kind of guiding people now is that you should think of 2010 as, may be a 25 million plus type of annual revenue rate and when you're doing your modeling.

Blake Hutchinson - Howard Weil

Okay, great. Well, thanks for the clarity. I'll get all of the way, here.

Operator

Next question is from Steve Ferazani of Sidoti & Company. Please go ahead.

Steve Ferazani - Sidoti & Company

Good morning Gary and good morning Ernesto.

Gary Kolstad

Good morning.

Steve Ferazani - Sidoti & Company

I want to follow-up on the oil/gas discussion a little bit. Can you give an idea over the last couple of quarters your trends of oil versus gas? You talked about the success in the Eagleford, the Bakken; is it fair to assume over the last couple of quarters you're selling a larger percentage into the oil plays now?

Gary Kolstad

That is the fair assessment, yes. And we think it given just the nature of the business right now low gas prices, decent oil prices or very nice oil prices, you'll see the same thing continue.

Steve Ferazani - Sidoti & Company

Outside of the Bakken, are you seeing any inroads into some of the other horizontal oil plays, Wyoming, Colorado, do you see potential growth there?

Gary Kolstad

We're seeing bigger ones of course, in the bigger plays right, the Eagleford, Granite Wash, things like that but absolutely. Remember the issue about high-conductivity especially benefits you on two-phase flow and I'm extremely excited about an SPE paper that's going to come out here at the next SPE events and we did it with an operator in the Bakken which will really help, once again explain that to people technically.

Steve Ferazani - Sidoti & Company

Okay. As you certainly noted the issues with potential gas oversupply which really could end up running into 2011 at a time when you're getting the extra capacity, just trying to get a feeling for how much the rigs have to add into the oil play if we see a real pullback in the Haynesville and some of your stronger gas markets and whether you can still sustain full capacity into next year?

Gary Kolstad

We're very comfortable and we are very eager to get Toomsboro Line 3 on line and so we have a lots of demand out there and a lot of folks are having to use lower conductivity products today because we can't fulfill their needs.

Steve Ferazani - Sidoti & Company

Okay so it’s a resin coated proppant; is that helping at all on the margins? How should we think about that moving forward?

Gary Kolstad

Well, we have mentioned in the last quarter that, in the Q2, we would be producing and also moving up to distribution points, that's exactly what took place. So in Q3, we have started selling already. Obviously we won't -- don't tell you what that is but it's Q3 where you'll start to see it show up and you know it might have some marginal -- it will have a marginal effect on pricing because, once again you have a ceramic substrate that you're adding technology too. So very similar to CARBO NRT, CARBOBOND will bring some incremental pricing.

Steve Ferazani - Sidoti & Company

Great. Final question, can you tell us what you had left in inventory at the end of the quarter?

Ernesto Bautista

So in dollar term, I guess, the important thing to consider is the difference between finished goods and raw materials, so in dollar terms, finished good was approximately $29 million.

Steve Ferazani - Sidoti & Company

Okay. So there's still a little bit more you could get out in Q3?

Gary Kolstad

We're not going to promise that.

Steve Ferazani - Sidoti & Company

In that I certainly wouldn't ask for a promise, I just wanted to say...

Gary Kolstad

We're trying to get people to a productive capacity of 300 million pounds a quarter.

Steve Ferazani - Sidoti & Company

That's fair. Okay, thanks a lot Gary, thanks Ernesto.

Gary Kolstad

You bet.

Operator

The next question is from Brian Uhlmer of Pritchard Capital. Please go ahead.

Brian Uhlmer - Pritchard Capital

Hi, good morning gentlemen.

Gary Kolstad

Good morning.

Brian Uhlmer - Pritchard Capital

Just have a couple of quick questions. If I look at how you're talking about pricing and with your volumes that you had, I get about a $0.336 prices, is that somewhat the ballpark that you guys are using as your average price? And second to that, that implies that you did about $6 million in your other business segments; how much of that is Falcon and how much of that is your geotechnical stuff?

Gary Kolstad

First of all, on the pricing that will be in the queue there in the next couple of days, I guess that comes out so you can actually see it. Secondly, regarding the other businesses there, they're very small and I think on the Falcon what I've tried to explain is that people should be using 25 million plus for the annual rate on Falcon. The other ones are just not material to the business.

Brian Uhlmer - Pritchard Capital

Okay, so for 2011 we can use -- I thought we were using 23, but 25 plus is where that business is heading?

Gary Kolstad

I'm saying 25 million plus for 2010 and then it might logically follow our other guidance, so a longer term up 20%, Brian.

Brian Uhlmer - Pritchard Capital

Right. Outstanding. And two quick questions on G&A and DD&A; it looked like DD&A was up sequentially, is that going to be ongoing? Is that because of Falcon or what do you attribute that to? And then the same with the startup costs; should we say that's a onetime and kind of use about 12.1 run-rate for G&A?

Ernesto Bautista

Well, the startup cost, yes. That's really more sensitively, the resin coating operation; we don't expect that as a recurring item. You will see and just to give an idea there we obviously will have startup cost added certain point associated with the other lines as they come on. But we don't anticipate that necessarily for the following quarter. The DD&A, that's right. The additions that we've made to the profit business along with Falcon, you're going to see an increment in DD&A.

Gary Kolstad

I think I would add Ernesto, in our past experience with Toomsboro 1 and 2 is there are something around the $500,000 figure for startup cost, that's approximately with that, yes, and that might logically hit in Q4. Correct, around the time of the startup.

Brian Uhlmer - Pritchard Capital

Good deal. I'm going to do a triple Lundy here and ask a third question. Trying to figure out, this frac trace technology I think is very interesting and I'm trying to figure out, is that something that you're pricing right now or you can do in that right now just including it for free to show guys how it works and at some point you'll get some pricing power out of that? How do you look at that technology?

Gary Kolstad

Well, we did field test with your aforementioned strategy now its gone commercial, so we will charge for it.

Brian Uhlmer - Pritchard Capital

That will be available in every type of proppant that you sell, is that correct or is it specific product lines that you add this to?

Gary Kolstad

Correct, it's available in our Ceramic proppant line, yes. All of them.

Brian Uhlmer - Pritchard Capital

But -- all of them, okay. Good view. I'll turn it back. Thank you.

Gary Kolstad

You bet, thank you.

Operator

Next question is from Jeff Spittel of Madison Williams. Please go ahead.

Jeff Spittel - Madison Williams

Hi good morning, guys.

Gary Kolstad

Good morning.

Ernesto Bautista

Good morning.

Jeff Spittel - Madison Williams

I apologize if you hit on this already; I've been jumping all over conference calls this morning. I was wondering if you give us a sense of how things are progressing in the international markets relative to the last couple of quarters?

Gary Kolstad

Well, in relative to the last couple of quarters, we have been capacity constraint, on our announcement this morning, I think we probably had it in there that international year-on-year increased 61% and that is still a function of us having capacity constraints. So we're pleased with our development, internationally, we tend to talk about regions and we're pleased with what we called EAME, Europe, Africa, Middle-East, having said that, the other regions the China, the Russia, they were up to, so we continue to see international interest and it's more a function of us so where we can distribute the profit.

Jeff Spittel - Madison Williams

Okay and this is one I get some pushback once in a while is people talking about restraining wells which chokes in some of the frac plays and what that could ultimately portend in terms of declining service intensity. Certainly not sure if I buy it, but just wanted to kind of pose the question to you and give you a chance to respond to that.

Gary Kolstad

Well, I don't think it has anything to do with the volume of proppants you've put in the overall. What it has to do is that they're trying to choke it back so they quit putting such Delta P near the wellbore there and causing damage and finds movement etcetera. So some of the operators are choking it back and what they hope to see is that their EURs and year one may be similar to the EURs and more of a wide open choke standpoint and hopefully in the year two, their EURs will be a little bit higher than what they were before therefore it would been more of an open flow types standpoint.

I've seen and talked to some of the chiefs of oil companies and I think the logic make sense. Having said that, it won't have anything to do with volumes because the one absolute trend we see is our ability to open more reservoir face to proppant and remember the only reason we frac right is to create a conducting channel or a super highway for oil and gas to flow out of that reservoir. It still keeps driving the same way and I think some of the things you see and especially like in the Bakken places like that continue to reinforce steps.

Jeff Spittel - Madison Williams

Great, so I was having a hard time making that connection too, so thanks for the explanation. I'll turn it back.

Gary Kolstad

You bet.

Operator

(Operators Instruction). Your next question is from Roger Read of Natixis Bleichroeder. Please go ahead.

Roger Read - Natixis Bleichroeder

Hi good morning, guys.

Gary Kolstad

Good morning.

Roger Read - Natixis Bleichroeder

I kind of like Jeff there, I've been bouncing around, so if I repeat a question or statement, I apologize in advance. But I just wanted to walk back through the lower manufacturing costs in the second quarter and then the improvement on pricing, if you kind of walk us through what were the reasons for those? Was the pricing a legitimate pricing change or a mix change I guess?

Gary Kolstad

What we've said at the beginning here was that price did increase in Q2 and I tried to jokingly said in my comment I made up to Q4 where we said we'd have a 3 or 5% price increase by the end of H1, we actually should have added those together and got an X percent increase by the end of H1. So that's really where it was at; it was price and somewhat of a favorable mix but more price.

Roger Read - Natixis Bleichroeder

Okay. Well, I want to congratulate you on finally moving the pricing out there; that's certainly been a restraining factor for me and sort of long-term expectations. Manufacturing costs were, it seemed like they were legitimately lower here; can you -- is that the resin coated stuff moving through or is that something else?

Ernesto Bautista

No, I don't think so. It much more has to do with the price and executing it max capacity and those things. It's not really the mix or anything else. We have that's pretty standard cost we have in those plants.

Roger Read - Natixis Bleichroeder

Yes, I was just trying to understand if there's anything else there. And then Toomsboro 3 and 4 are coming along here, looks like the market is going to need proppants for quite a long time to come and with other shales and other worlds opening up that may need them as well. What are you thinking of at this point in terms of the next level of capacity expansion? Is there room for a Toomsboro 5 and 6 or do you have to go elsewhere?

Gary Kolstad

No, we have plenty of room from five and six and onwards and we were in discussions and we've talked to the Board obviously about long-term trends and we've looked at the five year trend out in 2015 and so we are very excited about the future and as we finalize this things, we'll announce them to you, probably similar to our old fashion of announcing plants as we go along. But no, absolutely, long-term trend looks fantastic and that's the way we look the business.

Roger Read - Natixis Bleichroeder

Okay. Last question, you mentioned on the resin coated, as a percentage of your sales, can you give us an idea of maybe where that fits in the volumes and is it still less than 2% with a goal to 5% or is it market will be what the market will be there?

Gary Kolstad

Well, you might have missed that too but we in Q2, we said we are going to start producing and move to distribution points, that's exactly what took place. We just started selling in Q3, so it didn't impact Q2. The plant is a 100 million pounds, we'll see how it goes but the market is in need of resin coated ceramic for flow back resins and may be we'll give more color on that in Q3. Of course today, right, if we sell a pound of that, it takes away a pound of uncoated so we need more capacity.

Roger Read - Natixis Bleichroeder

Okay, that's it for me. Thanks.

Gary Kolstad

Thank you.

Operator

And so we do have a few more questions, are you be able to take on today?

Gary Kolstad

Yes.

Operator

Okay, the next question is from Craig Stone of Kayne Anderson. Please go ahead.

Craig Stone - Kayne Anderson

Good morning. First a clarification; you said that there would be an additional $500,000 DD&A for the startup of Line 3; is that per quarter or what timeframe are you talking about there?

Gary Kolstad

Whenever it starts up, so it's likely the fourth quarter.

Craig Stone - Kayne Anderson

Okay. And there should be no additional SG&A cost involved in the startup at all?

Ernesto Bautista

This is to clarify, it's actually startup cost owe approximately $500,000, not DD&A.

Craig Stone - Kayne Anderson

Okay, all right. I got that, got it. And then just a longer, bigger picture; if we look back today, the global market share of ceramic proppants as a percentage of total proppant worldwide, has that number increased over the past five years?

Gary Kolstad

It has increased up until let's say the last year or so when we got in such tremendous shortages.

Craig Stone - Kayne Anderson

Okay and you expect ceramic proppants to continue to take share over the next 5-10 years as well?

Gary Kolstad

Well, conductivity matter, right. But certainly we stand up and preach everyday so we continue our same thing we've been doing for two decades now and that's talking about that so we expect the growth in the ceramic business to continue on for a very long time and when I mentioned that we are planning the 2015, I planned, that's what we continue to see. You have to think it in terms of the reservoirs we're developing today too, right. So tighter, hotter, more closer stress etcetera. Conductivity matters, that's the science.

Craig Stone - Kayne Anderson

Okay. And then thinking out to 2015, are you looking at other international markets?

Gary Kolstad

Yes. We think we did well. It's a matter of clemency of the oil industry, right. And all the service companies and oil companies, everybody knows that right? Today, fracturing is of course, dominate by North America, as it has been for decades but you will continue to see more and more fracturing taking place in the international markets. At some point, all was the excitement about sales, we'll start to play out, you heard the stories about the earth and everything like that. So it's just a natural clemency, the international markets are always slower, that's the way it goes but this is why we are so excited about somebody's products we're bringing out and the add on technology in the international market should really prove to be very beneficial for us.

Craig Stone - Kayne Anderson

All right, thank you.

Gary Kolstad

Thank you.

Operator

The next question is from Mike Mazar of BMO Capital. Please go ahead.

Mike Mazar - BMO Capital

Hi good morning, guys.

Gary Kolstad

Good morning.

Mike Mazar - BMO Capital

A quick question about -- just to kind of follow-up on the expansion of capacity, etcetera. Obviously, like you said you had room at Toomsboro for more and more line. Is there any utility in looking elsewhere, given what your outlook for freight cost might be or kind of where the geography of some of these newer plays is, of building new capacity that isn't associated with Toomsboro, whether it be Canada, Texas, wherever?

Gary Kolstad

It's something that we constantly do and obviously, probably respect the fact that are not going to tell people where geographically we're thinking about building. But it's what we constantly look at and we look at the big picture of ores, distributions, labor force and that literally could be any place in the world but we certainly understand where the fracturing is today and we logically think we know where it's going to be tomorrow.

Mike Mazar - BMO Capital

Okay, so you wouldn't necessarily preclude building elsewhere because of the economics of adding on to Toomsboro were so good?

Gary Kolstad

No, that's right. We're not afraid to out to places.

Mike Mazar - BMO Capital

Okay, that's great. Fair enough, thanks guys.

Operator

At this time, there appear to be no more questions. Mr. Kolstad, I'll turn the call back over to you for closing remarks.

Gary Kolstad

Thank you. Thanks for getting for joining us this morning. I'm just going to say a couple points here. Once again, the near-term story for natural gas, we think it's unclear. Domestic related, oil related activity continues to follow a healthy trend which provide a generally positive second half of 2010. Our products remained in high demand as our clients continue to benefit from the value proposition of utilizing high-quality, high-conductivity ceramic proppants to enhance production.

Given the level of demand we expect sales volume to closely match our production capacity of the second half of 2010 which is previously stated at 300 million pounds a quarter and finally increasing our production capacity remained central to the continued growth of CARBO and we will continue to invest a new product development to fulfill the technical needs of our E&P clients. And with that, we thank you and have a good day.

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