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CARBO Ceramics Inc. (NYSE:CRR)

Q2 2011 Earnings Call

July 28, 2011 11:00 AM ET

Executives

Gary Kolstad – President and CEO

Ernesto Bautista – VP and CFO

Analysts

Blake Hutchinson – Howard Weil, Inc.

Jeff Tillery – Tudor Pickering Holt & Co. Securities, Inc.

Brian Uhlmer – Global Hunter Securities LLC

Roger Read – Morgan Keegan

Luke Lemoine – Capital One Southcoast

John Keller – Stephens Incorporated

Doug Garber – Dahlman Ros

Travis Bartlett – Simmons & Company

James Stone – Barron Capital

Presentation

Operator

Hello and welcome to today’s CARBO Ceramics Second Quarter 2011 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 28th, 2011, and your participation implies consent to our recording of this call. If you do not agree to these terms, you may please simply disconnect.

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

These statements are considered forward-looking statements under the Safe Harbor Provision of the Private Securities Litigation Reform Act of 1995 and are subject to risks and uncertainties that could cause actual results to differ materially from these projections.

These statements reflect the company’s beliefs based on current conditions, but are subject to certain risks and uncertainties that are detailed in the company’s press release and public filings.

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

Gary Kolstad

Good morning, and thank everybody for joining us to discuss CARBO’s second quarter results along with our outlook for the business as we move into the back half of the year. We had a great quarter and we’re pleased with the financial and operational results for the second quarter.

Demand for our proppant remains robust across the major resource plays in North America, including the Haynesville, Eagle Ford, Colony Wash, Permian and the Bakken. The company’s solid performance demonstrates our marketing strategy, based on highlighting the benefits of economic conductivity, resonates with our clients, and continues to have a positive impact on increased well production and enhanced recovery.

We remain committed to increase in profit capacity to satisfy client demand for high quality high conductivity proppant. Additionally, we are pleased with Falcon Technologies’ second quarter performance. Operators continue to respond well to Falcon’s innovative value-added products and services which reduce environmental risk.

Revenue for the second quarter of 149.7 million increased 34% compared to second quarter of 2010. Operating profit increased 61% compared to the second quarter of 2010. This increase is due to higher sales volume and increase in average proppant selling price, and higher contribution from other company business units, partially offset by an increase in freight, selling, and G&A.

Net income for the second quarter of 2011 increased 60% compared to the second quarter of 2010. Despite the effect of the Canadian break-up and weather conditions in the Bakken, we were able to partially redirect sales volumes in to other regions, which kept sales volumes near the record levels reported in Q – first quarter of 2011.

Global proppant sales volume totaled £387 million for the second quarter, representing year-over-year increase of 23%. North American volumes, excluding Mexico, increased 26%, while international sales proppants sales volume increased 10% compared the same period.

Turning to our environmental risk reduction business, Falcon Technologies continues to see broad acceptance of its products and services within the industry. One example of this is in the Pennsylvania are the Marcellus Shale where Falcon’s Surface Mounted Containment solution fits an environmental need of clients and easily adapts into well manufacturing work streams.

We’re pleased with the growth Falcon has experienced year-to-date which has a positive correlation with the growing trend of enhanced environmental stewardship by E&P operators.

Now, I’d like to take a few moments to discuss our outlook for the business in the current operating environment. We see industry activity remaining at healthy levels for the remainder of the year. For the third quarter, we expect profit sales volumes to coastally match our current productive capacity.

Moving past the near-time outlook, we’re excited about our long-term growth opportunities. With respect to our ceramic proppant capacity, we’re very pleased to announce that construction on Line 4 at Toomsboro is tracking ahead of schedule.

We now expect completion near the beginning of fourth quarter. Once completed Line 4 will add £250 million of ceramic capacity per year increasing our total ceramic proppant capacity to £1.75 billion per year.

We have identified and secured purchase contracts for land that could be used for future ceramic capacity expansion. Pending completion of survey and other customary due diligence, we plan to move forward with the purchase of the property.

While any future expense on the ceramic proppant business would require various approvals including environmental permits. Our preliminary analysis shows this new location to potentially support the plant with initial capacity of up to £500 million annually.

Although we’re still early in the process, we believe production at the new plant could commence before the end of 2013 if the needed permits and approvals are obtained in a timely manner.

Our resin coating capacity expansion Line 2 in New Iberia remains on schedule for completion before the end of this year. Once completed, this facility will be able to produce up to £350 million of resin-coated sand annually.

As previously announced, our new resin-coated sand plant in Marshfield, Wisconsin is scheduled for completion by the end of 2012 with a designed initial capacity of £600 million annually.

To supply these plans with sub-straight, we’ve secured multiple years of northern white sand reserves. These reserves will provide high-quality sand to our New Iberian, Marshfield resin coating operations.

Similar to our raw material strategy for our ceramic proppant business, we expect to grow our sand reserves over time. The purchase of these sand reserves will assist us in producing CARBOBOND RCS, a premium high conductivity resin-coated sand. Falcon Technologies is currently in line with our forecasted revenue growth projections for 2011 and we remain excited about the their potential growth over the future years.

This completes our prepared remarks. And at this time, we’ll be happy to address any questions.

Question-and-Answer-Session

Operator

At this time we’ll begin the question-and-answer session. (Operator Instructions) Our first question comes from Blake Hutchinson from Howard Weil. Please go ahead with your question.

Blake Hutchinson – Howard Weil, Inc.

Good morning.

Gary Kolstad

Good morning.

Blake Hutchinson – Howard Weil, Inc.

The first question, Gary, within the release it would appear that you would have kind of chosen your language a little bit carefully with regard to the deciding of the future ceramic capacity expansion. Should we take from this release that at this point, we’re beyond the point where authorities might some to their senses and allow for forward expansion at (inaudible), so we’re definitively off on another path?

Gary Kolstad

Yeah. I would always, first of all – the first part of your question, always – we’re consistently conservative, of course, right. But yes, we are moving on to the new location, and we will be building in a new location.

Blake Hutchinson – Howard Weil, Inc.

And should we also take it from the release that, you cite the fact that you can – you will have initial capacity up to 500 million pounds annually, would the thinking at this point be to construct that in one step rather than the kind of 250 million mile pound hats that we’ve been doing today.

Gary Kolstad

Well, conservatively we said that we could potentially put 500 million pounds there and knowing our history, probably understand what that statement means.

The second part of your question about how will we construct it? We’ll probably do it similar to how we did two for a line, three and four where it – I don’t know, which one to call a semi parallel where we start one and there’s just some economic and efficiencies that take place if you start one and then when part of that gets done, you start on two. So I’d call it semi-parallel just for some efficient reasons and economic reasons, but we do plan on building both.

Blake Hutchinson – Howard Weil, Inc.

Okay. Just so phased in. Okay. And then switching to the RCS markets, I take it from your commentary that you are pretty comfortable that you’ll have enough, white sand “Tier 3” product to use as feed stock, and that’s not going to be a limiting factor on any of your RCS expansionary plans here.

Gary Kolstad

Yeah, it’s Tier 2. Tier 1 is ceramic, Tier is 2 resin-coated sand and Tier 3 is raw sand. But, yes, we have went out there and secured, as we looked at the landscape, there was too many things getting in the way and slowing us down. And there’s really a need to have the high quality, northern white sands substrate.

So we’re went out there and we’re going to do it exactly like we’ve done business in the ceramic business and – so, yeah we’ll – as we move in to 2012, what we’re really trying to secure as this new Iberia comes up and get its production up, Marshfield gets it production up. We really want to have a good substrate and plenty of it. So that does not become a bottleneck. So, yeah, we made those decisions and expect more that to come.

Blake Hutchinson – Howard Weil, Inc.

And just finally, I mean, with the substrate secured and kind of phased production, can you just speak a little bit about your philosophy on, or your willingness to perhaps intermittently sell white sand directly in to the market? Or is that just a line that in your mind just doesn’t get crossed? And that’s – thinking that at some point your RCS capacity might be limited, would you ever kind of ponder selling directly the substrate in to the market?

Gary Kolstad

Well, in a general sense we told you that the reason we’re getting into Tier 2 resin coated ceramic sand is because it is higher conductivity sand, and we want to bring Tier 3 up to Tier 2, just like for last 30 years, we brought Tier 2 up to Tier 1. So, we’re here to increase earnings cash flow, and all of those other things by resin-coated sand.

So the general answer would be no, that’s not the direction we’re going now. If we needed to help out our clients on a very short-term temporary basis, we might think about it. But it would only be something along that line where one of our good clients is in trouble or something. But we intend on resin coating the sand, absolutely.

Blake Hutchinson – Howard Weil, Inc.

Great. That makes sense. Thank you so much for your time. I appreciated.

Gary Kolstad

You bet.

Operator

Our next question comes from Jeff Tillery from Tudor, Pickering. Please go ahead with your question.

Jeff Tillery – Tudor Pickering Holt & Co. Securities, Inc.

Hi, guys.

Gary Kolstad

Good morning.

Unidentified Analyst

Hi, Jeff.

Jeff Tillery – Tudor Pickering Holt & Co. Securities, Inc.

Just one more question on the sand reserves. Some of the competitors in the market, it’s been kind of a multi-year process to go from reserves to producing sand for proppant. I just wanted to understand kind of how long the process has been in place. Are you going to have sand ready for you whenever you get started in the fourth quarter in New Iberia, or are you going to have to purchase that from external sources?

Gary Kolstad

We probably won’t spell out the details, Jeff, but what I can say I’d talk more about 2012 rather than the fourth quarter of 2011. And from what we’re seeing and decisions we made a while back, we think we will be ready for 2012.

And generally speaking, given our operations, execution and the talented people we have down there, they tend to get those things done pretty quick, whether it’s building a ceramic plant, opening up sand mines or doing whatever they need to do. So we’ll probably do it a lot faster than anybody else. By I’d call it more of a 2012 versus a Q4.

Jeff Tillery – Tudor Pickering Holt & Co. Securities, Inc.

Okay. That’s helpful. And one kind of mundane question on New Iberia, the 350 million pounds you talk about capacity – of annual capacity for resin-coated sand, is that total capacity in New Iberia or I guess is that inclusive of the capacity using the resin-coat ceramic or exclusive of?

Gary Kolstad

Yeah, you are hitting the nail on the head there. We have an initial plant that produces 100 million pounds that we’re using to coat resin-coated ceramics, and in its spare time coat resin-coated sand, we’re building a 300 million pound line that is meant to be primarily resin-coated sand if not exclusively. So we’ll have 400 million pounds of resin-coated capacity in New Iberia, but we would like to call it 350 million pounds of resin-coated sand, just to kind of split it up 50-50 on that first line. And sometimes it will be 50-50, sometimes it will be 80-20, you know, it just depends on the market.

Jeff Tillery – Tudor Pickering Holt & Co. Securities, Inc.

Okay. That’s helpful. And my last question, it look like realized pricing for profit picked up a little bit in the quarter kind of order of magnitude 1.5% or so percent. Was that just flow through from price increases earlier in the year, or was that mix changes or can you just provide a little color on that?

Gary Kolstad

Yeah. I mean you started to mention some of the factors. There are a lot of things that take place there, right. Product mix, higher value specialty products such as resin-coated ceramic, transportation cost, region sales.

China, we had a record quarter in China, for example, where pricing tends to be lower, but we also have different cost base there, Russia. So there are a lot of things that take place there. We have long and short-term contracts with mechanisms in them. So lot of moving parts there. All I am going to say is that we’re pleased with the movement on price on both the quarterly and especially the year-on-year, which is the way we look at our business year-on-year. We’re not that interested in looking at things sequentially just because of the nature of our business.

Jeff Tillery – Tudor Pickering Holt & Co. Securities, Inc.

Okay. Thank you very much, Gary.

Operator

And our next question comes from Brian Uhlmer from Global Hunter Securities.

Brian Uhlmer – Global Hunter Securities LLC

Good morning.

Gary Kolstad

Good morning.

Brian Uhlmer – Global Hunter Securities LLC

A couple of very, very easy questions for you. First, as we look out this is probably for Bautista. As we look at the ramp in G&A – when we bring in new resin-coating, are we bring in new professionals, scientists, engineers et cetera? Are we going to have a larger ramp in G&A in 2012 and 2013 to bring on those folks or are those people that are already on Board, how should we look at modeling that for ‘12 and ‘13?

Ernesto Bautista

I’ll address we’re looking at 2011 we did have a bit of color there about – in the second quarter with respect to G&A most of that was associated with increases in comp and across the G&A pool as well as higher R&D spend. Looking forward, I’d say in absolute dollar terms as well as percent of revenue, the trend would be for that to go down.

Brian Uhlmer – Global Hunter Securities LLC

Go down in absolute dollar terms?

Ernesto Bautista

Absolutely, yes.

Brian Uhlmer – Global Hunter Securities LLC

Okay. In 2012 from kind of the $16 million level?

Ernesto Bautista

My focus was on ‘11 as opposed to ‘12 and ‘13. We’re not necessarily commenting out to that point in time. But that’s the anticipation for the balance of the year.

Brian Uhlmer – Global Hunter Securities LLC

Okay. Should you have new overhead and new staff for the resin building operations at the G&A level or is that mainly just the OpEx at the plant levels.

Ernesto Bautista

Generally that is going to be OpEx.

Brian Uhlmer – Global Hunter Securities LLC

Okay. At the plant levels. Okay. And second, following up on the margin commentary, was that a driver of China, or is that a driver of overall mix or what lead to the improved margins?

And obviously they could have been a little bit better if you sold a little bit more. And then my final question along those lines is if you didn’t sell out your capacity, and you are saying you can sell close to productivity capacity, do we have inventory build this quarter where we’ll actually sell more than your name plate 375 in Q3? And that’s it for me.

Gary Kolstad

Brian, I think I’ll jump in there and there let Ernesto take the inventory question. Actually we had a great quarter in terms of volume on a historical basis over the last five year. You usually see Q2 go down about 8.5% in volume. But that shows you a lot of the demand we have in the lower 48, because that count is still an important play for us and that Q2 has changed.

And of course this quarter, we have some other issues as other companies have reported from up north. But, no, we’re extremely pleased on the volume side of the equation year-on-year, it was really good. And I’ll let Ernesto take the inventory question.

Ernesto Bautista

On inventory what you’ll see is we did have an increase in both raw material and finished goods. Within finished goods, it included some of that specialty product like CARBOBOND as well as some of the third party required ceramic.

Gary Kolstad

I wouldn’t worry about finished goods inventory.

Brian Uhlmer – Global Hunter Securities LLC

All right. And that was it for me. Thanks.

Operator

Our next question comes from Roger Read from Morgan Keegan.

Roger Read – Morgan Keegan

Good morning.

Gary Kolstad

Good morning, Roger.

Roger Read – Morgan Keegan Let’s just maybe take your last comment there, not worrying about finished goods inventories, things look okay as we start the third quarter, right?

Gary Kolstad

Roger that’s a very clever way to put that. But I think I’ll go back to my comment. We’ll probably have no problem selling at capacity in Q3.

Ernesto Bautista

I’m with you. I just wanted to enjoy that one.

Roger Read – Morgan Keegan A real quick look at the addition of both resin – well, I guess, resin-coated ceramics pretty much only run through the system. But as you look at resin-coated sand coming out at the end of this year, and then more towards the end of next year in Wisconsin, what does that do as you tend to roll that in margin wise with the traditional more ceramic.

And the reason I ask is, probably go to last several quarter, you have seen price increase at the topline, but we’ve also seen margin increase. So while you definitely have some higher freight costs and things like that we’re seeing it generally move through as an improved margin. I know part of that is when you are running at high levels your absorption is really good as well. But maybe you can helps us as you look beyond second half ‘11, may be just how old that kind of transition.

Gary Kolstad

Yeah. Our margins are fantastic, of course, multiyear high tech stuff. And the reason we’re getting in to resin-coated sand of course is to per revenues, earnings per share – cash per share. That’s the reason we’re doing it. And I think we have consistently said that we don’t expect the margins after tax in resin-coated sand to be as good as ceramic.

And virtually you don’t expect your invested capital to be go die. So we have a lot of reasons we’re getting in there. The most important is the amount of cash we produce per share. On the marketing side, we want to be a bigger player and provide more things to more clients, and have access to more wells. Always use economic conductivity as our guideline, have a bigger portion of the client spend, all those things. So, I don’t know if that answers your question, but I think in a nutshell, yes, the margin –resin-coat sand not going to have the margin of ceramic.

Roger Read – Morgan Keegan

Yeah. I guess, I mean, what do you look at as sort of the margin differential here, a few hundred basis points or something less significant? And I understand the return argument, absolutely, and the cash flow it will generate.

I mean if you spend 30 million for a plant versus 70, we don’t need the same level of cash generation to get good return. I’m just trying to think about how to start rolling things in terms of clearly the ceramic market is supporting improving margins, ex the additions of new plants that may have some start-up cost issues. But how should we think about rolling in? What’s going to be a very significant amount of resin-coated sand over the next 18 months?

Gary Kolstad

Roger we haven’t actually said anything specifically. To put brackets around what we think that differential is, and I think we’re going to – we’ll retain that position at this point. You did hit upon something though, that’s important to note, and that is we are in start-up mode. And so obviously we’ve done a lot of diligence going back to ‘06 on what does this business generate? What does it do?

So we have a confidence in what the margins should be or will look like, and we expect that they will trend that way. We have just not have discussed what they will be, and what we anticipate them being other than saying they are lower than the ceramic business.

Roger Read – Morgan Keegan Okay. Last sort of unrelated follow-up question here. On the expectation of a new 500 million pound ceramic line in a different location, can you just kind of help us remember what the time line is in terms of want to break ground, the general period from a true Greenfield not the tune is where our model, we have gotten used to. And from the time you get the permit maybe how long until we can expect the new line?

Gary Kolstad

Well when we break ground, you know it’s roughly a year for us, because our team is pretty good at building plants. That’s not the unknown in our opinion. The unknown is the challenges of getting permits and stuff like that.

But I’m very pleased that our approach this time is very comprehensive, and we have a communication plan that’s hitting local as we speak, and it will move up through various places, and hopefully there will be some common sense same day in our administration – I mean, in our country’s administration. So I think we offer a lot to a state, and I’m just very pleased with our progress so far. And in our normal conservative fashion, when we say by the end of 2013, or whatever we put in the press release, there’s the ability for us to get that done sooner.

Roger Read – Morgan Keegan Okay. Great. Thank you.

Operator

Our next question comes from Luke Lemoine from Capital One Southcoast.

Luke Lemoine – Capital One Southcoast

Hey, good morning.

Gary Kolstad

Good morning.

Luke Lemoine – Capital One Southcoast

Gary, I guess first of all with Toomsboro line one through four and really I guess excluding three and four that were built semiconcurrently, you essentially built the line, made sure the production will be absorbed then evaluate the market and made a decision on another plant. Could we assume the same strategy unfolds with resin-coated sand? I mean after New Iberia is finished we essentially follow the same strategy as ceramics or will you wait till Marshville is complete and then make a decision?

Gary Kolstad

You are probably fairly right in saying we’ll follow the same pattern, we always have. And there are some advantages we have by adding this business, of course.

But, we probably won’t explain for competitive reasons. But – no, it’s probably good way to paraphrase it that we will look at it. And our ability to execute is always there, and probably the ability is a little bit faster in that business, right? Because you don’t have to go through the silliness that you have to go through on permitting in the ceramics world.

Luke Lemoine – Capital One Southcoast

Got you. Okay. And then lastly, I guess, for Ernesto, what was the CapEx during 2Q?

Ernesto Bautista

Total CapEx for second quarter was – sorry – right at about $16 million.

Luke Lemoine – Capital One Southcoast

Okay. That’s it for me. Thanks.

Operator

Our next question comes from John Keller from Stephens Incorporated.

John Keller – Stephens Incorporated

Hey, good morning guys. Most – everything is being covered, I think. But, just wanted to kind of understand, maybe your pricing philosophy on the resin-coated side versus say ceramics. I mean resin coat seems to be a little bit more maybe for lack of better term commoditized. How do you think about pushing pricing being aggressive with pricing now that that becomes a bigger part of your business?

Gary Kolstad

Yeah. It does – it has more characteristics like you say of that than ceramics, but there’s just some things, some inherent advantages we have, which include very technical people that can apply economic conductivity that’s really catching hold of the industry, and we have all our client relations, we have all of these things, and then combine that with the fact that we’re securing the best sand that there’s going to be and make good resin-coated sand.

We’re not going to be a follower. We’ll probably be up there in the leader side of that, but it won’t be the same position we have in ceramics for sure. But just the add-on benefit of that is quite incredible and that’s really the reason we’re doing it, right? Just the cash and stuff that we’ll generate per share is pretty exciting for us. And I had probably said this before, I’ve been trying to get us in to this business since 2006. So for me it is a culmination of a lot of hard work and we’ve got a sales and marketing team that’s pretty darn excited about getting this stuff and getting in their hands and getting out in market. So not as good as ceramic, but we’re happy to have it.

John Keller – Stephens Incorporated

Yeah. I guess my question is more along the lines of are you willing to push harder on price because maybe adoption isn’t as much of the goal as it is maybe in the volume and price game.

Gary Kolstad

We understand that price volume game, so we always do it to maximize the cash that we earn. So we’ve been at that game a lot of years, so – and we don’t like to spell that out on the phone for obvious reasons since we are the only public propane company basically in the world.

John Keller – Stephens Incorporated

Sure, and then maybe just kind of turning to the competitive landscape, I guess we sort of hear anecdotally more things coming in by ship and maybe some Greenfield operations potentially starting up. I mean, how is that shaping up in your eyes? Has it accelerated at all?

Gary Kolstad

We’re going to have – we keep saying that every year, of course. But I mean it’s getting closer. We’re going to have more ceramic competitors in the U.S. There is a lot of temporary business owners building resin-coated sand facilities and things like that. So yeah the competition is going to increase.

But once again when you have been at this business for 31 years, we intent on leading, and we know what we’re going to do, and we handle market cycles, and we just run our business long-term. So the short-term things that take place, we keep track of them, but that’s not the way we run the business, so it’s full speed ahead for CARBO.

John Keller – Stephens Incorporated

Got it. Well, that’s it for me. Thanks, guys.

Operator

(Operator instructions) Our next question comes from Doug Garber from Dahlman Rose

Doug Garber – Dahlman Ros

Good morning, guys.

Gary Kolstad

Good morning.

Doug Garber – Dahlman Ros

My first question is just on tax guidance is a little bit up this quarter. How do you think about going forward specifically as Toomsboro Line 4 comes online and that adds a little bit of a mining credit perhaps?

Gary Kolstad

Yeah, I think we would stick with our – you know, general statement for the year of 34% to 35%. For the quarter there were a few non-deductible charges that we identified which obviously caused a permanent difference in the overall provision calculation. Extended back in to the first quarter so second quarter was a bit of a catchup.

Doug Garber – Dahlman Ros

All right. Thank you. And going back in time, when you guys built Toomsboro, can you just remind us how long it took you to every bottom land to get the permit and break ground originally, and what has kind of changed. I know a more difficult administration between now and then?

Gary Kolstad

There has been – Toomsboro Line 1, 2 are built under one set of rules. Toomsboro Line 3 and 4 built on the next set of rules. Our new plants to be built under the third set of rules. That just tends to have a little bit of delay, but once again, I would say that I’m very pleased with our strategy, our communication and efforts that have already started, the feedback we get from those people that we communicate with, so we put a deadline out there that we’re extremely confident in, and if you pay attention to us long enough, you know, you’ll probably feel confident that what we put out there will get done if not better.

Now as far as buildings a plant, I already said that earlier here. Once we break ground, it’s about a year for us to get that done. So we have given ourselves wiggle room there, and we know what we need to do, and we’re extremely glad to find the location. There’s a lot of very also a lot of time and though. We had to put in that to get that done. So we’re excited about that. Now it’s go, go.

Doug Garber – Dahlman Ros

And last question, just going back to the 600 million pounds of resin for late ‘12 or 2013, is that going to be several lines or is that all going to come on line or is that just one facility that’s going to come online at once, and you’ll ramp up the production?

Gary Kolstad

We’ll build two lines simultaneously in Marshfield, Wisconsin.

Doug Garber – Dahlman Ros

Okay.

Gary Kolstad

And it will be on – what’s the language we are using now and before the end of 2012?

Ernesto Bautista

Correct.

Gary Kolstad

And we’re pretty darn sure that will absolutely happen.

Ernesto Bautista

Correct.

Doug Garber – Dahlman Ros

So back to the potential new ceramic facility in 2013, are you going to build those simultaneously two or are you going to stagger them build one maybe six months or 12 months after the first one?

Gary Kolstad

Well, I mean, the nice thing is we have all of those capabilities of doing anything we want there, but as I described earlier on the call, the way we think today is probably similar to the way we did on 3 and 4, Toomsboro Line 3 and 4 which is semi-parallel.

And amount of people come in and do the first line and then that crew moves over to do the same thing on the second line, meanwhile the other components of construction go back to the first line, so the second one will trail the first one, somewhat, but we’ll likely, you know, keep the same contractor and construction crews and all of that around, because there’s a lot of efficiency, knowledge and economic gains to be had there. So semi-parallel.

Doug Garber – Dahlman Ros

Okay. Any chance you do, two more lines there like you did in Toomsboro where you ultimately have four lines?

Gary Kolstad

I think when we go look at things, we tend to look at them in large scale, and so when we bought this land we certainly didn’t buy it for what we told you so far.

Doug Garber – Dahlman Ros

All right. Thank you. I’ll turn it back.

Operator

Our next question comes from Travis Bartlett from Simmons & Company.

Travis Bartlett – Simmons & Company

My question concerns operating margins and more specifically the 80 basis point sequential decline in margins this quarter. Given the decreases were likely the result of lower sales volumes from seasonal effects how should we think about sequential progression as we look to Q3?

Gary Kolstad

So I think part of that – if we’re looking at sequential – from a gross margin standpoint, you did see growth in that. I think the real impact had to do with the – kind of the overall increase in G&A and as earlier we were talking, we would expect that as we go forward to the second half of the year, that in absolute dollar terms and as a percent of revenue that will come down. I don’t actually see the specific decline that you are referring to, Travis, but generally, that’s the trend that we would expect from a G&A standpoint.

Travis Bartlett – Simmons & Company

Okay. Great. I think that’s all for me. Thank you.

Gary Kolstad

Thank you.

Operator

(Operator Instructions) And our next question comes from James Stone from Barron Capital.

James Stone – Barron Capital

Good morning, guys.

Gary Kolstad

Good morning, James.

James Stone – Barron Capital

You said earlier this year that at the media update you would give more detail regarding Falcon’s actual numbers and the nonprofit businesses, and I’m just wondering if you could share that with us.

Gary Kolstad

Yes, I think what we said is, we gave you guidance earlier of 20% to 25% growth in Falcon for the year, and we still feel very comfortable staying in that range. And I think the progress they are making is more geographical in nature, because we’re starting to work in the Eagle Ford and a few other places. So we’d still be comfortable staying at 20%. For the other businesses, I think they are going along as they should, and as we expected, the software businesses had a good year, and I guess I’d characterize that Ernesto do you have any more color to the...

Ernesto Bautista

Yeah. I think that’s right. I think we’re seeing some positive trends in the other businesses. Obviously, excusing Falcon the impacts are relatively small, and concur with Gary on the trend with Falcon keeping within that 20% to 25% growth rate.

James Stone – Barron Capital

And so we – the non- proppant businesses are still – would you say are still under the kind of 10% of revenue threshold?

Gary Kolstad

Yes, absolutely.

James Stone – Barron Capital

Okay. All right. Thank you.

Gary Kolstad

Thank you.

Operator

And at this time, I’m showing no further questions, would like to turn the conference call back over to Mr. Kolstad for closing remarks.

Gary Kolstad

Okay. Thank you for joining us today once again and a few key points. With the ceramic capacity of adding 250 millions at line 4, we’ll have 1.75 billion. The resin coating at New Iberia Line 2 adds another 300 millions of resin-coating capability. So we’ll exit 2011 with 2.1 billion pounds of annual proppant capacity.

For the third quarter, we expect proppant sales volumes to closely match our current productive capacity, and we’re very excited to continue adding proppant capacity to meet both the current and the future needs of our clients, and we continue to listen to them about developing the products that they need for their reservoirs.

Generating the long-term value of our shareholder is a priority, and one component of that, return equation is dividends. We recently announced a 20% increase in our quarterly dividend, and have increased the dividend for 11 years in a row. And finally I’m proud of the team here at CARBO and want to thank all of our employees for delivering another solid quarter. Thank you very much. We’ll see you next quarter.

Operator

That concludes today’s conference call. We thank you for attending. You may now disconnect your telephone lines.

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