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Executives

Gary Kolstad – President and CEO

Ernesto Bautista – CFO

Analysts

Jeff Tillery – Tudor Pickering & Co

Blake Hutchinson – Howard Weil

John Keller – Stephens Inc

Michael Mazar – BMO Capital Markets

Luke Lemoine – Capital One Southcoast

Brian Uhlmer – Global Hunter

Roger Read – Morgan Keegan

Bob Christensen – Buckingham Research Group

Doug Garber – Dahlman Rose

John Daniel – Simmons & Company

CARBO Ceramics, Inc. (CRR) Q3 2011 Earnings Call October 27, 2011 11:00 AM ET

Operator

Hello, and welcome to today's CARBO Ceramics Incorporated Third Quarter 2011 Earnings Conference Call. At this time all participants are in a listen only mode. After managements' remarks, we will conduct a question-and-answer session and instructions will follow at that time.

Please be advised that today's call is being recorded today, October 27, 2011 and your participation implies consent to our recording of this conference. If you do not agree to these terms, 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 those 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 conference call is Mr. Gary Kolstad, President and Chief Executive Officer of CARBO Ceramics Incorporated. Mr. Kolstad, please begin.

Gary Kolstad

Good morning. I want to thank you for joining us to discuss CARBO's third quarter results along with our outlook for the remainder of the year. We are pleased that CARBO set a number of financial and operational records during the quarter.

The exceptional third quarter results continue to highlight the importance that our clients placed on high-conductivity proppant, especially in the North America liquids rich resource plays such as the Bakken, Granite Wash, Eagle Ford and Permian.

The demand for E&P Operators for our high quality high conductivity ceramic proppant continues to grow as evidenced by the company's record ceramic proppant sales volume for the quarter. The benefit E&P Operators see, as measured by increased production and higher Estimated Ultimate Recovery or EURs, continues to enhance their economic returns. We continue to work with our clients to optimize their fracs and maximize their profit through Economic Conductivity analysis.

Regarding our commitment to capacity growths, we were excited to commence production ahead of schedule at the company's newest 250 million pound production line at our Toomsboro and Georgia plant.

Separately, the company repurchased 55,000 shares of its common stock at an average price of $120.89 during the third quarter pursuant to its previously announced stock repurchase program. Since September 2008, 1.8 million shares of the 2 million share buyback program have been repurchased at an average price of $39.93.

Before I turn to our outlook on the business, I'd like to provide a quick overview of our financial performance. Revenues for the third quarter of 2011 increased 41% when compared to the third quarter of 2010. North American as defined by Canada and the U. S., proppant sales volume increased 31%, while international proppant sales volume increased 29% compared to last year.

Operating profit for the quarter increased 80% compared to the third quarter of 2010. This increased due to higher sales volume and increase in the average proppant selling price, change in product mix and a higher contribution from other business units partially offset by an increase in selling, general and administrative expenses.

Net income for the third quarter increased 83% or $16.7 million compared to the third quarter of 2010. Sales volume set a quarterly record, as demand for our high conductivity ceramic proppant remained strong and Canadian activity rebounded from the spring breakup. Global proppant sales volume totaled 432 million pounds for the third quarter, representing a year-over-year increase of 30%.

Our environmental risk reduction business Falcon Technologies continues to gain traction amongst the various resource plays across North America, including the Marcellus, where our surplus amount of containment systems have now successfully deployed in Pennsylvania, West Virginia, and New York. Falcon remains focused on developing solutions that are engineered to protect the environment and our client's assets.

Now turning to the outlook, we exited the third quarter with positive momentum. As a result, we expect proppant sales volume to remain healthy tempered by the typical fourth quarter seasonality. Although, broader economic issues remain fluid and commodity prices continue to fluctuate, we remain optimistic with respect to proppant demand in 2012.

Noteworthy is the continued migration of North American upstream investment towards liquids rich resource plays, where multiphase flow reservoir conditions benefit the most from CARBO's high connectivity proppant.

We were pleased to commence operations on Line 4 at Toomsboro ahead of schedule and we expect this line to produce at capacity during the fourth quarter. The addition of this line increases our total ceramic proppant capacity to 1.75 billion pounds per year.

Regarding our future ceramic plant in Millen, Georgia, we have completed the due diligence process and are moving forward with the purchase of the real estate needed to construct the plant.

Our environmental permit application has been submitted to the Georgia EPD. We have targeted this site for initial manufacturing capacity of up to 500 million pounds annually and subject to obtaining permits and approvals in a timely matter. The plant could commence production before the end of 2013.

Before I move on to discuss our growth in resin-coated sand, I'd like to briefly discuss the topic of increasing proppant demand and competition. We've always faced competition whether from ceramic, resin-coated sand or sand itself. We have said repeatedly over the years that competition would increase and thus have based our business strategy under this assumption.

Demand for proppant continues to grow further amplified by the large liquids rich resource plays such as the Bakken, the Eagle Ford, the Permian, the Granite Wash, which continue to see rising rig counts largely focused on horizontal drilling. The trend towards horizontal drilling continues to increase the amount of proppant consumed in these long laterals and have a higher number of frac stages.

As I mentioned before, a horizontal well typically consumes 10 times that of a vertical well in proppant. So what does this all mean to the competitive landscape of the proppant market? Well, for every 200 million pounds of additional manufacturing capacity coming online, this will satisfy roughly 100 wells per year or eight wells per month. So let's look at that.

In 2011 in the U. S., we will drill about 52,000 wells. And that's up 40% from last year when we drilled 37,000 wells. More importantly to us and our high conductivity proppant is the fact that the oil wells being drilled have increased from 18,500 last year to where they'd probably be around 32,500 this year or an increase of 75%. And the analysts of course expect that continued migration to these liquids rich plays as we move into 2012 in the future.

Not only are we seeing in the rig counts increase in these liquid rich plays but we're also seeing drilling efficiencies increase the number of wells drilled per rig. The E&P Operators clearly understand they need more conductivity in the liquids rich plays, where multi-phase flow reservoir conditions would benefit the most from CARBO's high conductivity proppant. And that would include both our Tier 1 ceramic proppant and Tier 2 resin-coated sand proppants.

Chinese imports have increased as demand has increased too. If you remember what I told you in 2008, that during down cycles, Chinese imports would fall faster than the market, which is what happened in 2009.

As CARBO brings on additional capacity, we can expect to continue to displace these imports due to a number of reasons. Our clients trust CARBO quality and our commitment to deliver what we say we will.

Chinese quality on the other hand is variable. They are increasing costs of manufacturing in particular energy and raw materials in China. We know this because we have a plant that manufactures there. The transportation costs are increasing, foreign exchange cost, logistical issues and then the business model.

Clients often have to buy the proppant in China and put it into the inventory versus with CARBO, you make one phone call and we deliver it to the well site. The new ceramic manufactures that may enter the field in the U. S. over the next couple of years will likely displace the Chinese supply just like CARBO does. We will continue to improve upon and broaden what we believe makes CARBO leader in the proppant industry today.

Proven product quality, high efficiency manufacturing, low cost reserves, just-in-time distribution capabilities, prudent pricing, technical marketing personnel talking about Economic Conductivity and how E&P Operators can increase their returns, leading technology today and I might add, we are excited about the opportunities on our technology docket today that will benefit us in the future.

Now moving on to our resin-coated business, New Iberia Line 2 remains on schedule for completion near the end of the fourth quarter. Once completed, this line will increase CARBO's annual resin-coated sand capacity to 350 million pounds.

CARBO's 600 million pound resin-coated sand facility in Marshfield, Wisconsin is on schedule for completion before the end of 2012. Additionally, we continue to acquire high quality raw materials for this business and then have already secured multiple years of Northern White sand reserves.

Lastly, with our strong balance sheet and cash generation capabilities, we will continue to focus on organic growth, growth in dividends, share repurchases and acquisitions.

This completes our prepared remarks. At this time, we'll be happy to address any questions.

Question-and-Answer Session

Operator

(Operator Instructions). And our first question comes from Jeff Tillery from Tudor Pickering & Co.

Jeff Tillery – Tudor Pickering & Co

Toomsboro Line 4, does that contribute any material volumes during the third quarter?

Gary Kolstad

It contributes a few pounds in September, that was a little bit of a combination us going beyond what would say the capacity of 375. We took a little bit out of inventory, which built a little bit in Q2 and plus we got a little bit of a contribution from Toomsboro Line 4.

Jeff Tillery – Tudor Pickering & Co

And then, is that facility basically up to the point where you can run it full out produce kind of two in its name play [ph] capacity in fourth quarter?

Gary Kolstad

We fully expect it to work at capacity, yes. The tellers did a great job of getting up and run and executing it.

Jeff Tillery – Tudor Pickering & Co

And then, in the fourth quarter, the history on seasonal impacts is mixed. Do you have a visibility that we're going to see a seasonal impact or is it just a kind of cautionary note that we get weather issues early in winter just to be aware of this?

Gary Kolstad

We have a history, I always say it every year and you guys maybe 50% of the time believe me. I think, but December is always the low month of the year for us.

Jeff Tillery – Tudor Pickering & Co

Okay.

Gary Kolstad

And so we always like to put in that comment. I think, other not, it will be fine. I think the industry itself it's interesting. I think, it is facing some logistical challenges and that has to do with the growth in some of the big plays and the big shift out of the Haynesville and to some of the new growth places. I think the entire industry will have to work through some of those in -- issues from a logistic standpoint.

Jeff Tillery – Tudor Pickering & Co

Okay. It's fair. And then, with the New Iberia resin-coated facility, should we expect that to be able to be up and running full capacity for the first quarter?

Gary Kolstad

I wouldn't expect full capacity. January 1st will be on a learning curve. I think we would probably characterize that it's going to get up to whatever, pretty good efficiency by the end of the first quarter and it will start off at maybe 50% efficiency on January 1, something like that.

Jeff Tillery – Tudor Pickering & Co

Okay.

Gary Kolstad

Kind of how we told you to model ceramics in the old days.

Jeff Tillery – Tudor Pickering & Co

And that makes sense. And then my last question, on the middle application for the Millen facility. When would you expect to response, could we hear anything before the end of the year?

Gary Kolstad

We had to go out to far there. We're very comfortable. In fact, we're more comfortable than we've been in our past permit applications with the feedback that we received. So, I would say we're more positive on getting things done faster, this go around. But I think we should probably wait until we actually get it in hand and then there is a certain amount of public review, all that nice steps. So we're pleased with the reception we've received. We've done this few times before. So it's not like we don't know what we're doing there. It's just -- it's up to the agencies to process it fast. But I think, what I'd just characterize is we're pleased and we'll probably update you as it goes along.

Operator

And our next question comes from Blake Hutchinson from Howard Weil. Please go ahead with your question.

Blake Hutchinson – Howard Weil

I guess what sticks out most to me in the release is that the sequential improvement in gross margin, and you mentioned pricing in the release, but I'm guessing it's more of a mix issues. Was there a radical change in mix between Q2 and Q3 that drove that gross margin or is there something else at play here?

Gary Kolstad

Well, we have given the mix, we have good gross margin on those mixes that we're selling today, and it was up something around 34 million pounds or something, I think, quarter-on-quarter. So, it just all worked and even the small contribution with Toomsboro Line 4, the margins are good there, because it's the twin sister of the first one, which requires less people and less stuff. So it's really driven by the mix in the additional volume more than anything.

Blake Hutchinson – Howard Weil

Okay. And so with T4 contributing at that capacity in 4Q or about capacity in 4Q. We'd expect the margin level is experience in Q3 to at least stick. Correct?

Gary Kolstad

Was that a question, or a statement?

Blake Hutchinson – Howard Weil

No. Somewhere in between I suppose -- but again he found the people were as massive contribution to Q3, to expect it that, we continue to drive the mix in the right direction to have the higher margin mix in the right direction. I know, I guess it's kind of a think about the permanency of this kind of stuff functioning gross margin here.

Gary Kolstad

Yes, Blake I think, that we would point to the product mix even into the fourth quarter and it all depends on the contribution from sale raisin from sand or Line 4 Toomsboro so hard to say, which complete accuracy that it would maintain go up or go down. I think, we are just going to have to point if it's a strong quarter with continued or comparable mix and perhaps its stays otherwise we will just have to wait and see.

Ernesto Bautista

I think, I would add too, we had a good third-quarter with the other businesses and some of our new products we have introduced have really helped to like especially CARBOBOND Lite, our resin coated CARBO lite is doing extremely well. Software business is doing really well, Falcon Head good year-over-year improvement. So we have a lot of things that came together that impacted Q3.

Blake Hutchinson – Howard Weil

Excellent that’s good color and then again with a bit of higher bar year, in terms of the on your commentary in the past as, we are staring some more sizeable resin coated volumes coming in. You have mentioned that you would expect kind of equivalent operating margins. Does that change a little bit, given that you have set the bar a little bit higher here in terms of operating margin?

Ernesto Bautista

I don't think, we ever said that the resin coated sand business has the same margin as the ceramic business I am pretty share we haven’t said that.

Gary Kolstad

Right. I think, what we've said historically has been that it's similar, but lower and so as the volume of resin-coated sand grows, the masses is pretty straightforward, we would have a somewhat of a hit to the margin, where cash earnings would grow et cetera, but that's what we have said historically anyway?

Blake Hutchinson – Howard Weil

Excellent. I appreciate feedbacks, thanks a lot guys.

Operator

And our next question comes from John Keller from Stephens Inc. Please go ahead with your question.

John Keller – Stephens Inc

Gary you referenced some of the basins in the U.S. that are that you know there instead of -- that you seem pretty strong demand also hoping you could help us kind of qualitatively understand may be where, which basins are demonstrating better kind of growth profiles as you lookout in the next year be at the Permian or the Granite Wash/ Colony Wash et cetera.

Gary Kolstad

Well, you know you can look at rig count and kind of figure that out. I mean the growth we have seen in North Dakota and somewhat less in Montana in the Bakken is very interesting and there is a lot of reasons why that should continue the Eagle Ford of course has been outstanding and there is heck a lot of reasons why that should continue and you know the Permian and Granite Wash and all these things, the various names they will continue as well as.

So I, it literally is where ever you are seeing liquids and of course you look at the commodity price in natural gas versus the commodity price of oil, the whole balance of payments is used on the oils. So, we will just keep building oil as fast as we can in my opinion for a longtime. And I think the E&P are getting better at the infrastructure, one that from the mid-stream boys or the railroads [ph] or whatever so, I think the infrastructure cost in some of those big plays will go down, which will benefit the service companies, the E&P and everybody in places such as the Bakken.

So, I think the future just goes there.

John Keller – Stephens Inc

Sure. And then, if I could kind of get maybe your big picture take on the evolution of, say, and international markets. Is those -- it seems to be a lot of good data points coming out just industry wide about unconventional development be it in Argentina, Australia or China wherever else. How does that evolve over time and is that going to be a big demand driver on the ceramic side. I mean, is that going to be predominantly ceramics that go into those markets or how do you see that playing out.

Gary Kolstad

Well, we continue to see good growth and it's interesting. We're having a very good year in China which of course may surprise people, but once again it has to do with the quality of the proppant that we provide. Russia is actually not a bad year for us that we, Europe, Africa, Middle East, we're seeing some new interesting things there.

So we are doing pretty decent. But what you have to figure out from the macro standpoint, those numbers, I quoted you on number of wells drilled, what the rest of the world does is a needle in a haystack compared to that, okay. And the one well in Poland, shale well that was fraced does not change the world. We were very fortunate. We have very talented technical marketing people around the world that are taking advantage of that. But it's going to be very slow. And it's no different than the past few decades in my opinion, because they're just not used to as we often say, they're not used to West Texas where frac trucks and lenders and loads of proppant come rolling through the streets. So it will take a long time. The good news is that, it's good news. And we're ready for it.

John Keller – Stephens Inc

Yeah. And then if I could sneak one more in here, just first buybacks in seemingly quite a while. Could you just refresh us on where the current authorization stands and kind of your thoughts on that going forward? Do you reload that, etcetera?

Gary Kolstad

I'd probably talk more from a cash positioning. Everything we do is focused on growing the cash of the company. That's our primary objective. And one, we showed an organic growth, which you're seeing in us building plants and everything. Two, we put it into dividend growth, which you're seeing what we're doing there. Three, stock purchase, with part A of that trying to stop any share creep, which is basically what 55,000 did. And then B, when other people don't like our stock, we'll probably like it. And then the fourth part we do with cash is probably look for acquisitions. We still have 180,000 shares left on the 2 million. When we announced the 2 million share buyback back in 2008, that was basically 8% of the shares outstanding. So we'd bought back 7.25% of the outstanding shares with 180,000 shares left.

Operator

And our next question comes from Mike Mazar from BMO Capital Markets.

Michael Mazar – BMO Capital Markets

Obviously, the new ceramic facility is going to Georgia. If I had understood some of the previous commentary, the environmental regime, let’s say for lack of a better term was challenging in Georgia. But now the new facility what is going there. If it became easy enough to do it in Georgia, can you just remind us why it didn’t end up being easier or wasn’t in your strategy just to do a Toomsboro 5 or 6 or however many?

Gary Kolstad

I’m not going to say all the reasons but I would characterize it as, the environment we’re in, given the people we currently have in office, it created some problems via the EPA and stuff like that. And so we were never going to put the big Toomsboro complex at risk or retrofitting et cetera, it was called at. And so we moved out to a new place and the new rules are tougher and we will have more environmental controls on the new place. It will be a little more CapEx, things like that and that’s one of the things that all potential new comers coming into the business will face. So, that’s why we moved it.

Michael Mazar – BMO Capital Markets

Okay. Perfect. And if I could sneak in one more. Are you guys kind of still on the 20% growth year-over-year in Falcon?

Gary Kolstad

Yeah. And we will give you an update at the end of the fourth quarter but I think we kind of characterize it, yeah, things are on track there.

Operator

And our next question comes from Luke Lemoine from Capital One Southcoast.

Luke Lemoine – Capital One Southcoast

Just one question on your other proppant volumes, a bit nitpicky, but on the increase, was that more resin-coated sand or outsourced ceramics there?

Gary Kolstad

Both. A little bit of an increase in both from Q2.

Luke Lemoine – Capital One Southcoast

Okay. So we can say a fairly equal split their roughly?

Gary Kolstad

We can say that they both increased.

Operator

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

Brian Uhlmer – Global Hunter

I have a couple of quick easy questions. Number one, you said that your fourth use of cash is acquisitions. Looking at the competitive landscape and some of these smaller guys and new technologies, etcetera, do any of those bring to light the potential acquisition opportunities that would move that from number four, as you use cash off the list?

Gary Kolstad

I don’t know if we can comment that clearly on that. But I can categorize about a year ago, I said, it looks to me like we’re going to have our hands full in 2010, 2011 building organically. And we’d probably be more anxious in looking at stuff in ‘12 and ‘13 as the cash flow becomes a pleasant problem.

And once again, we’ll just repeat that parameters. We’re not going to compete against our clients. So we’re not going to buy a business that competes with our good service company clients. And it’s got to have a technology component and it has to produce cash way beyond the business needs even if we have to spend a lot at the beginning. So, I don’t think we'd discuss it any more than that. Ernesto, would you?

Ernesto Bautista

Yeah. One other comment maybe and that would just be, when you look at the market today, I think that there are still some multiples that we're not going to be interested in. As we look at share buyback and uses of cash, we’ll be opportunistic and I think that's the long and short of it.

Brian Uhlmer – Global Hunter

All right. And since I got you taking and Ernesto, can we follow up on, new equipment coming online, so DD&A is kind of a moving target here. What, what we thinking? Does, the impact is going to be in 4Q as well as the SG&A impact?

Ernesto Bautista

So 4Q, we’ll see another increase. I think we had something approximating an amount of $800,000 quarter-on-quarter. You will still see a slight increase because we only had one month word of D&A for Line 4 and as part of that increase. So you will see an increment. And then with respect to G&A, we did see a decrease as a percent revenue sequentially from 2Q to 3Q. The absolute dollar amount did go up and that was more so associated with the outstanding performance in the quarter.

So we had to do some catch ups on incentives and there was some additional R&D expense that we had and some profit sharing. So, going forward as we go into 4Q, I would just cast it as a continued reduction as a percent of revenue with regard to G&A.

Brian Uhlmer – Global Hunter

Okay. Good deal. And last one, I don’t think this had got an answer but the 500 million pound capacity expansion, is that going to be tiered, where 250 would come on one quarter and 250 the next or is it a phase for startup of both lines at the same time?

Gary Kolstad

We’ll update you that as it unfolds. We can do either parallel or sequential. And so we’ll see what the market conditions are at, at that time.

Brian Uhlmer – Global Hunter

Okay. But '13 estimate [ph] phase [ph] that, just to put all of it kind of towards the back half of the year for now?

Gary Kolstad

As we said before the end of ‘13 and it could be 250, it could be 500 but we’ll wait to comment later.

Operator

Our next question comes from Roger Read from Morgan Keegan.

Roger Read – Morgan Keegan

Guess, maybe getting back to a couple of questions little closer in on both pricing and maybe the future margin impact of the resin-coated sand coming in. Nobody knows for certain what pricing will be on what you’re selling, but if we kind of look at what the market has and where you are today is a sort of 5 or so percent erosion in sort of realized pricing that we see on your results, the right way to probably think about the impact of the resin-coated sand. And because I'd compute it’s going to be kind of 15% incremental volumes with the new facility in New Iberia, assuming you sell everything you’ve been selling and the other additions. Is that kind of the right way to think about it at least?

Gary Kolstad

Oh gosh, I don’t know. Over time Tier 2 proppant resin-coated sand tends to migrate between 65% to 80% of Ceramic price independent upon the cycle. Where you are at in the cycle, so I don’t know if we want to comment, Ernesto on means on the big overall basis set in let’s wait till next year when we get them up and running.

Ernesto Bautista

Yes, I think, that's right. I think, we prefer to wait and see to really arrange and not --

Gary Kolstad

So the margins are going to be lower, we said that.

Ernesto Bautista

That's right.

Roger Read – Morgan Keegan

No, I am with you on margins; I'm trying to first attack the topline and then let’s talk them. Margin wise understands Tier 4 helps you in Q3. Given that you’re going to be running Tier 4 full out in the fourth quarter. Is there anything other than the seasonality issues that could potentially say margins would be lower in Q4 than in Q1? Excuse me, Q3?

Gary Kolstad

Well, not too much less. I mean the only lever there is pricing right and maybe some start-up costs associated with New Iberia Line 2 resin coating, because we are going to be ready to go January 1st. So, there is people and some other things in certain amount of start-up cost associated with that and our other business did really well in the Q3, whether they can sell.

I don't know on balance it should be very similar, I think it's what we are trying to say.

Ernesto Bautista

I think, that's it.

Roger Read – Morgan Keegan

Yes, now it’s kind of what I figured out, just trying to understand if there is a mix issue or anything like that. Okay, and then final question Falcon, what kind of -- I know you don’t break it out separately, but if you look at it a year over year and sequentially what kind of revenue gross did it have and was there any substantial change in its margins also year-over-year sequentially.

Gary Kolstad

We have been very pleased, we threw up that figure of like a 20% top line and we fully expect that to be there 2011 versus 2010. And we have seen an improvement in bottom-line profitability too so they are doing a good job in improving from 2010 and, but we're not even close to capturing the potential of the business from either top or bottom.

So that's what -- actually we are very excited about. We love the improvement that the team has done. But we're more excited about the future.

Roger Read – Morgan Keegan

Okay. And I know you said earlier you didn't want to overpay for acquisitions which is definitely the right way to look at it, but with what is going on in the market place over the last couple of months, I mean, we have heard comments from other companies that acquisition prices are actually looking more attractive. Have you seen anything, I mean, do you look at it and say you're probably more likely to make an acquisition over the next two quarters the same or less likely?

Gary Kolstad

I think some things will go down a lot from where they are at right now, things we're interested in. So we're more excited as we move out farther. There are some things that are totally mispriced right now.

Roger Read – Morgan Keegan

Okay. Thank you.

Operator

Our next question comes from Bob Christensen from Buckingham Research Group.

Bob Christensen – Buckingham Research Group

Just could you define in layman's terms multiphase flows and why the ceramic conductivity works so much better there, and what are some of the extreme areas of the country plays that have multiphase phase flows?

Gary Kolstad

I always don't use an analogy on multiphase flow. A gas well, everything has liquids in it but gas is predominantly gas and has some liquids and most times its water, right.

As we move into the other plays, things like the Bakken, the Eagle Ford, you're going to add in oil, good old crude, you're going to add in condensate. And I like in it two, if I was drink I would use the analogy, if I was drinking out of a straw or I am drinking a milkshake out of a straw, the Delta P that the multiphase flow causes downhaul takes more pressure or i.e., Delta P by the time we get to the wellbore.

So we need to have much higher conductivity i.e., the ability to flow the channels and the great porosity and permeability that we get in the frac pack with ceramics to make that Delta P is little as possible. And we just continue to see this in some of the operators you are seeing that have been increasing their EURs and things like that, it shows up on the ceramics. So it's really a great thing that's happened.

Bob Christensen – Buckingham Research Group

Second question, if I may, I mean, so many of my producer companies coverage seemed to invest in sand mines and so they are saying we are getting our sand going in some of these guys are oriented to Bakken and some of them are oriented to the Eagle Ford and so how do you answer that question of, I guess, so much ceramic was going to these plays and now some of the customer base is saying going back to sand actually investing in it for their own account. I mean, how would you respond to that. Please.

Gary Kolstad

Two ways. One is that we do not have the capacity to serve all their needs first and foremost. In the absence of capacity people are going to drill in complete wells and that's taken place over years of time and as we look at the proppant market and our inability to feed the ceramics, which was taken up in some part by resin coated sand growth over last few years, which was taken up by growth in sand over the years.

As we move forward, which is part two, we are going to continue to do what we have done for the last 31 years and the 200+ SPE papers that we have shown that always shows conductivity is the main thing that will benefit these wells and so we'll keep moving those Tier 3 players sand up.

We will move to Tier 2 resin coated sand up to Tier 1 ceramic. And so for us, our inability to have enough capacity actually poses a hell of an opportunity moving forward, because Tier 3 has grown a lot, because nobody had anything else. Tier 2 is grown a lot, because we didn't have enough Tier 1.

Bob Christensen – Buckingham Research Group

Okay.

Gary Kolstad

And, so it will very exciting time and one other things that I will say is that some operators are trying to figure out how they can work in lower commodity market, commodity price market and so some of them are pumping some resin coated sand first and in some cases even sand before tailing in with ceramic.

You know you sure don’t want to be using sand in the high closure strip, places and place where temperatures is too high. So, we have an unbelievable opportunity in front of us and that's why we have such great technical marketing folks that are working on this globally. And so for us, we wish we had more capacity, but now we just move to move them up proper triangle.

Bob Christensen – Buckingham Research Group

If I might ask another question please on related. Falcon, and I guess you're going to give up a broader update on Falcon at the end of the year, but is Falcon gaining market share and didn't have a relatively small market share, because this I follow you wells go from 37,000 to 52,000 of this year, 40% increase.

The Falcon’s topline is growing at 20%, I guess it’s, can you put that in some sort of market share where we're, where we're going and who has the most market share. What is the competition to this tanks I guess that Falcon built.

Gary Kolstad

Well, first of all, Falcon created Tier 1, in containments, polyurea technology et cetera, so they are the only people at Tier 1 in their industry. They're competing against Tier 2, which is galvanized, and plastics and these things that don't ever last and Tier 3, which is dirt berms and the thing we really like about the business, is that the EPA is going to get rid of Tier 3. And operators are going to want to move to Tier 1 it’s our job to prove that to them, but they have the highest priced solution in the industry and it’s well-deserved because they provide the protection.

Their market share, they start from zero. So they start from zero market share and they are something today that very, very small. And so once again that isn’t problem, it's an opportunity.

And it's still a very young business; they have done a great job this year with building people, building new places, building their client list. Improving their profitability, but no we want them to grow just a heck of a lot from where they are at today. And I think the focus on environmental stewardship; will be one of our best sales too.

Bob Christensen – Buckingham Research Group

And the product that they are principality selling is the tank that stores the oil and liquids and water for its struck off the up location. Is that the principal product that they sense??

Gary Kolstad

No, every set of wells are bad wells, there is something lot of times operators will tie in numerous wells. They always onsite tanks, for the separation of water, crude oil et cetera and what we provide is containment around those tanks and those separator facilities and things like that.

So we prevent oil and GLs whatever, the things from spilling into the location by putting the containment around all the tanks and everything. We also sell tanks basis and we also align tanks. So people are going to put things out there, we will align them with polyuria.

Bob Christensen – Buckingham Research Group

Okay. So it's to the existing tank and then it is the surrounding containment to the tanks, is what you are describing.

Gary Kolstad

Yes.

Operator

Our next question comes from Doug Garber from Dahlman Rose. Please go with your question.

Doug Garber – Dahlman Rose

So, my question is, was the cost to build new facilities with hot new regulations and new equipment needed and permit delay is clearly an uncertainty. Did you look at building in China and importing the proppant to the U.S. and I'm curious the cost differential to build in China versus the U.S. with the new regulations here and then also may be on a per pound basis, how much for the cost to import it on a vessel?

Gary Kolstad

Well, thank you for that question, because it's one of my main points. China is no longer the low-cost producer. We know that's because we have a plant there, we're producing there. We know this because we know all the Chinese producers and we buy some from them. But no, it didn't enter our thought.

Doug Garber – Dahlman Rose

Okay. And what about on the price, did you ever send any of your Chinese proppant, when it was underutilized in China, did you ever sent it over to the U.S. or was it cost prohibited to transport it?

Gary Kolstad

We send proppant from our Russia plant and our China plant anywhere on the globe. So there is no barriers to any of that other than the Chinese now have a little bit of a tax, they like to draw on stuff that is exported.

Doug Garber – Dahlman Rose

And one for Ernesto. Can you help us with the amount of the start-up cost you expect in the fourth quarter with the two facilities coming online?

Ernesto Bautista

Right. So it's got New Iberia 2 actually coming up, sorry, coming online. And if you look at our historically, it's been somewhere approximately say, $500,000, that's in the proppant, ceramic proppant situation. With their history in resin coated, it's probably going to be something south of that, maybe approximating $300,000 or so.

Doug Garber – Dahlman Rose

Okay. And with New Iberia coming online, perhaps later in the quarter, what is the lag before you running through your distribution system and potentially sell it. Is it possible to have some sale of that facility or is it too much of a lag to kind of run it through the system?

Gary Kolstad

Not in Q4. We basically said that we will try and have proppant going out the door January 1 to sell to our clients in January.

Doug Garber – Dahlman Rose

All right. Thank you. I will turn it back.

Operator

Our next question comes from John Daniel from Simmons & Company.

John Daniel – Simmons & Company

Gary, how would you characterize the profitability, say in your China plant versus that in U.S. operation?

Gary Kolstad

I am going to characterize it is there is a reason; the previous gentleman has asked the question why we did not build capacity in China. And the other things that happened there from the logistics in the transportation, the foreign exchange which were likely of course get worse, right, the shipping costs, everything else and plus you bring stuff over in 3500 pound bag and dealing with that is not the funniest thing in the world when we're going out with 2 million pounds of proppant to the oil.

John Daniel – Simmons & Company

I wasn’t trying to suggest that you would bring stuff from China to the States. I'm just looking at that you can supply that market locally. And as you look at the returns there versus here, I'm just trying to get a sense, and I know you're not going to give numbers as it but just a sense as to how much worse Chinese profitability would be from say, something that's being manufacturing solely in the States.

Gary Kolstad

Yes. It's just not as good. Whether we sell domestic in China, which were actually doing pretty well this year, it's actually a record year for us selling domestically in China, which once again goes to the quality issue, unlike CARBO does better than anybody else over there. But now it doesn't approach what we have here with our high efficiency owning their ore reserves, having pseudo-control over natural gas pricing, the inflation and things that are happening in China, most Americans don't understand, but it's large.

John Daniel – Simmons & Company

You cited the quality issues with the Chinese proppant, not yours, but others and you hear that recently from industry folks. Specifically, what makes the quality worse? Where is the failure on their product?

Gary Kolstad

At the end of the day of course, we sum it all up to conductivity. So when we test things, always the end result is conductivity. Anecdotally, you’ll see a lot of dust. Anecdotally, you’ll here service companies say, god, dang it, I don’t want this, because of where is my iron out, because it’s very angular. There is a lot of things that take place there. This is not by accident where we’re at. We spent a couple of decade at this. So it has to do with the porosity, it has to do with the ore; it has to do with a lot of things. But at the end of the day, it always comes down to conductivity.

John Daniel – Simmons & Company

Okay. Fine. Industry having logistical issues and that you said that earlier in the conference call; was that a reference to include you guys or does that apply just to the competition and…

Gary Kolstad

Well, given our strong distribution and the way we look forward, if things happen we tend to catch a cold while the rest of them get pneumonia. But the big shift, there has been quite a shift out of the Haynesville going to the other places. There is an increasing demand for our product and we assume others. We just know the questions that E&P ask us and service companies ask us. So we have a pretty broad audience we get to listen to and so that’s why I made that statement.

John Daniel – Simmons & Company

Okay. Well, I’m just wondering if the logistical issues facing some of the others might be one reason that the seasonal impact in your ability to deliver product, seasonal impact in Q4 is not as great. And you’re not…

Gary Kolstad

Well, we will always have seasonal impacts. And then, this thing has gotten so big and the involvement of railroads and the involvement of trucking and the involvement of weather, I get a big kick out of this year, but we said well, we had weather problems in the Bakken and she's like, well, we got news for you; you’re going to have weather problems in the Bakken every year. So it’s where we're moving the drilling rigs now will pose more logistical problems in the north.

John Daniel – Simmons & Company

Okay. Given that at all rest with conductivity, at this point given the ceramic startups that are out there, would you have any desire to pre-emptively buy some of them and if you wanted to do that given that they are not really producing at this point, would you still have to go through an HSR process?

Gary Kolstad

I can’t comment on the latter, but we would probably much prefer to do it organically. Once again, some things are mispriced, right and so we know what the organic cost is, whether its resin-coated sand or ceramics and we know what we’re going to do and we’re moving forward.

John Daniel – Simmons & Company

Last one from me. You mentioned that you like to buy stock, when no one likes your stock. Did you guys buy any in October?

Ernesto Bautista

We'll let you know next quarter.

John Daniel – Simmons & Company

Okay.

Gary Kolstad

That was a nice (inaudible) of a question though?

John Daniel – Simmons & Company

Well, maybe it was a discount, right. So…

Operator

And our final question comes from Ben (inaudible) from Morgan Stanley. Please go ahead with your question.

Unidentified Analyst

You had mentioned that mix had contributed to margins and I was just wondering what specifically would cause the mix to change in a negative way for margins over the next six months or maybe make the mix improve?

Gary Kolstad

Well the positive side of it is just that’s bringing on more lightweight and one of our new products is doing very well CARBOBOND LITE, which is resin-coated CARBOLITE and actually our other new products are doing decent too, CARBONRT.

So it’s a combination of new products and the pricing that they have as well as increased volumes of lightweight. If we switch plans to proppants, it could have a negative effect. It’s probably that simple.

Unidentified Analyst

All right. That makes sense. And also on the other proppants line, on the outsourced amount, what's the maximum outsourced volume of proppant you could sell?

Gary Kolstad

Oh, I don’t think we’re going to go there. We do that on the request of our valuable E&P clients that when we can't fill the needs; we’re just trying to help them out. And for all the reasons that I’ve mentioned during this last 53 minutes we’re going to continue to build and the CARBO quality will always win out.

Operator

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

Gary Kolstad

Okay. Thanks everybody for joining us this morning. It was a great quarter for us. We're line for us starting up, we're going to continue to try and make the additional demand for our high-quality, high conductivity ceramic proppants in these incredible liquids at rich plays.

We're going to continue work on further capacity additions with a 300 million pounds of resin coating at new Iberian 2 online at the end of the fourth quarter. Additional 600 million pounds resin coating sand capacity before the end of 2012 in Marshville Wisconsin and up to 500 million pounds of Ceramic and Millen, Georgia before the end of 2013.

For the fourth quarter, as we mentioned, we expect proppant sales volumes to remain healthy tempered but typical fourth-quarter seasonality. Our strategy remains steadfast, we’ll continue to expand our company in a competitive marketplace and doing so we’ll continue to grow capacity of high-quality, high conductivity proppant, leverage and expand our distribution model and deliver upon the promises we’ve made to our clients.

I'm excited about the technology and it remains a core commitments for our future growth, and I want to thank our entire CARBO team for another exceptional quarter. And thank you all and we'll talk to you next quarter.

Operator

And with that, we'll conclude today's conference call. We thank you for attending. You may now disconnect your telephone lines.

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