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Executives

Gary Kolstad – President and CEO

Ernesto Bautista – Chief Financial Officer

Analysts

James West – Barclays Capital

John Daniel – Simmons & Company

Jeff Tillery – Tudor, Pickering

Roger Read – Morgan Keegan

Brian Uhlmer – Global Hunter

Doug Garber – Dahlman Rose

Blake Hutchinson – Howard Weil

John Keller – Stephens

William Conroy – Pritchard

Carbo Ceramics, Inc. (CRR) Q4 2011 Earnings Call January 26, 2012 11:00 AM ET

Operator

Hello. And welcome to today’s CARBO Ceramics Incorporated Fourth 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 that this call is being recorded today, January 26, 2012, and your participation implies consent to our recording of this conference. If you do not agree to these terms, we do ask that you 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 your call.

Gary Kolstad

Good morning. I want to thank you for joining us to discuss CARBO’s fourth quarter and fiscal year 2011 results along with our outlook for 2012. 2011 was a record year for CARBO. For the year ending December 31, 2011, revenues increased 32% compared to 2010. The increase is mainly attributed to an increase in profit and sales volume, an increase in the average profit and selling price, and an increase in the revenues of Falcon Technologies.

CARBO’s worldwide profit and sales volume total 1.6 billion pounds for the full year, an increase of 19% compared to 2010. Sales volume in North America increased 21%, primarily due to increases in both U.S. and Canada. International sales volume increased 12%, primarily due to increase in Russia, Latin America and Asia-Pacific including China.

Full year net income for 2011 increased 65% or $51.4 million compared to 2010. Earnings per share grew from $3.40 to $5.62. We continue to focus on returning cash to our shareholders by increasing the quarterly dividend 20%. This marked the 11th consecutive year the company has increased its dividend.

Overall, 2011 was a successful year and one that could not have been accomplished without the hard work from our dedicated employees. Revenues for the fourth quarter of 2011 increased 32%, $38.5 million when compared to the fourth quarter of 2010.

North American profit and sales volume increased 16%, while international profit and sales volume increased 21% compared to the same period last year. Operating profit for the fourth quarter of 2011 increased 59%, compared to the fourth quarter of 2010.

This increase is primarily due to higher profit and sales volume, and increase in the average profit and selling price and higher contribution from the company’s other business units, partially offset by an increase in freight and logistics cost.

Net income for the fourth quarter of 2011 increased 59%, compared to the fourth quarter of 2010. Notwithstanding the solid performance, the fourth quarter had its challenges beyond typical seasonality. The severe decline in natural gas prices during the quarter led E&P’s to reduce capital spending and natural gas basins and increased capital spending towards liquid rich basins.

The largest impact associated with this shift in capital spending was a reduction of approximately 70% in our Haynesville proppant sales volume from the third quarter of 2011, which was partially offset by growth in the liquid rich plays and international markets.

The growth of activity in the liquid rich plays contributed to logistical issues in the industry. These logistical issues burdened our distribution network. From our perspective the industry’s response to the decline in activity in the Haynesville relocation of proppant supply and demand, and adjusted international gas fundamentals will take some time to work out.

During the fourth quarter of 2011 we accelerated several distribution infrastructure investments to address the logistical challenges we faced. These investments include rail car additions, as well as increasing our storage capacity in the key unconventional plays we serve.

As frac jobs have increased in size and intensity common issues such as weather, equipment delays, etcetera, can result in increased variability in proppant sales volumes. Accordingly, serving our clients on a just in time basis has become more challenging. We believe the investments we are making in our distribution model will aid in managing this variability and capturing more opportunities for us in the future.

I would now like to comment on a couple of other items before moving on to the other businesses. First, proppant demand. The economic success our clients achieved by utilizing our high conductivity proppant in the oil and natural gas wells continues to give us confidence in the long-term demand for our proppant.

On a macro level, demand for all three tiers of proppant has grown significantly this past year and for high conductivity proppant should continue to grow given the increased at horizontal drilling and increased E&P investment in the liquids rich plays in North America.

On a reservoir level, production data from key producing basins continues to substantiate the 20% plus gains in production and recovery CARBO expects operators to achieve when using our high conductivity ceramic proppant. Conductivity is still the most important factor in well results after the rocks themselves.

With that as a backdrop we expect to see increasing demand for high conductivity ceramic proppant, our Tier 1 proppant which is what we produce. We need to remind everyone that not all ceramic is not high quality and we believe there is an excess of lower quality Chinese ceramic proppant, which is becoming more apparent given a decline in natural gas directed activity.

We are seeing some positive signs by some clients that they may be starting to revert back to the same buying habits witnessed in 2009. That is, they are increasing their purchases of high quality ceramic proppant and decreasing purchases of lower quality Chinese proppant. It is important to remember that lower quality Chinese proppant has all the supply chain negatives that we have described for the last few years.

In Tier 2 proppant or the medium conductivity resin coated sand market, there is still good demand for high conductivity, resin-coated northern white sand. The resin-coated sand supplied demand dynamics changed during the quarter as activity shifted out the natural gas plays into oil plays, most notably seen in the Haynesville. This shift in the oil plays, requires course met sizes and higher conductivity proppant.

Finally, in Tier 3, our sands, an increasing number of suppliers have approached us about acquiring raw frac sand but we have chosen to purchase and develop our own high conductivity northern white sand reserves.

So, in summary on demand, demand continues for our products, especially in liquid rich plays. We are pleased that we continue to see more clients adopting our high conductivity ceramic proppant in these plays. Relative to the fourth quarter, we are more optimistic on the Q1 trends.

We believe not only us but the entire industry is working hard to overcome the logistical issues and although it will take some time it is very solvable. We think the dramatic client the Haynesville is fairly well over, but there will continue to be downward pressure on natural gas drilling activity due to lower commodity price.

Now second point I wanted to cover before moving on to other business is on the subject of inventory. Inventory increased sequentially primarily due to an increase in finished goods. The increase was primarily the result of a build in both third-party manufactured proppant and internally manufactured ceramic proppant. The build in third-party proppant inventory relates to the slowdown in activity in the Haynesville.

In 2011 we wanted to build inventory in third party manufactured proppant, while maximizing production of our light-weight ceramic proppant. As the year came to an end the natural gas fundamentals declined. This level of inventory is no longer necessary and we have suspended further purchases of this third-party manufactured product. We will monetize the majority of this inventory while still maintaining sufficient amount to meet client needs.

To build an internally manufactured ceramic proppant relates to having kept our plants highly utilized during the first quarter. Our priority is of course to maximize our plant utilization and we will adjust utilization based on working through the logistic issues mentioned above, as well as mark conditions like any other year.

Now switching gears to other business lines, Falcon Technologies achieved revenue of $34.7 million in 2011, a 20% increase when compared to 2010. We are very pleased with the growth Falcon achieved in 2011 and Falcon continues to develop and deliver solutions that are engineered to protect, the environment and our client’s assets and reputation.

StrataGen Engineering Data and Neural Analysis, call it DANA studies are gaining E&P operator interest by contributing to the optimization of completions in the farc methods in the Bakken and Eagle Ford. This process allows us to do a relatively quick analysis for our E&P operators to show which parameters affect their production and recovery results the most.

Fracpro, the industry’s most popular frac simulation software achieved the record revenues 2011 due to client’s increased focus on fracturing an unconventional reservoirs and the need for multiple fracture simulator solutions.

Now turning to the outlook. We believe 2012 industry activity levels will be influenced by many factors. The contraction of North American natural gas fundamentals should be balanced by the continued strength of the liquids rich unconventional plays, which should lead to sales volume growth for CARBO in these liquid rich plays.

We are pleased that we continue to see more clients adopting our high conductivity ceramic proppant in these liquid rich plays. Our financial position remains strong and debt free, and affords us the ability to fund our growth from internally generated cash flows. We remain committed to growing our proppant manufacturing capacity for both ceramic and resin-coated sand.

With respect to our ceramic production capacity and as we noted last quarter we have submitted our environmental permit application for our new plant in Millen, Georgia, and although time is still uncertain, surrounding the receipts of an unproved permit, we expect this plant could commence production before the end of 2013.

Regarding our resin-coat sand operations we initiate the startup process on our second resin-coated line in New Iberia in late January 2012. Our resin-coating expansion efforts continue at our Marshfield, Wisconsin site. The first phase of this project is completing our sand processing plant which is expected to be operational by the end of the second quarter of 2012. Once complete, we’ll be back integrated into our own sand reserves which will feed our New Iberia plant and ultimately our resin-coating operations in Marshfield.

Regarding our environmental risk reduction business Falcon Technologies, we anticipate Falcon revenue growth to approximate 15% to 20% in 2012. As we typically do, we’ll provide a mid-year update for Falcon on the second quarter conference call.

We’re excited about the future of the Falcon business as we expect our engineered to protect solutions and the environmental stewardship exhibited by our clients to drive the future growth. We believe 2012 will be another successful year for CARBO. We continue to market the benefits that increase conductivity can achieve for our clients through economic conductivity analysis.

Now this completes our prepared remarks and this time we’re happy to take any questions.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from James West from Barclays Capital.

James West – Barclays Capital

Hey. Good morning, Gary.

Gary Kolstad

Good morning.

James West – Barclays Capital

Gary, I know you mentioned the logistical challenge would take some time to kind of resolve. The big fracturing companies have all suggested that perhaps it’s second half ‘12 event where they get fully repositioned into the liquids and oil plays, and out of the gas plays. Is that something consistent with your view or do you see bigger challenges that may take longer for you guys to kind of reposition?

Gary Kolstad

No. I don’t think so. We kind of have couple of methods of solving that. For us, we’ve added railcars two other solutions that we are bringing in, one, of course is, just the transloading of proppant at the geographical sites and the other is storage. So it kind of goes in that order in terms of how fast you solve the problem, rail transload and then storage.

So we’ve started some capital projects on storage. We’ve already secured additional railcars and started to filter some of those in Q4, as well as Q1, Q2 and stuff like that. So, yeah, it’s going to improve all the way through the first half is the way I’d characterize ours.

James West – Barclays Capital

Okay. Fair enough. And then on the demand side, it doesn’t seem like, if I wanted to just make sure with you that there is a lack of demand in the market for your proppants. So this is really the shortfall versus capacity, is this logistical challenge and if there’s plenty of demands in oil and liquids that will soak up the capacity you were supplying to gas plays. So when difficult challenges are completed and you’re backup running, you should be back to full capacity, excluding seasonality, things like that?

Gary Kolstad

Yeah. I would characterize this. We’re pleased with the liquid rich plays. We’re pleased that we’re gaining some new clients there. When I talked about the Haynesville, I mean, that was a large volume to displace and I think natural gas will be pretty tough for the year. So it’s no small feat to move all that volume and it’d be a heck of a lot easier if we didn’t have these logistical issues that are standing in the way of that.

But, nonetheless, I like the way we’re going. I think we know what we want to do and once again, it all comes down to production and conductivity. So we still like the fact that that part hasn’t changed at all and when we look at the production analysis that we do on these fields, it still confirms what we’ve always said. So we’re happy there.

In that Q1 part there, we don’t break out these numbers and stuff like that. But the decline in the Haynesville, if we wouldn’t have had some offset, let’s say in the liquids rich, you would have seen a lot lower volume.

James West – Barclays Capital

Okay. Okay. Got it. Okay. Thanks, Gary.

Operator

Our next question comes from John Daniel from Simmons & Company. Please go ahead with your question.

John Daniel – Simmons & Company

Hey, guys. Just a couple for me. I’m losing my voice. I apologize. But, Gary, you use the word could on the Millen plant startup before end of ‘13 and that sounds like your confidence might not be that high. Is that a fair comment on my part?

Gary Kolstad

No. I don’t think I meant to say that at all. I mean, we’re pretty linear in our thinking and working through the process of Millen and moving ahead with the permit and all those things, but it’s no different than in past years, John. Remember what we did when the Toomsboro complex during some of these things. So it’s nice to have the flexibility and it basically it doesn’t cost us much money.

John Daniel – Simmons & Company

Okay.

Gary Kolstad

So we’ll accelerate, we’ll slowdown whatever, it depends on the market. But, no, don’t take my comments as could.

John Daniel – Simmons & Company

Okay. That’s what you said. That’s okay. You guys used to sell your stated manufacturing capacity and I understand logistic issues here. But do you see yourselves returning to those levels in the second half of this year?

Gary Kolstad

Yeah. I don’t think we’re going to forecast out there. We don’t intend to do that, right. So we tend to talk about the next quarter. I think one of the things you have to understand too, is that as we get bigger and we fully intend on getting bigger, you’re going to see more variability and a lot of that’s going to be driven by the market. And the fact that we all now do a lot of work up in North Dakota, we’ll add to that.

And its interest as listening to one of the main operators last night on that and he talked about, well, we’ve had a decent winter this year, but he said, we haven’t had any yet. But that weather factor will play something pretty big and just the size of the wells and the pad drilling, and all these things, you’ll all of a sudden get some pretty big seasonal effects that will hit the whole industry.

John Daniel – Simmons & Company

Okay. Fair enough. Well, I want to talk a little bit about margins here. Given the logistics issues, do you throttle back the utilization on these plants in the near-term and should we expect margins to dip lower in Q1?

Ernesto Bautista

John, this is Ernesto. I would say we have the flexibility to do what you described. As far as the plant utilization, obviously, our goal at any point in time is to keep them highly utilize. Putting that aside, I would say from a margin -- gross margin standpoint, we need to estimate that, what we’re going to see in 2012 is going to be something lower than what we saw in 2011, partially driven by the fact that we have higher logistics costs, especially as we witnessed in this last quarter. And then, we’re going to see a growing amount of resin-coated sand contribution, which we have said in the past that lower margin.

John Daniel – Simmons & Company

Okay. Fair enough. All right. I’ll let others ask and I’ll queue back in. Thanks.

Operator

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

Jeff Tillery – Tudor, Pickering

Hi, Gary and Ernesto. Good morning.

Gary Kolstad

Good morning.

Ernesto Bautista

Good morning.

Jeff Tillery – Tudor, Pickering

Could you give us a little bit of color on just the kind of the timing of when some of the logistical bottlenecks start to creep in? I was just trying to -- the reason I ask is, December waited then may be the Q1 impact is a little bit worst or was it more just ratably felt through the course of the fourth quarter?

Gary Kolstad

Well, as I spoke in the Q3 conference call, I started mentioning logistics at that point and then later on of course at the conference I mentioned it. And so it got worse as you headed into the fourth quarter and I think, when I make a statement about relative to fourth quarter, we’re more optimistic on Q1, a lot of that has to do with logistics. So we’ve taken some of our steps, as I mentioned, added the railcars, we’ve done some other steps in the secondary solution and we’re getting ready to invest in the third solution.

So, yeah, I don’t know, the railroad gets to kind of do things at their will and I certainly now understand what the word embargo means, and I think the industry does too better now. So, we aren’t alone in this, and we get to work at their discretion, let’s say. But, I think on general, I’m feeling better about it today than I was in the middle of the fourth quarter.

Jeff Tillery – Tudor, Pickering

Okay. Good. And then just regards to the Marshfield facility, you talk about the sand capacity being up in the second quarter. Should we expect to see any resin-coated sand volumes out of Marshfield in 2012?

Gary Kolstad

We’re going to have the sand up in Q2, I don’t know, Ernesto, we said what, we’re going to do on resin-building there?

Ernesto Bautista

We have -- what we’ve said is that we would project that it would be up and running before the end of 2012.

Jeff Tillery – Tudor, Pickering

Okay. And no change to that?

Gary Kolstad

Not at this time.

Jeff Tillery – Tudor, Pickering

Okay. And then...

Gary Kolstad

We did, I hope you saw that New Iberia Line 2 resin was running about a month late and we’re actually just starting it up as we speak versus we thought we would be starting it up at the end of December, so that one got delayed a little bit.

Jeff Tillery – Tudor, Pickering

Should we expect to see sales volume in Q1 from that facility or is that more second quarter weighted?

Gary Kolstad

Well, we’re starting up now, we have to produce X amount of inventory and before we send it up to distribution points, and then you have to send it out to distribution points. So, there will be some sales that will show up in February but it’s much more of a March thing.

Jeff Tillery – Tudor, Pickering

Okay. And just with regard, so clearly natural gas hurts one side of the business, but gas prices have been falling for a while now and that’s a big input cost for you guys. Is that, is quarter-on-quarter changes and I know you guys hedged forward as we progress to 2012 enough to show up to externally reported margins, I guess how much benefit are we going to see from that?

Gary Kolstad

Well, we do cover ourselves in some outgoing years right there, I don’t know Ernesto, do you want to make a comment on that or you just want to update the effects of lower gas price would be or it’s not of a huge magnitude?

Ernesto Bautista

Yeah. I wouldn’t paint it that way. I mean I think its longer term, it’s over time and the way we’ve described it historically is, first half of 2012 will be better than first half of 2011. And everything is staggered, everything is, longer term than we’ve had it historically. The goal, obviously, over the long-term, is to get something that averages close to the long-term price of natural gas.

Jeff Tillery – Tudor, Pickering

Yeah.

Ernesto Bautista

… for a certain portion of our estimated utilization.

Gary Kolstad

Yeah. But don’t go take the strip over the last few months and model that.

Ernesto Bautista

Correct. Yeah.

Jeff Tillery – Tudor, Pickering

That’s right. And my last question just, Gary, it has been asked one different way and I’ll ask it another. Just in regards to production at your ceramics facilities, for the first quarter do you anticipate to have to slowdown production because of kind of the inventory backup?

Gary Kolstad

We built up inventory in Q4 by plan. We stopped the purchases of the third-party manufactured proppant. So there will be a natural evolution that takes place in Q1 here and we have the ability to do whatever we want. We wanted to have a little more inventory to take opportunity when it shows up here. But, we’ll probably do a little bit of everything, but we did want you to know that we had stopped purchase of the one and, we’ll rely more on the internal manufacturing now.

Jeff Tillery – Tudor, Pickering

Okay. Thank you, guys.

Operator

Our next question comes from Roger Read from Morgan Keegan. Please go ahead with your question.

Roger Read – Morgan Keegan

Yeah. Good morning.

Gary Kolstad

Good morning, Roger.

Roger Read – Morgan Keegan

I guess to kind of go down the same path as everyone else here. The changes that are going on here in the market, is there anything in the mix side or ability to supply the market where the liquids wells are using a different type proppant than what you were selling into the more gassy markets. You talked earlier about conductivity being the critical issue?

Are we going to see any change in the mix that affects either realized price or margins or just your ability to sell up to your maximum manufacturing capacity, assuming you’re able to get all of the logistical things corrected during 2012?

Gary Kolstad

The liquids rich plays really do their best with our light-weight products and especially when you figure in the volume factor of the light weights and knowledge other things and the conductivity of the light-weights compared to some of the Chinese proppant and things like that.

So we’ll -- we see the market as needing the step that we internally produce in the U.S. And like I said, we’ll run off some of that other inventory and the Haynesville was a bigger consumer of that than the liquids plays, so I think it will all work out in the end that where we’re sitting will be of advantage.

Roger Read – Morgan Keegan

Okay. And then kind of getting to that margin aspect of that, I would presume the margin is generally better on that, which you manufacture yourself than what you acquire from a third-party and then resell. Is that a fair statement or is there not much difference?

Gary Kolstad

That’s your first statement, Roger?

Roger Read – Morgan Keegan

And then, final thing along the margin front here. As you end up shipping stuff potentially a greater distance, right, either on into Texas into the Eagle Ford or up to the Bakken as opposed to parts of Louisiana? What is the impact there, is it something we should see, I mean, I’m just thinking in terms of the amount of time it takes to get the equipment there and then as you mentioned, Gary, the rails aren’t always the most friendly guys to do business with or the most efficient at times?

So how do we factor that into sort of a Q3 of ‘11 where things were pretty smooth to maybe Q3 of ‘12 where you’ve got the repositioning essentially done, but we’re now dealing with these greater distances and longer amount of time between manufacturing and actual sales?

Gary Kolstad

So, I think we have said historically a couple of things on that. One, you’ll -- average sales price somewhat gets distorted a little bit because when you send stuff a longer distance you’re actually going to charge more for the delivery component of that. So that will still occur.

I would say that, there is going to be some amount of permanent increase in cost associated with kind of transformation, if you will, that we are working on and I think, as I said earlier from a margin standpoint, we would see margins lower in 2012 than we did in 2011 for those reasons.

Roger Read – Morgan Keegan

Plus the resin-coated sand startup in New Iberia.

Gary Kolstad

That’s right. That’s right. That’s right.

Roger Read – Morgan Keegan

Okay. All right. Thank you.

Operator

Our next question comes from Brian Uhlmer from Global Hunter. Please go ahead with your question.

Brian Uhlmer – Global Hunter

Good morning, gents. How are you?

Ernesto Bautista

Good.

Gary Kolstad

Fine.

Brian Uhlmer – Global Hunter

Quick couple of quick questions here. First off, I want to point to maybe positive here. It appears that the pricing was actually up a little bit on the quarter, was that part of a mix issue or is there anything that we could factor into that in the quarter?

Gary Kolstad

We were very fortunate to sell one of our high technology specialty products CARBONRT and that actually impacted the whole quarter’s price. So I would think it would be more normalized as we move into Q1 more than Q4, Q4 is a little bit of an anomaly because of that had product.

Brian Uhlmer – Global Hunter

As a percent of total sales. Okay. That makes sense. Now, as we look at the inventory levels, did you build inventory that is somewhat a specific products that cannot be used elsewhere, they’re designed for specifically the Haynesville or will you be easily available to ship those elsewhere and sell them in a different basin or you going to have to look at cutting prices on those in order to liquidate that inventory?

Gary Kolstad

I think, we don’t mind carrying some inventory and our plans we made in 2011 got changed a little bit with the collapse of natural gas in Q4. But what we intend on doing of course is that we stop purchasing it and now we’ll just run it off and whether that takes six months a year, we’ll do what we need to do.

Our intention today is not to have a fire sale, no, and our products fortunately last forever, so there’s no obsolescence or anything. And on the internally manufactured stuff, of course, we can do that anyplace. So we’re not too worried about that. It does take time to run it off but that’s okay.

Brian Uhlmer – Global Hunter

Okay. It makes sense. And finally on the demand front when I look at the Eagle Ford which is going to be the number one, I think, grower in proppant demand year-on-year in our estimation? Could you throw a guess out there or what percent of total proppant is ceramic down there in that basin right now?

Gary Kolstad

I probably could, but I won’t. And I may offer that, the Bakken will be right there when -- in volumes and things like that, so...

Brian Uhlmer – Global Hunter

...more volume growth, I mean, are you guys using it more as in a mix there or there are certain operators that only use ceramics there or how do we look at that market versus the Bakken where we’ve got a pretty good feel of who is using what, and whoever is using it, it’s a little bit tougher them all the Eagle Ford right now?

Gary Kolstad

Yeah. I think it’s just exactly what you said. You have a mix of different things some 100%, some tail end. The other one I would also throw out there is Permian.

Brian Uhlmer – Global Hunter

In terms of and that’s an ECONOPROP or HYDROPROP market for you?

Gary Kolstad

Yeah. It is and that we’re seeing activity there, you can’t leave out the Permian when you’re talking about the other two guys.

Brian Uhlmer – Global Hunter

Okay. Fair enough. Thank you.

Operator

And our next question comes from Doug Garber from Dahlman Rose. Please go ahead with your question.

Doug Garber – Dahlman Rose

Good morning, guys.

Gary Kolstad

Good morning.

Ernesto Bautista

Good morning.

Doug Garber – Dahlman Rose

My first question is as your resin-coated sand becomes vertically integrated and you don’t have to purchase it from a third-party? Should the resin-coated sand see margin progression throughout the year and into 2013 when you don’t have to transport it down to New Iberia?

Gary Kolstad

That’s characterized correctly. Yeah, H2 will be better than H1, yeah.

Doug Garber – Dahlman Rose

Can you give us any more color on the progression of margins there, maybe not the actual number but just how you see that playing out in terms of the percent change?

Gary Kolstad

I’ll let Ernesto take that, but we keep repeating that it’s not as good as the ceramic business.

Ernesto Bautista

That’s right. I think it’s obviously a step here everything that comes on line it’s a step. So, we bringing on our sand processing, that’s a step. It feeds our -- with our own sand, it feeds New Iberia. You start to see some amount of improvement in margin. It’s just going to take a while, to say how much that is, we wouldn’t go into those specifics, but I think characterizing it as, first half versus second half and then first half of ‘13, I think we can go, I think consistently characterize that as improving at each of those points.

Doug Garber – Dahlman Rose

And my next question is still on resin-coated sand. You guys are becoming vertically integrated to the sand mine. And my understanding is the resin-coated sand is going to use the closer substrate, but the sand mine will also produce 40-70 in our finer substrate. What’s your plan with the finer substrate?

Gary Kolstad

I don’t think we’re going to detail out what our plans are with that. You’re correct in your premise on the front part. But I don’t think we’re going to tell on the conference call what we’re going to do with sand.

Doug Garber – Dahlman Rose

Okay. Well, thank you, Gary and Ernesto. I will turn it back.

Operator

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

Blake Hutchinson – Howard Weil

Good morning.

Gary Kolstad

Good morning.

Ernesto Bautista

Morning.

Blake Hutchinson – Howard Weil

Can you help us understand with this significant decline in the Haynesville, maybe just in kind of approximate terms where your U.S. business would lie in terms of oil versus gas disposition at this point and just kind of rough percentage terms, is it 60-40, 70-30 weighted to oil in a quarter like 4Q or kind of looking forward here?

Gary Kolstad

I’ll just say the large majority is oil. Let us put it that way. And that the, the Haynesville is an incredible machine there especially in the ‘09s, ‘10s and first part of ‘11, but let say, it’s a large majority is liquid rich.

Blake Hutchinson – Howard Weil

Okay. Great. So, I guess, another way of putting that would be safe to say that Haynesville was by and large your gas exposure?

Gary Kolstad

No. We proppant to gas all over the U.S., I mean, Southwest Wyoming, parts of Permian, Oklahoma, mid continents, things like that. So, no, we move it all over.

Blake Hutchinson – Howard Weil

Okay. And then Ernesto, I hate to beat a dead horse here, given the fact that you’ve said that margins will decline given that we’re moving product further and have some logistical investments to make. But does that come in tandem with an average price increase?

I guess this is my understanding that the further we got from home base the more you would build into your price to account for that, so that there is some offsetting, average price effect just in terms of moving stuff through the system at further distance?

Ernesto Bautista

Yeah. So, just to make sure, as we’re sending product further out, you -- all of the things equal you’d see an increase in the average sales price per pound, that’s really just pass-through if you will, so on the surface it’s -- it can negatively affect margin as far as percentages go.

On top of that, we do see and have a planning for an increased amount of temporary and also permanent costs within our distribution and logistics area. And so, that’s why, I made the comment about margins being lower 2012 versus 2011.

Blake Hutchinson – Howard Weil

Okay. And then, I guess, Gary, again back to Gary, you noted that you’re producing near capacity and happy to build inventory in 4Q, taking this as a sign of kind of confidence in the end market, understanding you can change your mind with immediacy, have you been producing in full capacity to-date in the first quarter?

Gary Kolstad

No.

Blake Hutchinson – Howard Weil

Okay. And then, finally, part of the problem -- was part of the problem in addition to kind of logistical issues, what we heard from the pressure pumpers, given what we heard from the pressure pumpers, certain customers are saying in terms of staging they’re simply not ready to take delivery or is the market pretty much still taking it wherever we can get it through the system?

Gary Kolstad

Yeah. It’s pretty, North Dakota in particular is pretty tough situation right now and everybody has their own sets of problems there and this activity is so high, I don’t know how you would describe it as one problem or 10 problems. So it’s a whole infrastructure thing in North Dakota. And quite honestly, I look at some of these things as opportunities. When we get set up, like I think we’re going to get set up, it’s a competitive advantage.

Blake Hutchinson – Howard Weil

But then in the host of problems, the idea that a customer is simply not ready to take delivery would exist too in the near-term?

Ernesto Bautista

I think that was probably characteristic of parts of the fourth quarter, yeah.

Blake Hutchinson – Howard Weil

Okay. Excellent. Thanks. I’ll turn it back. Appreciate your time.

Operator

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

John Keller – Stephens

Hey. Good morning. Maybe if I could just get one in here again to beat a dead horse I guess on the margin front. Ernesto, can you quantify or is it possible to quantify in terms of margin impact, the transitory nature or the short-term impact of the logistics increased costs from a margin standpoint?

Ernesto Bautista

Yeah. I don’t think we would go into that level of detail, John. I would say that what we experienced in 4Q incorporates some of that and leave it to you guys to work through some of that from an estimate standpoint.

John Keller – Stephens

Got it. Figured I’d try. And then Gary, you had mentioned some excess Chinese proppant in the market right now and a switch by many of your customers I guess they start using more CARBO product and creating that overhang, I guess. Is -- does that present a challenge or risk to the pricing structure in the overall ceramics market, as that excess supply continues to build?

Gary Kolstad

Yeah. I mean, it doesn’t help the situation, as you can obviously know. But that’s why I like to characterize it like 2009, although we’re not in a 2009 situation at all but it’s just a process. And when we have capacity available then we have to go tell all our clients and we convert new clients and we can even do the things that some of you have been around long enough to know that we do field trials and all these other things.

So we have flexibility to go out and get market now and there is just a lot of reasons why people would much rather use our product besides the actual higher conductivity in the well reserve and everything. It’s just the whole service delivery. It’s the issue of the headaches that are given by some and the variable quality. So pretty confident that we have been through this before and we will work through it again.

John Keller – Stephens

Okay. Thanks, guys. That’s it for me.

Operator

And our next question comes from William Conroy from Pritchard. Please go ahead with your question.

William Conroy – Pritchard

Good morning, Gary and Ernesto.

Gary Kolstad

Good morning.

William Conroy – Pritchard

Just a couple that are really follow-ups, I think to some earlier questions. Did rail congestion play a role at all in your Q4 results?

Gary Kolstad

Yeah. The railroad that’s why I made note of, I understand -- I understand the word embargo now. And it’s not unique to us, right? This is something we’re talking to all our clients about both service company and E&P.

So, yeah, they have put in someplace some rules and we’re trying to get out ahead of them, and get some investments and decisions done, and we’re happy with the path we’re on, but, yeah, that, the railroad was heavily involved with what took place to us and service companies and E&P.

William Conroy – Pritchard

That’s helpful. And completely different one, are you seeing any change in purchasing patterns on the part of your customers?

Gary Kolstad

No. Not really, not in the liquids-rich plays. Gas is a tough situation and people have to do what they have to do. I mean, you guys read press releases, as well as we do about E&P decisions in natural gas arenas.

William Conroy – Pritchard

That’s helpful also. Thanks, Gary.

Operator

(Operator Instructions) Our next question comes from John Daniel from Simmons & Company. Please go ahead with your question.

John Daniel – Simmons & Company

Hi, guys. Just want to change the tone a little bit, but as you look longer term at the China shale development, Gary do you see some of that proppant staying within that market and can you elaborate on what type of proppant being used on those wells?

Gary Kolstad

That’s interesting because we actually had a record year in China this year for sales. And our conversations with both CNPC, as well as the western E&P that working there, is that they have fairly big plans for horizontal drilling in the unconventional plays. And if that bears fruit and they execute on their plans, that -- the demand over there would go up pretty fast.

Recently there was an announcement by one of the super majors about some wells they had done there and they forgot to mention that our product has been used in those wells. But, nonetheless, they did do it. So we see the consumption side over there could go up a lot. I don’t think they can, I mean, they have big plans for 2012. I don’t know if they can execute them that fast.

John Daniel – Simmons & Company

Okay. Same question though, but in Latin America, do you see (inaudible) diverting production from the States, keeping within South America maybe Argentina?

Gary Kolstad

Yeah. It wouldn’t surprise me, whether it’d be currency or logistics costs or everything else, it would make more sense. Some of those markets are still rather difficult.

John Daniel – Simmons & Company

Okay. And lastly, the CE Minerals plant, they announced and it was going to be producing. Now they actually started selling product into the market yet and can you update us on the litigation?

Gary Kolstad

I can’t update you on the litigation but I -- we’re not aware of what they’re doing in the market, yet.

John Daniel – Simmons & Company

Okay. That’s it. Thanks, guys.

Gary Kolstad

Thank you.

Ernesto Bautista

Thank you, John.

Operator

And at this time, I would like to turn the conference call back over to Mr. Kolstad for any closing remarks.

Gary Kolstad

Okay. Thank you once again for joining us this morning. I’ll summarize a couple key points. The contraction in North American natural gas fundamentals should be balanced by the continued strength at liquids-rich unconventional plays, which should lead to sales volume growth for CARBO in those liquids-rich plays.

We’re pleased that we continue to see more clients adopting our high conductivity proppant -- ceramic proppant in those liquids-rich plays. We remain committed to growing capacity in our proppant business and we’ll continue to invest in technology and infrastructure necessary to maintain the high level of service that we provide to our clients.

Although, we believe the logistical issues witnessed during the fourth quarter to be transitory they will take some time to work out. And we continue to invest in R&D and our product pipeline has a lot of promise. And thanks again for the employees for the incredible 2011. And you all have a good day and we look forward to speaking with you on the next quarter. Thank you.

Operator

And ladies and gentlemen, we thank you for attending today’s conference call. It has now concluded. You may now disconnect your telephone lines.

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