U.S. Silica Holdings (SLCA) Bryan A. Shinn on Q1 2016 Results - Earnings Call Transcript

| About: U.S. Silica (SLCA)

U.S. Silica Holdings, Inc. (NYSE:SLCA)

Q1 2016 Earnings Call

April 27, 2016 9:00 am ET

Executives

Michael Lawson - Director of Investor Relations and Corporate Communications

Bryan A. Shinn - President and Chief Executive Officer

Donald A. Merril - Vice President and Chief Financial Officer

Analysts

Blake Allen Hutchinson - Scotia Howard Weil

Robin E. Shoemaker - KeyBanc Capital Markets, Inc.

John Matthew Daniel - Simmons & Co. International

Scott A. Gruber - Citigroup Global Markets, Inc. (Broker)

Marc Bianchi - Cowen & Co. LLC

Anjali Ramnath Voria - Thompson Research Group LLC

Bradley Philip Handler - Jefferies LLC

Brian Uhlmer - GMP Securities LLC

Operator

Greetings, and welcome to the U.S. Silica First Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. And as a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr. Michael Lawson, Director of Investor Relations and Corporate Communications for U.S. Silica. Thank you. You may begin.

Michael Lawson - Director of Investor Relations and Corporate Communications

Thanks. Good morning, everyone, and thank you for joining us for U.S. Silica's first quarter 2016 earnings conference call. With me on the call today are Bryan Shinn, President and Chief Executive Officer; and Don Merril, Vice President and Chief Financial Officer.

Before we begin, I would like to remind all participants that our comments today will include forward-looking statements, which are subject to certain risks and uncertainties. For a complete discussion of these risks and uncertainties, we encourage you to read the company's press release and our documents on file with the SEC.

Additionally, we may refer to the non-GAAP measures of adjusted EBITDA and segment contribution margin during this call. Please refer to yesterday's press release or on our public filings for a full reconciliation of adjusted EBITDA to net income and the definition of segment contribution margin.

Finally, during today's question-and-answer session, we would ask that you limit your questions to one plus a follow-up to ensure that all who wish to ask a question may do so.

And with that, I would now like to turn the call over to our CEO, Mr. Bryan Shinn. Bryan?

Bryan A. Shinn - President and Chief Executive Officer

Thanks, Mike and good morning, everyone. I'll begin today's call by reviewing our first quarter results followed by an update on the progress we're making on several fronts to manage through what is proving to be a lower-for-longer oil price environment. I'll conclude my prepared remarks with a market outlook for both of our operating segments. Don Merril will then provide additional color on our financial performance during the quarter, before we open up the call for your questions.

For the total company, first quarter revenue of $122.5 million, declined 10% sequentially, largely due to weaker energy business conditions and an extremely competitive market environment in our Oil and Gas segment. Tons sold in Oil and Gas for the quarter of $1.4 million, fell 9% sequentially. Even against the backdrop of a 37% decline in the U.S. land rig count and further E&P budget reductions, we believe that we continue to gain market share during the first quarter.

Adjusted EBITDA for the quarter of $5.3 million, declined 51% sequentially. Contribution margin in Oil and Gas of $851,000, fell 88% sequentially, primarily as a result of weaker market conditions, continued pricing pressure, and lower fixed-cost leverage. Average mine gate pricing declined approximately 5% sequentially.

As you know, unlike many of our competitors, we serve diversified markets beyond Oil and Gas and our ISP business had a very strong quarter. Contribution margin in ISP of $16.9 million, improved 11% sequentially, mostly as a result of the strategic price increases implemented on certain products earlier this year and selling a larger mix of higher margin products.

Sales volumes of approximately 900,000 tons during the quarter, fell slightly on a sequential basis, largely due to customer maintenance activities and the remarketing of some products to Oil and Gas customers. I'd like to now provide you with an update on the progress we've made year-to-date on cost reductions and our aggressive plans going forward to reduce both fixed and variable costs across our enterprise.

This year, we plan to eliminate approximately $40 million in costs on top of the $40 million in expenses that we took out last year. We're taking further decisive actions to reduce overheads, increase operational efficiency, optimize shipping and renegotiate supplier contracts. While some of these costs will come back as energy markets improve, we anticipate that most of the savings will be permanent and will further enhance our competitive position in the marketplace.

Starting at the plant level, we've completed several projects aimed at improving operational efficiency and lowering our overall cost per ton. For example, we've completed numerous debottlenecking projects and also in-source various mining activities to enhance workforce utilization and reduce cost.

At our flagship Ottawa facility, we've enhanced operational flexibility to enable us to ship more volume, build unit trains faster, reduce demurrage costs significantly and provide lower production and shipping costs.

On the logistics front, our focus has been on reducing rates and minimums with our rail partners and transload providers. We're finding multiple opportunities to lower cost and increase flexibility as suppliers recognize the value of working with the market leader with substantial staying power.

We shipped a record 56 unit trains in the first quarter. Unit train shipments enable us to take market share, while serving our customers more efficiently and cost effectively. They also, unfortunately, exacerbate the challenge our industry faces of having too many railcars. At the end of the quarter, our rail fleet included approximately 6,700 leased cars and 1,300 customer cars for a total of just over 8,000 railcars, 2,800 of which are currently in storage.

As we've previously discussed, we have no new railcars coming into the fleet in 2016, and we're working very hard to further delay or cancel the 2,500 cars that we have on order. We're also in active discussions with railcar manufacturers and leasing companies to reduce our monthly leasing costs. Many other vendors are stepping into help as well. We've renegotiated a number of supply contracts and gained meaningful concessions from many of our business partners, who are willing to work with us through this downturn.

From an overhead perspective, we've reduced our salary and head count by about one-third over the last 12 months, including a 15% reduction during the first quarter of 2016. We've also continued to throttle back all discretionary spending across the company.

For 2016, we're focused on three key areas; cash, customers and consolidation. We plan to manage our cash wisely and give priority to critical-maintenance and cost-improvement projects. We expect to be in even faster more efficient company to do business with in 2016 as well. At the same time, we're working hard internally to simplify by eliminating unnecessary and cumbersome processes and procedures and improving customer response times.

Finally, with our recently completed equity offering, I believe we're in an even stronger position to achieve meaningful accretive M&A. Looking ahead, we expect that oil prices, while relatively stable at the moment, will remain lower-for-longer, and that we will continue to contend with reduced drilling and completion activity, an extremely competitive marketplace and decreased industry demand for our Oil and Gas products in the near-term.

Sand pricing appears to have leveled out for the moment, but customers have recently commented to us that they expect that market conditions may continue to deteriorate, suggesting that we could see additional pressure on volumes and pricing in the second quarter.

For the Industrial business, we expect to see good bottom line growth this year, driven by the aforementioned price increases and the continued rollout of new higher margin products. The bulk of the ISP business is tied to the automotive and residential housing markets, and demand from both of those important end markets is expected to stay strong in 2016.

And with that, I'd now like to turn the call over to Don Merril. Don?

Donald A. Merril - Vice President and Chief Financial Officer

Thanks, Bryan, and good morning, everyone. I'll begin by commenting on our two operating segments, Oil and Gas, and Industrial and Specialty Products. Revenue for the Oil and Gas business for the first quarter of 2016 of $73.9 million, declined 17% sequentially compared with the fourth quarter of 2015, while revenue for the ISP segment of $48.6 million, represented an increase of 3%, when compared to the previous quarter.

Contribution margin from Oil and Gas in the quarter was $851,000, down 88% when compared with the fourth quarter of 2015. On a per ton basis, contribution margin for Oil and Gas declined 87% sequentially to $0.60, compared with $4.48 for the fourth quarter of 2015.

Contribution margin for Industrial and Specialty Products segment was $16.9 million, an increase of 11% sequentially over the fourth quarter of 2015, and 9% on a year-over-year basis. Contribution margin per ton for the ISP business of $19.60, improved 19% sequentially from the fourth quarter of 2015 and 25% over the same period last year.

As Bryan noted, the sequential increase in ISP contribution margin per ton was driven largely by a combination of mix of higher-margin business, the impact of the strategic price increases implemented earlier this year and the continued contribution from new value-added products.

Turning now to total company results; selling, general and administrative expenses for the first quarter of $15.5 million were slightly down compared with $15.7 million for the fourth quarter of 2015. As Bryan noted, we are taking significant actions this year to keep our overhead in line with the current business environment to reductions in head count and discretionary spending.

Some of these savings, however, are anticipated to be offset by increased business development expenses as we pursue various M&A opportunities throughout the year and increased equity-based compensation.

Depreciation, depletion and amortization expense in the first quarter was $14.6 million compared with $16.4 million in the fourth quarter of 2015. The sequential decline in DD&A was mostly due to an equipment write-off charge of $1.1 million taken in the fourth quarter of 2015 and reduced depletion cost in the current quarter.

Continuing to move down the income statement; interest expense for the quarter was $6.6 million relatively consistent when compared to the $6.8 million for the fourth quarter of 2015. Other income was $1.8 million for the first quarter compared with a loss of $90,000 for the fourth quarter of 2015. The increase was mainly due to a $1.5 million gain on an insurance settlement that we received during the first quarter.

From a tax perspective, during the quarter, we recognized an income tax benefit of $8.5 million and the estimated annual effective tax rate used for the first quarter was 44%.

Turning now to the balance sheet, cash, cash equivalents, and short-term investments as of March 31, 2016, totaled $470.2 million, compared with $298.9 million at December 31, 2015. As of March 31, 2016, our working capital was $536.8 million, and we had $46.7 million available under our revolving credit facility. As of March 31, 2016, our total debt was $490.9 million.

As Bryan mentioned, we completed a successful public offering of 10 million shares of our common stock during the quarter for net cash proceeds of approximately $186.2 million. This was an offensive capital raise that enhances our ability to pursue accretive M&A without compromising the balance sheet. In fact, following the equity raise, we now have only $20 million of net debt.

We believe our balance sheet provides our company with a key advantage over most in our industry, and it puts us in the best position to weather the current downturn and drive industry consolidation. We used $3.8 million of operating cash and incurred capital expenditures of $6.1 million in the first quarter of 2016, largely associated with the company's investments in various maintenance, expansion and cost improvement projects.

For the full-year 2016, we anticipate our capital expenditures to range between $15 million and $20 million, and concentrated largely on critical maintenance projects and cost improvement initiatives. We remain aggressively focused on reducing our cost structure, spending capital prudently, and identifying the best uses of our cash to maximize financial returns.

We are protecting our balance sheet, paying very close attention to receivables and collections, inventories and managing our working capital. Our actions are centered on ensuring that we remain in the best position financially for long-term success in a cyclical energy market.

Finally, as noted in the press release, we will continue to refrain from providing financial guidance until such time as we can begin to see more clarity in our customer demand trends. We will continue to watch this very closely and we'll provide you with an update on our next earnings call.

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

Bryan A. Shinn - President and Chief Executive Officer

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

Question-and-Answer Session

Operator

Thank you. At this time, we will be conducting a question-and-answer session. Our first question comes from the line of Blake Hutchinson with Howard Weil. Please proceed with your question.

Blake Allen Hutchinson - Scotia Howard Weil

Good morning. (15:03 – 15:22)

Operator

Hello?

Bryan A. Shinn - President and Chief Executive Officer

Yeah. Operator, we can't hear the audio.

Operator

Okay. Hold on. Let me see what happened here.

Our first question comes from the line of Robin Shoemaker with KeyBanc Capital Markets. Please proceed with your question.

Robin E. Shoemaker - KeyBanc Capital Markets, Inc.

Okay. Bryan, can you hear me?

Bryan A. Shinn - President and Chief Executive Officer

Yes, we can, Robin.

Robin E. Shoemaker - KeyBanc Capital Markets, Inc.

Okay. Okay. All right. So, I wanted to just start off, with the railcar situation again. And you know, you kind of updated us on the last call that you were engaged in conversations with the manufacturers and the leasing companies about basically canceling a large number of orders, and others are trying to do the same, obviously.

And that you were having some success there and leasing companies realized that financing these railcars that would be built would not be possible anyway. So, are we further along the line there? And have we peaked also in terms of your quarterly cost of idle railcars?

Bryan A. Shinn - President and Chief Executive Officer

Yeah. Thanks for the question, Robin. We continue our discussions with our railcar vendors. I think we're making some good progress. We still have about 2,800 cars in storage right now, so obviously, that's about 35% of our fleet. We're working very hard to get as many of those out as we can, but more importantly, to make sure that the 2,500 railcars that we have on order don't ever come to fruition.

And as you said, I think we've made pretty good progress in advancing the thought that the world just doesn't need more small-cube covered hopper cars right now or maybe not ever, quite honestly with the advent of unit trains.

And in our conversations with the builders and the lessors, what we're finding is that the railcar builders really don't want to build these cars, I don't believe. And the financial institutions who would underwrite the loans that would be necessary to build those cars don't necessarily want to underwrite those loans either. So, it feels like there's a kind of a coming together of interest here and we continue to work very hard on that.

Robin E. Shoemaker - KeyBanc Capital Markets, Inc.

Okay. Thanks. I just wanted to follow-up with one other question. Obviously, through your equity offering, you've effectively kind of pre-funded some acquisitions, as you've indicated. When you look at situations where companies that you might acquire have debt that's trading at deep discount to face value, so does that make it difficult, if not impossible, to make acquisitions that involve, you know, kind of companies that have make-whole provisions on their debt? Or are you likely to proceed more in the direction of specific kind of asset M&A?

Bryan A. Shinn - President and Chief Executive Officer

It's another great question, Robin. And certainly, the whole debt issue that overhang us out there around many of the companies that we might be considering from an M&A standpoint makes the whole proposition a lot more difficult. And even though, we see some debt trading at relatively low levels, it doesn't mean that you could somehow acquire the company at that level of debt.

And I think that was your point as well around the make-whole provision. I feel like as far as what's attractive for us, it's pretty similar to what it's been all along. We're looking for low-cost operations, the mining and processing type of operations. We want well-placed logistics assets and we look at things in the Permian, the Eagle Ford, parts of the Mid-Con, the Marcellus, for example, has been very attractive.

And we also think about things that could be game changers in terms of technologies or transformative value propositions. And, of course, I wouldn't want our investors to forget that we also have opportunities on the Industrial side of the business as well. Even though most of the M&A questions we get from investors and from analysts, so I think we're more focused on Oil and Gas, just because that is sort of an obvious thing that's in front of us. We do have the other side of the business as well, which may have some interesting opportunities.

Robin E. Shoemaker - KeyBanc Capital Markets, Inc.

Yeah. Interesting. Okay. Thank you.

Bryan A. Shinn - President and Chief Executive Officer

Thank you.

Operator

Our next question comes from the line of Blake Hutchinson with Howard Weil. Please proceed with your question.

Blake Allen Hutchinson - Scotia Howard Weil

Morning.

Donald A. Merril - Vice President and Chief Financial Officer

Morning.

Bryan A. Shinn - President and Chief Executive Officer

Morning, Blake.

Blake Allen Hutchinson - Scotia Howard Weil

I nearly got away with the best conference call ever, more of you guys...

Bryan A. Shinn - President and Chief Executive Officer

Yeah. Yeah. I told Mike that we were given just another two minutes and if the queue didn't redevelop well I guess nobody had any questions.

Blake Allen Hutchinson - Scotia Howard Weil

Yeah. I tried my best. Just something that we've usually covered in kind of the preamble that wasn't necessarily addressed is, you know, your in-basin versus mine gate mix here. I guess in this market, conceptually, is the differential between the margin advantage to in-basin deliveries kind of close the gap versus the mine gate as the kind of spot market, I guess, becomes a little bit more illiquid in-basin? Or is it still nicely advantaged in terms of in-basin deliveries?

Bryan A. Shinn - President and Chief Executive Officer

Yes. So, we're running about 60/40 right now. 60% plant sales and 40% in-basin. And it's one of these things that's hard to apply macros to. I mean, certainly they are macro numbers, but it moves around a lot. And the in-basin numbers, I feel like it's kind of come back more towards parity, just because there is a lot of stranded inventory at any given time in in-basin.

We're talking the other day and there was a particular grade that was extremely long in one part of the Permian and the prices were very depressed for that. Those really weren't reflective of kind of long-term or even short-term market prices for that grade in that location, but our competitor had a lot of excess inventory and they were willing to sell it at a big discount.

And so, we still see lot of those things popping up. So, it's kind of hard to get your hands on, but my sense is that there's not much difference at this point in terms of the margins between those two. On an actual basis, I would say if Don Merril was answering this question, he might look at it a little bit differently just because we allocate the sort of dead railcars, if you will, the ones that are in storage out to the transload business. So, you can make those margins look artificially worst, but when you take that out and sort of assume that's a sunk cost right now, the margins are pretty equal between plant gate and transload.

Blake Allen Hutchinson - Scotia Howard Weil

Okay. Great. That's exactly what I was looking for. And then just a quick follow-up on the ISP business. I guess, can you tell us what – as we start the year, a somewhat year-over-year depressed volume figure, is this really more of the remarketing of Oil and Gas volumes taking effect? And we should consider something maybe for the full-year of flat to down? Or you'd just suggest that there was some extreme seasonality to start the year here?

Bryan A. Shinn - President and Chief Executive Officer

No, I think it's more of the former than the latter. As we talk for several quarters now, our strategy in the Industrial business is to move more towards higher margin, Specialty Products, which tend to be lower volume products. And our team is doing a great job with that.

We also stopped serving some unprofitable customers in the ISP sector. And as you said, we remarketed some of that capacity to other end users including Oil and Gas. And so, at the end of the day, I think this team will be a consistent one throughout the year. Volume is lower, but margin is higher. And contribution margin dollars growing for the business. And that's exactly what our strategy is.

Blake Allen Hutchinson - Scotia Howard Weil

Great. Thanks for the time. I'll turn it back, guys.

Bryan A. Shinn - President and Chief Executive Officer

Thanks, Blake.

Operator

Our next question comes from the line of John Daniel with Simmons & Co. Please proceed with your question.

John Matthew Daniel - Simmons & Co. International

Hey, guys.

Bryan A. Shinn - President and Chief Executive Officer

Good morning, John.

John Matthew Daniel - Simmons & Co. International

I mean, first question is just over the last several weeks, there've been lots of different articles in local Wisconsin newspapers, et cetera, about the layoffs up there. And one of the most recent articles was on EOG, and I found that a little bit surprising. And I just want to ask you a question.

Do you think when you look at an E&P that's vertically integrated that has a sand mine, would those layoffs be a function of the shift to brown sand versus white? Or is just the leading-edge pricing, et cetera, so bad for the industry that they can actually go procure sand cheaper from third parties than what they might be able to produce on their own?

Bryan A. Shinn - President and Chief Executive Officer

Well, I think the main driver might actually be something different than that. I think what a lot of sort of single-mind operators are finding, or folks who don't have a big enough footprint is that, there's a sort of great mix phenomenon going on. And when you think about not having a sort of a fulsome outlet for your products and your mind makes a certain mix of products, if you can't sell all that, the cost of which you want to consume can become very large, right, on a per ton basis.

And I think that's one of the things that's tripped up some of our smaller competitors as the demand profiles have changed out in the market. And so, I would guess it could be that as much as anything else. They just looked at it perhaps at the end of the day and realized that if they weren't going to be using a certain grade or couldn't use all of it, the price for the grades that they did want could be substantially higher than what they expected.

John Matthew Daniel - Simmons & Co. International

Yeah. Fair enough. One more for you and then I'll jump back in the queue to let others get in. The business development expenses that you noted associated with the M&A efforts, those have popped up a number of times in recent quarters and sounds like there'll be some more going forward.

And as you know, most of us treat those as non-recurring. But just given that acquisitions are a stated objective of yours, is it reasonable to assume that over the next several quarters, this is going to be a regular expense? And then let's assume you end up doing a deal, don't those costs ultimately get allocated to a purchase price, so there could be an earnings pickup down the road?

Bryan A. Shinn - President and Chief Executive Officer

So, I'll deal with the first question then maybe ask Don Merril to step in around the allocation. Obviously, we've had a lot of discussion recently with investors and sort of publicly around our recent offering related to M&A.

And I think if you sort of step back, John and look at the things that we said in the past, around, first off, why do we want to do M&A? I think the drivers are all still there. We have a very fragmented market in Oil and Gas, in terms of our kind of supply base. We have well more than 60 competitors out there, and so that leads to a lot of inefficiencies, it seems like it's right for consolidation.

I think more and more of the industry and others, particularly investors are seeing that the scale matters in this industry. The scale players are the ones who are going to win long-term. And so, being able to consolidate certainly helps that. And obviously, we're extremely well positioned to do M&A.

I would say that there's sort of a new dynamic that's emerging, though, and this one I think might be interesting for investors, at least from my perspective, the challenging market conditions that we have today could really be the catalyst to close some of the bid ask spreads that have been pretty wide out there right now. We're doing a lot on the M&A front today. There's a lot in our pipeline. I think we're making a good progress, but certainly we're going to continue to be patient.

But, I'm feeling pretty optimistic about our pipeline of opportunities. And so, directly to your question, I certainly would expect that there would be some increases in business development expense over the coming quarters. And Don, maybe you could speak to the treatment of those expenses.

Donald A. Merril - Vice President and Chief Financial Officer

Yeah. The treatment of those, unfortunately, it's an expense, right? In the old days, we used to be able to capitalize all that, but now, as you're working on the deal, you expense all of that. So, you'll see that go through the P&L.

And you saw a lower number of business development expenses in Q1 versus what we've done in the past. And that in no way should be interpreted as a lack of activity, right. There's a lot of activity going on here, we just didn't spend a lot of money on lawyers and accountants in the quarter. So, I would anticipate that expense go up, John, in Q2.

John Matthew Daniel - Simmons & Co. International

I appreciate that, guys. I'll jump back in, in a bit.

Bryan A. Shinn - President and Chief Executive Officer

Thanks, John.

Operator

Our next question comes from the line of Scott Gruber with Citigroup. Please proceed with your question.

Scott A. Gruber - Citigroup Global Markets, Inc. (Broker)

Yes. Good morning.

Bryan A. Shinn - President and Chief Executive Officer

Good morning, Scott.

Scott A. Gruber - Citigroup Global Markets, Inc. (Broker)

Bryan, in the past, you provided good color on the call around the number of mines and the volumes you believe are shut-in to the industry. I imagine this increased during the first quarter. What's your best guess as to where those figures stand currently?

Bryan A. Shinn - President and Chief Executive Officer

So, it's a great question, Scott. We continue to see high-cost producers take capacity out of the industry. Our current estimate is that there are about 25 sites that are offline right now. And I would guess that represents 20 million to 25 million tons of capacity. So, by my count, I would put industry capacity, right now, sort of effective capacity if you will, at 40 million to 45 million tons.

And next obvious question is, what does demand look like right now? So, I would mark demand at somewhere between say 25 million to 28 million tons with probably some downward pressure coming into Q2. So, kind of do the math on that and we're 60% to 65% utilized right now, in terms of effective industry capacity by our calculations.

Scott A. Gruber - Citigroup Global Markets, Inc. (Broker)

And assuming we enter recovery in 2017, 2018, are there significant costs associated with restarting those shut-in mines?

Bryan A. Shinn - President and Chief Executive Officer

So, in our experience, there are couple of kind of issues with restarting the mines. The first is that, if you have to go in and re-staff the mine with employees. And obviously, that takes a little bit of time. Second is that it takes a lot of working capital to basically sort of get all the product prepared and start to get it in the pipeline to sell, particularly if you're pushing it out through a distribution network.

And then the third issue, which is one that maybe is not as obvious kind of from the outside, but being inside the industry, what you realize is that if you can't run your mind at a relatively high capacity, your cost per ton is going to be extremely high, and kind of back to John Daniel's question around perhaps why EOG and others have chosen to shut-in mines. You lose efficiencies very quickly in the mine site.

And so, if I had a mine site, owned something that was shut-in, I want to get up to maybe 60% or 70% of capacity throughput of the mine of sales, before I would start it back up. So, there's a lot of ifs there and then on top of that, many of the mine sites in Wisconsin, you have to build sort of a wet stockpile in the good weather. And we've seen those get depleted, so they have to rebuild their stockpile.

So, there's a lot of hurdles there. I'm not saying it's impossible. Certainly, if pricing gets high enough and demand rebounds to certain levels, some of those sites might come back on, but I don't think it's going to be as easy as perhaps some folks might think.

Scott A. Gruber - Citigroup Global Markets, Inc. (Broker)

So, overall, it sounds like there's upfront costs. These are higher cost mines and the operators need confidence that they're going to run at a certain utilization, a relatively high level of utilization when they start back up. So, assuming that we'll need some of the capacity coming back longer-term, I mean, if you call it a third or a half, what type of improvement in pricing relative to the current mine gate do you think we'll need to see at least a portion of that capacity come back?

Bryan A. Shinn - President and Chief Executive Officer

So, if you step back and think about what is it that drives the need for that capacity, I think it's going to be rig count coming back. And if you do some quick math, what you'll discover is that roughly for every 100, say, horizontal rigs – we tend to focus on horizontal rigs – every 100 horizontal rigs that come back, we'd estimate somewhere between six million to seven million tons of sand would be needed to support those rigs. Depending on where they come back, could be a little bit more or a little bit less, but that's kind of a good rule of thumb.

So, I think what we'll see, Scott, is the volumes come back first. And that's one of the things that will make it a bit challenging again for the folks who are thinking about restarting mine sites, because people like us and other Tier 1 folks with low capacity – or low-cost, rather – have excess capacity. So, we'll have to sort of get all our capacity back up and running first before the higher cost mine operators will realistically be able to do much in the way of starting things back up.

Scott A. Gruber - Citigroup Global Markets, Inc. (Broker)

I realize it'll take some time and some real improvement in the market, but do you think we'll need at least $30 a ton to see some reactivations?

Bryan A. Shinn - President and Chief Executive Officer

$30 a ton in terms of pricing?

Scott A. Gruber - Citigroup Global Markets, Inc. (Broker)

Yes.

Bryan A. Shinn - President and Chief Executive Officer

Yeah. Look, I think somewhere around there, maybe between $30 and $40 a ton, but you have to remember where some of these folks are on the cost curve. A lot of the mine sites that are shut down have cash costs in excess of $25 a ton. These are the kind of the guys that are at the high end of the sort of low-cost point of the curve, and then the moderate and high cost suppliers.

And typically, you're starting around $28, $30 a ton on up to $40 or $50 a ton cost for these mine sites. So, $30 a ton might not be enough, quite honestly, given that's pretty close to their cash breakeven. And that's in a steady state environment. And those cost curves were also anticipating that the mine site was sold out. So, when we say somebody's a $25 or $28 ton cost player, they're probably not that for the first many, many tons that they make. So, there's a big hurdle there.

Scott A. Gruber - Citigroup Global Markets, Inc. (Broker)

Got it. Appreciate the color.

Bryan A. Shinn - President and Chief Executive Officer

Thanks, Scott.

Operator

Our next question comes from the line of Marc Bianchi with Cowen & Co. Please proceed with your question.

Marc Bianchi - Cowen & Co. LLC

Hey. Good morning, guys.

Bryan A. Shinn - President and Chief Executive Officer

Good morning, Marc.

Marc Bianchi - Cowen & Co. LLC

Bryan, volumes have outperformed the rig count quite a bit here lately. Assuming this is continued share gains and assuming there are continued share gains with the largest players, does this reach a saturation point anytime soon where you're really bumping up against kind of the max amount of business you can do with those customers?

Bryan A. Shinn - President and Chief Executive Officer

So, I think there's a couple of things, right. We've continued to gain share. I think we took another probably two points of share plus in Q1 and depending on how much you think is actually being pumped out there in the market, we're somewhere, I believe, over 20% share right now.

You do reach some max point. And you could look at it in terms of share with customers. I tend to think about it in terms of at what point competitors will defend their share position. Up until now, I think a lot of the share gains have come from the Tier 3 and the Tier 2 and the high Tier 1 cost players who've either shut down or can't compete in this environment. As the amount of volume shrinks in the overall market, now we're bumping up against competitors who were probably more similarly situated in terms of costs.

So, there's a practical limit out there somewhere. It's hard to know exactly what that is, but probably somewhere 25%, 30% share becomes a practical limit, but that's a tough one to calculate, because there's so many factors that go into it.

Marc Bianchi - Cowen & Co. LLC

Have your larger customers said to you that they don't want you to be over a certain level of their business?

Bryan A. Shinn - President and Chief Executive Officer

No, we've never had those kind of conservations with customers. Now, I think most of the big customers would tell you they don't want to be sole-sourced, but the conversations that we've had with our customers typically go more along the lines and look, we're trying to consolidate down to two or three suppliers. We want you to be one of those suppliers, we were just down in Houston last week, as a matter of fact, talking to a pretty large customer and those are exactly the kind of things that they were telling us.

So, I haven't had any of the large customers tell us they didn't want us to be either their say number one or number two supplier. So, I think we're really well-positioned; but obviously, there's competitors out there as well and we mix it up every day in the market.

Marc Bianchi - Cowen & Co. LLC

Sure. Okay. Well, then, maybe just along those lines, can you talk to volumes recently? What you've seen coming out of the quarter and here so far in the second and maybe relate that to rig count? You know, it looks like rig count is going to be down over 20% here in the second quarter. How should we think about your volumes in that context?

Bryan A. Shinn - President and Chief Executive Officer

So, I think that, we'll see both volumes and price – continue to be under some pressure in Q2. The quarter started out with volumes in line or a little bit down to where we were in Q1. I feel like the 37%, 38% decline in rig count that we saw on Q1 is going to read through into Q2.

So, there's a bit of a delay obviously between the other rig count and the completion activity. So, I think we're just starting to see now, as we get in, kind of to the end of April here and into May, the full impact of the big declines in rigs that we saw in quarter one.

So look, it won't surprise me at all, if we seek continued pressure on both price and volume. Although, as I said, pricing has been relatively flat, but in recent discussions with customers, it feels like there's more pressure coming, though the reality is, there's not much more to give on price. I mean, they're pretty much already down to breakeven. So, I think that there's kind of a limit to how low we'll go on price.

Marc Bianchi - Cowen & Co. LLC

Okay. Maybe if I could just sneak one more in. With volumes coming down, pricing maybe not down, but you still have fixed cost absorption that will be a headwind. Could we see the contribution margin per ton in Oil and Gas go below breakeven in the second quarter?

Bryan A. Shinn - President and Chief Executive Officer

Maybe, I'll ask Don to comment on that. He and his team do a lot of work in that area.

Donald A. Merril - Vice President and Chief Financial Officer

Yeah. I think it's very possible, because of what Bryan just talked about. We're going to continue to see volume pressure into Q2 and pricing pressures, so you're going to see an impact on contribution margin per ton. And we're at $0.60 now, so I got to believe that goes below breakeven.

Marc Bianchi - Cowen & Co. LLC

Okay. Below a $5 loss? Is that too much?

Donald A. Merril - Vice President and Chief Financial Officer

No, I think that's a little hot, but I definitely believe that there's going to be pressure in the quarter.

Marc Bianchi - Cowen & Co. LLC

Great. Thanks. I'll turn it back, guys.

Bryan A. Shinn - President and Chief Executive Officer

Thanks, Marc.

Operator

Our next question comes from the line of Anjali Voria with Thompson Research Group. Please proceed with your question.

Anjali Ramnath Voria - Thompson Research Group LLC

Good morning. Regarding mine gate pricing, I think you noted a 5% sequential decline. I was wondering if you could tell me, do you think this is representative of what the industry is seeing? Or do you think that your trends were a bit better, based on perhaps some sort of quick shipped last-minute sales or exposure to certain basins?

And along those lines, could you also talk about the progression of mine gate pricing and where you've exited the quarter and have you seen further deterioration in April? I think your comment sort of suggests you may see deterioration in Q2, so I wanted to know where you were at in April?

Bryan A. Shinn - President and Chief Executive Officer

Sure. So, look, it's hard to predict exactly what's going on in the industry. We certainly have been aggressive in taking share. And so, on one hand, you could assume that perhaps our pricing would be appropriate for somebody who's taking share. On the other hand, we're more than 20% of the market right now. So, I think we are relatively representative. I'll be surprised if we're not. So, plus or minus, perhaps where others are.

In terms of the progression, we saw prices come down a bit throughout Q1. And I think you're going to – where we sort of exited Q1, April has been relatively flat with that, but I expect in May and June that we'll see some additional pricing pressure just based on the volumes falling further right. So, obviously there's a corollary between volumes dropping and pricing.

And as I mentioned earlier in one of my responses to another question, we're seeing more sort of stranded product, if you will, from our competitors, people having large volumes in silos or in railcars, in a basin that they have to move, because they're paying demurrage on railcars. And so, you'll see these, kind of spot prices pop up that look illogical and that just helps further erode the overall price in the market when those type of things happen.

Anjali Ramnath Voria - Thompson Research Group LLC

Okay. And then, I guess, just very briefly on SG&A, on a non-GAAP basis, adjusted for business development and restructuring, your costs were, I think, a little bit higher than the last three quarters. I was wondering if there were any unusual bad debt expense or some other factors that we should be aware of on that?

Donald A. Merril - Vice President and Chief Financial Officer

No, I think if you look at a comparison to Q4, our Q4 SG&A was definitely lower because we did have a lot of reversals like compensation expenses and things like that that happened in Q4. So, you saw those being re-accrued in Q1 of 2015.

We gave guidance at about $15.5 million of SG&A expense and we were basically on that number. I would anticipate that those expenses stay about at $15.5 million as we work our way through the year, per quarter.

Anjali Ramnath Voria - Thompson Research Group LLC

Thank you very much.

Bryan A. Shinn - President and Chief Executive Officer

Thank you.

Operator

Our next question comes from the line of Brad Handler with Jefferies. Please proceed with your question.

Bradley Philip Handler - Jefferies LLC

Thanks, guys. Good morning.

Bryan A. Shinn - President and Chief Executive Officer

Good morning, Brad.

Bradley Philip Handler - Jefferies LLC

I'd like to come back to a couple things related to the volumes and the margin. So, I'm retreading on some things where Blake started and Marc, I think, continued and such. But the – first of all, so strong volume performance, so kudos for that. And clearly, some market share pickup. I think that makes sense.

With this shift in FOB versus delivered volumes, if I'm doing math – and I know math can be hard to do on a conference call. But Don, maybe we can get somewhere here. It feels like average pricing fell, whether it's FOB or delivered, it fell something like $2 a ton, which just sort of leads to my question of, if I look at what contribution margin did, how can I try to reconcile the fact that it felt more like $4 a ton?

And I don't know if you can help me with some of the puts and takes there just to try to understand. I'd just love to sort of nail that out as I think about where we are and looking – then start to look forward to 2016. The rest...

Bryan A. Shinn - President and Chief Executive Officer

Yeah, I think if I understand your question, yeah, you're right. So, just straight mine gate price dropped about 5%, but you saw a greater reduction if you look at the ASPs and that has a lot to do with where we're selling right. So, selling more at mine gate than in-basin is going to affect that ASP as well.

Bradley Philip Handler - Jefferies LLC

Right, exactly. So, if you back out into that, then the reduction wasn't really $5 a ton...

Bryan A. Shinn - President and Chief Executive Officer

That's right.

Bradley Philip Handler - Jefferies LLC

...to mine gate. It's more like $2 a ton, it seems.

Bryan A. Shinn - President and Chief Executive Officer

Yeah, $2 a ton, $2.50 a ton. You're right.

Bradley Philip Handler - Jefferies LLC

So in that case, so what I'm trying to again reconcile just a little bit better, just to understand a little bit better is the reduction in contribution margin of $4 a ton. So, in other words, there were some other dynamics other than price. Volumes weren't off as much. So, perhaps fixed cost absorption wasn't as much the issue. I don't know if it's idle railcars. I'm not sure if there's some other issues that I'm just trying to understand.

Bryan A. Shinn - President and Chief Executive Officer

Yeah, look, fixed cost leverage for sure impacted the quarter worst in Q1 than it did in Q4. You've got price, you've got some mix issues in there as well as we are selling more of our product to bigger customers. And that's causing an overall reduction in price as well.

Bradley Philip Handler - Jefferies LLC

Okay. Okay. Fair enough. Maybe just one follow-up from me. I think with your stronger volumes, perhaps I can imagine that there was a basis to keep Sparta, Wisconsin, open. And I think we were sort of sure about that, that the status of that if the demand would be strong enough. But, can you speak to that at all with respect to are you at a baseline where that kind of makes sense? Or some other dynamics where that makes sense that it remains open?

Bryan A. Shinn - President and Chief Executive Officer

We have a very detailed decision model that we use for all of this, Brad. And the reality is for where demand has been for the last several months, we basically couldn't supply the demand without Sparta. We have Sparta throttled back. We only have a couple of shifts there, so it's not like we're running it full out. But it's definitely the right economic decision at this point to do that.

Obviously, as circumstances change in the market, we're right on top of that and we monitor that literally on a weekly basis. But at this point, Sparta is making a good contribution for us and is an important part of our network.

Bradley Philip Handler - Jefferies LLC

Sure, sure. Makes sense. Okay. Thank you, guys. I'll turn it back.

Bryan A. Shinn - President and Chief Executive Officer

Thanks, Brad.

Operator

Our next question comes from the line of Brian Uhlmer with GMP Securities. Please proceed with your question.

Brian Uhlmer - GMP Securities LLC

Hey. Good morning. Thanks for getting me in here.

Bryan A. Shinn - President and Chief Executive Officer

Good morning, Brian.

Brian Uhlmer - GMP Securities LLC

I have a simple two-part question. Number one, can you just talk to the trends towards in-basin versus at the mine as we run through into 2017 as you see it pickup and how you view that trend occurring?

Number two, you talked about the margin compression between the two currently happening due to maybe some spots sales of guys who have stranded cargoes. But longer-term, do you still view your logistical network as a benefit that will provide more margin at – in-basin than at the mine site as we model for it?

Bryan A. Shinn - President and Chief Executive Officer

Sure, Brian. So, I'll take the first part of your question here as far as trends. And if you look at the peak in 2014, we were selling 65% to maybe 68% of our volumes in-basin and the rest at plants. And that trend has kind of gone the other direction now. As I said, we're now 60% at the plants and 40% in-basin, and I think it's going to wax and wane over time.

The reality is even our large customers who like to buy at the plants have a limited capability in their logistics network. And I think the way to think about that is that our customers have invested in a logistics network. They want to fill their network up first before they use ours. So, on a lower demand environment, it's only natural that on a percentage basis, they'll use their network more than ours perhaps.

And that moves on to your second question around the kind of longer-term, where does this go? I think that it'll balance back out. We'll see over the long run the sales moving more towards – back towards our logistics network. And if you think about the kind of customers that we have that really heavily utilize the logistics network, it tends to be the smaller and medium-sized customers. The big ones use it, too, but I think as we get more of the smaller service companies kind of back on their feet and the medium-sized guys growing again, those are the folks who use our network probably more heavily. And I feel like, long-term, we'll continue to get separation and we'll start to regain rather, the separation in margins there, as we expect to get a return from the investment in logistics.

I guess maybe the last point on that though is that, it's great to have optionality in this market; we added another three transloads in Q1 to the network. These are all sort of no-cost adds for us, no capital commitment, no minimums. But in this market, you want as many sale point options as possible, and we have the logistics wherewithal to cover that from our network. It's one of the reasons we've been able to take share in the downturn and I think having that logistics network has been really good for us even in the downturn.

Brian Uhlmer - GMP Securities LLC

Great. Thank you. I wanted to try and get something possibly a little more perspicacious. Like my friend John Daniel always asks – questions he asks – talking to a private guy about the ability and the logistics to get sand down to Argentina and how they're transporting sand from Wisconsin and end up selling it down in Argentina.

Was curious, number one, have you looked at the ability to sell out of country and what that looks like for you guys? And number two, some discussions on potentially opening mines down there or in other regions where sand supply is a little bit tougher and they need somebody with some expertise in the sand business. Has any of that kind of crossed you guys' transom?

Bryan A. Shinn - President and Chief Executive Officer

So, we do have some sales in Argentina. They're pretty small. It's one of the reasons we don't talk about them much. I think it could be an opportunity for us long-term and so we've positioned ourselves down there appropriately. But, we don't see a lot of short-term opportunities in Argentina.

We have in the past looked in other countries, and I think that it's going to be tough for a company our size to try to establish a footprint in multiple countries in terms of sand distribution. So, more likely a route for us to expand internationally would be in partnership with one of our larger service company customers. We've had some discussions around that in the past. But the fact is the international market hasn't really been all that much in terms of opportunities, but it's one that we keep our eye on and if the opportunity comes up, I think we'll be well-positioned to capitalize on it.

Brian Uhlmer - GMP Securities LLC

Perfect. Thank you very much.

Bryan A. Shinn - President and Chief Executive Officer

Thanks, Brian.

Operator

Our final question comes from the line of John Daniel with Simmons & Co. Please proceed with your question.

John Matthew Daniel - Simmons & Co. International

Hey. Thank you for putting me back in.

Bryan A. Shinn - President and Chief Executive Officer

No problem, John.

John Matthew Daniel - Simmons & Co. International

A couple real quick ones for me. Let's say you walk away from the railcars that are on order. What type of penalties would you face?

Bryan A. Shinn - President and Chief Executive Officer

Well, look, I can't really get into discussions around the contracts. I think, to me, it just keeps coming back to the reality that these cars don't need to be built. I mean, everybody recognizes that. The question is how do you find a way to not build the cars and we're working with a number of different parties to help us think that through.

John Matthew Daniel - Simmons & Co. International

Okay. That's fair. But in theory, if you wanted to, you could walk away and just pay a penalty.

Bryan A. Shinn - President and Chief Executive Officer

Well, that's in theory. If my General Counsel was on the phone, she might have different opinion around that. But it's not the way we typically would do business. It's an option, negotiate a penalty, end up in court or something. But I think that the reality is the industry as a whole knows that it's just not a good idea to build these cars, because if you look at the oversupply out there right now, John, there's just thousands and thousands of too many cars of the small-cube covered hoppers. And the industry just doesn't need these, I mean maybe not ever.

John Matthew Daniel - Simmons & Co. International

Okay. Fair enough. And then given the focus on M&A and just the obvious need for the industry to consolidate, do you think that that effectively suspends any organic growth initiatives that you may have had until that M&A development program is complete?

Bryan A. Shinn - President and Chief Executive Officer

Well, we certainly – on the Oil and Gas side – have suspended indefinitely the greenfield projects that we had up in Wisconsin and the expansion that we had at our Pacific, Missouri plant. It just feels like the industry certainly doesn't need those kind of capacities at this time. So, I do feel like it's probably M&A, first; organic, second, right now. So, I think that's probably right.

John Matthew Daniel - Simmons & Co. International

Okay. And then Don, just quickly, depreciation thoughts for Q2? It was down in Q1. And any prospect for tax refunds in Q2?

Donald A. Merril - Vice President and Chief Financial Officer

Yeah. So, I think, DD&A was down in Q1. I would anticipate that it jumps back up to a more normalized level of $15.5 million, $15.7 million in Q2. And as far as tax refunds go, we did net in the first quarter about $5.5 million of a tax refund, and that's already hit our bank account.

John Matthew Daniel - Simmons & Co. International

Right. Thanks, guys.

Bryan A. Shinn - President and Chief Executive Officer

Thanks, John.

Operator

There are no more questions at this time. I would like to turn the call back over to Bryan Shinn for closing comments.

Bryan A. Shinn - President and Chief Executive Officer

Thank you. Thank you very much. I just like to close the call with a few key thoughts. First, we believe we're going to see further downward pressure on volumes and pricing in Oil and Gas in the second quarter as we talked about, with the kind of declines that we expect in drilling and completions activity in Q2.

Second, we believe we'll see continued growth in profitability in the Industrial and Specialty Products segment. Obviously, that's been a big winner for us. We'll continue to drive strategic price increases and going to rollout more higher-margin products. We didn't really get into it on the call here today, but we have another eight to 10 products that I expect we'll rollout in 2016, and these are pretty exciting new products for the company.

And then finally, I want to just make sure that everyone knows what we're focused on as we get into 2016, here. And the three things that I talked about in my prepared remarks and that's cash, customers and consolidation.

I want to also thank all my colleagues at U.S. Silica for their fantastic efforts to meet the tremendous challenges that the company has faced over the last few quarters. And I want to thank our investors for their interest and support and all the encouragement that we received from them in these challenging times. And I certainly look forward to meeting and speaking with as many of you as possible in the future. Thanks, everybody, and have a great day.

Operator

This concludes today's teleconference. Thank you for your participation, and you may disconnect your lines at this time.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!