U.S. Silica Holdings (SLCA) Bryan A. Shinn on Q2 2016 Results - Earnings Call Transcript

| About: U.S. Silica (SLCA)

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

Q2 2016 Earnings Call

August 03, 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

Michael LaMotte - Guggenheim Securities LLC

Connor Lynagh - Morgan Stanley & Co. LLC

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

Marc Bianchi - Cowen & Co. LLC

Blake Allen Hutchinson - Scotia Howard Weil

John Daniel - Simmons & Company International

Judson E. Bailey - Wells Fargo Securities LLC

Robin E. Shoemaker - KeyBanc Capital Markets, Inc.

James Wicklund - Credit Suisse Securities (NYSE:USA) LLC (Broker)

Kurt Hallead - RBC Capital Markets LLC

Brian Uhlmer - GMP Securities LLC

Brandon B. Dobell - William Blair & Co. LLC

Operator

Greetings, and welcome to the U.S. Silica Second Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Michael Lawson, Director of Investor Relations and Corporate Communications. 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 our combined U.S. Silica's second quarter 2016 earnings and Sandbox Enterprises acquisition conference call. With me on the call today are Bryan Shinn, President and Chief Executive Officer; and Don Merril, Executive Vice President and Chief Financial Officer. We'll be using slides today in our discussion regarding the Sandbox acquisition. You'll find a copy of those slides posted in the Investor Relations section on our website at www.ussilica.com.

Before we begin, I'd 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 either of the two press releases the company issued last night 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 our second quarter press release or 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. Before we review our second quarter results. I'd like to take a few minutes to discuss our recently announced acquisition of Sandbox Enterprises. As Mike mentioned, we prepared a few slides, that provide an overview of the acquisition and illustrate why we are so excited about the complementary addition of Sandbox and the tremendous value we think it will bring to our customers and our shareholders.

Let's start with slide three. The acquisition of Sandbox is a truly unique opportunity to add a terrific business with the best proppant logistics solution in the market. At its core, Sandbox provides customers with cost-efficient last-mile delivery system, that decouple sand delivery from consumption on the well site.

I'll provide some more detail on Sandbox and its system shortly, but let me begin by saying that this acquisition, which significantly enhances our logistics capabilities aligned with our strategy of effectively managing the entire supply chain of frac sand from taking it out of the ground at the mine, to putting it back in the ground at the well site.

At the same time, it helps our customers lower overall well completion costs. With our expanded platform, we will be well-positioned to both increase our potential addressable market with the new offering and grow market share. We also see an opportunity to integrate Sandbox's proprietary solutions into our own logistics network.

By doing so, we can make our network even more efficient with capabilities for mobile transloading and in-basin proppant staging. Importantly, Sandbox delivers a transformative value proposition to customers, as its unique, containerized, delivery system increases transportation efficiency at multiple points across the supply chain.

Trucks can turn deliveries faster and jobsites become less congested, resulting in lower delivery costs for customers. In addition, as stricter safety standards for worker exposure to Silica were put in place, Sandbox's containerized storage units and micro vacuum delivery system, dramatically reduce silica dust and support regulatory compliance. The bottom line is that we believe the Sandbox acquisition will drive growth and create long-term shareholder value.

Let's move to slide four and walk through some of the key elements of the transaction. Total consideration for the acquisition is approximately $218 million, which will be funded through a combination of cash and equity. We expect that the transaction will be modestly accretive to 2016 EPS and to add $0.20 to $0.30 to 2017 EPS. We also believe that we can achieve operational synergies by integrating Sandbox's solutions into our operations.

For example, we expect to utilize Sandbox's capabilities at our mines and transload sites to store and direct ship product. In addition, we're excited to have the Sandbox team led by Founder, Josh Oren join our enterprise upon closing, which we expect to take place in mid-to-late August, subject to regulatory approvals and other customary closing conditions.

Turning to slide five, you can see that the Sandbox solution positions us well to capitalize on the evolving dynamics of the oil and gas industry. Increasingly, wells are demanding greater levels of proppant. Since 2013, the per-well demand for proppant has increased more than 70%, and is estimated to rise further in the coming years.

This trend has created significant logistics challenges for energy and frac service companies, as more proppant means more deliveries, more trucks, and more congested jobsites. Today's high-intensity completions often require 400 truckloads of sand or more, creating delivery delays, noise and dust at the well site. Many service companies are citing last mile proppant logistics as a major barrier when energy markets recover.

Sandbox addresses all of these issues through its patented, streamlined, storage and delivery system, which we believe has tremendous runway to grow in scale and gain further adoption throughout the industry.

So what is a Sandbox solution? Let's move to slide six and talk about the specialized equipment Sandbox makes and leases to customers. The core of the Sandbox system is the unique storage container they've created and patented. Each one of these steel, weatherproof containers hold approximately 22.5 tons of proppant for transport. To transport the units, Sandbox had designed specialized truck chassis, which offer highly efficient delivery, and represent a 60% lower investment versus traditional pneumatic trucks. Once delivered to a jobsite, the boxes are then loaded onto a customized conveyor cradle, which delivers the proppant directly into the blender hopper with a throughput of up to 25,000 pounds per minute.

Currently, Sandbox provides these solutions to clients in the most active U.S. oil and gas locations including the Bakken, Eagle Ford, Marcellus, Permian, and the DJ. On slide seven, you can see how all these pieces fit together to form a cleaner, safer and more efficient last mile delivery solution.

Beginning with the transload, Sandbox containers are loaded with sand and either shipped directly to the well or stacked onsite awaiting pickup. The unique design of the Sandbox container also allows for loading to occur at pop-up transloading sites along a rail spur without the need for heavily developed infrastructure. This can dramatically reduce delivery distance and eliminate the need for substantial capital investment and maintenance costs associated with traditional transloading operations.

Once at the jobsite, containers are offloaded and stacked in storage. Typical unload times are 5 minutes to 10 minutes for a Sandbox versus 30 minutes or more for a pneumatic truck. Operators also have the option to create virtually unlimited storage to pre-stage proppant.

When completion operations begin, stored containers are loaded directly onto conveyor cradles, which quickly and precisely dispense proppant into the blender hopper via high-speed conveyor belt. Depleted containers are replaced in real time until the job is completed. In total, this process increases overall fracking rates, reduces costs, and creates a much safer and cleaner work environment with less dust and reduced traffic congestion.

Let's wrap up on slide eight. Let me reiterate how excited we are about the potential of this highly complementary acquisition. We're confident that Sandbox will provide meaningful opportunities for continued growth and deliver substantial financial benefits and long-term value creation for our shareholders. Taking a step back, acquisitions like this certainly represent a key part of our growth strategy.

As I said previously, it all starts with our best-in-class balance sheet, which allows us to pursue meaningful accretive M&A opportunities like Sandbox and our recent NBR acquisition that add scale and greater capabilities to our platform. These attractive opportunities allow us to profitably grow market share in the oil and gas segment by capitalizing on industry trends and providing our customers with an expanded portfolio of products and more efficient low-cost solutions. We continue to maintain a pipeline of M&A opportunities across a range of areas, and we'll remain disciplined in exploring further transactions.

With that, I'd now briefly like to discuss our performance in the second quarter before turning the call over to our CFO, Don Merril, for additional color on our financial performance, then we'll open up the call for questions.

Our second quarter results, once again, demonstrated the strength of our low-cost diversified business model. Despite the continued headwinds in our Oil and Gas business, and a 26% decline in the average U.S. rig count, total company revenue of $117 million declined only 5%, sequentially.

Our Oil and Gas business showed great resilience in the face of a very challenging market environment, with 1.3 million tons sold, down just 6%, sequentially. Adjusted EBITDA for the quarter of $5.4 million increased marginally from the first quarter due mostly to our continued cost reduction success and outstanding ISP results. Our Industrial and Specialty Products segment recorded record contribution margin in the quarter, and had the highest contribution margin per ton in our company's 116-year history. A combination of higher margin products and the addition of new profitable business were largely responsible for driving these impressive results.

In Oil and Gas, unfavorable mix, loss of fixed cost leverage and continued pricing pressure early in the quarter drove negative contribution margin of $6 million. We continue to work diligently to drive costs out of the business, and we made further workforce reductions in the second quarter. We've now brought our salary head count down over 40% from the peak. We're on track to deliver nearly $50 million of cost improvements this year, driven by head count reductions, transportation rate negotiations, support from our supplier partners, and operational efficiencies.

In addition to the Sandbox deal, we signed an agreement last month to acquire NBR Sands, a low-cost, high-quality regional frac sand producer located in Tyler, Texas. NBR produces the 40/70 and 100 mesh grades that are in high demand today, as E&Ps shift their completion designs towards more slickwater fluid systems to further reduce completion costs. This is an excellent mine and plant that has been operational and has remained profitable through the cycle, but has even greater potential that, I believe, will be unlocked by utilizing U.S. Silica's strong customer relationships and robust logistics network.

Turning to our Industrial business, we're making great progress this year on our product development initiative. Some of the highlights from this quarter include ramping up sales of the new glass product for the automotive and building products industries that uses recycled materials, and we also netted the first commercial installation of our antimicrobial water treatment product. Going forward, I expect these higher margin products to make up an even larger portion of our total ISP contribution margin and drive continued bottom-line growth.

Finally, I'd like to make a few comments about our market outlook for Oil and Gas in the second half of the year. Several industry experts have predicted a coming surge of demand for frac sand. While we also expect to see significant increases in sand used per well, to-date our demand has not picked up significantly.

We are, however, beginning to see a few green shoots, which may be signs of an impending market recovery. For example, we've had numerous conversations recently with customers who've indicated a renewed interest in securing long-term supply contracts. In addition, we've seen activity levels in our 30-day open order book begin to tick up in the last few weeks, indicating the potential for an incremental increase in demand.

Another positive sign is that sand pricing in Oil and Gas appears to have stabilized over the last couple of months. In fact, we've begun to test the waters for potential price increases in specific parts of certain markets. So have we hit the bottom of the cycle? Well, our largest customers believe that we have. Our view is that we have to continue to do the things we've done over the past several quarters to position our company for success by strengthening our market position, enhancing customer relationships, improving operational efficiencies, expanding our distribution network, and last-mile logistics capabilities, and maintaining a strong balance sheet, which has allowed us to play offense, while most of our competitors have been forced to play defense during this epic downturn.

And with that, I'd now like to turn the call over to Don, to review our quarterly financials. 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 segment for the second quarter of 2016 of $64.9 million, declined 12% sequentially compared with the first quarter of 2016 while revenue for the ISP segment of $52.1 million represented an increase of 7% when compared to the previous quarter.

Contribution margin from Oil and Gas in the quarter was a loss of $6 million, compared with a profit of $851,000 in the first quarter of 2016. On a per ton basis, contribution margin for Oil and Gas was a negative $4.50 compared with a positive $0.60 for the first quarter of 2016. As previously discussed, lower volumes and the associated impact on fixed cost leverage, unfavorable mix and early quarter pricing pressure partially offset by our stringent cost-cutting initiative, drove the margins negative for the quarter.

Contribution margin for our Industrial and Specialty Products segment was $21.5 million, an increase of 27% sequentially over the first quarter of 2016, and 10% on a year-over-year basis. Contribution margin per ton for the ISP business of $23.77 improved 21% sequentially from the first quarter of 2016, and 26% 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 increased higher margin product sales, and the impact of the strategic price increases implemented earlier this year.

Turning now to total company results; selling, general and administrative expenses for the second quarter of $14.6 million were down compared with $15.5 million for the first quarter of 2016. As Bryan noted, we are taking significant actions this year to keep our overhead in line with the current business environment through reductions in head count and discretionary spending.

Some of these savings, however, are anticipated to be offset by increased business development expenses, as we complete and pursue various M&A opportunities in future quarters.

Depreciation, depletion and amortization expense in the second quarter was $15.2 million compared with the $14.6 million in the first quarter of 2016. The sequential increase in DD&A was mainly driven by increased depletion costs.

Continuing to move down the income statement; interest expense for the quarter was $6.6 million, virtually flat when compared with the interest expense for the first quarter of 2016. Other income was $608,000 for the second quarter compared with other income of $1.8 million in the first quarter of 2016. The first quarter, you may recall, was positively impacted by a $1.5 million gain on an insurance settlement that we received in the period.

From a tax perspective, during the quarter, we recognized an income tax benefit of $9.6 million and the estimated annual effective tax rate used for the second quarter was 44%, which is consistent with our rates in Q1.

Turning now to the balance sheet. Cash and cash equivalents as of June 30, 2016 totaled $454.2 million, compared with $277.1 million at December 31, 2015. We tend to use approximately $200 million of this cash to complete our announced acquisitions of NBR Sands and Sandbox. As of June 30, 2016, our working capital was $513.9 million and we had $46.7 million available under our revolving credit facility. As of June 30, 2016, our total debt was $490 million. We generated $5.1 million of operating cash and incurred capital expenditures of $17.3 million in the second quarter of 2016, largely associated with the company's purchase of additional reserves adjacent to our Ottawa, Illinois facility and investments in various maintenance, expansion, safety and cost improvement projects.

Subject to our continuing evaluation of market conditions, we anticipate that our capital expenditures for the full year 2016 will range between $28 million and $33 million, which again includes the aforementioned purchase of reserves in Ottawa. We remain steadfast in our efforts to reduce our cost structure, spending capital prudently and identifying the best uses of our cash to maximize financial returns.

We are utilizing our strong balance sheet to make accretive acquisitions that will help us grow our business, improve our competitive stance in the marketplace, and ultimately make our customers more successful. We continue to manage our working capital tightly with a very close eye on our accounts receivables in this difficult market. Our actions are centered on ensuring that we remain in the best position financially for long-term success in the cyclical energy market.

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

Bryan A. Shinn - President and Chief Executive Officer

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

Question-and-Answer Session

Operator

Thank you. The floor is now open for questions. Our first question is coming from Michael LaMotte of Guggenheim. Please proceed with your questions.

Michael LaMotte - Guggenheim Securities LLC

Thanks. Good morning guys. And congratulations on the transaction.

Bryan A. Shinn - President and Chief Executive Officer

Good morning, Michael.

Michael LaMotte - Guggenheim Securities LLC

I guess the first question would be on the incremental CapEx commitment going forward, particularly, I guess, as we look into next year. I noticed in the slides there is a 10% estimated share of Sandbox's in the trucking space, and it's obviously lower than your mining capacity and market share. So I'm just wondering what that mix could look like over time, and what the incremental capital commitments could look like just to build that out?

Bryan A. Shinn - President and Chief Executive Officer

Yeah. It's a great question, Michael. And I think you've picked on the fact that we think there is tremendous growth opportunities with Sandbox, and given that they've been able to get to 10% market share, actually the way it's trending right now, probably a bit higher than that. And then sort of epic downturn, and penetrate the market that way is pretty impressive. So we think there is a lot more room to grow the market penetration. Certainly, our vision would be that in the future, almost every ton of sand that's moved across the industry, out the last-mile is moved in, in one of our Sandbox's.

In terms of the capital intensity, a lot of it depends on the business model. There's lots of different models here. In some cases, Sandbox invest the capital in the additional equipment required as the market gets penetrated, in other cases the customers do that, and there is lots of permutations of that. I would say that, in terms of capital intensity, it's certainly not nearly as intense as the sand business, when you look at the capital required to generate $1 of earnings. So I expect we will provide some capital for sure, but it will be relatively modest, and I think this business is going to generate a lot of cash as well. So it should be self-sustaining at some point.

Michael LaMotte - Guggenheim Securities LLC

And then, just as a follow-up. If I think about the fact that this is a chassis and container business, you're not really getting into the trucking business per se, because you're – it's not like you're hiring drivers and tractors, is that correct? You have a solution here, but from a labor and fixed assets standpoint, that's still essentially a third-party service. Is that correct?

Bryan A. Shinn - President and Chief Executive Officer

So the way the model works today, the equipment tends to be leased to customers, and Sandbox in many cases does provide the transportation solution. We have a chassis and a box arrangement that we use to transport the sand out to the wellhead. And so, they do employ some drivers, and then there are some contract and third-party drivers, and in some cases, customers can choose their own carrier. So it's sort of a mix right now, and we'll have to see how that evolves over time. I think our focus is to make sure that we've got the most cost competitive solution out there, and we continue to generate a lot of value for the customers of Sandbox.

Michael LaMotte - Guggenheim Securities LLC

That's great. Thanks, Bryan.

Bryan A. Shinn - President and Chief Executive Officer

Thanks, Mike.

Operator

Thank you. Our next question is coming from Connor Lynagh of Morgan Stanley. Please proceed with your question.

Connor Lynagh - Morgan Stanley & Co. LLC

Hi, good morning.

Bryan A. Shinn - President and Chief Executive Officer

Hey, good morning, Connor.

Connor Lynagh - Morgan Stanley & Co. LLC

Just wondering if you could talk us through how this is going to fit longer term in your logistics network. You obviously cite the ability to use that in Texas and Oklahoma mines, but given the operations in the Bakken and elsewhere, can you just talk us through the long-term vision for how this integrates with your existing railcar network.

Bryan A. Shinn - President and Chief Executive Officer

Sure, Connor. I think you sort of start at the top level. We believed for a long time, and you've heard us talk about this that the game here is to get the absolute lowest cost delivered out to the wellhead, and I think U.S. Silica started a lot of the trends in this industry. We were some of the first to do certain things at our mine sites. I think we were the first ones to really embrace the notion of transloading and pushing that in the industry, and now I think we're at the forefront again in taking this last mile step.

And so, for us, it's all about trying to get the lowest delivered cost out to the wellhead. And we think Sandbox is that solution. It's a premier solution in the industry. And so, I think there is all kinds of things we can do with Sandbox as part of our portfolio now. For example, we can offer sand priced at the wellhead, turnkey in the boxes as a solution service. So there are many things that we can do, and I think it's right in line with our vision of being a low cost sand provider at the wellhead.

Connor Lynagh - Morgan Stanley & Co. LLC

How generally are you approaching? And I know we're early in the game here, but how are you approaching marketing this? Is this a sale to the E&P? Is this a sale to the service company, and to what extent does it integrate with the existing structure, both logistically and at the wellhead?

Bryan A. Shinn - President and Chief Executive Officer

So we view this as a complementary piece. So I think it's an add-on. Certainly, we don't do anything in the last mile today. So I think it's important for investors to understand that this is – it's kind of new value space for us. And so, we're opening up a new pool of profits, if you will, that we can access. And if you look today, Sandbox customers are all service companies. Certainly, service companies are the primary target here, as they will be the ones who'll benefit substantially from this. Certainly, energy companies will as well, given all the cost advantages and other benefits that the system brings.

Connor Lynagh - Morgan Stanley & Co. LLC

Got it. Thanks a lot.

Bryan A. Shinn - President and Chief Executive Officer

Thanks, Connor.

Operator

Thank you. Our next question is coming from Scott Gruber of Citigroup. Please proceed with your question.

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

Good morning, gentlemen.

Bryan A. Shinn - President and Chief Executive Officer

Hey, good morning, Scott.

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

So Sandbox, it sounds like a very interesting solution. Have you studied the growth potential for the business? What are the biggest impediments to rapid broader adoption of the system?

Bryan A. Shinn - President and Chief Executive Officer

Yeah. So it's a really good question. It's something that we spend a lot of time thinking about. There are few barriers out there that are obvious. One is that the current infrastructure around pneumatic trucks. So that the pneumatic trucks themselves, and the Sand King they are so called Mountain Movers. Big infrastructure out there to support the existing way of getting sand out to the wellhead. So that's probably the biggest barrier is just having that infrastructure attrit off.

A lot of it's in storage right now. So it actually might be a great time from our view to come in and offer this solution. And I think as the market ramps back up, service companies will have a choice to make, do I go out and take my Sand Kings out of storage and spend a lot of money to repair them, or do I switch to the Sandbox solution. So it feels like a good time to do that.

I think probably the second biggest barrier is just lack of understanding of all the value that's delivered by this system. When you step back and look at all the different points of value for service companies here, it's just a massive list, and I think it's an overwhelmingly positive value proposition, and hopefully, we can add our voice too out in the marketplace, and introduce the Sandbox team to our network of customers and help break down some of the barriers and misconceptions that might exist around a system like this.

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

Got it. What's the typical useful life on the Sand Kings?

Bryan A. Shinn - President and Chief Executive Officer

I would guess somewhere in the neighborhood of 10 years. I don't know that specifically, but that's what I've heard from people.

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

Okay. And then, any color on the synergies incorporated into the accretion estimate?

Bryan A. Shinn - President and Chief Executive Officer

So there are a lot of synergies here, and some are relatively obvious, others not so much. I think the first one is that we can plug the Sandbox team into our customer network, and it certainly broadens their sales opportunity. The reverse of that is true also. Sandbox has some customers that we don't do a lot of business with today. So I think their just kind of customer contact and networking that is going to help. We also believe that we can load these boxes and put them through our best-in-class logistics network, and so we think that's going to help with market penetration.

I think we're also looking at the opportunity to sell sand and logistics together kind of at an all-in price at the wellhead. Another interesting one, and I think everybody knows that we're pushing hard into regional sands because we think that has a big part to play in the future of this industry. Having these Sandboxes substantially increases the shipping radius from our regional sand mines – currently we'd estimate it adds another 50- to 100-mile reach beyond the current radius out into the market. So we think there is opportunities to grow our regional sand business substantially.

And then you get into other things that are more sort of future oriented. As we think about new transloads, we probably can configure them differently for box loading, may be much cheaper to do that. And there's another interesting idea here that has only begun to be explored, and that's this notion of creating pop-up transloads.

So, imagine a Sandbox transload can be a one- or two-acre patch of land that's got gravel on it, where the boxes are stacked. There's no silos, there's no building, there's no complicated infrastructure. You could kind of have these pop-up transloads come and go across the country, depending on how work is done. So we thought about all those things, and my guess is as we get deeper into this and spend more time with the Sandbox team, there'll be a whole another laundry list of opportunities. So we're pretty excited about the value that we can create here, Scott.

Donald A. Merril - Vice President and Chief Financial Officer

And, Scott, let me just add to that, just as a point of clarification. In our accretion estimate that we gave for 2017, there is a very immaterial amount of synergies in that number. To try and be as conservative as we always are, the synergies that Bryan just spoke about are all plus ones to the Enterprise acquisition.

Bryan A. Shinn - President and Chief Executive Officer

Yeah. I get excited about all the big things down the road, and Don and the team can reel me in on that. So, thanks, Don.

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

Well, it sounds like a great year with NBR and Cadre, and the rest of the footprint. So, congrats. Thanks.

Bryan A. Shinn - President and Chief Executive Officer

Thanks, Scott.

Operator

Thank you. Our next question is coming from Marc Bianchi of Cowen & Company. Please proceed with your question.

Marc Bianchi - Cowen & Co. LLC

Thank you.

Bryan A. Shinn - President and Chief Executive Officer

Good morning, Marc.

Marc Bianchi - Cowen & Co. LLC

Don, just a follow-up. Good morning. Just a follow-up on that last point about the accretion assumption. I mean if we just sort of annualize where the business is today, how much different would that be from the $0.20 to $0.30 accretion that you are talking about for 2017?

Donald A. Merril - Vice President and Chief Financial Officer

There is some uptick next year in the business as the company themselves have looked at increasing their market share. But it is going to be – the numbers that we have out there for accretion are roughly what we have estimated for full year 2016.

Marc Bianchi - Cowen & Co. LLC

Okay. So perhaps annualized at the low end and then some uptick in the market to get to the high end. Is that a fairway to think about it?

Donald A. Merril - Vice President and Chief Financial Officer

That's a fair way to think about it.

Marc Bianchi - Cowen & Co. LLC

Okay. Great. Thanks. How much of the 10% market share would you say is kind of regional sands versus Northern White at this point for Sandbox?

Bryan A. Shinn - President and Chief Executive Officer

Yeah. So it's a mix, Marc. And at the end of the day, the Sandbox team has been pretty much agnostic to the type of sand that's used in this solution. And so it all depends on what the customers are pumping at the time. So I would say that comes and goes. But there's a really nice – there's a nice suite of customers that come along with this deal, contracts and things like that. So I think the customer side of it looks really good.

Marc Bianchi - Cowen & Co. LLC

Okay. And then thinking about just the value proposition here, is there any way to generalize how much you can lower the delivered cost per ton with this opportunity compared to the conventional method?

Bryan A. Shinn - President and Chief Executive Officer

Yeah. So I think that, I don't really want to share too many specifics on that for competitive reasons, but let me just give you sort of a hit list of the things that disappear when you use Sandbox versus a traditional pneumatic solution or things that get reduced, for example. So there's fewer trucks, and that means fewer drivers. It's almost no demurrage. There's less maintenance and clean-up at the well site, less shrinkage. As I mentioned in my prepared remarks, that we use less expensive and more available trucks to pull the chassis around, so the actual cost of the truck itself is less.

A big one, and this is where it gets harder to estimate, Marc, is that we think there's a tremendous impact, positive impact to crew productivity. Customers are telling us that they can see substantial increases in the amount of stages completed per day, and this can lead to, depending on the size of the pad job, completing the whole pads, several days sooner. So that's another one that's in there. And there's less waste in this whole process. And then on top of that, we think this can be a really important part of helping the service companies and the energy companies get compliant with the impending OSHA regulations that are kicking into place over the next couple of years. So you add all that up, and I think there's a tremendous amount of value generated there for our customers. The challenge always is to have those discussions and make sure there is a kind of fair sharing of that value.

Marc Bianchi - Cowen & Co. LLC

Okay. Thanks for the comments. I'll jump back in the queue.

Bryan A. Shinn - President and Chief Executive Officer

Thanks, Marc.

Operator

Thank you. Our next question is coming from Blake Hutchinson of Howard Weil. Please proceed with your question.

Blake Allen Hutchinson - Scotia Howard Weil

Good morning.

Bryan A. Shinn - President and Chief Executive Officer

Good morning, Blake. How are you doing?

Blake Allen Hutchinson - Scotia Howard Weil

Very well. Why don't you just chat a little bit about, I guess, the base business here. Bryan you're loud on, in your opening commentary that you've seen some customers coming in and doing some checks in terms of perhaps engaging in some contracts, or I guess, that's something we haven't really spoken about, and perhaps at the business level maybe you can correct us on this. You've lost a little bit of fidelity with what the long-term contract entailed as we're headed into the downturn. Maybe just a big picture or review of what you kind of see contracts evolving into as we go into potentially another expansionary cycle. What can you do to, I guess, extract some value for Silica as we kind of re-engage on the contract front?

Bryan A. Shinn - President and Chief Executive Officer

No, it's a really good question, Blake, and I found it very interesting that in Q2 we've had several discussions initiated by and large by customers around contracts, increasing volumes of current contracts, signing new contracts. And so, I'm pretty encouraged by that. And I think that we'll just continue to look very carefully at how we structure those deals. And one of the things that we've done so far in the discussions is make sure that any type of contract that we sign gives us ability to recover margins as the market recovers.

And so, finding ways to peg the contracts to market indicators like the WTI prices or number of rigs, things like that is where we're going. And I feel like that's where the industry is going to go as well. I think everyone is looking to make sure that as things get tight again, which it feels like they will, although, it's hard to predict when that's going to happen, but you just do the math on completion intensity, and the amount of sand that's now needed per rig, or per 100 rigs, as we've talked about. It feels like there's – it's almost certain that things will tighten up, and the challenge is to structure the contracts in a way that are fair to both parties.

Blake Allen Hutchinson - Scotia Howard Weil

Okay. So we should be thinking in terms of volume based minimums, perhaps with some price triggers at different WTI or activity levels.

Bryan A. Shinn - President and Chief Executive Officer

So I would say that share of wallet is probably is more common than volume minimums. Most of the customers that I've talked to are a bit leery to sign up to volume minimums, but we actually have had a couple of customers that are talking volume minimums with us. So we'll see how that plays out. I feel like the more confident customers, who've got a good feel for what's going to happen out in the market with sand are getting ahead of the curve and trying to sign up with the leading players in the industry like U.S. Silica.

Blake Allen Hutchinson - Scotia Howard Weil

Okay. And then, just following up on lot of the Sandbox conversation, I guess, trying to pin it down a little bit more functionally, as this rolls in to the financials, will it be something that we just see that is more embedded in your average selling price and contribution margins within Oil and Gas, or is this very definitively kind of the third reporting division?

Donald A. Merril - Vice President and Chief Financial Officer

No. Right now, we anticipate this to be part of our overall logistics network. So it will be rolled up as part of the Oil and Gas segment.

Blake Allen Hutchinson - Scotia Howard Weil

Okay. Excellent. Thank you.

Bryan A. Shinn - President and Chief Executive Officer

Thanks, Blake.

Operator

Thank you. Our next question is coming from John Daniel of Simmons & Company. Please proceed with your question.

John Daniel - Simmons & Company International

Thanks. I'll stick to operation things as well. Bryan, can you just speak to your July volumes relative to the Q2 monthly average?

Bryan A. Shinn - President and Chief Executive Officer

Yeah. So the quarter was really interesting one. April was relatively slow, May was pretty strong, and then we saw things tail off a bit in July, John, but – sorry in June rather, but as we look back at that, there were a couple of specific reasons that we saw June tail off a bit. One of our big customers pushed a lot of work out into Q3. One customer slowed down, they told us specifically, we're trying to manage our cash for Q2, so we're limiting our purchases of sand in June. And then one that, I guess, you could call sort of self-inflicted, we continued to tighten our credit policies during the quarter, given the financial situation with some of our customers. So, anyway long story short, as we rolled into July, our volumes were up versus Q2 exit. And I'm also excited to see that for the first time in a while, our 30-day advance order book is up pretty substantially. So it feels like there could be some green shoots out there. I'm feeling better about Q3 volumes certainly than Q2.

John Daniel - Simmons & Company International

Okay. Thank you. We occasionally hear anecdotes that sand mines selling sand to one another. Can you comment on whether or not any of your Q2 volumes or any sand sales made quarter-to-date include sand obtained from any of your competitors, and to the extent you have done one, can you explain why and how much?

Bryan A. Shinn - President and Chief Executive Officer

Yeah. We haven't done a lot of that, John. I mean there is occasions where competitors may swap small volumes of product in this industry, if somebody is long on a particular grade and somebody else is short on the grade, and they both have orders that kind of match up. We've done those kind of things in the past, but it's pretty small.

John Daniel - Simmons & Company International

Fair enough. And then just the final one for me is in your prepared remarks you said that you were testing the waters for certain price increases, any color on that would be very helpful.

Bryan A. Shinn - President and Chief Executive Officer

So we're looking across certain basins with certain products, depending on supply and demand. And one of things that, I think, we've been pretty consistent on saying is that even though, I think, we all tend to look in one way or another at supply and demand at a national level, the reality is that it's all about supply and demand at kind of a sub-basin level. So the subparts of the Permian or the Scoop and Stack or whatever. And so what we find is that we're starting to see some shortages out there in certain locations in certain grades, and so we're working with customers to – still be fair, but also to try to get the right value for that relatively scarce product at that time.

John Daniel - Simmons & Company International

Okay. Are you seeing any shortages within the coarser grades or is it the others, the finer sands?

Bryan A. Shinn - President and Chief Executive Officer

I would say generally the finer grades are shorter than the coarser products, right now. And this is all, in my opinion, driven by the move to more slickwater fluid systems that tend to use the finer products.

John Daniel - Simmons & Company International

Okay. Thanks guys.

Bryan A. Shinn - President and Chief Executive Officer

Thanks John.

Operator

Thank you. Our next question is coming from Jud Bailey of Wells Fargo. Please proceed with your question.

Judson E. Bailey - Wells Fargo Securities LLC

Thanks. Good morning.

Bryan A. Shinn - President and Chief Executive Officer

Good morning Jud.

Judson E. Bailey - Wells Fargo Securities LLC

Question just more on the core business at this point, and thinking about third quarter and fourth quarter, you're seeing an uptick from green shoots as you put the rig count is up, obviously the oil prices pulled back. You guys have – your volumes have pretty significantly outpaced rig counts for a while now. Can you help us think about maybe how you see volumes shaking out in perhaps the third quarter and fourth quarter? And then in line with that as well, with the pricing environment, more volumes, how we can think about maybe contribution margin over the next couple of quarters?

Bryan A. Shinn - President and Chief Executive Officer

So I would say that with a big caveat that it's obviously hard to predict, and things move pretty quickly here, especially given that oil has now dipped below $40. So with that as a caveat, I would expect increased volumes in Q3 somewhat, Q4 is always tough because we just don't know how the industry is going to response throughout the holidays, but I would say generally I'm fairly bullish on volumes. It feels like pricing is, I would call it sort of flattish right now. I think we have an opportunity as we said a few minutes ago to do some price increases, but they're not going to be across the board increases. So volume pretty bullish, pricing flattish to maybe a tailwind.

Judson E. Bailey - Wells Fargo Securities LLC

Does that – I guess, if we were to think about volumes being up, if the rig counts up high single-digits, is it fair to think that your volumes could be up at least 10%, excluding NBR?

Bryan A. Shinn - President and Chief Executive Officer

Yeah. I think that's not an unreasonable assumption, Jud.

Judson E. Bailey - Wells Fargo Securities LLC

Okay. And in that environment can contribution margin per ton get back up to, say, breakeven or higher?

Bryan A. Shinn - President and Chief Executive Officer

So I think we'll start to get close to breakeven. I feel like it's going to take more than just that volume increase to get there. We'd have to see some pricing to get there as well. But certainly, I'd expect an improvement in contribution margin per ton going forward.

Judson E. Bailey - Wells Fargo Securities LLC

Got it. Okay. I appreciate that. And I've got a follow-up just on the modeling and thinking about Sandbox. As we're thinking about modeling accretion and just kind of upside potential, should we think about it more on the volume side, or do we see it more in lower cost per ton, or just the combination of both? I'm just trying to think through how we're going to think about this as you grow the business, and how that's going to translate into the P&L, and your operating segments?

Bryan A. Shinn - President and Chief Executive Officer

So probably the simplest way to model it is in terms of volume. So if you think about the kind of sand that's been put through the Sandbox system today, as I said it's 10% of the market or more. We think the market today is between 25 million tons and 28 million tons, so you kind of do the math on that. And I think probably easy is just to model as a direct ramp-up to volume which would equate to market penetration. Obviously, we'll have to look at pricing and a variety of other things, but that's probably the simplest way to look at it, Jud.

Judson E. Bailey - Wells Fargo Securities LLC

Okay. Great. I appreciate it. I'll turn it back. Thanks.

Bryan A. Shinn - President and Chief Executive Officer

Thanks.

Operator

Thank you. Our next question is coming from Robin Shoemaker of KeyBanc Capital Markets. Please proceed with your questions.

Robin E. Shoemaker - KeyBanc Capital Markets, Inc.

Thank you. So, Bryan, I was hoping you could give us an update on the idle railcar situation as it stands today, and what it cost you in the second quarter. You provided that figure previously. And then your negotiations ongoing about future railcar deliveries and your hope to cancel those?

Bryan A. Shinn - President and Chief Executive Officer

Sure, Robin. So we have about 2,600 railcars in stores today that's down 200 railcars or so from our Q1. We had a few roll-offs and we also – we're able to sublease some cars. I would expect based on the numbers I saw that the cost of those for the quarter was somewhere between $5 million and $5.2 million, pretty consistent with where it's been. I would say also as we talk about when we announced the NBR deal that we would expect several hundred cars to be used there, as we get more of that volume moving on rails. So that takes us down a bit more.

We continued the negotiations with our rail partners. I would say that, generally they recognize the issue. There're somewhere between 25,000 to 30,000 cars in storage across the country, based on our estimates. And just based on that, and sort of the reality, our partners are showing a fair amount of flexibility in working with us. And another thing that has come out of this is that they clearly have a strong desire to work with U.S. Silica in the future. And they see us as somebody who is going to continue to lease a lot of cars and has the financial wherewithal to actually pay the leases right. So we're a pretty attractive customer. Put all that together, and I'd say that I expect a positive outcome from these discussions.

Robin E. Shoemaker - KeyBanc Capital Markets, Inc.

Okay. Just my follow up-and switching topics a bit here. On the Sandbox, just trying to picture how this works at the well site. Is the Sandbox delivery system versus the conventional system a truly either/or situation? Are there situations where you're delivering part of the sand required for the well site, and the pneumatic trailers, the conventional trucks are also involved in delivering sand to the same well site?

Bryan A. Shinn - President and Chief Executive Officer

No. I think it's typically a Sandbox only solution. So, I think, it's either/or.

Robin E. Shoemaker - KeyBanc Capital Markets, Inc.

Okay. Good. Thanks for that.

Bryan A. Shinn - President and Chief Executive Officer

Okay. Thanks, Robin.

Operator

Thank you. Our next question is coming from Jim Wicklund of Credit Suisse. Please proceed with you question.

James Wicklund - Credit Suisse Securities (USA) LLC (Broker)

Good morning, guys. Congratulations on the Sandbox acquisition.

Bryan A. Shinn - President and Chief Executive Officer

Thanks, Jim. Good morning.

James Wicklund - Credit Suisse Securities (USA) LLC (Broker)

But don't underestimate these guys from SMU. A question, if I could, on pricing. Your Oil and Gas sand pricing declined in Q2. It was much less than your peers, and I noticed that your sand sold in basin had spiked up. Can you talk about what you did in pricing in the second quarter in Oil and Gas, and how you did so much better than your peers?

Donald A. Merril - Vice President and Chief Financial Officer

Well, what we saw was pricing start to hit us in April and May as we continued to look after market share. We saw about, I would say, approaching about a 4% reduction in price on a quarter-over-quarter basis. So again in keeping with our strategy to make sure that we have the right product in the right place for our customers.

James Wicklund - Credit Suisse Securities (USA) LLC (Broker)

Okay. That was impressive. And if I could change from a follow-up on the ISP business, what's the outlook for that sector? We all have our opinions on the Oil and Gas side, but none of us pay that much attention to industrial. What's the outlook for that sector? And with a 21% sequential increase in contribution margins, can you see them going significantly higher?

Bryan A. Shinn - President and Chief Executive Officer

Yeah. So it's a really good question, Jim. And I have to tell you I'm extremely proud of the work that our ISP team is doing, and it's something we've talked about for a while as a really important part of the company, and I think now, given the sort of depths of the downturn here, everybody understands why we like this business so much. This business just continues to amaze...

James Wicklund - Credit Suisse Securities (USA) LLC (Broker)

Me too. Me too.

Bryan A. Shinn - President and Chief Executive Officer

Yeah. This business continues to amaze me. We set a number of new records again this quarter. I think the product pipeline is really strong. We highlighted two new products, in particular, that we've really ramped up recently. One was a glass product that uses some recycle materials, and then we also talked about our new antimicrobial product, which has gotten a real foothold in some industrial applications. I think you're going to see a continued stream of new products coming out from us, and at the same time we'll maintain our market leading position, either we're number one or number two in all the other segments that we work in.

So I'm really optimistic about ISP. And I think there is also, as I talked about before, probably some bolt-on M&A opportunity here as well, probably not necessarily the size of things we're doing in the Oil and Gas, but there are interesting opportunities there also. So I think this will just become more and more important part of the company going forward, quite frankly.

James Wicklund - Credit Suisse Securities (USA) LLC (Broker)

And with that level of technology, I would think that your contribution margins could increase, right?

Bryan A. Shinn - President and Chief Executive Officer

Well, it's possible. It's hard to forecast. We don't really focus so much on the contribution margin per ton. It's kind of an outcome. What we're really trying to do is grow overall contribution margin dollars. So the team is always looking at that, but by its nature if you're introducing a suite of kind of high end, hi-tech products that they tend to be priced higher, and have higher margins, so just from a mix enrichment standpoint, there's probably favorable dynamics there for increases in contribution margin per ton. But it may go up and down a bit quarter-to-quarter just depending on what sells in which quarter, but I'm pretty excited about that business, I'll tell you.

James Wicklund - Credit Suisse Securities (USA) LLC (Broker)

Okay, guys. Thanks much.

Bryan A. Shinn - President and Chief Executive Officer

Thanks, Jim.

Operator

Thank you. Our next question is coming from Kurt Hallead of RBC Capital Markets. Please proceed with your question.

Kurt Hallead - RBC Capital Markets LLC

Hey, good morning.

Bryan A. Shinn - President and Chief Executive Officer

Good morning, Kurt.

Kurt Hallead - RBC Capital Markets LLC

So just curious as to whether or not you can give us some sense on the volume mix for the quarter between Northern White, brown and resin coated?

Bryan A. Shinn - President and Chief Executive Officer

So the resin coated sales are relatively small. There is not a tremendous amount of resin coated product being sold today. It's probably 1% to 2% of the mix, something like that. I would say generally, we're probably 60% to 70% Northern White, and 30% plus or minus regional sands right now, of course, that excludes NBR since we don't own that yet.

Kurt Hallead - RBC Capital Markets LLC

Great. And then on the pricing front, I was wondering if you can give us some general sense as to the split between transportation and logistics and raw sand, how that worked out?

Donald A. Merril - Vice President and Chief Financial Officer

Could you ask that question again, I'm not sure I understood the question.

Kurt Hallead - RBC Capital Markets LLC

Yeah. So you had about $50 average pricing per ton for Oil and Gas in the quarter, how much of that was logistics versus the frac sand component?

Donald A. Merril - Vice President and Chief Financial Officer

Yeah. We really haven't gone into the details around splitting out exactly what our ASP represents because of this split out of in-basin sales or transportation included sales versus plant sales.

Kurt Hallead - RBC Capital Markets LLC

Okay. All right. And then just on Sandbox, very interesting acquisition. I could see how it definitely benefits your business plan going forward. It also seems in some ways to be very similar to some of your larger customers recent product introductions, for example, something called the SandCastle. Is this a competing product, or is a complementary product, to maybe what some of your larger customers are trying to do?

Bryan A. Shinn - President and Chief Executive Officer

Yeah. It's a really good question, Kurt. So it's completely different from say a SandCastle. In my understanding of it anyway, SandCastle is kind of a giant vertical silo that sits out at the well site and gets filled up still by pneumatic trucks, right. And so, our system doesn't have any pneumatics. The boxes are filled off-site at a transload, or some other location and trucked out to the well site and stacked out there. And there's a continuous flow of those boxes during the fracking operation. So it's very different.

I think the SandCastle is just kind of another version of a Sand King or a Mountain Mover, just maybe a bigger one that's kind of a stationary silo. But it still has all the problems associated with the pneumatics and the dust and the expense and the demurrage and the long line of trucks. I'm not sure how many folks on the call today have ever been out to a well site being fracked, but there's always a long line of sand trucks waiting to be unloaded. And those problems are really only solved with the Sandbox solution.

Kurt Hallead - RBC Capital Markets LLC

Okay. Great. That's it from me. Thanks so much.

Bryan A. Shinn - President and Chief Executive Officer

Thanks, Kurt.

Operator

Thank you. Our next question is coming from Brian Uhlmer of GMP Securities. Please proceed with your question.

Brian Uhlmer - GMP Securities LLC

Thank you. Thanks for squeezing me in, gentlemen.

Bryan A. Shinn - President and Chief Executive Officer

Good morning, Brian.

Brian Uhlmer - GMP Securities LLC

I was curious heading back to kind of your existing operations. On your reserves out in Voca, how expandable is that facility? What are kind of the bottlenecks out there? And is putting more capital to work there a possibility as we look at kind of their regional model vis-à-vis buying plants kind of in that neighborhood or some other regional facilities?

Bryan A. Shinn - President and Chief Executive Officer

Yeah, it's a really, really interesting question, Brian. It's something that we've looked at. And we've done some incremental expansion there, kind of few brownfield type things where you put in a bigger pump or things like that. The issue now is that we run into permitting, and particularly water permitting. If you've ever been out in that part of the country, water is a bit scarce, and it's pretty far below the ground level. So I would say that that would likely be the biggest issue.

We have plenty of reserves there, and there's plenty of physical space to do it. So we just have to get into permitting, and then, I would say, the economics of doing that. The Voca site is great. One of the issues with it though is it doesn't really have any rail access. So you are pretty much locked into the trucking distance that you can make from the mine out to the well sites. And one of the things we like about this Sandbox deal is that, for mines like Voca it probably expands that reach another 50 miles or 100 miles, which will take in a lot more wells. And so, that's the kind of thing that could really spurs on to think about potential expansion and going through the work of getting the permitting.

Brian Uhlmer - GMP Securities LLC

Yeah. That's where I was heading, are we getting extra hundred miles, or deeper into the Midland potentially. Okay. Perfect. I had another follow-up. On looking at Sandbox they do have some potential, they show it on rail as a possible way of transportation, but it doesn't seem like any of the discussion you had is heading that way. Is this going to be primarily in-basin or on trucks, is that how you are looking at it, so there's no impact on the rails, is that proper way of looking at it?

Bryan A. Shinn - President and Chief Executive Officer

So they do have a solution that they've demonstrated using custom railcars to move the boxes. I would say that's still something out in the future to think about, certainly there's a lot of investment already in the small cube covered hopper. So we have to work our way through that. There's a lot of other things that we didn't highlight. We think there's international opportunities for Sandbox. There's also potentially opportunities to go outside of Oil and Gas. You can imagine that there's many other industries that need products delivered in a manner that the Sandbox solution could fit.

And I would say that the Sandbox team has done a great job of penetrating Oil and Gas, but given all that work they haven't had a lot of time really to think about other industrial applications. So there could be some synergies back with our Industrial business. But that's not our initial focus here. We're currently focused on Oil and Gas, and all those other ones are just sort of plus ones that came with the deal.

Brian Uhlmer - GMP Securities LLC

Okay. And then the final quick one on logistical, on the Sandbox. Is the primary method always to have the four boxes on the chassis and deliver that to the well, and then when you're done with that, you'd pull out the chassis and drop in a new one, or do you pull off the box, and then a trucker can flatbed in incremental boxes as needed? Can you just explain that to me real quick?

Bryan A. Shinn - President and Chief Executive Officer

Sure. So the box when it gets delivered out to the well, it's a one box on a chassis, and it gets placed out near the blender. And then essentially what you have would be the Sandbox employee who is constantly loading full boxes on to the top of a conveyor, which feeds directly into the blender hopper. As those boxes get exhausted, they're replaced with a fresh box, and then at the same time, you've got a constant replenishment of full boxes coming in. And the way the system is setup, the chassis can hold one box when it's full of sand, and it can haul two empty back to be refilled. So it's pretty efficient system.

Brian Uhlmer - GMP Securities LLC

Okay. Got it. So you're still dropping out 22.5 tons as you do in any trucking operations, but you just pop it off with a forklift and then leave as opposed to unload and conveying it.

Bryan A. Shinn - President and Chief Executive Officer

Exactly.

Brian Uhlmer - GMP Securities LLC

Okay.

Bryan A. Shinn - President and Chief Executive Officer

So that the difference there is it takes about five minutes to unload one of these boxes. It can take 30 minutes or more to unload a pneumatic truck, right.

Brian Uhlmer - GMP Securities LLC

Yeah.

Bryan A. Shinn - President and Chief Executive Officer

So you can start to see the advantages here. And I think that's really important that maybe get missed in this, it was one of the fundamental attributes here, is that this system disconnects sand delivery from sand consumption.

Brian Uhlmer - GMP Securities LLC

Yeah.

Bryan A. Shinn - President and Chief Executive Officer

So those two are now independent, and the frac crews, you talk to the customers, they have to slow down many times because there's an issue with the sand. There's never an issue with the sand with the Sandbox's constant flow, whenever the crews are ready it's always there. So there's real value in that.

Brian Uhlmer - GMP Securities LLC

Yeah, absolutely. Thank you. I really appreciate. Great acquisition.

Bryan A. Shinn - President and Chief Executive Officer

Thanks, Brian.

Operator

Thank you. We're showing time for one additional question today. Our last question will be coming from Brandon Dobell of William Blair. Please proceed with your question.

Brandon B. Dobell - William Blair & Co. LLC

Thanks for squeezing me in guys. I appreciate it.

Bryan A. Shinn - President and Chief Executive Officer

Good morning, Brandon.

Brandon B. Dobell - William Blair & Co. LLC

Good morning. As you think about the mix of grades this quarter, and how that may flow or look at the back half of the year, are you guys still seeing more growth, more volume 40/70 mesh, 100 mesh? Is there any shift back towards the coarser grades? And if you can intersperse that with how volumes from Voca are impacting that too?

Bryan A. Shinn - President and Chief Executive Officer

Sure, so at this point, Brandon we see much more demand for the finer grades, particularly 40/70 mesh and 100 mesh. 30/50 mesh demand is okay, 20/40 mesh demand is not great in the market today. It comes and goes, but I would say generally that's the weakest one. At this point, we don't see any specific technical trend that would change that. I would say that what could happen if demand really picks up here quickly, it feels like 40/70 mesh and 100 mesh are mostly sold out today. So you – kind of by definition the service companies and energy companies might be forced to use more 20/40 mesh, so that could help that trend. But it won't be by sort of technical choice. It will be just a fact of what's available in the market.

Brandon B. Dobell - William Blair & Co. LLC

Okay. And then building off of that, as you guys think about that the 40/70, 100 mesh market being tight or sold out, how do we think about that dynamic relative to you guys thinking about bringing back or expanding capacity to serve that need? And I know it's a longer term question, but given that that market is already pretty short, it's not going to take much for you guys to be bumping up against capacity utilization issues, probably.

Bryan A. Shinn - President and Chief Executive Officer

Well, certainly, opportunity is there when you look at sites like Mill Creek, Oklahoma. We've done some incremental work there that the Stack/Scoop is going strong, and Mill Creek's a great alternative there as well as down into many of the Texas basins. We had a question earlier around Voca, are there opportunities there? We see our customers wanting more product out of Voca, and being willing to sign up for additional contracted volume there. We also have started to ramp up at our Kosse, Texas site.

Brandon B. Dobell - William Blair & Co. LLC

Okay.

Bryan A. Shinn - President and Chief Executive Officer

Which is one that has traditionally been an ISP site, but we flipped that over to Oil and Gas. And so, there's definitely solutions out there. I think that we'll be right on top of that.

Brandon B. Dobell - William Blair & Co. LLC

And then the final one from me on Sandbox. Are the services companies any kind of gating factor to much broader market adoption, or are they going to be a partner to try and drive faster adoption? I guess, I'm sure you got some feedback as you're going through this process on how this might fit with your relationship with the bigger service companies. So how do you view them as a part of this process to drive market share?

Bryan A. Shinn - President and Chief Executive Officer

So I think the service companies are absolutely critical. If you look at Sandbox, all of Sandbox customers today are service companies, and as part of our acquisition due diligence, we actually went out and talked to most of their customers. And I've been on a lot of customer interviews in my career, and I don't think I've ever heard more positive comments about a company. People basically said things like we tried other solutions, and this is the only commercially viable one, operators love it, customers ask for it. Probably my favorite quote was somebody, he said, it's bulletproof, idiot-proof, it's great, right. So it feels to me like that there is a lot of positive energy out there. And another one the customer said, look, we have a plan to move to 100% boxes for our sand. And so it's kind of this double value proposition, one being sort of improved efficiency, reduce cost all that, and second being there's not a lot of viable solutions out there today to resolve the coming compliance issues with the new OSHA dust regulation. So it feels like Sandbox is kind of a double home run because it does both of those.

Brandon B. Dobell - William Blair & Co. LLC

Got it. All right. Thanks a lot. I appreciate it.

Bryan A. Shinn - President and Chief Executive Officer

Thanks, Brandon.

Operator

Thank you. At this time, I'd like to turn the floor back over to Mr. Shinn for any additional or closing comments.

Bryan A. Shinn - President and Chief Executive Officer

Thanks. I just want to close the call with a few key thoughts. First, I'd like to reiterate that I'm very pleased with our two recent acquisitions. I believe that both NBR Sands and Sandbox will add substantial value for both our customers and our investors. Second, while we talked a lot today about Oil and Gas segment, I want to make sure we remember ISP, where I'm really excited about our growth potential. I think we'll see hopefully continued price improvements there, rollout of new higher margin products, and then potential for M&A. And third, just to make sure that everybody is clear on this, we're going to remain keenly focused on the three areas that we've been focused on in 2015 and 2016, and that's cash, customers and consolidation. So you can expect more focus on those areas for sure.

Lastly, I want to thank all of my colleagues at U.S. Silica for their tireless efforts in meeting the challenges that our company has faced over the last several quarters. So you can imagine with these two acquisitions going on, almost simultaneously, there has been a lot of late-night hours and just a tremendous amount of work by our teams, so I want to thank them. I want to thank our investors for their interest and support. And I look forward to meeting our folks and speaking with all of you in the future. Thanks everyone for dialing in, and have a great day.

Operator

Ladies and gentlemen, thank you for your participation. This concludes today's teleconference. You may disconnect your lines at this time. And have a wonderful day.

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