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Executives

Gary Kolstad – President, Chief Executive Officer

Ernesto Bautista, III – Vice President, Chief Financial Officer

Analysts

Brian A. Uhlmer – Global Hunter Securities LLC

James West – Barclays Capital

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

Doug Garber – Dahlman Rose & Co. LLC

Blake Hutchinson – Howard Weil, Inc.

John Daniel – Simmons & Co.

John Keller – Stephens Inc.

CARBO Ceramics Inc. (CRR) Q1 2012 Earnings Call April 26, 2012 11:00 AM ET

Operator

Hello, and welcome to today’s CARBO Ceramics Inc. First Quarter 2012 Earnings Conference Call. At this time, all participants are in listen-only mode. After management’s remarks, we will conduct a question-and-answer session and instructions will follow at that time.

Please be advised, this call is being recorded today, April 26, 2012, and your participation implies consent to our recording of this conference. If you do not agree to these terms simply disconnect.

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

These statements are considered forward-looking statements under the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995, and are subject to risks and uncertainties that could cause actual results to differ materially from these projections. These statements reflect the company’s beliefs based on current conditions, but are subject to certain risks and uncertainties that are detailed in the company’s press release and public filings.

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

Gary Kolstad

Good morning. I want to thank you for joining us to discuss CARBO’s first quarter results along with our outlook for the remainder of 2012. Overall, in the first quarter CARBO made a lot of progress in managing the large transition and activity in North America from natural gas basins to liquids rich basins. I want to make couple of comments on proppant demand and supply chain challenges associated with this large transition.

First of all, in demand side compared to the fourth quarter of 2011, sales volumes rebounded up 4% to £404 million, while our average proppant price per pound remain relatively flat.

We were very pleased with the trend in the first quarter sales volume as we continue to place increased amounts of ceramic proppant to the liquids rich basins.

Importantly, our client base in these liquid rich basins also continue to expand as E&P operators achieve increased production results by utilizing our high conductivity, high quality ceramic proppant.

The industry transition in North America from gas-directed activity to oil-directed activity continues. However, for CARBO, this transition is largely complete as the vast majority of our U.S. ceramic proppant sales volume is now being sold into liquid rich basins. As mentioned in previous quarters, and over the previous business cycles, we remain confident in the demand for our ceramic proppant now and in the future.

The basic permit to that confidence is that our high conductivity ceramic proppant makes wells produce better and have higher EURs than all other proppants. The trends seen year-to-date during this transition and industry activity gives us confidence and long-term prospects for our proppant business.

Additionally, our top technology continues to grow. We have successfully demonstrated the value of CARBONRT, a non-radioactive detectable proppant on five continents around the globe. The backlog of CARBONRT jobs continues to grow as E&P operators choose to measure fracture height without the environmental concerns associated with radioactive material.

Finally, as I mentioned on the fourth quarter conference call, we’ve already seen some users of lower quality, lower conductivity Chinese ceramic proppant change their buying habits. That is, they switch from these lower quality proppants to a high quality, high conductivity proppant such as Carbo’s.

Now on the supply chain. On the supply chain challenges, we continue to work on the cost side. As previously discussed, the increased amount of activity in the infrastructure limited liquids rich basins introduce supply chain challenges to the industry. The challenges resulted in a higher supply chain cost this quarter for CARBO, and I’ll comment a little bit more on that later. CARBO is investing in strategic projects to strengthen our distribution in order to meet the present and future demands of our clients. We are pleased with the progress made thus far, and anticipate these investments should be completed before the end of the year.

Moving on to our other businesses. In late January, the start-up of our second resin-coating line in New Iberia was initiated. This line however produced minimal quantities during the quarter due to the limited availability of third-party supplied northern white sand.

Our consulting business StrataGen continues to see a growing demand for field consultants, Data and Neural Analysis or DANA studies in overall fracturing design and evaluation requests. Our environmental risk reduction business Falcon Technologies continue to see growth in both client base and geographical operations with a new operations center in Colorado.

Falcon also broadened its Engineered to Protect product suite by delivering its first location liner during the quarter. The location liner service has an independent role and efficient protector of the ground soil during the completion and fracturing operations, and has the ability to be transport and reused on multiple locations.

I’ll look at the financial and operational results. Revenues for the first quarter of 2012 increased 8% or $12.3 million when compared to the first quarter of 2011. North American, which is defined as Canada and the U.S. proppant sales volume decreased 2%, while international proppant sales volumes increased 21% compared to the same period last year.

International proppant sales volumes continue to grow setting a new quarterly record. Now, compared to the fourth quarter of 2011, the company experienced increases in both North American and international proppant sales volume.

Operating profit for the first quarter 2012 remained relatively flat compared with first quarter of 2011. Higher gross profit from an increase in average proppant selling price and a greater contribution from some of the company’s other business units will relatively offset by increases in freight, logistics and SG&A and other operating expenses.

Net income for the first quarter 2012 remain relatively flat compared to first quarter. The company repurchased 60,000 shares of its common stock at an average price of $95.44 during the first quarter pursuant to its previously announced stock repurchase plans. Since September 2008, 1.9 million shares have been repurchased at an average price of $41.70 per share.

Now, I’ll make some additional comments on our margins. The incremental supply chain cost negatively impacted gross margins by approximately 150 basis points when compared to the fourth quarter of 2011. This includes increased costs associated with railcar rental, demurrage, storage fees, et cetera. With respect to SG&A, the majority of the sequential increase is associated with increased R&D spend as well as other administrative costs.

For the full year 2012, we expect SG&A as a percent of revenue be in the 9% to 10% range. In terms of gross margins, the volatility makes it difficult to forecast when and where gross margins may bottom. However, we do not expect to cycle being as bad as 2009.

Now turning to the outlook. We believe 2012 will be a challenging year primarily due to the continued transition underway by the industry to relocate equipment, services and supplies into a liquids rich basins in North America. As a result, pricing pressures will likely become more evident in the industry over the remainder of the year.

With respect to our pricing strategy, it is important to note that during past cycles we’ve been prudent about increasing price during the upturns and disciplined during the downturns.

At this point, second quarter sales volumes are expected to be similar or better than the volumes sold in the first quarter of 2012, despite the lower activity in Canada as a result of the spring breakup. And as an added note, breakup in Canada usually reduces our overall volumes by 5% to 7%.

I want to add a point about comments someone said about the impact of guar gum shortages impacting ceramic proppant usage. With some operators going to slickwater to overcome the shortages, I wanted to bring technical reality to the comments.

CARBO lightweight ceramic proppants offer distinct advantages for slickwater applications. Our lightweight ceramic proppants have specific gravities similar or less than sand, but with significantly higher conductivity. CARBOHYDROPROP was developed specifically for high performance and slickwater applications, and that’s due to superior thermal stability compared to sand or resin-coated sand, similar transport characteristics as 40:70 sands and of course greater productivity and recovery due to higher conductivity.

Moving on, we continue to pursue new attendees by discriminating the benefits of economic conductivity and the resulting increase in production rates and estimated ultimate recovery that can be achieved by using the company’s high-quality, high-conductivity proppants. We’re also increasing selected field trials with E&P operators.

With respect to our future ceramic production capacity additions, we are pleased to announce the receipt of the Air Quality Permit for our plant in Millen, Georgia; and we’re moving forward with construction of the first 250 million pound line. Operations at our Millen plant could commence near the end of 2013.

As previously mentioned, we initiated the start up of our 300 million pound resin-coated line in New Iberia in late January 2012. Production output however continues to be limited by the availability of third-party supplied northern white sand that meets the company specs.

The completion of our sand processing facility in Marshfield, Wisconsin is a priority, and we expect to be utilizing our own sand reserves in the third quarter of 2012. Regarding our Marshfield, Wisconsin resin-coating operation, capital spending on this project has been slowed by approximately six months and this operation could commence near the end of the first half of 2013. We have delayed the resin-coating portion of the plant as a prudent financial action to the current industries supply and demand position in resin-coating capacity.

We continue to expect solid growth from Falcon Technologies as it builds out a suite of Engineered to Protect solutions that protect our clients’ assets and reputations. Geographically expansion will also drive growth.

In summary, 2012 will have its challenges as supply and demand dynamics of the industry are rebalanced. However, as we have done for over 30 years, we will continue to focus on managing the business through these swings in activity and positioning the company for long-term success.

This completes our prepared remarks and at this time, we will be happy to take questions. Valerie are you there?

Question-and-Answer Session

Operator

We will now being the question and answer session. (Operator Instructions) And our first question comes from Brian Uhlmer of Global Hunter.

Brian A. Uhlmer – Global Hunter Securities LLC

Hey, good morning gentlemen, how are you?

Gary Kolstad

Good morning.

Ernesto Bautista

Good morning.

Brian A. Uhlmer – Global Hunter Securities LLC

I’ll have a quick one for you; really on the expansion, both at Millen and in Marshfield, I was trying to figure out from the commentary, whether or not those are planned delays on the resin-coated side or if there’s equipment, some type of equipment change or what’s driving kind of moving back the Marshfield resin coat? And then with Millen, obviously the timing was always uncertain based on the permit. Is that a delay or a planned delay or is that something that’s just working through the schedule?

Gary Kolstad

On Millen, not just working through schedule, we had to get the permit before we could move ahead. So that’s basically on schedule, and as we’ve said over the past year or 18 months, we had to wait on permit. As far as Marshfield resin coating, we had to make sure people understand, we’re doing the Marshfield build out on sand processing, so that’s within the same facility and everything, we’re just delaying the resin-coating operations there, just due to the industry supply/demand situation very soon in order to E&P that or slowing down their natural gas field, and it doesn’t make a lot of sense for us to build excess resin-coating capacity right now.

Brian A. Uhlmer – Global Hunter Securities LLC

Right, all right. Obviously, a good decision. Now, on the third party sand issues and getting the processing done, will you be able to supply 100% of your needs from that sand processing to at least fill up New Iberia?

Gary Kolstad

Yes, starting in the third quarter, yes.

Brian A. Uhlmer – Global Hunter Securities LLC

Okay, and then finally you said that you’re primarily an oil and liquids basin, but then you discussed potential for not knowing where margins are bottoming. I guess margins bottoming more of a factor of price, if you have your logistics under control here or is it more of a factor still some things yet to be done?

Gary Kolstad

Well, I think the one key point is that, from a transition from client base and geography and everything that’s basically done for CARBO. So now we work on the supply chain side, we work on the cost side of the equation, some of that’s what we said before, we’ll build some storage out there, our volumes will likely come up, that makes the whole thing much more efficient. So we’re very pleased that way, and also just for growing client base.

In terms of margins, it’s going to take a little while to get those things worked out, railcars, storage, et cetera. So we know that’s going to impact us some, some of those costs will go away over time, much more likely an H2 type of event than a Q2 type of event, but we’ll eventually get there. And then directionally, we say that obviously pricing will have a – won’t be in an upward direction, directionally it will be lower.

Brian A. Uhlmer – Global Hunter Securities LLC

Thank you very much. It’s very helpful, Gary.

Gary Kolstad

Okay.

Operator

And the next question comes from James West of Barclays.

James West – Barclays Capital

Hi, good morning, Gary.

Gary Kolstad

Good morning.

James West – Barclays Capital

Curious though, your transition to oil and liquids is done in the industry, is still probably in some transition mode here, demand is coming back or demand was always there for your product, but you’re now able to supply your product into those markets. As we think about you fixing full year supply chain by the end of this year, should we or would you expect to be once again, almost fully utilized at your facilities?

Gary Kolstad

I think from our facilities, we expect to get better as the year goes on. Keep in mind James that we did say also, the line below our ceramic proppant volumes, we told you in Q4 that we stop purchasing third-party material, so we are very prudently reducing down our inventories there as well. So we do a balancing act of reducing down inventories on that, and increasing the consumption of our plant produced products.

James West – Barclays Capital

Okay. And in terms of I guess your inventories plus probably the inventories that may have already been in the field. What’s your expectation on those types of inventories being reduced to where you’re just selling – just selling and the industry just consuming kind of your ceramics and your competitor’s ceramics rather than the Chinese inventories that are in the market?

Ernesto Bautista

I don’t know, I hate to get into numbers. I’ll just say, directionally we believe it's going to get better as the quarters roll on during the year. I think that's the way we feel today, and we’re seeing, I would say good success in particular with our marketing and sales folks, broadening our client base. I mentioned I think in the prepared remarks that we’re doing some field trials with some new clients. So we’re comfortable that the demand for our own produced lightweights is probably going to grow.

James West – Barclays Capital

And typically what's the conversion rate on field trials, I mean you drill obviously one well and then use your proppant in some wells that are done with sand or resin-coated sand, when do you see the conversion over to ceramics?

Gary Kolstad

Well usually we have, we need a bigger data set, so you know it maybe five wells, 10 wells or whatever it might be; and then we wait for X amount of time for six months worth of production data et cetera. We tend to be pretty successful, in other words it would be a majority not a minority success, and that the one you forgot to put in there right is that we also will compare against the Chinese, the lower conductivity Chinese ceramics. So our success is greater than 50%, I’d say.

James West – Barclays Capital

Okay, okay, great. Thanks, Gary.

Operator

And the next question comes from Jeff Tillery of Tudor, Pickering, Holt.

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

Ernesto, can you help us in how just inventory seen in first quarter, I mean the other current asset category is pretty flat sequentially, so we think about inventories as being pretty flat for you guys sequentially?

Ernesto Bautista

I would say, yes. The inventories are being relatively flat, but slight growth in inventory, but nothing material.

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

Okay. And then for CapEx this year, it’s growing from where it’s been at Marshfield, I mean – primarily it’s 1.8 million, I don’t know if that had an impact on what you guys thought, you’re going to spend for this year, but any change to what you, the total CapEx you think will go up during this year?

Ernesto Bautista

Yeah, I think the revised range probably be more in the 100 to 110 for the year, rather than what we have talked about previously.

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

Okay. And then Gary, from a volume standpoint for the permutation in the fourth quarter market correction plus supply chain, supply chain get better in the first quarter, sounds like it gets better again in the second. I’ll then may be see during the first quarter, any reason to think of a steady rig count where it is today that you can’t see sequential improvement through the course of this year on the volume side?

Gary Kolstad

Well directionally, we’re kind of confident in that. But, clarify your comment about supply chain got better, it may have got easier from getting product there, that doesn’t mean that the cost got better. No, we had some pressure honestly on costs, and that’s really what we’re focused on now to drive the cost out. And some of that is efficiency, operational efficiency et cetera, but some of that is the step that we’re building that will get built in the second half. But yeah, we’d like the way, when I mentioned the client base is broadening, you should probably pay attention to that comment.

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

Okay. And then, just one question on resin-coated sand, once you have availability of sand let’s call it August, September, from your own sourcing, are you guys comfortable from a marketing and placing standpoint that you are able to run that facility at a healthy utilization and get it out the door?

Gary Kolstad

Yeah, keep in mind, one of that – it’s an interesting point. The reason we can’t get substrate from third-parties is that they don’t provide the high quality, high conductivity substrate that we’re demanding. We’ve made a decision that we’re going to have high conductivity resin-coated sand. So we’re willing to wait for our own produced sand to get to that point. So, if we produce a high conductivity resin-coated sand, we’re pretty confident that the market will welcome that.

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

And my last question, just on pricing. Okay, it’s certainly not going up, so I think about that pressure is being mostly second half of year or do you start to see some earlier in the second quarter?

Gary Kolstad

Well, I mean, you shouldn’t tailored in over the year, I think it would be the prudent way to do it. Once again, keep in mind the dynamics there. We have the retail pricing which others have to go through right, which just can be pretty large bandwidth, ours is wholesale pricing. So it doesn’t move at that bandwidth at all. And then keep in mind what I said about field trials and some other things we’re doing. We have our buyers towards volume and we have our buyers towards getting our (inaudible) to clients. So we haven’t been able to use it. So we are going to get there.

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

Okay. All right. Thank you guys.

Gary Kolstad

Okay.

Operator

And the next question comes from Doug Garber of Dahlman Rose.

Doug Garber – Dahlman Rose & Co. LLC

Good morning, guys. I wanted to ask a little bit about the guidance for second quarter for volumes to be flat to slightly up. I was wondering if you would perhaps break that out into your core ceramic line and in the other line? I know you are talking about the aggregate there, but your core ceramic line, would that be flat to – flat-ish and the other part be up because of more resin-coasted sand?

Gary Kolstad

I think you should probably look at the comments I’ve made about resin-coated sand, probably implies and they were minimal in Q1, okay. They will probably be fairly minimal in Q2, so that growth won’t come from resin-coasted sand to speak of. So that means its ceramic in general will grow, and when you look at the third party stuff that we’re working off the inventory on, we will make business decisions on that weekly.

So you might expect both our produced ceramic as well as maybe the third party, we’ll both see and match the commentary we’ve given you. And when I pointed out with Canada, usually impacts us negatively 5% to 7% total volume. So that same will probably do all right in Q2.

Doug Garber – Dahlman Rose & Co. LLC

Okay. And my next question, I’m not sure that you will go into this much detail, but are you seeing pricing vary meaningfully between the basins, i.e., the Bakken versus the Texas area just because of the overflow from the Haynesville down in the south?

Gary Kolstad

Yeah, you shouldn’t associate, as it sounds like you’re trying to associate us with pressure pumping business. You shouldn’t do that, it’s not of that radical nature. The other thing, remember it’s of the distance we travel impacts the price that is charged. So sometimes you’ll see higher pricing due to transportation costs. And North Dakota is certainly taller than whatever South Texas or closer, so I would be cautious on following the commentary that comes from other companies.

Doug Garber – Dahlman Rose & Co. LLC

Okay. And just last question here, are you guys running at full capacity currently?

Gary Kolstad

Well, I hate to get into these types of quarterly comments. Obviously, the plants are all running right now.

Doug Garber – Dahlman Rose & Co. LLC

All right, thank you Gary, I will turn it back.

Operator

(Operator Instructions) And the next question comes from Blake Hutchinson of Howard Weil.

Blake Hutchinson – Howard Weil, Inc.

Good morning guys.

Gary Kolstad

Blake, good morning.

Blake Hutchinson – Howard Weil, Inc.

Just wanted to clarify couple of your comments here, Gary. When you referred to the 150 basis points of gross margin hitting the COGS line from 4Q to 1Q. Is that kind of fact always this is the type of cost increase that we will be dealing with on an ongoing basis or where there one-time build out items also and that number, incorporate in that number?

Gary Kolstad

I will allow Ernesto to take.

Ernesto Bautista

Blake, so it's, it will be a combination of both, right, so part of that will be cost incurred for specific reasons in the quarter. Others are going to be cost that will remain be incremental, was given just as an indication of want to get deltas between Q4 and Q1. Our goal right now as Gary had previously mentioned is, to work that down but because of the volatility in the market things can change from quarter-to-quarter, we are not at a steady state at this point.

Blake Hutchinson – Howard Weil, Inc.

Okay.

Gary Kolstad

You know that, as time goes on we build storage, there will be some costs, there will be depreciation costs, there is just a current period cash cost, lets say.

Blake Hutchinson – Howard Weil, Inc.

Yeah, right. There’s several things that play between the CapEx and OpEx, and I just wanted to clarify that you had a kind of medium term like, a lot of the facilities build out would actually be second half, but it sounds like we will see the impact of real life day to day differences in first half and then there will still be some knock on facilities spending that needs to be done in the second half, even as we kind of ease the kind of absolute quarter-to-quarter costs that you’re enduring?

Gary Kolstad

Yeah, I think that’s right.

Blake Hutchinson – Howard Weil, Inc.

Okay, and…

Gary Kolstad

They will still be present in Q2.

Ernesto Bautista, III

Sure. A portion of cost will still be present in Q2.

Blake Hutchinson – Howard Weil, Inc.

And I guess you commentary in the release and here, Gary makes it sound as if perhaps versus last quarter you see some of that cost lending, maybe a little longer than you did, or is that an incorrect reason and then you still think you’re going to – a lot of what you – a lot of the big stuff would be taken care by end of 2Q or so?

Gary Kolstad

I don’t think, I don’t know, maybe I am just saying that, we would go, somewhat goes throughout the year, it probably as we get into the second half it trickles down. But Q2, I would expect to be having these costs like Q1 for sure.

Ernesto Bautista, III

Well, yeah, a lot of the initiative is to reduce costs, it’s – you can’t do them very quickly. It’s not a light switch unfortunately. So they bleed off.

Gary Kolstad

Some of that have been built in Q3, some would get built in Q4, so it’s a – you have to transition it towards the end of the year.

Blake Hutchinson – Howard Weil, Inc.

Okay. Got it. And then I was intrigued by the commentary that at least from 4Q to 1Q, you have proppant pricing, apples to apples was flat, especially since I mean you had noted in 4Q that you had more quality mix. So would have expected some drop off. As we think about your pricing commentary that you have today, I mean how much of it is just common sense, you look out the window and say, we’ve got to be a more competitive entry just in some markets that we need be bigger and eventually the industry pricing pressure catches up with you versus the reality of what – do you have lower pricing in hand today or you just kind of making a general comment in terms of our expectations here?

Gary Kolstad

Well, let me, first of all, if we look at the industry right, we have a depression going on in natural gas, we have kind of a stable environment in oil that could change 10, 20 bucks a barrels pretty easy. We are seeing a slight trickle down in the rig count in the lower 48, I mean oils and keeping up with the decline in natural gas. You have the retail pricing due to various factors and the industry changing quite a bit. So we’re certainly not immune on the wholesale pricing side. And we also have build in, we’ve kind of mentioned over the years that we have our business motto where we have anything from spot pricing to multiyear pricing. So, directionally, we are seeing, the pricing is directionally lower and we think that’s very prudent to say that. I also put in the carry out, so I’ve mentioned couple of times now that we will be doing field trails and we have a history on what those do and which workout long term for us, it’s the right thing to do, but we offer an economic benefit at the time of execution on those. And then, when we are done with them we go back to, let’s say our normal pricing.

Blake Hutchinson – Howard Weil, Inc.

And with regard to margins, you kind of directed us towards looking at the 2009 timeframe, and having the caveat that’s certainly not worse. I mean would you say the same, should we be looking at the same type of timeframe for pricing or lesser issue given versus margins given operational hurdles you’re facing?

Gary Kolstad

Yeah. I don't think it's going to be 2009, so I just don’t see that, to correct you a little bit too, I said we don't expect it to get to 2009 gross margin levels, so – and I think that kind of...

Blake Hutchinson – Howard Weil, Inc.

Okay. Great, thanks for taking enough time, I’ll turn it back. Thanks guys.

Operator

And the next question comes from John Daniel of Simmons & Co.

John Daniel – Simmons & Co.

Some of the volumes be in the field trials, how much of the volume is field trials?

Gary Kolstad

Not of any material nature in Q1.

John Daniel – Simmons & Co.

All right, and then just on the customer base, the comments that were made about [belonging] to customer base, which is kind of middle, but at this point have you seen any of the larger customers start to shift away from ceramics?

Gary Kolstad

We’ve seen larger customers be extremely sticky.

John Daniel – Simmons & Co.

Okay. That's all from me, thanks.

Operator

(Operator Instructions) The next question comes from John Keller of Stephens, Inc.

John Keller – Stephens Inc.

Thanks. Gary just wanted you to elaborate a little bit on couple of comments you made regarding some of the sort of the discount pricing to gain new customers. Is that something that as it works through, you typically do move your pricing back up to kind of a normalized level, I think that’s how you characterize it, I just want to make sure that’s correct?

Gary Kolstad

Yeah. We don’t, we’re not offering discounts to get new clients, we offer discounts on field trails because we always have a belief from the technical side that ours will not produce all of the proppants. So we setup a comparison, we have to offset wells, it’s a very planned program and we look at production results and at the end of that trail period, which may be five wells, 10 wells, whatever it is. Then we and the clients regroup and we make a decision and based upon we’ve already seen the results what they expected et cetera and we move forward. But it is a period of an economic incentive, and it’s not yet permanent though.

John Keller – Stephens Inc.

Got it. And then just from a – it sounds like you’re clearly attacking some of the Chinese that had come in to the marketplace maybe more so now given your slack volumes or some available volumes. Are you seeing them become a lot more price competitive in the market?

Gary Kolstad

Yeah, I think my comments didn’t say we were attacking them, what we said is that some of our customer on sides, meaning end consumers, service company et cetera are lowering their purchases of Chinese proppant. And so – and the only tool they have in their tool box is price, right? Because the quality is lower, the conductivity is lower, the supply chain is worse, all these things. So the only tool they have is price, so you might imagine that they use the only tool they have.

John Keller – Stephens Inc.

Perfect that’s it from me. Thanks.

Operator

At this time, there appeared to be no more questions. Mr. Kolstad, I’ll turn the call back to you for closing remarks.

Gary Kolstad

Thank you. I think I will summarize by saying, we’d mentioned previous quarters and overall the previous business cycles, we remain pretty confident, the demand of our ceramic proppant to grow now and in the future. And the basic promise of the confidence is that our high conductivity ceramic proppant makes the wells produce better, and have higher EURs than all other proppants.

The transition in North America from gas to oil continues, however for us this transition is largely complete. Our key focus points as we head into the year is drive costs up from the distribution system, continue to grow our client base by demonstrating the technical and economic mode of our proppants, and what they deliver for the E&P.

We remain committed to capacity growth in our ceramic proppant business, and in our overall proppant business in a physically conservative manner. We’re going to keep on developing technology that strengthens our competitive edge, and with that I wish you all a good day and look forward to seeing you on the second quarter.

Operator

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.

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