U.S. Silica's (SLCA) CEO Bryan Shinn on Q3 2018 Results - Earnings Call Transcript

U.S. Silica Holdings, Inc. (NYSE:SLCA) Q3 2018 Results Earnings Conference Call October 23, 2018 9:00 AM ET

Executives

Michael Lawson - Vice President, Investor Relations and Corporate Communications

Bryan Shinn - President and CEO

Don Merril - Executive Vice President and CFO

Analysts

George O’Leary - Tudor, Pickering, Holt & Co.

Marc Bianchi - Cowen and Company

Ken Sill - SunTrust Robinson Humphrey

Scott Gruber - Citi

Stephen Gengaro - Stifel

Connor Lynagh - Morgan Stanley

John Watson - Simmons & Co.

Chris Voie - Wells Fargo

Operator

Greetings. And welcome to the U.S. Silica Third Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]

As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Michael Lawson, Vice President of Investor Relations and Corporate Communications for U.S. Silica. Thank you. You may begin.

Ladies and gentlemen, please stand-by our conference will resume momentarily. Ladies and gentlemen, please stand-by our conference will resume momentarily. Once again, ladies and gentlemen, thank you for stand-by, our conference will resume momentarily.

Michael Lawson

Thanks. Good morning, everyone, and thank you for joining us for U.S. Silica’s third quarter 2018 earnings 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.

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

Additionally, we may refer to the non-GAAP measures of adjusted EBITDA and segment contribution margin during this call. Please refer to today’s 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 Shinn

Thanks, Mike, and good morning, everyone. I will begin today’s call by reviewing highlights from our third quarter performance and then provide commentary on key trends in our businesses. I’ll conclude my prepared remarks with an outlook for our major markets before turning the call over to Don, who will provide more color on our financial performance, and an update on our capital allocation plans going forward.

For the third quarter, total company revenue of $423.2 million was down slightly sequentially. Adjusted EBITDA of $105.5 million declined 15% on a sequential basis. Oil & Gas contribution margin of $89.6 million declined 22% sequentially, as we saw a significant reduction in pricing in the back half of the quarter, as the slowdown in wells completions coincided with more in-basin capacity coming online. As we previously reported, volumes in Oil & Gas were up 10% driven primarily by ramp of our new West Texas capacity and resilience of our low cost Northern White mines.

Our SandBox unit experienced lower load volumes during the quarter due to whitespace on our customers’ calendars, which was partially offset by higher profitability per load. We averaged 82 crew deployed across all the major shell basins. As we previously disclosed in a press release, SandBox was awarded $49 million in damages from Arrows Up and the jury and judge found that we are the rightful owners of all their frac sand shipping containers. While Arrows Up may ask for a stay, as it seeks to appeal the verdict, we are confident that our judgment will be upheld as the facts are overwhelmingly on our side.

Turning to the non-energy side of our business the Industrial & Specialty Products segment had another record breaking performance in the third quarter, setting new heights for revenue contribution margin and contribution margin per ton.

Revenue of $120.7 million improved 106% on a year-over-year basis. Segment contribution margin of $48.7 million increased 103% over the third quarter of 2017, driven by strong legacy ISP business and a full three months in the quarter of results from EP Minerals, an acquisition we closed on May 1st, of this year.

Let me now discuss some of the more important trends in our markets, starting with Oil & Gas. That business is evolving rapidly and being influenced by four major dynamics today. First, local sand capacity continues to come online with most of the capacity additions in the Permian so far. We are also seeing local sand projects in other basins with varying degrees of market acceptance. We believe that as much as 12 million to 14 million tons of new capacity could eventually come online outside the Permian mostly in South Texas and the MidCon. We do however expect that many of our customers will continue to want to pump Northern White Sand in these basins, as well as other geographies such as the Bakken, the Rockies and the Northeast.

That said, incremental local capacity will pressure Northern White sales volumes and margins and we experience that in Q3. As more local mines come online, we expect that higher cost Northern White mines will be closed and we have already seen more than 12 million tons per year of idle capacity. We believe that another 10 million to 15 million-ton of non-local capacity may come off line in the next few quarters.

U.S. Silica is well-positioned to opposite this dynamic with bottom of the cost curve Northern White assets and approximately 70% of our current capacity in basin. We are less dependent than competitors on Northern White sales. For example in the third quarter, less than one-third of U.S. Silica’s contribution margin came from Northern White sales and we expect to triple our Permian capacity by the end of 1Q 2019 with Crane and Lamesa mine ramp-ups.

The second dynamic is white space on our customer’s calendars in the last four months of the year. Several factors including budget exhaustion and takeaway capacity constraints are driving the gaps. We believe that these factors were transitory though, a growing inventory of drilled and uncompleted wells demonstrates that E&P is continuing to invest and supports future completions growth and we believe rise in Oil & Gas prices further strengthen their resolve as budgets reset in 2019.

The third important dynamic here is that many E&P companies are direct sourcing sand to assure supply and reduce completion cost. This is a disruptive change as these customers are more focused on product quality, supplier safety and reliability, as well as delivered cost. They are also more likely to sign longer term contracts, those that are aligned with their long-term drilling plans as evidenced by our recently announced 15-year sand supply contract with Pioneer Natural Resources, a leading operator.

They also generally prefer that the sand provider manages both sand and logistics all the way to the blender, which gives rise to the fourth dynamic that’s currently influencing our industry and that’s the importance of having a leading last mile sand logistics solution to serve operators who want to self source on their own sand.

We believe that we have the best solution in the market today with SandBox and we are seeing more customers recognize this as well. We have a very strong pipeline of new work with recent contract awards from several operators from multiple crews planning to start in Q4 and Q1.

We are also happy to announce an expansion of our commercial offering for delivered sand to include performance based pricing. Our track record gives us confidence that we can deliver on-spec and on-time, and we’re the only sand company today offering to pay customers when they wait on our proppant and exchange for bonuses when they do not.

We also continue to innovate and improve our offering. We have several mobile transloads deployed today. We have a new trailer system that moves two boxes simultaneously, which can reduce sand transportation cost by up to 50% and a new patented well side box sand that simplifies operations and lowers costs. Our SandBox team is doing an amazing job of developing innovative solutions to better serve our customers.

Taking a step back and looking at Oil & Gas macro, we continue to see strong demand for sand, driven by the secular trend of longer laterals, tighter spacing and more proppants per foot, resulting in more proppant per well.

We are currently forecasting 110 million tons of industry demand in 2018 increasing to 130 million tons in 2019. This is opposite an outlook of 150 million to 155 million tons of effective capacity in 2019.

Regarding our new capacity additons in the Permian, we continue to make steady progress during Q3 installing and starting up equipment, and we are servicing more customers every week.

Our facilities are operating at approximately 35% of design capacity and we expect to complete construction by the end of 1Q 2019. It’s a tough operating environment in the Permian for sure and I’m very proud of the work that our team is doing today.

While these facilities have started up slower than planned, it’s important to note that our Permian mines are designed to be the very best-in-class, with improved wet and dry processing and more load outs than any of our competitors. This means higher quality products and faster load out times for our customers.

Moreover, our two mine locations combined with our SandBox solution give us the lowest delivery cost in the industry across much of the Permian. Redundant supply backed by in-basin transloads also gives our customers the confidence that we can deliver. This best-in-class offering has allowed us to contract up a significant portion of our new capacity at attractive pricing and those agreements held up well in Q3 with volumes and pricing at plan.

Let’s finish up with commentary on the industrial side of our business. We are continuing to see favorable macro conditions across most of our end use sectors. Our teams are targeting several attractive new growth opportunities across a diverse set of end-used markets and customers.

We have been very successful with new product introductions and sales from our new products now represent about 15% of ISP earnings. As a result, we expect to extend our 10%-plus five-year growth CAGR again in the 2018.

I’m very excited about our prospects in ISP. Our marketing team has a robust new business pipeline with more than 100 projects in the queue. I expect that we will be bringing many new and improved products to market over the next few years and that will also add substantial value to our business.

We are also still very active on the M&A front in ISP, looking for businesses that have great market structures, high barriers to entry, consistent earnings and cash flows along with good growth opportunities to further diversify our company.

Regarding Q4, we expect a normal seasonal slowdown in ISP volumes and a seasonally driven decline in higher margin ground product sales as customers idle production facility for the holidays and for major maintenance.

And with that, I will now turn the call over to Don. Don?

Don Merril

Thanks, Bryan, and good morning, everyone. I will begin with the results from our two operating segments, Oil & Gas and Industrial & Specialty Products. Third quarter revenue for the Oil & Gas segment was $302.5 million, down 7% from the second quarter of 2018, primarily driven by the pricing declines that Bryan mentioned earlier.

ISP’s segment revenue was a $120.7 million, up 17% over the prior quarter as a result of having a full quarter benefit from the acquisition of EP Minerals, but also due to the effect of price increases, favorable mix in our ISP sand products.

Oil & Gas segment contribution margin on a per ton basis was $23.43, compared with $33.08 for the second quarter of 2018 due to a significant reduction in price. On a per ton basis, contribution margin for the ISP business of $49.54 represented 23% increase over the second quarter as a result of a full quarter impact from EP Minerals, as well as strategic price increases and favorable product mix.

Let’s now look at total company results. Selling, general, and administrative expenses in the third quarter of the $38 million represented a decrease of 10% from the second quarter of 2018. This decrease in SG&A expense is largely due to lower merger and acquisition-related expenses and reduced compensation expense.

Depreciation, depletion and amortization expense in the third quarter totaled $37.2 million, up 2% from the second quarter of 2018.

Interest expense for the quarter was $22 million and our effective tax rate for the quarter ended September 30, 2018 was a negative 32%. Our tax benefit in the period represented accumulative adjustment to reflect the estimated annual effective tax rate of 11%.

There were several adjustments called out in our results including $8.3 million in merger and acquisition-related expenses, which included $7 million of purchase accounting related to the EP Minerals transaction.

We also incurred $25 million and expenditures related to plant capacity expansion. These charges are continuation from similar expenses in prior quarters and are mostly associated with the ramp up of our new West Texas mine. We anticipate that these charges will be greatly reduced in Q4.

Moving on to the balance sheet, cash and cash equivalents as of September 30, 2018 was $345.6 million compared with $322.4 million at June 30, 2018. As of September 30, 2018, we have $95.2 million available under our revolving credit facility and our total debt was $1.26 billion.

During the third quarter, we incurred capital expenditures of $61.6 million, primarily associated with our continuing Permian basin and SandBox growth projects as well as other various maintenance and cost improvement capital projects. We continue to expect our 2018 capital expenditures to be approximately $350 million.

We anticipate that the company will continue to generate significant operating cash over the next several quarters and that will help maintain our flexibility with capital allocation options between growth in our ISP segment at SandBox reducing debt and returning cash to shareholders.

And with that, I will turn the call back over to Bryan.

Bryan Shinn

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

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from the line of James Wicklund with Credit Suisse. Please proceed with your question.

Unidentified Analyst

Hey. Good morning guys. This is Jake on for Jim.

Bryan Shinn

Hi, Jake. How are you doing this morning?

Unidentified Analyst

Good. How are you guys?

Bryan Shinn

Good.

Unidentified Analyst

Quick question. Just first, on Northern White pricing, so you kind of reference some of the shutted capacity shut-ins that are coming through. How should we think about the impact on pricing? And then specifically just thinking about supply demand dynamics in 2019 kind of relative to what we saw in 2016 how would you kind of compare those two scenarios?

Bryan Shinn

Yeah. I think, it’s early interesting comparison back to 2015 and 2016. And I will get to that in a minute. But maybe just to frame it up Jake, certainly we saw volumes under pressure about midway through the quarter. July was really strong month, middle of August we started to see some reductions in market demand for sand, and of course, that put Northern White under pressure as we talked about.

In ‘15 and ‘16 as you specifically asked, this industry very closely followed the cost curve when prices went lower and I think we will see the same thing happen again here with higher cost producers taking capacity out of the market.

We have already seen about 12 million tons come offline and interestingly we are seeing reports of some different kind of reductions than we saw last time and we are actually seeing reports of some customers, sorry, some competitors selling off pieces of their plants as they shut them down. So, it’s pretty clear they are not intending to restart those facilities.

At this point, we’d expect another 10 million to 15 million tons of capacity needs to be idled to rebalance the Northern White market and just based on experience, it will probably take a couple of quarters for that to play out and what we have seen in the past when these types of things happen is that there is some, I guess, what I will call, irrational pricing that tends to creep into the market as well.

So from of our perspective, we are going to stay disciplined. We are going to maintain our share and probably grow our share a little bit and I think we are in a great position in terms of Northern White just given our asset footprint and where we are in the cost curve Jake.

Unidentified Analyst

Got it. That’s helpful. Thank you. And then could you touch on appetite for building sand mines outside of the Permian, so in-basin mine outside of the Permian, you referenced some stuff in Eagle Ford, couple of other basins. Do you guys have of any interest -- you got decent amount of cash sitting on the balance sheet, do you have any interest in making investments into any other basins?

Bryan Shinn

So, it’s a great question and would say at this point we like our sand portfolio that we have. On the Oil & Gas side, about 70% of our capacity is non-Northern White. So, we think we are situated pretty well. We already have some other in-basin mines, like for example, we have a mine in the Mid-Con which is in a great location.

So, I think we feel pretty good about our portfolio as I think about where we will spend growth CapEx. Certainly on the industrial side of the company, we have a tremendous opportunities there, I touched on that briefly in my prepared remarks.

And then in the Oil & Gas side, SandBox has a number of really interesting opportunities. We are starting to get a lot of traction out in the marketplace right now and so I think you can see a spend, perhaps, some growth CapEx there as well.

Unidentified Analyst

Got it. Really appreciate the color guys. I will get back in queue.

Bryan Shinn

Thanks Jake.

Operator

Thank you. Our next question comes from the line of George O’Leary with Tudor, Pickering, Holt & Co. Please proceed with your question.

George O’Leary

Good morning, Bryan. Good morning, guys.

Bryan Shinn

Hi. Good morning, George.

George O’Leary

The color on the mine closures and how that might play out industry-wide was very helpful. Just curious, I’m sure you guys are mulling over your own mine plans. How do you think about your Northern White mines and might there be any mines either Northern White or even on the regional front that you would consider idling during this soft period?

Bryan Shinn

So we -- as you could imagine we are carefully watching demand patterns across the industry in all the basins and at our mine sites. To-date quite honestly, at least from a historical perspective, we are seeing -- still seeing pretty strong demand across the Board.

And at this point, we are running all of our facilities except for one very small satellite processing facility that we have that’s near our Ottawa mine and historically that’s been kind of peaking mine, if you will, for us, we turn that on and run it hard when demand is really strong.

But other than that one, everything else is running. So, we will have to wait and see what happens. But certainly we will be vigilant and depending on what happens with demand, we will make the appropriate decisions.

George O’Leary

Great. That’s helpful color. And then maybe as you take out your crystal ball and look at the fourth quarter and see what’s happened so far in October. Any color you could provide on potentially how the fourth quarter plays out in the Oil & Gas business from a volume and pricing standpoint. And maybe if you can’t speak to that just kind of where do we exit the quarter from an underlying pricing decline standpoint to help us better understand where we started this fourth quarter?

Bryan Shinn

Yeah. So it’s a really good question, George. And we have done a lot of work on what we think is going to happen in the fourth quarter and so let me give you some thoughts on that. There certainly are a lot of moving parts right now. Based on what we have seen the issues so far in the market in terms of supply and demand have really been demand driven.

Everybody kind of knew or have their own estimates as to how fast supply was going to come online and we certainly haven’t seen anything change with the supply trajectory at this point or said another way that’s pretty predictable.

But the demand dropping precipitously in August and then continuing on and through September, and then on October certainly was the big change for us and I think for most folks in the industry.

Right now we are focused on maximizing our profit dollars and so we have done this in the past. In ‘15 and ‘16, for example, is another question that we got this morning kind of how things played out then.

But in our experience, we have to find the right combination of volume, price, product mix and customers, and we have a lot of options with our portfolio. So our team is working very hard to try and maximize profit dollars.

That said, I think, we will see a continued softness in the market, I think, we will likely see a sequential demand decline from Q3 to Q4 even if we sort of just stay where we were on the run rate basis coming out of Q3.

We have all the kind of holiday season in Q4, which typically takes things down further. So, I think, we will continue to see pricing pressure particularly on Northern White Sand and it’s always hard to get a handle on this, because our customers forecast move around a lot.

So given all that as I step back and look at our fourth quarter as a company, I tend to think of this way, the industrial business will kind of do what it usually does, which is decline slightly in 4Q. That part of the company is rock solid and doing very well.

If you look at last year, for example, our industrial business in Q4 versus Q3 declined about 8% in volume and 11% in contribution margin in the fourth quarter. So that -- and if you go back and look in history that’s a pretty typical sequential decline, so if I was modeling the industrial side of the company I would use something like that I think.

On the Oil & Gas side, my expectation is that we will be flat in volumes Q3 versus Q4 and that will mean that we are probably taking share during the quarter given that I expect industry demand to fall a bit in Q4 versus Q3.

In terms of contribution margin dollars, which is what we are really working to manage here I would model something like maybe 60% what we had in Q3 in terms of Q4 just for the Oil & Gas side of the company, so flat volumes in Oil & Gas and maybe 60% of contribution margin dollars.

But there’s sort of a caveat around that. There’s, obviously, big arrow bars that could be more or less depending on how things play out here in the fourth quarter. So it’s a pretty long winded answer to your question, George. But it’s somewhat complicated to see all the trends and be able to predict them.

George O’Leary

No. That’s a very robust and outflow answers. So, thank you very much, Bryan. I will turn it back over.

Bryan Shinn

Okay. Thanks, George.

Operator

Thank you. Our next question comes from the line of Marc Bianchi with Cowen and Company. Please proceed with your question.

Marc Bianchi

Thank you. Maybe a follow up just on the last comment about the progression here in fourth quarter for margin, is -- Bryan, what’s the underlying assumption for pricing when you are making that comment. I guess that works out $40 a ton if I did my math right here?

Bryan Shinn

Yeah. It’s pricing is complicated and that’s why we focus on contribution margin per ton Marc. I know everybody wants to kind of know the pricing piece. But a lot of it depends on the mix that we end up selling, right. And so, it’s so hard to say that and so that’s why even internally here, we tend to focus more than that contribution margin number, because that’s what our teams are really tasked that to maximize that so we can maximize the cash flow.

Marc Bianchi

Okay. In terms of the volumes, so volume is flat. I presume you are ramping your West Texas facilities and your other regions are kind of going down. Is that a fair assumption and can you talk about kind of how much you would be ramping your West Texas facilities, and kind of what the timeline is to be fully ramp there?

Bryan Shinn

Yes. So we -- as you said, we continue to ramp up West Texas, and I think, you are generally, directionally right that, we would expect to sell more tons out of our Crane and Lamesa, our two West Texas mines, and probably, less Northern White. In terms of how we are ramping, I would say, our teams are making very good and steady progress out there.

And as you know and as many of the folks on the call know who are familiar with sand mining, there’s different unit operation in the process. So we have a mining piece, which we typically call out wet process. We have drying. We have screening. We have the silos where we store our sand and then loadouts.

And so, I tend to think about each of those individually to look at kind of how we are coming up, right. So, the wet section or the mining piece if you will we are 100% complete there and running very well.

So we have large piles of wet sand out at both Crane and Lamesa. Wet section is doing great. We are installing five dryers across those two sides and we have four of those five dryers installed and running. And we expect that the for the dryer will be done by the end of this year.

The screening piece, which is kind of the next part of the process, we are 75% complete and running pretty well for what’s been installed. And I expect there again we will be done by the end of 2018.

The last piece is silos and loadouts. We are about 50% complete there and running well again. I think that will probably take us through the end of Q1, 2019. So bottomline is, all construction at Crane and Lamesa should be done by the end of Q1, obviously, there will be a little bit of start up and check out as we go there.

And as I think about kind of how volumes ramp up there, I would assume that Q4, we are at about four million ton annualized run rate out in Crane and Lamesa, Q1 I would see it’s ramping up to six million, Q2 to eight million and then all the way to 10 million as soon as we can get there at the end of Q2. So once again maybe little conservative, but just given all the challenges out there in West Texas, I will be conservative in my estimates at this point.

Marc Bianchi

Right. Okay. Maybe just a follow up on that part, Don or Bryan could you share with us what you expect for the start up cost as you kind of ramp to these levels and I will just leave it there.

Don Merril

Yeah. Marc, it’s Don. We spend a lot of money in the quarter to get those facilities to where they are today in Q3. I would anticipate that number to be cut by close to two-thirds in Q4. So we are looking at somewhere around 8 million to 10 million in Q4 and then really that number should go down to almost -- when we get into Q1 and Q2, because those plants as Bryan said are going to be up and running at a pretty good rate.

Marc Bianchi

Great. Thank you very much.

Bryan Shinn

Thanks Marc.

Operator

Thank you. Our next question comes from the line of Ken Sill with SunTrust Robinson Humphrey. Please proceed with your question.

Ken Sill

Yeah. Good morning, guys,

Bryan Shinn

Good morning, Ken.

Ken Sill

So, looking at your guidance that would imply another 10% to 30% drop in Oil & Gas pricing per ton, if volumes are flat and contribution margin per ton falling to the mid-teens, how does this compare to what you were expecting on the contracts so far, because I know before we’d talked about either be able to maintain $20 per ton contribution margins, but it looks like we are diving pretty steeply below that here in Q4?

Bryan Shinn

Yeah. So a couple of thoughts on that Ken, our contracts held up really well during Q3 and when you look at the pricing decreases that we had, if you go back and track that into the details, 85% of the pricing decreases that we saw were from Northern White sand.

So, it was mostly a Northern White sand issue and actually we had no price declines from our Permian regional sales, which is where a lot of our new contracts are. So our new contracts held up pretty well. I think the real question for me is where does supply and demand balance go in the coming quarters and I think you have to sort of dig deep down into the details to do that math.

So, I think what we are seeing in the pretty sharp decline in demand, but I think it’s transitory. I saw a report yesterday suggesting that demand was down on annualized run rate to something like 70 million to 80 million tons a year here in October and that’s versus may be 100 million to 110 million ton run rate, so 30 million to 40 million tons down in terms of a run rate as we sit here in October.

But the reality is I expect that to reset substantially as we get into 2019. I think that the whole sort of budget exhaustion that’s been widely reported, takeaway capacity issues and a variety of other things that are sort of depressing demand right now all come back in 2019.

And so if you look at where we had been earlier in the year, the supply and demand gap total sand in the market was about 20 million tons to 25 million tons. So, said more clearly, we had about 20 million tons to 25 million tons more supply than demand say back in Q2 for example. Pricing was robust, the market was kind of rock and rolling and things were going very well.

If you believe the current sort of run rates that would say the market is more like 50 million or 60 million ton alone today. But our math suggest that that’s going to tighten backup in 2019 and so our forecast is for about 130 million tons of demand next year and about 150 million to 155 million of supply. So, we kind of get back to that 20 million ton to 25 million ton gap and I apologize for all the math here on the call.

But I think it’s very important that everybody who’s on the call today understands that this is not a one-way street where margins and pricing go down without coming back in my humble opinion. I think that the supply-demand gap will tighten in 2019, in spite of the fact that there is more capacity coming on line, but there’s going to be more demand next year as well. So, we believe that in 2019, perhaps let’s say, let’s give Q1 a chance to settle out by Q2. I would expect a pretty substantial rebound in pricing and margins and that’s what we are forecasting.

Ken Sill

Okay. One unrelated follow up, I was a little bit surprised to see industrial volumes down Q2 to Q3. Q3 tends to be one of you higher volumes quarters. I wonder if you give us some color on was that like a product mix or where were the volumes have actually fallen in Q3?

Bryan Shinn

Yeah. It was just a product mix issue. There’s really no issue there. The industrial market is doing really well. So no issues there at all. It’s just time-to-time customers buy more in one quarter than the next. They are trying to manage their own inventory and sort of issues and so we see these kinds of swings all the time.

Ken Sill

All right. Thank you.

Bryan Shinn

Thanks, Ken.

Operator

Thank you. Our next question comes from the line of Scott Gruber with Citi. Please proceed with your question.

Scott Gruber

Yes. Good morning.

Bryan Shinn

Good morning, Scott.

Scott Gruber

So SandBox averaged 82 crews during the quarter. What did they exit the quarter and I may have missed it earlier, but is the 90-plus crew target for exiting the year is that still valid?

Bryan Shinn

Yeah. So it’s a great question and I believe that -- I believe we can get either at 90 or really close to 90. We have got a strong pipeline of new opportunities and we are recently awarded work with several major operators for multiple crews and so some pretty exciting demand coming in SandBox.

I would say that sort of dynamic for the quarter was we had a good number of crews working in Q3, but sometimes a working through means different things depending on what’s going on in the quarter. We really make most of our money in terms of loads of sand that we deliver.

So we can have a working through, but if the frac crew that its supporting has slowed down or has whitespace on their calendar, we don’t have as much profitability from that crew in a quarter. So we saw some of that.

But as I mentioned in my prepared remarks, we had a pretty nice improvement in cost effectiveness and so in spite of this softness, we actually saw a 7% increase in profits per load that we did deliver.

So, net-net, we are able to offset most of the softness in the quarter. But the reality is we do make our money off of sand delivered by and large. So sand demand is down that means our profitability for SandBox is going to be down a bit as well.

Scott Gruber

And so it sounds like the contribution margin dollars for SandBox fell on the volume headwind in 3Q. How much was it down and then if you are on the ramp, up towards 90, how much rough does it increase in 4Q?

Bryan Shinn

Yeah. So we haven’t given any guidance or information specifically on the contribution margin dollars, Scott. But, I think, we were pretty close to flat with Q3. We weren’t quite able to offset the volume headwinds with our pricing and the productivity improvements, but we came pretty darn close.

Scott Gruber

Got you. And where do we start the quarter from a crew’s deployed standpoint?

Bryan Shinn

So we started the quarter at 76 crews and actually today we average 82, but today we have 85 crews deploying. We have actually gone up three crews since the end of the quarter.

Scott Gruber

Got you. Thank you.

Bryan Shinn

Thanks, Scott.

Operator

Thank you. Our next question will come from the line of Stephen Gengaro with Stifel. Please proceed with your question.

Stephen Gengaro

Thank you. Good morning gentlemen. Two things, one you mentioned on the conference call a long-term contract you signed down in the Permian. What kind of appetite are you seeing for more deals like that? I know, that’s kind of a unique one? But are you seeing a lot of interest for deals with fairly long duration similar to that transaction?

Bryan Shinn

We actually do Steve have a number of those deals under discussion. I think what you are saying is that, energy companies have a better visibility in terms of their demand and particularly demand in a certain area than, perhaps, the service companies do.

So energy companies will tend to be more willing to sign longer-term contracts and I think that Pioneer deal was kind of a model contract and has attracted to the interest of a lot of other energy companies are thinking about the same thing.

And certainly given our footprint in terms of sand and our logistics capability with SandBox, I think we are in a great position, you know probably best positioned in the industry to be able to deliver and execute against something like that.

Stephen Gengaro

I know you didn’t disclose the terms, but assuming that -- I’m sure you seem some of the numbers that we have thrown and others have drawn out. Are deals that our being discussed at similar terms ort do you think they’d be better or worse, is there any sense for that?

Bryan Shinn

So the kind of deals that we are talking about have what I would sort of look at is pretty attractive margins and terms and we haven’t signed any long-term contracts that we are not really excited about. So I feel good about the things that we are discussing.

And I think the other thing that’s important to remember is that, there’s also a cost curve in the Permian and so if you look at how our mine footprint is laid out. We have a great low-cost access to a number of the wells in and around the Basin.

And so particularly operators that are closer to our mine sites there’s really good profitability there for us and a lot of these deals that we are talking about also include SandBox. So now we have the sand, but you have got the margins you will make of moving that sand around and these kind of short to medium size, halls if you will, with the trucking with SandBox that’s right in our wheelhouse in terms of the most profitable business that we have in SandBox. So it’s a pretty exciting opportunity to see if we can get some more of these contracts signed.

Stephen Gengaro

Great. And just one final one, you mentioned the ISP side. I think you mentioned earlier in the call 10% growth rate in ‘18 kind of in line with the CAGR you have talked about. You think that is a fair number for ‘19 at this point as well?

Bryan Shinn

I do. We have a lot of things in the queue for ‘19 and beyond, new products and new opportunities. I’m feeling particularly bullish about the industrial business right now.

Stephen Gengaro

Great. Thank you.

Bryan Shinn

Thanks Steve.

Operator

Thank you. Our next question comes from the line of Connor Lynagh with Morgan Stanley. Please proceed with your question.

Connor Lynagh

Yeah. Thanks a lot.

Bryan Shinn

Hi. Good morning, Connor.

Connor Lynagh

I was wondering -- good morning. I was wondering if you could talk a little more -- you were starting to talk about the cost curve in the Permian. Can you give us a feel I mean just relative to the cost curve that you would have seen in Northern White? How steep I guess is the cost curve in the Permian or just local markets in general?

Bryan Shinn

So, if you look at the cost curve there, it’s -- let’s say it’s mostly based on logistics. There are certainly some operational cost differences from a mine standpoint. But let’s just take those and put those to the side and say for sake of argument that everybody’s the same in terms of operating cost or kind of cost to put into a truck.

Typically, to drive say an hour of round trip adds $5 a ton to the cost of the sand. So, for example, every place that were, say, a short round trip by an hour for that sand then we have a $5 advantage. If it’s a two-hour round trip, savings then that’s less $10, right.

So we see many of our customers that we are targeting in that kind of range where their next best alternative would cost somewhere between $5 a ton to $10 a ton additional to deliver. So, I think that’s a kind of number that you are looking at.

Then if you add back in some of the operational efficiencies I think our sites, once we get everything started up, we will probably be at the bottom of the cost curve in the Permian as well, particularly Lamesa given that’s a 6 million ton site, you get a lot of efficiencies there. So maybe there’s another few dollars a ton.

So it’s pretty easy to see $7 a ton to $12 a ton advantage for a site like Lamesa and that should be a pretty sustainable, durable advantage and that’s really our point around talking about the cost curve in the Permian.

Connor Lynagh

Yeah. Understood. And could you just elaborate a little on what you think in terms of the long run trajectory for imports there, is Northern White still setting the price there, what sort of the marginal ton?

Bryan Shinn

So, I think, that in the Permian 100 mesh will probably be self-sufficient within the Permian. I think we have a long way to go before 40-70 and gets to that and then in all the other basins that we see, Northern White will still be a player.

So, I feel like Northern White is kind of that best Northern White ton that can deliver -- get delivered into the basin. It’s still going to be the marginal ton for a while outside of the Permian and even inside the Permian for 40-70 it probably will be.

Connor Lynagh

Okay. Got it. Thanks for the color.

Bryan Shinn

Thanks Connor.

Operator

Thank you. Our next question will come from the line of John Watson with Simmons & Co. Please proceed with your question.

John Watson

Good morning, guys.

Bryan Shinn

Good morning John.

John Watson

Bryan I wanted to follow-up on your commentary on Arrows Up, I appreciate it if you can’t say more for legal reasons. But is there timing where you expect to receive the $49 million of damages and the containers? I saw that they are appealing, can you elaborate on your thoughts there?

Bryan Shinn

Well, we are not sure what Arrows Up is going to do. They have the right to appeal. But as with most appeals in these kind of situations, the appeals not necessarily on the merit of the case, sit on procedural things or technical things that happen during the trial and given the unanimous verdict and the verdict being basically affirmed by the court and the judge, we think we have a really, really strong case here, and so we will just have to see ultimately what they do.

We would expect that if and when we get this equipment, we will have an orally transition of their equipment to U. S. Silica’s ownership and certainly we want to work with all the parties involved to try and minimize the impact as we make this transaction to Arrows Up customers and we will see when we get the $49 million check.

John Watson

Okay. Understood. That’s helpful. As you think about your 2019 CapEx budget is there a chance that you expand Crane to $6 million and have $12 million in the Permian and can you also talk about the prospect of some of your competitors expanding from their current nameplate to higher nameplate using an NSR?

Bryan Shinn

Yeah. It’s a great question, John. I would say at this point, we don’t have any plans to expand our Permian capacity. I like the footprint that we have both Crane and Lamesa and the couple out up with SandBox and I think we have a lot of advantages. So, we don’t have any plans to expand in the Permian at this time.

John Watson

Okay. Understood. I will turn it back. Thanks, Bryan.

Bryan Shinn

Thanks, John.

Operator

Thank you. Our next question comes from the line of Chris Voie with Wells Fargo. Please proceed with your question.

Chris Voie

Good morning.

Bryan Shinn

Good morning.

Chris Voie

Just wanted to talk about impact for 4Q a little bit, you gave some good piece of the guidance here and we haven’t really touched on where Northern White margin per ton might be specifically or where are the leading edges. But if I understand the guidance right and did my math quickly.

Bryan Shinn

Yeah.

Chris Voie

If you assume Permian margin per ton is probably in the $20 range, you said it was holding up pretty well. My math suggests that margin per ton for let’s say Northern White and other regional sources, probably, shakes out zero to $5, is that where Northern White is right now?

Bryan Shinn

Yeah. Look I don’t think it’s that far down. But we haven’t really talked specifically and broken out the margins by the different kind of sand. I think what we will see as I said earlier is more pressure on Northern White, obviously.

I think it remains to be seen how much Northern White capacity comes off-line, certainly the more of that happens the better in terms of the margins that those of us who are still remaining with low cost capacity in Northern White. The margin is better for us if that happens.

So we will have to wait and see. But we are really happy with how the local sands held up with this kind of first test if you will in terms of demand going down.

Chris Voie

Okay. That’s helpful. And then just the conceptual one, with in-basin clearly taking more and more share and certainly for certain basins that’s going to continue, have you just review on what you think full cycle or normalized contribution margin per ton might be. I think in the past we discussed somewhere in the $15 to $20 range as the full cycle kind of fair value but given lower barriers to entry for in-basin mines and competition, have you adjusted that view at all?

Bryan Shinn

We haven’t. I think, for example, in the Permian, the question that we were answering earlier around the cost curve structurally, I believe we should have a $7 a ton to $10 a ton maybe $12 a ton advantage versus the lot of the competition there.

So even if competition was selling for zero profit that would say we should still make $7 a ton, $10 a ton, $12 a ton margin and I don’t know maybe business -- that will stay in business for long selling for zero profit, right. So I think the long-term future for the in-basin mines could be in that $15 to $20 range as well.

Chris Voie

Okay. Thank you.

Bryan Shinn

Thanks.

Operator

Thank you. We have reached the end of our question-and-answer session. I’d like to turn the call back over to Mr. Shinn for any closing remarks.

Bryan Shinn

Well, thank you very much, operator. I’d like to close today’s call by thanking everyone on our team who helped us deliver over $105 million of EBITDA in Q3. We have a lot of exciting opportunities ahead, some of which we talked about on the call today and I look forward to talking with all of you next quarter. Thanks for dialing in and have a great day everyone.

Operator

Thank you. This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.