U.S. Silica (SLCA) CEO Bryan Shinn on Q1 2019 Results - Earnings Call Transcript

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About: U.S. Silica Holdings, Inc. (SLCA)
by: SA Transcripts
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Earning Call Audio

U.S. Silica (NYSE:SLCA) Q1 2019 Earnings Conference Call May 1, 2019 8:30 AM ET

Company Participants

Michael Lawson - VP, IR & Corporate Communications

Bryan Shinn - President & CEO

Don Merril - EVP & CFO

Conference Call Participants

Marc Bianchi - Cowen & Company

Scott Gruber - Citi

Stephen Gengaro - Stifel

Lucas Pipes - B.Riley FBR

John Watson - Simmons & Company

Operator

Greetings, and welcome to the U.S. Silica First Quarter 2019 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 now begin.

Michael Lawson

Thanks. Good morning, everyone, and thank you for joining us for U.S. Silica's first quarter 2019 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'll begin today's call by reviewing the details of our strong first quarter followed by an update on the progress we're making to drive growth, diversify our profits sources, and enhance shareholder value across the U.S. Silica enterprise. I'll conclude my prepared remarks with a market outlook for both of our operating segments, and lay out why we're becoming more optimistic on business performance over the coming quarters. I'll then turn the call over to Don Merril who will review key financial metrics before we open the call for your questions.

For the total company, first quarter revenue of $378.7 million increased 6% sequentially. Adjusted EBITDA for the first quarter of $68.8 million was up marginally on a sequential basis, driven largely by very strong performance from SandBox in the quarter, and a rebound in Northern White sand volume and pricing. Our Industrial and Specialty product segment had a solid quarter with revenue up 4% sequentially, and total segment contribution margin relatively flat. Price increases implemented at the beginning of the year were more than offset by some unfavorable production costs that are improving here in the second quarter.

In our Oil & Gas segment; we sold 3.9 million tons of sand in the first quarter, a 4% improvement sequentially as we continue to bring on new West Texas capacity. We also saw a resurgence in volume and pricing for Northern White sand during the quarter, a trend that has continued in Q2. SandBox had a very strong quarter recording record volumes, revenue and margins, primarily driven by a 55% sequential growth in loads delivered through our full-service model. We continue to take share from both, silos and other containerized offerings and believe the gains are driven by our unique service offering that clearly differentiates SandBox from competitors. We estimate that we currently have more than 25% of the last-mile market share based on volumes of sand moved, and would expect that number to grow throughout the year based on our strong new opportunity pipeline.

Let me now provide you with an update on our progress to transform U.S. Silica and position us for success with a Winning Trifecta of performance materials products, last-mile logistics solutions, and best-in-class sand profit and capabilities. I want to focus this morning on examples of recent progress in our industrial business, and in particular, our performance materials offerings. Today marks the one-year anniversary of our acquisition of EP Minerals, this acquisition not only doubled the size and diversified the mix of our Industrial business, it has also provided a strong platform for growth through new product development, access to attractive new end-use markets, and the ability to compete on a larger global stage. Both, EP and our legacy ISP business have durable competitive advantages including proprietary processes, quality reserves, intellectual property, strategic assets, high-customer switching costs, and unique products.

Let me give you several examples of how we're capitalizing on these many advantages today to grow our company. First, interest in Transcend; EP Minerals new and improved diatomaceous earth filtration media product line continues to be strong with sales nearly doubling versus the prior year as more customers and more markets experience the value of this unique and innovative offering. Second, we're in discussions with multiple pharmaceutical and health sciences customers regarding the use of our broadening product line of ultra-pure filtration materials for applications like blood plasma fractionation, drug purification, and enzyme separation, all based on EP Minerals technologies and knowhow.

Third, we're experiencing strong growth in end-markets utilizing our new whole-grain and ground crystalloid [ph] offerings named EVERWHITE. For example, EVERWHITE is a key ingredient in engineered quartz countertops, which are rapidly gaining share in North America versus traditional surfaces such as granite and marble. Based on a recently signed long-term customer contract, we're expanding our capacity to produce EVERWHITE products. Fourth, U.S. Silica is one of only two companies in North America with a capability to produce ultra-fine ground sand. An industrial customer recently approached us to produce a high-value new product for their specialty materials business in Europe and Asia. New government standards in those regions are prompting a strong uptick in demand for our customary products and they want to work with U.S. Silica as the trusted supplier for this critical ingredient.

Fifth, just last week we shipped the first material from our ISP facility in South Carolina to a customer's new fiberglass manufacturing plant that was specifically constructed near our sand mining plant, which by the way, we're in the final stages of expanding to meet this additional demand. The customer signed a long-term contract with volume set to double in 2020 when they finish doubling the size of their own plant. And finally, last month we received a second patent for our solar-reflective technology that goes into making White Armor cool roof granules. We intend to begin manufacturing this product at our new Millen Georgia facility this summer and we're seeing very strong customer interest. This is another example of U.S. Silica's commitment to product innovation and to developing new product solutions that serve our growing performance materials markets.

These six examples are just a few of the exciting growth projects in our Industrial business pipeline, and I look forward to sharing details of other projects on future calls.

Now, let me conclude today with a market outlook commentary starting with Industrials. Our robust U.S. economy supported by strong job growth and moderate interest rates bodes well for many of our end-use markets like new housing construction and residential remodeling. First quarter GDP numbers released last week show the strongest rate, a first quarter growth in four years according to the Commerce Department. Analysts predict that despite some early weakness, housing starts should strengthen through the remainder of 2019. Also, big ticket residential remodeling activity nationwide is expected to stay strong due to strong job growth and record levels of home equity according to a leading industry association report. U.S. auto sales are expected to climb modestly year-over-year, but conversely, sales of premium wine, an important filtration market for us are expected to grow between 4% and 8% in 2019.

When taken in total, we believe these factors provide a positive economic climate for our Industrial business and we would expect to see the normal seasonal increases in both, sales and contribution margin for the ISP business in the second quarter.

Let's move now to Oil & Gas outlook commentary starting with sand. Well completions climbed 5% month-over-month in March despite flat activity in the Permian. Permian activity is expected to ramp to above 2Q '18 levels in anticipation of off-take constraint relief in the second half of 2019. As I mentioned earlier, we also saw demand and pricing for Northern White sand strengthened during the quarter. In March alone, we had to decline approximately 800,000 tons of customer order requests across multiple basins due to lack of supply. When we analyzed this situation, we found a number of factors. First, the Appalachian Basins experienced providence shortages in the first quarter due to extensive delays on barge and rail shipments. As those log jams cleared, however, we saw accelerating completions activity in the Northeast which kept prices and volumes strong.

Also, we're hearing anecdotally from more customers today about quality concerns around poor crush strength of new in-basin sand in areas like South Texas. Some customers are expressing interest in moving back to Northern White or other regional sands to use in the Eagle Ford. In the meantime, Northern White is filling demand as new mines come online. And we're also hearing about delays in bringing new in-basin sand capacity on in places like the Midcon, which could be leading to more Northern White sales. But I would also say that internally we spent a lot of time during the quarter working with our logistics partners to find new profitable routes into areas like the Northeast and parts of South Texas. Those incremental tons allowed us to reactivate shifts at plants that were previously disadvantaged from a cost standpoint. There are a lot of puts and takes here overall, but I have to say that we remain optimistic that we'll see continued heightened activity around Northern White sand in the coming quarters.

For Q2 specifically, we believe our Oil & Gas sand volumes will grow low to mid-single digits sequentially, driven by our continued ramp in West Texas production and the reactivation of some of our Northern White capacity partially offset by the loss of volumes from our Voca, Texas facility, which we idled April 1. West Texas pricing, however, remains under pressure and as a result, we could see another dollar or two per ton decline in contribution margin per ton for the oil & gas business in Q2. Prices in the region may rebound in the back half of the year as activity accelerates, but that remains to be seen.

Finally, we believe that SandBox full-service load volumes should be up than 15% sequentially in Q2 with profitability up accordingly. We have several recent customer wins and a very robust pipeline of potential new opportunities. We expect to invest up to $40 million this year in new equipment as planned, including our next generation of boxes and a new gravity-fed conveyor and we're continuing to develop a new product line to add to the SandBox portfolio.

And with that I'll now turn the call over to Don. Don?

Don Merril

Thanks, Bryan, and good morning everyone. First, I would like to reiterate Bryan's comments on the company delivering a strong first quarter and generating $68.8 million of adjusted EBITDA.

Moving onto the results of our two operating segments, first quarter revenue for the Industrial and Specialty segment was $118.3 million up 4% from the fourth quarter of 2018. The Oil & Gas segment revenue was $260.5 million up 7% from the fourth quarter of 2018 due to increased SandBox activity. On a per ton basis, contribution margin for the ISP segment of $46.12 represents an approximate 3% decrease from the fourth quarter. Price increases implemented in the first quarter were mostly offset by the increased costs and our mixed use plans due to reduce the oil and gas volumes and the associated in efficiencies in the first half of the quarter. These cost headwinds were reversed late in the quarter as volumes increased at the affected plan.

We anticipate that the Industrial and Specialties segment will see low-double-digit percent increase in contribution margin dollars in the second quarter of 2019. The Oil & Gas segment contribution margin on a per ton basis was $15.16 compared with $14.65 for the fourth quarter of 2018 largely due to increased SandBox loads, improved logistic expenses and more favorable mix including Northern White sand has previously discussed.

Let's now look at total company results. Selling, general and administrative expenses in the first quarter of $34.7 million represents an increase of 8% from the fourth quarter of 2018. That increase was in line with the guidance we provided on last quarter's earnings call and relates to increases in compensation expenses and facility closure costs. We expect SG&A expenses to increase by $1 million in Q2 again due to expenses related to facility closures. Depreciation, depletion and amortization expense in the first quarter totaled $44.6 million and we expect DD&A to be reduced by approximately $1 million in Q2 of 2019. Our effective tax rate for the quarter ended March 31, 2019 was a benefit of 9% including discrete items. However, the company still believes our full-year effective tax will be a benefit of about 29%.

Moving onto the balance sheet, cash and cash equivalents as of March 31, 2019 was $161.6 million and total liquidity, including the revolving credit facility was $256.8 million. The reduction in cash was expected as we plan to spend roughly a third or $44.4 million of our capital budget in the first quarter. We still intend to keep full-year capital spending within our operating cash flow and be free cash flow positive for 2019. Additionally, our net debt under our credit facility at quarter-end was $1.1 billion. As noted earlier, our capital expenditures for the quarter were $44.4 million primarily associated with our Permian basin mine sites which are very near completion and other growth projects such as additional assets for our SandBox business. We expect to keep capital expenditures in the range of $100 to $125 million in 2019 and as I already said, it'd be funded from cash flow from operations.

And with that I'll turn the call back over to Bryan.

Bryan Shinn

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

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Marc Bianchi with Cowen & Company. Please proceed with your questions.

Marc Bianchi

Thank you. I guess just first question, Bryan, on the outlook for margin in Oil & Gas, you mentioned $1 to $2 decline. Is that for the overall segment or were you just talking about the Sand margin specifically.

Bryan Shinn

So, that's for the overall segment, Marc.

Marc Bianchi

Okay, thanks for that. And I guess it sounds like the driver there is continued weakness in West Texas. What would you anticipate in terms of pricing bottoming out there? I mean, is there any line of sight to things bottoming at some point in the second quarter? What are the puts and takes that you guys are thinking about as you put that out together?

Bryan Shinn

It's a great question, Marc. And I would say it's something we spend a lot of time thinking about. I would say that what we're seeing kind of first off is some pressure in West Texas, mostly on 100 mesh as it has been well-reported and discussed, there's more capacity out there than demand right now. So, that's definitely not helping prices there. I would say though that the balance to that for us is that we're starting to see some tailwinds from the Northern White sand that's coming back. I would say we talked about that in our prepared remarks. In the Permian, the other issue that we have to deal with is all the capacity gets started up out there. There's a lot of sort of pricing irrationality that happens. Sometimes new suppliers when they bring their minds online or when they try to, they end up with silos full of sand that they need to move at the real low prices. And so, the spot market has been pretty erratic for 100 mesh. 40/70 in West Texas, pricing has held up a really well. So, that's helping also. So, there's puts and takes here, but if I had to boil it down to one thing, I would say it's pricing pressure on 100 mesh in the Permian. It probably the biggest negative we have.

On the positive side, to your question, the market is definitely starting to firm up a bit. I feel like we're going to see it get a bit firmer in the next couple of quarters here. So, that's going to be good. Northern White sand coming back and having that market tighten up a bit is certainly helpful to us. Demand is really strong overall and as we talked to a particular energy company customers, we're getting a more sort of bullish outlook in terms of how they're viewing the rest of 2019. So, there's a lot of things to be hopeful here about as we go forward, but I think we'll persist with pricing pressures on 100 mesh in the Permian.

Marc Bianchi

Okay. That's great color. And then Don and Bryan, I guess you mentioned the ISP contribution margin improvement of low-double-digit dollars in the second quarter. It would appear that that's the average that you'll realize. And perhaps the second quarter exit rate is going to be higher and you have other things in place that are trying to drive that margin higher. What would your expectation be in third quarter in terms of a tailwind? I know it might be difficult to quantify, but just maybe help set a baseline for us as we think about how you're progressing through second quarter.

Bryan Shinn

So my expectation, Marc, would be that Q3 would be relatively flat versus say Q2 exit rate, which as you said, should be up a bit. We have a lot of new opportunities coming online. And I talked about several of them in detail in my prepared remarks. And so, those new products and new wins that we've had in the market will start to hit as we go through 2019 here. And if you look at our business historically Q2 and Q3 are usually the strongest quarters. Q4 typically falls off with a seasonal activity if you will. So, I think Q3 should be pretty strong, but I wouldn't model it higher than say Q2 exit.

Operator

Next question is from Scott Gruber with Citi. Please proceed with your question.

Scott Gruber

What level of volume growth did you see in SandBox and 1Q?

Bryan Shinn

So, we talked about the loads being up 55%. The delivered loads 55% from Q4 to Q1. So, that's I think one of the largest jumps that we've made in terms of absolute growth. My expectation is that Q2 is going to be really strong as well. March was the best month we've ever had in the history of SandBox by almost every measure and it looks like April's coming in much stronger than March. So, SandBox is really doing well and my expectation is that we're going to continue to grow that business quarter-on-quarter right through 2019.

Scott Gruber

The 55%, is that via the full-service model or total volumes?

Bryan Shinn

So, that was the full-service model. And typically, these are more energy company direct customers. And so, if you look at that side of our business that probably makes up right now about 50% of our revenue. We have a lot of other models that we run. Some are just pure equipment rentals. Others are sort of partial service models depending on what the customer wants. But the reason we call that a piece of the business out is that that's the fastest growing part of our SandBox enterprise. And I think that's kind of where the future model is trending with providing that full-service, kind of a gate-to-gate service to the energy companies.

Scott Gruber

And then we and other analysts typically model your province business separate from your SandBox business or at least we had come to. But obviously, as a full-service model becomes a bigger portion of the pie, it doesn't make sense to start thinking about a joint business as you reported. That modeling contract seems to be more appropriate. And thinking about the full-service model and kind of being agnostic to where you make your margin or how you'd make your margin as long as you make the margin, how should we think about a normal margin then for the business?

Bryan Shinn

It's a tough question to answer because you're right, these businesses start to meld together, right? The Oil & Gas profit business and the SandBox business that we're capturing margin for selling our sand right from the mindset the way to the wellhead. So, it gets difficult for us to break that out for you all. Think of it in these terms, right? If you think about from Q4 to Q1 increase in SandBox profitability was roughly 20%, and I would anticipate that the increase in profitability in SandBox from Q1, Q2 would be 20% plus.

Scott Gruber

Gotcha. Is there any color on whether the segment margin that you think of it's kind of more normal as it's not 15 bucks at time, but 2025 kind of any color on, I had to think about that kind of longer-term normalized margin?

Bryan Shinn

A lot of terms are a little bit difficult because a crystal ball is a little fuzzy as you go out, but I would say that if Bryan talked about you've got some pricing pressure going on in the Oil & Gas prop inside that's being offset by or mostly offset by the increase in SandBox. So, as we go forward, we're looking at normalized margins roughly where we are today.

Operator

Next question is from the line of Kurt Haled [ph] with RBC.

Unidentified Analyst

It sounds like you guys got a lot of good momentum in a number of different businesses despite some of the challenges surrounding the FRAC sand. So, kudos for managing through this period of time. I guess what I wanted to start with was you mentioned some challenges that some of the operators might be facing with cash strength in Eagle Ford and potential shift toward Northern White. So, maybe just starting there, what do you think that may mean in terms of shift back to Northern White and maybe volumes, and I know we're all kind of guessing at this, but maybe at first pass, what do you think that could mean?

Bryan Shinn

So, it's really fascinating Curt. I have to admit that if you'd asked me two or three quarters ago, what do we see this resurgence in Northern White sand, would have been hard to really bet on that. But we definitely saw in Q1 and it's continuing into Q2, as I mentioned in my prepared remarks, we actually had to decline about 800,000 tons of orders in March. And most of those orders were Northern White sand orders from customers because we just didn't have the capacity. It is interesting though, if you look in Q1, we didn't mention this in our prepared remarks, but we actually signed four new profit supply contracts in Q1 and all four of those were for Northern White sand and all four of those counterparties were energy companies. So, just think about that four energy companies signed contracts with us for Northern White sand that starts to feel like the old days again a bit. And our experience so far with energy companies is that they don't typically sign contracts for products that they don't have plans to use. It's a bit different than service companies. And so, sales team kudos to them, a great job during the quarter of bringing those contracts in.

And then we also signed meaningful extensions to two very large contracts we had with other customers. And some of those contracts that included Northern White, some were for local sand, but just the fact that customers are willing to sign contracts for Northern White sand right now I think speaks volumes too to some of the things that we're seeing in the market.

Unidentified Analyst

That's great color. I appreciate that. And just quick follow-up to that was were those contracts for Eagle Ford or were they for the Permian as well?

Bryan Shinn

So, it's interesting. The contracts with the four energy companies were for pretty much everywhere, but the Permian, so all of the other basins, the two extensions were in multiple regions. But probably 60%, 70% focused on the Permian.

Unidentified Analyst

Got it. All right. And then they follow-up and staying along those lines of crush strength challenges and everything else, so I take it by lack of commentary that you're not really seeing that dynamic play out in the Permian just yet. I guess you're still learning about the crush strength dynamics and kind of what people won't companies are going to prefer to use for those Permian wells. Can you give us some insights on that?

Bryan Shinn

Yes. So, I think it's not exactly that. It's a bit of a subtle difference when you look at the physical performance and characteristics of the local Permian sand, particularly the crush strength, most of the crush strength of that sand is relatively close to the Northern White sand. It's a step-down, but it's not a big step-down from Northern White sand. So if you say in Northern White sand might be eight to 10K crush, that some of those Permian sands or 6K or 7K sands. So that's not too bad. In the Eagle Ford, a lot of the sands are 2K, 3K and 4K. So it's another one or two big steps-down from Northern White. And I think that's perhaps the difference. Also as we look out into the future and think about potential for consolidation of the energy companies and assuming that it's some of the majors and super majors doing the consolidation, those energy companies tend to hold on to the wells longer and they're more interested in our experience and looking at the performance of the well over its entire life as opposed to just the IP. And we think that's really the difference in the long-term between Northern White sand and some of these substandard local products. You get better performance over time. And so, I think that could be driving some of this kind of re-examining that's going on right now.

Unidentified Analyst

That's great. And just one on the ISP front, I think Marc had asked this question, I just wanted to clarify it. So, you're expecting that ISP contribution margins will improve versus the first quarter levels. So, are you thinking they kind of get back to where they were in the third quarter of '18? Is that how we should be thinking about the second and third quarter?

Bryan Shinn

Yes, I think what we commented on was contribution margin dollars would go up in Q2 versus Q1. I think that if you look at on a contribution margin per ton basis, getting back to Q3 levels of last year and Q2, I think it's pretty close to that.

Operator

The next question comes from the line of Tommy Mou [ph] with Stevens. Please proceed with your questions.

Unidentified Analyst

Good morning and thanks for taking my questions. Last quarter, you guys mentioned that for the full-year in 2019 you were ballparking about 25% of company profitability from sand, from frac sand and 75% from the combination of ISP and SandBox. Is that still about the right split to think about for this year or would you adjust that up or down?

Bryan Shinn

My sense is that still about the right split. It feels like we've got a little bit more of a tail-wind on the sand business right now, just given the kind of Northern White demand coming back. And SandBox being so strong, so we'll see where that goes. But I think it's generally in that kind of ballpark and obviously things move around. Tommy, even though we've got, it looks like more strength in our oil and gas business overall. As we said in our prepared remarks, we have an amazing amount of new products and new offerings coming online in the industrial business, which are going to start to put a lot of points on the scoreboard there as well. So, I would keep it about the 25% level for Oil & Gas, sand and 75% for the rest of the business.

Unidentified analyst

Okay. As a follow-up, I wanted to double-back to your commentary on 100 mesh pricing in West Texas. If it's possible to try to strip out the impact of some thin spot volumes is people may need to reduce inventories as they bring new minds online and peer through to underlying contract pricing or were new deals of significant size could be signed today. How do you see the trend there and how do you see that unfolding throughout the years? Have we hit a bottom do you think on long-term contract pricing? Any outlook you could give would be helpful. Thanks.

Bryan Shinn

Sure, Tommy. I would say that pretty much as in any market and certainly in the Oil & Gas sand market, if you're signing new contracts, typically the benchmark is worse spot pricing, right? So, my guess is that most new contracts that are being signed are somewhere in and around the spot price today and it feels like we, I wouldn't say we hit the bottom quite yet, but boy, things are definitely feeling like they're firming up. And there are days where we can get a little more price and then sometimes, we get a little bit less. So, the big swings that we've seen in pricing in West Texas 100 mesh in the past seemed to be dampening out a bit. And usually that's a good sign of kind of a flattening and a stabilization coming. My hope would be that over the next couple of quarters, it really starts to level out of it and we find call it a bottom or a kind of a stable place where everyone has confidence that's where it's going to stay for a while.

Operator

The next question is from the line of Taylor Zusher [ph] with Tudor Pickering Home. Please proceed with your questions.

Unidentified Analyst

Good morning. Bryan, you've had a lot of positive comments around Northern White today, and so I wonder what the Q2 guidance on a frac sand side for low to mid-single digit volume growth; if you could help us I think about how much of that on a percentage growth basis might be Northern White versus in-basin?

Bryan Shinn

So, just to give you a sense, we reactivated about 1.5 million tons of Northern White capacity. So, I think you can -- it looked bad to assume that a reasonable Porsche that would be sold going forward, and so hopefully that will be created through our volumes as we look forward over the next couple of quarters here.

Unidentified Analyst

Okay. And then maybe a more high-level one, it feels like a lot of your customers, at least on the EMP side, are now starting to talk about up-facing and then obviously laser-focused on cost. And so, I'm curious for you guys, if you think the well intensity trend is it starting to stall out here or maybe on an average-to-average basis 2019 versus 2018 if you still expect more growth year-over-year from a profit per well perspective moving forward?

Bryan Shinn

We do. Our model shows two drivers of that. One is longer laterals here in '19, and so we're estimating about 7% of longer laterals. And based on the data we've seen so far, it looks like about an additional 2% in profit per lateral foot. So, somewhere around 9% to 10% of profit per well gain. And that was at $50 oil when we originally made that estimate. My guess is it could be north of that if oil continues to climb. And I think just in general, as you talk about the kind of factors that could influence this market, there are a couple of indicators that we're watching. Obviously, one is WTI pricing. And as we stay here now somewhere in the mid-60 and maybe with a little bit of a positive Ford outlook that's certainly helpful in conversations with a number of operators. It seems like they're perhaps now predicting better cash flows for the year versus what they had in their budgets.

So that may free up some additional capital for them to make decisions, whether used for completions or something else, but more cash in and around our customer base is probably helpful. I would say also, I'm hearing a lot fewer concerns around Permian takeaway capacity, which I think is constructive and perhaps leads operators to be a bit more aggressive. So, I think there's some positive trends here that could help all across the completion space for sure.

Operator

The next question is from the line of Chase Maheil [ph] with Bank of America. Please proceed with your questions.

Unidentified Analyst

Good morning, gentlemen. If we can talk about ISP on 2Q, it seems to be a little bit of confusion, kind of what's the outlook for 2Q? So, could you just kind of reiterate what you were saying on the 2Q outlook for ISP.

Bryan Shinn

Yes. So, what I said was that the we believe that ISP in Q2 will have about a low double-digit, 10% to 12% increase in overall contribution margin dollars in Q2 versus Q1.

Unidentified Analyst

Okay. And then the other confusion I'm getting so far is just the $1 to $2 decline in Oil & Gas contribution margin. It seems like commentary so far from providence in some other companies have been that pricing has kind of found a bottom in West Texas. But maybe kind of help us understand what's going on within your West Texas volumes. Is it more kind of contract rollover? So, just kind of help us understand why we're seeing a sequential decline in contribution margin.

Bryan Shinn

Yes, sure. I think part of it for us is as we bring up our second site out there, the Lamesa site; if you look at some of the customers that we contracted there, the margins there are a little bit lower than some of our other contracts. And so, for example, we'd reported back several months ago that we signed a really large with an operator and they actually paid us for reserves in the ground. And so, you could imagine that contract has lower net pricing per ton because of that. Right? So, the things like that are impacting our mix, I would not say that spot pricing has hit bottom yet. I think we're starting to sort of see the bottom from where we are, but I'd expect an on-spot pricing alone. There's another, I don't know, maybe $1 or $2 per ton of pressure that we could see in the coming quarter.

So, I would not agree with the commentary that we fit bottom in terms of spot pricing in West Texas, at least based on what we're seeing out there. And we're pretty much all over the basin and have a good sense for it.

Unidentified Analyst

Okay, all right. And in West Texas volumes, what were they in 1Q and what do you expect them to be in 2Q and what's left to ramp in the back house?

Bryan Shinn

Sure. So, if you look at our Crane and Lamesa sites, things are actually running pretty well. We've got Crane essentially fully-started up and it's almost at its run rate of 4 million tons per year. Lamesa is ramping and that's currently at about a 50% run rate of its capacity. So, it's a 6-million-ton capacity plant; so we're at about 50% of that and would expect to ramp throughout the remainder of the year. And I think what we talked about in the past is having a couple of million tons of product out there in the market as we exited the year and then ramping up to something like 3 million tons in Q1 and then are ramping there for the rest of the year.

Operator

The next question is from the line of Stephen Gengaro with Stifel. Please proceed with your question.

Stephen Gengaro

Thanks. Good morning, gentlemen. You've really answered a lot here. So, only a couple of quick ones, but can you give us a sense right now the contribution margin difference if there is one between the Northern White and the in-basin mines?

Bryan Shinn

It's a great question, Stephen but it's a pretty tough one because it's sort of all over the map. I would say generally what we've seen is that the Northern White margins have held up better than the Permian margins just because there's less competition for that product, but it's kind of on a basin-by-basin basis and a lot of it depends on the setup of your minds and what sort logistics network you have. So, for example, even though we reactivated something like 1.5 million tons of this quarter in response to strong demand, I wouldn't necessarily project that across our competitors because we have a different footprint than they do. And also, we can make it more attractive for customers by using a SandBox for their last mile. So, I think we have levers to pull that perhaps others don't. And then, as Don mentioned earlier, it really gets complicated when you start doing delivered sand to the well. Where do you put the margin between sand and SandBox? Right? So, it's pretty tough to give you a definitive kind of one size fits all answer for that.

Stephen Gengaro

Okay. Thank you. That's helpful color. From a high-level perspective, when you're thinking about the penetration, you're seeing some SandBox relative to the competition out there, what would you say are the sort of the two or three biggest drivers in the SandBox's favor over other containerized solutions?

Bryan Shinn

Sure. It's a great question and if you look at how SandBox has grown, we now believe we have more than 25% market share. And I think, I personally recalculate market share the right way, which is of all the volume of sand that's being moved in the market today, how much of it is getting moved to a SandBox system? And that's 25% plus. And we talked to customers and I'm out visiting them all the time asking why you choose SandBox versus something else. There's two or three things that they cite a over and over again. The first is efficiency. Our solution is very efficient. It's time efficient, there's no demurrage, it's kind of easy to see how it works and people like that. Second is flexibility and that's extremely important. I always say that with SandBox, we have a sort of fleet of PT boats that are very easy to change and move things around versus some other systems. And we're like big aircraft carriers and I think flexibility tends to win the day. And we've got high throughput capacity too. We've never had a job where the sand demand was so large that we couldn't serve it with SandBox. So, all those are important, probably the most important one is that we generally have zero NPT on the well sites that we work with SandBox associated with sand and sand delivery.

And if you look back with all the jobs we're doing, all the work all around the country, literally, it's very rare that we have any non-productive time. And because of that, it really improves the well performance and a cost performance for the operators. And so, in many cases when they see our record on NPT, that's what closes the deal. So, a lot of things that we have to offer -- and a plus I didn't mention we also have sand, right.? So, we can backstop all of that with being able to do a complete turnkey offering.

Operator

The next question comes from the line of Lucas Pipes with be Riley FBR. Please proceed with your question.

Lucas Pipes

Thank you very much, and good morning, everyone. I think last quarter, three months ago, so you commented that Northern White is still oversupplied and that more capacity still has to come out. How do you look at the market today? And in light of your more positive comments on Northern White, do you think any more capacity needs to come out in Northern White? Thank you.

Bryan Shinn

Thanks for the question, Lucas. And I think, again, you have to sort of dive into the details, but my belief is that probably 50% to 60% of the Northern White capacity has been taken offline today. And a lot of that capacity I don't think will be reactivated anytime in the foreseeable future quite honestly, because it's such high cost. Our positioning is a bit different, just given where our minds are and how our logistics pathways run. So, I think we had the ability to do what others couldn't. Also, we worked very hard with our logistics providers, both by truck and rail to take out costs and improve efficiencies, and kind of lower the delivered cost, if you will, from some of these locations before we reactivated capacity.

So, I'm not sure how much additional capacity might need to come offline; I think a lot of that will depend on where oil prices go. Generally, what we've said is if we're in the sort of $50 to $60 oil range, we think that we'll probably see 50% utilization of Northern White capacity. If we get up into the $70 and $80 range, that utilization could go up to 70% or 75% because it's going to be needed, quite frankly, in the basins where there is not viable local sand, which is most everywhere except for the Permian and parts of the Midcon the way things are looking right now.

Lucas Pipes

That's very helpful. Maybe one quick follow-up. You mentioned that you don't expect the supplier to come back quickly in Northern White; is that because higher cost mines have been kind of semi-permanently closed or have we seen also a reduction in the utilization rate where you could maybe dial back things a little bit more quickly? Thank you.

Bryan Shinn

It's a great question. And what we've seen that a number of mines have been completely shutdown. The mines that we reactivated, for example, we had just curtailed production and taken out a couple of shifts. The challenge there is that if you don't have the right cost structure, as you do that, your cost per ton gets really high and so it's hard to keep one of these mines open if you're only running at say 25% capacity. So I don't think there were that many mines that were in this kind of warm idle stage, if you will, where you could just add another shift or add another crew to get them right back online, and it would be a pretty big decision for someone to restart an entire mine; you'd really have to see a very solid demand that goes out probably a couple of years that you have contracts for -- if you're really competent on before you would do something like that in my experience.

Operator

The next question's from the line of John Watson with Simmons & Company. Please proceed with your questions.

John Watson

Bryan, with regard to SandBox, I think we've seen the industry push more and more towards more payload for a variety of different last-mile solutions. Can you talk about how SandBox specifically is working on increasing payload? And how that helps lead to some of the traction that you're seeing today?

Bryan Shinn

So, John, we're in the process of rolling out our next-generation boxes which hold substantially more sand. And so I think that will be very helpful, both for ourselves who are running the boxes in these full-service situations, and then also for our customers who are renting boxes and using them themselves. So that is I think a real positive for us. We also have just rolled out a stand system and it basically eliminates a conveyor that we typically have used in the past and we expect to roll that out across the SandBox network, it's a solar-powered system, so it doesn't -- basically have any moving parts, just a few valves that open. Once again, we're focused on efficiency but also on zero NPT; and so things like conveyors and hydraulics, and -- in fact, we will see some other last-mile systems today that depend on huge belts and 100-foot cranes and towers and lots of hydraulics and moving parts. And those are the things that tend to break down, and I think that's one of the things that differentiates us. We're moving to sort of minimized scenario for moving parts and I think that could potentially give us breakdowns and non-productive time on the well sites.

John Watson

Okay, got it. In ISP we've got good guidance for Q2, as I think about the full year; can you speak to the growth opportunities for EP Minerals given the significant impact that can have on your contribution margin for a given quarter?

Bryan Shinn

So, we have a number of interesting opportunities at EP. We've talked about some of those in our prepared remarks there. There is whole another side of EP that we just -- quite honestly, I ran out of real estate in my prepared remarks that talk about; we have a specialty Clay's [ph] business that has a number of interesting opportunities. And when you look across our industrial business in general, we have a very robust pipeline. We have more than 100 growth opportunities, new projects, and opportunities that we can put into play over the next couple of years here. So, we just highlighted six this morning, but there are a lot more behind that. This is a facility at Millen, Georgia, the oldest ceramics facility that we purchased, and are in the process of retrofitting. I think it's just going to be a fantastic opportunity for us. There is already two or three new business opportunities there that we didn't even have in mind when we originally bought the facility. So, I think we can see a continuing stream of new products coming out of the EP, and even on the sand side, but we're tending to think and look more at what we would call performance materials, products.

So these are things that are highly-engineered typically with intellectual property protection, very hard to duplicate, high margins, and things that are very specialized and attend to be very sticky with customers. So, just look out for more of those coming both from EP but also from our base sand business. We're doing a number of things there as well. So, I'm very excited about the industrial side of the company, John, and the kind of growth that's going to deliver for us. And I think for our investors, typically, those kinds of products or companies that make those type of products, the multiples on the earnings that are generated are 1.5 to 2 times what we might see in Oil & Gas. So, every dollar of earnings we generate over there is probably even more valuable from an equity standpoint. So pretty exciting stuff.

John Watson

Thanks for the additional color there. Lastly, as a quick follow-up to Chase's question, the volumes from West Texas, I guess I want to make sure I'm clear on what's nameplate versus what's tons sold. Do you have the number for Q1 of what was sold from those two sites and then expectation for Q2? I'm sorry if I missed that.

Bryan Shinn

I don't have the numbers in front of me; quite frankly, what came from those sites. Perhaps Don has those.

Don Merril

Yes. In Q1 we were a little over 1 million tons. I would say that our run rate at the end of March was pushing 6 million tons of run rate.

Operator

Thank you. The next question is a follow-up from the line of Marc Bianchi with Cowen. Please proceed with your questions.

Marc Bianchi

Thanks for squeezing me back in. I just wanted to clarify. We've got all the guidance that you guys gave and just make sure I got it all kind of rolled up into what the outlook is. It sounds like Oil & Gas here is going to be down slightly in the second quarter on a total dollars of profit basis depending on whether it's $1 or $2 of margin compression. And then the Industrial Business is up probably more than offsetting the decline in Oil & Gas. And then it sounds like kind of on an adjusted basis, the G&A is slightly higher. So, if I kind of roll it all up to EBITDA, maybe you're just slightly higher from where you were in first quarter. Is that kind of the right way to think about it?

Don Merril

No, I think what's happening in Oil & Gas and they'll clarify it better, there was a little bit of confusion around the ISP segment, Marc. So, if you look at the Oil & Gas segment, what's going on right there, Bryan talked a little bit about pricing pressure, but we are going to see a nice uptake again in SandBox and I think that that's going to more than offset overseeing there from Q1 to Q2. So, I think you will see contribution margin dollars actually going up from Q1 to Q2 On the ISP segment, you're going to see contribution margin dollars going up 10% to 12%. So, you're going to see overall contribution margin dollars going up there as well. And yes, we did mention that we'd see a little bit of SG&A due to some of the office closures that we have talked about. So, on an overall basis, I think you're going to see EBITDA go up Q2 versus Q1.

Marc Bianchi

Okay. And those closures done, is that something you guys are going to adjust out? So, when we look at the adjusted number that incremental cost will be excluded.

Don Merril

We did adjust the -- so, in Q1 we had about $1.8 million that shows up in our adjustments associated with the most of -- well, all of that actually pertains to the closure of our Frederick office as we move our corporate headquarters here to Katy, Texas. So that's what it is. And you'll see about that same number again hit in Q2 and then a little bit less than Q3 is we're looking for the closure that office somewhere in the September timeframe.

Operator

Thank you. We've reached the question-and-answer session and I'll now turn the call over to Bryan Shinn for his closing remarks.

Bryan Shinn

Thanks, Operator. I'd like to close today's call by thanking my 3,000 U.S. colleagues who helped us deliver a great start to 2019. We have a lot of exciting opportunities ahead and I'm certainly looking forward to talking with our investors and analysts at the mini conferences that will be attending in the coming weeks. Thanks everyone for dialing in and have a great day.

Operator

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.