SLCA
#Well, I think the main driver might actually be something different than that.
I think what a lot of sort of single-mine operators are finding, or folks who don't have a big enough footprint, is that there's a sort of grade mix phenomenon going on.
And when you think about not having a sort of fulsome outlet for your products and your mine makes a certain mix of products, if you can't sell all that, the cost of what you want to consume can become very large on a per-ton basis.
And I think that's one of the things that's tripped up some of our smaller competitors as the demand profiles have changed out in the market.
So I would guess it could be that as much as anything else.
They just looked at it perhaps at the end of the day and realized that if they weren't going to be using a certain grade or couldn't use all of it, the price for the grades that they did want could be substantially higher than what they expected.
So I'll deal with the first question and then maybe ask <UNK> <UNK> to step in around the allocation.
Obviously, we've had a lot of discussion recently with investors and sort of publicly around our recent offering related to M&A.
And I think if you sort of step back, <UNK>, and look at the things that we've said in the past around, first off, why do we want to do M&A.
I think the drivers are all still there.
We have a very fragmented market in oil and gas in terms of our kind of supply base.
We have more than ---+ well more than 60 competitors out there.
And so that leads to a lot of and efficiencies.
It seems like it's ripe for consolidation.
I think more and more, the industry and others, particularly investors, are seeing that the scale matters in this industry.
The scale players are the ones who are going to win long term.
So being able to consolidate certainly helps that.
And obviously, we are extremely well positioned to do M&A.
I would say that there's sort of a new dynamic that's emerging, though, and this one I think might be interesting for investors, at least from my perspective.
The challenging market conditions that we have today could really be the catalyst to close some of the bid ask spreads that have been pretty wide out there right now.
We are doing a lot on the M&A front today.
There's a lot in our pipeline.
I think we're making good progress, but certainly we are going to continue to be patient.
But I'm feeling pretty optimistic about our pipeline of opportunities.
And so directly to your question, I certainly would expect that there would be some increases in business development expense over the coming quarters.
And <UNK>, maybe you could speak to the treatment of those expenses.
Yes, the treatment of those, unfortunately, it's an expense right.
In the old days, we used to be able to capitalize all that.
But now, as you are working on the deal, you expense all of that.
So you'll see that go through the P&L.
And you saw a lower number of business development expenses in Q1 versus what we've done in the past.
And that in no way should be interpreted as a lack of activity.
There's a lot of activity going on here.
We just didn't spend a lot of money on lawyers and accountants in the quarter.
So I would anticipate that expense go up, <UNK>, in Q2.
So it's a great question, <UNK>, and we continue to see high cost producers take capacity out of the industry.
Our current estimate is that there are about 25 sites that are off-line right now.
And I would guess that that represents 20 million to 25 million tons of capacity.
But by my count, I would put industry capacity right now, sort of effective capacity, if you will, at 40 million to 45 million tons.
And next obvious question is what does demand look like right now.
And so I would mark demand at somewhere between, say, 25 million to 28 million tons with probably some downward pressure coming into Q2.
So kind of do the math on that and we are 60% to 65% utilized right now in terms of effective industry capacity by our calculations.
So in our experience, there are a couple of kind of issues with restarting the mines.
The first is that you have to go in and re-staff the mine with employees.
And obviously, that takes a little bit of time.
Second is that it takes a lot of working capital to basically sort of get all the product prepared and start to get it in the pipeline to sell, particularly if you are pushing it out through a distribution network.
And then the third issue, which is one that maybe is not as obvious kind of from the outside, but being inside the industry, what you realize is that if you can't run your mine at a relatively high capacity, your cost per ton is going to be extremely high.
And it's kind of back to <UNK> <UNK>'s question around perhaps why EOG and others have chosen to shut in mines: you lose efficiencies very quickly in the mine site.
So if I had a mine site, owned something that was shut-in, I would want to get up to maybe 60% or 70% of capacity throughput of the mine of sales before I would start it back up.
So there's a lot of ifs there.
And then on top of that, many of the mine sites in Wisconsin you have to build sort of a wet stockpile in the good weather.
And we've seen those get depleted so they have to rebuild their stockpile.
So there's a lot of hurdles there.
I'm not saying it's impossible.
Certainly, you know, if pricing gets high enough and demand rebounds to certain levels, some of those sites might come back on.
But I don't think it's going to be as easy as perhaps some folks might think.
If you step back and think about what is it that drives the need for that capacity, I think it's going to be rig count coming back.
And if you do some quick math, what you'll discover is that roughly for every 100, say, horizontal rigs ---+ we tend to focus on horizontal rigs.
Everyone 100 horizontal rigs that come back, we'd estimate somewhere between 6 million to 7 million tons of sand would be needed to support those rigs.
Depending on where they come back, it could be a little bit more or a little bit less.
But that's kind of a good rule of thumb.
So I think what we'll see, <UNK>, is the volumes come back first.
And that's one of the things that will make it a bit challenging again for the folks who are thinking about restarting mine sites.
Because people like us and other Tier 1 folks with low capacity ---+ or low cost, rather, have excess capacity.
So I think we'll have to sort of get all our capacity back up and running first before the higher cost mine operators will realistically be able to do much in the way of starting things back up.
$30 a ton in terms of pricing.
Yes.
Look, I think somewhere around there, maybe between $30 and $40 a ton.
But you know, you have to remember where some of these folks are on the cost curve.
A lot of the mine sites that are shut down have cash costs in excess of $25 a ton.
These are kind of the guys that are at the high end of the sort of low-cost point of the curve and then the moderate and high cost suppliers.
And typically, that's ---+ you are starting around $28, $30 a ton on up to $40 or $50 a ton cost for these mine sites.
So to ---+ $30 a ton might not be enough, quite honestly, given that that's pretty close to their cash breakeven.
And that's in a steady-state environment.
And those cost curves were also anticipating that the mine site was sold out.
So when we say somebody is a $25 or $28 a ton cost player, they are probably not that for the first many, many tons that they make.
So there's a big hurdle there.
So I think there's a couple of things.
We've continued to gain share.
I think we took another probably 2 points of share plus in Q1.
And depending on how much you think is actually being pumped out there in the market, we are somewhere I believe over 20% share right now.
You do reach some max point.
And you can look at it in terms of share with customers.
I tend to think about it in terms of at what point competitors will defend their share position.
You know, up until now, I think a lot of the share gains have come from the Tier 3 and the Tier 2 and the high Tier 1 cost players who have either shut down or can't compete in this environment.
As the amount of volume shrinks in the overall market now, we are bumping up against competitors who were probably more similarly situated in terms of cost.
So there's a practical limit out there somewhere.
It's hard to know exactly what that is, but probably somewhere 25%, 30% share becomes a practical limit.
But that's a tough one to calculate because there's so many factors that go into it.
No.
We've never had those kind of conversations with customers.
Now, I think most of the big customers would tell you that they don't want to be sole-sourced, but the conversations that we've had with our customers typically go more along the lines of look, we are trying to consolidate down to two or three suppliers.
We want you to be one of those suppliers.
We were just down in Houston last week, as a matter of fact, talking to a pretty large customer.
And those were exactly the kinds of things that they were telling us.
So I haven't had any of the large customers tell us they didn't want us to be either their, say, number one or number two supplier.
So I think we are really well positioned.
But obviously, there's competitors out there as well and we mix it up every day in the market.
I think that we will see volumes ---+ both volumes and price ---+ continue to be under some pressure in Q2.
The quarter started out with volumes in line or a little bit down to where we were in Q1.
I feel like the 37%, 38% decline in rig count that we saw in Q1 is going to read through into Q2.
So there's a bit of a delay, obviously, between the rig count and the completion activity.
So I think we are just starting to see now as we get in kind of to the end of April here and into May the full impact of the big declines in rigs that we saw in quarter one.
So look, it won't surprise me at all if we see continued pressure on both price and volume.
Although, as I said, pricing has been relatively flat, but in recent discussions with customers, it feels like there's more pressure coming, though the reality is that there's not much more to give on price.
I mean, we are pretty much already down to breakeven.
So I think that there's kind of a limit to how low we'll go on price.
Maybe I'll ask <UNK> to comment on that.
He and his team do a lot of work in that area.
Yes I think it's very possible, because of what <UNK> just talked about, we're going to continue to see volume pressure into Q2 and pricing pressure.
So you are going to see an impact on contribution margin per ton.
And you know, we are at $0.60 now, so I got to believe that goes below breakeven.
No, I think that's a little hot, but I definitely believe that there's going to be pressure in the quarter.
Sure.
Look, it's hard to predict exactly what's going on in the industry.
We certainly have been aggressive in taking share.
And so on one hand, you could assume that perhaps you know (technical difficulty) would be appropriate for somebody who is taking share.
On the other hand, we're more than 20% of the market right now.
So I think we are relatively representative.
I'll be surprised if we are not sort of plus or minus perhaps where others are.
In terms of the progression, you know, we saw prices come down a bit throughout Q1.
And I think where we sort of exited Q1, April has been relatively flat with that.
But I expect in May and June that we'll see some additional pricing pressure just based on the volumes falling further.
So obviously, there is a corollary between volumes dropping and pricing.
And as I mentioned earlier in one of my responses to another question, we are seeing more sort of stranded product, if you will, from our competitors.
People having large volumes in silos or in railcars in a basin that they have to move because they are paying demurrage on railcars.
And so you'll see these kind of spot prices pop up that look illogical, and that just helps further erode the overall price in the market when those type of things happen.
No.
I think if you look at a comparison to Q4, our Q4 SG&A was definitely lower because we did have a lot of reversals of like compensation expenses and things like that that happened in Q4.
So you saw those being re-accrued in Q1 of 2015.
We gave guidance at about $15.5 million of SG&A expense and we were basically on that number.
I would anticipate that those expenses stay about at $15.5 million as we work our way through the year per quarter.
Yes, I think if I understand your question, you are right.
Just straight mine gate price dropped about 5%, but you saw a greater reduction if you look at the ASPs.
And that has a lot to do with where we are selling.
So selling more at mine gate than in-basin is going to affect that ASP as well.
Right.
Yes, $2, $2.50.
You are right.
Fixed cost leverage, for sure, impacted of the quarter worse in Q1 than it did in Q4.
You've got price.
You've got some mix issues in there as well as we are selling more of our product to bigger customers.
And that's causing, you know, an overall reduction in price as well.
We have a very detailed decision model that we use for all of this, <UNK>.
And the reality is for where demand has been for the last several months, we basically couldn't supply the demand without Sparta.
We have Sparta throttled back up.
We only have a couple of shifts there, so it's not like we are running it full out.
But it's definitely the right economic decision at this point to do that.
Obviously as circumstances change in the market, we are right on top of that.
And we monitor that literally on a weekly basis.
But at this point, Sparta is making a good contribution for us and is an important part of our network.
Sure, <UNK>.
I'll take the first part of your question here as far as trends.
If you look at the peak in 2014, we were selling 65% to maybe 68% of our volumes in-basin and the rest at plants.
And that trend has kind of gone the other direction now.
As I said, we are 60% at the plants and 40% in-basin, and I think it's going to wax and wane over time.
The reality is even our large customers who like to buy at the plants have a limited capability in their logistics network.
And I think the way to think about that is that our customers have invested in a logistics network.
They want to fill their network up first before they use ours.
So in a lower demand environment, it's only natural that on a percentage basis, they use their network more than ours perhaps.
And that moves on to your second question around the kind of longer term, where does this go.
I think that it will balance back out.
We'll see over the long run the sales moving more towards back towards our logistics network.
And if you think about the kinds of customers that we have that really heavily utilize the logistics network, it tends to be the smaller and medium-sized customers that ---+ the big ones use it, too.
But I think as we get more of the smaller service companies kind of back on their feet and the medium-sized guys growing again, those are the folks who use our network probably more heavily.
And I feel like long term, we'll continue to get separation and we'll start to regain, rather, the separation in margins there as we expect to get a return from the investment in logistics.
I guess maybe the last point on that, though, is that it's great to have optionality in this market.
We added another three transloads in Q1 to the network.
These were all sort of no-cost adds for us, no capital commitment, no minimums.
But in this market, you want as many sale point options as possible.
And we have the logistics wherewithal to cover that from our network.
It's one of the reasons we've been able to take share in the downturn.
And I think having that logistics network has been really good for us even in the downturn.
So we do have some sales in Argentina.
They are pretty small.
It's one of the reasons we don't talk about them much.
I think it could be an opportunity for us long term, and so we've positioned ourselves down there appropriately.
But we don't see a lot of short-term opportunities in Argentina.
We have in the past looked in other countries.
And I think that it's going to be tough for a company our size to try to establish a footprint in multiple countries in terms of sand distribution.
So a more likely route for us to expand internationally would be in partnership with one of our larger service company customers.
We've had some discussions around that in the past.
But the fact is the international market hasn't really been all that much in terms of opportunities.
But it's one that we keep our eye on, and if the opportunity comes up, I think we'll be well positioned to capitalize on it.
I can't really get into discussions around the contracts.
I think to me, it just keeps coming back to the reality that these cars don't need to be built.
I think everybody recognizes that.
The question is how do you find a way to not build the cars.
And we are working with a number of different parties to help us think that through.
Well, that's in theory.
If my General Counsel was on the phone, she might have different opinion around that.
But it's not the way we typically would do business.
It's an option: negotiate a penalty, end up in court or something.
But I think that the reality is that the industry as a whole knows that it's just not a good idea to build these cars.
Because if you look at the oversupply out there right now, <UNK>, there are just thousands and thousands of too many cars of the small-cube covered hoppers.
And the industry just doesn't need these.
Maybe not ever.
We certainly on the oil and gas side have suspended indefinitely the greenfield projects that we had up in Wisconsin and the expansion that we had at our Pacific, Missouri, plant.
It just feels like the industry certainly doesn't need those kind of capacities at this time.
So I do feel like it's probably M&A first, organic second right now.
So I think that's probably right.
DD&A was down in Q1.
I would anticipate that it jumps back up to a more normalized level of $15.5 million, $15.7 million in Q2.
And as far as tax refunds go, we did net in the first quarter about $5.5 million of a tax refund and that has already hit our bank account.
Thank you.
Thank you very much.
I'd just like to close the call with a few key thoughts.
First, we believe we are going to see further downward pressure on volumes and pricing in oil and gas in the second quarter, as we talked about, with the kind of declines that we expect in drilling and completions activity in Q2.
Second, we believe we will see continued growth in profitability in the industrial and specialty products segment.
Obviously, that's been a big winner for us.
We'll continue to drive strategic price increases and going to rollout more higher-margin products.
We didn't really get into it on the call here today, but we have another eight to 10 products that I expect we'll rollout in 2016, and these are pretty exciting new products for the Company.
And then finally, I want to just make sure that everyone knows what we are focused on as we get into 2016 here.
And the three things that I talked about in my prepared remarks, and that's cash, customers, and consolidation.
I want to also thank all my colleagues at U.S. Silica for their fantastic efforts to meet the tremendous challenges that the Company has faced over the last few quarters.
And I want to thank our investors for their interest and support and all the encouragement that we received from them in these challenging times.
And I certainly look forward to meeting and speaking with as many of you as possible in the future.
Thanks, everybody, and have a great day.
