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U.S. Silica Holdings (NYSE:SLCA)
Q4 2019 Earnings Call
Feb 25, 2020, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Greetings, and welcome to the U.S. Silica fourth-quarter and full-year 2019 earnings conference call. [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.

Michael Lawson -- Vice President of Investor Relations and Corporate Communications

Thanks. Good morning, everyone, and thank you for joining us for U.S. Silica's fourth-quarter and full-year 2019 earnings conference call. With me on the call today are Bryan Shinn, 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 -- Chief Executive Officer

Thanks, Mike, and good morning, everyone. I'll begin today's call by reviewing our fourth-quarter performance and highlighting key accomplishments in 2019. I'll then provide updates on our three strategic priorities for 2020 and our commitment to sustainability and environmental stewardship. I'll conclude my prepared remarks today with a market outlook for our two operating segments, industrial and specialty products and oil and gas.

Don Merril will then provide additional color on our financial performance before we open the call for your questions. Q4 total company revenue was $339.1 million represented a sequential decline of 6%. Adjusted EBITDA for the fourth quarter was $73.6 million, which included a net $52.3 million of a customer shortfall penalty compared with $58.4 million of adjusted EBITDA in the third quarter of 2019. In our industrial and specialty products segment, we experienced a normal seasonal decline plus overall weaker demand due to market conditions and the ongoing Asia trade dispute.

Customers slowed purchases at the end of the year to manage inventories. This customer cash-generation effort was more focused perhaps than in past years. As a result, contribution margin in this segment was down approximately 12% on a year-over-year basis. Sales and margins are rebounding in Q1 as expected.

Oil and gas proppant volumes declined 14% sequentially in response to lower activity levels and normal seasonality related to holidays and E&P budget exhaustion. Pricing continued under pressure throughout the quarter, particularly in West Texas. We have, however, seen prices improve in the first two months of this year. Given that local sand continues to displace legacy capacity, we prudently idled additional sand proppant capacity in the quarter, bringing our total capacity currently off-line to approximately 8 million tons.

We will continue to manage our capacity as the market evolves. I believe that the sand industry is behaving, though, in a disciplined manner as we have not seen additional capacity reactivated in response to stronger-than-expected demand to start 2020. I expect that U.S. Silica will continue to prioritize higher prices over additional sales volume in Q1.

Sandbox load volumes declined 18% sequentially, in line with lower completion activity in the market. As a result, we experienced modest downward pricing pressure in the quarter. We ended the year with approximately 24% market share of delivered oilfield sand and a robust pipeline of new business opportunities to pursue in 2020. From a broader perspective, in 2019, we continued to build, invest and transform U.S.

Silica for long-term success. We converted a former ceramic proppant plant in Millen, Georgia to manufacture new, high-margin, high-performance ISP products to meet growing customer demand. We expanded milling capacity at our industrial facility in Columbia, South Carolina, which enabled us to secure new business and a long-term contract with a major customer. In fact, we nearly doubled capacity to produce our finest ground specialty products last year with just $2.5 million of capex.

A great example of how we can organically grow our ISP business with modest capital investment. We invested in next-generation equipment for Sandbox, expanding box payloads and offering customers a new gravity-fed stand that is quieter, requires less maintenance and is less expensive to make and we signed several new long-term contracts with blue-chip customers in our energy segment, which will provide a springboard for growth going forward. We also took significant steps toward rightsizing our oil and gas proppants business reducing the size of our logistics footprint, head count, and capacity to better align our business with the current market structure. I am, perhaps, most proud of the fact that our team in 2019 recorded the safest year during my tenure at U.S.

Silica. We achieved a total recordable incident rate of 0.86, a 38% reduction from 2018, as well as a loss time rate of 0.18, a 19% reduction from the previous year. I'd like to congratulate my 2,000-plus colleagues who completed our belief-based safety workshops across the enterprise and achieved this stellar accomplishment. Well done.

Let me now turn to the progress we're making on our three strategic priorities for 2020: generating free cash flow, repositioning our oil and gas business, and growing our industrials business. Late last year, we announced a 10% reduction in headcount to improve efficiencies and better align operations and support staffing with the current challenges in our energy businesses, delivering annualized SG&A savings of approximately $20 million. We've minimized our planned capital expenditure for 2020 to a range of $30 million to $40 million. We've increased asset efficiency and are driving to the lowest cost on basic products through increased automation and we've rightsized plants while continuing to shift the mix of our industrial business to higher-margin products.

From a cash management perspective, we have an intense focus on optimizing working capital, including accelerating collections, negotiating better terms with key vendors and improving inventory management, as well as monetizing noncore assets wherever possible. We've also made good progress on our second strategic priority, which is to reposition our oil and gas business. As I stated earlier, we've executed steps to right-size production. We're continuing to optimize our network by eliminating suboptimal shipments and exiting high-cost transload sites while renegotiating transload fees and rail rates.

We also staggered railcar leases with 1,100 cars rolling off this year and 900 more rolling off lease next year. Moreover, we're developing new low-cost rail routings and are maximizing barging to keep us on the very low end of the cost curve. In terms of our third priority, growing our industrials business, I'm very pleased with the work that our ISP team has done to lay a path for growth. Once again, we've implemented price increases for most of our noncontracted silica sand, aggregate diatomaceous earth and clay products.

We continued to shift our ISP business toward higher-margin products and are pursuing several growth platforms. For example, we're using new milling technology that delivers expanded capabilities. We're also targeting new, high-value, non-inclined markets where customers are looking for an effective alternative to existing offerings. We have several new products in various stages of customer trials.

In many cases, the sales cycles for these new products are long, but we're gaining traction and making very good headway. Our plan is to increase the base business through price and share gain, focused on launching our new higher-margin products and grow opportunistically through small tuck-in adjacent acquisitions. Let me now provide you with an update on our major ESG initiatives. Being a leader in sustainability and environmental stewardship is core to U.S.

Silica and a value that matters deeply to our employees, our stakeholders and to me personally. This commitment to sustainability includes stewardship of water, one of our most precious resources. We continue to advance our water conservation and recycling efforts, for example, we invested over $5 million last year in our Jackson, Mississippi facility and reduced our water consumption by 37 million gallons, annually. We're also committed to reducing energy consumption.

For example, in LoveLock, Nevada, we shifted to energy-efficient lighting technology and variable frequency drives for key equipment. These changes substantially lowered our energy cost and will save approximately 1 million kilowatt hours of electricity annually, enough to power about 100 households for a year. We have a terrific team at U.S. Silica, and their well-being continues to be a primary focus also.

In 2019, we partnered with NIOSH, the National Institute of Occupational Safety and Health, to identify unexpected dust sources and reduce exposure for our employees. Finally, we continue to develop low environmental impact products for our customers. For example, our organic pesticide DEsect has helped us branch out into the commercial agricultural business, showing significant success over the past two years. Because it's made up of minerals rather than chemicals, DEsect is not harmful to the environment and doubled as a soil amendment to improve organic plant growth.

Let me conclude my prepared remarks today with a market outlook for both of our operating segments, starting with industrials. Based on recent reports from the Federal Reserve and others, we believe that downside risks to the U.S. economy have receded. The U.S.

job market and consumer spending remains strong, and we're relatively optimistic about the overall strength of the U.S. economy in 2020. Further, a strong job market and continued U.S. population growth are constructive for home building and remodeling.

Both important positive indicators for our Industrial business. On the flip side, light vehicle sales in the U.S. beer and wine markets are forecasted to contract in 2020 and creating headwinds for some of our silica sand and diatomaceous earth product offerings. Further, we're carefully watching for potential impacts from emerging global health and trade issues.

All in, we believe that our Industrial business can grow profitably at a rate of two to three times GDP in 2020, driven by a combination of higher volumes, continued price increases and new product introductions. For oil and gas, we're off to a good start in Q1. We expect to continue to prioritize pricing and profit per ton over incremental sales volumes for oilfield sand and do not plan to return title capacity to the market. Accordingly, I think we'll sell between 13 million and 14 million tons of frac sand in 2020.

For Sandbox, we anticipate that low volumes will be flat to slightly down year over year, and that pricing pressure will persist but not worsen. I also expect our energy business in total to mirror the last two years in terms of the seasonality of profitability as customers continue to stay disciplined and spend within their cash flows throughout the year. After taking all these factors into account, I expect that the current street consensus adjusted EBITDA outlook of $165 million to $170 million is a reasonable but conservative estimate for total company profitability in 2020. We expect to update our 2020 outlook as the year progresses.

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

Don Merril -- Executive Vice President and Chief Financial Officer

Thanks, Bryan, and good morning, everyone. The adjusted EBITDA for the fourth quarter was $73.6 million. And as Bryan stated, this figure includes a net $52.3 million customer shortfall penalty that was recorded in the quarter. The amount recorded is an estimate based on current negotiations and could increase or decrease.

We cannot comment further on this, but we will keep you informed as changes occur. During the fourth quarter of 2019, like the fourth quarter of 2018, we experienced a sharp decline in customer demand for Northern White frac sand and for regional non-in-basin frac sand as more tons were produced and sold in basin. Unfortunately, this contributed to a significant decrease in frac sand pricing. Given the changes in demand and customer preferences for in-basin sand, we also experienced a decline in the utilization of the sand railcar fleet in our transload network and the overcapacity industrywide of this type of railcar grew even more.

As a result of the triggering events described above, we impaired $363.8 million of assets in the fourth quarter, consisting of $243.1 million related to property, plant and equipment, $115.4 million related to operating lease right-of-use assets and $5.3 million related to inventories and intangible assets. The bulk of the property, plant and equipment impairment charges were related to facilities that have been idled or are operating at reduced capacity, including Tyler, Texas; Sparta, Wisconsin; and Utica, Illinois. The operating lease right-of-use asset impairments are entirely related to railcar leases. As of December 31, 2019, we maintained a fleet of 6,979 leased railcars, of which 2,271 were in storage.

In 2020, we expect approximately 1,100 railcars to roll off lease. Moving on to the results of our two operating segments. Fourth-quarter revenue for the industrial and specialty products segment was $104.8 million, down 12% from the third quarter of 2019 due largely to the typical seasonality we see in that segment. As mentioned earlier, the ISP segment is off to a good start in 2020, and the first quarter should look like quarter 3 of 2019.

Oil and gas segment revenue was $234.3 million, down 3% from the third quarter of 2019 due largely to a 14% decline in frac sand volumes, a pricing reduction of 20%, offset by the previously mentioned shortfall penalty. On a per-ton basis, contribution margin for the ISP segment of $46.45 was essentially flat versus the third quarter despite the 12% reduction in volume. The oil and gas segment contribution margin on a per-ton basis was $20.22 compared with $12.98 for the third quarter of 2019. The increase is due to the customer shortfall penalty, offsetting the impacts of lower volumes and pricing.

Let's now look at total company results. Selling, general and administrative expenses in the fourth quarter of $37.3 million represented a decrease of 7% from the third quarter of 2019. This decrease was largely the result of lower employee costs due to headcount reductions partially offset by higher noncash equity-based compensation expense. We believe that SG&A expense will total approximately $125 million for the full-year 2020 due to the head-count reductions announced in 2019 and our other cost-cutting initiatives.

Depreciation, depletion and amortization expense in the fourth quarter totaled $42.8 million, down 9% from the third quarter of 2019. The decrease in DD&A was mostly due to the reduced depletion expense driven by idled plants. We estimate that DD&A to be roughly $185 million for the full-year 2020. Our effective tax rates for the quarter and year ended December 31, 2019 were 24% and 23%, respectively.

At this point in the year, we anticipate a tax benefit of about 23% in 2020. Moving on to the balance sheet. As of December 31, 2019, the company had $185.7 million in cash and cash equivalents and $93.5 million available under its revolving credit facility, resulting in total liquidity of $279.2 million. Our net debt at year-end was $1.05 billion, and our term loan has a maturity date of 2025.

Capital expenditures in the fourth quarter totaled $20.5 million and were mainly related to growth projects in our ISP segment, as well as spending on equipment to expand our Sandbox operation and other maintenance and cost improvement projects. We expect to keep capital expenditures in the range of $30 million to $40 million in 2020 and be funded from our cash flow from operations. Lastly, I'd like to comment on our capital allocation policy. As you know, we recently elected to reduce our quarterly dividend to $0.02 per share.

We did this to better align with our strategic priorities and felt that this action was appropriate as it will free up additional cash that can be used to reduce our leverage and grow our higher-margin industrial and logistics businesses. And with that, I'll turn the call back over to Bryan.

Bryan Shinn -- Chief Executive Officer

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

Questions & Answers:


Operator

Thank you. We will now be conducting a question and answer session. [Operator instructions] Our first question comes from the line of Stephen Gengaro with Stifel. Please proceed with your questions.

Stephen Gengaro -- Stifel Financial Corp. -- Analyst

Thanks. Good morning, gentlemen.

Bryan Shinn -- Chief Executive Officer

Good morning, Steven.

Stephen Gengaro -- Stifel Financial Corp. -- Analyst

I guess two things. What I'd start with is we're hearing a lot about in-basin capacity right now, and I know you mentioned in the press release that the two mines down there are among the highest utilized in Texas. Can you talk about what you're seeing from an in-basin capacity perspective and also sort of how that's impacting the pricing situation down there?

Bryan Shinn -- Chief Executive Officer

Sure, Stephen. So if I think about the Permian, which is where we usually speak to when we're thinking about in-basin capacity given that's where most of it is, I sort of think of this way. I think the sort of total supply that got installed is something like maybe 75 million tons. What I would call the kind of capable supply, the sort of realistic supply that could be out there is more like 60 million tons and what we've seen today is that what's active is probably closer to 50 million tons.

And so if you look at that opposite to demand, I think as we exited Q4 and entered Q1, demand was probably in the 40 million to 45 million-ton range. So we're starting to get pretty tight relative to the active supply that's out there in the Permian today.

Stephen Gengaro -- Stifel Financial Corp. -- Analyst

OK. And then as we think about the ISP business and the contribution margin per ton numbers as we kind of roll forward here, should that number advance a bit as some of these new product lines are introduced? And is that more of a 2021 event, or is that going to impact 2020 much?

Bryan Shinn -- Chief Executive Officer

So I think what we'll see is that we'll continue to launch a series of new products, all of which have very high contribution margins. At the same time, there is some legacy demand that's rebounding a bit, and that legacy business tends to be at a bit lower margins than the average that we see today. So I think we'll see kind of a balancing act going forward. And it really depends on how fast the new products get launched and how much extra demand we get from some of our legacy customers.

We've had a couple of big contracts on the legacy side that we signed recently, and so that would be obviously very accretive to overall contribution margin but somewhat dilutive to the total. So I think it will be sort of plus or minus, as I model it, I would say it's pretty flat going forward for the next several quarters as we kind of play out this balance between new products and some legacy products.

Stephen Gengaro -- Stifel Financial Corp. -- Analyst

Great. Thank you.

Bryan Shinn -- Chief Executive Officer

Yes. Thanks, Stephen.

Operator

Thank you. Our next question comes from the line of Tommy Moll with Stephens Inc. Please proceed with your questions.

Cameron Lochridge -- Stephens Inc. -- Analyst

Hey, good morning. This is actually Cameron on for Tommy.

Bryan Shinn -- Chief Executive Officer

Hi, Cameron. How are you doing this morning?

Cameron Lochridge -- Stephens Inc. -- Analyst

Doing well. Thank you. I wanted to start with ISP and some of the growth opportunities you guys are going to be investing in going forward. It looks like right now, ISP is about a third of revenue.

How do we see that growing going forward into 2020 and '21? Any color you can give there would be helpful.

Bryan Shinn -- Chief Executive Officer

Sure. So I think over the next two years, we'll see a number of new products get launched, and that's really what's going to drive a big chunk of our revenue growth in the industrial business. If you look at the pipeline that we have today for new products, it's about $200 million in annualized contribution margin per ton, so these are all things that are kind of working their way through. In the last 12 months, we've launched products which we think have the potential to generate about 20 million tons of annualized contribution over the coming years as they scale up.

And then we've got another about $18 million of annual contribution margin generation in what we would call scale up, they're close to being launched, but not officially launched yet, and I was actually looking back at the products that have been launched. I know we get a lot of questions from investors on what's actually come out. And just to give some examples, we've got a consumer product that looks really interesting. It's actually causing us to add some new production equipment at one of our facilities, but we have a long-term contract there with a leading consumer product company.

And I think that's going to be a very interesting product. We've launched a high-end filtration product, a new one, a new specialty filler on the DE side. And when we say fillers, we're talking about products that go into the compounding market, so resins, polymers, paints, coatings, those types of things. Could still light for quartz countertops.

We've talked about that quite a bit, and we'll see that ramp up over the next couple of years. And then we have a couple of really cool high-end specialty products, one for high-end ceramic manufacturer and one for the aerospace industry. So I think we'll start to see more of an impact from these products in the second half of this year, and then it should ramp up as we go through 2021. So I'm very excited about the product that we have there -- the products that we have here, Cameron, and we'll definitely start to see the effects in the coming quarters.

Cameron Lochridge -- Stephens Inc. -- Analyst

That's great. Awesome. Thank you. And then flipping to oil and gas, proppant demand looks like it will be about 5% year over year in 2020.

If you can maybe talk about some of the things that have given you confidence in that. And then do we think that could be accretive to contribution margin per ton into 2020?

Bryan Shinn -- Chief Executive Officer

The proppant market is really interesting. And as you kind of step back and look at it, I think there are several positives starting to emerge we've certainly seen West Texas capacity. A lot of it gets idled, and we've seen other capacity come out of the market over the last couple of quarters, U.S. Silica, for example, has idled about 8 million tons of capacity, and a lot of our competitors have done the same thing.

And so I think that will help drive some rationalization in the market. And certainly, from our perspective, we're prioritizing higher sales prices over incremental sales volumes here in Q1. And just generally across the industry, I see a lot of discipline in the sand space right now, which I think is good. To your point, we're seeing demand pick up pretty strongly here in Q1 within completions and stages are headed higher.

We've seen some estimates that suggest a 10% increase, plus or minus, in Q1 versus Q4 in terms of completions and stages. So that's all positive for proppant demand. I think we'll see our volumes up a few percent, sequentially, here as we go from Q4 to Q1. Again, we're really trying to focus on pricing as opposed to getting that last incremental sales to I guess, the other comment I'd have on 2020 is that we'd expect to see the same kind of seasonality of E&P spend, as we've seen in 2018 and 2019.

So just to be specific, I would expect that spend in Q1 will be OK. Q2 and Q3 will be much higher, and then as we get into the fourth quarter, things will fall off. We've seen that trend for a couple of years now, and my guess is that to persist here in 2020.

Cameron Lochridge -- Stephens Inc. -- Analyst

Great. All right. Thank you so much. And I'll turn it back.

Bryan Shinn -- Chief Executive Officer

OK. Thanks, Cameron.

Operator

Thank you. Our next question comes from the line of Kurt Hallead with RBC Capital. Please proceed with your questions.

Kurt Hallead -- RBC Capital Markets -- Analyst

Hey. Good morning.

Bryan Shinn -- Chief Executive Officer

Hi, Kurt. Good morning.

Kurt Hallead -- RBC Capital Markets -- Analyst

Appreciate the great summary there. Hey, Bryan, a question for you just on the competitive dynamics within the oil and gas business, especially as you look at Sandbox. I understand that there are a few different dynamics out there that are altering the way that sand is being distributed on an in-basin dynamic. You have, I guess, some conveyor belt system that's supposedly out there and then you have this mobile processing unit that's out there.

Just wanted to kind of gauge, get your feel on how that's impacting Sandbox and what you may be doing to combat that.

Bryan Shinn -- Chief Executive Officer

You know, it's a really good question, Kurt. I think as we step back and look at Sandbox, we've gained share very quickly in the market. We think we're at about 24% today market share, and so just step back and think about that means about one out of every four tons that's being consumed in the oilfield today is being run through a Sandbox system. So we've grown pretty rapidly the loads that we delivered in 2019 were up about 30% versus 2018, so kind of massive increase year on year.

2020 feels like it may be more of a flattish year as we work to hold on to that share and also all the competitive dynamics that you mentioned. I still feel really optimistic about Sandbox. I think when you look at the benefits that it brings, they're just enormous. And I saw a recent survey that was done by a leading bank.

And for the first time ever, the respondents in this survey, and these were all energy company and service company customers of ours and out of the market. The first time ever, those customers expressed more of a preference for box systems versus silos, so survey said that 48% of these respondents like boxes and only 44% like silo. And particularly, in some of the basins where the pad sizes are the smallest little in the Marcellus or the terrain is tough. So Marcellus, Rockies, MidCon and some other areas, there is an overwhelming preference for box solutions, and we're the leader in that sector, so I think that benefit is going to accrue to us.

And there's numerous advantages over the silo systems. So I feel really good about Sandbox and our prospects, and I think we'll have a good year in 2020. I just don't expect to take a whole lot more share this year. We're certainly working on that, but just given the share we took to come into 2020, it feels more like a kind of a flattish year to me.

Kurt Hallead -- RBC Capital Markets -- Analyst

Got you. Thanks. And then just a follow-up on the commentary about the pricing again, staying within the oil and gas proppant side. I appreciate the fact that you're going to look to maximize that dynamic.

Same token in the prepared commentary, you mentioned that the lineage is differently. So in the context, I was wondering if you can give us some relative magnitude of what kind of pricing improvement you could expect given the discipline that you've already indicated that was under way in the market.

Bryan Shinn -- Chief Executive Officer

When we look at what's already occurred here in Q1, we're seeing spot pricing up significantly, particularly in West Texas, I would say that what we've seen so far, sort of quarter to date. We're up about $2 to $3 a ton in overall pricing versus our Q4 exit pricing rate. And if you look at spot pricing in West Texas, where it was some cases, $10 or $12 a ton or something like that at the very end of last year. It's now back up in the low to mid-20s.

And I think over time, as more capacity comes offline and things rationalize, I think we could end up with pricing in the mid- to upper-20s. Quite honestly, it may take us several quarters to get there, but again, with the industry looking like it's going to be pretty disciplined here, I think there's a chance that we settle out in a pretty good spot.

Kurt Hallead -- RBC Capital Markets -- Analyst

That's great. Awesome. Appreciate that color. Thank you.

Bryan Shinn -- Chief Executive Officer

Thank you, Kurt.

Operator

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

George O'Leary -- Tudor, Pickering, Holt & Co. -- Analyst

Good morning, Bryan. Good morning, guys.

Bryan Shinn -- Chief Executive Officer

Hi. Good morning, George.

George O'Leary -- Tudor, Pickering, Holt & Co. -- Analyst

Just following on to that prior question on the frac sand pricing front. I wondered if you could just maybe bifurcate between Northern White pricing and in-basin pricing and how those are both trending on a quarter-over-quarter basis and kind of relative to each other. And then is there any differentiation in the pricing between grade, 100-mesh 20/40? We've even heard 30/50 is getting a little bit of love at this point, but just wondering if you could walk through any pricing deltas across those various buckets.

Bryan Shinn -- Chief Executive Officer

So George, I would say what we've seen so far is that the West Texas pricing is up the most, and that's really just because it got depressed the most at the end of last year. Northern White sand has been a bit more steady, certainly fallen out of favor a bit as we went through 2019 and has come back some but not as much as the West Texas pricing. So I think that's where we're seeing the most increase right now. And to your point, there are certain grades like 30/50 which seems like it's a grade that goes in and out of favor the most.

There are times where it's really hard to sell 30/50 in times where we just don't have enough of it for demand, so a lot of it's relative to specific energy company customers and what they like to pump. Some customers love 30/50, so it's sort of all over the map as usual. But I would say most of the pricing rebound right now is in West Texas.

George O'Leary -- Tudor, Pickering, Holt & Co. -- Analyst

OK. That's super helpful. And then on the cost-reduction side. You guys are clearly making good headway in reducing costs across the board.

And the $20 million SG&A reduction was nice to see. From just the logistics and a COGS side of the equation, given the incremental mines that you've idled, is there any way to frame how much you've taken out of the system and how much you will take out as these ongoing cost-reduction efforts continue from a dollars perspective? Any way to frame that for us?

Don Merril -- Executive Vice President and Chief Financial Officer

Yes. Look, we've taken out a lot of cost to your point. I think where we're going to see the cost to really start to hit the bottom line is more on the logistics side. There's really not a good way to frame that.

We're really not talking about contribution margin per ton for a full-year impact. I think Bryan hit it best saying that as we go forward, we're going to see incremental favorable impact to cost of our CM per ton as we go forward.

George O'Leary -- Tudor, Pickering, Holt & Co. -- Analyst

I'll sneak in one more if I could. And I appreciate that prior response as well. So pricing has started to move to beginning of the year, but will we see more of the realization of that pricing move materialized in the second quarter from a results perspective? Or are there some spot pricing? Did it rise early enough and quick enough in the year that Q1 will see some benefit over Q4 on the oil and gas side of the business?

Bryan Shinn -- Chief Executive Officer

I think we'll definitely see some benefit in Q1 over Q4. And if we stay disciplined as a company and if the market continues to be disciplined, I think we could certainly see that hanging over into Q2.

George O'Leary -- Tudor, Pickering, Holt & Co. -- Analyst

Thank you, guys, very much.

Bryan Shinn -- Chief Executive Officer

OK. Thanks, George.

Operator

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

Connor Lynagh -- Morgan Stanley -- Analyst

Thanks. Morning, guys.

Bryan Shinn -- Chief Executive Officer

Good morning, Connor.

Connor Lynagh -- Morgan Stanley -- Analyst

So I was wondering if we could just tie all these different moving pieces together. It seems like you'll have a bit of a pricing tailwind in the first quarter. You probably have some lower costs in the oil and gas business after you finished idling some of these mines. So would you be willing to hazard a guess as to how much contribution margin per ton or contribution margin dollars, however you prefer to frame it, could be up relative to the fourth quarter?

Don Merril -- Executive Vice President and Chief Financial Officer

Yes. Look, you said it very good in the very beginning of your question. There's a lot of moving parts right now. And look, we've got some -- as Bryan talked, we've got some really nice tailwinds.

We've got some costs that are coming out. Right now, volumes look good, but look, in a relatively schizophrenic market, it's really hard to tell and give any guidance on that. Maybe as we move into the following quarter, we'll have a little bit more insight to that. But right now, it's difficult to do that just because we really don't know on the volume side where this is headed.

Connor Lynagh -- Morgan Stanley -- Analyst

OK. That's fair. I mean, maybe if we could just talk about the things you do know. How big of a cost tailwind do you have? I mean, it seems like there was a lot of idling actions and things like that in the fourth quarter, and you're slowly starting to roll off some railcars.

So on that side of things, how much of a benefit would you expect?

Don Merril -- Executive Vice President and Chief Financial Officer

Yes. I think from the idling of railcars, the railcars coming off lease is where we're going to start to see the cost to come out. I think we are going to have a benefit, I would say, if you look at the overall benefit to the cost, let's say, contribution margin per ton, you're probably looking at somewhere between $2 to $2.50 a ton.

Connor Lynagh -- Morgan Stanley -- Analyst

And that's a full-year benefit or the first quarter?

Don Merril -- Executive Vice President and Chief Financial Officer

That's full year. Well, it'll start hitting in Q1. Yes, you're going to start to see that benefit in Q1, so you've got $2-ish a ton that you're going to see from an overall CM per ton impact for these cost take-outs in Q1, and then it'll follow every quarter after that.

Connor Lynagh -- Morgan Stanley -- Analyst

Got it. OK. One last one here. Just on the higher-level supply demand picture here, how do you think about what the incentive price is to bring back some of the capacity that you've pulled out or more broadly in the industry? I mean, how much higher does pricing need to move before you think that makes sense to bring it back?

Bryan Shinn -- Chief Executive Officer

Well, the way we look at it, I think there's two components to it, Connor. There's how much higher and for how long, right? So let me start with the second one. From me personally, I would need to see several months of sustained profitability, of sustained higher prices before I'd be at all excited about bringing capacity back online because there's definitely cost to do that. And if you look across the industry, there's two kinds of capacity takeout.

There's take-outs where sites have been completely shut, and there's a big hurdle there to reactivate. And then there's places where maybe you've taken out a shift or two, and you would just need to go out and hire people. So in the second case, the barrier is a little bit lower. In the first case, it's much higher.

And a lot of what we've seen so far is pretty hard to take out across the system. So if you look, in our case, for example, we've shut our Voca mine, we shut our Tyler mine. To restart those mines would take a lot in terms of what we'd have to see in the market. And I believe, just based on the actions that we've seen here in the first quarter with no one sort of rushing to reactivate capacity that the industry in general, it's kind of coming around at the start of -- let's just not rush out and get more tons online when we see a spike for a week in pricing.

So I think it's going to take much more sustained pricing over a longer period of time to entice most of the rational people in the industry to restart capacity.

Connor Lynagh -- Morgan Stanley -- Analyst

All right. Thanks very much.

Bryan Shinn -- Chief Executive Officer

Thanks, Connor.

Operator

Thank you. Our next question comes from the line of Jon Hunter with Cowen & Company. Please proceed with your questions.

Jon Hunter -- Cowen and Company -- Analyst

Hey, good morning, and thanks for taking my questions.

Bryan Shinn -- Chief Executive Officer

Good morning, Jon.

Jon Hunter -- Cowen and Company -- Analyst

So first one I had is on the overall EBITDA outlook for the year, $165 million to $170 million. If I take your 13 million to 14 million tons of oil and gas volume expectation for 2020 and assuming some growth within ISP, you have to assume kind of high single-digit contribution margin per ton within the oil and gas business to be able to achieve that kind of level of EBITDA for the year. And I know you mentioned some of these cost-out opportunities and some pricing, but I guess I'm wondering what are the exact moving pieces and kind of a cadence to getting to that level of profitability in 2020 as you see it today.

Bryan Shinn -- Chief Executive Officer

So I think, obviously, there are a lot of moving pieces here, and there's a lot of ways that this can play out. I think what we're trying to do is to give an indication when we sort of knit that all together, recognizing that some pieces are going to move up and down, we felt like this $175 million -- or $165 million to $170 million number for the year was appropriate but, perhaps, conservative. I think there's some upside to that, particularly given the early sort of pricing positives that we're seeing.

Jon Hunter -- Cowen and Company -- Analyst

Got it. And then as it relates to kind of free cash flow for the year, I'm curious how much of the $52 million shortfall revenue was a cash benefit or is expected to be a cash benefit and kind of what are your expectations for working cap in 2020.

Don Merril -- Executive Vice President and Chief Financial Officer

Yes. So the shortfall penalty, about a little less than half of that is going to be cash, but that's not baked in right now into our expectation of being free cash flow positive next year. Our goal is to continue to push on our every button we can from cost savings to working capital. I'm glad you brought that up.

Working capital was a big source of our cash in 2019. And I think we've got more to squeeze out of that in 2020, so we're going to continue to focus on that.

Jon Hunter -- Cowen and Company -- Analyst

Got it. Thank you.

Don Merril -- Executive Vice President and Chief Financial Officer

Thanks, Jon.

Operator

Thank you. Our next question comes from the line of John Watson with Simmons Energy. Please proceed with your questions.

John Watson -- Simmons Energy -- Analyst

Thank you. Good morning.

Bryan Shinn -- Chief Executive Officer

Good morning, John.

John Watson -- Simmons Energy -- Analyst

Good morning, Bryan. I wanted to start on ISP. It's obviously a fluid situation. But could you talk us through how the coronavirus could potentially impact that segment and how you're thinking about it today, understanding that it's subject to change?

Bryan Shinn -- Chief Executive Officer

Sure, John. A very good question. I would say, as of this point, we haven't seen any impact from the coronavirus. I think there's sort of two sides to that coin for us.

On one hand, we have some of our customers across the industrial sector who have parts of their supply chain in China. Our customers ultimately could be impacted to some degree, depending on how this plays out, so it's on the sort of negative side. On the other side of the coin, we have an emerging competitor in China who's relatively small but an aggressive competitor out there in the market, and so I would expect that they may face some challenges as well. So I look at all that sort of on balance, and it's hard to see a real positive or a real negative for us, just sort of back away up from it.

And if there's a massive sort of disruption to global business as a result of this, well, certainly we'll be pulled into that. Our industrial business sells to more than 10,000 customers across all kinds of value chains. So I would say we would be impacted probably at an average of a variety of industries. We're not overly concentrated in any sort of specific area at this point in terms of an industry or geography.

And we still have probably 85% of our sales and profitability coming domestically. So I think we're not tremendously reliant on sales outside the U.S., but as I said before, some of our customers definitely have global supply chains.

John Watson -- Simmons Energy -- Analyst

Sure. OK. That's helpful. Secondly, I wanted to follow-up on Jon's question with respect to the shortfall, and I appreciated the pricing and demand dynamics you outlined.

What would have to change in terms of the pricing demand environment for you to realize more shortfalls this year? Is that something you're anticipating and that you're baking into the adjusted EBITDA commentary that you made earlier?

Bryan Shinn -- Chief Executive Officer

No, we don't have a lot actually baked into that at all. Look, my expectation and my hope is that we continue with a strong oil and gas environment, and all of our customers are sort of byproduct to their contract levels. I think what I would say, though, is that our expectation at the same time is that customers do live up to their contractual commitments no matter what. And I think this discussion around the shortfall penalty is a good example of us holding customers accountable for the contracts that they signed up for.

John Watson -- Simmons Energy -- Analyst

Right. OK. Thanks for that, Bryan. I'll turn it back.

Bryan Shinn -- Chief Executive Officer

Thanks, John.

Operator

Thank you. Our next question comes from the line of J.B. Lowe with Citi. Please proceed with your question.

J.B. Lowe -- Citi -- Analyst

Hey, good morning, guys.

Bryan Shinn -- Chief Executive Officer

Good morning, J.B.

J.B. Lowe -- Citi -- Analyst

Just to wrap up that last line of questioning, on the 13 million to 14 million tons that you guys are expecting in 2020, how many of those are actually under contract?

Bryan Shinn -- Chief Executive Officer

We have about 80% of our sales this year under contract for oil and gas.

J.B. Lowe -- Citi -- Analyst

And so is there a potential that we do see further shortfall payments as we move throughout the year based on what you've been -- the discussions you've been having with your customers?

Bryan Shinn -- Chief Executive Officer

I mean, that's not our expectation, but certainly, it's a great backstop for us. It should something change. The market looks pretty robust in the oilfield right now, so that's not anywhere in our base case. But as I said, it's always a backstop in case things don't go well in the market this year.

J.B. Lowe -- Citi -- Analyst

OK, great. And then just my other question was on Sandbox. You're saying that you don't think pricing is going to get too much worse. Is that a function of the competitors in the market just being a little bit more disciplined? Because I know that there's pushes into both types of systems some of your competitors.

Just wondering what the kind of the pricing behavior has been in recent weeks and months.

Bryan Shinn -- Chief Executive Officer

So I think what we're starting to see is somewhat of a settling out of the market. And you kind of get a sense of which customers like boxes, which customers like silos, and it feels like the market share is starting to kind of level out. And so I think some of the aggressiveness that we've seen out there from some competitors, perhaps, moderates a bit this year just as -- look, if you continue to try to take share from certain customers or in certain regions or something and you don't have success, at some point, you probably give up and you become happy with the share that you have. And so I think, perhaps, some of the aggressive actions and pricing that we've seen from our competitors, which frankly is unsustainable.

In some cases, maybe that moderates a bit in 2020. I mean it's hard to tell for sure. But it is a relatively small competitive set. It's not like there's 20 players like in the sand industry, Sandbox has a much more kind of narrow set of competitors.

And quite frankly, there's only maybe three or four out there, including ourselves, that really matter in terms of share.

J.B. Lowe -- Citi -- Analyst

All right. Great. Thanks so much.

Bryan Shinn -- Chief Executive Officer

You're welcome.

Operator

Thank you. Our final question comes from the line of Lucas Pipes with B. Riley FBR. Please proceed with your questions.

Dan Day -- B. Riley FBR -- Analyst

Hey, good morning, guys. This is actually Dan on for Lucas. I just had a quick question on the oil and gas contribution margin. If I'm remembering correctly, back in November, you had guided that pretty significantly lower sequentially.

And looking at the number, I think it actually came in like 35% higher. So if you could just get some color on maybe what happened there, if it was just like pricing on uncontracted volumes came in a lot better, if there were some costs you were able to take out from the idled mines, that would be great.

Don Merril -- Executive Vice President and Chief Financial Officer

Look, I think we're starting to see some of the impact of idle mines and lower cost, but you have to take into consideration the shortfall penalty that's in there as well, and that's what's impacting -- that's the most dramatic upside of the contribution margin per ton in the oil and gas segment.

Dan Day -- B. Riley FBR -- Analyst

Got it. And then just one follow-up on a higher level. Maybe if you could break out the demand outlook by basin, especially curious about maybe what's going on in the more natural gas heavy plays like the Marcellus where pricing is really falling off and some of those players are having a bit harder time financially. Thanks.

Bryan Shinn -- Chief Executive Officer

Yes. I don't have a specific breakout in front of me by basin, but I can comment on the Marcellus. We've seen pretty strong demand up there, quite honestly. We're extremely well-positioned there.

We can deliver by barge or by rail. And I think we're the lowest landed cost supplier into the Marcellus, so we've had pretty good luck there in terms of sales over the last few quarters. Now look, I do take your point. We know that natural gas pricing has come down substantially and will, perhaps, be under further pressure.

So we'll watch that closely, but the Marcellus has been a pretty strong for us. MidCon has been strong, and we actually do really well out west. So we're in all the basins. And so whether you want local sand or Northern White, I feel like we can be one of the most sort of effective total supplier across the country.

Dan Day -- B. Riley FBR -- Analyst

Great. Thank you.

Bryan Shinn -- Chief Executive Officer

Thanks, Dan.

Operator

Thank you. There are no further questions at this time. I'd like to turn the call back over to Mr. Shinn for any closing remarks.

Bryan Shinn -- Chief Executive Officer

Thanks, operator. I'd like to close today's call by reemphasizing that we continue to focus on a few key priorities, namely accelerating organic growth in our Industrial business, effectively deploying our oil and gas assets to maximize profitability and then, of course, generating free cash flow. I'm confident that we have the right strategy, the right plan, and the right resources for success and I'm very optimistic that 2020 will be a strong year for U.S. Silica.

So with that, thanks for dialing in to our call and have a great day, everyone.

Operator

[Operator signoff]

Duration: 54 minutes

Call participants:

Michael Lawson -- Vice President of Investor Relations and Corporate Communications

Bryan Shinn -- Chief Executive Officer

Don Merril -- Executive Vice President and Chief Financial Officer

Stephen Gengaro -- Stifel Financial Corp. -- Analyst

Cameron Lochridge -- Stephens Inc. -- Analyst

Kurt Hallead -- RBC Capital Markets -- Analyst

George O'Leary -- Tudor, Pickering, Holt & Co. -- Analyst

George OLeary -- Tudor, Pickering, Holt & Co. -- Analyst

Connor Lynagh -- Morgan Stanley -- Analyst

Jon Hunter -- Cowen and Company -- Analyst

John Watson -- Simmons Energy -- Analyst

J.B. Lowe -- Citi -- Analyst

Dan Day -- B. Riley FBR -- Analyst

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