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US Silica Holdings Inc (NYSE:SLCA)
Q4 2020 Earnings Call
Feb 26, 2021, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to the U.S. Silica Fourth Quarter Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Don Merril, Executive Vice President and Chief Financial Officer. Thank you, sir. Please go ahead.

Don Merril -- Executive Vice President and Chief Financial Officer

Thanks. Good morning everyone and thank you for joining us for U.S. Silica's fourth quarter year-end 2020 earnings conference call. With me on the call today is our Chief Executive Officer, Bryan Shinn.

Before we begin, I would like to remind you of our standard cautionary remarks regarding the forward-looking nature of some of the statements that will be made today. Such forward-looking statements may include comments 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.

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, Don, and good morning everyone. I hope that you and all your loved ones remain safe and healthy as the world continues to navigate the ongoing COVID-19 pandemic. Also our thoughts and best wishes go out to all of the colleagues, friends and family that we have that have been impacted by the cold weather that has recently swept the country. Through these uncertainties, we've continued to prioritize the health, safety and well-being of our colleagues and have remained focused on following all appropriate health and safety guidelines.

I'm proud of our Company successfully navigated 2020 and of our strong overall performance during the year in spite of the challenging macroeconomic environment. Some examples include achieving the best safety performance year that we've ever had and also delivering $200 million in adjusted EBITDA during 2020. We ended the year with approximately $150 million of cash on our balance sheet, generated over $45 million in cost savings to support overall profitability and we maintained fiscal discipline by limiting capital spending to $34.5 million and reducing SG&A by $25 million that's down 18% from 2019. We commercialized a number of critical industrial growth products such as coated diatomaceous earth, cristobalite and cool roof granules. We also expanded our new product pipeline and advanced numerous key projects such as blood plasma filtration, organic pesticides and specialty silica additives.

Obtained several new customer contracts during the year. We estimate that greater than 50% of our industrial revenue and 90% of our oil and gas profit revenue is now under long-term contract. And finally, we continue to improve manufacturing efficiencies. Plant costs are coming down. Railcars in storage are 30% lower sequentially due to scheduled car returns and we're seeing increased capacity utilization of the cars as well.

Looking ahead to 2021 and beyond, I see a minerals and technology company that is well positioned for sustainable long-term growth and significant free cash flow generation. We already serve numerous critical industries, such as food and beverage production, housing, automotive, glass manufacturing, biopharma and energy and we have a pipeline of innovative products to serve other high-growth sustainable markets including solar energy, wind power, cleaner air, green diesel, food safety and energy-efficient buildings.

Let's move on now to specifics for Q4 starting with a Company overview. The US economy is recovering from recent lows and while the macroeconomic environment remained challenge in Q4, we delivered outstanding results during the quarter. Quarterly volumes increased 26% sequentially and adjusted EBITDA was $63.6 million, up 24% from Q3 driven by increased profits in oil and gas and a robust industrial segment which performed better than expected in Q4.

Speaking of industrials, let's focus on that segment for a moment. Volumes of 926,000 tons increased 10% versus Q4 2019 and were only down 3% sequentially. Average sales price was up about 7%, mostly due to seasonal product mix. Contribution margin dollars were almost back to pre-pandemic levels and just 1.8% lower than Q4 2019.

As the economy continued to recover, we increased staff at key industrial manufacturing sites during the quarter as demand rebounded in important end markets including corn wet milling, edible oils, polymer additives and housing. From a geographic perspective, demand was strongest in the US and Asia while Europe, Africa and Latin America have been slower to recover.

In our energy segment, we experienced robust demand with proppant sales volume of 1.9 million tons, up 48% sequentially on stronger West Texas sales and increased Northern White Sand volumes. The number of frac crews operating in the US continued to increase in Q4 and we now estimate more than 165 active crews completing wells in the United States. In response to customer requests, we successfully restarted our Crane, Texas and Sparta, Wisconsin mines during the quarter. Proppant pricing was down 2% sequentially, primarily due to lower spot pricing in West Texas.

SandBox loads jumped 71% versus Q3 as numerous customers increased activity. As a result of overall strong performance, segment revenue and contribution margin dollars increased 81% and 64% respectively.

I'll conclude my prepared remarks this morning with market commentary. We currently believe that most sectors of the economy are recovering and expect that 2021 will be a good year generally for our customers and also for U.S. Silica. Our current outlook is for a robust recovery in energy sector proppant and last mile logistics demand and GDP plus growth in our industrial segment.

Let's look at the detail, starting with energy. We're experiencing a strong start to 2021 with surging proppant demand in January. February started strong as well, but has been negatively impacted by the recent unprecedented cold weather causing disruption last week in West Texas, South Texas and the Mid-Con as a result of freezing conditions and electricity and natural gas curtailments. We did not suffer any major damage and our operations and deliveries in these geographies are ramping back up. It's too early to estimate the total impact but I believe that we will lose several days of oil and gas sales in February to those basins and will occur increased operating, maintenance and start-up costs as well. Even with all the disruptions, our current forecast is for proppant volumes to increase 15% to 20% sequentially in Q1. Regarding profitability impact, we expect to make up most of the lost profits later in 2021 as we believe that energy company completion spending will be redistributed throughout the year and also insurance claims will likely offset some of our increased expenses.

Further with some industry experts now forecasting $70-plus WTI pricing later this year, there is potential upside from incremental completion spending, particularly from private energy companies. We're also off to a strong start in industrials, but did experience some weather-related headwinds there, but to a lesser extent in Q1. That said, we still expect Q1 industrial profits to increase 3% to 5% sequentially with several product lines growing nicely, including filtration, cool roof granules, cristobalite and ground silica. For the year, I believe that we will grow industrial segment profits at a GDP-plus rate as expected.

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

Don Merril -- Executive Vice President and Chief Financial Officer

Thanks, Bryan, and good morning again everyone. Let me begin with a review of our operating segment results. Fourth quarter revenue for the Industrial and Specialty Products segment of $106.9 million decreased 3% versus the third quarter of this year, but increased 2% compared with the same quarter one year ago. Fourth quarter revenue was driven by some economic recovery, but was offset by the anticipated seasonal declines.

The Oil and Gas segment revenue was $120.3 million for the fourth quarter, an increase of 81% compared with the third quarter of 2020 and a decrease of 49% compared with the fourth quarter of 2019. The sequential increase was mostly due to the recovery in the energy space during the quarter.

On a per ton basis, the contribution margin for the Industrial and Specialty Products segment was $41.47 per ton for the fourth quarter, which is a decrease of 9% compared with third quarter results. This was expected and represents a typical seasonality and was especially unsurprising after the strong third quarter performance of 2020.

The Oil and Gas segment contribution margin on a per ton basis was $27.10, an increase of 64% when compared with the third quarter 2020. However, as mentioned in our earnings release, the oil and gas segment contribution margin includes $27.2 million attributed to customer shortfall penalties.

Moving on to full-year total Company results for 2020. Selling, general and administrative expenses for the year of $124.2 million represents an 18% decrease when compared to the full year 2019. The decrease reflects the concerted effort by the team to reduce spending to better align with business condition. I should note that SG&A spending in the quarter was $27.8 million and we expect Q1 of this year to be roughly in line with this.

Depreciation, depletion and amortization expense in the fourth quarter totaled $40 million, which was essentially flat compared to the third quarter. We expect depreciation, depletion and amortization to be flat, again in the first quarter of 2021. Our full year effective tax rate was a benefit of 34.3% for 2020 and we currently estimate a tax benefit for the full year 2021 in the low 20% range.

Turning to the balance sheet. The Company had $15.9 million in cash and cash equivalents and $52 million available under its credit facilities. As previously discussed on our third quarter conference call we are anticipating any additional tax refunds from the IRS related to the CARES Act. We expect the refund to be approximately $37 million. However, the receipt of these funds remains delayed.

Finally, our net debt as of year-end was approximately $1.1 billion. Capital expenditures in 2020 remained inside our guidance at $34.5 million and were mainly related to our growth projects in our ISP segment spending to expand our SandBox operations and other maintenance and cost improvement capital projects. We also expect our 2021 capital spending to be in the range of $30 million to $40 million.

Finally, as we move into 2021 we remain keenly focused on our cash and we are committed to keep capital spending within our operating cash flow. Currently, we expect to be free cash flow positive for the year. However, we will burn some cash in Q1 as we typically do. Additionally, our cost cutting efforts in 2020 have made the Company more nimble and flexible allowing us to react quickly to changes, which the market will inevitably throw at us.

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 and Answers:

Operator

[Operator Instructions] Our first question today is coming from Stephen Gengaro of Stifel. Please go ahead.

Stephen Gengaro -- Stifel -- Analyst

Thanks. Good morning, gentlemen.

Bryan Shinn -- Chief Executive Officer

Hi. Good morning, Stephen.

Don Merril -- Executive Vice President and Chief Financial Officer

Good morning.

Stephen Gengaro -- Stifel -- Analyst

So two things. I think to start with, if you look at the contribution margin in Oil and Gas in the fourth quarter, you -- I think it's like in the, like, low $12 range excluding shortfalls. So how should we think about that --?

Don Merril -- Executive Vice President and Chief Financial Officer

Sorry. You there, Stephen?

Stephen Gengaro -- Stifel -- Analyst

[Technical Issues]

Operator

[Technical Issues] Sir, please make sure your phone is close to your mouth.

Don Merril -- Executive Vice President and Chief Financial Officer

You there, Stephen?

Stephen Gengaro -- Stifel -- Analyst

Yes. I am here. Can you hear me?

Bryan Shinn -- Chief Executive Officer

Yeah.

Don Merril -- Executive Vice President and Chief Financial Officer

Yeah. So I think your question is what's normalized contribution margin look like in the oil and gas business. Is that right?

Stephen Gengaro -- Stifel -- Analyst

Exactly. Because I think we ended up a little over $12 in the quarter with -- excluding the shortfall reviews. And just trying to get a sense for that, especially with maybe some pricing over the next year, but clearly some issues on the short term with the weather.

Don Merril -- Executive Vice President and Chief Financial Officer

Yeah. So, Steve, this is Don. You're right. We're in the $12.70 range once you take out the $27 million for the shortfall penalties. But we had some other kind of run of the mill things that happened at the end of the year. So -- and a lot of those year-end adjustments were favorable, right. So we did have some really nice tailwinds on that as well that probably accounted for roughly about $2 a ton. So when you look from a normalized perspective, you're probably in that $10 range coming out of Q4. And just to elaborate a little bit more going into Q1, we're seeing some really nice volume growth on the proppant side. But with growth comes cost, right. So we're starting up a couple of our plants, specifically Sparta and Crane. We also are pulling a lot of railcars out of storage and that's pretty pricey because you're taking railcars out of storage with no products in it, right. So you're paying a little bit more for that. So you probably have another $1.50 to $2 there going into Q1. Before -- you always get the cost before you get the profit right. So you will see a little bit of drag on Q1 and then getting better as the year goes on.

Stephen Gengaro -- Stifel -- Analyst

Right. Thank you. And that's good color. And then the other question, so from a bigger picture perspective you guys did a really good job I thought with the ISP discussion in December. As we look out and I know it's early, but if you look out for like 2023, '24, is there a situation where the volumes may be up a bit, but the contribution margin per ton and the pricing because of the higher-end products and ISP will generate contribution margins that are materially higher or is it a volume and a contribution margin. I'm trying to just get a sense for the big drivers of longer-term profitability in ISP.

Bryan Shinn -- Chief Executive Officer

Yeah. It's really an interesting question, Steven. And I think, as you said, kind of from a big picture standpoint, I feel like we're transitioning from more of a bulk material supplier, which has been kind of where we've been for a century plus to more of a specialty kind of highly processed minerals and ingredient supplier. And so we make that transformation over the next several years here, I think what you'll see is that revenues and profits will go up a lot faster than volumes or said more cleanly we will probably be shipping less things in railcars and more things in smaller containers. So a lot of the new products that we have under development are much lower volumes but sell for 10, 50, 100 times in price what we have today. And one of the advantages of that is that these are truly specialty products, which quite frankly once we get into an application and get specified in will be very hard to specify out and some of them are fairly unique products as well. So I think you'll see less volume growth per se and more revenue and profit per ton.

So if you look at contribution margin, for example, we've got some products in the pipeline that have contribution margins of $500 to ton, $1,000 a ton. Some of them we actually are measuring in dollars per pound now, so dollars per ton. So just kind of a flavor for the type of things that are coming through the pipeline.

Stephen Gengaro -- Stifel -- Analyst

Great. That's good color. Thank you.

Bryan Shinn -- Chief Executive Officer

Thanks, Stephen.

Operator

Thank you. Our next question is coming from Connor Lynagh of Morgan Stanley. Please go ahead.

Connor Lynagh -- Morgan Stanley -- Analyst

Yeah. Thanks. Good morning.

Don Merril -- Executive Vice President and Chief Financial Officer

Good morning, Connor.

Connor Lynagh -- Morgan Stanley -- Analyst

Wondering if you could give us sort of a feel for the supply side out there on the oil and gas business. Certainly demand is picking up with frac activity. I guess what I'm trying to get a feel for is is there incremental pricing required to bring back idle mines? Do you think there is substantial reactivation under way already? If you could just give us sort of your feel and maybe compare and contrast Texas and the Northern regions.

Bryan Shinn -- Chief Executive Officer

It's a really interesting question. And if you look at what happened in the pandemic sort of downturn of 2020, you saw a lot of companies do exactly what we did which was take some mines almost completely offline and then others got turned back and started running at, say, less staffing levels. And so, if a mine could do 1 million tons maybe it was only staffed for 200,000 tons or 300,000 tons or something like that. So what we've seen as demand has come back very strongly here, we've seen that that second category, the ones that quote-unquote got just turned down kind of get turned back up, if you will. And so we have restaffed, for example, our ATTO [Phonetic] mine back to 24/7 operation. So, that's relatively easy to do. And our West Texas mines, Crane and Lamesa, we were able to restaff those as well.

I think you'll -- we will hit a point here pretty soon where you can't just sort of turn back up the mines that were turned down and it will come to actually reactivating mines that have been shuttered. And what we've seen out there actually so far is surprisingly perhaps to some is a fair amount of discipline among the supplier base. And I'm aware of several examples where customers have gone to ourselves and to competitors looking for additional capacity. And I think the competitors and us are looking for long-term contracts at reasonable prices to restart mines. We've already gotten a lot of those contracts. Others perhaps are to come. So I feel like there's a bit of discipline out there right now. And it certainly does take some incremental pricing to get those mines reactivated. As Don was saying earlier, talking about our contribution margin for oil and gas in response to Stephen's question, if there is upfront costs to reactivate the mines, and so you got to dig a bit of a cash hole when you start those back up. So I think most people in the industry are looking for some incremental pricing to be able to do that.

Connor Lynagh -- Morgan Stanley -- Analyst

Got it. And then specifically in that comment of Don's that you we're talking about, are you guys contemplating any incremental price in 1Q versus 4Q? And regardless of that, should we expect more as we move into, say, 2Q?

Bryan Shinn -- Chief Executive Officer

So I feel like things will get a bit more constructive out there. We've already seen some opportunities to get pricing. It's a bit of an interesting dynamic. We had a lot of negotiations with our customers in Q2 and Q3 of last year and gave some pricing concessions in those quarters as needed to support the customers and now I think we'd quickly be coming to an environment in the first couple of quarters here of 2021 where things have flipped a bit and we're tightening up pretty substantially. We've seen some prices go up a bit already and certainly with WTI screaming up into the $60s and I know we've all seen the forecast from some of the leading prognosticators out there saying that WTI could get into the $70s by summer time of this year. If that happens, I feel like there'll be some reasonable opportunities to get price.

Connor Lynagh -- Morgan Stanley -- Analyst

Got it. Thanks very much.

Don Merril -- Executive Vice President and Chief Financial Officer

Thanks, Connor.

Operator

Thank you. [Operator Instructions] Our next question is coming from J.B. Lowe of Citi. Please go ahead.

J.B. Lowe -- Citi -- Analyst

Hey. Good morning, Bryan. Good morning, Don.

Bryan Shinn -- Chief Executive Officer

Hi, J.B. Good morning.

Don Merril -- Executive Vice President and Chief Financial Officer

Good morning.

J.B. Lowe -- Citi -- Analyst

Just kind of a question on the competitive landscape. As your -- as some of your competitors have exited bankruptcy, were you guys able to take some market share over the last couple of quarters and how do you think that the competitive landscape is kind of set up now that you've seen some of your competitors kind of reemerge here?

Bryan Shinn -- Chief Executive Officer

So I think we have been able to gain share in oil and gas and in the industrial sector as well. We've had a number of customers approach us, started in 2020 quite frankly, looking for additional supply. And it's not just from the competitors who went through bankruptcy. But I felt like there was just kind of a general concern around the health of our industry and customers saw us as the strongest player out there from kind of a stability and strength standpoint. And so we've been able to sign a lot of new contracts. Just in this previous quarter Q4 that we're talking about here this morning, we signed in the industrial business, for example, 14 new contracts from customers. And we're continuing to increase the amount of contracted volume that we have out there. We're well over 50% of our industrial business that's under long-term contract and we're typically somewhere between, depending on the grade of product and the basin, etc., 80% to 90% in oil and gas. So I think that has -- it certainly has helped us.

Just the kind of disruption that was created in the industry with the bankruptcies there, if you kind of step back and look at it, three of our largest competitors in the oilfield anyway went through bankruptcy last year. And so I feel like customers were sort of fleeing to safety and quality when they would choose us. So our team has done a really nice job of getting additional volumes locked up under contract here over the last 12 months or so.

J.B. Lowe -- Citi -- Analyst

Okay. Great. And just a follow-up, do you guys expect to get any shortfall payments in 1Q?

Don Merril -- Executive Vice President and Chief Financial Officer

No, right now -- we don't know what's the answer. But right now, I would say that we're not anticipating anything of a material nature in Q1?

Bryan Shinn -- Chief Executive Officer

We would hope that especially in this environment that our customers going to buy all the contracted tons. But things are pretty tight out there and there are days where especially with some of the recent weather issues, we know customers are scrambling looking for products out there. And to the question earlier that came from Connor around pricing, all that feels like it's constructive for a pretty positive environment for oil and gas demand for sure as we go into 2021 here.

J.B. Lowe -- Citi -- Analyst

Yeah, I guess just a follow-up on that, I'm kind of -- I mean I understand the costs on the ramp-up side are going to hit Q1. But do you think 2Q contribution margin on the O&G side given those dynamics could get back to the 4Q adjusted level of near $13? [Phonetic]

Bryan Shinn -- Chief Executive Officer

I would expect that we'll see a rebound in Q2. I think there's a couple of things there, as Don said, we'll be through some of the cost issues from Q1. We didn't talk about the whole sort of weather thing yet. I mentioned it in my prepared remarks, but I think that will definitely be a bit of an impact, of course, in Q1. But my expectation is that, especially as volumes continue to ramp, we should be able to have some tailwinds on our cost. I think we will have opportunity to get some pricing. So I'm feeling pretty positive about margins increasing from Q1 to Q2 at this point. Obviously still a lot of unknowns, but given that a lot of the operators out there weren't able to finish their completions or had to stop their completions in February because of weather, I feel like some of that work is going to push into Q2 and this is going to put even further strain on what looks like a pretty tight market right now for sand, proppant into the oilfield sector.

J.B. Lowe -- Citi -- Analyst

All right. Great. Thanks, guys.

Bryan Shinn -- Chief Executive Officer

Okay, thanks.

Operator

Thank you. Our next question is coming from Lucas Pipes of B Riley Securities. Please go ahead.

Lucas Pipes -- B Riley Securities -- Analyst

Hey. Good morning, everyone. My first question is on the specialty material side. And I wondered if you can give us a little bit of a sense of how large the addressable market is. You mentioned the revenue price per ton potential is very attractive. So I wondered if you could maybe frame up the kind of total market opportunity. And then also kind of who would you be competing with in that segment? Thank you.

Bryan Shinn -- Chief Executive Officer

So it's really fascinating, Lucas, and it's one of the things that I really get excited about when I think about our industrial business. If you look at how we've defined the business over the last more than a century, it tended to be pretty focused on the sand dynamics and a lot of the same end uses that we've traditionally been in glass manufacturing, foundry etc. One of the really cool things about what we see is the future of our industrial business is we're going beyond the markets that we sold into and looking at a completely new markets and end uses. And I see our competitive set now is not just sand, but a lot of other specialty minerals and products. And so when you start thinking about what that opens up, I mean literally it's billions of dollars worth of market space that we can go after. There was some information that we've put together. Some of you might have seen presentation in December when we had our industrial focused investor call. If you check out that presentation, find it on our website obviously, you can see some of the markets there. And some of the markets range addressable size from $100 million to $150 million and some are literally in the billions. And so at its core, what we're trying to do is take one of the minerals that we have or a mineral that we can get access to, perhaps do some processing to it, coat it, heat it, do a variety of things to it and transform it into something that can compete in completely different market sectors and in many cases do it with either an advantage in performance or an advantage in manufactured cost. So I think that's really exciting as we look at that potential for the future.

Lucas Pipes -- B Riley Securities -- Analyst

Very helpful. I appreciate that. Thank you. And then, turning back to the energy side. There's been a fair bit of consolidation among service providers but then also among producers. How do you think this is impacting the competitive dynamics kind of as you reemerge from this downturn? Thank you.

Bryan Shinn -- Chief Executive Officer

I think that that dynamic actually is one of the most beneficial things that's happened for us. My experience in selling into a lot of industries over more than three decades is that big customers like to do business with big suppliers. And so the larger the customers get, I think the more they're looking for companies like us who can supply them across multiple basins, multiple locations and have the sort of wherewithal to match up with those companies and be able to respond quickly to meet their needs. So you see the largest folks in the industry now are coming to us and there are some of the customers, in some cases ones that maybe we didn't do business with the two or three entities that were kind of small to mid-sized companies as they were separate, those are coming together now. They're rethinking their sourcing strategy and their kind of vendor partnership strategy. And we've really been the beneficiary of that. I mentioned earlier in the call about all the new contracts that we signed. And I think several of those have been as a result of some of these larger entities forming and going out and really rethinking how they want to -- how they want to partner with their suppliers.

Lucas Pipes -- B Riley Securities -- Analyst

I appreciate it. Thank you. Thanks for all the color and best of luck.

Bryan Shinn -- Chief Executive Officer

Thank you very much.

Operator

Thank you. At this time, I'd like to turn the floor back over to Mr. Shinn for closing comments.

Bryan Shinn -- Chief Executive Officer

Thanks, operator. I'd like to close today's call by reiterating a few of the key points that we talked about. First, very proud of how our Company successfully navigated 2020 and of our overall strong performance during the year in spite of the challenging macroeconomic environment. Second, we started the new year well in both of our business units and I believe we're positioned for really good success in 2021 and beyond with numerous growth opportunities in our pipeline as we discussed a bit this morning and of course those are across a diverse set of markets and end uses. And then finally with improving profitability and continued capex discipline, we expect to be cash flow positive this year, as Don mentioned in his remarks.

So, thanks everyone for dialing into our call today and we look forward to speaking with you all again next quarter.

Operator

[Operator Closing Remarks]

Duration: 33 minutes

Call participants:

Don Merril -- Executive Vice President and Chief Financial Officer

Bryan Shinn -- Chief Executive Officer

Stephen Gengaro -- Stifel -- Analyst

Connor Lynagh -- Morgan Stanley -- Analyst

J.B. Lowe -- Citi -- Analyst

Lucas Pipes -- B Riley Securities -- Analyst

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