U.S. Silica Holdings, Inc. (NYSE:SLCA) Q3 2022 Earnings Conference Call October 28, 2022 8:30 AM ET
Company Participants
Bryan Shinn – Chief Executive Officer
Don Merril – Executive Vice President, Chief Financial Officer
Patricia Gil – Vice President of Investor Relations
Conference Call Participants
Stephen Gengaro – Stifel
Samantha Hoh – Evercore
Derek Podhaizer – Barclays
John Daniel – Daniel Energy
Operator
Good morning and welcome to the U.S. Silica Third Quarter 2022 Earnings Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded.
It is now my pleasure to introduce you to Patricia Gil, Vice President of Investor Relations. Thank you, you may begin.
Patricia Gil
Thank you and good morning everyone. I’d like to thank you for joining us today for U.S. Silica’s third quarter 2022 earnings conference call. Leading the call today are our Chief Executive Officer, Bryan Shinn; and Don Merril, our Executive Vice President and Chief Financial Officer.
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 which are predictions, projections or other statements about future events are based on current expectations and assumptions 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. We do not undertake any duty to update any forward-looking statements.
Additionally, we may refer to the non-GAAP measures such as adjusted EBITDA, segment contribution margin, net debt and our net leverage ratio 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 discussions of segment contribution margin, net debt and the net leverage ratio.
And with that, I will hand the call over to Bryan Shinn.
Bryan Shinn
Thanks Patricia and good morning everyone. We delivered another exceptional print in Q3, resulting in our best quarterly financial performance in the last four years. These tremendous results were driven by continued robust customer demand in both business segments and outstanding execution by our talented team. We enjoyed a full quarter of price increases to fight inflationary impacts in our industrial segment, realized greater contract coverage and improved prices in sand proppant, and delivered further margin expansion in SandBox last-mile-logistics. This resulted in sequentially higher revenue, earnings, and strong cash generation across the Company, affording us the opportunity to repurchase an additional $50 million of debt earlier this month. So far this year, we have used our strong cash flow generation to repurchase a total of $150 million of debt and expect to generate substantial operating cash flow in the fourth quarter and in 2023, which should further strengthen our balance sheet and help us achieve our objective of meaningfully reducing net debt.
Don will discuss the details of Q3 performance in just a moment. But first, I’d like to review some of the important trends that we saw during the quarter. In our oil and gas segment, the supply and demand balance was very tight in sand proppant and last mile logistics and we remained effectively sold out due to strong well completion demand, particularly in West Texas. Spot prices range from approximately $40 to $50 per ton, and our contract sand and sandbox sales prices and margins continued to expand.
During the third quarter, we achieved new business milestones in the month of August, with record sand production in West Texas, and record SandBox delivered loads. With the current energy cycle anticipated to last for multiple years, our customers have been determined to secure sand supply and continue to sign attractive multi-year contracts. These contracts are recently included paying cash upfront in the form of a capacity reservation fee or CRF, the latest of which was signed a few weeks ago.
Overall, our oil and gas segment finished the quarter with positive momentum. And we expect continued underlying demand strength in the fourth quarter balanced against the potential for weather disruptions and the level of holiday seasonality.
In our industrial segment, customer demand remained robust across the end uses and market segments and third quarter results improved sequentially versus a very strong second quarter. Volumes persisted at record levels in Q3, and we reported the second highest contribution margin and segment history. These strong results were driven by improved product mix, continued operational efficiency gains, and price increases and surcharges across all major product lines to combat inflation.
In September, we announced another round of price increases ranging from 9% to 20% for most of our non-contracted industrial products, effective for shipments beginning November 1.
And finally, many of our facilities continue to operate at record utilization rates to keep pace with industrial segment demand. With the remainder of my time this morning, I want to give an update on a few of the exciting growth opportunities in our industrial portfolio, and then finish with a summary of our outlook for the fourth quarter and for 2023. New product innovation and the profitable growth of our industrial product portfolio remain important priorities for U.S. Silica.
During the quarter, we had numerous successes and made further progress toward the expansion of future contribution margin dollars, including receiving our first purchase order for our newest patent pending white pigment product, ramping up sales of our Diatomaceous earth filtration products into the renewable diesel market, signing a key purchase agreement for the first significant sale of our new high purity filtration product, executing a long-term contract for our ultra-low iron silica that will support the increasing demand for U.S. Solar panel glass manufacturing. And finally, we have multiple customers across different markets inquiring about long-term contracts for Diatomaceous earth filtration and clay adsorbent products, given that the supply for both of these products is expected to be tight for the next several years.
Now let’s turn to our business and market outlook for the fourth quarter starting with oil and gas. Energy sector demand continues to be robust, and we remain effectively sold out. With Q4 off to a really strong start, in fact, October is tracking to be our highest profitability month of 2022 so far. Typically, we expect seasonally weaker demand in the back half of Q4 in the oilfield part of our business, but it’s unclear to what extent this will happen in 2022.
Meanwhile, we expect to continue securing new customer contracts at attractive pricing. In our industrial segment, demand continues to be strong in Q4 so far, and we’re not experiencing specific economic driven weakness. Historically, our Q4 profitability declines around 10% to 12% sequentially, due to a combination of seasonal demand, customer facility maintenance and customer year-end inventory management. We expect the Q4 22 profitability for industrials will be in line with those historical norms.
Looking out to 2023 our oil and gas segment is in an excellent position for further sequential growth and cash generation. We’re committed to efficiently running our operations and maximizing our production levels without adding incremental capacity.
Additionally, we believe that the industry forecasted 9% year-over-year profit supply additions will be easily absorbed by the market as supply and demand is projected to remain tight. More importantly, our customers appear to believe this as well given the attractive multi-year contracts that we’ve signed recently. We expect to continue to maintain competitive discipline and further enhance our strong reputation as a reliable low cost sand and logistics provider. We believe that a combination of constructive, crude oil pricing and strong sand profit customer contract coverage and mix coupled with higher sandbox margins will continue to generate significant free cash flow from operations in 2023 and help further strengthen our balance sheet.
Turning to our industrial and specialty product segments, we are continuing to carefully evaluate a variety of factors to develop our 2023 outlook. Currently our base case 2023 forecast is for increased sales volumes with improving margins. We have not yet seen meaningful indications of potential recessionary impacts, but obviously there’s a lot of noise in the market right now. I’m encouraged that several key customers are relatively bullish regarding demand next year and that they’re continuing to sign attractive, long term contracts with us. While we will have more to say on our 2023 ISP outlook on the next earnings call, our focus remains on margin growth through a combination of new customer acquisition, new product development and productivity improvements. And we plan to continue to invest in high return high certainty growth projects.
And with that, I will turn the call over to our CFO Don Merrill, who will discuss our financial results in more detail. Don?
Don Merril
Thanks, Bryan. And good morning, everyone. As Bryan stated, we reported another strong quarter in Q3 as both of our segments are supported by robust customer demand, higher pricing, margin expansion and favorable product mix. Compared to the prior quarter, total revenue increased 8% to $418.8 million, adjusted EBITDA increased 10% to $102.7 million overall tonnes sold remained elevated but decreased marginally by 1% to 4.6 million tonnes. The total company contribution margin increased 7% to $131.8 million.
Selling, general and administrative expenses for the quarter decreased 3% sequentially to $33.9 million, driven mostly by lower insurance costs and stock based compensation in the quarter. Depreciation depletion and amortization expense decreased 1% sequentially to total $34.5 billion in the third quarter. Our effective tax rate for the quarter ended September 30 2022 was 24%, including discrete items.
Now, let me move on with a detailed review of our operating segment results. The oil and gas segment reported revenue of $267.5 million for the third quarter, an increase of 10% when compared to the second quarter. Volumes for the oil and gas segment decreased marginally by 1% compared to the prior quarter and totaled 3.5 million tons. While SandBox delivered loads increased 9% compared to the prior quarter.
Segment contribution margin continued its expansion improving 10% quarter-over-quarter to $85.3 million, which on a per ton basis was $24.38. These positive results were driven by on-going strength and customer demand and improved pricing for both profit and last mile logistics. Our industrial and specialty product segment revenues increased 5% sequentially to $151.4 million when compared with the second quarter.
Volumes for the ISP segment were slightly higher compared to the prior quarter and totaled a new historical record of 1.126 [ph] tons and segment contribution margin increased 1% on a sequential basis due to our continued inflation offsetting price increases, favorable product mix and operational efficiencies. On a per ton basis, the contribution margin for the industrial and specialty product segment increased 1% sequentially and totaled $41.32 per ton.
Turning to the cash flow statement. During the third quarter, we delivered $66.3 million of cash flow from operations. And we invested $11.1 million of capital primarily for facility maintenance and growth projects. The company’s cash and cash equivalents on September 30 2022 totaled $267.1 million after completing a $100 million loan repurchase in July. At quarter end, our $100 million revolver had $0 drawn with $78.9 million available under the credit facility after allocating for letters of credit. Our actions to strengthen the balance sheet have been successful. And at the end of the third quarter, our net-debt to trailing 12-month adjusted EBITDA ratio was 2.9 times already below our 2023 target of 3.0 times levered.
Given our meaningful levels of free cash flow generated year-to-date, coupled with our internal projections for future operating cash flow, we seize the opportunity to once again repurchase a portion of our outstanding term loan earlier this month. This latest $50 million term loan repurchase was oversubscribed and our debt was retired at a discount to par utilizing cash on hand.
So far this year, we have repurchase a total of $150 million of our term loan, which we view as the best immediately accretive option of providing returns to our shareholders, especially considering the current rising interest rate environment.
Looking forward, we forecast that we will continue to generate robust operating cash flow for the remainder of the year, allowing us the flexibility to further deliver our balance sheet. We remain committed to organically funding our business growth, and we will continue to be disciplined in our capital spending, managing accordingly with an emphasis on effectively maintaining operating levels at our facilities and investing in selective growth projects for the ISP segment to maximize future profitability.
Our capital spending forecast for the full year remains in the range of $40 to $50 million. We guide full year 2022 SG&A expenses to be up 15% to 20% year-over-year, primarily due to the supplier contract termination in the first quarter, merger and acquisition related expenses for the strategic alternatives review and the first half of the year and other costs mostly related to increased activity and inflation.
Full year 2022 DD&A expense is still anticipated to decrease approximately 15% due to past investments which became fully depreciated at the end of 2021. Our estimated effective tax rate for the full year 2022 is 23%. In conclusion, our main priority is to continue strengthening our balance sheet by focusing on free cash flow generation. The pricing and contracting actions that we have taken are allowing the company to effectively manage inflation issues and provide visibility and stability for the future quarters for our two business segments. For the remainder of this year and heading into 2023, we aim to balance our capital investments with cash flow, including further improving our net leverage ratio.
And with that, I’ll turn the call back over to Bryan.
Bryan Shinn
Thanks, Don. I’m very proud of the results that our team delivered in Q3 and we expect continued excellent performance in Q4. While strengthening our balance sheet and expanding our industrial product portfolio and profitability, we also continue to drive numerous initiatives to extend our market leading positions and pave the path to meaningful growth over the next three to five years.
With that, operator, will you please open the lines for questions.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] Our first question comes from the line of Stephen Gengaro with Stifel. Please proceed with your question.
Stephen Gengaro
Thank you. Good morning, everybody.
Bryan Shinn
Good Morning, Stephen.
Stephen Gengaro
So I have two things for me. If you don’t mind, the first would be obviously demand on the oil and gas front is good, is very good. When you look at your current capacity and efficiency or facilities, what type of volumes can you deliver on a quarterly basis? I’m just trying to get a sense because obviously, this has been a good year. I’m just trying to get a sense of what kind of volume upside is there if the market remain despite it?
Bryan Shinn
It’s a great question, Stephen. And as we said before, we’re essentially sold out on our sand proppants right now. And we’ve got somewhere around 14.5 maybe a little bit more million tons per year of capacity turned on. And so we’re running pretty close to that rate right now. So I don’t see a lot of additional volume upside, at least from a nameplate perspective. That said, our teams are always sort of tinkering, thinking about ways that we can do some incremental capacity squeezing out to make sure that we are able to satisfy all our customer demand. So I’m sure our team will, will come up with some creative ideas. But basically, the capacity we have is sort of what we have, and we’re pretty close to that right now.
Stephen Gengaro
Great, thanks. And you mentioned contract coverage. And obviously, pricing has been extremely good this year. When you look out into over the next two to four quarters, based on like kind of what’s embedded in your in your contract coverage, should contribution margins per ton in oil and gas continue to trend higher?
Bryan Shinn
So if you look at our contract coverage is really interesting. I was just talking with our sales team about this the other day and where we are right now, if you project that forward, say into 2023. I believe that we’ve already got 85% to 90% of our capacity sold for 2023 and pushing upwards of 70% under contract for 2024. So we have really good visibility along the way here. I would say that throughout the year, we’ve had increasing price on a quarterly basis. And if you look at this past quarter, for example, prices were up just amazingly out there across all the basins, prices ranged up from about 5.5% to more than 30% across space. And so we had a lot of pricing tailwinds in Q3 and I think you can expect to see some of those embedded in future contracts. Obviously, as we’re signing contracts over the next couple of quarters and extending contracts prices in some of those older contracts will be updated. So I feel like pricing will be a tailwind for us in the future.
Stephen Gengaro
Thank you. I will get back in the queue.
Bryan Shinn
Okay. Thanks Stephen.
Operator
Our next question comes from the line of Samantha Hoh from Evercore. Please proceed with your question.
Samantha Hoh
Hey, good morning, guys. Congrats on the great quarter.
Bryan Shinn
Thanks Samantha and good morning to you.
Samantha Hoh
Thanks. Just to maybe continue the last line of questioning but where are you seeing pricing more than 30%?
Bryan Shinn
So we had a couple of basins where we saw that going up and northern white sand was up a lot. That’s a big quarter for northern white sand in terms of pricing. So great job by our team, negotiating contracts and getting those price increases out in the market.
Samantha Hoh
Okay, great. One of the things I’ve been thinking about lately was sand intensity per well, one of the big pressure pumper there spoke recently about how that trend is still going up. And I was just wondering how that impacts you guys. When you think about, what your customers are, are contracting for and how you think about the sandbox business, for example. Are you guys tied to that trend? Like, where you’re capped? Or, if they say an intense week keeps growing? I mean, how do you think about that in terms of your capacity and how you grow with your customer?
Bryan Shinn
It’s a really, really timely question. We were just talking about this the other day, and it’s actually a big advantage for us, quite frankly, particularly out in the Permian. If you think about what it takes to serve one of these gigantic wells with a [Indiscernible] frac these days, having very large sand capacity, and being able to do that whole well, from one facility, as we can do say, with our Lamesa, mine, customers like that a lot. It’s one of the reasons that we’ve been getting some additional business out in the Permian. And also, our SandBox solution has proved amazingly resilient. I know, initially, there were some doubters around whether SandBox could keep up with some of these high intensity wells. But we’ve demonstrated that we can, and actually customers are coming to us now, because of that some of the other solutions out in the market, are proving to be not as effective for these big Sinal [ph] frac. So it’s really kind of a double advantage for us with our large capacity, say, out in the Permian, backed up by SandBox.
Samantha Hoh
Okay, and then, I’d love to hear this a little bit more about just the solar glass part of your new product growth; you kind of outlined a bunch of different ones. But I think the one that kind of interests me the most these days are just solar panels and the growth of domestic manufacturing for that. So if you could just sort of share any more information on that product line?
Bryan Shinn
Sure, no, it’s a very interesting one as well. As we mentioned in prepared remarks, we just find actually extended a big contract with a key customer. And I think, as I look at some of our plant growth in the industrial business of solar panels is one of the very interesting areas. We have a really low iron silica today that our customers like a lot. And the reason that’s important is that if you use low iron, silica to make the glass for the solar panels, it basically increases the solar transmissivity basically to make the solar panels more efficient.
So we’re currently we project in about 50%, of new solar panel manufacturing here in the U.S. through the glass, as we said. And the funding provided by the inflation Reduction Act, I think will turbocharge a lot of the solar capacity in the U.S. and some of the data I’ve seen recently indicate that solar installations are going to be up somewhere in the neighborhood of 60% to 70% in the coming year.
So I think that’s a really good tailwind for us in the business. But similarly, on the sort of renewable energy side, we’re big in wind energy as well torn about 80% of us wind turbine blades today. And the domestic wind energy industry is projected to double by 2026. So a lot of really interesting tailwind for us on the renewable energy side Samantha.
Samantha Hoh
For delivery, for those types of products are you going to be making deliveries and sales? I mean, well, before installation begins. What sort of, I mean, I’m just trying to time the growth in terms of the delivery of your products versus when we would expect installation and growth of those capacity.
Bryan Shinn
So if you think about what we’re doing, we’re making the glass that has to go into the assembly of the panels to protect the photovoltaic cells. So obviously, we’re well before the install. So I think we’ll, we’ll see the positivity for that probably 6 months to 12 months before the actual solar panels get installed out on someone’s house, for example.
Samantha Hoh
Okay, great. Thanks so much and congrats again.
Bryan Shinn
Thanks Samantha.
Operator
Our next question comes from the line of Derek Podhaizer from Barclays. Please proceed with your question.
Derek Podhaizer
Hey I wanted to hit on the fourth quarter a little bit more. You talked about the typical seasonality between weather and some holiday slowdowns. Sounds like budget exhaustion won’t be much of an issue this quarter, relative to last, just wondering if you could just talk about that what you’re seeing this fourth quarter versus last fourth quarter. What maybe helped frame us with that short term air pocket could mean from a contribution margin or contribution margin per ton perspective for oil and gas.
And then separately, if there is no budget exhaustion and things remain pretty tight. What does that mean for the first quarter recovery? That typically comes off with a little bit slower start, but now it seems like you might get a pretty strong snapback, just given that fourth quarter is not as light as it typically is. Just your thoughts around that would be helpful.
Bryan Shinn
Sure, Derek. It’s very interesting and a bit sort of uptrend, quite honestly, what we’re seeing in the oilfield business right now, October is coming in super strong. And I think October might be our strongest month of the year-to-date anyway. So we’re watching that very carefully. And I do agree with you that we haven’t heard much right, to this point around budget exhaustion. So that doesn’t seem to be a factor this year. It feels more like in terms of fourth quarter potential headwinds. For us and really, for the whole, oilfield industry, it’s more about weather in certain locations, and then what happens around the holidays. So I think that’s, that’s probably overall a positive.
I think that as we finished 2023, 2022 here, we continue to see very strong demand obviously for our products and services into the oilfield. So I think that’s going to be positive. I also believe that Q1 is going to start off strong, if you look at our earnings last year, and I think most companies earnings, they were a bit lower in Q1 and then have ramped up throughout the year, it seems to me like we’ll probably start off much stronger in Q1 of next year. And also, as we kind of think about all these things, there’s lots of ways to look at it, lots of experts out there, and people with opinions on what’s going to happen. And I tend to pay more attention to what our customers say, but more importantly, what they do. And what our customers have been doing is coming to us wanting to sign multi-year long-term contracts at very attractive pricing. So that tells me that customers believe that things are going to be tight. And I would expect a good start to 2023 as a result of that.
Derek Podhaizer
Got you. And those kinds of that insulate you from any headwinds in the fourth quarter are just considering a bit of a spot might drive earnings down a little. Just could you help give us any color around where you could see contribution margin going in fourth quarter?
Bryan Shinn
So I think that there’s obviously some insulation there. Historically, though, we do see Q4 down a little bit, not just in the oil and gas side, but obviously in our industrial business as well. So there always tends to be a bit of seasonality there. So if we just have a kind of a normal year, we might see CM [ph] down slightly in Q4, but the [Indiscernible] started off pretty strong right now. So we are waiting and watching to see exactly how demand plays out. And we’re obviously poised and ready to serve customers at whatever level they need.
Derek Podhaizer
Got you. Great. That’s encouraging. And then just a quick one on ISP, in your opening comments. I know you’ve talked about how you’re not really seeing the indicators right now at this macro recession. But obviously, it’s still looming out there. And I think previously, you talked about how you might be one of the more last to notice, given where you are in the supply chain. Can you just help us what would be that canary in the coal mine as far as ISP and actually seeing the recessionary risk way on your way on your contribution margins way on your earnings? I know right now, everything looks great, but what are the signals that you’re looking for that would make that would make you think differently about the profitability profile as we move into 2023?
Bryan Shinn
So again, I think it goes back to our customers. And we’re diving in pretty deeply at our customers, not just with the sort of normal sourcing contacts that we might have. But we’re mining much deeper kind of senior level contacts to really understand what might be happening in their supply chains. And so, to me, that’s the thing that we’re studying very carefully, to make sure that, as you said in certain supply chains, we’re pretty far down the chain. So we, we might be a little bit late to the party understanding what’s happening in that chain. So we’re doing everything we can to make sure that that doesn’t happen, and that we have as good of visibility as we can possibly have.
And in the meantime, we are continuing to think about if something does occur if there is some slowdown, or indication of a slowdown, what actions do we take and the good news is it’s pretty much the same playbook we had in 2020 when things slow down very rapidly because of the pandemic. So we know what to do we know how to take out costs, we know how to how to deal with that. We have the playbook ready. And if we see any signs of weakening or softening, we’ll pull that playbook off the shelf and start to implement.
Derek Podhaizer
Great, appreciate all the color. I’ll turn it back.
Bryan Shinn
Thanks, Derek.
Operator
Our next question comes from the line of Dan [Indiscernible] with Morgan Stanley. Please proceed with your question.
Unidentified Analyst
Hey, thanks. Good morning and congrats on the quarter everyone.
Bryan Shinn
Thanks, Dan.
Unidentified Analyst
So I just wanted to revisit some of your comments on the oil and gas supply picture, both from the macro and I guess, Stephens questions on silica capacity. I just wanted to confirm that the about 14.5 million tons is kind of that’s, that’s the ceiling X, I guess you guys said, that there could be some tinkering that there could be some upside around the margin. But I just wanted to confirm that that’s all this kind of contemplated are available from a silica capacity perspective.
And then from an industry perspective, I just wanted to confirm, I think I caught a 9% supply growth quote from earlier and I wanted to confirm that that’s a 2022 industry supply growth number. And I guess, just as your thoughts on where you think, industries supply, all that trends, from here, any anything that you’re seeing on that, on that side of the market? Thanks.
Bryan Shinn
So regarding our capacity, the 14.5 million tons is correct. And as we talked about that kind of margin at the margins, it’s the type of thing where well what if we have to replace a pump, if you increase the capacity, put in a new pump, that’s 10% more or something you can squeeze a little bit out, it’s those kinds of things that we’ll continue to look at no, no substantial incremental, sort of on purpose capacity increase investments contemplated at this point.
And in terms of the industry capacity, that 9% was a 2023 number. So that’s increased from 2020 to 2023. And that 9% translates into something like 10 million tons plus or minus of capacity. And we tend to look obviously, capacity and demand. And based on what we see on the demand side, we think that that capacity, increase that projected increase will be easily absorbed into the market. And in terms of the source of that it’s a couple of third party data points and our own at work, just kind of understanding what’s happening in the industry, Dan.
Unidentified Analyst
Great, that’s really helpful and appreciate that outlook. So just I guess, on-going back to some of the comments you made about the levering the debt retirement, you guys have done this year. I mean, you flagged that you’ve already hit your interim leverage target of three times, as of the end of the third quarter, and kind of that debt retirement has been the most attractive use of free cash flow from you guys perspective, so far? How are you guys thinking about that moving forward, kind of the, given that interest rates are increasing the calculus between whether to look at opportunities to maybe refi and extend the maturity of the 2025? One, or just kind of continue taking bites out of it with cash that you generate? Thanks.
Don Merril
Yes, look, we’re, we’re really pleased with the, with the cash flow profile the company today. And we took the opportunity to buy back that deliver the company. And again, it was at a discount to par between the two, I think it was roughly $5 million worth of savings from an — from a par versus what we bought it back at.
So, I think it is very attractive for us to continue to do that if we can do it at something less than par. The IRR’s on that are very good in an interest rate environment today. Our interest rate is about 7.7%. So the more we can pay off, the better off we’re going to be going forward. Now having said that, we also have some attractive investments obviously on the growth side of ISP. So we’re kind of we’re analyzing that all the time. Bryan and I have this discussion all the time on where the best place to put the money along with the board. So I think you’ll see continued net debt leverage go down and opportunistically buying back some debt to reduce the gross leverage.
Unidentified Analyst
Really helpful. Thanks a lot. I’ll turn it back.
Don Merril
Thanks, Dan.
Operator
Our next question comes from the line of John Daniel with Daniel Energy. Please proceed with your question.
John Daniel
Good morning guys.
Bryan Shinn
Morning John.
John Daniel
Just curious, I think you mentioned that 85% or 90% of the volumes for next year are committed. Do you have a sense as to where that goes? I mean, I’m just trying to get a feel for how you see activity outside the Permian next year.
Bryan Shinn
So we do, obviously, we have several contracts with, with various customers. And I don’t see a big shift in activity compared to where we are today, probably the biggest thing we saw this year was that some of the basins out west that the DJ, etcetera had picked up a bit with Northern White sand, and we have seen a price increase going out west. But in terms of the fundamental split, I still feel like the Permian will be somewhere in the 50% to 55% range in terms of volumes, and then it’s divided up amongst the other basins pretty much the way it is today.
John Daniel
Okay, so nothing to suggest one basin to step change, higher next year.
Bryan Shinn
No, we really haven’t seen that based on the customer contracts that we signed.
John Daniel
Okay. And forgive me for asking what I’m sure all the other people that have doubt and know, but remind me what happens under the typical contract, if a committed customer can’t take the sand for an operational issue, such as a well incidents or just any other job related inefficiency? How do you guys get protected?
Bryan Shinn
So there’s, there’s no provision in the contracts for those type of things. And the customers are on the hook in these contracts to either take the sand or typically pay a penalty. And we also have a number of contracts that we’ve signed, that are kind of the latest generation capacity reservation fee contract. So basically, customers are paying kind of paying the penalty upfront, and then we give it back to them on a quarterly basis as they purchased tons. And we just signed the latest one a couple of weeks ago and got upfront money from a customer. So those are the most secure contracts. And we have several of those now, and it feels like the this whole question around what happens in take or pay contracts is, has been somewhat resolved. Over the last few years, there have been several, several lawsuits and settlements. And in every case, including our when we had that was a big one of the sand companies have come out, and kind of victorious in that. So I feel like customers are pretty much well aware of what they’re signing up for these days. And we don’t get into a lot of arguments and discussions anymore around paying penalties.
John Daniel
Got it. Fair enough. Last one Don, a non-sand question. But can you give us your views on just the what you see in the commercial bank market these days for LFS any signs, some of the banks or that may have stopped calling you or not calling you again, or just give us an update?
Don Merril
Yes, the banks are calling right. And, we’re, we’re constantly looking at the market for an attractive time to get in and look at a refi on our loan. The markets a little choppy right now for a lot of reasons. But we’ve got a couple of things working for us, right. We just got, we got an upgrade from Moody’s not too long ago. We have the industrial side of the business, so they don’t necessarily look at it as an OFS company. So and folks liked the story a lot. And the more cash flow that we’re driving, the more we can drive down debt, the more banks get interested in talking to us. So I think things will get a lot more active here as we roll into the first quarter. But right now, it’s not the most opportune time to go out there. But I think it’ll turn around as we as we get into the New Year.
John Daniel
Okay, great. Thank you all for including me.
Don Merril
Yes. Thanks, John.
Bryan Shinn
Thanks, John.
Operator
[Operator Instructions] There are no further questions in the queue. I’d like to hand the call back to management for closing remarks.
Bryan Shinn
Thank you very much operator. First, I want to say thanks to my approximately 2000 colleagues around U.S. Silica for all their hard work and dedication to make 2022 what looks like an outstanding year here with strong sales, profitability, above expectations, great cash generation and meaningful improvements in numerous areas of ESG.
Second, I want to reaffirm as came up a couple of times on the call here regarding capacity that we are committed to market and capital discipline. And we’re also delivering big time on our promise to further strengthen our balance sheet and we expect to continue to sustainably generate significant positive cash flow from operations next year as we talked about a bit on the call as well.
And finally, as we look ahead, we remain confident that our industry leading business segments, robust product portfolio, focused strategy, best-in-class execution and continued emphasis on creating a diverse and inclusive culture here at U.S. Silica will deliver substantial value for our shareholders and other stakeholders. Thank you again for joining our call today. And we look forward to speaking with you all again next quarter. Stay safe and be well.
Operator
Ladies and gentlemen, this does conclude today’s teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.
Be the first to comment