Emerge Energy Services' (EMES) CEO Rick Shearer on Q2 2014 Results - Earnings Call Transcript

| About: Emerge Energy (EMES)

Emerge Energy Services LP (NYSE:EMES)

Q2 2014 Earnings Conference Call

August 6, 2014 4:00 PM ET

Executives

Robert Lane - CFO

Ted Beneski - Chairman

Rick Shearer - CEO and Director

Warren Bonham - VP, Director

Analysts

Ethan Bellamy - Robert W. Baird

Vaibhav Vaishnav - Bank of America

Matt Conlan - Wells Fargo Securities

Abhi Sinha - Wunderlich Securities

Aria Cole - Cole Capital

Brandon Dobell - William Blair

Marc Bianchi - Cowen & Company

Selman Akyol - Stifel Nicolaus

William Gold - Investor Wealth Management

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2014 Emerge Energy Services’ Earnings Call. My name is Sarah and I'll be your operator for today. At this time, all participants are in listen-only mode and later we will conduct a question-and-answer session. (Operator Instructions) I would now like to turn the conference over to Robert Lane, our Chief Financial Officer.

Robert Lane

Thank you, Sarah. Just a quick note before we start. Our discussion today may contain forward-looking statements. These statements may include but are not limited to our estimates of future volumes, operating expenses, and capital expenditures, and may also include statements concerning anticipated cash flow, liquidity, business strategy, distributions and other plans and objectives for future capital expenditures and operations. These statements are based on management's beliefs and assumptions. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can provide no assurance that such expectations will prove to be correct.

These statements are subject to certain risks and uncertainties. If one or more of these risks materialize or should the underlying assumptions prove incorrect. Our actual results may vary materially from those expected. These risks are discussed in greater detail in our Annual Report 10-K on file with the Securities and Exchange Commission.

Please also note that, on this call, we may use the terms EBITDA, adjusted EBITDA and distributable cash flow. These are non-GAAP financial measures and we have provided reconciliations to the most direct comparable GAAP measures in our earnings release published this morning.

And now, I would like to turn the call over to our Chairman, Ted Beneski.

Ted Beneski

Good afternoon everybody and welcome to another Emerge Energy Services’ conference call. Once again Emerge Energy turned in a record quarter. We had record sand volumes sold, record adjusted EBITDA, record distributable cash flow and a record distribution. Net income for the three months ended June 30, 2014, was 20.1 million or $0.83 per unit compared to a loss of 4.1 million for the same period in 2013.

We reported adjusted EBITDA of 30.1 million for the second quarter of this year compared to 17.3 million a year ago, an increase of 74%. Please note that results may not be directly comparable between the two years as the second quarter of 2013 included only partial results from our Direct Fuels subsidiary as well as approximately 11 million of onetime charges in connection with our IPO that affected net income.

Our distributable cash flow for the quarter was 26.6 million and we are pleased to declare a record distribution of $1.17 per unit. Rick, Warren and Rob are going to go into the numbers in a bit more detail but first we want to give you an update on our capital projects as we’ve had a number of exciting developments since we last spoke.

As most of you know, we announced back in April, that we were planning to bring online two new planned complexes with annual capacity of 2.5 million tons each by early 2015. The first of these facilities, our Arland plant began construction in June and we expect that it will begin shipping sand in the fourth quarter of this year.

The second facility, which we are now calling our Independence plant, is scheduled to break around in the coming weeks and it remains our expectations that we will be shipping sand from there in the first quarter of 2015. Both of these facilities will be supported by Emerge Energy’s own mine and wet plants. As we mentioned last quarter, we began shipping wet feed from the LP mine Barron in early May. Our 1.6 million ton per year Thompson Hills mine and wet plant is currently under construction and we expect to have that in service late in the third quarter.

As we announced last week, we have completed the purchase of the MidWest Frac mine and wet plant. As many of you know, we had a long-term contract to purchase wet feed from MidWest Frac, while this was among our course to Sand and therefore capable of generating some of our highest revenue on a FOB mine equivalent basis. It was also among our most expensive sand resource. We believe that we’ll be able to enjoy substantially better costs, mining this sand ourselves and plan to increase the usage of that sand at our Barron and Arland plants.

As we’ve mentioned before, we build to meet market demand and so we are happy to update our supporting contract profile as well. We currently have 7.4 million tons under contract with an average weighed life of 4.4 years. In addition we have well over 4,500 railcars currently in our fleet and anticipate that we will add another 1,500 railcars between now and the end of the year with more on order for the first quarter of 2015.

Our fuel segment performed very well, turning in 10 million of segment adjusted EBITDA for the quarter. Our per gallon margin on fuel remained strong and consistently in the $0.15 to $0.20 per gallon range. Year-to-date our fuel segment has performed above our expectations. Finally, we did want to provide an update to our guidance for 2014. In November, we issued distribution guidance of $3.80 to $4 per unit. We now believe that we should be able to distribute $4.70 to $4.90 per unit for 2014.

I would like to now turn the call over to Rick Shearer our CEO, who will discuss the results of operations in our sand segment.

Rick Shearer

Thank you, Ted. Our sand segment yet again turned in a record quarter. Our first quarter performance was strong because we came in the winter prepared to weather the storm which resulted in our strongest performance to-date. Our second quarter built on that success with record sand sales of over 1 million tons and adjusted EBITDA of 23.2 million. If one sums-up our Barron and New Auburn numbers it is clear that we are operating at our maximum allowable production levels under our air permit. While we’re exploring options to improve capacity utilization at our Kosse plant, more simply we’re sold out.

However, even with the record sales and adjusted EBITDA our per ton margin is lower than it was in the first quarter, a small part of this has been by design as we bring on new railcars under operating lease and integrate them into our fleet. The other major factor has to do with our wet plant capacity when we look at our operations we tend to view dry sand capacity as our limitation on sales and our wet sand capacity as what determines our cost of goods sold. The more wet feed we are able to produce at facilities we own and/or control the last third-party sand we have to source and the higher our per ton margin should be.

Right now we’re still partially relying on third-party sand which means that the marginal ton that we sell while profitable and cash flow positive is also our most expensive ton to source. So how we’ll be addressing this; first of, as we conclude construction of our Thomson Hills mine and begin processing sand there which we expect will be by early next month. We should begin to see some margin expansion; secondly and clearly more immediately is the acquisition of MidWest Frac that operation was a life saver for the company as we helped bring it online to supply Barron with wet feed back in December 2012.

The sand is close and the location is as close as our LP mine to the Barron plant but it was also among our most expensive wet feed. We believe that we will be able to produce that sand at substantially less than what it had cost us to buy the sand from MidWest Frac and we are already enacting improvements to increase the output of the mine. Both of these factors should create margin expansion this quarter and into the fourth quarter and we fully expect that this will supply substantially all of our wet sand needs. Finally as we bring Arland and our second new plant online Independence we expect that we should have the wet feed we require to run those facilities.

The other side of the margin equation is sales. We stated in the past that our goal was to be 80% contracted at our facilities. As Ted said earlier in the call, we now have 7.4 million tons under contract. This amounts the 79% of our pro forma nameplate capacity and 84% of our pro forma Northern White capacity. We are also pleased to see that our average selling price on those contracts continues to rise and we expect our ASP on FOB mine equivalent basis to increase roughly but for the second half of the year versus the first of the year.

We have stated several times in the past that we do not build our facilities on spec but based on actual demand from customers. To the keen eye even with the two new plants we’re building we’re once again in danger of running out of capacity. To address that risk we are in the process of putting together our next dry plant. This is a fifth 2.5 million ton per year Northern White facility and look forward to sharing these details with you on this project at a future date.

One more word about sales and flexibility, as we’ve stated in the past one of our competitive advantages is our ability to transload between Barron and New Auburn which gives us logistical flexibility to best meet our customer’s needs. This is one of the reasons why our New Auburn sales exceed plant capacity. The Arland facility will be located near both of these sites effectively creating a triangle of dry plants to and from which we can transload to three Class I rail lines.

Turning briefly to the Kosse Texas plant that operation continues to benefit from the migration of the Eaglebine formation northward to our facility and strong demand out of the Permian. We expect to continue producing at a 90,000 to 100,000 ton per quarter level through the rest of this year and as a result are exploring options on deep bottlenecking Kosse right now.

As we said last quarter our logistics footprint continues to evolve. We currently have 11 transload facilities into which we deliver inventories for spot sales in addition to numerous destination sales on behalf of customers. We utilize a fleet that is ground 4,564 railcars and to which we continue to add. Typically this includes cars owned by our customers as well as cars under operating lease from major rail leasing companies, while we capitalize the cost of bringing the cars into our facilities once they are built and ready for delivery we do incur some additional expense associated with the operating lease while the cars are in transit and as we put them into service that will continue to be an unreimbursed expense as we bring more railcars into our system. Again this is all by design so that as our new dry plants are brought online, we are able to ride our customers with destination sales on day one of the operation.

Pulling back a bit to look at the industry as a whole, market dynamics are very favorable right now. On the demand side of the equation, we are happy to let the pressure pumpers and the E&P companies continue to tell the story for us. There are more wells per rig, more stages per well and more sand per stage and while we’ve seen increased interest in sands such as Brady Brown and our own native sand from Kosse, Northern White continues to demand a market premium.

On the supply side despite our relative success and that of a few of our competitors and announcing new capacity it is still increasingly difficult to get new capacity approved. We see a number of estimates that on paper suggest that supply exceeds demand. However, that is simply not the case as we see it. Not everything that gets announced gets permitted, not everything that gets permitted gets built, not everything that gets built gets utilized, and not everything that gets utilized gets fully utilized. In short the market dynamics are still very favorable to producers, especially those with the course, Northern White product that remains in such high demand.

I would now like to turn the call over to Warren Bonham, for a discussion of our fuel segment.

Warren Bonham

Thank you, Rick. Fuel had another record quarter with 9.8 million in adjusted EBITDA compared to 4.5 million from the second quarter of 2013. While this was impart because of the full quarter contribution from direct fuels, the primary driver for the more than doubling of adjusted EBITDA was strong per gallon margins in both wholesale and transmix especially at our Birmingham facility.

For the quarter we sold 71 million gallons of refined product and put 53 million gallons of refined products through our terminal. This compares the 55 million gallons of refined products sold and 54 million gallons of throughput at our terminals for the second quarter of 2013. For the second quarter of 2014, we refined 28 million gallons of transmix compared to 18 million gallons for the second quarter of the prior year.

As a quick reminder, our fuel segment year-over-year results are not comparable because we acquired Direct Fuels at the IPO on May 14, 2013 and Direct Fuels pre-IPO results are not included in the predecessor results. Were we to include Direct Fuels for the full quarter the throughput and transmix volumes would be lower in the most recent quarter compared to the same period in the prior year while wholesale volumes would be comparable.

In addition to being a shipper on Colonial and Explorer we are pleased to announce that we are now also with shipper on Plantation. We anticipate that this will give us additional opportunities to capture margins going forward. We’ve had somewhat higher than normal segment adjusted EBITDA over the last few quarters but expect that our fuel adjusted EBITDA will revert to a more normalized level for the second half of the year.

I will now turn the call over Rob Lane, our Chief Financial Officer.

Rob Lane

Thank you, Warren. Emerge Energy reported net income of 20.1 million or $0.83 per diluted common unit for the three months ended June 30, 2014, this compares to a loss of 4.1 million for the three months ended June 30, 2013. The results are not directly comparable as the June 30, 2013 quarter included only a partial contribution from Direct Fuels, which we acquired at our IPO on May 14, 2013 and also included onetime IPO related expenses of 10.9 million.

For the same period Emerge Energy reported adjusted EBITDA of 30.1 million compared to 17.3 million for the same quarter last year. This improvement is primarily because of the significant year-over-year increases in sand sales, the contribution of our sand logistics efforts, the acquisition of Direct Fuels and improved wholesale margins in the fuel segment. For the three months ended June 30, 2014 Emerge Energy generated 26.6 million in distributable cash flow.

Our Board of Directors released the remaining 1.1 billion reserve established for capital expenditures in the third quarter of 2013. After adding back this part of the reserve our cash available for distribution is 27.8 million. Our total SG&A increased to 9 million from 6.1 million because of a full quarter of additional expenses we now incur as a public company, incremental cash and non-cash bonus accrual.

The SG&A associated with our Barron facility and Direct Fuels and payable expenses related to the conversion of certain phantom units held by select members of management. Our interest expense for the quarter was 1.9 million compared to 3.5 million for the prior year period. The decrease is primarily due to more favorable interest rates we are paying under our current facility, which are at the lowest applicable level under our credit agreement.

As we continue to build out our new sand facilities, investors should expect our interest expense to rise moderately quarter-over-quarter as our debt level increases. We ended the quarter with 176.4 million of debt outstanding including our capital leases and 11.6 million of cash on the balance sheet. At the end of the quarter we had 139.6 million of availability on our credit facility. As we have previously disclosed on June 27th, we entered into an amended and restated credit agreement that increased our facility from 200 million to 350 million, increased our borrowing base and modified certain covenants. As of June 30th we were in compliance with all our financial covenants.

Our capital expenditures for the quarter were 24.6 million which includes 1.4 million of maintenance capital expenditures. Investors should look at the most recent quarters of good run rate for maintenance capital expenditures in the near future. On the anniversary of the closing date of our IPO we issued approximately 398,000 common units in exchange for phantom participating units held by two members of our management team. These units which received distributions through payroll as if the phantom units had been public are now a part of our unit base which should have a net neutral impact on our distributable cash flow and DCF per unit.

On June 20th Inside Equity our sponsor together with certain members of management issued approximately 3.7 million units to the market including the subsequent partial exercise of the overallotment option. This offering added approximately 91,000 units to our unit base. The net effect of these transactions was to increase our public flow without effectively diluting our unit base for future quarters. We declared our fourth quarter cash distribution of $1.17 on July 24th which will be paid on August 14th to investors who are holders of record today August 6th. This distribution includes $0.05 per unit of previously released cash flow from the third quarter 2013. As Ted stated earlier in the call, we are advising our distribution guidance for the year from $3.80 to $4 per unit to $4.70 to $4.90 per unit inclusive of the $2.30 we have already distributed for the first and second quarters.

I’d now like to turn the call back over to Ted.

Ted Beneski

Thank you, Rob. Just to wrap-up Emerge is pleased to follow our great first quarter this year with an even stronger second quarter and we hope to continue to improve on those results in the second half of the year. Like Rick said sand fundamentals remain strong and we are very well positioned to capitalize on the opportunities in the market. We want to thank each of you for participating today and for your continued interest in Emerge Energy.

Operator I think we are now ready to take questions.

Question-and-Answer Session

Operator

Alright, great. (Operator Instructions) And our first question comes from Ethan Bellamy from Robert W. Baird. Please proceed.

Ethan Bellamy - Robert W. Baird

Do you see yourselves doing any M&A at all and relatedly one of your peers has talked about inevitability of industry consolidation and how would you guys see yourself playing in that if at all?

Ted Beneski

Yes, thanks for the question. We have looked at a number of transactions and in each case we have come to the conclusion that it was not going to be in our best interest from an investor return perspective to close on those acquisitions. And the primary reason for that is inevitably as we have moved through the last 18 months or so we’ve always come to the conclusion that the economics are far superior if we organically grow our business as opposed to acquire growth in our business. Most of the expectation in the market is between eight and 10 times or above in terms of EBITDA multiples and when we do the math and we look at what it cost us to generate similar levels of EBITDA we can acquire that level of EBITDA growth at a fraction of that cost. So the choice thus far has been to choose the organic route in every situation but that doesn’t preclude the opportunity of following through and consummating on some acquired sand operations going forward if we think we can get an attractive price and we can justify the acquisition cost.

Rick Shearer

Ethan this is Rick and I might just tag along with Ted’s comments to highlight what we recently did at MidWest Frac while strategically that makes a lot of sense as you’ve already heard as far as the feed for our own plants. There is a dimension of consolidation in the industry that took place with that acquisition because MidWest Frac not only was supplying feed to us but the two other competitors and they also had the option to total covert some of their own sand to sell into the marketplace. Those are no longer options not that we’ve taken MidWest Frac essentially out of the market. So we feel like in some way certainly we have continued to play a role as Ted touched on to do our part for consolidation in the industry such that as we’ve said before the major players the strong producers get stronger as the whole process moves forward and we evolve in the market here.

Ethan Bellamy - Robert W. Baird

Okay, that’s helpful. With respect to the ability of the industry to expand capacity, we have heard anecdotally that permitting is becoming more difficult and that location where the economics of transportation would makes sense are increasingly scarce, can you quantify that for us I mean how many Greenfield development sites are there that might make sense or might be economic, I’m just trying to get a sense for where industry capacity could ultimately go?

Ted Beneski

Well, there is a lot of sand that remains certainly in Wisconsin and in other key areas that have good quality deposits but you pointed out the barriers to entry certainly continue to increase both on a political front it’s more and more difficult to work your way through the process, it’s more and more difficult to find quality frac sand deposits that have reasonable competitive logistics being pulled specially near rail service. So, those opportunities are lessening for sure. That said if in fact you’ve got credible reputation and if in fact you have the political ties that Emerge Energy and other leading companies are developing in key areas like Wisconsin expansion can happen, it may a take a little longer than it typically has in the past but we’ve got our sights set on yet further growth as you heard earlier and we’re looking at a couple of very good options that we hope we can move forward and take advantage of the reputation that we have and the relations that we have to make that expansion happen sooner rather than later.

Ethan Bellamy - Robert W. Baird

Okay, thank you. And then one last quick and I think the answer to this is no, but are you aware of any technological developments or substitutes that might dislodge Northern White as the primary proppant?

Ted Beneski

In a word no, a lot of people have looked at substitute proppant materials, there really isn’t anything that looms on the horizon certainly in the timeframe that we have looked at that would say that there is any threat in particular. Northern White, a very high quality natural frac sand still appears to be the very best proppant available for the value that it brings and for the economics that it brings into the marketplace. I did just see recently where one of the major E&Ps actually declared that they were going to reduce the usage of ceramic proppant as an example in favor of moving toward Northern White natural frac sand. So, no I think people are actually leaning more and more toward the use of natural frac sand as opposed to looking and finding any other options right now.

Operator

Our next question comes from Vaibhav Vaishnav from Bank of America.

Vaibhav Vaishnav - Bank of America

I was just hoping if you can help up break the gross profit decline from first quarter to second quarter into some bigger buckets if you will, I know you touched upon it and also if you can help us quantify what was the impact on each of them?

Ted Beneski

Vaibs we don’t really disclose too much detail but I can sort of give you an order of magnitude what the pieces were, the biggest one as you know is the wet feed and sourcing the wet feed, that has been for us really something we’ve been chasing from the beginning, it has been the result of a very high class problem which is having tremendous demand for our sand and we can’t just source it in a cavalier fashion we really have to bet we were going to get that sand from in some cases we find that if you’re going to get the high quality sand or people who have high quality sand like ours, there is a little bit of a premium ported in striking those temporary deals but MidWest Frac, Thompson Hills this is what we are doing to alleviate that major portion.

Second is, as we bring these railcars on there is a major capitalized portion of that cost but there is also just the cost that we pay two-fold, one is, the fact that we are paying our operating leases the day that it leaves the yard of the leasing company and the other is that we just have the practical limits of putting that car into service. The third is, going to be something that is not going to go away and we don’t want it go away and that’s Kosse. Our Kosse sand is going to be a lower margin sand just because of the nature of the price point we’re going to get on an FOB mine equivalent basis, as well as some of the cost for us to produce that sand but it’s a great sand and it’s got a lot of folks who will use it for a variety of purposes. So, while that would be the third part we expect that to going to be the biggest part of what would cause any sort of margin erosion and a product that we’re very happy to have.

Vaibhav Vaishnav - Bank of America

So, if I’m not mistaken what, hi, I guess if we look about, think about going forward does that feed cost would go away from that MidWest and when Thompson Hills comes in and the railcar issue should also go away, is that a fair way of thinking about it?

Ted Beneski

That’s exactly correct. The two things that were the key driver of the difference in gross profit per ton were the first two that Rob mentioned and they are both very good problems, because both of those incremental costs would go away but what we’ve achieved by sourcing the sand from a third-party contractor of wet feed is the preservation of strong customer relationships and actually the growth of those customer relationships and we’ve established our reputation of being able to answer the mail on delivering the sand that they are looking for. Yes, it was at a slightly higher cost and we would like it to have it be over the sustainable medium to long-term but as that cost goes away we’ll not only have that incremental volume but we’ll have more volume. So, it’s a very positive development for our company.

Vaibhav Vaishnav - Bank of America

Okay. My second question, can you talk about the MidWest transaction in terms of eased budget price multiples and more importantly how much of that cost benefits should we expect going forward?

Ted Beneski

Vaibs we are going to have some detail in that in our 10-Q suffice to say it’s a transaction, we’re just very happy with.

Vaibhav Vaishnav - Bank of America

Okay, fair enough. And last question, so you have 7.4 million tons of per annum contracted volumes, is that fair?

Ted Beneski

Correct.

Rick Shearer

That’s right.

Vaibhav Vaishnav - Bank of America

And that’s roughly on the pro forma basis once both the plants come online that’s about around 80% I don’t know 80% contracted, is there like a sweet spot that you guys would like to have if you want to have more contracted versus spot beyond this or how should we think about it?

Ted Beneski

No, I think Vaibs we have stuck to the original strategy and that is that we really don’t want to contract more than 80% or so we have exceeded that 80% target as we sit here today as far as contracted volume. Let me put that in perspective for just a second, at the end of last year we had 1.4 million tons in long-term contracts, we’ve added 6 million tons of long-term contracted business in the last seven months that’s say something about our reputation in the market and then certainly the demand for high quality proppant. So, we’ve hit the max, we’ve reached our target earlier than expected, we’re going to stick with that number because we do want to have an additional 15% to 20% capacity available for those customers, should there would be any additional need but most importantly for higher margin spot business that we can take advantage of. So, we are following a very strong and a very solid plan but because we’re at the max right now where our targets are again this is driving us to work closely with inside equity to look at the next expansion and we’re excited about that and moving forward in that direction knowing that the market demand is still there for our proppant.

Operator

Our next question comes from Matt Conlan from Wells Fargo Securities.

Matt Conlan - Wells Fargo Securities

Hey guys, thanks very much. So, I wanted to first ask about your price expectations. You said that in the second half of the year you expect total average prices to be 5% to 10% higher FOB than in the first half, with the new contracts that you’ve signed it will clearly ramp-up a lot in 2015, do you expect another price lift next year over the second half?

Ted Beneski

I think we’ll begin to realize that Matt as we unfold 2015, we’ve gone up more than 5% in our ASP that we’ve realized since the end of last year as you heard us say Matt that it will go up another 5% to 10% by year-end and then we’ll start to realize those price increases as we ramp-up the capacity with these new contracts the 5 million tons that is coming on by the first of the year with the two new plants that you are aware of. So, I think certainly the pricing scenario looks very bullish, everything says 2015 is going to continue to have a very strong growth in demand especially for the leading proppant suppliers that are out there and I think there is every expectation that we’ll continue to see our average selling price stay very strong even increase further in 2015.

Matt Conlan - Wells Fargo Securities

Okay, great. Now, do you want to focus on cost just a little bit and in particularly the MidWest Frac acquisition what that’s going to do? Are they currently able to produce the 1.2 million ton capacity?

Ted Beneski

They are and we are looking to expand the capacity and improve the mining there at that MidWest Frac Matt. We will realize as Rob touched on a significant savings by moving forward and taking that operation over and we’ve been laying the plans to do that well before we finalized the acquisition and so we are in the middle of all of that right now both expansion and improvement at that mine site. It’s very convenient that we take that over strategically because our mining properties are all around the MidWest Frac site we call it Church Road mine now just to give a new name to it. The Church Road mine is right beside the Arland dry plant that we’re building right now. So this will improve our economics dramatically for feed coming out of that mine say.

Matt Conlan - Wells Fargo Securities

Okay. So it seems like that it can better feed Arland and I assume the Arland facility could feed Arland as well and then you could relocate Thompson Hills down to Barron?

Ted Beneski

Yes, basically that’s right the Church Road mine can also it is convenient enough to Barron that we can also have the flexibility of feeding Barron as well.

Matt Conlan - Wells Fargo Securities

Okay, terrific. Thank you very much.

Ted Beneski

Thanks Matt.

Operator

Our next question comes from Abhi Sinha from Wunderlich Securities.

Abhi Sinha - Wunderlich Securities

Couple of questions first, I just want to ask on Ethan’s question earlier that we see increasing demand for Brady Brown I was trying to see if you can provide some color why is that is that capacity comes from Northern White is it the pricing why do we see more Brady Brown demand coming out?

Ted Beneski

Well I think right now the market is so spiked right now that pressure pumpers are looking to get whatever proppant they can get Brady Brown while not as desirable and Northern White is available, there is additional capacity there to be used and particularly when you’re looking at the Permian and to a lesser degree the Eagle Ford in Texas those shale plays there are some conveniences there as far as the proximity of those mines to the well head. The economics are there to some degree as a result of that but also the convenience of delivery the trucking to the well head directly from the mine site. So for now there is a yes, a strong demand for Brady Brown type sand and other lesser quality proppants but when the market cycles whenever that might be we don’t see that in the foreseeable future but whenever that happens people historically and certainly to be extracted will always revert back to the higher quality proppant that’s available.

Abhi Sinha - Wunderlich Securities

Sure. Thanks for that color. Pardon me if you have already provided this I was trying to see if you could provide some color on the ramp-up of the utilization for the new plants I mean so, like maybe in terms of months when should we expect it to reach 70%-75% desirable capacity utilization that you’re thinking is it like 10 months, 5 months, 12 months, how should we think about that?

Ted Beneski

Well, we’re very proud of the operational expertise and the operations management team that we have. This team has a wealth of experience. If we look at how quickly we were able to ramp-up the new Auburn plant a couple of years ago and a little over year ago the Barron plant we were operating at full capacity well within 60 to 90 days, if not a little shorter than that. Compare that to a number of competitors who have taken two quarters or more to six months or more to get their operations ramped up I think with our expertise we have every expectation that both of these plants will ramp-up certainly within 60 days of initially firing up the dryers.

Abhi Sinha - Wunderlich Securities

Sure.

Rick Shearer

And I wanted to be clear about something that was said earlier in our presentation materials which was that when we talk about being 80% contracted that includes the new plant. We’re already talking in detail about providing contracted volumes from the new plants to these customers at levels that enable us to foresee those new plants being completely sold out within a reasonably short period of time.

Abhi Sinha - Wunderlich Securities

Sure. Thank you. And further your performance 7.4 million tons under contract I mean how much of that is efforts based, is it still more than 50% or has that changed?

Rick Shearer

FOB?

Abhi Sinha - Wunderlich Securities

No, how much of that is effort based?

Rick Shearer

Effort based, I don’t know the exact percentage we do have take or pay contracts in the mix but I would say efforts based in probably 65%, 70% of the new contracted amounts.

Abhi Sinha - Wunderlich Securities

Okay.

Rick Shearer

There is always price and then of course take or pay in the mix.

Abhi Sinha - Wunderlich Securities

Sure. Does it seem like the new contract is adding as we’re getting more effort based rather than take or pay I mean because I think that your percentage share for effort based is increasing from 50% to 65%, 70% there?

Rick Shearer

No, I think there is still a willingness to do some take or pay of course we’ve seen that we have signed up some take or pay, but there is also because of some issues in the past people are trying to be as conservative as possible that doesn’t mean that they’re any less committed or any less obligated frankly there are penalties build into those contracts if they don’t take the tonnage that is contracted. So I mean we feel very good about where we are with the customer relations, we’ve got great customer relations that have only gotten better as we’ve been able to build out and make this capacity available largely before our competition has been able to make it available so we’re servicing that need and customers are not only appreciative but the relationship has gotten even stronger and the commitment to Emerge Energy has gotten stronger in the process.

Abhi Sinha - Wunderlich Securities

Sure, thank you. And then the last one that I have is basically I was trying to figure out how much now since because you have basically started talking about your plant coming online. So how much time does it take you for both the plants to get the permits done I’m trying to get at is like for the fifth plant, what do you expect does it something in that neighborhood that you already built or might been longer a way to think about that?

Rick Shearer

That’s a very difficult question to answer. There are so many variables because you’re not only dealing with state and federal requirements and permits but you’re dealing with the various counties and townships. So I can only tell you the barriers to answer you are increasing not decreasing. It’s getting harder to go through the process but the time table does vary according to where you’re trying to open up a mine and build the new dry plant.

Abhi Sinha - Wunderlich Securities

Okay, sure. That’s all I have. Thank you very much.

Rick Shearer

Thank you.

Operator

Our next question comes from Aria Cole from Cole Capital.

Aria Cole - Cole Capital

A question regarding the fifth plant that you’re trying to open sometime, can you just explain if you’re working just on one opportunity or might there may be three opportunities you’ve seen and you’re hoping maybe just the minimum one of them is able to get all the approvals necessary over the next year or so.

Ted Beneski

Yes, I’ll start and then Rick can chime in. We’re actually looking at three or four opportunities all of which did happen. The only reason we’re mentioning the fifth plant in particular is because we think it has a high probability of success, in other words we think its past the point now where it’s going from unrealistic to realistic. And so we’re more and more confident that we can start talking about it as something that can happen the early part of next year. But unlike the way you phrased the question there are other opportunities that are at an earlier stage but the probability of them becoming real is increasing as the months go on and we’re hoping that we can add even more news about capacity expansions in the future.

Aria Cole - Cole Capital

Okay. And you alluded it earlier in the call or maybe you can embellish what is that you think specifically are you core competencies that it is allowing you to have a higher success rate in terms of getting new plants approved and opened versus those other players who you are saying have had less success doing so?

Rick Shearer

Well this is Rick and I’ll just say I think and I mean this to be sincere and that we have people who are very experienced at what they do and we have a culture that is a very flat organization that communicates very well and is very driven. We don’t spend a lot of time talking about things in our culture. We try to push the organization forward in the strategic direction we put in place. We try to do that every day. That sounds pretty basic but I know a lot of other competitors do have a lot more issues internally to deal with than we do as they have flat lean and mean so to speak organization.

So we’re able to do that we also have a good team of contractors we’re already talking to contractors and equipment suppliers that we have a lot of confidence and about this additional plant that Ted just spoke of. So we’re very proactive, we are very confident in the team that we have together both internally and externally and I will say we build a reputation in Wisconsin that allows us to work on a first name basis on a very close basis with everyone from the WDNR to a number of the county officials and people in the state at Wisconsin in particular where we’re known. And that certainly helps us well.

Aria Cole - Cole Capital

Okay. And then just a follow-up that is unrelated, regarding the FOB price increases you’re hoping to realize in the next 12 months, just to use simple numbers because it is easier, if you’re realizing a 10% price increase I’m just trying to understand the benefit to you on a gross margin per ton basis because I know we have logistics and transportation costs that are not true profit so if you look at just your gross profit per ton are you hoping to realize kind of a $5 per ton benefit from these new contracts as they roll in on all your volume or is it a different sort of amount?

Ted Beneski

I think that’s a reasonable assumption, yes, there are going to be additional logistics costs but any incremental logistics costs, we believe that we will be compensated for. And we believe that if there is a 10% price improve out there in the environment and it approximates $5 that that will flow mostly through to the bottom-line.

Aria Cole - Cole Capital

Okay. And then just the final question maybe you can talk about before the 10-Q, on MidWest what was the volume of sand that you were purchasing from, and what came of more interest really is once the mine expansion takes place that you’ve been planning on, how much greater are those potential volumes once all of it can potentially go to you?

Ted Beneski

Well, we will look it, how we alternate feed from the different mines that we have into this plants. To answer your question specifically before the acquisition we were buying approximately 400,000 to 500,000 tons a year of damp feed for our Barron plant from that facility. So we’ll certainly ramp-up from that number but that’s where we’ve been at this point. And with the kind of savings that we expect to get there that will be a noticeable improvement to our costs.

Operator

Our next question comes from Brandon Dobell from William Blair.

Brandon Dobell - William Blair

Couple of things to stick with the contracts for a second, given your I guess, the confluence of your price comments plus the 80% contracted, is there any, how would I guess, room or caveats in the contracts that has price moves up, let’s say you do get 5 or 10 to finish out the year, how do we think about the impact of price on those contract volumes looking out to 15 and 16 given the four year average life.

Ted Beneski

Well, of course, Brandon we’ve got escalators in everyone of these contracts some of these are indexed not only annually but even quarterly for such things as fuel. Producer price index and recognition of market impact, we’ve seen even that last caveat we’ve seen that exercise with a couple of major customers even recently where with the relationship that we have in place with them, we can have a very frank and very candid discussion that allowed us everyone at the table recognize that the market has done up and so has pricing. And we’ve been able to move their pricing up very much in the line with the market pricing improvement that’s been seen. So I think we’re very comfortable that we got to hold our margins and we got to over the length of these contracts which go anywhere from 3 to 10 years in duration that we’re going to be able to continue to move our margins forward and reflect any escalated costs and more perhaps as we get into these contracts.

Brandon Dobell - William Blair

Okay. And I guess I am curious of our past six months or maybe to longer timeframe, as the market has gotten progressively tighter, your discussions with these contracted customers when they start to come back and ask for a lot more volume or more volume than they signed up for originally the back and forth between volume and price in your discussions, are customers still going to say look I need more volume and I don’t want to, and we’re keeping it more. Or I am going to take more volume but the price as to be the same, how do those kind of back and forth are going these days?

Ted Beneski

That’s a great question. And the answer is that in short we’re getting both, we’re getting the volumes and a higher price and the reason for that is because as Rick said earlier demand exceeds supply. And so if somebody wants to take up their volumes by a considerable amount of tonnage and there isn’t that availability in the marketplace they understand that in order to secure it they’ve got to pay more price. So we’re getting both from literally everyone of those conversations.

Rick Shearer

Brandon, this is Rick. I’ll just add further to Ted’s comments as we’re gotten closer and closure to fulfilling that target is 80% plus we’ve gotten more selective we’ve actually have turned down some customers who wanted more sand we’ve told them at the very best we can talk about further expansion with the fifth plant in Wisconsin we can talk about that. But in the whole process of things, as Ted mentioned we have raised the price on a steady basis. One major customer that you know very well we set a new contract with them, literally two months later they came back and one is another 500,000 tons we gave them that 500,000 tons but we raised price yet again. So I think we’ve been able to be very fair with our customers but at the same time we both recognized the dynamics in the market and the pricing that’s out there and we’ve been able to have that work to our advantage as well.

Brandon Dobell - William Blair

Okay. And I know you guys aren’t a big 100 mesh seller but any commentary on demand and perhaps a couple of your peers don’t include 100 mesh typically in their nameplate capacity given it wasn’t really a source of demand or volume two or three years ago, any color on 100 mesh and how that’s working for you guys?

Rick Shearer

Well, we’ve launched a 100 mesh market that more than any have been very cyclical people we’re dumping 100 mesh 18 months ago. We are going to have 100 mesh product available we’re still not focused on it because in the long-term interest of what’s best for this company, we believe that are focusing on the coursed product mix is in our long-term bets interest that having been said we will have some 100 mesh circuit in these next two plants, we don’t really include that in our capacity but first the year will be at 9.4 million tons and moving forward with that fit to Wisconsin plant will be at right at 12 million tons of capacity which will make us certainly the leading we believe frac sand supplier in the industry but 100 mesh is something we recognized but it’s not going drive this business but we’ll do what we can to supply some 100 mesh to our customer base to take the care of that need but I don’t think we’re convinced as many are that 100 mesh will be in strong demand on a steady basis for the long-term it’s a product that will continue to fluctuate unlike of course frac sand has been.

Brandon Dobell - William Blair

Okay, in the quarterly any sense of how much sand was sold FOB mine versus FOB definition and given you visibility on contracts, how do we think about that as you finish out the year that percentage sold FOB minor or definition?

Rick Shearer

Yes Brandon, we are still right at we’re hovering around that 60-40 split, 60% FOB plant but as we put these new contracts in place will be selling more and more out to our terminals that we’re continuing to build out. So there will be ultimately I think a flip of 60% being sold out of our transload sites 40% FOB and that’s we’re certainly headed in that direction, that’s a very positive thing because as you touched on Ted, that’s more margin for us, our profit center on the logistic side should grow certainly in 2015.

Brandon Dobell - William Blair

Got it and then final one for me, any conversations with E&Ps about going direct especially they have got a large presence in a single Basin or is it just service companies that you are talking to primarily?

Rick Shearer

We are still very focused on the service companies as of the people that are our cornerstone for sure and we are doing everything we can to keep them happy and to build our relationship with them.

Brandon Dobell - William Blair

Okay, great, thanks a lot, all for me.

Rick Shearer

Thanks, Brandon.

Operator

The next question comes from Marc Bianchi from Cowen.

Marc Bianchi - Cowen & Company

I just, first question on the guidance range that you provided, can you talk to sort of the assumptions between the lower end and the upper end, what’s the assumption for the fuel business and that’s 5% to 10% of pricing how is that they can just curious to hear some more commentary on that?

Rick Shearer

Marc, part of it I think the part of that is as if we start to do that we got to put give you a reconciliation table and all that good stuff so we’ll just say that it’s just reflected in the comments that we have given so far that fuel has been very strong, we expect fuel to remain to be a solid contributor and really I think we’ve given a lot of direction on this call on where we expect sand to go. So, it’s probably all the color I think we can provide at this time.

Marc Bianchi - Cowen & Company

Okay, fair enough. The next question, and you addressed this a little bit but on the new Auburn dry plant this quarter it was looked like it produce quite a bit above its nameplate and just trying to think of looking forward in the second quarter, it is likely that it can continue with that level and how do we think about third quarter volumes relative to second quarter in terms of what you are capable of doing?

Rick Shearer

I would say Marc, that we are running at optimum capability right now we’re always looking to do things better to get us creative as we can but we are flat out, sold out at all of our plants and looking to make improvements always but realistically, I expect that the third quarter will be similar although there will be improvements on the revenue side as we talked earlier but as far as tons produced, we are producing every ton we possibly can right now and I hope we can do a little better, we’re certainly working hard to do that every day but the big jump of course will be in the fourth quarter when our Arland plant comes on followed soon then behind with the second plant coming online and then there will be a marked improvement in tons and the bottom-line.

Operator

Our next question comes from Matt Conlan from Wells Fargo Securities.

Matt Conlan - Wells Fargo Securities

Rick really I was just a little bit confused about your commentary on the fix of ramp-up, trend reached 500,000 tons else for the quarter within five quarters of an opening, how long do think it will take Arland in the sense, since they are already substantially contracted, how many quarters do you expect it will take those plants from getting to 500 or above?

Rick Shearer

I am sorry, the number Matt, 500 would you say that again please?

Matt Conlan - Wells Fargo Securities

Yes. So if your capacity is 2.5, your capacity would be 600 plus per quarter, through those plants. How many quarters will it take from if Arland does in the first quarter -- I am sorry, in the fourth quarter of 2014, at what point should we model that up that in the 80% to 90% of capacity?

Rick Shearer

Okay. Excuse me, Matt, first of all the good news is as Ted pointed out those contracts are in place or ready to move forward as quickly and with sales we’re ready to move forward as quickly as the operations team can ramp that plant up. And the history would show that we’re probably going to be able to make that happen sooner than many of our competitors. Certainly, I would expect within quarter and half if not sooner we will basically be at capacity with those plants. But if you’re planning purposes I would say 1.5 quarters.

Matt Conlan - Wells Fargo Securities

Okay. That will be substantially faster than the Barron ramp-up?

Rick Shearer

Yes. Because the Barron ramp up was in a softer market, where we had the build out those contracts over a period of time, in today’s market with the table already set with this new contracts now for 7.4 million tons and more, sales is not an issue. The table is set, the sales are in place, people are waiting for our sand, as quickly as we can get this plants built and start producing that sand. So yes, the ramp-up will be significantly quicker than Barron had been.

Matt Conlan - Wells Fargo Securities

That’s excellent. Thank you very much. And unrelatedly you under assets increased by 19 million in the quarter a little bit, it looks like there was a cash increase too, can you tell us what’s that per asset represents?

Rick Shearer

Alright, part of it was the ESCO for MidWest Frac, part of it was the railcars as we begin to have these operating leases come on we are capitalizing as we said a portion of that. And part of that increase was just the increase in the fees that we have and associates with our credit facility.

Operator

Our next question comes from Selman Akyol from Stifel.

Selman Akyol - Stifel Nicolaus

So starting off at MidWest Frac you guys, you said you’re taking currently 400,000 tons I means ballpark et cetera for 8% to 10% of your volumes?

Rick Shearer

Yes.

Selman Akyol - Stifel Nicolaus

Okay. And then how much of the capacity were you taking?

Rick Shearer

It’s been really MidWest Frac was really the major player, Selman as far as the number of additional third-party wet feed tons that we were bringing on. Earlier in the year, when we got through a very longer winner and then had a very wet spring, we did bring on some other third-party damp feed for our plants just to produce more tons to keep up with the growing demand as we got through the winter and into the spring. But we since moved ahead and then what much more self sufficient as we’ve opened up the LP mine and improved the FLS mine operation. I think the whole point to make here is now that we have MidWest Frac in place we should be self sufficient as far as feeding these plants now. We’ve got 110 million tons of high quality sand deposits in place. And with the fifth plant coming on that will add another 80 million. So we have plenty of reserves and now we are building out the wet plant capacity to be self sufficient.

Selman Akyol - Stifel Nicolaus

Okay. So in terms of your own mining operation do you outsource all that, is MidWest Frac outsources or will you be implementing that or how should we think about that?

Rick Shearer

We do have a contractor doing the mining in one case we have one contractor mining and running our wet plant it is our asset, it is our wet plant. And the other case as we’re running the wet plant as well. So yes, it’s been a very efficient practice for us to contract out the mining and in some cases the wet plant.

Selman Akyol - Stifel Nicolaus

And you’ll be doing the same thing with MidWest as well then?

Rick Shearer

And we will do the same thing at MidWest side as well, that’s correct that same team.

Selman Akyol - Stifel Nicolaus

Okay. And then did you say in the quarter how much spot sales were?

Rick Shearer

It was small because we’re really focused on our contracted customers and selling largely to them to keep them going and to keep them building the relationship with them we’re taking care of those contracted customers first and foremost with a very small amount as spot business I would say 5% to 10%.

Selman Akyol - Stifel Nicolaus

Okay. And then going back to the Analyst Day I think you were, or let me rewind, 4,500 railcars now another 1,500 by the end of the year take you to 6,000 and I think then going back to the Analyst Day I heard somewhere around 8,500 maybe by the end of 2015, is that number gone up at all or I mean directly you trying to take more railcars?

Rick Shearer

Well, we’re scrambling together every railcar we can it’s very important that we have the rail service and the cars available. We’re working very hard with our customer base to put more cars into the system and then we’re very much in the queue to get more and more of our own lease cars which we won’t see as a cash stream as well and we use our own cars for our customer deliveries. But we’re going to need to be at 8,000 cars basically by spring of 2015 when this last plant comes on and then frankly if we move ahead with yet another plant that we’ve talked about in concept at least you can do the numbers we’re going to need over 10,000 cars when that point comes on. So we’re very focused right now on getting more railcars to make sure that we can deliver the sand that is in such high demand and we’re in good shape but that’s an ongoing issue that we want to continue to work on, make sure the cars are there when they are needed.

Selman Akyol - Stifel Nicolaus

Got you. And then I know you’ve talked a little bit about contracting on the new plants you are essentially sold out up to the 8% level that you want, but if for any reason these plants come on later there are also penalties associated with it?

Rick Shearer

To us?

Selman Akyol - Stifel Nicolaus

Yes.

Rick Shearer

No. We have been careful about that, we don’t anticipate any problems if anything these plants are coming on sooner than we had initially projected, but the way these contracts are written Selman we basically are saying when those plants start up there is a certain ramp-up level that’s agreed to in the contract, there is no penalty in the sense that the sand is sold to them when it is available. I think our customers are going to be pleasantly surprised when they see that the timing is better maybe than they had anticipated.

Selman Akyol - Stifel Nicolaus

That’s great. And then just last question surrounding, I guess I know they’re not terribly labor-intensive but getting people shouldn’t be an issue either?

Rick Shearer

No, we’ve actually found a very good workforce especially in Wisconsin. The skill level and the dedication of these people mechanically inclined many of them grew up on a farm. There is a good strong workforce that’s one of the other advantages of being in Wisconsin. They want to work for a top leading mining company like Superior Silica and Emerge Energy. So we actually have been able to bring in very good quality people to staff up these plants and to train them and move forward. That doesn’t look to be any problem for us with these new expansions that we have on the table.

Selman Akyol - Stifel Nicolaus

Alright. Thank you very much.

Rick Shearer

Thank you.

Operator

(Operator Instructions) We do have another question it is coming from William Gold from Investor Wealth Management.

William Gold - Investor Wealth Management

Thank you. Just a follow-up on the railcar question, at the end of the previous quarter you thought you could add about 1,500 railcars this quarter, but you added about 200, what were the reasons why those cars were not added and how does that impact sales in anyway?

Rick Shearer

It didn’t impact sales because to operate at the capacity levels that we have it were around 4,600 to 4,800 cars William that will max us out, what it does do and it’s very important that we drive more and more unit trains, we reduced cycle times and we turned these cars much more efficiently and we’re very, very focused on doing that to optimize the use of these railcars. So that’s been a focus and we’ve been successful in doing that and the numbers are showing good results on that end. The reason we didn’t grow more railcars this past quarter than what we had originally projected is Ted alluded to the fact that there is this upfront cost, this dead space, if you will, when we’re initiating a lease for the car but takes whatever three to four weeks to get them up to the plant load them and start generating revenue, with that interest in minimizing the upfront cost actually we add 2,500 cars or so coming in and we pushed that back knowing that we don’t need that bubble if you will that bubble of new cars coming into the system, adding cost to the system until those plants are ready to open in October and then the first of the year. So, with one of the new builders of new cars we were able to swap with another company to take these cars a little later in the process so we didn’t have the upfront cost but we’re still assured of having the cars when we need them when the plants open.

William Gold - Investor Wealth Management

Okay, thank you.

Rick Shearer

Thanks, William.

Operator

Alright, great. Well, there are no further questions in queue so I’ll turn the call back over to Ted, for some closing remarks.

Ted Beneski

Okay, once again we just wanted to thank everybody for your interest in Emerge Energy Services and we’re very proud of the fact that we had another record quarter and appreciate all the time that you spent on the call with us today. Thank you everyone.

Operator

This does conclude today’s conference. Thanks for your participation, you can disconnect and have a wonderful day.

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