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Hi-Crush Partners LP (NYSE:HCLP)
Q4 2018 Earnings Conference Call
Feb. 6, 2019, 8:30 a.m. ET

Contents:

Prepared Remarks:

Operator

Greetings and welcome to the Hi-Crush Partners LP Fourth Quarter 2018 Earnings Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press *0 on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Caldwell Bailey, Lead Investor Relations Analyst. Thank you. You may begin.

Caldwell Bailey -- Lead Investor Relations Analyst

Thank you. Good morning, everyone, and thanks for joining us today. With me are Bob Rasmus, Chairman and Chief Executive Officer of Hi-Crush, and Laura Fulton, Chief Financial Officer. Before we provide our prepared remarks, I would like to remind all participants that our comments today will include forward-looking statements which are subject to certain risks and uncertainties. Actual results could differ materially from those projected in any forward-looking statements.

Additionally, we may refer to the non-GAAP measures of EBITDA, adjusted EBITDA, distributable cash flow, and contribution margin during the call. Please refer to our public filings for definitions of our non-GAAP measures and the reconciliation of these measures to net income or loss as well as a discussion of risks and uncertainties. With that, I would now like to turn the call over to our CEO, Bob Rasmus. Bob?

Robert Rasmus -- Chairman and Chief Executive Officer

Thanks, Caldwell, and thank you to everyone for joining us this morning. 2018 was a busy and successful year for Hi-Crush on many fronts. We made operational financial, and structural changes to our business that align with our strategies, strengthen our company, and position us for success over the long term. These changes -- and ones we will continue to make over time -- make us less susceptible to energy market volatility, more responsive to customer needs, and better able to create value for our unit holders. Importantly, they also afford us more control over the success of our business.

At the outset here, I'd like to discuss the progress we made and successes we achieved during 2018, and what this indicates about our strategy going forward. The full-service, integrated model we have developed was designed to most efficiently service the E&Ps. We have spoken extensively in the past about the value we and the E&Ps themselves see in these important partnerships. It's a different kind of relationship, built on long-term perspective, integrated planning, and tangible efficiencies that will be the foundation of our company going forward. It's truly a win-win strategy when E&Ps choose to direct-source with Hi-Crush, offering benefits on both sides of the relationship.

From our perspective, we gain better visibility into demand trends and fundamentals. We establish strategic partnerships based on a long-term perspective, we experience increased growth opportunities to provide our full scope of services, and we reduce volatility in activity and performance. From the perspective of our E&P customers, by working with Hi-Crush, they gain a dedicated frac sand provider capable of delivering integrated mine-to-well-site services, they have exposure to multiple sources of sand that ensure reliable supply, they realized delivery-point optionality across their supply chain, and they align with a partner with a proven track record of safety.

Throughout 2018, we achieved tremendous success in expanding our E&P customer base. Volume sold to E&Ps more than tripled over 2017, reaching nearly 40% of total volume sold during the year and over 50% of volume sold in the fourth quarter. This is an important accomplishment for Hi-Crush and an amazing one, having only begun directly serving E&Ps in the first half of 2017. Our E&P customer base growth began in the Permian with our Kermit Northern White sand being utilized through our PropStream container crews. Whether the availability of sand drove the last-mile or the service in the last-mile drove the sale of sand, the integration of the two is the core reason we are in a prime position to serve the E&P.

Adding to our Kermit E&P customer base, we announced a contract with a major E&P in the Permian last July, and we have continued to grow our contractual relationships, notably with E&Ps in the Northeast. We now have over 60% of our total currently operating production capacity, including both Northern White and Permian sand, contracted with E&Ps. Our success here is a direct result of the efforts of our entire organization to offer differentiated products and services of the highest quality. Our E&P customers demand nothing less.

Success in working with E&Ps is correlated with our growth in last-mile services. We grew PropStream significantly in 2018, exiting the year with 16 container crews and eight silo systems deployed. Since we expanded into the last-mile a little more than two years ago, our flexibility, reliability, and differentiated level of service has been recognized by our customers, and we are continually challenging ourselves to ensure we have the most versatile and efficient last-mile solution on the market.

You may have also seen in an important update regarding PropX, which in late January won a summary judgment in a breach of contract and intellectual property suit brought by one of our competitors. Hi-Crush itself was not party to the lawsuit, but as a JV owner, the judgment unequivocally affirms the integrity of PropX's IP, and for us confirms the differentiation of the technologies and equipment we use, adding to the value of the partnerships we have pursued to build our business for the long term.

To this point, in a strategic expansion of our PropStream last-mile offering, on August first, we acquired FB Industries. FB is a designer and marketer of well-site frac sand storage silos and associated equipment. As of the end of the year, we have deployed eight silo systems into the market and continue to see strong interest for our FB silos. In addition, we recently completed field testing of the FB Atlas top-fill conveyor, which allows for faster silo fill times and reduced well-site footprint for sand storage during all phases of completion operations compared to other silo systems. The FB Atlas is an additional differentiator for our PropStream offering, which will support further significant growth of the service. With the acquisition of FB, Hi-Crush became the only fully integrated provider of mine-to-well-site frac sand supply chain services capable of providing customers with container and silo last-mile options. This is a real advantage that differentiates our service offering and allows us to meet the entire addressable market.

We're also working on a number of exciting initiatives with regard to further embedding technology across our network and our process. By utilizing and developing technology, we're able to enhance customer experience by improving the timeliness of information flow and also create efficiencies for ourselves and our customers from both a data and operational perspective. This is an ongoing iterative process that we will continue to refine in an effort to provide customers the most timely actionable information.

We have also begun utilizing land at our Pecos facility as a logistics hub to forward-stage sand from our Kermit facility. This helps to alleviate bottlenecks on the roads in West Texas by making supply runs during off-peak times and placing our sand closer to the point of use. We often refer to our owned and operated terminal network as the backbone of our operations, and the investments we've made into this essential component of our service offering make it stronger and even more valuable to our customers than before.

On the production side, we achieved another major milestone in December with the completion of the second 3-million-ton-per-year facility at Kermit. This gives the Kermit complex total production capacity of 6 million tons per year. We are very proud of our team, who completed this project on time and under budget. This E&P-customer-driven expansion is undergoing a quick ramp and is on track to reach full production capacity next month with similar production costs per ton as the first Kermit facility.

During 2018, we also began the customer-supported expansion of our Wyeville facility, which, when completed this quarter, will bring that capacity up to 2.7 million tons of annual production of Northern White sand. The expansion of Wyeville and the agreements that back it reflect a continuing demand for Hi-Crush's Northern White sand and terminal network from our customers.

Despite our accomplishments, 2018 was not all positive. Challenges for the industry began to emerge midway through the third quarter as E&P budget exhaustion drove a slower pace of completions through the end of the year. At the same time additional in-basin Permian supply came on quickly, driving a more competitive environment for Northern White sand. Compounding these headwinds were takeaway capacity issues in the Permian that caused some E&Ps to slow activity as well as a rapid and significant decline in oil prices during the fourth quarter.

Though this weakness was felt across all basins, the impact to our business occurred predominantly in the market for Northern White sand as more in-basis Permian capacity came online. This led to pricing impacts and lower volumes for Northern White sand. We expect to see more mine idlings or closures across the industry from others with higher-cost facilities who do not have our customer profile and distribution network.

Our customers are the ones driving this demand, with operations across basins utilizing different chemistries, technologies, and completion techniques to target a diverse set of geologies. As we have said for some time, different circumstances and preferences dictate what sand is used by individual E&Ps in particular basins and for specific completion designs. Because of this, we project that Northern White sand will continue to be in demand going forward, and that's not just our opinion. Our recent contract wins for our Northern White products support this assertion.

As new in-basin capacity comes online, some basins outside the Permian may reach the point of self-supply for finer-mesh grades of sand, particularly 100 mesh. However, demand for 40, 70, and coarser grades of sand in those basins and demand for all grades of sand in regions where no in-basin supply exists will still need to be met by Northern White sand. We continue to believe that Northern White sand will remain in demand at significant levels to meet growing frac sand needs in basins throughout the U.S. The degree to which frac sand companies will be able to compete in this environment will be dependent upon ability to control costs and optimized well site deliveries, two key factors for which we are significantly advantaged.

We have a long track record of being proactive, nimble, and responsive to the market. In response to the rapid decline in completions activity, we announced the idling of a Northern White mine, our Whitehall facility, at the end of September. We recently announced that we have reopened Whitehall, and at the same time, idled our Augusta facility. This is part of an ongoing process of optimization, including aligning origin and destination pairings and a result of the recent contract wins we've achieved with our E&P customers. As market conditions require, we will continue to adjust our portfolio and asset deployment to most cost-effectively serve our customers. We are uniquely positioned due to our level of operational flexibility, having purpose-built all of our facilities with this versatility in mind.

As the first operator of an in-basin mine in the Permian, we realized tangible benefits for a period of time in the form of higher contract pricing. As more competition entered the market, we worked with customers to structure contracts to reflect the market as it exists today. Our relationships enable us to preserve value in the form of additional last-mile services, additional volumes, and/or more term. We've long described this as exchanging value for value, and it's exactly what we've been able to achieve in the process. As we noted in our press release at the beginning of January, we conservatively expect to generate more than $100 million in annual EBITDA from our Kermit facilities. This is before any contribution from our logistics services or other production assets and provides a strong base level of cash flow for our business and future growth.

The purposeful way we approached the market weakness in the back half of 2018 was due to a fundamental belief in our company's direction. Hi-Crush's commitment to our "mine, move, manage" strategy kept us focused on execution even as the market softened during the latter part of 2018. Thanks to this commitment, we sold 10.4 million tons of frac sand during the year, the most in our company's history. We sold the most volumes to E&P customers in our history, and we sold the most volumes through PropStream in our history. Our ability to achieve these results is driven by our integrated services, infrastructure, and team that are built to win in the frac sand and logistics space long-term. We will do so by continuing to provide consistency, reliability, and efficiency on a day-to-day basis to our customers.

In addition to the operational focus we exhibited in 2018, we were thoughtful from a capital perspective. We made several changes that fortified our balance sheet and supported our spending priorities during the year. These include the board's recent decision to suspend the distribution in order to maintain balance sheet strength. In August, we became the first company in the frac sand space to successfully execute a senior notes offering. At the same time, we converted our existing revolving credit facility to an asset-backed facility and eliminated our term loan. These moves supported project development, improved our liquidity, and enhanced our financial flexibility, as our debt is now free of any and all maintenance covenants and we have no maturities until 2023.

Additionally, during the fourth quarter, we completed the acquisition of our sponsor in a critical step that simplified our corporate structure. This change paved the way for our conversion from an MLP to a C corp structure, which remains on track to be completed during the second quarter of 2019. We filed our preliminary proxy statement yesterday and will be communicating more to unit holders in the coming weeks regarding voting on the conversion. Moving away from the MLP structure is essential to our strategy. Our team believes that the success of our business with a growing focus on logistics is better enabled as a C corp. With that review of our year, I'll now hand it over to Laura to discuss our fourth-quarter results in more detail. Laura?

Laura Fulton -- Chief Financial Officer

Thanks, Bob. Before I start, I'll remind you that our prior financial information has been recapped to include the sponsor and general partner for all periods due to the simplification transaction in October. The primary change you will see is to G&A and, in 2016 and '17, interest expense. As we announced early in January, during the fourth quarter, we sold just shy of 2 million tons of frac sand, a substantial decrease of 29% from the third quarter of 2018. For the year, Hi-Crush sold 10.4 million tons of frac sand, the company's highest sales volume in its history, and a 16% increase over the full year 2017.

With our integrated offering, volumes are sold at the mine gate, in-basin at our terminals, and at the well site through our PropStream service. During the fourth quarter, 73% of sales occurred at the terminal or at the well site, the highest level in our history. This milestone indicates just how far we have evolved from the company that began operations in late 2010. We continue to push the point of sale downstream, closer to the well site, exactly where our customers require.

The fourth quarter was also the first period during our history that we had a higher percentage of sales at the well site than at the mine gate. This is predominantly because of the success we've achieved in growing our E&P customer base. As we continue to expand our relationships with these customers, we expect that in-basin sales as a percentage of volumes will continue to grow, as E&Ps require full-service sand supply to the well site. All in, these results clearly exhibit the success we're achieving in developing our business to a full-scope frac sand logistics and services company.

The fourth quarter of 2018 was the eighth consecutive quarter of growth in absolute volume sold through PropStream, and for the full year 2018, we saw an increase in volume sold through our last-mile service of 166% over 2017. We are building this business to be our primary outlet for E&P sales and expect further growth in PropStream sales volumes as our relationships with E&Ps grow as well.

Average sales price for the fourth quarter of 2018 was $58.00 per ton, compared to $64.00 per ton in the third quarter and $71.00 in the fourth quarter of 2017. This sequential decline in average sales price resulted from increased competitiveness in the market for Northern White sand due to growing in-basin supply and lower overall completion activity levels. Revenues for the fourth quarter of 2018 totaled $162 million, compared to $214 million in the third quarter of 2018, driven by lower volumes and decreased average pricing. Adjusted EBITDA for the fourth quarter totaled $10.2 million, compared to $51.3 million in the third quarter of 2018. Adjusted EBITDA for the quarter includes the impact of $4.7 million in business development costs, primarily related to the simplification transaction and severance.

Contribution margin for the fourth quarter of 2018 was $14.35 per ton of frac sand sold, in line with the guidance we had previously provided, compared to $23.92 in the third quarter of 2018 and $23.46 in the fourth quarter of 2017. Our ability to deliver contribution margins in line with our previous outlook despite a challenged market environment resulted from our ongoing focus on cost control, including our decision to idle the Whitehall facility and most efficiently utilize our portfolio of production assets. Contribution margin for the full year 2018 was $25.45 per ton, compared to $18.38 per ton for the full year 2017. SG&A was $18.6 million for the fourth quarter of 2018, up from $15.6 million for the third quarter of 2018, driven by the $3.8 million in business development costs related to the simplification transaction.

Moving to depreciation, depletion, and including the amortization of intangibles, DD&A totaled $9.8 million for the fourth quarter of 2018, compared with $10.2 million in the third quarter of 2018. Interest expense for the fourth quarter totaled $10.1 million, up from $8 million in the third quarter of 2018, reflecting the full amount of quarterly interest expense from our senior notes issued on August first.

As Bob discussed earlier, we have maintained a strong balance sheet that will provide us with the flexibility needed to pursue our priorities going forward, even in down times. We exited the fourth quarter with total liquidity of $172.5 million, including $114 million in cash, and availability under our $200 million asset-backed revolving credit facility. Borrowing base under our ABL facility fluctuates with accounts receivable and inventory levels, and as of December 31st, we had $58.2 million of availability after consideration of letters of credit under this facility. Total debt outstanding was $445.5 million, and we have no balances drawn under our ABL facility.

For the fourth quarter, we reported distributable cash flow attributable to the limited partners of $1 million, including the impact of the $4.7 million I mentioned previously for the business development and severance costs, down from $40 million of distributable cash flow in the third quarter. As Bob discussed, we previously announced the board's decision to spend the distribution for the fourth quarter to preserve balance sheet strength.

Turning to CapEx, for the full year 2018, we spent $141.5 million compared to the full-year guidance we gave on our third-quarter call of $155-165 million. The difference is due to elimination of some discretionary projects, but is primarily driven by timing of payments associated with construction at our second Kermit facility that was completed in the fourth quarter of 2018 and the related payments, which will carry over into the first quarter of 2019.

The first quarter of 2019 will be very active for Hi-Crush, as our second Kermit facility ramps up, new Northern White contracts with E&Ps in the Northeast begin, existing customers ramp up activity, and the commodity price outlook stabilizes. What does that mean in terms of our operational and financial performance? Well, we expect sales volumes to be in the range of 2.4-2.6 million tons in the first quarter, up from approximately 2 million tons in the fourth quarter, primarily due to additional volumes from our second Kermit facility, which is currently undergoing a fast ramp to its nameplate capacity.

We will also see additional volumes from our new Northern White contracts with our E&P customers in the Northeast. We expect average sand pricing to remain largely unchanged in the first quarter, despite increased activity levels. As announced early in January, we've renegotiated many of our contracts for Kermit sand. The benefits we received in return for lower pricing in the form of extended term, additional volumes, and last-mile services will accrue over time.

Given these factors, we expect contribution margin to remain relatively flat in the first quarter. However, the deployment of additional PropStream crews will improve bottom-line results in the first quarter of 2019. We are pleased with the operational and financial results we have seen from the deployment of our container crews and silo systems and see room for further improvement as we continue to enhance and develop the systems to meet the challenging and dynamic needs of our E&P customers.

In January, we made some tough decisions regarding our people and are realigning our personnel to meet the needs of our growing logistics operations. We continue to keep a keen eye on costs, and are looking at every dollar. Going forward, we expect SG&A to trend around $14-15 million per quarter. We expect DD&A to increase concurrent with our growth in last-mile equipment, although it will fluctuate due to wet plant seasonality in Wisconsin. We currently anticipate our first-quarter DD&A to be in the range of $9-10 million, with increases in 2019 resulting in annual quarterly average of $10-11 million.

In 2019, capital expenditures will fall into three main buckets. Carryover growth capital expenditures associated with project costs from the Kermit and Wyeville expansions are expected to be about $30-35 million, and maintenance CapEx will range from $25-30 million in 2019. Growth CapEx associated with PropStream expansion and other projects is expected to range from $45-55 million, and we'll be flexible in response to market and customer demand. We will only spend the money if the demand is there, so we refer to this category as discretionary. With that, I'd like to turn it back to Bob for some comments on our outlook and our closing remarks. Bob?

Robert Rasmus -- Chairman and Chief Executive Officer

Thanks, Laura. If you look at the way we have built our business over the last eight years, we have a clear track record of proactively addressing not just the market as it stands today, but as the market will evolve, and this goes back to our early days as a company. With an eye on the future, we built our Wisconsin mines on multiple Class 1 rail lines. We developed a portfolio of purpose-built production facilities that would provide us with maximum flexibility. We purchased D&I Silica as in-basin delivery became important to our customers and grew that capability, opening owned and operated terminals in the DJ and Permian basins.

We inaugurated our PropStream last-mile service during the third quarter of 2016 in the very depths of the downturn. We opened the very first in-basin mine at Kermit. We acquired FB Industries and became the only company capable of offering both container- and silo-based frac sand management solutions to customers. And, we're proactively growing our business with the E&Ps, which represented more than half of our sales volumes for the fourth quarter.

Because of our past investments, even through down periods, the base of assets we control ideally positions us to serve these E&P customers. By controlling production and supply chain all the way to the well site, we are able to meet their needs as efficiently and effectively as possible, providing the exact frac sand supply solutions that each company and well location requires.

Before we open the call up for Q&A, I would like to reiterate a few things. First, Hi-Crush is a company building for long-term structural advantage in the logistics and frac sand space. We aren't interested in short-term thinking or approaches. Second, our strategy has been proven, and we will stick to it. The bedrock of that strategy is working with an increasing base of E&P customers and providing them with a range of services to support their full frac sand supply chain needs.

Last, our business will be better enabled to succeed over the long term with conversion of our corporate structure to a C corp. We have been communicating the benefits of this structural change for some time now, and we'll be issuing our definitive proxy statement soon. We appreciate the support of our unit holders and their vote in favor of conversion to enable continued growth in our business, our capabilities, and its shareholder value. This past year, Hi-Crush remained committed to our strategy and took definitive steps toward our future as a logistics company. We will continue to focus on long-term goals as we execute to our "mind, move, manage" strategy in 2019 and beyond. Now, I'd like to turn it over for Q&A. Operator?

Questions and Answers:

Operator

Thank you. The floor is now open for questions. If you would like to ask a question, please press *1 on your telephone keypad at this time. A confirmation tone will indicate your line is in the question queue. You may press *2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing *. Once again, that's *1 to register questions at this time. Our first question is coming from James Wicklund of Credit Suisse. Please go ahead.

James Wicklund -- Credit Suisse -- Managing Director

Good morning, guys.

Laura Fulton -- Chief Financial Officer

Good morning, Jim.

James Wicklund -- Credit Suisse -- Managing Director

I'm looking at -- I appreciate the rundown, and that's all very helpful. There's a great deal of question as to what sand pricing will be in '19, and the estimates are all over the map. But, I want to talk mainly about cash. You mentioned $100 million in EBITDA from Kermit. Is that gross profit, or is that EBITDA, and can you explain the difference? And, where I'm going with this, so you know, is I'm looking at $100-120 million in CapEx, and you've got about $40 million in annual interest payments, so I'm just curious as to -- will you -- do you think you'll be able to generate enough cash flow to cover that $140-160 million cost into '19, or will you have to dip into cash?

Laura Fulton -- Chief Financial Officer

So, Jim, as usual, you asked about six questions embedded in that one question there, so I'll try and split them apart. First, when we talk about the more than $100 million in EBITDA being generated from the Kermit plant, that is gross profit. It is essentially the same as EBITDA because we don't allocate that much G&A specifically to our production facilities, so you can kind of equate them to be the same number, but we're expecting at least $100 million annually from the two Kermit facilities when the second one is fully ramped up. You're absolutely right -- we have about $40 million in interest that we need to cover, and our base level of cash flows from Kermit certainly does that.

But, the rest of the business -- the logistics side of the business, the PropStream part, as well as our Northern White sand -- will obviously generate more EBITDA, and when we talked about our CapEx program, we spoke about it in really those three buckets, the first being the carryover from 2018 from the Kermit expansions and the Wyeville expansion, and that's largely funded with the cash we have on the balance sheet. In addition, we have our maintenance CapEx, which is normally $25-30 million a year. Again, that could be funded with the cash that we have on the balance sheet.

And then, that final category is the discretionary CapEx, and we put a range out there of $45-55 million for the growth in our logistics assets, the PropStream crews, whether that's containers or silos, but that is very discretionary. We don't have intentions of borrowing to fund that CapEx. It's going to be based on the demand needs and the customer pull of that equipment to the market. And so, we're not looking at a situation where we would be funding that from the debt on the balance sheet, but instead, funding that from the operations because of the profitability that we're looking at. So --

James Wicklund -- Credit Suisse -- Managing Director

Yeah, you're not locked into that spending, so it can be discretionary.

Laura Fulton -- Chief Financial Officer

Exactly.

James Wicklund -- Credit Suisse -- Managing Director

Okay. And, I'm a big fan of your last-mile, both the transload and your two last-mile logistics options, and combining both boxes -- whatever logistics last-mile or silos with the sand -- makes a huge amount of sense. You talk about the Northeast. In terms of placement of your silos and your 16 box crews, can you give us some idea of what percentage, how many are in the Northeast, and how many are scattered out? Just a little bit of geography on that.

Robert Rasmus -- Chairman and Chief Executive Officer

It's a mix, Jim, between the Permian and the Northeast. Currently -- or, at the end of the year -- it was predominantly in the Permian. Some of the growth in the new contracts that we have mentioned previously -- that will lead to growth for both boxes and silos in the Northeast.

James Wicklund -- Credit Suisse -- Managing Director

Okay. And, if I can sneak one more in, are you happy with your transload distributions network now? You didn't mention expanding that. Is that something you don't see the need to expand and you'd rather focus on silos and boxes for now?

Robert Rasmus -- Chairman and Chief Executive Officer

I think we're very happy with our owned and operated terminal network. As we've always said, owning and operating that network is the key. It allows us to control cost, and more importantly, control customer service quality, and we think we're well positioned with our current footprint in that respect.

James Wicklund -- Credit Suisse -- Managing Director

Okay, guys. Thank you very much.

Laura Fulton -- Chief Financial Officer

Thanks, Jim.

Operator

Thank you. Our next question is coming from Praveen Narra of Raymond James. Please go ahead.

Praveen Narra -- Raymond James -- Analyst

Good morning, guys.

Laura Fulton -- Chief Financial Officer

Good morning, Praveen.

Praveen Narra -- Raymond James -- Analyst

On a press release, you talked about expectation Q1...to have flat sand pricing quarter over quarter, which stood out as a surprise to me. When I think of Kermit 2 ramping, I assume that that just drags it down as well as some carryover from inter-quarter pricing negotiations. Could you help me with the bridge, and do we need to see pricing increases from today's level in order to get that?

Laura Fulton -- Chief Financial Officer

Our comments on pricing were really in reference to the industry pricing. To be clear, we will see somewhat of a step-down in our average pricing because of the Kermit renegotiations that we've done, but also just because Kermit will become a much bigger portion of our volume sold as you're ramping up that second facility. But, the industry pricing -- I think it's important to note we do believe that that has really stabilized here as you got to the end of the fourth quarter. We're hopeful that we'll be able to see some price increases as demand picks up, but we're not counting on that in the guidance that we're giving.

Praveen Narra -- Raymond James -- Analyst

Okay. And then, if we can come back to the contract negotiations in terms of trading value for value, can you talk about how the average contract tenor has changed? Did we get an extra year and half or two years' worth of maturity length on those?

Robert Rasmus -- Chairman and Chief Executive Officer

It varied by contract, and so, in some cases, we got extra term, in some cases, extra volume, in some cases, we got additional logistics services, and in some cases, a combination of two or all three of those. But, in general, that the contract -- the average length did go out further.

Praveen Narra -- Raymond James -- Analyst

Okay. And, just one quick one -- what percentage of Kermit has been contracted today -- of the combined --

Robert Rasmus -- Chairman and Chief Executive Officer

Roughly 85% between the 6 million tons' production capacity.

Praveen Narra -- Raymond James -- Analyst

Okay, perfect. Thank you.

Laura Fulton -- Chief Financial Officer

Thanks, Praveen.

Operator

Thank you. Our next question is coming from Marc Bianchi of Cowen & Company. Please go ahead.

Marc Bianchi -- Cowen & Company -- Analyst

Thank you. First, Laura, I just wanted to clarify the comment you made on contribution margin. Was that contribution margin dollars flat in the first quarter or contribution margin per ton?

Laura Fulton -- Chief Financial Officer

Contribution margin per ton is expected to be flat when you're talking fourth quarter moving into first quarter, and that's reflective of the pricing impacts that we're seeing from Kermit, but also our focus on cost and cost reduction and making sure that we're being as efficient as possible with our origin and destination pairing.

Marc Bianchi -- Cowen & Company -- Analyst

Sure, OK. And, it sounded like there was some addition to that from additional PropStream crews. Is that right?

Laura Fulton -- Chief Financial Officer

Yes. We're expecting that we will continue to enhance our PropStream operations and create more efficiencies there, which should add to the bottom line just from having the same number of crews, but also deploying more systems out there during the first quarter, which should be additive to the bottom line as well.

Marc Bianchi -- Cowen & Company -- Analyst

Got it. Okay. In terms of Kermit, can you share with us a volume expectation for first quarter? It's just tough to -- you've got a pretty fast ramp, as you mentioned, so I guess you'd be at a 750,000 run rate by the end of the quarter on that Kermit 2, but what do you expect to ship in the first quarter from Kermit?

Laura Fulton -- Chief Financial Officer

Sure. The ramp of the second Kermit facility is actually going very quickly. We obviously learned a lot from our quick ramp of the first facility, which took about two and a half months, so the second facility we're expecting will get to full capacity by March, which means we're ramping in less than two months. So, I think a good expectation is you've got a little bit more than half of the capacity available for sale during the entire quarter, so, rather than 750,000 tons, maybe half of that -- call it 400,000 tons -- would be what we're expecting from the second Kermit facility.

Marc Bianchi -- Cowen & Company -- Analyst

Okay. All these pricing adjustments that are occurring -- is that something that takes the full quarter to be reset, or did a lot of that stuff reset on January first and whatever you're guiding to here includes the full adjustment?

Laura Fulton -- Chief Financial Officer

Most of that reset as of January first, so I would expect that our guidance is inclusive of that for the full quarter.

Marc Bianchi -- Cowen & Company -- Analyst

Okay. And, just the last one for me, on the discretionary CapEx piece -- the $45-55 million -- what are you really looking for to make the decision to move forward there? Are you looking for raw sand margins to improve from where they are here in the first quarter? Are you willing to make an investment before those margins improve? Perhaps you see an opportunity on the logistics side and want to take advantage of it. I'm curious if you can provide some more color on the decision process there.

Robert Rasmus -- Chairman and Chief Executive Officer

Sure. It's really almost exclusively on the logistics side. It does not relate to sand. It relates to the movement and last-mile of sand -- ours or other people's sand. As Laura has mentioned and we've talked about before, it comes in $1-1.5 million increments depending upon what type of demand there is for a particular last-mile crew or service, and so, what we're really looking for is the pace of customer negotiations, the pace of customer demand on that, and so, there'll be a little bit of front-running, if you will, but it'll be modest dollars, but each additional spend will be in the range of $1-1.5 million, and it will be truly discretionary.

Marc Bianchi -- Cowen & Company -- Analyst

Okay, great. I just have one more that I forgot to ask. On the working cap, what are your thoughts just as we move through the first half of the year here?

Laura Fulton -- Chief Financial Officer

On working capital, I think we would expect, with increasing activity levels, that you're starting to build working capital -- the receivables and the inventory, obviously. That'll help our borrowing base, although we don't have any plans to borrow under our asset-backed facility, but we would see a build. And, you're normally going to have a build in your inventory levels anyway as you're going through and starting to produce the wet sand starting in the second quarter.

Marc Bianchi -- Cowen & Company -- Analyst

Okay. So, is something in the double-digit millions of dollars -- $10-15 million -- in the ballpark per quarter, or would that be too high?

Laura Fulton -- Chief Financial Officer

I think that's probably reasonable. It truly depends upon the level of receivables and how quickly we collect some of those receivables, and that's just a customer-by-customer-type situation based off our normal terms with them.

Marc Bianchi -- Cowen & Company -- Analyst

Sure. Great, thanks very much. I'll turn it back.

Laura Fulton -- Chief Financial Officer

Thanks, Marc.

Operator

Thank you. Our next question is coming from Mike Urban of Seaport Global. Please go ahead with your question.

Mike Urban -- Seaport Global Securities -- Managing Director

Thanks. Good morning.

Laura Fulton -- Chief Financial Officer

Good morning, Mike.

Mike Urban -- Seaport Global Securities -- Managing Director

So, I wanted to dig into the volume guidance a little bit of the 2.4-2.6 million. Is that -- how much of that is contracted currently?

Laura Fulton -- Chief Financial Officer

I would say it's largely contracted. We said in our previous announcements at the beginning of January as well as in our release yesterday that we have 60% of our currently operating capacity contracted with the E&Ps, but the remainder of that is largely contracted as well, and the variation in our range is really just dependent upon the timing of our customers' work, when they're actually starting to build up some of their well completion schedules and things like that.

Mike Urban -- Seaport Global Securities -- Managing Director

And, with some of the new contracts you've hammered out or the contracts you've signed since the industry slowed down starting in the second half of this year, or the renegotiations that you've done, how much -- if any -- change is there in terms of the flexibility that customers have to take those volumes and -- vis a vis the price that they're paying?

Laura Fulton -- Chief Financial Officer

For the Kermit contracts, we actually give our customers less flexibility because you really are just-in-time manufacturing. You don't have the buffer zone like you do with the Northern White plants of the rail capacity and storage in the terminals. So, in general, we're looking at monthly type commitments, if not even weekly expectations, for the amount of sand that they'll pull. But, with the Northern White contracts, it's generally an annual commitment where there is flexibility. The advantage of working directly with the E&Ps, as we do, is that we have visibility to what their plans are for, if not the next year, sometimes even the next two years, and so, we're really able to work with them on what their well completion schedule looks like and help even things out between all of our customers and our plants to make sure that we're on a fairly steady production schedule. Obviously, things happen and those schedules change, but we do have more visibility because of our relationships with the E&Ps.

Mike Urban -- Seaport Global Securities -- Managing Director

Great. And, if I could just clarify the comments on pricing -- so, your comment on flat pricing was an industrywide comment in terms of what spot pricing is doing across the industry, but your pricing should be down just because of the renegotiations and a greater in-basin mix? Is that right?

Laura Fulton -- Chief Financial Officer

Yeah, that's correct. I think a key point here is that our additional volumes coming from the second Kermit facility as well as the renegotiation of the pricing under those contracts does dilute the average selling price quarter on quarter, but those are our most profitable plants, and so, that will help us on the contribution margin per ton.

Mike Urban -- Seaport Global Securities -- Managing Director

Okay, got it. That's all for me. Thank you.

Laura Fulton -- Chief Financial Officer

Thank you.

Operator

Thank you. Our next question is coming from John Watson of Simmons & Co. Please go ahead.

John Watson -- Simmons & Company -- Vice President

Good morning.

Laura Fulton -- Chief Financial Officer

Good morning, John.

John Watson -- Simmons & Company -- Vice President

Laura, with the slowdown in completions activity in 4Q, was there any weakness in utilization for the active PropStream or FB systems, and do you expect better utilization per system in 1Q? I'm trying to think about how profitability per system could change sequentially.

Laura Fulton -- Chief Financial Officer

Yeah, we did see some slowdown -- I'll call it "white space" -- on the calendar as we went through the fourth quarter with some of our PropStream crews, particularly the container crews, but that started to pick up in December, and we've seen steady utilization as we've gone through January as well. So, I do think we'll see better utilization from our PropStream crews as well as the silo systems, as we were rolling those out during the fourth quarter and now have those in place for the first quarter.

John Watson -- Simmons & Company -- Vice President

Okay, great. And then, to follow up on one of Marc's questions, do you have the number of systems that are deployed today or an expectation for the end of the quarter?

Robert Rasmus -- Chairman and Chief Executive Officer

No, today and for the end of the quarter, we expect continued growth, and it depends upon the pace of some of our customers resuming spending or getting the plans in place, and to some extent, weather that we've been experiencing, but as Laura mentioned, we do expect growth in the first quarter.

Laura Fulton -- Chief Financial Officer

And I would add to that -- one thing that we're focused on is not just increasing our market penetration for the sake of increasing the market penetration, but we want to make sure that we're doing so with the right customers, the right relationships, really providing that value-added service. So, we're not interested in just increasing the numbers for the sake of saying that we've captured market share.

John Watson -- Simmons & Company -- Vice President

Understood. Makes sense. And then, I guess another follow-up on the discretionary CapEx guidance -- I know that's flexible, but the current guidance -- am I right in thinking that implies 20-25 new systems built during the year?

Laura Fulton -- Chief Financial Officer

Yes. I think you could back into that number easily from the guidance that we gave.

John Watson -- Simmons & Company -- Vice President

Okay, perfect. And then, one last one for me -- the business development costs in 4Q -- any expectation for how that changes in 1Q?

Laura Fulton -- Chief Financial Officer

You'll have some amount of costs in the first quarter, specifically related to the conversion process. The business development costs that we had in the fourth quarter were $3.8 million that was included in G&A, there were some additional amounts that were in severance costs that's actually included in our cost of goods sold, but in the first quarter, you'll have some conversion costs -- the printer, legal fees, and all of that related to the proxy solicitation process. Don't expect that to be much more than $1 million or so, but we'll wait and see how quickly we can get the votes in, and hopefully reduce some of our cost there.

John Watson -- Simmons & Company -- Vice President

Great. Thanks, Laura. Thanks, Bob.

Laura Fulton -- Chief Financial Officer

Thanks, John.

Operator

Thank you. Our next question is coming from Samantha Hoh of Evercore ISI. Please go ahead.

Samantha Hoh -- Evercore ISI -- Managing Director

Hi. Nice quarter, all things taken into account. But, just a quick question on the C corp conversion. What are your expectations in terms of being able to lower your interest costs relatively quickly once that is complete?

Laura Fulton -- Chief Financial Officer

I think lowering our interest costs after the C corp conversion would be largely dependent upon the market. I think we're benefiting right now from having a very good debt structure in place with the senior notes that we entered into last summer that have no maintenance covenants and no maturities until 2026, as well as our asset-backed facility, which has a much lower interest cost and gets us the flexibility as the company grows if we needed it. So, we could go out there, but it's going to be very dependent upon the market conditions. Another benefit of the refinancings that we did is that it's already baked in the C corp conversion, and so, we don't have to go back to the debt holders and ask for any sort of changes to the instruments for the C corp conversion, and that's already included in there.

Samantha Hoh -- Evercore ISI -- Managing Director

Okay. And then, could I get an update on the rail cars? Do you have excess rail cars in inventory? Is it an extra cost that's factors into your contribution margin?

Laura Fulton -- Chief Financial Officer

Yeah, the rail car costs are obviously factored into our contribution margin. We have a little over 7,000 cars right now in our fleet. About 2,100 of those are customer cars, and to the extent that the customers don't need those rail cars in our fleet because they're not taking deliveries at the mine gate, we are returning those to our customers. We do have some rail cars in storage. I don't think that we are putting nearly as many in storage as some of our competitors, maybe, but there are some that are in third-party paid storage, but we do have an advantage in that we have a significant amount of rail track at all of our Wisconsin facilities to allow for essentially free storage of those rail cars. The last thing that I would say is that the precision railroading that the Union Pacific moved to in the fourth quarter actually helped us a little bit with excess rail cars, as it meant that there were more cars in transit as they moved away from unit trains, so again, we have not had to put as many rail cars in storage as we might have in other circumstances.

Samantha Hoh -- Evercore ISI -- Managing Director

That does it for me. Thanks.

Laura Fulton -- Chief Financial Officer

Thanks, Samantha.

Operator

Thank you. Our next question is coming from Lucas Pipes of FBR. Please go ahead.

Matt Key -- B. Riley FBR -- Analyst

Good morning, everyone. Matt Key here, asking a question for Lucas. Just a quick one for me today. Could you remind me of the economics of the last-mile business? For example, typically, how much revenue do you generate per crew, and are these economics different for containers and silos? And also, do you see the economics per crew improving as you continue to develop last-mile business and add on features like the conveyor system?

Robert Rasmus -- Chairman and Chief Executive Officer

We expect to generate about $1-1.5 million in EBITDA, which is what we focused on, not on revenue. We focus on the bottom line, not the top line, in terms of that. And, it depends upon which system, too, in terms of more advanced or more encompassing. The economics of containers and silos are very similar.

Matt Key -- B. Riley FBR -- Analyst

Got it. All right. Well, that's all I had. Thank you, and best of luck.

Robert Rasmus -- Chairman and Chief Executive Officer

Thank you.

Laura Fulton -- Chief Financial Officer

Thanks, Matt.

Operator

Thank you. Our next question is coming from Saurabh Pant of Jefferies. Please go ahead with your question.

Saurabh Pant -- Jefferies -- Vice President

Hi, guys. Good morning.

Laura Fulton -- Chief Financial Officer

Good morning, Saurabh.

Saurabh Pant -- Jefferies -- Vice President

Hi. So, I guess I'll start with the last-mile logistics. It does seem like you got some visibility into deploying additional crews. It's obviously hard to quantify how much, but in terms of how that is happening, I would like to understand -- are you displacing some of the legacy systems still, or do you see yourselves ending up in competition with some of the other last-mile logistics solutions, or it's just a one-on-one with the E&P customer, and that's how it goes?

Robert Rasmus -- Chairman and Chief Executive Officer

It's really a combination of both. What the E&Ps are looking for is a provider of really flexible, fully integrated, full scope and scale profit and logistics services, and they realize Hi-Crush is that company. In some cases, we are -- people are going to self-sourcing in last-mile and new case, and we're picking up that business. In other instances, people are transferring from previously utilized systems to Hi-Crush's system, so it's really a combination. But, what people like is the fact that we're a full-scale solutions provider. We're pushing solutions and providing solutions, not pushing particular products.

Saurabh Pant -- Jefferies -- Vice President

Okay, that makes sense. And, one thing that's obviously been difficult to calibrate in our seat is what's your best sense as to what the penetration level is for all these new-generation last-mile solutions, be it boxes or silos? If I were to combine those two and try to guess at what the penetration is -- so, maybe as a percentage of total frac fleets out there -- let's say there are 400-450 frac fleets out there, whatever that number is -- what proportion of that is currently using either a box- or a silo-based solution?

Robert Rasmus -- Chairman and Chief Executive Officer

I'd say it's somewhere around 70-75% or so is using some type of last-mile solution. We expect that market to continue to grow to virtually 100% over time, but currently, 70-75% or so of the frac fleets use some type of alternative delivery mechanism.

Saurabh Pant -- Jefferies -- Vice President

Okay, that's helpful. And then, one last one for me. In terms of Northern White sand sales, obviously, we all know that the Northern White is getting pushed out of the Permian progressively. So, if we were to look at your Northern White portfolio and sales right now, maybe fourth quarter or your expectations for the first quarter, how does that divvy up between the basins? I'm assuming more of that is coming from outside the Permian right now. Any rough proportion as to where it goes?

Laura Fulton -- Chief Financial Officer

There's still some amount of Northern White sand that is being sold in the Permian basin, and primarily, the 40-70 and coarser grades of sand, but obviously, as more in-basin sand has come online, a lot of the 100-mesh has been displaced, but in the majority of the cases, our Northern White sand is going to the Marcellus and Utica, partly because of our owned and operated terminal network there. We've got a strong competitive advantage. But, we're still seeing lots of Northern White sand going to all the different basins. Some of those -- like the Eagle Ford and the Haynesville -- as more and more in-basin sand gets developed, I think you'll see some Northern White pushed out there, but we're seeing a lot of opportunities in the Powder River, in the DJ, and then, obviously, in the Marcellus and Utica as well.

Saurabh Pant -- Jefferies -- Vice President

Right, OK. And, it's safe to assume that northeast Appalachia is the biggest basin for you from a Northern White perspective right now?

Laura Fulton -- Chief Financial Officer

I would say that's correct.

Robert Rasmus -- Chairman and Chief Executive Officer

And, that's primarily due to the advantage we have in terms of our low-cost production base and our extensive owned and operated terminal network.

Saurabh Pant -- Jefferies -- Vice President

Right, definitely. D&I Silica gave you a good footprint over there, so that's clearly an advantage. Okay, guys. Thank you. I'll turn it back.

Laura Fulton -- Chief Financial Officer

Thank you, Saurabh.

Operator

Thank you. At this time, I would like to turn the floor back over to Mr. Rasmus for closing comments.

Robert Rasmus -- Chairman and Chief Executive Officer

Thank you, Donna. Over the past year, today, and in the future, we've pursued and emphasized and are pursuing and emphasizing four distinct themes. Those four themes are differentiation, strategic vision, long-term structural success, and shareholder value creation through differentiation of services and quality. We have known for some time how we want to differentiate Hi-Crush and create value for our shareholders over the long term. We are committed to our strategy of being a fully integrated provider of choice of flexible, full-scale-and-scope profit logistics services. We have already built a base of assets, infrastructure, and capabilities that will allow us to be successful for years to come. Thank you for your interest in Hi-Crush and for your time today.

Operator

Ladies and gentlemen, thank you for your participation. This concludes today's conference. You may disconnect your lines at this time, and have a wonderful day.

Duration: 56 minutes

Call participants:

Caldwell Bailey -- Lead Investor Relations Analyst

Robert Rasmus -- Chairman and Chief Executive Officer

Laura Fulton -- Chief Financial Officer

James Wicklund -- Credit Suisse -- Managing Director

Praveen Narra -- Raymond James -- Analyst

Marc Bianchi -- Cowen & Company -- Analyst

Mike Urban -- Seaport Global Securities -- Managing Director

John Watson -- Simmons & Company -- Vice President

Samantha Hoh -- Evercore ISI -- Managing Director

Matt Key -- B. Riley FBR -- Analyst

Saurabh Pant -- Jefferies -- Vice President

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