Covia Holdings Corporation (CVIA) Q2 2018 Earnings Conference Call Transcript

Covia Holdings Corporation (CVIA)
Q2 2018 Earnings Conference Call
August 14, 2018, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, welcome to the Covia second quarter 2018 earnings conference call and webcast. During the call, all participants will be in a listen-only mode. After the presentation, we will conduct a question and answer session. Instructions will be provided at that time. If at any time during the conference you need to reach an operator, please press the * 0. As a reminder, today's call is being recorded. I would now like to turn the meeting over to your host for today's call, Matt Schlarb, Director of Investor Relations for Covia. Please go ahead, Matt.

Matthew Schlarb -- Director of Investor Relations

Thank you, Christina. Good morning and welcome to Covia's second quarter 2018 earnings conference call. With us today are Jenniffer Deckard, our CEO and president and Andrew Eich, our executive vice president and chief financial officer. We would like to remind all participants that certain statements during this call may constitute forward-looking statements which are subject to certain risks and uncertainties. For a complete discussion of these risks and uncertainties, we encourage you to read the press release in our documents on file with the SEC. We would also like to remind you that during this call, we will comment on non-GAAP measures including EBITDA and adjusted EBITDA. These financial measures are used by management to monitor and evaluate the ongoing performance of the company and to allocate resources. You can find a reconciliation of these non-GAAP measures to the nearest comparable GAAP results as an attachment to our earnings release which we issued this morning.

Additionally, our reported second-quarter 2018 financial results which will be filed today contain a number of merger-related items which impact the comparability of our results to previous periods. As the merger took place on June 1st, the reporter results include only Unimin's results for April and May and the consolidated results for Covia only for June. The April and May results of Fairmount Santrol are not included in the reported results. In additional, Unimin's legacy high purity quartz business was spun off in the second quarter in connection with the merger and has been treated as a discontinued operation. Finally, our reporter results also contain a number of costs related to the merger. Therefore, in an effort to provide comparable information, commentary during this call will focus on the proforma combined financial results for Covia which will reflect the combined Unimin and Fairmount Santrol results for the entire periods discussed, excluding the results of the high purity quartz business.

It's important to note that our proforma figures that we will discuss today will include the non-cash impact of purchase accounting on Fairmount Santrol's inventory. We will call those figures out throughout the call. Reconciliations to reported numbers have been included in our second quarter press release. Now, to begin, here's our CEO and president, Jennifer Deckard.

Jenniffer Deckard -- Chief Executive Officer, President

Thanks, Matt. And good morning, everyone. Thanks to all you for joining us today. And we're pleased to welcome you to Covia's first earnings call. Since this is our first call, I'll begin by providing a high-level overview of Covia followed by an update on our integration and then a high-level overview of our second quarter results. Andrew will then cover our full financial results for the second quarter as well as to provide an update on our key capital projects. Finally, I plan to review overall market conditions and to discuss other key priorities for Covia. Afterwards, we'll be happy to address your questions. As an overview, Covia was created on June 1st through the combination of Unimin and Fairmount Santrol, and we're a leading supplier of a broad portfolio of minerals and material solutions to the industrial and the energy markets.

With over 50 plants across North America operating a wide variety of both minerals and value-added products, we are well-positioned to serve customers in diverse and complementary end markets, including oil and gas, glass, coatings and polymers, ceramics, building products, metals and castings, sports and recreation, and water filtration. Our broad product offering and operational footprint is further supported by our leading distribution network consisting of well-balanced positions on multiple class one rail lines, plant locations which are in close proximity to many of our customers and over 90 distribution terminals. These assets combined with our approximately 3,500 employees put us in a unique position to serve over 2,000 customers in varied end markets with the total solutions they need.

Our diversified business model enhances Covia's ability to maintain leading positions within multiple industrial end markets which offer attractive and stable cash flow generation and a variety of growth opportunities as well as in the high growth yet cyclical energy sector. These complementary segments provide end market diversity as well as opportunities to better leverage our asset footprint at any point in the cycle. In the short period over which we have been a combined company and through the significant efforts of our integration teams over the past six months, we've hit the ground running toward the benefits of combining our two legacy organizations. This is particularly so with the integration of our extensive supply chain optimization system which was successfully completed by the middle of our first month of combined operation.

Over these recent weeks, we have spent significant and detailed efforts to capture every shipment in each of our separate order books for the second quarter and then to recast each of those shipments through our supply chain optimization system in order to quantify and validate the actual synergies that would have been achieved had we supplied those same tons through our now combined and optimized footprint. This optimization of shipments would have generated approximately $17.5 million in savings over those same second quarter volumes confirming our initial targeted range for the OD pairing component of our supply chain synergies which represented just under half of our total expected synergy targets. While these synergy levels will vary week to week based on volume, grade, and location mix, we're pleased that this range was well in line with our original estimate. We're extremely proud of what our people have achieved thus far.

And we're energized by the opportunities that Covia can achieve as a fully integrated company. And now, turning to our strong second quarter results, I'm pleased to provide a few key highlights. Overall, Covia achieved substantial profitability growth during the second quarter stemming from both strong top-line growth and improved cost efficiencies. We commend our teams for achieving such strong results while also making great progress on the integration. Sequentially, volumes increased by 10% to ten million tons. And revenue was up 11% to $712 million during the quarter primarily due to growth in our energy segment, which growth rate was equal across both sand and value-added products. Our adjusted EBITDA increased by over $27 million sequentially to $179 million which included $7 million in start-up costs related to the West Texas facility as well as $19 million in non-cash charges related to the required fair value write up of Fairmount Santrol's legacy inventories.

Excluding these items, adjusted EBITDA would have been $205 million for the quarter. With that summary, I'm happy to turn the call over to Andrew who will take us through a detailed review of our second quarter operating performance as well as an update on a few of our key capital projects.

Andrew Eich -- Executive Vice President, Chief Financial Officer

Thank you, Jenniffer. Starting first with our segment performance, industrial volumes were 3.8 million tons for the quarter which is relatively flat when compared to the second quarter of 2017. Volumes by end market were fairly consistent with the prior-year period. Sequential volumes increased 8% driven by normal seasonal factors in end markets that benefit from better weather including building projects and sports and recreation. Our industrial revenues total $206 million for the second quarter which represents a 3% increase versus the second quarter of 2017. The increase in revenue was driven primarily by price increases that were instituted at the beginning of 2018. Gross profit for the industrial segment was $62.1 million for the second quarter of 2018 versus $67.5 million for 2017. Our second quarter gross margin includes $1.2 million related to purchase accounting that Jenniffer noted earlier. Excluding this impact, gross margin declined $4.2 million relative to 2017.

And higher operating costs at certain facilities in the United States and Mexico exceeded pricing increases during the quarter. We estimate that approximately $3 million of this margin decline represents costs which are transitory in nature. And we expect these cost headwinds to improve as we progress through the year. In our energy segment, Covia sold more than $6.2 million tons in the second quarter on a proforma basis representing 11% sequential growth with balanced growth between our raw sand and value-added province. Utilization of our plants was over 90% of nameplate capacity during the quarter with strong demand throughout most of the quarter. Covia's volume growth benefited from increased production at our recently expanded Utica, Illinois mine as well as from favorable seasonal operating conditions and a balanced grade mix which also benefited cost during the quarter. The completion of our process engineering changes also added to the effective capacity utilization of our plants.

Energy revenues increased 13% sequentially to $506 million in the second quarter. This was driven by the combination of strong volume growth and approximately a $2.00 per ton average price increase on raw sand on a like for like basis. Second quarter gross profit was $161.8 million which includes $18 million in purchase accounting adjustments and $7 million in start-up costs at our Crane and Kermit facilities in West Texas. Excluding these costs, proforma gross margin would have been $186.9 million or over $30.00 per ton for the quarter. This margin performance reflects our industry-leading cost position in the profit market. The sequential $4.00 per ton increase was driven by improved pricing that I discussed earlier during the quarter of approximately $2.00 per ton as well as the improved cost leverage on our higher volumes.

SG&A for the quarter was $51.5 million and included $5.9 million in non-cash stock compensation. For both the third and fourth quarter, we expect SG&A to be around $52 million which includes $2 million in non-cash stock compensation. The company's reported tax expense was $6.5 million, and the effective tax rate was 27% for the quarter. For the full year, we expect Covia's effective tax rate to be approximately 23% driven mainly by merger-related expenses which cannot be deducted for tax purposes. We expect our tax rate to moderate to mid- to high-teens percentages as we move into 2019. Turning to the balance sheet, the company finished the quarter with $136 million in cash. In conjunction with our merger, Covia closed on a $1.65 billion Term loan B facility which matures in 2025. The interest rate on this term loan is currently LIBOR plus 375 basis points with quarterly amortization requirements of approximately $4 million.

The company also entered into a $200 million revolving credit facility which has letters of credit totaling $14.6 million drawn against it. There were no other borrowings against this facility during the quarter. As of June 30, we have approximately $11 million of written up inventory remaining on the balance sheet, the majority of which we expect to be sold down in the third quarter. Our second quarter results also include a writedown of approximately $12.3 million related to an expansion project which was subsequently canceled following the merger. The majority of the purchased equipment associated with this project has been redeployed to other sites throughout Covia. And the remaining unusable equipment has been written off in this charge.

The amount has been excluded in our adjusted EBITDA. We anticipate capital spending in the second half of 2018 to be between $110 and $130 million which is approximately $30 to $40 million lower than our previous forecast that Unimin and Fairmount previously provided on a stand-alone basis. Capital spend for the remainder of the year includes $20 to $30 million in maintenance CapEx, $50 million for our three Greenfield facilities in the Permian and Midcon, and approximately $40 million in various growth projects within our industrial segment including the modernization of our Nepheline Syenite operations in Canada. To provide an update on the status of our key capital projects, I'll start first in West Texas. We've made considerable progress at both our Crane and Kermit facilities which are strategically located in both the north and south ends of the Permian.

These facilities provide sourcing optionality to our customers and have more than 70% of the combined six million tons capacity contracted under multiyear agreements, much of which are tied to northern white volumes. Startup activities at both plants have begun with Kermit having commenced shipments in late July and Crane expected to begin shipments next week. Startup costs associated with these plants totaled $7 million during the quarter which we noted earlier. And that reduced our proforma gross profit during the quarter. We expect production at both sites to ramp up to full capacity by the end of the fourth quarter. Turning to the Midcon, our Seiling, Oklahoma plant construction activities continue with commissioning expected in the fourth quarter of 2018. Once this plant comes online, its location within the Northern STACK Play will complement our existing raw sand and resins coating facilities located in the Southern SCOOP Play.

This will be further complemented by our northern white plants with low-cost lanes and infrastructure capabilities serving the Midcon. Seiling already has over half of its two million ton capacity under contract. And we expect it to be in Covia's targeted range of 78% to 80% of nameplate capacity under contract by the time the plant comes online. In the industrial segment, the modernization of our Nepheline Syenite plant in Canada is on track and expected to be completed by the end of 2019. This multistage project will not only increase our production capacity for our value-added offerings, but it will also allow us to operate the plant more efficiently, resulting in lower production costs. In addition to the Nepheline Syenite project, we are also investing in several other industrial projects to either improve production efficiency or expand capacity in target markets where we expect growth to outpace GDP.

These projects along with cross-selling opportunities for the combined company position us well to achieve our industrial growth targets in the coming years. With that, I'll turn the call back over to Jenniffer to cover the market dynamics and priorities for Covia.

Jenniffer Deckard -- Chief Executive Officer, President

Thanks, Andrew. Beginning with industrial and at a macro level, overall market dynamics remain solid, supported by strong housing start, low unemployment, and positive consumer trends which favor Covia. Looking at specific key markets, we begin with our leading position in the glass industry. While the glass industry remains relatively stable overall, there is higher growth in niche markets stirred by Covia such as in both flat glass markets and in Mexican containerized glass markets. Foundry markets, which have recently experienced higher growth, are expected to moderate in 2019 to more GDP type level growth. At Covia, we're focused on expanding our geographic presence within the foundry industry as well as on leveraging our expensive value-added product portfolio across the company's now combined footprint and customer base in order to further grow that business.

Construction activities in the US remain robust driving volume and pricing opportunities for several of our silica, clay, nepheline, lime, and custom blending products which are positioned in favorable geographic locations. Taking these factors into account and looking at the full year, we expect that industrial revenue will grow at a low-single-digit combined rate over 2017 level aided by pricing increases instituted at the beginning of the year. Gross profits for the year are expected to be slightly down as cost and operational headwinds that we experienced during the first half of the year moderate in the second half. Over the longer-term, we've been actively developing a robust pipeline of cross-selling opportunities that leverage the collective strength of our legacy organizations. These initiatives, combined with the optimization of our production costs and our growth investments are expected to drive profitability within our industrial segment over the next several years.

Moving to our energy segment, while overall proppant demand in the first half of 2018 has remained ahead of our initial forecast, we expect relatively flat market demand in the back half of the year driven by two key factors. First is the number of EMPs who are well ahead of production targets for the year and have moderated completions in order to remain within capital budget expectations. Secondly, the well-publicized takeaway capacity issues in the Permian have temporarily moderated the growth in completions activity in that basin. Both of these dynamics should be relatively short-term in nature as oil prices and improved pipeline capacity drive growth and capital investment in the US onshore market over the mid- and longer-term. On the supply side, significant capacity additions in the Permian have started to outpace demand growth which, when coupled with a bit softer July led to rising sand inventory levels both for sand producers as well as customers as we started out the quarter.

As we moved further into July, we saw broad pricing concessions in the market for certain sand grades in an effort to move these higher inventory levels. This impact has been more pronounced on 30-50 and on 100 mesh grades. This combination of factors negatively impacted Covia's volumes in July while we held pricing constant throughout the month. In response, we've now begun providing some pricing concessions for August. Still, in total, we anticipate that overall third-quarter volume will lag second quarter volumes by plus or minus 10%. Turning to sand type preference, local sand's lower cost point is attractive to end customers and particularly so if suitable for certain well designs. In our ongoing conversations with both servicers and EMPs as well as our own crush and conductivity research indicate that there is a product performance differential between northern white sand and local sand both over time and, more so, under conditions of higher closure stress.

Also, a great deal of variability exists within local sand quality from basin to basin and even within basins themselves. It remains to be seen what the ultimate impact on overall well productivity and the resulting returns to the EMP will be from these product differentials. However, these varying dynamics support our continued belief that long-term demand will be a mix of northern white and local sands. Our investments in both West Texas and Seiling operations were made where we believe that the local sands are fit for purpose for certain well designs within those basins. This will nicely complement our leading and low-cost position in northern white sands. Moving to Covia's key priorities, we remain committed to creating both near and long-term value for our customers and our shareholders. In the near-term, we remain sharply focused on integrating the business and delivering on synergy.

In addition to the OD pairing portion of the supply chain synergies which I mentioned in our opening remarks, we're making meaningful integration progress toward synergies in several other areas as well including additional supply chain and operational initiative that will enhance capacity utilization, increase efficiency, and reduce both operating cost and capital spending. We've also begun executing on a variety of opportunities within procurement and SG&A as we work to integrate our systems, consolidate spend, and lower cost. Finally, we're actively building a robust pipeline of cross-selling initiatives, particularly within our industrial segment which we believe will open top-line opportunities for Covia. We expect that we can achieve the procurement savings relatively quickly with the SG&A and cross-selling synergies taking a bit longer time to realize in line with our guidance of achieving one-half of synergies in year one and full synergy realization by end of year two.

As we think about other near-term priorities, we're also focused on completing our strategic capital projects which are under way in both the energy and the industrial segment and which Andrew has already discussed in detail. These projects will enhance our product portfolio, open new adjacent markets, and further strengthen our market position. Cash generation and delevering also remain an important focus for the organization. Our low-cost asset portfolio generate strong margin while requiring relatively low-maintenance CapEx with a positive tax position resulting in attractive cash flows and optionality in our capital deployment. In the near-term, our free cash generation will be focused on delevering our balance sheet and to maintaining a target of approximately two times annual adjusted EBITDA throughout an economic cycle.

Logistics capability is also an ongoing key area of consideration of the company. As we have frequently discussed, we believe that logistics solutions, particularly around the last mile have been in a rapid state of evolution in terms of both technology and customer needs. And we've continued to evaluate and to formulate our view on the evolving solutions that will best complement Covia's existing value proposition as well as to complement both the needs and the current capability of our customer base while also providing a rightly turned profiled to Covia relative to the structure through which we may offer solutions. There are many options available in this space. The options continue to evolve in terms of both technology and availability as do both the needs and the capability of our customer base. Consequently, we believe that the right solution is actually a diverse set of solutions that provide customers with the most flexible, base, efficient, and low-cost options available and as suited to their very specific needs.

Finally, we believe that maintaining a balance between industrial and energy projects will be critical to the long-term success of Covia as the two segments are complementary throughout various cycles both financially and operationally. Our pipeline of industrial growth opportunities is significant across geographies, minerals, and markets including organic growth opportunity. We will be focused on driving growth in this business by investing alongside our strategic customers and capitalizing on our organic opportunity made possible through the creation of Covia. Before we open the line for questions, I wanted to take the opportunity to thank all of our team members who have worked so hard to make Covia a reality.

We're well-positioned to achieve long-term success for all of our many stakeholders including customers, shareholders, employees, communities, and other value-added partners, none of which could be achieved without the dedicated efforts of our full team. So, thank you to them for both a successful combination and a stellar second quarter. Very well done. With that, Christina, would you please open the line for questions?

Questions and Answers:

Operator

Certainly. At this time, if you would like to ask a question, please press * followed by the No. 1 on your telephone keypad. Your first question comes from George O'Leary from Tudor, Pickering, Holt & Co. Your line is open.

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

Morning, Jenniffer. Morning, Andrew.

Jenniffer Deckard -- Chief Executive Officer, President

Good morning, George.

Andrew Eich -- Executive Vice President, Chief Financial Officer

Morning, George.

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

I appreciate the candor with regards to the softness that we're seeing in the market. Certainly, as we progress through the OFS earning season, we've heard that from a number of different both EMPs and service providers. So, thinking through the positives that you mentioned which are, on the cost side, that $17-$17.5 million of synergy that you could have realized if you had both logistic footprints slapped together for the whole quarter versus the commentary of volumes being down 10-ish% in the third quarter for the energy business in particular. As we think about that near-term outlook and those two dynamics, the interplay there, does it feel like earnings are flattish quarter-over-quarter? Or is that an unfair way to think about it? Correct me where I'm wrong.

Jenniffer Deckard -- Chief Executive Officer, President

So, George, a couple of things that will be impacting particularly the third quarter. So, as we indicated, our volumes are gonna be down plus or minus 10%. That is, of course, gonna have an impact on cost which will somewhat be offset by gaining some of the synergies as well as a few other positive mix components. So, we would expect our cost to be up a couple of dollars. And our pricing, as I mentioned, is beginning to become downward in movement by mid-August. And we would expect that pricing to be in the range of $6.00 to $8.00 per ton in quarter three.

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

Okay. That's very helpful. And then I thought the commentary was interesting around -- 100 mesh being under pressure makes perfect sense to me with the large swath of regional sand that's coming online and that being very 100 mesh very. But is it 100 mesh on 30-50 mesh competition that's putting pressure on the 30-50? Or what's the primary driver of the pressure there as you guys see it?

Jenniffer Deckard -- Chief Executive Officer, President

George, I would say on the 30-50, it's a combination of both the locations and the well designs as the product moves between basins and different well designs. But it's also, I think, partly impacted by switching between product rates and substitutions.

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

Okay. Great. And I'll sneak one more in if I could. I think one of the main concerns from investors out there on the frack sands side is there's this big belief that all northern white frack sand will be displaced by regional. You spoke to various reasons why that's not true. We know that that's not the case because of the pressures at certain reservoirs, etc. Maybe just to assuage those concerns somewhat, could you frame -- are you guys still signing incremental contracts or contracts today for northern white frack sand? Any color on the tenure or duration of those contracts? Any of that would be helpful.

Jenniffer Deckard -- Chief Executive Officer, President

So, I would say that our discussions with customers is equally weighted to local sands as well as not only northern white sands but also to our value-added products. So, we typically approach most of our customers with a total solution package in mind and keeping in mind the balance that we need to optimize the operations. We're pretty fully contracted. We're within our targeted range of 70% to 80% contracted already. Although, as contracts roll on and off, we're in continuous conversations with customers and as we expand our capacity.

Andrew Eich -- Executive Vice President, Chief Financial Officer

And I also think, George, that the customer base is not looking exclusively for one product. Typically, they're looking for both northern white, and regional, and value-added products. And so, a lot of our contracts link those dynamics together.

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

Great. Jenniffer and Andrew, thank you, guys, for the color.

Jenniffer Deckard -- Chief Executive Officer, President

Have a great day.

Operator

Your next question comes from Marc Bianchi from Cowen. Your line is open.

Marc Bianchi -- Cowen -- Analyst

Thank you. Just first to clarify, Jenniffer, your comments on the margin outlook going into third, you said costs up a couple dollars. And then there's this $6.00 to $8.00 of price. So, margin could be down on the order of $8.00 to $10.00. Did I hear that right?

Jenniffer Deckard -- Chief Executive Officer, President

Yeah. I would say that's on the high side.

Marc Bianchi -- Cowen -- Analyst

Okay. Is that because you just don't have the full quarter impact of the price hit hitting in third quarter?

Jenniffer Deckard -- Chief Executive Officer, President

I would say that the $6.00 to $8.00 is average across the entire quarter. So, without a price increase in July, you would expect that the exit would be a little deeper than that. And our costs will be up due to absorption. But that's gonna be offset by bringing in some synergy. So, I think that the cost will not be up dramatically because we've got some mitigating factors coming in to offset the absorption on lower volumes.

Marc Bianchi -- Cowen -- Analyst

Okay. And the plant start-up was $7.1 million in the second quarter. What are you anticipating for that in the third and the fourth, if you could?

Andrew Eich -- Executive Vice President, Chief Financial Officer

Sure. It's gonna be less in the third quarter. Our overall start-up costs are probably gonna be a little more than half of that number is where we're thinking it's gonna come out. And most of that is related to bringing labor on and things like that.

Marc Bianchi -- Cowen -- Analyst

Okay. Okay. And on the volume outlook down 10% at the midpoint, you mentioned, Jenniffer, some slow in completions. We've had a lot of earnings calls here, but that's the first indication, particularly in the Permian, that we've heard that. Could you talk a little bit more about that, maybe when you started to see that happen and what the expectations are for progression from where we sit today?

Jenniffer Deckard -- Chief Executive Officer, President

Sure, Mark. Just to be clear, I think what we indicated was a slowing in the growth of completions. So, probably relatively flat in Q3 and Q4 is the outlook.

Marc Bianchi -- Cowen -- Analyst

Okay. And what sort of visibility do you have right now on the -- have you had discussions with customers that give you confidence in a certain level of activity by the end of this quarter and in fourth quarter? Or are you just weighing the evidence of everything and trying to come up with a forecast?

Jenniffer Deckard -- Chief Executive Officer, President

It's a combination of direct conversations with our customers, industry, data. And all of those seem to fit together with about a depletion activity that would equate to this 24 to 26 million ton per quarter proppant usage.

Marc Bianchi -- Cowen -- Analyst

Okay. If I could just ask one more on the terminated project, could you just talk to what that was and how maybe we should be thinking about your overall capacity exiting once these two Permian facilities in Seiling are online?

Andrew Eich -- Executive Vice President, Chief Financial Officer

Sure, Mark. This project was a legacy Unimin project that began a couple of years ago and was halted after a period of time. We've had that project on hold pending the merger. And once we combined as Covia, we basically decided that this is a project that Covia does not need. That's not to say that had Covia not existed we wouldn't have pursued that project as a stand-alone Unimin. So, it doesn't impact the capacity numbers that we've provided in the past.

Marc Bianchi -- Cowen -- Analyst

Okay. And total energy capacity, once everything's ramped up, will be at what level?

Jenniffer Deckard -- Chief Executive Officer, President

About 35 million tons per annum.

Marc Bianchi -- Cowen -- Analyst

Great. Thanks so much. I'll turn it back.

Operator

Your next question comes from Kurt Hallead from RBC. Your line is open.

Kurt Hallead -- RBC Capital Markets-Analyst

Hey.

Andrew Eich -- Executive Vice President, Chief Financial Officer

Good morning.

Jenniffer Deckard -- Chief Executive Officer, President

Good morning.

Kurt Hallead -- RBC Capital Markets-Analyst

So, appreciate the updates and the color. Just wanted to get a general sense, Jenniffer, again, in terms of the contractual dynamics that are in place. And I guess I might have been under the impression that some of those contractual dynamics might have mitigated some of the potential pricing pressures that could have been anticipated, whether it's a slowdown in the Permian or whether there was going to be some surplus of frack sands capacity. So, I just wondered if you could give us an update on the contractual dynamics that are in play on the combined company.

Jenniffer Deckard -- Chief Executive Officer, President

Sure, Kurt. I think if you listen to legacy Fairmount and then now combine Covia discussions, we've been pretty clear over the years in our position around contracts that are predominantly market-based in pricing. So, that has been our position for a long period of time. So, we have a little bit more in fixed-price contracts as we move into more local sand. But we generally have a 20% to 25% of our contracts at fixed to indexed pricing. And the rest are as a function of market pricing.

Kurt Hallead -- RBC Capital Markets-Analyst

Okay. Great. Thank you for the color. And again, the dynamics at play regarding a slowdown in growth rate and completion in the Permian has been out in the marketplace there for a while, no doubt. Just trying to marry up a slowdown in growth to a decline in volumes. Not quite sure if I fully comprehend that dynamic.

Jenniffer Deckard -- Chief Executive Officer, President

Sure. So, overall, the profit market we believe in the third quarter will be flattish. So, what occurred was a little bit of softness in July, which I think you've heard across both the proppant space and the OFS space which created an increase in inventories in July. That coupled with increasing supply of proppant combined in pricing pressures to which we did not respond throughout July and which impacted our volumes and therefore, our share. And we've now responded with some pricing to recover those volumes.

Kurt Hallead -- RBC Capital Markets-Analyst

Okay. Awesome. I appreciate that clarity. Thank you so much.

Jenniffer Deckard -- Chief Executive Officer, President

Sure. Have a great day.

Operator

Your next question comes from Brad Handler from Jefferies. Your line is open.

Brad Handler -- Jefferies -- Analyst

Thanks. Good morning, guys.

Jenniffer Deckard -- Chief Executive Officer, President

Hey, Brad.

Brad Handler -- Jefferies -- Analyst

I guess I'll wind up asking something similar just to clarify it in my mind too. Did the volume reduction come from your contract customers? Or was it the spot market that essentially fell out completely in July?

Andrew Eich -- Executive Vice President, Chief Financial Officer

It was broad-based, Brad. I think what tends to happen here is as companies build up inventory, both our customers and other competitors in the market, they build up inventory in basin. As that grows to too high of a level, there's strong incentives to move that product. And that's what we saw in July. As Jenniffer mentioned, we did not have that operational challenge where we needed to move inventory. And so, we did not move inventory at lower prices. We kept our pricing flat. But that pricing pressure has persisted. And we've since reacted to that across most basins.

Brad Handler -- Jefferies -- Analyst

Okay. Understood. All right. Let me make sure I ask a couple other types of questions too. So, as you are able now to look at your overall combined plant portfolio, can you speak to and maybe just give us a couple of examples of the sort of production optimization types of opportunities? Are you shifting grades around? As you look at the landscape, might you be in a position to consolidate facilities relative to expectations or something along those lines? I'm just trying to get a sense. I think I recall a -- and the background I guess is I think I recall you mentioning something like a $3.00 to $10.00 per ton opportunity as it related to production specifically. And maybe I misunderstood that comment on a slide. But that's where I'm coming from with the question. And I'm curious about that side of the opportunity set.

Andrew Eich -- Executive Vice President, Chief Financial Officer

Yeah. I would say on a weekly basis, we are optimizing our production planning across all of our tons to produce at the lowest unit cost and deliver at the lowest unit cost. And so, that process, as I mentioned, occurred weekly. You'll tend to see that result when volumes decline as volume being concentrated at our lowest cost facilities. And so, that happens every single week. And we've got a number of facilities that are located on class one rail lines which are in the first quartile of the cost curve. And so, I think we're extremely well-positioned from a cost perspective to produce at attractive economics.

Brad Handler -- Jefferies -- Analyst

Okay. I see. So, that range is perhaps -- it's the kind of thing that one can create through a cycle but again under specific circumstances? But that's the flexibility in the network, I guess. That's how I should understand it, right?

Andrew Eich -- Executive Vice President, Chief Financial Officer

Yeah. I think that's right.

Brad Handler -- Jefferies -- Analyst

Okay. If I could sneak in one more please, could you speak to -- now that the combined company philosophy -- I just wanna make sure I understand if it's changed at all. You had a strong preference to working with oilfield service companies, the pressure pumpers themselves as Fairmount. I think I've noticed that you had a couple of contracts with a couple of oil companies. Where do you stand on that strategically? And how might we think about contract evolution directly with EMPs?

Jenniffer Deckard -- Chief Executive Officer, President

I would start with that the legacy Fairmount Santrol and the legacy Unimin concentration in oilfield services is widely held between both companies. As we think about it strategically, we're really focused and less concerned about whether a customer is an OFS or an EMP. And there's a lot of discussion around this percentage mix between the two. But we're more focused on whether the customers are a strong fit for a long-term partnership. So, we have some very strong long-term partnerships with oilfield service companies that are gonna continue to require a significantly large percentage of the sand in North America. And we're gonna continue to have a very strong relationship with the OFS. That said, we do have some very specific EMPs that both fit the profile for Fairmount Santrol and which complement our infrastructure and complement our relationships with our legacy OFS partners.

Brad Handler -- Jefferies -- Analyst

Understood. Okay. Thanks for that. I appreciate it, and I'll turn it back.

Operator

Your next question comes from John Watson from Simmons & Co. Your line is open.

John Watson -- Simmons & Co. -- Analyst

Thank you. Good morning.

Jenniffer Deckard -- Chief Executive Officer, President

Good morning, John.

Andrew Eich -- Executive Vice President, Chief Financial Officer

Morning, John.

John Watson -- Simmons & Co. -- Analyst

As we think about pricing into Q4, is there a possibility of further concessions? Do you expect to have to cut price again? And I realize we might be too early to know at this stage but curious if you have any color there.

Andrew Eich -- Executive Vice President, Chief Financial Officer

No. I think it's too early to make a call on the fourth quarter, nor are we gonna get into any dynamics associated with our pricing strategy for this call. So, I think it's just too early.

John Watson -- Simmons & Co. -- Analyst

Okay. Fair enough. Legacy Fairmount would disclose the value-added proppants segment. Can you give us any color on what happened for value-added proppant in 2Q? And is that something we shouldn't expect to receive moving forward?

Jenniffer Deckard -- Chief Executive Officer, President

Yeah, sure. John, first of all, thanks for asking. And our value-added products for Covia were equally up in the energy sector with our sands. So, they each were up about 10%. Given the fact that our value-added products as they exist today are under 5% of the total Covia volume, we won't be breaking that out. But I think what we would be doing is where there are movements in value-added products that have an implication to forecast and/or a specific impact on margins or volumes, we'll be sure to point that out.

John Watson -- Simmons & Co. -- Analyst

Okay. Great. Great. Thanks for that, Jenniffer. And then lastly, on synergies, you've given some helpful color on what you've realized thus far. Are asset divestitures part of the equation being contemplated to reach your stated synergy goals?

Andrew Eich -- Executive Vice President, Chief Financial Officer

No. There were no asset divestitures in our 150 million ton target. When you look at the 150 million, roughly two-thirds of that is relate to our supply chain. A large percentage of that supply chain synergies are the ones that Jenniffer was referring to in her opening remarks. And the remainder is a combination of procurement driven synergies as well as SG&A related synergies. No asset divestitures.

John Watson -- Simmons & Co. -- Analyst

Okay. Great. Thanks for that. I'll turn it back.

Operator

Your next question comes from David Deckelbaum from Keybanc. Your line is open.

David Deckelbaum -- Keybanc Capital Markets -- Analyst

Good morning, Jenniffer and Andrew. Thanks for taking my questions.

Jenniffer Deckard -- Chief Executive Officer, President

Good morning, David.

Andrew Eich -- Executive Vice President, Chief Financial Officer

Morning, David.

David Deckelbaum -- Keybanc Capital Markets -- Analyst

I just wanted to go back to some of the comments. I know you gave some outlooks on the third quarter and then some of the temporary dynamics that you think are happening in the market. Do you have any thoughts on, based on the amount of supply coming onto the market, what you think the balance thinks like heading into next year or at what point you think this pricing softness reaches an equilibrium?

Jenniffer Deckard -- Chief Executive Officer, President

Sure. David, I think it's important that we also -- there were some inventory build in July, for sure. But all of this is a culmination of this oversupply which we all know is upon us. And I believe that we're reaching a point as you think about in the Permian where the capacity builds are outpacing the demand to such an extent very shortly here that there really can't be much more impact on pricing because once that capacity is oversupplied by a certain degree -- call it 2019 -- it's oversupplied. And the additional capacities are just on top of that.

David Deckelbaum -- Keybanc Capital Markets -- Analyst

Got it. Is it fair to say even currently, are you still having to walk down the northern white portion of the business? Or if you were to think about a composition of what's leading to some of the lower margins, is it all being driven by the end basin sand at this point? Or are you having to create some concessions on the northern white side as well?

Jenniffer Deckard -- Chief Executive Officer, President

I think they're all related to the supply dynamics on local sand which then filter into the northern white. We, at this point, of course, through the second quarter haven't had walking down on margins. But the margins that we're forecasting forward are all around our existing sand base for Q2 because we hadn't really started any of our local sand operations in Q2. So, when you compare Q2 to Q3, Q2 has no local sand. Q3 will have some local sands. So, for us. We have been behind on the start-up of our local sand plants. So, as the local supply has come online, we have not yet captured our share of that to offset some of the decline that we'll be seeing in Q3. Although, we are now shipping volumes from there. So, we're going to begin that recapture and our portion of the local sand share.

Andrew Eich -- Executive Vice President, Chief Financial Officer

And I think in low in our term, we've talked previously about margins across the northern white and in basin sands should approximate each other. And that will happen over time. And so, I think it remains to be seen. And it's too early to make a call on where margins for ton in West Texas are going to be because we have so much supply there coming online and we haven't really fully felt that impact yet.

David Deckelbaum -- Keybanc Capital Markets -- Analyst

Absolutely. I appreciate the color, guys. Thank you.

Operator

Again, if you would like to ask a question, please press * followed by the No. 1 on your telephone keypad. Your next question comes from James Wicklund from Credit Suisse. Your line is open.

James Wicklund -- Credit Suisse -- Analyst

Good morning, guys. So, did I hear right that Kermit and Crane you have 70% contracted for the sand that those two mines produce?

Jenniffer Deckard -- Chief Executive Officer, President

We're probably actually on the high end of our range with our local sands in West Texas.

James Wicklund -- Credit Suisse -- Analyst

Okay. And I ask the question because if we're oversupplied so badly in West Texas, why don't you maybe not open one of the mines? I guess that's not a possibility if you've got 70% of all of it contracted already.

Jenniffer Deckard -- Chief Executive Officer, President

I think that our strategy is that we, as the leader, will retain share on both northern white as well as local sands. And I do think that our customer base is and does look to suppliers that can provide their total solution needs, including into basin and actually including all the way to the tips of the wells with our product portfolio.

James Wicklund -- Credit Suisse -- Analyst

Which leads me into my second question. Earlier in the conference call, you were talking about last mile solutions. And you said that instead of a last mile solutions, there are lots of last mile solutions. Here it is. A set of solutions is better than one solution. Does this mean that you're going to start making use of third-party options and start contracting -- you already said -- more directly with EMP companies? But is the idea to get into the last mile business on a third party basis, the range of options as opposed to having one that's captive?

Andrew Eich -- Executive Vice President, Chief Financial Officer

I think, Jim, all investment options are on the table, whether that's acquisition of a solution or a partnership arrangement. I think the key for us -- and we've always said this -- is that the last mile solutions have been subject to continuous innovation, that the solutions that we see coming to market today of which there are many are superior to those that we've seen that were introduced several years ago. The solution that we're looking at and would invest in need to move more sand cheaper, faster, and safer than the versions that were introduced before that. And so, we're actively looking at that market now. And I think we're pretty open as to how we'll participate in that.

James Wicklund -- Credit Suisse -- Analyst

But it sounds more like you're looking to buy into something or partner with something as opposed to just use third party out there. So, that's helpful. Okay.

Jenniffer Deckard -- Chief Executive Officer, President

Yeah. Jim, I would say that that isn't what we're saying. We actually think it will be not only a set of solutions but a different set of structures through which we'll provide those solutions, whether that be third party -- we would be open to investments with the right return profile. But we certainly are open to third-party solutions, including with our existing customers who also have that capability.

James Wicklund -- Credit Suisse -- Analyst

Great answer. Okay, Jenniffer. Thank you all very much.

Operator

And your last question comes from Lucas Pipes from B. Riley FBR. Your line is open.

Lucas Pipes -- B. Riley FBR -- Analyst

Hey. Good morning, everybody. I wanted to also follow up a little bit on the market dynamics and specifically with the weakness that you articulated. I'm trying to square that with some of the recent announcements we've had in the industry regarding additional northern white capacity and additional in-Permian, in-basin capacity. How do you square that?

Jenniffer Deckard -- Chief Executive Officer, President

I think that the in-basin Permian supply has followed the path that has been projected by multiple sources, including Covia. And that just continues this path. I think as we started to look at the Permian capacity, it has been stated for a year and a half that it has been heading toward oversupply. So, I think that that is following what we would have all expected. Covia, itself, completed some northern white expansions in the second quarter. We've seen a few announcements of some northern white expansions as well. And I think that's an indication that all northern white sands are not positioned equally. And there are people that have northern white sands, a low-cost position. And it, I think, supports our argument that there will be a long-term home for northern white sands as well as local sand.

Lucas Pipes -- B. Riley FBR -- Analyst

Are you receiving requests for additional contracts, longer-term contracts?

Jenniffer Deckard -- Chief Executive Officer, President

We're receiving an in-dialogue on longer-term contracts across our entire product portfolio, including northern white sands, local sand, and value-added products.

Lucas Pipes -- B. Riley FBR -- Analyst

Got it. And then just to hone in on the product market, can you give us a sense of where you see the greatest amount of weakness? Or differently, where in North America is sand pricing maybe holding up a little bit better?

Jenniffer Deckard -- Chief Executive Officer, President

That's actually a really great question. And all I can do is talk to you about what we've seen in the third quarter. And it is not, as you might think, concentrated in one basin or one area. It was broad-based across all the basins. And we serve all of them, both in the volume decline that we mentioned as well as the pricing implications are broad across on all of the basins.

Lucas Pipes -- B. Riley FBR -- Analyst

Got it. Okay. Well, thank you very much and best of luck.

Jenniffer Deckard -- Chief Executive Officer, President

Thanks, Lucas.

Operator

There are no further questions at this time. I would like to turn the meeting back over to Jennifer Deckard.

Jenniffer Deckard -- Chief Executive Officer, President

Thanks, Christina. And thank you all for listening and participating today. And we look forward to talking to you about our third quarter results in the near future. And we'll see you out on the investor circuit. Have a great day.

Operator

This concludes today's conference call and webcast. You may now disconnect.
Duration: 55 minutes

Call participants:

Matthew Schlarb -- Director of Investor Relations

Jenniffer Deckard -- Chief Executive Officer, President

Andrew Eich -- Executive Vice President, Chief Financial Officer

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

Marc Bianchi -- Cowen -- Analyst

Kurt Hallead -- RBC Capital Markets -- Analyst

Brad Handler -- Jefferies -- Analyst

John Watson -- Simmons & Co. -- Analyst

David Deckelbaum -- Keybanc Capital Markets -- Analyst

James Wicklund -- Credit Suisse -- Analyst

Lucas Pipes -- B. Riley FBR -- Analyst

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