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Covia Holdings Corp (NYSE:CVIA)
Q3 2018 Earnings Conference Call
Nov. 14, 2018 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to the Covia third-quarter 2018 earnings conference call and webcast. [Operator instructions] As a reminder, today's call is being recorded. I would now like to turn the call over to your host for today's meeting, Matt Schlarb, director of investor relations for Covia. Please go ahead, Matt.

Matthew Schlarb -- Director of Investor Relations

Thank you, Jack. Good morning, and welcome to Covia's third-quarter 2018 earnings conference call. With us today are Jenniffer Deckard, our CEO and president, and Andrew Eich, our executive vice president and CFO. Our remarks this morning will include forward-looking statements, which are subject to various factors that may cause our actual results to differ materially from those projected in the forward-looking statements.

Forward-looking statements speak only as of today's date, and we undertake no obligation to update those statements. For more information, please refer to the risk factors discussed in our filings with the SEC in this morning's earnings release. 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.

Reconciliations of GAAP results to non-GAAP results are included in this morning's earnings release, which is available in the Investor Relations section of our website. Additionally, our commentary around prior and year-to-date periods during this call will focus on the pro forma combined financial results for Covia, which will reflect the combined legacy Unimin and Fairmount Santrol results for the entire periods discussed and exclude the results of the high-purity quartz business shown as a discontinued operation for periods prior to June 1. Reconciliations to reported numbers have been included in our third-quarter press release. Now to begin, here's our CEO and president, Jenniffer Deckard.

Jenniffer Deckard -- President and Chief Executive Officer

Thanks, Matt, and good morning, everyone. We appreciate you all taking the time to join our call today. I'll begin today with a high-level overview of our third-quarter results. Andrew will then cover our financial results in greater detail as well as provide an update on capital projects.

We'll then discuss market condition, our strategic initiatives and we'll conclude with our outlook. Beginning with the third quarter, Covia delivered solid results from our industrial segment, which was offset by a challenging quarter from our energy business. Overall, the company's volumes declined 19%, and our revenues declined 27% compared to second quarter. Our industrial business continued to perform well with 3.7 million tons sold and more than $56 million in gross profit generated during the quarter.

Year to date, this segment has generated approximately $174 million in gross profit. During the third quarter, most of our industrial end markets showed strong demand with revenues increasing 3% over the prior-year period due primarily to price increases implemented at the painting portions of the year. The cost headwinds that we referenced on our last quarter have begun to moderate, and we're confident that this segment will continue to generate healthy cash flows and steady growth for our business in both the near and long term. Our near-term growth plans are focused on commercial excellence, realizing cross-selling synergies and deploying capital toward organic opportunities, all of which will provide attractive returns compared to what is currently available through acquisitions.

Turning to energy. Revenues were nearly $325 million, a decrease of 36% sequentially. This was a result of lower volumes, which were down 28%, and average selling prices, which were down approximately $6 per ton on a like-for-like basis. As we discussed on our last earnings call, market conditions in our energy segment began to deteriorate in July, with market prices declining significantly across all basins and grades for Northern White sand.

Our volume decline during this quarter was driven by several factors. First, overall market demand declined from second-quarter levels. We estimate proppant demand declined from over 100 million tons on an annualized basis at the end of June to 85 million tons annualized at the end of September. EMP budget exhaustion and constrained activity had a more pronounced impact on market demand, particularly in the second half of the quarter.

Second, in-basin supply continued to increase and took market share from Northern White volumes. During the same period, we had limited local capacity available to capture this shifting market demand. The good news is that this is a timing issue, and our production levels are scaling rapidly toward our 8 million tons of nameplate capacity with strong demand from our customers. Additionally, two of Covia's customers fell disproportionally short of contractual volume commitments relative to overall market decline.

We're actively pursuing our best path forward with each unique situation with proper weighting being given to our contractual remedies. Despite these shortfalls, we remain within our targeted 70% to 80% range of capacity under contract, and we continue to focus on allocating capacity to those who will strengthen and diversify our customer base. These factors, combined with our decision to hold pricing early in the quarter, resulted in our volumes being disproportionately lower in the third quarter. In response to the oversupplied market conditions, we've taken the difficult but important operational steps to align our production with the market.

In September, we idled 3.3 million tons of our relatively higher-cost Northern White capacity and last week, we commenced idling of an additional 1.6 million tons at our two Voca, Texas, facilities, which will close by the end of January. At the same time, we're expanding our in-basin footprint by rapidly increasing our daily production capacity at our two Permian operations. We've also just recently started commissioning activities at our Seiling, Oklahoma, facility in the MidCon basin. Demand for products from our in-basin facilities has been strong, and we feel confident in our ability to sell what we can produce.

Pro forma for all of these activities, our energy capacity will consist of 8 million tons of low-cost, in-basin sand, 19 million tons of Northern White sand that is produced from unit training capable facilities and 4 million tons of remaining Northern White capacity coming from our hybrid plant, which can be efficiently flexed up or down based on market demand. This restructured footprint further strengthens our cost-competitive position, and it allows us to supply our customers with Northern White pricing hovering at unsustainably low levels for the market. We've also initiated strategic alliances with select partners in order to give our customer base the option of an integrated mine-to-well side solution, utilizing today's leading last-mile technologies. In general, this model affords our customers with the highest optionality so that we can tailor a solution that is best suited to each of our customers' specific needs.

More specifically, we've chosen to align with providers who will enable us to offer solutions with -- which emphasize technology, and that is in both asset and administration, high-payload transport, overall efficiencies and importantly, safety. These are the elements that we believe to be the most impactful to our customers. We expect our first silo-based system to be placed in the field during the fourth quarter with additional systems placed in 2019. Importantly, this model is asset-light, requiring limited capital into what is a rapidly evolving segment of the market.

Finally, we'd like to update you on our synergy capture program. As we discussed on our last call, we completed our operational supply chain integration in the early weeks following the merger. This allowed us to quickly optimize our supply chain and to capture the synergies associated with origin-destination paring, which represented approximately half of our initial synergy target. These synergies, which are captured on a daily basis, will fluctuate from week-to-week, based on volumes, product mix and location mix.

In addition to these origin-destination pair synergies, we have made and continue to make meaningful progress toward the remainder of our synergy target. For example, we have consolidated significant spend across both operations and SG&A to both leverage our procurement scale and to eliminate redundancies. Our teams have put in substantial effort toward our ERP consolidation, and we expect to have the first and very significant wave of this implementation completed by the fourth quarter. And kudos to the many Covia's team members who are making all this happen.

We are on clear target to capture north of our $75 million target, the majority of which we expect to realize over the next 12 months, well ahead, also, of our initial time frame. I'm now happy to turn the call over to Andrew who will walk us through third-quarter performance in greater detail as well as to provide an update on key capital projects. Andrew?

Andrew Eich -- Chief Financial Officer

Thank you, Jenniffer. Good morning, everyone. Reported gross profit totaled $117.8 million in the third quarter of 2018, which was down 47% sequentially and 40% compared to the third quarter of 2017 due to declines in the performance of our energy segment. Our third-quarter gross profit was negatively impacted by $18.5 million in cost primarily relating to our energy segment and including inventory write-offs from closed facilities, purchase accounting adjustments, and an operating loss from our in-basin facilities, which resulted from their start-up cost and high fixed costs relative to the limited volumes sold.

Moving to segment performance. Industrial volumes were 3.7 million tons for the third quarter, which is relatively flat when compared to the same quarter in 2017. Industrial revenues totaled $199 million for the third quarter, an increase of $6.3 million, or 3%, when compared to the third quarter of 2017. The increase in revenue was driven primarily by pricing increases that were instituted at the beginning of 2018.

Gross profit for the industrial segment was $56.8 million for the third quarter of 2018, versus $60.8 million in 2017. Our third-quarter gross profit includes $1.4 million related to purchase accounting and inventory charges. The transitory costs increases that we highlighted in our second quarter persisted in the third quarter, albeit to a lesser extent. Additionally, some of our plants in the southeast experienced both customers and operational disruptions from Hurricane Florence, which added to costs and constrained volumes.

In our energy segment, volumes were 4.5 million tons in the third quarter, down 28% sequentially. The pricing concessions we began implementing in August resulted in an average Northern White sand price decline of roughly $6 per ton in the third quarter on a like-for-like basis, which was in line with our outlook and which partially contributed to energy revenues decreasing sequentially to $325 million in the third quarter. Pricing continued to trend down throughout the quarter, and we exited September at average Northern White pricing approximately $9 lower than average pricing in the third quarter on a like-for-like basis. Our third-quarter energy segment gross profit was $61 million, or $13.60 per ton, a decline of 62%, respectively, on a sequential basis.

Our segment gross profits were impacted by $17.1 million of costs, or approximately $3.80 per ton, related to inventory write-offs, purchase accounting, and in-basin losses that I mentioned earlier. Aside from these costs, the decline in profitability per ton was driven primarily by pricing declines that we noted earlier of approximately $6, with the remaining difference driven by lower fixed-asset utilization and mix. SG&A for the third quarter was $43.2 million and included $2.7 million in non-cash stock compensation. On an annualized basis, we are now substantially below our pre-merger levels due to realized synergies and lower variable compensation.

As we move through 2019, we believe we will trend below these levels and exceed initial SG&A target as we complete the integration activities. Net loss in the third quarter was $288.8 million, or $2.20 per share, mainly driven by the pre-tax impact of $265 million of non-cash goodwill and other asset impairments, $24 million in restructuring costs related to merger integration and plant closures, and $5.6 million in merger transaction costs. Our goodwill charge reverses a portion of the asset value that was required to be written up in purchase accounting. Adjusted EBITDA in the third quarter of 2018 was $84 million, or 16% of sales, and excludes a total of $298 million in extraordinary charges from goodwill and other asset impairments, restructuring charges, merger-related expenses and non-cash stock compensation.

It's important to note that our reported adjusted EBITDA does include $11.8 million in non-cash charges from purchase accounting and inventory adjustments and a loss at our in-basin plants from the start-up costs and low-fixed utilization. The company's reported cash benefit was $16.8 million for the quarter. The tax benefit is relatively low compared to the pre-tax loss due to the exclusion of our goodwill impairment, which is considered to be a discrete item under GAAP, and the nondeductible any of certain merger-related costs during the year. Looking forward toward next year, we anticipate minimal cash taxes as we are able to utilize net operating loss carryforwards of approximately $270 million.

Turning to the balance sheet. We ended the quarter with total liquidity of $343 million, consisting of $155 million in cash and net availability at our revolver of $188 million, which matures in 2023. Our net debt was $1.48 billion at the end of the quarter, a reduction of $22 million since the second quarter. And as a reminder, our term loan B debt matures in June 2025 and is not subject to covenants.

Net cash provided by operating activities increased to $105 million in the third quarter, driven by solid operational results, particularly from our industrial segment, along with lower working capital. Capital expenditures totaled $73 million in the third quarter, primarily for the costs related to the Kermit and Crane facilities as well as investments in our Seiling facility and nepheline syenite modernization. In our industrial segment, we recently completed an expansion of our Canoitas facility in Mexico that will add 350,000 tons of annual capacity to support strong demand from our containerized glass customers. Within our energy segment, both Kermit and Crane facilities began production in the third quarter, and we expect both of these plants to ramp up to full production capacity by the end of the first quarter 2019.

Additionally, our Seiling plant in Oklahoma also recently began production and is expected to ramp up to its full 2 million-ton production capacity by the end of the first quarter 2019. Now I will turn the call back over to Jenniffer to talk about our outlook for our markets.

Jenniffer Deckard -- President and Chief Executive Officer

Thanks, Andrew. Starting first with the industrial segment. Our many end markets remained solid, buoyed by general, strong economic conditions, including rising GDP, low unemployment and healthy construction activity. Glass markets have shown good strength in the year and as Andrew just mentioned, we recently completed an expansion of our Canoitas facility in Mexico to meet rising demand from our containerized glass customers, and this project will also support future growth from this market.

Also a particular strength has been our portfolio that serves the building products market. And we expect that to be a continued source of solid growth, both organically and through synergistic cross-selling. We attribute the strength and resilience of our industrial market to not only the demand drivers underlying these stable markets, but also to several Covia-specific attributes, including our geographic footprint, our 100-plus years of demonstrated capability and consistency in producing the customers' exacting existing specifications, whether it be size, shape or chemistry and our broad and blue-chip customer base. The important product specification to our industrial customers' ongoing operations and product quality are both essential and unyielding.

Finally, through our commitment to industrial customers throughout many cycles, we have developed very strong and reliable relationships that are not easily replicated. We are upbeat on this segment's ability to continue its solid performance driven by our personal excellence, organic growth and cross-selling opportunities across several end markets. These opportunities require relatively limited capital, and therefore, opportunities for strong returns on investments. Moving to our energy segment.

The previously mentioned market headwinds, namely new local supply and a transitory slowdown from the early exhaustion of operator budget, have continued into the fourth quarter and are likely to persist throughout the end of the year. Through these challenging market conditions, we've consolidated our capacity into our most competitive asset, and we've retained our Northern White volume levels from August to October, gaining share in this category. Additionally, we've made significant progress in consistently ramping up shipments from both our Crane and Kermit, Texas, facilities throughout the quarter. And we have now commenced with the commissioning of our Seiling, Oklahoma, will facility in November.

Customer demand for these local products remain strong and when combined with our Northern White sales, has resulted in our posting solid October volumes. As we move toward the holiday season, we expect total proppant market demand to further soften, which will likely impact volumes across all energy product lines. While the impact of this seasonality is not fully known, we're forecasting annualized fourth-quarter profit demand for the industry to be down 15% to 20% sequentially, on average, for the fourth quarter. Taking all these factors into account, we estimate our fourth-quarter energy volume will total 4.3 million to 4.5 million tons or relatively flat sequentially.

Looking into early 2019, several of our customers have indicated that they plan to expand completion activities in the first quarter of the year when budgets are refreshed. Our continued ramp-up of our in-basin plants throughout the first quarter should nicely complement this expected trend. Pipeline issues in the Permian are likely to persist throughout 2019, but will ultimately subside and are expected to provide an added tailwind to Permian completion in the back half of 2019. However, for now and the near term, the market remains oversupplied, and it will require additional capacity reductions in order to rebalance.

To date, we estimate that at least 15 million tons of capacity have been taken out of the market. However, we believe more is likely to come, as today's pricing has reached unsustainable levels for the market. In the near term, local sand is likely to continue to gain share from Northern White, solely on the basis of cost, as operators incorporate local sand into their well designs. The ultimate adoption rate of local sand, however, still remains to be seen.

However, our own extensive testing, along with third-party verification, continues to illustrate a substantial and consistent differential in both fines generation and conductivity between local and Northern White sand, even with the testing is well within the specified limits of both products. To put the potential impact of this into perspective, the cost-saving differential to complete a well using local sand versus Northern White sand can be lost in a matter of a few months with only a very small percentage in well production decline. While this does not suggest that local sand will not have a future, as it is for purpose for many well environments, these findings support our continued confidence that proppant demand will continue to be a mix of both local and Northern White sand, and Covia is well-positioned to be the leading supplier of a comprehensive proppant solutions to meet the very broad needs of our customers. With that, I'll turn the call back over to Andrew to provide our fourth-quarter guidance.

Andrew Eich -- Chief Financial Officer

Thanks, Jenniffer. Starting first with industrial. We anticipate the fourth quarter of 2018 will be similar to the fourth quarter of '17, with volumes totaling 3.4 million to 3.5 million tons. As a reminder, the fourth quarter is typically negatively impacted by seasonal factors.

For energy, as Jenniffer indicated, after solid October results, we expect market seasonality to impact volumes in the second half of the quarter and result in fourth-quarter volumes to be in the range of 4.3 million of 4.5 million tons, driven by growing local volumes and offset by seasonal declines for existing capacity. Energy pricing exited the third quarter $9 below Q3 averages on a like-for-like basis, and our energy costs per ton are expected to be relatively flat in the quarter as the idling of higher-cost plants and higher utilization at our in-basin facilities is offset somewhat by lower utilization at our Northern White plants. In the fourth quarter, we expect SG&A to be approximately $45 million, which includes $3 million of non-cash stock compensation. And finally, for Q4, we anticipate capital expenditures will be in the range of $50 million to $55 million and in the range what we had communicated in the second half of 2018 on our last call.

Thanks, Jenniffer.

Jenniffer Deckard -- President and Chief Executive Officer

Thanks, Andrew. I'll conclude remarks today by saying that we continue to believe that Covia's best suited in the industry to offer customers a compensable and highly scaled product and supply chain solution that matches the needs of every customer in nearly every basin, and we can do this on a consistent and cost-competitive manner over the near and long term. Our Northern White facilities are among the most cost-competitive in the industry. We're increasing our in-basin capabilities by 8 million tons.

We've added flexibility to our hybrid plants. We have a suite of high value-added products and most recently, we now offer the option of an integrated and leading last-mile solution. These capabilities resonate with all customers, and we'll continue to broaden and strengthen our customer base, aligning Covia's business with those partners who can benefit from the unique strengths that we offer and in return, who can offer Covia good visibility toward long-term demand. Before we open up the call for questions, I'd like to thank our team members at Covia who have worked tirelessly to not only navigate the current market challenges but to also integrate, both operationally and culturally, to form one company.

Because of these efforts, we're in a stronger position to navigate changes in our markets and to deliver long-term success and value to all of our stakeholders. With that, Jack, could you please open the line for questions?

Questions and Answers:

Operator

[Operator instructions] Your first question comes from the line of Kurt Howee with RBC. Your line is open.

Kurt Howee -- RBC Capital Markets -- Analyst

Great. Good morning. How is everybody?

Jenniffer Deckard -- President and Chief Executive Officer

Good morning, Kurt.

Andrew Eich -- Chief Financial Officer

Good morning.

Kurt Howee -- RBC Capital Markets -- Analyst

Good morning. I appreciate all that color and the update. I think, Jenniffer and Andrew, just like to get a feel for the tenure of kind of the contracting and elements of the dynamic, and what you're experiencing in the market, and how you feel about the duration. And just give us an update, if you will, on kind of contracting dynamics for both local and Northern White sand at the moment.

Jenniffer Deckard -- President and Chief Executive Officer

Sure, Kurt. I'll start with our existing contracts, which have an average -- weighted average life of about two to three years. And I think contracts today are averaging anywhere from one to three years, some a little bit longer. But that on average -- and that actually applies to both Northern White sand as well as local sand.

Andrew Eich -- Chief Financial Officer

Yes and we're -- Kurt, just to just add to that, we're well within the range of 70% to 80% of our capacities is contracted. We actually signed a few additional contracts in the third quarter for Northern White sand. And we feel pretty good about our contract position, both for Northern White as well as for the in-basin.

Kurt Howee -- RBC Capital Markets -- Analyst

That's great. And then in the context of pricing, has that remained kind of a variable price dynamic?

Jenniffer Deckard -- President and Chief Executive Officer

Most of our contracts continue to have a function relative to market pricing. But we also have a degree of fixed pricing and indexed pricing, whether that be to some oil and gas metrics in the market.

Kurt Howee -- RBC Capital Markets -- Analyst

OK. And then maybe just as a follow-up. Kind of curious to get a sense from you guys, what do you think you can continue to do to take costs out of the system and be a -- be the leader in terms of your total delivered cost of sand? What's left to do from an internal standpoint?

Andrew Eich -- Chief Financial Officer

Yes. So Kurt, we've -- as Jenniffer has discussed on the call, we've already idled a significant amount of our higher-cost capacity, and we're consolidating our volumes into our lowest-cost plants. I think what's unique about Covia is the sheer amount of unit train capable capacity that we have for Northern White sand, which provides us with the distinct cost advantage. Obviously, volume is a really important element to managing cost.

And so we're focused on really maximizing our volume as much as possible in this environment. But the other thing I would add is, we've got a flexible fleet with railcars that we can flex up and down based on our leasing schedules. And so that while we may have some fixed cost overhead from that in the third quarter, we have an ability to take that down in a fairly organized manner as we move into 2019 than we need to.

Jenniffer Deckard -- President and Chief Executive Officer

Yes. I think, Kurt, the other thing that we mentioned on the call is we're still in the early stages of capturing the synergies from the integration. Our target outside of origin-destination pairing, which we're realizing today is $75 million. And we think that we will exit well within that range by the end of 2019.

So we'll be ramping up to that throughout 2019.

Kurt Howee -- RBC Capital Markets -- Analyst

Great. I appreciate that color. Thank you.

Operator

Your next question comes from the line of George O'Leary with Tudor Pickering Holt. Your line is open.

George O'Leary -- Tudor, Pickering, Holt & Company -- Analyst

Good morning, guys.

Jenniffer Deckard -- President and Chief Executive Officer

Good morning, George.

George O'Leary -- Tudor, Pickering, Holt & Company -- Analyst

Jenniffer and Andrew, just curious how we should think about margins for the energy segment as we head into the fourth quarter and the moving pieces on the pricing side. It sounds like you said prices down $9 a ton. And then marrying that up with you are shattering some mines taking some costs out of the system. So with those two moving pieces, just any more granularity you could provide on the margins quarter over quarter for the fourth quarter would be very helpful.

Andrew Eich -- Chief Financial Officer

Sure. So yes, as we said, George, we -- our reported gross margin per ton is about $13.60. We talked about a number of items that impacted those results that added up to about $3.80 per ton. I think pricing, we averaged $6 for the third quarter.

But as we exited that quarter, we were $9 below that level. I do think we're going to see some cost savings, particularly as we ramp up our West Texas facilities as well as consolidate our capacity into our larger Northern White facilities. But that will be offset part -- that will be offset somewhat by the fact that we're expecting lower Northern White volumes as we move through the holiday season and have a higher fixed-cost overhang.

George O'Leary -- Tudor, Pickering, Holt & Company -- Analyst

OK. That's helpful. And then following on to Kurt's prior question. With regards to the contracts, is -- are the contracts for the in-basin mines you started up  -- I realize the overall composition is, you have a lot of market-based pricing and index-base pricing -- but just bifurcating Northern White versus the in-basin sand mines, are the contracts notably different? Do you have more fixed-price contracts with those as a percentage of total for those in-basin mines? Or is it exactly apples-to-apples with Northern White or approximately apples-to-apples with your Northern White contracts?

Jenniffer Deckard -- President and Chief Executive Officer

We think we have a higher -- of our percentage of contracts that are fixed in nature, there's a higher percentage of those in local sand versus Northern White.

George O'Leary -- Tudor, Pickering, Holt & Company -- Analyst

All right guys. Will turn it back over. Thanks very much for the color.

Jenniffer Deckard -- President and Chief Executive Officer

Thank you.

Andrew Eich -- Chief Financial Officer

Thank you.

Operator

Your next question comes from the line of Mike Urban with Seaport Global. Your line is open.

Michael Urban -- Seaport Global Securities -- Analyst

Thanks. Good morning.

Andrew Eich -- Chief Financial Officer

Good morning, Mike.

Michael Urban -- Seaport Global Securities -- Analyst

Just want to make sure I had kind of the market expectations right. So you had said that you felt you exited the quarter -- third quarter, kind of, 80 million to 85 million ton run rate for the industry and then expected another 15% to 20% decline sequentially. I guess it's a little apples and oranges because it's kind of a point in time versus an average. I guess that would imply something in the 70-ish million tons kind of exit rate for the industry.

Is that roughly what you're thinking?

Jenniffer Deckard -- President and Chief Executive Officer

Yes, Mike. That does line up with our thinking. It's is the low 70 million tons for the fourth quarter. And much of that is going to be influenced in the second half of the fourth quarter around the holidays.

Michael Urban -- Seaport Global Securities -- Analyst

OK. And just, given that low exit rate, I mean, do you have a view on what next year looks like, just recognizing the timing of the ramp-up and completions is still kind of variable? But if you have any additional thoughts on that would be helpful.

Jenniffer Deckard -- President and Chief Executive Officer

Sure. Our forecast, based on all the elements that we put into that, is about 105 million to 115 million tons for the overall market.

Michael Urban -- Seaport Global Securities -- Analyst

OK. And do you feel like you're -- the actions you've taken capacity and idling some of the higher-cost facilities, you -- is that kind of what you're aligned for right now capacity-wise? Or do you have to take some additional actions to get to that kind of number?

Jenniffer Deckard -- President and Chief Executive Officer

No, we think that where we sit today with our volume utilization and where we see demand heading, and even if demand were to stay at today's level, as long as we continue to focus on cost, which our people are doing every day, we feel that we're -- we have the appropriate capacity. We also have the ability to flex some of our plants up and down. And so we wouldn't expect, with those underlying assumptions, we would not expect to see any further closures in 2019.

Michael Urban -- Seaport Global Securities -- Analyst

OK. Got you. That's all for me. Thank you.

Jenniffer Deckard -- President and Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of John Watson with Simmons Energy. Your line is open.

John Watson -- Simmons Energy -- Analyst

Thank you. Good morning.

Jenniffer Deckard -- President and Chief Executive Officer

Good morning, John.

Andrew Eich -- Chief Financial Officer

Good morning, John.

John Watson -- Simmons Energy -- Analyst

Jenniffer, on the last-mile side, can you speak to us about the silos you're using? Are you all manufacturing those in-house? Did you buy someone? Are you buying silos from someone and then renting them out? Any color on your strategy would be helpful.

Jenniffer Deckard -- President and Chief Executive Officer

Sure. So whether that -- whichever type of solution our customers are going to be requiring, we will be partnering with key partners on a lease basis. So trying to keep this to an investment-light approach. And so we would not be owning systems, we would not be manufacturing themselves -- manufacturing them ourselves.

John Watson -- Simmons Energy -- Analyst

OK. Got it. So fair to assume, you could use multiple different silo systems. Is that the right way to think about it?

Jenniffer Deckard -- President and Chief Executive Officer

That is the right way to think about it. Although I think we're making sure that we're choosing those technologies that we think are leading today.

John Watson -- Simmons Energy -- Analyst

OK. Understood. In terms of West Texas, can you give any color on either where market pricing is today or if profitability for your two mines are meeting your expectations now that they are up and running and selling sand?

Jenniffer Deckard -- President and Chief Executive Officer

Sure. So that -- it's very recent in our history. So we've just begun ramping those capacities up. But thus far, pricing is holding.

Now of course, for us, we're selling 100% of those capacities currently to contracted customers. So we're not participating in any of the spot market in West Texas. So for us, everything's meeting expectation.

John Watson -- Simmons Energy -- Analyst

OK, understood. And last one for me. In terms of profitability for the industrial business, do you have any expectation on how that could improve next year, what you're thinking about in terms of price increases and other ways to improve the returns of that business?

Jenniffer Deckard -- President and Chief Executive Officer

I think that, well, normally, and we would expect also into 2019, those will have, generally, GDP-type growth dynamics. However, we do think we have a few key opportunities where the organic growth in those markets are a little bit above GDP as well as we have some opportunities for investment. We've made some investments in 2018. We also have some opportunities in 2019.

So as we give our capital guidance, I think, as we move into the beginning of 2019, we'll give a little more guidance as we finalize that internally. So I would expect to see stronger margins from the cost side and GDP plus-type growth on the top side.

John Watson -- Simmons Energy -- Analyst

Great. Thanks, Jenniffer. I'll turn it back.

Operator

Your next question comes from the line of Chris Buoy with Wells Fargo. Your line is open.

Chris Buoy -- Wells Fargo Securities -- Analyst

Good morning. I just wanted a little more clarity on kind of a follow-up to the last -- on the last question. You mentioned that pricing was down about $9 versus the 3Q average, and I get that. You're not participating in the spot market, but you are variably priced in most of your contract.

Should we assume that that $9 is all driven by Northern White in that case? Or have you seen some shift down in the in-basin pricing? Just a little more clarity there.

Jenniffer Deckard -- President and Chief Executive Officer

Yes, sure. So the $9 is certainly relative to Northern White sand because that was the predominant of our volumes in the third quarter. So that was all third quarter relative.

Chris Buoy -- Wells Fargo Securities -- Analyst

OK. So the pricing that you're experiencing, let's say, right now versus in the average in 3Q for in-basin is pretty consistent?

Jenniffer Deckard -- President and Chief Executive Officer

Yes.

Chris Buoy -- Wells Fargo Securities -- Analyst

OK. And then just one more on the industrial segment. Just curious, what kind of organic opportunities you're pursuing in that business. Can you speak a little bit more to that?

Andrew Eich -- Chief Financial Officer

Yes. I can speak to that. So we've got a number of opportunities in our pipeline right now. We are evaluating growth opportunities in Mexico, particularly around glass and glass manufacturing.

We also are looking at a pretty robust environment down in the Southeast and are targeting -- looking at expansion opportunities for certain of our facilities as well as generally just deploying a commercial excellence strategy to move volumes from either legacy Unimin plants to legacy Fairmount customers and taking advantage of those cross-selling opportunities as and when we see them. And then we also think that the market itself is strong and supports price increases, which we would look to put forth in 2019.

Chris Buoy -- Wells Fargo Securities -- Analyst

OK. That's helpful. And maybe I'll sneak one more in. Just curious, some of your competitors have mentioned some issues with rail at this point, given the decline in demand.

I'm curious if you're experiencing any discrete costs related to railcar storage or anything like that embedded in those margin assumptions for the Northern White.

Andrew Eich -- Chief Financial Officer

Yes. We do -- we did incur some incremental costs related to railcar storage. We have a couple thousand cars in storage. So not that significant relative to our overall suite.

I think, as I mentioned earlier, we have a very laddered maturity schedule for our leased fleet, which gives us an ability to release cars pretty readily on an annual basis. So we would view these as more for a temporary cost while we resize the fleet as and when we need to.

Chris Buoy -- Wells Fargo Securities -- Analyst

OK. Thank you.

Operator

Your next question comes from the line of David Smith with Heikkenin Energy Advisors. Your line is open.

David Smith -- Heikkenin Energy Advisors -- Analyst

Thank you and good morning.

Jenniffer Deckard -- President and Chief Executive Officer

Good morning, David.

Andrew Eich -- Chief Financial Officer

Good morning, David.

David Smith -- Heikkenin Energy Advisors -- Analyst

Sorry if I missed this, but what level of volumes were you expecting to sell from your in-basin plants in the fourth quarter?

Andrew Eich -- Chief Financial Officer

So the total volume that we expect to produce and sell in the fourth quarter is going to be somewhere around 700,000 to 800,000 tons out of our in-basin facilities.

David Smith -- Heikkenin Energy Advisors -- Analyst

OK. Which, if you're going from about 4% of your mix in the third quarter of in-basin tons to closer to maybe 17% or so of the mix in the fourth quarter, presumably, that should have some positive offsetting impact relative to the $9 -- the pricing decline for the Northern White volumes?

Jenniffer Deckard -- President and Chief Executive Officer

Yes. So I think the $9 should be -- you should think about that in the context of Northern White. So as you think about bifurcating fourth quarter into Northern White and local sand, then $9 would apply to Northern White. That's correct.

David Smith -- Heikkenin Energy Advisors -- Analyst

So if there were -- if costs were to stay -- costs per ton were to stay relatively flat, and pricing was unchanged for in-basin volumes, then maybe is it fair to think about that that sequential margin decline outlook and maybe the mid-single digit range, the -- around $6 a ton?

Jenniffer Deckard -- President and Chief Executive Officer

Well, the other thing that I would mention is that we are still in ramp-up mode. So outside of the pricing, we would think that we should see a positive impact on the cost side. That said, if our volumes are flat, our Northern White Sands have held quite strongly in October, but we do expect a decrease in the second half of the fourth quarter. So those cost gains might be offset by under -- a lower utilization in our Northern White plants in the second half of the fourth quarter.

David Smith -- Heikkenin Energy Advisors -- Analyst

Great. Thank you very much.

Operator

[Operator instructions] Your next question comes from the line of Saurabh Pant, Jefferies. Your line is open.

Saurabh Pant -- Jefferies -- Analyst

Hi, Jenniffer and Andrew, it's Saurabh with Jefferies. So I had a question on the industrial side of things before I go to energy. We have been getting a lot of questions on the [Inaudible] Northern White volumes that are getting displaced by local sand, particularly in the southern basin, right, so the risk of that volume showing up on the industrial side of the market. Is that a real risk? Are you concerned about that? And how should we think about risk going forward?

Jenniffer Deckard -- President and Chief Executive Officer

Sure, Saurabh. So I think I would first start with, I mentioned several factors as to why we've been strong in the industrial, why we continue to believe that we're well-positioned there. But what I didn't mention that I think is very important is the industrial markets really do have a very big influence by proximity to your customers. So the location of those plants, you are constrained by the amount of miles that you have to transport the product.

So that is also something. If you look at our footprint, and you look at, especially around that Southeast footprint that is located very near to those customers with very specific product specifications. So we think it will be challenging for displaced -- for much of the displaced frac sand to address those markets, which are a significant component of our industrial margins as is Mexico.

Andrew Eich -- Chief Financial Officer

Yes. The other thing I'd add to that is, the core of our industrial business is served, our customer base is -- consists of very large blue chip-type companies we've been doing business with for decades. They are heavily reliant on us for providing products that are specific in nature, whether its size, shape or chemistry. It has to be the same spec every day, on time, and that consistency of quality and reliability is something that really is a benefit to companies like ours who've been doing this for long as we have.

So it makes those barriers a bit difficult if you're not proven in that industry.

Saurabh Pant -- Jefferies -- Analyst

OK, that makes a lot of sense. Thanks to that color. And then related to that, I think, Jenniffer, you have said that in the past, that you would try to leverage the coating technology from the legacy Fairmount side and then, obviously, the volume for the substrate, particularly in the Southeastern market from the legacy Unimin side, right? And you would try to make some more headway on the value-added products side in the Southeast industrial market. Maybe you can give us a little more color on that, and how do you plan to progress on that in 2019?

Jenniffer Deckard -- President and Chief Executive Officer

Thanks, Saurabh. I would say that our industrial commercial groups have spent a significant amount of time together over the last two to three months, really evaluating those opportunities. So as we look forward, and we talk about the synergies, the synergies that we talk about our exclusive to cross-selling opportunities. So while those are not going to be realized at a significant percentage of our total business, but we think that we're going to be making some really good progress on those in 2019.

And as we evaluate our capital investment opportunities, we'll be probably investing in those for the second half of '19.

Saurabh Pant -- Jefferies -- Analyst

OK, OK, OK. No, that's useful color. And lastly, Andrew, for you. I think you did say there are no covenants on the term loan, right, but I think there was a covenant in the revolving credit facility.

I know it's not drawn, right, so it's not a big issue. But how should we think about that going forward? Because the way earnings are compressing on the energy side, there's a risk that you would rip that covenant, right? I know it's not a liquidity issue, right, but how should we think about that? And do what you plan to do about that?

Andrew Eich -- Chief Financial Officer

Yes. So we're pretty comfortable with our ability to service our debt. Our revolver, the members of our revolver are relationship partners. And so to the extent that we see leverage levels rise, we'll work with them.

I mean, I feel very comfortable. We have plenty of liquidity as an organization to meet our obligations. And importantly is that that term loan B is not due until 2025 and is covenant light. So we're -- we've only tapped our revolver for letters of credits, and we're not -- we don't have plans to utilize it in the near term anyway.

So I feel pretty good about it.

Saurabh Pant -- Jefferies -- Analyst

OK. That's good color guys. I'll turn it back. Thanks.

Operator

Your next question comes from the line of Harry Plans with Bank of America Merrill Lynch. Your line is open.

Harry Plans -- Bank of America Merrill Lynch -- Analyst

Just a few quick ones. Can you talk about mine gates spot pricing in Northern White, where is it today and also what mine gates pricing is on the Permian?

Jenniffer Deckard -- President and Chief Executive Officer

Sure, good morning, Harry. So we mentioned that our pricing into -- moving into the third quarter would be down 9. But as we've gone through, thus far, in the fourth quarter, FOB mine pricing Northern White has been relatively flat. We do think that there is a little bit of pressure, although all of that pressure on pricing has really dissipated in the fourth quarter.

But there may still be some downward pressure, we'll -- that remains to be seen yet for the second half as we go into the holidays. As we mentioned in the -- on the in-basin and local sand, we're selling to mostly contracted customers, and they're taking all of the volumes that we can supply them. And so we can't really comment on the spot pricing in the Permian.

Harry Plans -- Bank of America Merrill Lynch -- Analyst

Understood. And as that contracted price in-basin lower than it was as you exited 3Q?

Jenniffer Deckard -- President and Chief Executive Officer

You're talking about for Northern White sand?

Harry Plans -- Bank of America Merrill Lynch -- Analyst

Sorry, for in-basin, Permian sand.

Jenniffer Deckard -- President and Chief Executive Officer

I think that we've -- everything has been holding up pretty solid, thus far, in the fourth quarter. So we haven't seen that.

Harry Plans -- Bank of America Merrill Lynch -- Analyst

OK, got you. And turning to cost, fixed costs were kind of mentioned earlier. Can you talk a little bit about the associated fixed costs around your logistics network and potential negative absorption as Northern White volumes fall? If there's any numbers you can put around that?

Andrew Eich -- Chief Financial Officer

Sure. Yes. We had -- our costs were impacted by a couple of dollars as a result of railcars, excess railcars and storage. But other than that, we also had a -- we did have facilities open that we recently idled that saw limited volumes and so that actually contributed to our cost.

As we mentioned, as we think about fourth-quarter costs, I think some of those headwinds will go away. We still are ramping up some facilities at Seiling. But on the flip side, you'll see West Texas volumes improved, which will improve the cost positioning in the Permian. But as Jenniffer mentioned, we do anticipate seasonal decline, particularly for the Northern White volumes as we move through the holiday season.

And that's the decline will result in higher operating costs at our Northern White facility. So we think net-net-net, we're probably going to be relatively flat, Q3 to Q4.

Harry Plans -- Bank of America Merrill Lynch -- Analyst

OK. And how much of -- should we expect similar amount of start-up costs in 4Q?

Andrew Eich -- Chief Financial Officer

Yes. It's difficult to say. It's probably going to be the lower given that it's -- we're ramping up a much smaller facility relative to the 6 million tons that we've been ramping in the third quarter in Texas.

Jenniffer Deckard -- President and Chief Executive Officer

And I think -- I just want to expand on Andrew's comment. So I think your original question, I had a little bit of trouble hearing you. I think your original question was the per ton fixed cost around our logistics, and Andrew had mentioned that earlier relative to the logistics only in third quarter, that was about $0.50 on excess railcars.

Harry Plans -- Bank of America Merrill Lynch -- Analyst

OK. Got you. That's very helpful. Thanks so much, guys.

I appreciate it.

Operator

This completes the time allotted for our Q&A section. I would now like to turn it back over to the Covia team for closing remarks.

Jenniffer Deckard -- President and Chief Executive Officer

OK. Thank you, Jack, and thank you all for listening and participating today. We're looking forward to meeting many of you over the coming few months. Hope all of you have a great day.

Thanks so much.

Operator

[Operator signoff]

Duration: 51 minutes

Call Participants:

Matthew Schlarb -- Director of Investor Relations

Jenniffer Deckard -- President and Chief Executive Officer

Andrew Eich -- Chief Financial Officer

Kurt Howee -- RBC Capital Markets -- Analyst

George O'Leary -- Tudor, Pickering, Holt & Company -- Analyst

Michael Urban -- Seaport Global Securities -- Analyst

John Watson -- Simmons Energy -- Analyst

Chris Buoy -- Wells Fargo Securities -- Analyst

David Smith -- Heikkenin Energy Advisors -- Analyst

Saurabh Pant -- Jefferies -- Analyst

Harry Plans -- Bank of America Merrill Lynch -- Analyst

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