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Covia Holdings Corporation (NYSE:CVIA)
Q1 2019 Earnings Call
May. 9, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, welcome to the Covia First Quarter 2019 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. (Operator Instructions) 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, Investor Relations

Thank you, Emily. Good morning and welcome to Covia's first quarter 2019 earnings conference call. Before we begin, I wanted to ensure everyone is aware that we issued a press release this morning announcing that Jenniffer Deckard has resigned as President and CEO following our board's decision to take a different leadership direction.

As a result, our Board Chairman Rick Navarre has been appointed Interim President and CEO will be on today's call. Joining Rick will be 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 and this morning's press release.

We would also like to remind you that during this call, we will provide 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 periods prior to June 1, 2018, 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, 2018. Reconciliations to reported numbers have been included in our earnings release issued this morning.

Now, to begin, here's our Interim President and CEO, Rick Navarre.

Richard A. Navarre -- Chairman of the Board of Directors and Interim President & Chief Executive Officer

Thank you, Matt and good morning everyone and thank you for joining us today. I'm pleased to be speaking with you today as Covia's Chairman and in my new role as Interim President and CEO of Covia. Before we review the results for the first quarter and our outlook, as Matt had mentioned, we announced the CEO transition this morning.

I first want to take a minute to thank Jennifer on behalf of the Board for her extraordinary contributions over her career at the company. Jennifer played an instrumental role in the creation of Covia, bringing two leading organizations together through a transformative merger, while at the same time leading Covia through a challenging market environment. Her dedication to the company and our people will have a lasting impact.

Some background about me. I have served as Covia's Chairman of the Board of Directors and Chair of its Executive and Audit Committee since the company's creation in June of 2018. I have more than 35 years experience in the mining and energy industry, including nearly 20 years with publicly traded Peabody Energy Corporation where I held a number of executive roles, including President, Chief Commercial Officer and Chief Financial Officer. I'm experienced in the mining and energy industry and I understand its opportunities as well as its unique challenges.

In my time as Chairman of Covia's Board, I've had the opportunity to get to know our leadership team, its assets very well. And I'm confident that we have the right assets, and more importantly, the right people to execute our strategy and to succeed and be the leader in this market. The Board has commenced a search process to identify a permanent CEO to lead the company. In the interim I'm committed to serving as Chairman and Chief Executive Officer until a permanent successor is identified. However, I will tell you that I will not be a caretaker. My role is to drive improve performance and execute our strategy at an accelerated pace.

We continue to believe that the best way to create shareholder value is to optimize the performance of our assets, maximize free cash flow generation and improve our balance sheet. We believe reducing leverage is the fastest way to deliver value to our shareholders over time. We will also provide -- we will provide the company the flexibility to pursue value-added opportunities for growth or margin enhancement. This has been the foundation of Covia's strategy since the merger and that strategy remains consistent at its core and it is unchanged. What I expected to change is the fact that as a CEO, the pace of execution of that strategy will accelerate and we'll take a number of actions to improve on our execution of that strategy. Let me share some of those actions with you.

So, first in our Energy segment, our market conditions have changed significantly over the last year as you are well aware, forcing us to rethink how we position our business. We have critically evaluated the long-term competitiveness of our Northern White and resin asset portfolio to assure these assets can generate positive cash flow at any point in the cycle. I believe this is core to our long-term success. We need to have assets that make money in all market conditions.

Toward that end, we have idled or reduced production capacity by more than 9 million tons annually, including our Maiden Rock and Roff resin plant which we announced internally last night. These actions are necessary to ensure we have the lowest cost and most competitive assets in the industry.

Second, we need to ramp up our new in-basin plants to their stated capacity levels as quickly as possible. We expect that our plants will reach this level by the end of the second quarter and we're targeting 80% to 85% of nameplate capacity of the 8 million tons per year capacity that we have in those plants at utilization for these very important assets. This should have an immediate and positive impact on revenues, costs, and profitability.

Third, we are deploying cross-functional teams across the business to optimize the performance of our Energy assets, Industrial assets and support functions to drive unit and cost improvements. Our teams are intensely focused on these opportunities and are actively executing on a number of initiatives. Our focus on efficiency and continuous improvement will be a core driver of better performance and will accelerate our efforts.

Fourth, we're targeting inefficiencies on our balance sheet with a goal to optimize and lower working capital and extract that cash from the business to be deployed elsewhere.

With that overview and introduction, I'd now like to turn to our first quarter performance. At a high level, the first quarter was in line with our expectations coming out of a very soft fourth quarter. The key takeaway is that we are not satisfied with that performance, yet we are encouraged by strengthening markets and cost performance that we saw as we exited the quarter.

Let's take a look at the first quarter segment trends and I'll begin with Industrial. Overall, our volumes totaled 3.6 million tons, which was consistent with the first quarter of 2018. Some of the positive end market trends we experienced in the back half of 2018 continued in the first quarter of 2019, namely strengthened glass markets, and in particular, Mexico, slightly offset by weakness in our ceramic markets.

Our building products also experienced seasonally slower results. However, the conditions of building products have improved as we exited the first quarter and we expect good results in the second quarter as conditions and weather improves.

Turning to the Energy segment, fourth quarter demand softness lingered into January and February, but we did see demand for profit increase notably in March. We believe that annualized profit demand in the first quarter was somewhere in the mid-70 million ton per year range, which is slightly better than what we saw in the fourth quarter. We also saw much better demand in March and we estimated we exited the quarter close to an 80 million ton per year pace, which positions the second quarter to be significantly stronger if we can continue at that level.

We finished the first quarter with volumes of 4.4 million tons, which was a 2.2% sequential increase. The stronger demand also allowed us to institute modest price increases for Northern White products toward the end of the first quarter. At our local plants, we made significant progress in addressing the operational issues that we've discussed with you earlier. This will also help not only volumes but also per ton cost trends late in the quarter. And what we're seeing local spot prices for local sands that are slightly -- that are certainly down over time, Covia is largely insulated through our contracted position in local sands.

Now I'll turn the call over to Andrew who will cover the financials and performance in more detail.

Andrew Eich -- Executive Vice President, Chief Financial Officer

Thanks, Rick. Our first quarter revenues totaled $428 million, a 3% decrease from the fourth quarter, driven primarily by product mix and pricing declines in our Energy segment. Reported gross profit totaled $67 million in the first quarter, which includes $2.1 million of non-cash charges related to railcar leases assumed at the closing of the merger. In January, we adopted the new lease accounting standard, which reclassified these costs from amortization expense into cost of sales. Accordingly, we expect to incur similar amount of non-cash charges in our Energy segment each quarter for the next several years.

Gross profit during the quarter was negatively impacted by $2.1 million of costs at our Voca, Texas facility, at which we completed the idling process in the first quarter, and just under $1 million in non-cash purchase accounting inventory charges. Reported gross profit decreased $15 million from the fourth quarter. The decrease in gross margin was driven by reduced local sand prices, higher operating costs at our Northern White sand plants due primarily to severe winter weather, which we spoke about and increased rail rates. Our operating costs steadily improved throughout the quarter and exited at levels lower than our Q4 or Q1 averages.

Moving to segment performance, Industrial first quarter 2019 revenues were $192 million, a 1% decrease from the first quarter of 2018. This decline in revenue was driven by reduced freight-related revenues, for which Covia does not earn any margin. This decline was mostly offset by price increases on our products of approximately 2% over the first quarter 2018 levels.

Industrial gross profit was $52 million and included $0.5 million in non-cash inventory charges related to purchase accounting. This compares to $55 million in gross profit for the first quarter of 2018. As market demand for proppant has decreased from first quarter 2018 levels, utilization rates at our hybrid plants, which supply both energy and industrial customers has fallen and increased unit production costs, which in turn negatively impacted Industrial segment results in Q1. Additionally, our product mix in the first quarter was more heavily weighted toward glass and less toward ceramics compared to 2018, which also served to negatively impact margins.

In our Energy segment, revenues totaled $236 million in the first quarter, a sequential decrease of $19.5 million. This decrease was due primarily to mix shifts from Texas Gold toward local sand sales, as well as local sand prices. As Rick noted, we implemented a price increase on our Northern White Sand at the end of the quarter.

Our reported Energy gross profit was $15 million for the quarter, or approximately $3.40 per ton. These figures include a combined $4.6 million in costs or approximately $1 per ton, resulting from non-cash charges associated with the new lease accounting standard, losses at our Voca facility and purchase accounting charges. The overall decline in sequential profitability was mainly a result of lower average selling prices, primarily local and sand prices and cost headwinds outlined earlier.

SG&A for the quarter was $42 million, which included $2.8 million of non-cash stock compensation expense. This represents a decline of $3.8 million from the fourth quarter of 2018 and was aided by improved synergy capture and expense reduction initiatives that we previously initiated.

Additionally, we recognized $4.3 million of customer forfeited prepayments into other income in the first quarter, which was not included in gross profits. Adjusted EBITDA was $35 million for the quarter, which includes $2.1 million losses at our Voca facility and just under $1 million in non-cash purchase accounting inventory charges. First quarter tax benefit is $4 million. For the full year, we estimate our effective tax rate to be approximately 8% due to an expected taxable loss in the US offset by income tax expense on projected profits in foreign jurisdictions in which we operate.

However, as we have previously discussed, net operating loss carry forwards should limit any US tax payments in the near future. We expect to receive over $20 million in cash tax refunds during 2019 and we received $6 million of this in the first quarter. Capital expenditures were $33 million in the first quarter, primarily for the completion of our local sand facilities and our Canoitas expansion in Mexico.

Our full-year 2019 capital expenditure forecast remains between $80 million and $100 million. We ended the quarter with $225 million in liquidity, including $37 million of cash and $188 million in availability on our revolver. The decrease in our cash balance was driven primarily by higher capital spending during the quarter, increased working capital, and the payment of 2018 variable compensation.

Our increase in working capital during the quarter was driven by a seasonal increase that we see each and every year in the first quarter as well as temporary increases as a result of integration activities throughout the quarters. Our cash position has been steadily increasing from March, and as of yesterday, we had approximately $90 million cash on hand.

Importantly, with integration efforts nearing completion, we expect to steadily improve our working capital for the rest of the year, as Rick outlined. Total debt, as of March 31, was $1.61 billion. And, as a reminder, the term loan that we have matures in 2025 and does not have any covenants.

Now I'll turn the call back over to Rick to cover current market dynamics.

Richard A. Navarre -- Chairman of the Board of Directors and Interim President & Chief Executive Officer

Thank you, Andrew. Starting with the Industrial markets, most of the end markets are growing similar to GDP levels. The glass markets in Mexico remain strong and we expect this to continue. However, the downside in the Industrial is that our ceramic tile markets remain a bit softer throughout North America as domestic producers face pressure from international competition and substitution with luxury vinyl tile. As I noted earlier, the building product sales were negatively impacted in the quarter primarily by weather, but we expect that to rebound as lower interest rates and improvement in weather support continued construction and home remodeling activity.

Additionally, we expect to see normal sequential increase in demand during the second quarter in our end markets that are more dependent upon the seasonal factors such as sports and recreation. On the cost side for the Industrial segment, toward the end of the first quarter, we started seeing cost improvements, not only from improved utilization in our hybrid plants, but also from initiatives that we've taken to reduce costs across our operations. We've seen that cost improvement continue into April combined with seasonal increase in demand. So we expect profitability improvement in the Industrial segment as we move into the second quarter.

Moving to the Energy segment, demand has developed in line with the forecast that we provided earlier in March. The positive momentum in overall profit demand for March has continued into April. We're forecasting second quarter annualized total market demand to be in the high 80 million ton per year range, which represents a solid increase over the averages we experienced in the first quarter. While demand is increasing in all basins, we're expecting growth in the Northeast and Bakken to outpace other basins as weather conditions continue into the spring.

Turning to the supply side, we expect Northern White supply to be relatively stable throughout the quarter as some higher capacity is either derated or completely idled. But it's expected to be offset by some higher production from other plants as weather conditions improved and they improved their utilization. So we believe Covia's capacity reductions in the Northern White Sand markets are necessary both to balance the market and improve Covia's cost position as we discussed earlier.

The good news is we are seeing improved supply and demand dynamics, particularly in fine mesh grades. This has allowed us to implement a $1 to $2 per ton price increase on Northern White Sand. The price increase demonstrated in the Northern White market has stabilized off of its lows. However, we still believe pricing remains unsustainably low for the current overall market supply. We've been asked often at what price would we reactivate the Northern White capacity. I'd tell you the short answer is we will need to see much higher market prices and stronger sustainable demand over the longer period before we consider reactivating any Northern White capacity.

Turning to the local markets. Most local sand plants in the Permian appear to be operating at varying levels of capacity utilization. We do not expect any meaningful new capacity additions beyond what's already been announced in the Eagle Ford and Mid-Con. We expect a handful of new plants to come online to the third quarter of 2019. However, we believe some of the projects that have been announced may have been delayed or reduced in size or canceled. We'll keep a close eye on that and we will keep you posted.

So, in summary, we are expecting higher volumes across both segments. We're expecting the lower unit costs due to our asset rationalization. We're expecting higher prices for Northern White Sand. We expect our in-basin plants to have improvements in volumes, improvements in cost and therefore profitability. And we also expect positive operating cash flow from working capital initiatives and lower capital spending. I think, all this will result in stronger second quarter profit and stronger cash flow in the second quarter.

Now I'll turn the call back to Andrew to cover guidance.

Andrew Eich -- Executive Vice President, Chief Financial Officer

Thanks, Rick. So starting first with Industrial, for the second quarter, we are affirming our previous volume guidance of 3.8 million tons, which is similar to the second quarter, which is similar to the guidance we provided last quarter and similar to the 2018 second quarter. We are also affirming our previous guidance range for Energy with volumes expected to be 5 million to 5.3 million tons. Recently Covia also amended the terms of the supply agreement with one of our long-standing energy customers. And as part of this resolution we received $23 million in cash in May, which reflects the combination of 2018 shortfall payments -- prepayments on 2019 future purchases as well as fees associated with reducing 2019 obligations to levels that are really more consistent with our customers current demand.

Under the terms of that amended agreement we will receive an additional $21 million per year through 2024, approximately half of which reflects prepayments toward annual volume commitments and the remainder represents compensation for reduced volume commitments over the remaining term of the agreement. We expect to reflect approximately $3 million per quarter of income related to this amendment through 2024.

We are pleased with this outcome of this resolution because we think it better aligns to our customers needs, while at the same time incentivizes the purchases of future volume as well as compensate Covia for the reduced volume commitments, which were under the previous agreement. We expect our Energy margins in the second quarter in total to be approximately $3.50 to $4 per ton higher compared to our reported first quarter segment results. This will be driven by improved Northern White Sand pricing and lower costs across all our facilities both in Northern White as well as the local sand plants.

For the full year, we continue to expect that SG&A will be in the range of $160 million to $170 million which includes approximately $10 million in non-cash stock compensation expense. We are also maintaining full-year CapEx guidance of $80 million to 100 million as I mentioned earlier.

So that concludes our prepared remarks this morning. So Emily, you can open up the line for questions.

Questions and Answers:

Operator

Thank you. (Operator Instructions) Our first question comes from the line of John Watson with Simmons Energy. Your line is open.

John Watson -- Simmons Energy -- Analyst

Thank you. Good morning.

Richard A. Navarre -- Chairman of the Board of Directors and Interim President & Chief Executive Officer

Hey John.

John Watson -- Simmons Energy -- Analyst

Hey. Rick, I want to start with you in the sheet you mentioned briefly strategy and your outlook and how you're looking to improve results. Can you give us any more color on specific changes you'd like to institute and maybe just a fuller outlook on the different businesses moving forward from your purview?

Richard A. Navarre -- Chairman of the Board of Directors and Interim President & Chief Executive Officer

Sure, John. I think, you know, what I said in the remarks was that, you know, from a strategy standpoint, we remain very consistent with the strategy that we put together at the beginning of the merger. We want to operate safe low-cost operations and generate strong cash flow from those operations. And in doing that that will allow us to reduce debt rapidly as we move forward and strengthen the balance sheet.

When we first did the merger you know our debt levels were at $1.6 billion or certainly in range what we expected. The market has changed quite a bit. So we need to react to what's changed in the market and move faster to institute changes and realign our portfolio to make sure we're running low-cost assets that are profitable in all market conditions.

And we're doing that. We're embarking on that. What I'm going to change is how fast and how quickly we do that, we need to make decisions, we need to move forward decisively as an organization and we need to bring some new ideas into the organization as well as we do that is because we tried to bring about change as we go forward. I think we can do that. We've got a great team here and we've got a great set of assets. And you'll hear more about that in the period to come. But I'm very excited about the opportunity. I think the company has a very bright future.

John Watson -- Simmons Energy -- Analyst

Okay, perfect. That's great. And looking ahead, the Northern White strength that we've seen recently, I completely agree with the off-take. As we look further in the year in Q3, Q4 who knows, but do you think that Northern White strength, does that continue through the third quarter, or is there a chance for budget exhaustion to erode some of the strength that we've seen recently?

Andrew Eich -- Executive Vice President, Chief Financial Officer

Yes, it's a great question John. I think that you know there's been a lot of discussion around budget exhaustion and how that's going to flow through the entire Energy business. As it relates to proppant, you know remember that producers really need to keep production levels as high as possible and so that requires completion activity. So as we think about what's going to be the main drivers behind the budget exhaustion, I think it's important remember there's been a significant amount of deflation in costs for E&Ps, whether it's sand prices or service pricing.

And so that's going to be a natural benefit to E&P budgets. Right now based on feedback from our customers, crew counts have picked up in the second quarter. They're expected to remain high through the summer and into the third quarter. I think you always see a bit of seasonality in the fourth quarter and it just remains to be seen whether or not that's going to be similar to Q4 of last year or will it be stronger. So, it's a bit early to tell. But as Rick said, we'll certainly keep you posted.

John Watson -- Simmons Energy -- Analyst

Okay great. And just one more if I can squeeze it in, in the second quarter, should we expect Seiling and Kermit to operate at a normalized run rate, normalized profitability?

Andrew Eich -- Executive Vice President, Chief Financial Officer

I think you'll see Crane and Kermit operate near those levels. I don't think we'll get fully to those levels. As Rick mentioned, we're going to get to our stated nameplate capacity by the end of the quarter. And so you're going to see that ramp up throughout the quarter.

John Watson -- Simmons Energy -- Analyst

Okay great. Thank you all for the color. I'll turn it back.

Andrew Eich -- Executive Vice President, Chief Financial Officer

Thanks John.

Richard A. Navarre -- Chairman of the Board of Directors and Interim President & Chief Executive Officer

Thanks.

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 & Co. -- Analyst

Morning guys.

Richard A. Navarre -- Chairman of the Board of Directors and Interim President & Chief Executive Officer

Morning George.

Andrew Eich -- Executive Vice President, Chief Financial Officer

Hi George.

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

Any color you guys could share on just where spot prices sit for in-basin Permian sand today versus maybe where we were Q4 last year, Q3 last year, whatever time frame you like, just quantifying the magnitude of the decline would be super helpful.

Andrew Eich -- Executive Vice President, Chief Financial Officer

Sure. I think on our last call few weeks ago we talked about our own pricing being down $10 to $12 over the last six months, so that that was color going through Q1. Pricing has held up pretty well in Q2 for Covia. We still see some softening expected. But I think that's going to be more than offset by cost improvement of those assets. We're not currently selling a whole lot of volumes at spot, but you know to answer more specifically your question, you know supply demand dynamics are certainly not as favorable in the local markets as they are for Northern White Sand.

You have a flat cost curve generally speaking across the assets and so we have seen in the market spot pricing that can be low-20s or in cases high teens. It's hard to say whether or not that pricing is representative of where you'd contract millions and millions of tons, but you certainly will see fire sale selling with silos being full, operators will dump sand at lower spot pricing. And so I think that's influencing it a bit. So, I think we've got a fairly insulated position relative to those companies who don't have contracts or don't have relatively high 40/70.

The other thing I'd add is we also have a multi-plant portfolio, we've got assets in the north and the south as well as we offer a whole product suite. So operators, we are meeting those local sand and Northern White resin that's the value we can provide that others can't. So that gives us at least some benefit related to where other spot market transactions would be occurring.

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

That's helpful context. My next question will fit in with one of your latter statements in that, given you guys have that full product suite and a good geographic distribution of mines and transload facilities, how do you view that? Are you seeing any operators push back on the quality of the in-basin sand broadly in favor of sticking with higher crush strength, bet around this since curiosity, Northern White Frac Sand, or any of those discussions happening? And do you have any customers who seem hesitant to adopt the in-basin sand in various southern basins in particular?

Andrew Eich -- Executive Vice President, Chief Financial Officer

Yeah. So, I guess I'd answer that a couple of ways. That conversation has actually occurred even within the local sand market. We've gotten feedback that there's varying qualities of local sand, which has been an interesting comments we've heard in the market. So I'd say that and then I'd also say that as it relates to Northern White versus local sand, you definitely continue to hear customers concerned about the quality of Permian Sand, particularly as it relates to the Delaware Basin, which have deeper wells. We certainly have talked about at various conferences our views that the local sand is likely fit for purpose in Midland Basin, but we'll be unfit for the Delaware Basin due to well depth.

So there's certainly a dialogue going on there. We saw higher volumes into the Permian for our Northern White Sand and I think that is a representative, not just to the strengthening market, but also you know an indication that there's been some shifts in views for this. I think the leading edge thinking we see typically comes from the larger more integrated operators who are looking at the long term performance of a well and are valuing that performance over necessarily the cheapest cost to complete a well and that's driving some of the proppant recipes that they're pumping down-hole.

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

Great that's helpful. I'd sneak one more in if I could. Did you frame for us more or less what percentage of your Northern White volumes are actually still making their way into the Permian even as we have an oversupplied market there from an in-basin perspective?

Andrew Eich -- Executive Vice President, Chief Financial Officer

Yeah. So we don't disclose the exact percentages. It's certainly less than what it used to be. I would say that it's definitely meaningful, in the sense that it's a couple million tons per year at least.

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

Got it. That's helpful framing. Thanks Andrew.

Andrew Eich -- Executive Vice President, Chief Financial Officer

All right. Thanks George.

Operator

Your next question comes from the line of Chase Mulvehill with Bank of America. Your line is open.

Chase Mulvehill -- Bank of America -- Analyst

Hey, good morning. I guess, I wanted to come back to the Permian volumes and I didn't hear this. So I'm sorry if I missed it, but what were your Crane increment volumes in 1Q?

Andrew Eich -- Executive Vice President, Chief Financial Officer

So we did not disclose the Crane increment volumes. They were up relative to our Q4 volumes. So we saw rough volumes of say approximately a couple of hundred thousand tons higher.

Chase Mulvehill -- Bank of America -- Analyst

Okay. All right. And then how do you expect that to progress? You said you expect to be at full capacity by the end of 2Q. Was that right? On effective capacity, not nameplate.

Andrew Eich -- Executive Vice President, Chief Financial Officer

Yes.

Chase Mulvehill -- Bank of America -- Analyst

Okay.

Andrew Eich -- Executive Vice President, Chief Financial Officer

Yeah. So we should have full productive capacity by the end of the quarter. We won't -- we don't anticipate selling 100% capacity. You don't see that. What we've said is we'd be around 80%, 85% utilization be a good number to say.

Richard A. Navarre -- Chairman of the Board of Directors and Interim President & Chief Executive Officer

So that's of 6 million tons of nameplate capacity for both plants.

Chase Mulvehill -- Bank of America -- Analyst

Okay. All right. And then you know, 1Q free cash flow was a little bit light. Could you talk to free cash flow for the remainder of the year. Do you think you can actually get to generate free cash flow this year after a negative 1Q burn and including the payment that you're getting from a large customer?

Richard A. Navarre -- Chairman of the Board of Directors and Interim President & Chief Executive Officer

Certainly, yes. Certainly we had some unusual items in the first quarter. Capital carryover number impacted us heavily. We also had an ERP system implementation which slowed down our receivable collection effort. So we think we'll reverse those. Certainly, some of that and we will go to positive cash flow as we get to the end of the year. Andrew, you might want to give a little bit more detail.

Andrew Eich -- Executive Vice President, Chief Financial Officer

Yeah, I think one of the other dynamics at play is January and February were relatively light months from the sales perspective whereas March was very heavy month with a significant amount of our EBITDA generation occurred in March. And so that combined with more integration activities as Rick outlined caused a fairly significant decline in cash. We tried to highlight on the press release and in the prepared remarks that the cash balance has rebounded sharply since the end of the quarter. So we're just under $90 million in cash on hand you know after only a few weeks coming into the quarter. So we feel pretty good that we will be able to generate cash flow this year.

Chase Mulvehill -- Bank of America -- Analyst

And so the $90 million on the balance sheet, does that include the $23 million cash payment that you got -- that you are supposed to get in May.

Andrew Eich -- Executive Vice President, Chief Financial Officer

Yes it does.

Chase Mulvehill -- Bank of America -- Analyst

Okay. And then -- so working capital the rest of the year, should we think of it being additive to cash or neutral or how should we think about working capital the rest of the year?

Andrew Eich -- Executive Vice President, Chief Financial Officer

We've got a number of initiatives in place. We think that'll be positive as we exit the year for sure.

Chase Mulvehill -- Bank of America -- Analyst

Okay. Last one, on your last mile strategy, you know, could you kind of talk to your last mile strategy? It feels like that that's getting more airtime now from your competition and some other guys that are trying to really focus on the last mile. So just walk us through kind of how you see the evolution of your last mile strategy evolving over the medium term?

Andrew Eich -- Executive Vice President, Chief Financial Officer

Sure. So we've talked in the past about our view that last mile solutions are capital intensive businesses. They're going through a number of competing and rapidly changing technologies and that these dynamics suggest that solutions will ultimately have to compete on price. And our -- and are or very soon we will reach of the situation of oversupply.

From an investment perspective, we've kept our capital dry, opting instead to partner with providers rather than buying them. That provides a couple of things, one it provides optionality to Covia to partner with those companies that we believe have the best solution. It also provides optionality to the customer giving them the choice and ability to work with Covia on the solution that they want. And then last and not least, it keeps our capital investment relatively light, which we like in an environment where there's a fairly high degree of disruption.

We have put in place last mile systems. So we have put in place and are targeting around four to six systems in the second and third quarter. But it's not a core business for Covia. It's not something we expect to earn significant margin from given its asset-light nature.

Chase Mulvehill -- Bank of America -- Analyst

Yeah. And when you talk to your customers about last mile solutions, do they prefer boxes or silos?

Richard A. Navarre -- Chairman of the Board of Directors and Interim President & Chief Executive Officer

I would say it depends on the customer. Our general view is that the silos are a better option mainly because they are, from our perspective, they are safer. You can carry a higher payload when bringing the sand to well site. And they take up a smaller footprint relative to the boxes. But we do have customers who prefer boxes as well. So we're open to working with any last mile solution.

Chase Mulvehill -- Bank of America -- Analyst

All right. I am going to squeeze one real quick one and I apologize. So you said $1 to $2 per ton price increase for Northern White. Was that across all grains, or was that coarse grains, are you actually being able to push price in the fine grain, further with the light?

Richard A. Navarre -- Chairman of the Board of Directors and Interim President & Chief Executive Officer

Yeah. That's a blended average across all grades. We see the most significant tightness in the 40/70 market, followed by the 100 mesh. And then the coarse grade still have -- are still fairly soft, so that's across all grades the pricing guidance.

Chase Mulvehill -- Bank of America -- Analyst

Okay. I'll turn it back over. Thanks for letting me to ask a lot of questions.

Richard A. Navarre -- Chairman of the Board of Directors and Interim President & Chief Executive Officer

Thanks.

Operator

(Operator instructions) Our next question comes from the line of Chris Voie with Wells Fargo. Your line is open.

Christopher Voie -- Wells Fargo -- Analyst

Good morning. Just a couple of quick ones. First on the margin per ton guidance for Energy, I think you said up $3.50 to $4 in 2Q. Just to clarify, is that on the adjusted basis of $3.40 a ton? And then in 2Q after that you would expect another $2 million or so impact from the new lease accounting.

Andrew Eich -- Executive Vice President, Chief Financial Officer

Yes, so that's correct. So we have reported gross margin of $3.41 that includes the $2.1 million of the non-cash lease costs. And then we've provided guidance of $3.50 to $4 which would be an additive from that level.

Richard A. Navarre -- Chairman of the Board of Directors and Interim President & Chief Executive Officer

Combination of price and cost to get the additional margin.

Christopher Voie -- Wells Fargo -- Analyst

Right. And then in Industrial, I don't think you guided on margin per ton unless I missed it. What is the outlook? I assume, there is seasonal improvement for building products, and some tailwind on the cost side, but could you quantify how much margin per ton could move?

Andrew Eich -- Executive Vice President, Chief Financial Officer

Yeah. We didn't provide margin per ton guidance. I mean the way I would think about it you always see a seasonal growth versus the first quarter as weather improves and construction activity improves. So the better -- I think the better metric to look at would be the pro forma gross margin levels that we had in Q2 of '18. And our expectation is that we should be modestly positive to that.

Christopher Voie -- Wells Fargo -- Analyst

Okay. And then just one last one. So there's a lot of conversation about E&Ps evaluating what they're getting out of the in-basin sands. Have you noticed any customers where you're selling directly deciding to switch back to Northern White, like what -- how much activity is there on those lines?

Andrew Eich -- Executive Vice President, Chief Financial Officer

Yeah. So we've gotten feedback from a few sources that have either tested the material and opted to supply -- opted instead to go with Northern White Sand or have switched back to Northern White Sand in certain well types and geographies. It was fairly consistent with how -- with what we expected based on some of the work we've done in terms of where those locations are. It's not a clean opinion in the sense that all operators in particular areas are moving back one way or the other. It really depends on the philosophy of the operator. But what we've tended to see is that those operators who are more long-term focused on long-term well results will tend to value a combination of Northern White Sand, local sand and resins depending on what they're pumping or where they're producing wells.

Christopher Voie -- Wells Fargo -- Analyst

Okay. I understand this is difficult, but do you have any sense on where you think the Delaware Basin might shake out in terms of the mix of in-basin and Northern White supply, like if you have to handicap it right now?

Richard A. Navarre -- Chairman of the Board of Directors and Interim President & Chief Executive Officer

That's a great question.

Andrew Eich -- Executive Vice President, Chief Financial Officer

You know, I think that over the long run you should see continued favoring of Northern White Sand based on what we know right now. What's hard to say is when -- how long that will take for that dynamic to play out. But based on what we see and based on the customers that we talk to some of which have quite a bit of sophistication to them, they are pretty adamant on Northern White Sand.

Christopher Voie -- Wells Fargo -- Analyst

Okay. Thank you very much.

Andrew Eich -- Executive Vice President, Chief Financial Officer

Thanks.

Operator

That concludes our question-and-answer session at this time. I would like to turn the call back to Rick Navarre.

Richard A. Navarre -- Chairman of the Board of Directors and Interim President & Chief Executive Officer

Great. Thank you, Emily. And first let me say to the participants on the call thank you for your interest in Covia today. I look forward to updating you in the future on the progress on our important initiatives. I'd also like to thank our dedicated team at Covia of more than 3,000 people. Covia has a very bright future because of your unwavering commitment and because of you, I'm confident we will execute our strategy and create value for all of our stakeholders. So thank you. That concludes our conference.

Operator

This concludes today's conference call. You may now disconnect.

Duration: 42 minutes

Call participants:

Matthew Schlarb -- Director, Investor Relations

Richard A. Navarre -- Chairman of the Board of Directors and Interim President & Chief Executive Officer

Andrew Eich -- Executive Vice President, Chief Financial Officer

John Watson -- Simmons Energy -- Analyst

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

Chase Mulvehill -- Bank of America -- Analyst

Christopher Voie -- Wells Fargo -- Analyst

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