After completing the merger between Fairmount Santrol Holdings and Unimin back in June and changing its name to Covia Holdings (CVIA), we got to see the financials of the combined entity for the first time. While there are some funky numbers because the deal was closed during the second quarter and because there were several merger-related expenses, the underlying results at Covia look promising.
Here's a brief review of Covia's most recent results and what investors should make of this newly formed frack sand and industrial aggregate company.
By the numbers
Since the deal was completed in June, Covia's official results for the quarter include only a partial contribution from Unimin. For comparison's sake, though, these results are on a pro forma basis for the current and all preceding quarters, with the exception of earnings per share.
|Metric||Q2 2018||Q1 2018||Q2 2017|
|Revenue||$712.4 million||$643.2 million||$557.3 million|
|EBITDA||$97.3 million||$139.6 million||$112.1 million|
|Net income||$19.8 million||$65.5 million||$38.0 million|
Before you get too concerned about the sharp drop in profitability between this quarter and the prior one, keep in mind that management spent about $63 million in the quarter for the integration of Fairmount and Unimin. Covia reported that after adjusting for integration-related expenses, pro forma EBITDA for the quarter would have been $179 million.
From an operations standpoint, the company seemed to be progressing rather well, as volumes for its industrial segment and energy segments were flat and up 15%, respectively, over the same time last year on a pro forma basis. Management also noted that its two regional frack sand facilities in the Permian Basin started operations in July, and that its new Oklahoma sand mine to supply customers in the Woodford shale is on schedule.
What management had to say
As part of the company's press release, CEO Jenniffer Deckard gave a brief outlook on both the industrial aggregate and frack sand businesses, and management's plans as the company continues to work through the integration process.
As we move into the second half of the year, the outlook for the Industrial markets that we serve remains steady, and our teams continue to explore cross-selling and other attractive growth opportunities as a result of our now combined product and operational footprints. Within the proppant market, continued supply growth has begun to outpace the growth in demand, which will create pricing and volume pressure. We remain committed to capturing synergies, growing our total solutions offerings, and leveraging our industry-leading capabilities to outperform in the market.
Management could be onto something here
Despite the less-than-stellar stock performance since the merger, Covia's second-quarter earnings results looked pretty good. Even though it didn't begin operations at its Texas facilities until July, it was able to increase volumes sold and increase the gross margin per ton sold to $29 on an adjusted basis. Considering that its two largest peers, U.S. Silica Holdings and Hi-Crush Partners, have regional sand facilities running and last-mile logistics services to boost gross margins, Covia's margin per ton compares rather favorably.
It's also worth noting that, even after raising $1.6 billion in debt to finance the deal and restructure both Fairmount's and Unimin's debt, its balance sheet doesn't look too bad. If we assume that it can achieve similar levels of EBITDA excluding merger costs as it did this past quarter, then its debt-to-EBITDA ratio would be in the 2 to 2.5 range, which is respectable.
The only question left for Covia is how will shareholders benefit from the merger? Both U.S. Silica and Hi-Crush have begun dividends or share repurchase programs because they are throwing off plenty of excess cash today. If management can show in the next quarter or two that Covia can also generate loads of cash and returns it to shareholders, then it's easy to imagine the gaining considerably from here.