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Covia Holdings Corporation (CVIA) Q4 2018 Earnings Conference Call Transcript

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Covia Holdings Corporation (NYSE: CVIA)
Q4 2018 Earnings Conference Call
March 21, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

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

Matthew Schlarb -- Director, Investor Relations

Thank you, Leandra. Good morning, and welcome to Covia's Fourth Quarter and Full Year 2018 Earnings Conference Call. With us today are Jenniffer Deckard, our CFO 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 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 on the Investor Relations section of our website.

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Additionally, our commentary around periods prior to June 1st, 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 1st, 2018. Reconciliations to reported numbers have been included in our fourth-quarter press release, issued this morning. Now, to begin, here's our CEO and President, Jenniffer Deckard.

Jenniffer Deckard -- Chief Executive Officer and Vice President

Thanks, Matt, and good morning, everyone. We appreciate each of you taking the time to join our call today. We'll start this morning with an overview of our fourth-quarter results, and Andrew will then cover our financials. I'll provide an update on more recent market conditions and company focus, and then Andrew will conclude with our outlook.

We'll begin with a review of 2018, which was a significant year for Covia, including several key accomplishments. First on a pro forma basis, we sold 35.2 million tons and generated more than $2.3 billion in sales. We expanded our Canoitas facility in northern Mexico to meet the growing needs of our Mexican glass customers. We also commissioned three plants to provide 8 million tons of nameplate, local, in-basin production capacity to serve the energy markets. In support of these local plants, we've achieved our targeted levels of contracting more than 70% of that capacity with key strategic customers who are industry leaders.

And, our most significant accomplishment was bringing together two industry-leading companies to form Covia, all of which was made possible by the hard work of our dedicated team members and the committed support of our board of directors. I'm proud to say that we've made tremendous progress in integrating our business. Covia team members have concurrently achieved several important accomplishments that lay the foundation for current and future value creation. Some of these accomplishments include the complete integration of our sales, operations, and supply chain teams and their associated technology systems, and through today, we've integrated approximately 90% of our business by revenue into our consolidated ERP platform.

While there were many benefits from the combination, one of the primary drivers was to create a unique, flexible, and low-cost business model with balance and diversity both between our two segments and within each of our segments themselves. As proppant supply began to rapidly outpace demand in mid-2018, we underscored this flexibility when we quickly idled nearly 7 million tons of capacity within our Energy segment and consolidated production into our most efficient and competitive assets.

As overall market prices and volumes declined, we leveraged that network of assets to strengthen our competitive position and to grow market share. For 2018, our diverse and sizable Industrial segment posted solid overall revenues and generated very attractive cash flow throughout the year. However, despite this top-line growth, gross margins for our Industrial business were below our expectations due to a few key factors. First, our Mexican business posted solid growth in overall revenues, but was adversely impacted by above-average general cost inflation and, in particular, in utilities, a devaluation of the peso, and high interim costs prior to the full commercial expansion of our Canoitas facility.

In the U.S., we saw higher operating costs at many of our hybrid plants that serve both our industrial and our energy customers, particularly in the third and fourth quarter, as energy volumes fell quickly. Additionally, certain industrial sites had higher than normal stripping and contractor costs throughout the year. Our operations teams have made several adjustments to better align our capacity to overall market demand and to recalibrate those production sites that were impacted by higher costs in 2018, thus improving our cost position as we will move through 2019.

Turning to our Energy segment, we estimate overall market volumes to have declined nearly 20% sequentially in the fourth quarter, exiting at an annualized run rate in the high 60-million-ton range. Despite this sharp market decline, our volumes were down modestly, with 4.4 million Energy tons sold during the quarter, representing what we believe to be a meaningful increase in market share for Covia.

Several factors both positively and negatively impacted these results. First, our Kermit and Seiling facilities had slower-than-expected ramp-up, which impacted both our volume growth and our overall cost during the quarter. At Kermit, operational challenges associated with ramping the plant limited our production and our fixed-cost leverage, including an elevated cost of powering the plant with generators before connecting to the utility grid in November.

At Seiling, freezing weather delayed the plant completion and the scaling of production, resulting in lower sales volumes and higher costs. These issues have also persisted throughout most of the first quarter. However, we've achieved significant improvement in March, and we expect to reach our full production capacity by the end of the second quarter for all three of our local sand plants. And, importantly, we expect our costs to come in line with our long-term expectations, concurrent with this volume ramp.

Notwithstanding these challenges, our local sand facilities did continue to ramp up throughout the fourth quarter and sold over 700,000 tons during the quarter, which is an increase of over 500,000 tons compared to the third quarter. These volumes help to offset decreased volumes from our Voca plants, which we began to idle during the fourth quarter, as well as lower volumes from our Northern White facilities.

In addition to the incremental local capacity, our Northern White plants performed well in the fourth quarter relative to the overall market and contributed to our solid results. We continue to sell Northern White sand into every major basin, including those that have excess to local sand. And, with our low-cost facilities, balanced rail exposure, unit train capabilities, and expansive logistics network, we're well positioned to serve our customer base at a competitive overall price, gain share, and generate sustainable margins on our Northern White sand.

Finally, our cross-functional teams did an excellent job of understanding our customer needs and leveraging Covia's strengths in order to deliver the proper solutions to address those needs. We credit them for a solid fourth-quarter performance, particularly in light of the more challenging market conditions within the Energy segment. I'm happy to now turn the call over to Andrew to cover the financial results.

Andrew Eich -- Executive Vice President and Chief Financial Officer

Thanks, Jenniffer. Good morning, everyone. For the total company, fourth-quarter revenue totaled $441.3 million compared to $523.4 million in the third quarter. This sequential decline was due primarily to lower proppant pricing, while the typical seasonal slowdown in our Industrial business also had a more modest impact. Quarter gross profit totaled $81.8 million in the fourth quarter, which was a decrease from the third quarter of $117.8 million. The fourth-quarter figure includes $8.1 million in losses related to the ramping of production at our Seiling and Kermit facilities and $3.6 million in non-cash purchase accounting adjustments. The rest of the sequential decline was driven primarily by lower proppant pricing and fixed-cost leverage at our Northern White facilities.

Moving to segment performance and beginning first with Industrial, fourth-quarter 2018 revenues were $185.7 million, an increase of $3.7 million from the fourth quarter of 2017, aided primarily by higher average selling prices compared to 2017. Industrial gross profit was $50.5 million, and includes $1.1 million in non-cash inventory charges related to purchase accounting. This compares to $53.9 million in gross profit for the fourth quarter of 2017. In addition to the purchase accounting charges, and as Jenniffer also mentioned, costs at our hybrid facilities also increased due to lower energy volumes, which led to lower fixed-cost utilization.

In our Energy segment, revenues totaled $255.6 million in the fourth quarter, a decrease of $69 million sequentially. This decrease was due to a mix shift toward sales at the mine, which carry a lower average selling price, as well as reduced Northern White pricing. We believe market pricing for Northern White reached a bottom in early 2019. Energy gross profit was $31.3 million during the quarter, or approximately $7.20 per ton. These figures include $2.5 million in purchase accounting charges, or nearly $0.60 per ton.

The decline in profitability was driven primarily by lower Northern White pricing, primarily resulting from having the full-quarter impact of pricing concessions which were made in the third quarter, which was offset somewhat by the idling of higher-cost facilities. Additionally, our results were negatively impacted by the $8.1 million in negative margins at our Seiling and Kermit facilities as they started and scaled production during the quarter.

SG&A for the quarter was $45.8 million, which included $2.4 million of non-cash stock compensation and $1.9 million of integration expenses. Adjusted EBITDA totaled $43.9 million for the fourth quarter. This figure includes $8.1 million in negative margins at Kermit and Seiling, as I previously mentioned, as well as $3.6 million in purchase accounting charges. These items were partially offset by the positive impact of the $5 million valuation adjustment of the contingent liability.

In the fourth quarter, we had a tax expense of $4.5 million. At the end of December, we had net operating loss carry-forwards of approximately $300 million that can be utilized to offset future taxable income in the U.S., which will result in minimal cash taxes paid in future periods. Additionally, we expect to receive a cash tax refund of approximately $18 million in 2019 due to revised tax liabilities from prior years. This refund will be largely offset by expected international tax payments during the year. Operating cash flow in the fourth quarter was $57.1 million.

Turning to the balance sheet, capital expenditures was $75.6 million in the fourth quarter, primarily for the completion of our local sand facilities. The capex figure was above our previous guidance of $50-55 million due to the acceleration of planned 2019 spending into 2018 as well as unforeseen spending associated with the ramping of our in-basin plants. These items have resulted in our 2019 forecast for capex to range between $80-100 million versus the previously provided $90-110 million.

We ended the quarter with $322 million in liquidity, including $134 million of cash and $188 million in availability on our revolver. As you may have noticed from the 8-K we filed this morning, we recently amended the terms of our revolving credit agreement to raise the net debt to adjusted EBITDA covenants to 6.6x in 2019, 5.5x in 2020, versus the 4x under the original agreement.

Importantly, we have maintained the full $200 million facility with no change to the interest rate spread, providing us with substantial liquidity and flexibility if needed. Our term loan had a balance of $1.63 billion at the end of the year, and as a reminder, the term loan matures in 2025 and does not have any covenants. Now, I'll turn the call over to Jenniffer, who will provide an update on our markets and on key strategic initiatives.

Jenniffer Deckard -- Chief Executive Officer and Vice President

Thanks, Andrew. I'll begin with our Industrial segment, where 2019 volumes have been relatively flat to prior year thus far. Stronger overall volumes in our combined glass markets have been offset by a bit softer volumes on a few other end markets, including our ceramics and sports and recreation markets, to start the year. One particular market in which we see continued strength is containerized glass in our Mexico markets. In addition to completed 2018 expansion project at our Canoitas facility, which I mentioned earlier, we've also recently commenced an additional expansion project to meet further customer demand for our products in this region. Canoitas is a prime example of how our long history of commitment and partnership with our Industrial customers, both within and across cyclical periods, are of great mutual benefit for both parties over the long term.

Moving to our Energy segment, the demand softness that we saw at the end of 2018 continued through January and February, as operators were slow to get back to work from lower commodity prices at the end of 2018. Additionally, exceptionally cold temperatures throughout much of the U.S. hampered completion activities for customers in several basins. This weather also impacted operations at our plants in the north. While we were successful in moving volumes, our costs were negatively impacted by these events as well as by annual freight rate increases. Throughout March, we've seen volumes pick up noticeably, and are expecting double-digit sequential volume growth in the second quarter for our Energy segment.

Overall, we believe market demand for proppant in the first quarter will be at an average run rate in the low 70-million-ton range, only modestly above the high 60s we saw in the fourth quarter. However, we believe the market is exiting the first quarter at an annualized run rate in the low 80-million-ton-per-year range. And, as weather conditions improve, we expect proppant demand in the second quarter will continue to accelerate into the mid-90-million annualized ton range.

Turning to supply, we believe the unsustainably low market pricing in the fourth quarter resulted in additional higher-cost supply exiting the market, either through the idling of plants or derating of capacity. We estimate between 20-25 million tons of supply have come offline since June of last year, and this figure is likely conservative, as additional facilities have likely derated capacity, which is more difficult to precisely track. Also, we believe that some higher-cost supply has remained in the market as winter stockpiles are drawn down, and which may move to additional supply reductions as these stockpiles are exhausted and investments must be reconsidered.

With this contraction of supply and with demand improving, we've seen early signs of market stabilization for Northern White. Toward the end of the first quarter, we instituted a modest price increase on Northern White sand. While relatively small, the price increase is a positive step and furthers our belief that we've seen a bottom in Northern White sand pricing, and that customers also value the complete solutions that we can provide. As we enter the second quarter, we expected additional price increases. These operational advances for Covia, combined with strong market dynamics and a strengthening price environment, should provide positive overall tailwinds into the second quarter.

For local sand, there continues to be additional supply entering the market, although the pace of these additions has begun to slow, and the ultimate effective utilization of nameplate capacities remains yet to be seen. We believe the oversupply of local sand in the Permian will likely persist throughout 2019. In order to navigate this environment, we've contracted more than 70% of our nameplate capacity under long-term agreements with customers who value Covia's complete product portfolio and ability to consistently deliver solutions.

As we discussed in our last call, we believe that the long-term demand mix between Northern White and local sands has yet to settle out. Third-party lab results have indicated that the shape and polycrystalline structure inherent in local sand results in a lower crush strength and greater fines generation compared to Northern White. These factors may lead to conductivity issues in certain well environments, particularly in areas with higher closure stress, such as in the Delaware Basin.

While many customers have converted to regional sand, there are also customers who continue to see the value in pumping Northern White sand, either in total or in wells where local sands are less fit for purpose. For these customers, they expect that the use of Northern White sand, particularly for higher-pressure wells, will result in a higher return for wells, and we have continued to sign new contracts for Northern White sand during the first quarter.

As such, we continue to believe that demand in basins with local sand availability will continue to be served by a mix of both local sand and Northern White sand. Further enhancing our customer value proposition is our ability to now offer last-mile solutions where needed. We placed our first last-mile system this quarter, and through an asset-light model, we will continue to offer leading options to those customers who prefer that the last-mile solution be provided by the sand supplier.

Lastly, our balanced product solution, consisting of local sand in two basins, low-cost Northern White supply, value-added products, low-cost unit train capabilities on five different Class 1 railroads, and mine-to-well capability strongly position us to meet the needs of our customers, wherever and whatever they may be. And, as I previously mentioned, we're exiting the first quarter in a stronger position from where we began the year regarding the ramp of our local sand capacities, which will set the foundation for both higher volumes and improved costs as we enter the second quarter.

As we think about our overall priorities for 2019, our focus is on execution of our base business, including the leveraging of our recent investments in both Industrial and Energy capacities, and on overall cash generation and net debt reduction. We further anticipate that the completion of our ERP platform consolidation will drive added cost savings through advancing our remaining organizational integration, enabling greater spend analysis and margin optimization, and improving our working capital management. We also expect to significantly reduce our 2019 capital spending. These measures underscore our commitment to reducing net debt in 2019, and coupled with our well-positioned Energy assets and our large and predictable Industrial business, we're confident that we have a pathway to accomplish this goal. With that, I'd like to turn the call back over to Andrew to provide our more specific outlook.

Andrew Eich -- Executive Vice President and Chief Financial Officer

Thanks, Jenniffer. Starting with Industrial, we anticipate the first-quarter 2019 volumes will be approximately 3.5 million tons, relatively consistent with the first quarter of 2018. The second quarter, we expect Industrial volumes to be 3.8 million tons, or relatively similar to the prior-year period. At the beginning of 2019, we instituted a low-single-digit-percentage price increase on average across our portfolio, in line with prior years.

For Energy, we expect volumes in the first quarter to be approximately 4.4 million tons, or similar to the fourth quarter. March volumes are expected to be significantly stronger than January or February. We anticipate margins in the first quarter to be down approximately $3.00-3.50 per ton, driven by slight declines in pricing and higher overall costs. These cost increases will be partially offset by improving operating performance of our local facilities, which are rapidly increasing production.

As we look forward into the second quarter, we expect Energy volumes to range between 5-5.3 million tons, which represents double-digit-percentage sequential growth in both Northern White and local sand. We also anticipate the improving volumes will allow us to further increase prices for our Northern White sand, particularly for those locations where we saw freight rate increases at the beginning of the year. We also expect the higher monthly Northern White volumes, better weather conditions, and the ramp-up of our new local facilities to largely reverse the cost headwinds we experienced in the first quarter.

For the full year, we anticipate SG&A will total $160-170 million, which includes approximately $10 million in non-cash stock compensation. This represents a reduction of $18-28 million from the 2018 SG&A levels, excluding integration costs. Finally, and as I mentioned earlier, capital expenditures are expected to be $80-100 million for the full year 2019, a reduction from our previous guidance, as some of this spending occurred in 2018. Back to you, Jenniffer.

Jenniffer Deckard -- Chief Executive Officer and Vice President

Thanks, Andrew. I'll conclude our prepared remarks today by saying that our Industrial markets remain strong, and while the Energy market remains dynamic, we're encouraged that recent trends and momentum bode well for the coming quarters and the outlook for Covia. Our diversified business model combined with our firm commitment to maximizing cash generation and deleveraging our balance sheet will continue to position Covia for success. Before we take questions, I'd like to again thank our Covia team members, many of whom are continuing to do double duty of integrating the company while also ensuring that we're meeting and exceeding our customers' needs in order to remain a leader in our industry. With that, Leandra, could you please open the line for questions?

Questions and Answers:

Operator

At this time, if you would like to ask a question, please press *1 on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. And, our first question comes from the line of Kurt Hallead with RBC. Your line is open.

Kurt Hallead -- RBC Capital Markets -- Managing Director

Hey, good morning. Thank you for that detailed update. You gave great color regarding the progression as you head out into the first half of the year. I was really curious about the dynamics around your commentary on Northern White pricing. What do you think the primary drivers of that pricing dynamic are? Is it just simply the fact that you've had idle capacity, or is it the fact that you've seen also growing demand? I guess I'm just trying to gauge whether it's more supply or whether it's a combination of increasing demand along with a lower supply.

Jenniffer Deckard -- Chief Executive Officer and Vice President

For the first quarter -- well, I think it's a combination of both, Kurt, and I think most recently, it's the increase in demand because we saw that capacity come out across the last six months, and I think it's also outlook, and I would also say an important factor is the position of our assets because whether that's through the actual price that we pass on to the customer or the leverage and cost reduction that they get on their end from using our assets, I think that it's those three things. We do believe that the total market is going to be up, as I mentioned, in both the first and second quarter.

Kurt Hallead -- RBC Capital Markets -- Managing Director

Great, thank you. I appreciate that. And then, maybe a quick follow-up for Andrew. You mentioned contribution margins per ton being down $3.00-3.50 sequentially in the first quarter. I just want to be sure -- were you referencing Energy-specific on that?

Andrew Eich -- Executive Vice President and Chief Financial Officer

Yes, that's correct. Energy specifically.

Kurt Hallead -- RBC Capital Markets -- Managing Director

Okay, great. That's it for me. Thank you, guys.

Andrew Eich -- Executive Vice President and Chief Financial Officer

Thanks.

Operator

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

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

Hey, guys. Thanks for taking my questions. Just to clarify on the Energy contribution margin per ton guidance, is that off the clean contribution margin per ton for 4Q, excluding the start-up costs and the non-cash inventory charges?

Andrew Eich -- Executive Vice President and Chief Financial Officer

Yeah. So, what I would say there, Harry, is I would -- that's off of the purchase-accounting-adjusted figures. So, what we would expect over the course of Q1 is we saw some higher costs in our Northern White facilities because of the weather-related challenges that Jenniffer mentioned, particularly in January and February. We also experience freight rate increases down our railed lanes. And then, that will be offset in part by our expansion of volumes in west Texas, which are improving our unit costs there, as well as in Oklahoma with our Seiling facility. But, all in all, the gross margin per ton is across all of the tons, and it's on the clean number after the purchase accounting adjustment.

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

Okay. So, we should be adding back the start-up costs in 4Q to go off that?

Andrew Eich -- Executive Vice President and Chief Financial Officer

No, you shouldn't. You should not be adding that back.

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

Okay, got it. And then, just one more -- on the Northern White pricing increases, is that mesh-specific? Could you clarify the magnitude of those price increases, or is that across all of your mesh size?

Jenniffer Deckard -- Chief Executive Officer and Vice President

The price increase is across generally all of the product categories. Clearly, it was a modest price increase, as we mentioned, and we certainly can't quantify yet the first quarter because we're actively in those discussions. What I would say is that we understand the complexity of the many moving parts here, which is why we've tried to quantify it from a margin perspective for you, because we recognize there's many moving parts here, and that includes -- so, the margin includes both our price and cost expectations.

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

Okay, that's helpful. And then, if I could sneak in one more, how much start-up cost do you expect in 1Q? Do you expect it to be up or down?

Andrew Eich -- Executive Vice President and Chief Financial Officer

No, we would expect that to come down quite a bit. That's been built into the guidance that we've provided. So, we do expect that to come down as our volumes ramp up quickly, at least in the first quarter.

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

Okay, thanks so much, guys. I'll hop back in the queue.

Andrew Eich -- Executive Vice President and Chief Financial Officer

Thanks, Harry.

Jenniffer Deckard -- Chief Executive Officer and Vice President

Thanks, Harry.

Operator

As a reminder, if you would like to ask a question, you can press *1 on your telephone keypad. And, your next question comes from the line of Mike Urban with Seaport Global. Your line is open.

Michael Urban -- Seaport Global -- Managing Director

Thanks. Good morning.

Andrew Eich -- Executive Vice President and Chief Financial Officer

Good morning, Mike.

Jenniffer Deckard -- Chief Executive Officer and Vice President

Good morning.

Michael Urban -- Seaport Global -- Managing Director

I wonder if you could talk just a little bit about your contracting strategy. In the past, you guys have shied away from especially take-or-pay contracts, just given the tendency for them to go away whenever it's not beneficial for the customers. It sounds like you are contracting more volumes -- are those take-or-pay or are those essentially volume agreements with some price variability? If you could just give us a little bit -- a sense of what those contain and your thoughts here going forward on the contracts.

Jenniffer Deckard -- Chief Executive Officer and Vice President

We actually maintain a similar position in that the majority of our contracts are a function of market price. We do have a degree -- call it 20-25%, probably -- in fixed-cost and/or indexed, but we continue to believe that those contracts -- even while fixed or indexed -- you need to help your customers to be competitive, and so, we believe that market-based contracts provide the most flexibility and align ourselves with the customers the best.

Michael Urban -- Seaport Global -- Managing Director

Got it. And then, on the last-mile, you said you deployed your first last-mile solution. How many more do you expect to deploy here over the course of the quarter or the year?

Jenniffer Deckard -- Chief Executive Officer and Vice President

That's a great question. It's certainly a moving target. Our strategy is to provide those solutions where the customer really is desiring that to be provided integrated with the sand business. We believe that's a small percentage of the market, and so, we don't expect this to become a big growth driver, although it will generate some margins for us. Our strategy is to make sure that we've maximized our addressable market for sand.

Michael Urban -- Seaport Global -- Managing Director

Okay. I think you just addressed it there, but -- so, you are capturing some margin there. Given that you have the asset-light model, presumably, you're going to have to pay a third party for some of these assets, and they'll capture some margin. So, you do think you're capturing some of that margin there, and it's not necessarily just a volume driver, so in other words, they prefer to have sand from Covia, and as long as you provide the last-mile, you'll do that, but you're able to capture some margin on top of that?

Andrew Eich -- Executive Vice President and Chief Financial Officer

Our primary goal with the asset-light last-mile solution is to offer multiple solutions to the customer base to provide them with the flexibility. We're not doing it as a major margin contributor to our business. Now, having said that, we will earn some margin, but we don't anticipate it being a huge growth driver for our business in 2019.

Michael Urban -- Seaport Global -- Managing Director

Okay. That's all for me. Thank you.

Jenniffer Deckard -- Chief Executive Officer and Vice President

Thank you.

Operator

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

Christopher Voie -- Wells Fargo -- Analyst

Good morning.

Jenniffer Deckard -- Chief Executive Officer and Vice President

Good morning, Chris.

Christopher Voie -- Wells Fargo -- Analyst

Just curious -- within the guidance getting to 5-5.3 million tons in 2Q, can you give a sense of what's baked into that in terms of in-basin versus Northern White? Does that assume that all the growth comes from in-basin, or potentially even a further decline for Northern White volumes in there just given the industry shift, or maybe a little more color on that?

Andrew Eich -- Executive Vice President and Chief Financial Officer

Sure. So, I would say that we're expecting in Q2 double-digit percentage increases in both Northern White and local sand. So, you will see -- from a percentage basis, you're going to see a higher percentage of local sand growth. That's because we're ramping up the facilities, but we are expecting a meaningful uptick in Northern White sand as well. And so, that's really driven by the overall growth we're seeing in the market.

Christopher Voie -- Wells Fargo -- Analyst

Okay, that's helpful. And then, within the in-basin market, can you give a sense of what kind of specific pricing trends you're seeing, not just for yourself, but a sense of where the spot market is for in-basin in terms of on the pricing level, how that has declined quarter over quarter, and maybe if you see any kind of premium for your contracts versus where the market is currently?

Andrew Eich -- Executive Vice President and Chief Financial Officer

Sure. It's a good question. So, I'd make a few comments here. One is that we're more than 70% contracted in our local sand markets that we're selling into. I'd also say that over the last six months or so, we've seen pricing for our customer base declining roughly $10.00-12.00, including Q1, and that's also been factored into our guidance as well. Unlike Northern White sand, we don't anticipate pricing opportunities in these markets given the supply situation and the meaningful capacity that keeps coming on, but offsetting that to some extent are going to be some of these start-up challenges that have been rampant across the industry. So, it's a bit hard to gauge the overall effective capacity that's going to be selling into these local markets, but I would say that we really don't anticipate pricing improvement in '19, unlike Northern White, where we think that market is a bit more stabilized.

Christopher Voie -- Wells Fargo -- Analyst

Got it. Thank you.

Operator

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

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

Hey, guys. Just one more. Talk a bit about Permian pricing in-basin and the delta between the spot and the contracted pricing trends right now.

Jenniffer Deckard -- Chief Executive Officer and Vice President

Sure, Harry. Good morning. As Andrew mentioned and as I mentioned in our comments, all of our -- the predominance of our products are going to our contracted customers, and so, we really are not participating in the spot market, and so, it's probably difficult for us to comment other than that we've seen the $10.00-12.00 decline over the last six-month period.

Andrew Eich -- Executive Vice President and Chief Financial Officer

And, I think that spot market pricing is very misleading because a lot of spot market pricing is driven by the fire selling of production. If your silo is getting nearly full and you need to offload inventory, you'll see spot pricing drop -- can drop significantly relative to what you might sell larger, more consistent volumes at. So, I think it's a bit misleading to look to that as an indicator of where overall pricing is going to go.

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

Got it. Makes sense. And then, for Seiling, you guys said you had 70% contracted across all your in-basin lines. Is that on average, or are you guys having trouble locking up any capacity at Seiling as in-basin mines start ramping up there?

Jenniffer Deckard -- Chief Executive Officer and Vice President

That is on average, but all of our plants, including Seiling, are at or above our targeted 70%.

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

Got it. That's all I've got. Thanks, guys.

Andrew Eich -- Executive Vice President and Chief Financial Officer

Thanks.

Jenniffer Deckard -- Chief Executive Officer and Vice President

Thanks, Harry.

Operator

We have no further questions at this time. I'll turn the call back to Jenniffer Deckard for closing remarks.

Jenniffer Deckard -- Chief Executive Officer and Vice President

Okay. Thanks, Leandra, and thanks to all of you for listening and participating today, and we look forward to meeting with many of you over the next coming weeks. So, have a great day, everyone, and thanks very much.

Operator

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

Duration: 38 minutes

Call participants:

Matthew Schlarb -- Director, Investor Relations

Jenniffer Deckard -- Chief Executive Officer and Vice President

Andrew Eich -- Executive Vice President and Chief Financial Officer

Kurt Hallead -- RBC Capital Markets -- Managing Director

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

Michael Urban -- Seaport Global -- Managing Director

Christopher Voie -- Wells Fargo -- Analyst

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