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Covia Holdings Corporation (CVIA) Q2 2019 Earnings Call Transcript

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Covia Holdings Corporation  (NYSE: CVIA)
Q2 2019 Earnings Call
Aug. 08, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, welcome to the Covia's Second Quarter 2019 Earnings Conference Call and Webcast. [Operator Instructions]

I would now like to turn the meeting over to your host for today's call, Matt Schlarb, Director of Investor Relations for Covia. Please go ahead, Matt.

Matthew Schlarb -- Director of Investor Relations

Thank you, Brandy. Good morning, and welcome to Covia's second quarter 2019 earnings conference call. Joining us on today's call are Rick Navarre, our Board Chairman, President and CEO; 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 and this morning's press release. This morning, we also published an investor presentation to accompany this call, which can be found on our Investor Relations section of the website.

I would also like to remind you that during this call, we will provide non-GAAP financial measures, including segment contribution margin, 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 press release, which is available in the Investor Relations section of our website.

Additionally, our commentary during this call regarding periods prior to June 1, 2018, 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 I'll turn the call over to Rick.

Richard Navarre -- Chairman, Interim President and Chief Executive Officer

Thank you, Matt, and good morning, everyone, and thank you for joining us today. I would like to update you today on a number of items that allowed us to report much improved results in the second quarter, and also provide an outlook for each of our business segments. Over the past several months, we have accelerated initiatives across the organization to improve our profitability, optimize assets, increase cash flow and strengthen our financial position, and I'm proud of our team's achievements this past quarter. Thanks to the hard work of Covia's employees, we've lowered our costs across the organization. We've consolidated our production into our lowest cost plants, leading to a contribution margin increase of 44% from the prior quarter. And structurally, we lowered our SG&A costs 25% from this time a year ago, resulting in sequential EBITDA that has nearly doubled.

In addition, we made meaningful improvements in working capital, completed our important ERP integration and effectively managed to lower our capital spending. In addition to all these operating improvements, we also announced $240 million in noncore asset sales at an attractive multiple, 12 times our 2018 gross profit. These divestures will strengthen our balance sheet, and clearly demonstrate the substantial value of our industrial portfolio which represents more than 60% of our profits.

As we announced in our press release this morning, Covia is keenly focused on ensuring we are a safe, low-cost, competitive supplier that can deliver multiple quality products to its customers. This is demonstrated by our improved margin per ton this quarter, as we improved our operating costs in both segments.

Importantly, we are targeting further improvements, and have launched a companywide process improvement program to analyze all aspects of how we operate with the ultimate goal of driving operating efficiencies and improving margins. In connection with this program, we recently adjusted staffing levels to match changing industry dynamics, which is expected to result in annualized savings of $15 million and coupled with actions that we took in the first quarter will reduce overhead by a combined $20 million annually. With that as background, I'd like to give a high-level overview of the dynamics by segment before turning the call over to Andrew to cover the financials and our capital structure.

Beginning with the Industrial segment. Due to price increases that we instituted at the beginning of the year along with lower costs, we were able to more than offset the volume declines and grow our contribution margin by $3 million compared to the second quarter of 2018. Our second quarter volumes were somewhat lighter than expected, as growth in coatings and polymers was offset by softness in building products, which suffered from unseasonably wet weather across the U.S.

We were also impacted as several glass customers had temporary unplanned shutdowns and that business has rebounded in July. So far this year, we've also signed multiyear agreements with industrial customers with annual volume commitments in excess of 2 million tons. These renewals further demonstrate that our value proposition of providing consistently high-quality products continues to resonate well with our customers.

In Energy, volumes of 4.6 million tons were up 3% from the first quarter. Our Northern White markets were solid, and we were able to realize price and margin improvements. I'm also pleased to report that our in-basin plants are now fully commissioned. And as we continue to increase sales volumes from these plants, we expect to lower our unit production costs. I will add, however, that in West Texas, oversupply continues to put downward pressure in that market. However, as you may recall, our plants are well contracted, which helps insulate us from some of the price pressure.

So to summarize, we are encouraged by our second quarter performance and the execution on our key initiatives to optimize assets and maximize cash flow. These efforts have put us on the pathway to improving our leverage.

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

Andrew Eich -- Executive Vice President & Chief Financial Officer

Thanks, Rick. Our second quarter revenues totaled $445 million, a 4% increase from the first quarter with sequential growth in both of our segments. Sequential contribution margin increased 44% to $106 million in the second quarter, and volume growth of 2%. Contribution margin includes the ongoing $2.1 million of noncash charges related to lease accounting -- the new lease accounting standard.

This quarter, we began disclosing contribution margin, which excludes costs associated with idle assets as well as excess railcars. We believe this measure is a better indication of our operating performance. Importantly, we have over $25 million of annual costs related to these idled assets, and that will significantly decline over time as railcar leases expire over the next several years.

Moving to segment performance. Industrial first quarter 2019 revenues were $193 million or a 6% decrease from the second quarter of 2018. The decline in revenue was driven by reduced freight-related revenues, which are passed through, and for which Covia does not generally earn a margin. We also benefited from low single-digit average price increases that were instituted at the beginning of the year. Our second quarter 2019 industrial contribution margin was $65 million. This compares to $62 million in contribution margin for the second quarter of 2018. The increase in profitability was driven by both price increases and lower operating costs.

Turning to our Energy segment. Revenues totaled $252 million in the second quarter, or a sequential increase of over $15 million. We benefited from improved Northern White pricing, which increased about $1.50 per ton on a like-for-like basis as well as increased Northern White and local sand volumes. Our local sand pricing was fairly stable in the second quarter. Our Energy contribution margin was $41 million for the second quarter, which is an 80% sequential improvement or approximately $8.90 per ton driven by lower operating costs and improved pricing. Both quarters in 2019 include $2.1 million in noncash charges related to the new lease accounting standards. As a reminder, this $2.1 million quarterly noncash charge will continue for the foreseeable future.

Total SG&A for the quarter was $38.6 million, which was down $3.3 million compared to the first quarter, driven by lower variable compensation expense. As Rick mentioned earlier, we have taken several actions to structurally reduce SG&A at the end of the quarter, and we expect to realize these benefits as we move forward. All of these efforts contributed to a strong increase in sequential profitability during the quarter. Adjusted EBITDA was $65.3 million, which almost doubled from the prior quarter.

Our second quarter tax benefit was $5 million. Cash tax expense on the recently announced asset sales are expected to be relatively small as we utilize NOL carryforwards to offset tax costs associated with the sales. Second quarter capital expenditures were $26 million, which is down more than 20% compared to the first quarter and were primarily driven by the completion of our local sand facilities and our industrial plant expansion in Mexico. We expect our second half capital spending to be significantly lower than the first half as most of our capital projects have been completed. You will see that we generated $107 million of operating cash flow in the second quarter, which was driven by improved operating results and significantly improved working capital.

We ended the second quarter with $112 million in cash, or nearly $70 million more than we ended the first quarter. Combined with the revolver availability, that resulted in total liquidity of over $300 million at the end of June. Importantly, however, we collected $135 million of gross proceeds last week from the sale of the Calera facility, and expect to collect an additional $105 million from the sale of the W&W by the end of the quarter. We expect to use a substantial portion of these proceeds to reduce debt levels. We will keep you updated over the coming months as we finalize our capital allocation strategy.

Now before I turn the call back over to Rick, I would like to address our capital structure. As of June 30, we had $1.6 billion of debt. The vast majority of this is comprised by our term loan, which matures in 2025 and does not have any financial covenants. Having said that, we fully recognize that Covia today has far too much debt, and reducing this debt is the single best way to drive shareholder value in the near term and position Covia for growth in the long term.

We are confident that the initiatives Rick talked about, when combined with our large, predictable and high cash flowing base businesses and lower capital spending in the future will allow us to substantially reduce our debt levels over the next several years. Our second quarter operating performance, combined with the divestitures we announced, represent a very important first step for reducing this debt, and we look forward to building on the progress we have made so far.

With that, I'll turn it back over to Rick to cover the market dynamics.

Richard Navarre -- Chairman, Interim President and Chief Executive Officer

Thank you, Andrew. Starting with industrial, most end markets remain steady. The ones that are more weather dependent, such as building products and sports and rec, have been negatively impacted by unseasonably wet weather this spring. However, we do expect a rebound in these markets in the second half of the year.

The glass markets continue to move higher, driven by growth in the Mexican container glass market. We were also expecting solid growth in coatings and polymers on strengthening customer demand in the second half of the year. We continue to see softness in the ceramics market from foreign imports and design styles shifting away from the use of ceramics. We expect to benefit from increased year-over-year pricing, which is, on average, has been up 2% over the prior year levels. And we expect to have improved cost during the quarter in this segment as well.

Moving to the Energy segment. Full year visibility, as you can imagine, is very difficult at this point. However, July volumes were well above June levels, and our order book for August looks reasonably strong. However, we are mindful of the anticipated slowdown expected in the second half of the year, which may impact volumes later in the quarter. At this time, we are forecasting third quarter volumes to be similar to the second quarter levels.

As we think about the fourth quarter, we expect a typical seasonal slowdown due to customer budget exhaustion and holidays. As previously mentioned, the market for local sand remains oversupplied, which has resulted in continued pricing pressure in the spot market. Once again, we are highly contracted with quality customers, yet weak spot pricing does have a negative impact on the market as a whole, and this would include any incremental spot business we may accept. Fortunately, we're making good progress on reducing our costs at our in-basin facilities, which should help mitigate the margin impact of any lower pricing.

I will also add that we believe in in-basin pricing at today's levels is not sustainable. We've seen some plant closures. We've seen some mines to begin to moderate production. And we expect this trend will continue. As far as Covia is concerned, we have demonstrated with decisive actions that we have taken to date, that we intend to be a safe, low-cost leader in the industry and a supplier of choice.

I'll now turn the call back to Andrew to provide guidance.

Andrew Eich -- Executive Vice President & Chief Financial Officer

Thanks, Rick. Starting first with Industrial and for the third quarter, we are forecasting volumes and overall contribution margins to be relatively similar to the second quarter of 2019 levels. For Energy, we are also estimating third quarter volumes and contribution margins will be similar to the second quarter of '19. Due to the progress we've made in reducing SG&A, we are also forecasting full year 2019 SG&A to be in the range of about $145 million to $155 million. And a reminder, that includes about $10 million in noncash stock compensation expense.

Moving to CapEx, we expect the full range -- we expect the range for the full year to be about $80 million to $100 million. And that implies, obviously, a significant reduction compared to the first half of spend, as I mentioned earlier, with most of our spending has occurred in the first half.

So that concludes our prepared remarks this morning. I'd like to ask Brandy to open up the lines for Q&A, please.

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from the line of Kurt Hallead with RBC.

Kurt Hallead -- RBC -- Analyst

Hey, good morning.

Andrew Eich -- Executive Vice President & Chief Financial Officer

Good morning, Kurt.

Kurt Hallead -- RBC -- Analyst

I appreciate the colored commentary and the guidance dynamics there. Maybe to just follow up on the initial guide for the third quarter, I just want to make sure I understand kind of the baseline that we're going to be working from. When you talk about the Energy third quarter contribution margins being flat on a sequential basis, Andrew, is that on the unadjusted number or on the adjusted number when you exclude out that lease expense?

Andrew Eich -- Executive Vice President & Chief Financial Officer

It's -- it would basically be on both, Kurt. I mean the lease accounting is going to -- the same amount is going to occur in the second quarter as in the third. So we're essentially saying we expect the third quarter contribution margin to be relatively the same as the second quarter.

Kurt Hallead -- RBC -- Analyst

Okay. Thanks. Appreciate that. And then just a follow-up on the broader market dynamics on just staying on the Energy front for now. Rick, you mentioned a number of different dynamics at play in West Texas and some plants potentially, either not coming online or not coming online with the same volumes that maybe had been initially anticipated. When you guys get kind of go through your market intel process, what kind of volumes are we talking about potentially not hitting the market?

Richard Navarre -- Chairman, Interim President and Chief Executive Officer

I think it's difficult to tell at this point in time, Kurt. I mean we know how much demand is out there. And as we look at that, particularly in, say, let's say, west Texas, it's probably in excess of 20 million tons, and we know the supply is certainly in excess of that. So we know how much has to come out of the market, and we don't get spot reports on every single plant out there. We think we've got a low-cost facility that's well positioned in both Kermit and Crane. But from our standpoint, we feel we're pretty well positioned in the market to be able to run at decent capacities going forward and still make good profits.

Kurt Hallead -- RBC -- Analyst

Okay. I appreciate that. And maybe if I just squeeze one on the capital structure. You guys just kind of spelled out a game plan to kind of reduce debt going forward. At a minimal baseline, what kind of -- what's your target when you think about debt reduction on an annualized basis?

Andrew Eich -- Executive Vice President & Chief Financial Officer

Yes. So great question, Kurt. I mean I think that when you look at the cash-generating capability of our base business, if you think about the asset sales we've announced and some of these other initiatives that Rick talked about, our goal is to reduce our gross debt levels by several $100 million between now and over the next several years. We haven't specifically called out exactly what the number's going to be next year, but I would expect us to be making significant progress in that front.

Kurt Hallead -- RBC -- Analyst

Okay. Thanks for that additional color. Appreciate it.

Andrew Eich -- Executive Vice President & Chief Financial Officer

Thanks, Kurt.

Operator

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

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

Good morning, guys.

Andrew Eich -- Executive Vice President & Chief Financial Officer

Hi, George.

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

Nice free cash flow generation during the quarter, and as you guys pointed out, clearly, reducing that net debt balance will be important for folks getting increasingly excited about the equity up. Just thinking through the cash flow from operations that you have -- line of sight to in the back half or even just the third quarter. Do you expect to be free cash flow positive going forward, i.e., how much more kind of working capital tailwind is there left in the business?

And then two [Phonetic] you guys have done an impressive job on the asset sales front. What's left to do there, if anything? And would you also mull over selling some assets from the Energy side of the business? Or is the Industrial side really where you can get the best bang for your buck from an asset sale standpoint?

Richard Navarre -- Chairman, Interim President and Chief Executive Officer

So a number of questions there, I'll try to tackle those. Let me start with the back -- the last question around asset sales. Certainly, we had some good success earlier in the year -- in this quarter, selling a couple of assets that we would consider noncore at very attractive multiples, which just indicates the value of the industrial portfolio that we have. As we go forward, we'll be looking at other items that we might sell. There'll be more toward idled assets and surplus properties. And there may be an occasional other items that's in there. But I think the bigger items have been -- we've sold are out there. We're not really looking to sell any Energy assets at this particular point in time because those are core to the business.

As it relates to our free cash flow, we do expect to be positive free cash flow generation in the next quarter. As we look forward with lower capital spending and positive operations, we're going to have cash to be able to pay down debt further. Andrew? Do you want to add some.

Andrew Eich -- Executive Vice President & Chief Financial Officer

Yes. And I'd just add that the working capital remains a key focus for us. I think there's more work to be done there. And so we'll be pushing on that pretty hard over the next several quarters.

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

Okay. That's very helpful. And then you guys -- I know you all do a lot of technical work. Right now, a lot of that's focused on how sand quality can impact well results, and on occasion, you work with your E&P customers to do that work. As you guys go through that process, are you seeing any negative impacts from the use of in-basin sand and certain regions' basins, those where the bottom hole pressure may overwhelm the lower crust strength of that regional sand and impact productivity? And two, are any E&Ps that you're working with kind of acutely focused on this as a potential issue and mulling over switching back to a higher quality Northern White product?

Andrew Eich -- Executive Vice President & Chief Financial Officer

Yes. Great question, George. I mean I guess I'd say a couple of things. One is we certainly are hearing increasing chatter in the Eagle Ford that the local sand quality is significantly worse than Northern White in terms of performance. And so I think that's probably the first base in where you see a broad shift back to Northern White. That's where you would expect it, based on the chatter we're hearing in the market.

As it relates to the Permian, I think that the economics of Northern White sand versus local, still remain a very compelling proposition for the operators there to be trying the local sand. I also think it's probably a little too early before you -- even if they moved back to Northern White, I think it's a little early for there to be a broad swing. We certainly have operators who are very focused on continuing to use Northern White. But we haven't seen as big of a shift one way or another on -- in the Permian.

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

Great, guys. I'll turn it back over. Thanks for the color.

Andrew Eich -- Executive Vice President & Chief Financial Officer

Thanks, George

Operator

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

Mike Urban -- Seaport Global -- Analyst

Thanks. Good morning, guys.

Andrew Eich -- Executive Vice President & Chief Financial Officer

Good morning, Mike.

Mike Urban -- Seaport Global -- Analyst

So I wanted to dig into the guidance a little bit as well. You guys have done a really good job of consolidating facilities, pulling cost out and improving efficiency. Volume's kind of flattish. And as you said earlier, as more of those volume shift to the in-basin facility, you bring your unit cost down. You've kind of looking for similar contribution margin sequentially. Is that a function of conservatism just given that you said, hey, the -- we do see this potential for decline in the second half? Or is it also kind of a lower average price and also the potential for spot pressure in the Permian that kind of keeps you fairly flat sequentially?

Andrew Eich -- Executive Vice President & Chief Financial Officer

Yes. No. Good question, Mike. There's puts and takes around all of this. I do think, we realized, as spot market has dropped quite a bit in local sand -- in the Permian, we'll be -- we expect volumes to come in a little higher there as we ramp up the plants, and that's going to impact the average selling price. I think the offset there is going to be, as we get the additional volumes, you're also going to see our cost per ton drop in that area. So all in all, I think the puts and takes kind of balance each other out. As it relates to Northern White, we're not, at this point, forecasting price increases for the third quarter. So we expect volumes to be relatively similar. And costs, we're going to continue to push on them. But at this point, we're sort of guiding flattish performance in that area as well.

Mike Urban -- Seaport Global -- Analyst

Okay. Got you. And then a bit of an off-the-wall question, but there's been a long time trend in the Energy industry or anything that you see in the U.S., ultimately, you see globally within five or 10 years. And I think conventionals, and by extension, sand uses is no exception there. And I think you guys are somewhat uniquely positioned by virtue of your footprint. Have you thought about, at all, international markets in terms of frac sand, looking at any of those opportunities? Or just too early and too immature at this point?

Andrew Eich -- Executive Vice President & Chief Financial Officer

Sure. No, it's a good question. I think the big -- well, I guess I'd start with saying a couple of things. We do sell product internationally. We do have a small operating footprint in Europe where we sell some value-added products. It's not that material. We also sell product down in South America. Again, not huge amounts but we do sell some there.

The single limiting factor for us at this point is certainly exporting raw sand is probably is not going to be a viable option. And the sand loading levels, when you look internationally, are just not as significant as what you see in a typical well here in the United States. So in my view, I think the better opportunity will, longer term, lie in places like Mexico as well as potentially some activity in Canada, but more so in Mexico. I mean the Eagle Ford doesn't stop at the U.S. border, and that's a fairly underdeveloped area in Northern Mexico to -- for oil and gas. So we see longer-term opportunities more so there than internationally. So hopefully, that answers your question then.

Mike Urban -- Seaport Global -- Analyst

Yes. Absolutely. That's off me. Thank you.

Andrew Eich -- Executive Vice President & Chief Financial Officer

Thanks.

Operator

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

John Watson -- Simmons Energy -- Analyst

Thank you. Good morning,

Andrew Eich -- Executive Vice President & Chief Financial Officer

Good morning, John.

John Watson -- Simmons Energy -- Analyst

For the recently announced divestitures, how should we think about those as affecting your gross margin percentage within Industrial? Will it be accretive? And did we see that effect already in 2Q? Or should we be expecting something more in the back half of this year?

Andrew Eich -- Executive Vice President & Chief Financial Officer

Well. Yes. So that -- we closed on Calera, on August 1, and we're expecting to close on the W&W on the end of September. That's subject to -- from the regulatory approvals. But we expect to close that at the end of the quarter. So our guidance does contemplate this. In terms of it being accretive, I would answer that by simply saying, when you look at the valuations that we received on these sales, we certainly think that that's accretive relative to where our shares are trading today. But yes, I think it'll be -- we're going to see about a $20 million gross profit impact once all these assets are sold to our Industrial business, but that would be the main impact.

John Watson -- Simmons Energy -- Analyst

Okay. And I probably phrased that poorly. For the Calera facility specifically, is that the gross margin percentage for sales from that facility? Would it be above or below in line with your total segment gross margin percentage for 2Q?

Andrew Eich -- Executive Vice President & Chief Financial Officer

Sure. On gross margin percentage. Sure. That tends to have -- that'll have a higher gross margin percentage relative to what we have blended across the business. That's -- the main product that's sold out there is the high-calcium line product, which has a very higher operating cost and command for higher margins.

John Watson -- Simmons Energy -- Analyst

Okay. Okay, great. Very helpful. Switching gears to Energy. You mentioned spot pricing pressure for local sand. I'm assuming that's just West Texas, and we should still think about your rough mine and your ceiling mine as having strong spot pricing in those areas. Is that a fair statement?

Andrew Eich -- Executive Vice President & Chief Financial Officer

Yes, I think that's a fair statement.

Richard Navarre -- Chairman, Interim President and Chief Executive Officer

And we're seeing a little bit of pressure, though, in the MidCon as well. I mean if there's new mines that have come online in the MidCon, so to be fair, there's some pricing pressure there as well. But we're pretty well -- just like we are in West Texas, we're pretty well contracted at this point in time.

John Watson -- Simmons Energy -- Analyst

Right, OK. Okay. And lastly, Andrew, I think in response to Mike's question, you mentioned Northern White volumes being flattish in the third quarter, correct me if I'm wrong, and that would imply that your local sand volumes are also roughly flat given the guide. I would have expected an uptick in local sands volumes in the third quarter. Can you provide some further detail on the puts and takes between Northern White versus local?

Andrew Eich -- Executive Vice President & Chief Financial Officer

Yes. I think I said flattish. Generally speaking, we're -- I think we're forecasting probably a slight decline on the Northern White business as we get to the back half of the quarter, John, and that's going to be offset by growth in the local market. So flattish that's what I meant when --

Richard Navarre -- Chairman, Interim President and Chief Executive Officer

It's flat overall in there basically.

John Watson -- Simmons Energy -- Analyst

Yes. Right. Great. Thanks. Thanks for the added detail. That's all from me. I'll turn it back.

Operator

[Operator Instructions] Your next question comes from the line of Lucas Pipes with B. Riley FBR.

Lucas Pipes -- B. Riley FBR -- Analyst

Hey, guys. Good morning, everyone.

Andrew Eich -- Executive Vice President & Chief Financial Officer

Good morning, Lucas.

Lucas Pipes -- B. Riley FBR -- Analyst

I wanted to follow up on the budget exhaustion in the back half of the year. It's been a topic on a number of calls. Can you walk us through kind of what you expect specifically in Q4 as it relates to the spot price of sand in the various regions? Should we be kind of pacing ourselves for renewed declines in the market? Or do you think what we've seen so far in the supply response that will be sufficient to kind of hold the line? Thank you very much.

Richard Navarre -- Chairman, Interim President and Chief Executive Officer

Well, Lucas, to be honest, as we said, it's just really too early to tell. I mean we're hearing the same things everybody else has hearing about potential budget exhaustion and everybody living within their budgets and their cash flows. And so it's just too early to tell. We hope it's not as significant as it was last year, and we're prepared to adjust our production accordingly if we need to. We think with the lower cost structure that we have now, we'll be able to manage through that. And we're designing the company to be able to manage through the troughs in the cycle.

Lucas Pipes -- B. Riley FBR -- Analyst

Okay. I appreciate that. And then on kind of second question related to some of the prior ones. Should we be thinking about more asset sales? What business segments, what assets could qualify for additional asset sales? Do you have a target in terms of divestitures over the next few years? And I assume that would all go toward for the debt reduction. I would appreciate your perspective on that. Thank you.

Richard Navarre -- Chairman, Interim President and Chief Executive Officer

Yes. Sure, Lucas. I think as I said earlier, I think the larger asset sales have occurred with the two that we completed just recently. As we look forward, we've got some idle assets and some surplus properties that we'll continue to monetize, but they won't be at the magnitude of what we just recently did. Will there be another potential sale? Not a -- we don't see anything in the pipeline of the size of which book that we just did. So we're kind of focused on the core business right now.

Lucas Pipes -- B. Riley FBR -- Analyst

Got it. Got it. Okay. And then maybe last one for me. When you think about your capital allocation, is there any area -- you have in long-dated maturity on your indebtedness. So when you think about maybe growth to reduce your leverage, is there any pocket that is particularly interesting? Or are you more in the mode of hunkering down here and waiting for the market recovery? Thank you very much.

Andrew Eich -- Executive Vice President & Chief Financial Officer

Sure. No. Great question. I think our primary focus is to chase -- to go after the organic growth that's fairly capital light. That's not to say we wouldn't invest capital -- and we certainly would look at those opportunities. But our primary focus is to be investing -- making smaller investments to grow our Industrial business. Any capital allocation to the business will come at a fairly high return hurdle, given our debt load and our priorities to reduce debt. Yes.

Richard Navarre -- Chairman, Interim President and Chief Executive Officer

Exactly. And it have to have a very fast payback and a high -- and good return before we would invest in anything else at this point.

Lucas Pipes -- B. Riley FBR -- Analyst

Very helpful. I appreciate it very much and best of luck.

Andrew Eich -- Executive Vice President & Chief Financial Officer

Thanks, Lucas.

Operator

Your next question comes from the line of Harry Pollans with Bank of America.

Harry Pollan -- Bank of America -- Analyst

Hey, guys. Thanks for taking my question.

Andrew Eich -- Executive Vice President & Chief Financial Officer

Hi, Harry.

Harry Pollan -- Bank of America -- Analyst

Looking at 2Q volume mix, can you talk a bit about the moving parts there with the pricing increases that rolled through? Did that kind of offset Northern White growth in the quarter? I'm just kind of trying to wrap my head around with volumes in the quarter.

Andrew Eich -- Executive Vice President & Chief Financial Officer

Sure. So I would say, overall, if you think about where we thought the second quarter would come out, our bonds came in lower than our guidance. We saw some slowdown in volumes in places like the MidCon, which we didn't expect in the back half of the quarter. So -- but overall, the Northern White volumes didn't go down quarter-over-quarter. Local sand volume did go up, although I think we didn't get as much volume out of the local sand plants in part because we didn't chase a lot of the lower spot business. And so that impacted our margins -- or our volumes as well. So it was a bit in both areas where we came in lower than what we have wanted to in both of those segments. Some of those were conscious choices and others were market impacted.

Harry Pollan -- Bank of America -- Analyst

Got it. That's helpful. And then I don't think you touched on your last-mile strategy, anything you're looking on there, any changes, anything you've got in the hopper. Can talk about your strategy there? That would be helpful.

Richard Navarre -- Chairman, Interim President and Chief Executive Officer

Yes, I think we've been pretty consistent on our last-mile strategy. We continue to believe that, that market is fully saturated and potentially oversupplied, and the prices and margins will come down for that solution. And the technology continues to change, which requires continuous capital investment in that market. So we've taken the asset and capital-light approach and partnering with last-mile providers, so we can still provide our customers that want a last-mile solution. We can provide that offering to our customers and deliver it to them. We think that's the right answer today and for the long term. And if we had additional capital to invest, it would be invested probably in the industrial sector versus the last-mile sector, because we get better returns and more stable returns.

Harry Pollan -- Bank of America -- Analyst

That makes sense. Awesome. Thanks, guys.

Andrew Eich -- Executive Vice President & Chief Financial Officer

Thank you.

Operator

I would now like to turn the call back over to Mr. Rick Navarre for closing remarks.

Richard Navarre -- Chairman, Interim President and Chief Executive Officer

Thank you, Brandy, and thank you, everyone, for participating and for your interest in Covia today. Before ending, I would, again, especially like to thank our employees who have done an excellent job, quickly executing initiatives across the organization that have resulted in improved profitability and will position Covia for future success. Thank you.

Operator

[Operator Closing Remarks]

Duration: 38 minutes

Call participants:

Matthew Schlarb -- Director of Investor Relations

Richard Navarre -- Chairman, Interim President and Chief Executive Officer

Andrew Eich -- Executive Vice President & Chief Financial Officer

Kurt Hallead -- RBC -- Analyst

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

Mike Urban -- Seaport Global -- Analyst

John Watson -- Simmons Energy -- Analyst

Lucas Pipes -- B. Riley FBR -- Analyst

Harry Pollan -- Bank of America -- Analyst

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