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Edited Transcript of CMP earnings conference call or presentation 6-Nov-19 3:00pm GMT

Q3 2019 Compass Minerals International Inc Earnings Call

OVERLAND PARK Nov 13, 2019 (Thomson StreetEvents) -- Edited Transcript of Compass Minerals International Inc earnings conference call or presentation Wednesday, November 6, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* James D. Standen

Compass Minerals International, Inc. - CFO

* Kevin S. Crutchfield

Compass Minerals International, Inc. - President, CEO & Director

* S. Bradley Griffith

Compass Minerals International, Inc. - Chief Commercial Officer

* Theresa L. Womble

Compass Minerals International, Inc. - Director of IR & Assistant Treasurer

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Conference Call Participants

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* Christopher Lawrence Shaw

Monness, Crespi, Hardt & Co., Inc., Research Division - Research Analyst

* Christopher S. Parkinson

Crédit Suisse AG, Research Division - Director of Equity Research

* David L. Begleiter

Deutsche Bank AG, Research Division - MD and Senior Research Analyst

* Jeffrey John Zekauskas

JP Morgan Chase & Co, Research Division - Senior Analyst

* Joel Jackson

BMO Capital Markets Equity Research - Director of Fertilizer Research & Analyst

* Mark William Connelly

Stephens Inc., Research Division - MD & Senior Equity Research Analyst

* Seth Goldstein

Morningstar Inc., Research Division - Equity Analyst

* Tom Glenski;Goldman Sachs, Analyst

* Vincent Alwardt Anderson

Stifel, Nicolaus & Company, Incorporated, Research Division - Associate

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Presentation

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Operator [1]

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Good day and welcome to the Compass Minerals Third-Quarter Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Theresa Womble, Director of Investor Relations. Please go ahead.

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Theresa L. Womble, Compass Minerals International, Inc. - Director of IR & Assistant Treasurer [2]

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Thank you. This morning, our CEO, Kevin Crutchfield, and our CFO, Jamie Standen will review Compass Minerals third-quarter results as well as our outlook for the rest of 2019. During the question-and-answer period, we will also have available Brad Griffith, our Chief Commercial Officer. Before I turn the call over to Kevin, let me remind you that today's discussion may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on the company's expectations as of today's date, November 6, 2019, and involve risks and uncertainties that could cause the company's actual results to differ materially. Please refer to the company's most recent Form 10-K and 10-Q for a full disclosure of these risks.

The company undertakes no obligation to update any forward-looking statements made today to reflect future events or developments. Our remarks also may include non-GAAP financial disclosures, which we feel are important to provide a full understanding of our business and operating conditions. You can find reconciliation of any of these measures in our earnings release or in the earnings presentation; both of which are available in the Investor Relations section of our website at compassminerals.com.

Now I'll turn the call over to Kevin.

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Kevin S. Crutchfield, Compass Minerals International, Inc. - President, CEO & Director [3]

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Good morning, everyone. I'll begin today with a brief review of some of the highlights of our third-quarter results then discuss the path to senior management team and I have defined for moving forward to build a better Compass Minerals for our customers, employees, communities and shareholders. Before I do that, I'd like to take a moment to address a fatal incident that occurred at our Cote Blanche mine in mid-August when Shawn Clements, a contractor at the mine, contacted a live electrical cable while working inside the fire suppression systems electrical panel. We would once again like to extend our sincere condolences to his family. The safety of our workforce is our top priority and incidents such as the one which claimed Mr. Clements' life are unacceptable.

Coming from a long career in mining, I also believe it's imperative that we take the necessary time and actions to learn from these tragedies in order to prevent them from happening again. As such, I've been impressed with the manner in which our Cote Blanche team has responded, reviewing the circumstances that resulted in the accident in order to minimize future risk and sharing those learnings across the enterprise. Operationally, the mine was offline approximately 3 weeks beginning in mid-August as a result of the investigation of the incident. But our Cote Blanche team is expected to recoup the loss production before the year-end.

Turning to this quarter's financial results. I'll just say upfront they are disappointing to me and our leadership team. While consolidated revenue increased 6% to completely to year-on-year improvements in our Salt business, our operating earnings and EBITDA declined. We had a challenging quarter in Brazil where uncertainty in global agriculture markets has reduced farmer’s appetite for many of the specialty nutrients we sell. While in North America we eked out modest gains in SOP sales volumes.

The bright spot with our salt business were stronger year-over-year demand for preseason stocking of deicing products lifted highway deicing and consumer and industrial sales volumes compared to the third quarter of 2018. And strong highway deicing crisis in North America raised total salt average selling prices. Higher than expected costs however limited our earnings growth. I'll speak more to those results shortly.

We're also reporting our final North American highway deicing bid season results, which are described on slide 4 of our earnings deck. We increased our bid volumes an additional 3% from what we reported last quarter, which brings the total increased to 18% over the 2018-2019 winter season. I'm pleased to also report that our Salt team achieved this additional increase while still maintaining the plus 8% average selling price we announced in August. Just as we stated last quarter, we've achieved a total price improvement over the last 3 bid seasons of plus 22%. Though commercially speaking, things remain on track for the salt business. From a production perspective, we faced some challenges in the quarter. In addition to the downtime at Cote Blanche, we had to work through some difficult geology at Goderich, which slowed our production rates compared to what we achieved in the second quarter. Even with those challenges, we still improved production through the first nine months of the year by 34% compared to 2018 results. We've also taken a deliberate approach to settling outstanding labor dispute to Goderich, I believe this is critical to our long-term success.

A strong partnership with our employees is and must be a focus for us. The good news at Goderich is that the focus we've placed on corrective actions to mine more efficiently and the efforts to improve our labor relations are bearing fruit. We had an excellent month of production in October, even exceeding our targeted production rates. In fact, it was a record production month within the current fleet at Goderich and demonstrates what this mine is capable of when everything comes together.

Given that, I'd like to congratulate the team there for an outstanding month. Because of their efforts, we can report that at the end of October our year-to-date production at the mine was a strong 40% ahead of last year's result for the same period. With that said, one month does not a year make, but we're also taking definitive steps to build on this success. We're using ground penetrating radar along with in-seam horizontal drilling to explore both existing and future mining areas and re-configuring the geometry of current mine panels to better accommodate the continuous mining and haulage systems. This work is part of initial stages of implementing a new long-term mine plan at Goderich, some of the broad-brush strokes are provided on Slide 6. What you see here is in an illustrative representation of how we plan to evolve the mine over the next few years. This plan is designed to maximize the productive capability of our continuous mining systems. This should also reduce maintenance costs related to the massive abandoned and previously mined areas while improving safety and provide operational flexibility throughout the various mining districts. This flexibility is key and will make it easier to respond to salt deposit quality and consistency issues that can always emerge in any mine.

While this is a multi-year project, we're beginning to institute the new mine panel shape, which you can see here in the callout graphy. Instead of rooms and pillars oriented at right angles, we're modifying to more of a Chevron pattern with 60 or 70 degree angle advances, which we believe through past experience will work much better with the flexible conveyance systems we have in place here at Goderich. Another key feature will be the new bypass road area, where we will have permanent built-for-purpose roads and entryways leading to and from the mining industry, significantly reducing travel time and shortening the belt distance out of the mine.

Importantly, these roadways will be easier to maintain and safer for our miners. As we further develop our long-term mine plan, we'll share more details regarding timing and related spending. Importantly, we expect to be able to complete this work and keep our total CapEx in the $90 million to $110 million range.

Now, turning to our plant nutrition business, we continue to face challenging market conditions. In North America, our SOP business has held fairly steady. But our micronutrient business has lagged due to the significant reduction in acres planted due to poor weather conditions earlier this year. In South America, the lack of clarity on China-US trade has prolonged uncertainty resulting in delayed decisions by farmers or even skipped nutrient application altogether in some cases.

In addition, Asian swine flu has pressured demand from China. You can see the price chart on Slide 7 for Brazil soybean, which is indicative of the weaker grower economics. These pressures have mainly impacted our business-to-business sales, which serve smaller growers through the distribution channels. Our Direct to grow our business actually increased modestly versus 2018 results and we expect this portion of the business to remain strong in the fourth quarter. Before turning the call over to Jamie, I'd like to spend a few minutes discussing our approach to setting up Compass Minerals for the future.

It's clear to me that there is immense potential within Compass Minerals for organic growth and operational improvement. Significant investments have been made in this company, and less than stellar execution has prevented us from achieving the appropriate level of returns on these investments. Our focus over the next 18 months will be twofold. First, we will work to become an execution machine and push to deliver on the promise of the investments we've already made. Second, as our results and our balance sheet improve, we'll be able to better define what our long-term direction will be.

We outlined the process will be following on Slide 8. First, we're conducting a top-to-bottom review of all our operations and businesses, looking for every value-generating opportunity available to us. We call this enterprise-wide optimization. Next, we'll announce the pertinent details of the plan and begin executing on it. We expect to begin delivering improved financial performance as a result of this plan in 2020. As these business improvements and organic growth opportunities materialize, we'll begin discerning what we want the Compass Minerals of the future to look like. Consequently, we would expect to have a thorough strategic discussion externally later in 2020. Throughout this process, we will provide updates on our progress in an effort to be as transparent as possible with our investors. So, today, I'll share that we're making great progress on Phase 1. We've completed the review, think of it like an organizational MRI of sorts, and have identified several key value streams where we will be focusing our efforts. We are employing a bottom-up process, involving everyone in the organization to generate the initiatives within the plan that will foster broader improvements throughout our organization.

We expect to announce more of the specifics of this optimization plan early next year. I am very enthusiastic about the work we've done so far and impressed with the energy and engagement of our employees have already brought to bear in this process and I'd like to thank them all for their hard work today. Now, Jamie will walk through the financial details of the quarter and the rest of the year outlook. Jamie?

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James D. Standen, Compass Minerals International, Inc. - CFO [4]

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Thanks, Kevin and good morning everyone. I'll start with a review of our Salt segment results, which are on Slide 10. Third quarter 2019 revenue for this segment increased 16% from prior year results on 7% volume growth and 9% higher average selling prices. Volumes grew in both the highway deicing and consumer and industrial businesses, primarily due to more preseason stocking orders compared to the 2018 third quarter. We also had some sales pushed into the third quarter from the second quarter due to shipping delays caused by Mississippi River flooding. The 9% improvement in salt pricing was driven by better highway deicing prices, which increased 22% on a combination of improved highway deicing contract prices and a lower mix of sales to chemical customers compared to the prior year.

Consumer and industrial average selling prices declined 2% due to year-over-year changes in product sales mix. So all in all, we had a solid quarter from a revenue perspective. We also generated significant year-over-year operating earnings and EBITDA growth, but as Kevin stated, it was less than what we were targeting. There are several key factors that pressured salt earnings growth this quarter. First, as Kevin mentioned, we encountered some tough geology at Goderich mine during the quarter that slowed our pace of production. This lower-than-expected production depressed our results by about $6 million in the quarter. The good news is that the ground penetrating radar we've recently begun using should be a powerful planning tool going forward. This will help us avoid impurities that has historically been encountered from time to time. Second downtime at the Cote Blanche mine also resulted in lower-than-expected production in the quarter and reduced earnings by about $3 million. We do expect to make up that production in the fourth quarter, so this is just a timing impact. Finally, executive transition costs and a proactive decision to settle some labor disputes at Goderich resulted in a total charge of about $3 million. If not for these items this quarter, we would have handily outperformed prior year results, even after adjusting for the $15 million in Goderich strike-related impact we called out last year.

I'd also like to note that our UK salt business EBITDA was a couple of million lower this quarter compared to 2018 due to lower year-over-year production rates following the very mild winter last season. Obviously, we would like to have achieve better results in the salt business, and as Kevin said, the focus we have placed on corrective actions to mine more efficiently at the Goderich mine are already yielding benefits as seen in the very strong production results in October, and our Cote Blanche mine has also been performing at or above plan coming out of this (indiscernible). Both of these are great signs for the salt segment overall.

Turning to Slide 11, the Plant Nutrition North America segment delivered 6% revenue growth compared to the 2018 third quarter driven by an 8% increase in sales volumes, partially offset by a 3% decline in average selling prices. Operating earnings in EBITDA both increased as a result of lower production cost and revenue growth. I would also like to note that logistics costs in the quarter were higher versus prior year due to less favorable geographic sales mix and increased warehousing costs.

Our third quarter Plant Nutrition South America results found on Slide 12 were broadly down versus the strong third-quarter results of 2018. Third quarter 2019 revenue declined 4% on volume and price weakness. Agriculture revenue dropped 5% from third quarter 2018 levels, driven primarily by lower B2B sales to distributors; although, importantly, we saw an increase in direct-to-grower our sales. We believe our agriculture sales this quarter were pressured by delayed planting, trade uncertainty and weaker farmer economics in Brazil, which tend to have a larger impact on the smaller growers ultimately served through our B2B channel. Our larger more sophisticated grower customers are still investing in our yield-enhancing products even in a less favorable agriculture market. Chemical solutions revenue for this segment was flat compared to prior year on a 14% increase in sales volumes, offset by a 12% decline in average selling prices. As we previously discussed, this business continues to sell higher volumes of low-priced water treatment products compared to prior year as many states and municipalities are looking to spend less on water treatment solution. Unfortunately, we also saw some margin compression this quarter in the agriculture business as the modest price lift was more than offset by higher unit cost due to raw material inputs and lower production levels. It's also important to note that we continue to invest more each year in our sales force, agronomy expertise and marketing efforts to drive strong growth going forward. All these things together resulted in a 28% decline in operating earnings and a 22% decline in EBITDA compared to the prior year quarter. We begin discussing our fourth quarter outlook on Slide 13 with a look at expectations for each of our segments for the rest of the year.

Given the strength of our North American highway deicing bid results, we expect low teens salt revenue growth compared to the fourth quarter of last year. Remember that our bid season results impact only about 2/3 of our overall highway deicing business, the remainder is shaped by our bulk sales to chemical producers and our UK salt business. In both of those businesses, we expect lower sales volumes versus prior year.

Our sales to chemical customers have been reduced as we have prioritized our constrained supply on higher margin deicing customers. Given the improved pricing environment, increased volumes and significant improvements in operating performance at our North American salt mines, we expect fourth quarter 2019 EBITDA growth of between 40% and 50% versus prior year where we fall in that range will ultimately be determined by how winter weather unfolds and our ability to continue hitting our planned production rates at our North American mines. Both Plant Nutrition segments are dealing with some demand challenges and we've reduced our full year volume outlook for each to take into account third quarter results and the fact that we don't expect to recover all of the lost sales by year-end.

In North America, we expect a strong fourth quarter of SOP sales, but micronutrients are likely to remain challenged. In South America, we expect earnings growth in the fourth quarter versus prior year as we believe a combination of delayed plantings and trade uncertainty pushed buying decisions into the fourth quarter. This shift is also expected to improve the segment's EBITDA margin compared to prior year results as we expect to sell more of our higher value full year products. It's also important to note that in this segment, we do expect a 5% to 8% currency translation headwind in the fourth quarter when compared to prior year. Our full year consolidated outlook is provided on Slide 14. As noted in our press release, we've reduced our full-year EBITDA outlook to take into account the weaker results and outlook for the Plant Nutrition businesses. Before beginning the question and answer session, I'd like to touch on our leverage and free cash flow expectations.

Given our lower EBITDA outlook, we now expect to generate between $80 million and $90 million of free cash flow this year, but expect a very large step-up in 2020. We also expect in the year with an adjusted net debt leverage ratio of about 3.9 times. Lastly, it's important to note that all of these estimates exclude the benefits that we believe will come from the enterprise wide optimization plan we are in the process of deploying. While we aren't quite ready to discuss the value of the internal opportunities we've identified, we are confident that our new operating structure strengthened mining capability and recent success executing the basics, day in and day out, will serve as the foundation to execute our optimization plan over the coming months and quarters.

With that, I'll now ask the operator to begin the Q&A session. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) We will now take our first question from Joel Jackson with BMO Capital Markets.

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Joel Jackson, BMO Capital Markets Equity Research - Director of Fertilizer Research & Analyst [2]

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Jamie, Kevin, I want to discuss the geology issues you've been facing, maybe going back to some of the problems that we saw at Goderich a year or couple of years ago, over fines or maybe some of the particle distribution. Can you talk about, is this just straight geology or is this related to how you are now managing the ore with the continuous miner versus drill and blast before and wasn't the optical sorter supposed to fix a lot of this, or is this a new issue?

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James D. Standen, Compass Minerals International, Inc. - CFO [3]

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Yes, that's a good question, Joel. So the optical sorters are designed obviously to separate the small rock particles from the salt particles; as long as you have a mixture of those 2, those machines are operating just fine. What we hit in the third quarter was actually more of a geologic anomaly. It was an intrusion of mineral we call anhydride and that's why we've engaged the ground-penetrating radar, is to really understand the extent and breadth of this formation, because we don't want to mine where that exist, it's not a profitable venture, it is very difficult, very hard on the machines, and optical sorters don't work when you're in those conditions, because the level of reject materials are non-salt materials, it is just too high for the optical sorters to function, notwithstanding the difficulty on the mining machinery itself. So we've got a good handle so far just through the ground-penetrating radar; the technique that we've deployed were also going to start some horizontal drilling, probably this weekend to better define that feature. Because we want to set up as we're working towards this long-term mine plan, we want to set the mine up in such a manner that we avoid those kinds of areas. So in the process of determining what that looks like, look the bad news is one of the units had a tough quarter in that material. The good news is, as we are defining it and we can avoid those areas in the future, which we think will result in much better performance than what we saw in the third quarter, which as I said in the prepared remarks as well as in the press release, were disappointing from our perspective.

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Joel Jackson, BMO Capital Markets Equity Research - Director of Fertilizer Research & Analyst [4]

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Okay. And in South America, I know, Kevin, this may not be fair because you're going to go through a process here and we've now been at this company for several months. When you look at that South American business, it certainly is not meaning the types of double-digit growth caters and targets that the management team would have wanted some years ago on the acquisition, when you look at this, your gut feeling is, does this business stay intact, you need to cut it up, because there are some things you can do to acquire to make it better and what is your gut on that?

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Kevin S. Crutchfield, Compass Minerals International, Inc. - President, CEO & Director [5]

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Yes, good question. So, in our job, well on the way we're looking at it, Joel, is to make the company run to its full potential and stay focused on execution. I think it would be fair to say that we've had some execution problems here in the past, I mean, I really believe that there is a lot of pent-up potential inside the company, both across Salt and Plant Nutrition businesses where we can realize better results, better execution, better performance and once we get the company kind of stood up and running to the degree we believe it's possible, then I think that's when we're going to begin working through more of a strategic discussion internally with our Board and then begin having that discussion externally. So I don't want to front run anything at all. I think it's kind of first things first, let's get the company running at its full potential. We've got a lot of work to do there but again, I continue to be very, very encouraged about the internal potential that exists here just from a transformation perspective and we're knee-deep into that work right now and look forward to sharing our thinking on that early in 2020 just to try to paint what we think the potential of the company does look like, so that everybody is on board with where we're going.

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Operator [6]

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(Operator Instructions) We'll will now take our next question from Christopher Parkinson with Credit Suisse.

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Christopher S. Parkinson, Crédit Suisse AG, Research Division - Director of Equity Research [7]

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Great. Kind of a corollary of the last question, but Kevin, now that you've had a few quarters in your belt evaluating the situation at Goderich, what have ultimately been the biggest surprises in Salt mining versus your past experience? And where ultimately does your past experience enable you to truly fix the issues, I mean, it just seems like a lot still in flux, but I just want to get a sense of your degree of confidence in your ability to truly turn everything around.

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Kevin S. Crutchfield, Compass Minerals International, Inc. - President, CEO & Director [8]

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Well, look, I'll say my degree of confidence in our ability to turn this around with the T&O changes we've made on the operating side, I believe is very, very high, I think it should come a little more natural to us, haven't come as natural to Goderich. So I think, as I've said before, we didn't get where we are overnight, we won't get where we need to be overnight either. It's a process, it's a continuum, but we're taking very definitive steps here on the development of this long term mine plan as is illustrated in the slides to set this mine up for the next 50 years. And while I understand the pressure of demonstrating some results quarter-on-quarter and we're completely focused on that, we do want to be focused on the long-term mine plan here too, because we are setting this thing up for the next 50 years or so. So I think through a combination of better maintenance practices, better utilization, better availability coupled with mining where there aren't geologic anomalies, then coupled with the institution of this new room and pillar system that is set up more on an angle as opposed to 90-degree angles and then ultimately setting up these long-term roadways where we can create these rooms where we mine for 4 to 6 years and then shut them off permanently and you don't have all these ground control costs, I think will manifest itself in truly world-class, it's world-class reserve already, it will truly manifest itself in a world-class asset that's performing at world-class levels. So we've only scratched the potential of where Goderich can be long-term, but just to reiterate my confidence level in our team's ability to get this mine running at that world-class level is exceptionally high. There's not a doubt in my mind, we will get there.

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Christopher S. Parkinson, Crédit Suisse AG, Research Division - Director of Equity Research [9]

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It's very helpful and just clearly '19 is in the benchmark you want investors to think about the [landing biz], but could you just give us an update on your confidence also on this front for your portfolio positioning, distribution, your transportation logistics, capabilities. So just without the concept of any portfolio action, just what are the key puts and takes that we should be thinking about as we head into 2020 and even 2020. It just seems like there are a lot of efforts to recalibrate the growth in the margin profile, so just scrap in the near term, how should we be thinking about this intermediate to long-term?

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James D. Standen, Compass Minerals International, Inc. - CFO [10]

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On the salt franchise? Is that your question?

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Christopher S. Parkinson, Crédit Suisse AG, Research Division - Director of Equity Research [11]

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No, sorry, for the Brazilian business.

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James D. Standen, Compass Minerals International, Inc. - CFO [12]

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Yes, let me start with maybe, so this is a tough year, obviously, with trade uncertainty, African swine flu, China demand; there are a number of factors. Fundamentally, we feel very good about the long-term growth profile of our South American business. The key competitive position than it has in the marketplace, it's a market leader as all of our businesses. So, we feel very, very good about our B2C business as well. So we continue to think about top-line growth in the 10% area over the longer period of time and that kind of low to mid-teens earnings growth potential as well.

Now, it's going to ebb and flow, we've seen that when we bought the business, we had a flat year. We bought it in '16, had a flat year in '17, demonstrated about 20% growth in 2018. Now it's feeling a bit flattish again in local currency. That's frustrating, but, I think the real focus and the potential down there is twofold. It's in our B2C category, which maybe Brad can add some color too, and then this enterprise-wide optimization program will really help us achieve at those earnings growth levels. We see a lot of opportunity through global sourcing through sales force efficiency. There is a lot of things. Brad, do you want to talk a little bit about B2C?

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S. Bradley Griffith, Compass Minerals International, Inc. - Chief Commercial Officer [13]

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Yes, sure. Thanks, Jamie. Christopher, hello. Just building on Jamie's comments, we look at our direct-to-farm business internally codenamed B2C, we are seeing over a 3 year CAGR that 22% range of performance in terms of operating income. And I think when we look even at 2019 year-to-date, given the difficulties that Jamie outlined in terms of global trade uncertainty the African swine fever [parts of] BARDA rate behind where farmers were in 2018. That business is still looking to grow about 11% year-to-date and we expect it to close stronger. So when we look at our competitive peer group through (inaudible), we are just over 2x the industry average in terms of expected growth. So we feel very good about the investment thesis that we made in Brazil. Our direct-to-farm business year-to-date accounts for about half of our Brazilian business revenues and over 60% of our operating income, so I suppose in poker terms we want to feed the hot hand and we certainly feel like our direct-to-farm approach is that hot hand. On the B2B side, that's where we kind of felt some of the pressure exacerbated by the kind of environmental topics that we spoke about a little bit earlier. Our customers are having a challenging time. We have small customers, we have large commercial customers. We sell them raw materials, intermediates and finished goods, and when they're feeling the pain, they buy less from us. And so I think as we look at our portfolio and re-calibrating that portfolio and our resources and making sure we're able to feed the hot hand without incurring additional expense, that's how we look at enterprise optimization and it's a significant opportunity for our entire business.

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Operator [14]

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We’ll now take our next question from Vincent Anderson with Stifel.

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Vincent Alwardt Anderson, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [15]

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I wanted to go back to geology just for a minute. So how far out can you really get with ground radar and horizontal drilling and is the plan in the new mining districts to make one long cut into each new panel and sample out along the Chevron's and then maybe a long shot here, I know you are long ways away from Michigan, but is there any reliable geological work that's been done on the other end of the reserve and anything you can glean from it with regards to the consistency of the ore grade at least at the book ends of the deposit?

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James D. Standen, Compass Minerals International, Inc. - CFO [16]

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Hitting the last part of your question first, I don't know the answer to that question. That's a good point, it would be worth looking at. If you look at the end of the day what horizontal drilling tells you is what's in that core. But if you sample enough data, you can create a very nice well-defined image of what you're ore body looks like. That coupled with the ground-penetrating radar. I'm not sure of the length of the ground-penetrating radar that works because when it hits these anomalous anhydride areas, it will bounce back, but we have enough confidence in the technology that we believe it's going to create a very good image for us to very completely understand what's in the area of concern right now, but more importantly what lies across the areas where we plan to lay out future parts of the mines, look this is just mining 101, is understanding your resource and that's what we're in the process of doing right now, is understanding the resource and as a consequence that is what we will drive what the long-term mine plan looks like to ensure that you can never 100% eliminate the chances of having geologic anomaly, but you can certainly mitigate those circumstances to a great degree by deploying the technologies that we're talking about here. So I think there is a very high level of confidence that we can do that. And I think we're talking about the depth, the penetration on this radar is about a mile. Excuse me, and the horizontal drilling itself will penetrate a mile and then we drop off laterals along the way and you can start at the development lift and go all the way down through the fourth lift that we're mining. So it will really be very additive in terms of defining the resource.

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Vincent Alwardt Anderson, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [17]

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That's very helpful. And just quickly to bring it back to the numbers on Salt. I appreciate the detailed 3Q '19 cost overages you gave, Jamie, how should we think about the hangover in inventories into the first half of 2020 or was this pretty well contained to 3Q assuming Goderich continues to improve.

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James D. Standen, Compass Minerals International, Inc. - CFO [18]

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Well, yes. So the salt we made, a lot of that did flush through the quarter, we will have it some into fourth quarter. If we continue at the rates we are running, as we mentioned running above targeted rates, our internal planned rates, we shouldn't expect to have a significant carry over into '20.

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Vincent Alwardt Anderson, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [19]

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That's great. Okay. I'm going to sneak one more in, if that's okay. It did look like one of your more French competitors in the eastern US was sitting on some high stockpiles and didn't start shipping in earnest really until fairly late in the third quarter. Did you see any pull eastward in your contract book towards the end of the bid season?

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James D. Standen, Compass Minerals International, Inc. - CFO [20]

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Not really. A bulk of our business was booked when we reported earnings in August, remember you recall, we were 85% complete. So a lot of our remaining book was commercial, I think Brad, you would agree, we didn't see a particular pools of these.

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Operator [21]

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We will now take our next question from Mark Connelly with Stephens Inc.

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Mark William Connelly, Stephens Inc., Research Division - MD & Senior Equity Research Analyst [22]

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MOP prices have been a little bit sloppy and it feels like SOP is holding up better. Could you talk about the economic trade-offs and how confident you are that SOP can hold up even if MOP doesn't recover from this lousy summer?

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S. Bradley Griffith, Compass Minerals International, Inc. - Chief Commercial Officer [23]

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Yes, hi, Mark, this is Brad Griffith. I like how you characterize MOP. I would say, we feel very good about pricing and the stability of the market. I think what we've seen is based on the unprecedented spring that the United States went through with respect to precipitation of 125-year weather event, there were a number, there was a significant amount of inventory carryover in the channel. And so what we're seeing now is we're seeing good demand from our tree nuts, berries, chloride-sensitive crops in the Southeast, but also now in the Western US, in the Pacific Northwest. So it's very good to see those areas coming online.

Now the almond harvest is probably about anywhere from 2 to 4 weeks delayed from what we typically see in an average year and it's been an extremely resilient crop as it pertains to export stability. The EU is still strong, India is still strong. So I think that those export data points as well as just internal demand for the crops that really give SOP a good pricing. Now having said that, Mark, we've said in the past, we will continue to price dynamically to the market. We have a significant share of the North American market and we certainly intend to ensure that continues to be the case. I think we also feel very good about our cost of production in our Ogden asset. We've had a good harvest, that we've been able to use our ( pond] tons to get attractive margins thus far.

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Mark William Connelly, Stephens Inc., Research Division - MD & Senior Equity Research Analyst [24]

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Fantastic. Just one question, maybe for Jamie. I think investors want to hear that you can keep your CapEx in that 90 to 110 range, but they know you're spending more on these heavy pieces of equipment. So, can you remind us, some of the puts and takes in the overall CapEx spend that's allowing you to stay in that range, even as you proceed through these big new initiatives?

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James D. Standen, Compass Minerals International, Inc. - CFO [25]

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Yes. We're focused on finding the perfect amount of MOB maintenance spend, which we believe is in the $70 million to $80 million range for this business. So if we're going to be running in the 90 to 110 out in the future as we go through this long-term mine plan, we think there is plenty of flexibility there to make some adjustments even on the MOB side to absorb some of the bulkiness that may come with the longer-term mine plan, which we haven't outlined yet. We don't have any specific line of sight on the timing exactly of that but because of that MOB level and that targeted range of 90 to 110, we believe we can fit it in there.

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Operator [26]

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(Operator Instructions) We will now take our next question from Bob Koort with Goldman Sachs.

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Tom Glenski;Goldman Sachs, Analyst, [27]

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This is Tom Glenski on for Bob. So first just touching back on salt unit costs, so transportation cost per ton were down around 20% quarter-over-quarter. Could you just walk through the drivers there and was it mainly just weaker volume in 2Q and are there any larger factors at play?

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James D. Standen, Compass Minerals International, Inc. - CFO [28]

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So are you in Salt? I'm sorry.

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Tom Glenski;Goldman Sachs, Analyst, [29]

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Yes.

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Unidentified Company Representative, [30]

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So, are you talking about logistics cost just in the salt segment? Are you talking about sequentially or year-over-year?

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Tom Glenski;Goldman Sachs, Analyst, [31]

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Sequentially.

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James D. Standen, Compass Minerals International, Inc. - CFO [32]

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Yes, sure. So sequentially we always see a decline, I think the better way to look at salt cost would be year-over-year because of really mix activity of what we're shipping in the third quarter versus the second quarter. So in the third quarter, we see a tick up in highway deicing shipping, right, as we do our pre-fill activity, so we tend to see lower shipping costs in the third quarter. The other piece of that would have been there was some Mississippi River flooding impact that we incurred that was about $2.8 million of cost in the second quarter that would have run through distribution costs.

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Tom Glenski;Goldman Sachs, Analyst, [33]

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Okay, that's helpful. And then second, just going back to the labor discussions at Goderich, could you give any color on just what the conversations with employees sounds like and maybe how you see that progressing in the next year?

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Kevin S. Crutchfield, Compass Minerals International, Inc. - President, CEO & Director [34]

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Yes, sure. I mean, as we talked about, we resolved a fair number of outstanding disputes that had been laying around up there for some time and myself and our new Chief Operating Officer, George Schuller, along with the management team there at the mine have been working very diligently with the union leadership there as well as our employee base to try to set some mutual goals together, how we can work together well, continue to resolve disputes, not allow things to get to the grievance category, because at the end of the day it's a partnership up there, they are our partners we can't do what we need to do without them, they can't do what they need to do without us. So it is a partnership and what we're trying to do is re-forge that relationship and create that partnership so we can work together to solve problems because as I have shared with them and George as well, a safe profitable productive Goderich is good for everybody around the table. So, look, it's pretty basic at the end of the day I think, treating people like the way you want to be treated, and working with them as a partner, I think we will set the stage for better relations going forward. Again, we didn't get here overnight, we won't get out of this overnight, it will take time and rebuilding some trust, but I believe the proper steps have been taken and we look forward to continuing to forge that relationship.

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Operator [35]

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We will now take our next question from Jeff Zekauskas with JP Morgan.

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Jeffrey John Zekauskas, JP Morgan Chase & Co, Research Division - Senior Analyst [36]

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I know October is early in snow season but there were some snow in the Dakotas and some snow in Minneapolis and Chicago. Was there appreciable snowfall influencing the fourth quarter because of early snow or no?

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Kevin S. Crutchfield, Compass Minerals International, Inc. - President, CEO & Director [37]

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Not yet, Jeff, it's too early on that, we're seeing really nice pre-fill. So we're excited about that. So snow impact, it's nice to see, it's nice to see it start to get going, but it's not appreciable yet.

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Jeffrey John Zekauskas, JP Morgan Chase & Co, Research Division - Senior Analyst [38]

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Okay. And then did you say that your geological issue increased your costs by $6 million in in the quarter?

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James D. Standen, Compass Minerals International, Inc. - CFO [39]

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Yes. So the impact of producing fewer tons in the quarter because of the geology create the way we account for our cost to come through our P&L that impacted in the current period.

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Jeffrey John Zekauskas, JP Morgan Chase & Co, Research Division - Senior Analyst [40]

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Okay. And then lastly, in terms of your capital expenditure expectations in the future, where you in effect saying that your optimization program could cost you as much as $20 million annually in CapEx or were you not saying that because to get to that 90 to 110 numbers and normal number?

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James D. Standen, Compass Minerals International, Inc. - CFO [41]

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Well, what we're saying is, there are a number of opportunities to invest internally, right, to generate higher profits. The maintenance of business, let's call it that $75 million, I said $70 million to $80 million, you've got other opportunities to invest along the way. And we should be able to absorb any impact related to our long-term mine plan. So the long-term mine plan CapEx is not the difference, there are other items that will come through there over time.

So you're up to optimization program is not a capital-intensive optimization program. It's more operational. Is that was your saying?

Yes, I'm sorry, yes. So it is mostly operational, there are opportunities that will identified that will require some capital and will give more clarity and color about that, but certainly the things that don't require any capital and can be done quickly, we'll do as quickly as we can and that will drive higher profitability and generate more cash flow to make incremental investments in the business. So yes, I would categorize it as operational first but we will identify opportunities to invest.

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Kevin S. Crutchfield, Compass Minerals International, Inc. - President, CEO & Director [42]

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And then in terms of how we allocate that amount will figure out what we can afford to spend and I think as we've talked about, we've kind of a pretty good idea on what that range is and then we'll look at all the opportunities, all the projects and rank them in order of payback return, etcetera. And then when the capital is gone, it's gone, and then we will enter the phase for the next period, so there is a very disciplined approach and process in place there that we will deploy going forward.

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Operator [43]

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We will now take our next question from Chris Shaw with Monness, Crespi.

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Christopher Lawrence Shaw, Monness, Crespi, Hardt & Co., Inc., Research Division - Research Analyst [44]

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Going back to Brazil for a second. Just on your B2B business, I guess in Brazil, I think that people get worried when, I think, distributors sort of dial back. Is there any sense that this is a channel inventory issue, particularly given that the B2C is doing better. Have they been over bought in the past, does it have too much inventory or are you not seeing that?

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S. Bradley Griffith, Compass Minerals International, Inc. - Chief Commercial Officer [45]

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Hey, Chris, Brad, again, I think that's a great question. When we look at our B2C business, I like how you delineated those 2 segments. On our direct-to-farm business, we call that POG, so we get product on the ground through that team and distribution is not sitting in warehouses. So the statistics that I named earlier that is a product that is getting on the farm getting used in crop. On the direct to sort of commercial side of the business, which could be commercial customers and then competitors, I think that it's less that they have a significant amount of inventory. I think that there is certainly some inventory in the channel, but it's not what I have seen in Brazil in prior years from other players. I think it's just more of concern around market demand and as some of the global uncertainty in terms of how aggressive producers are going to be in terms of managing their inputs and share of wallet. So I sense that that's more of the situation and more on the uncertainty side of things, versus sort of a channel epidemic, if you will.

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Christopher Lawrence Shaw, Monness, Crespi, Hardt & Co., Inc., Research Division - Research Analyst [46]

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Okay. And then just shifting back to Salt. I guess more of the longer-term conceptual question, has Goderich, I guess in all operations continue to improve and you're producing more volumes, what's the thought going ahead in terms of market share and volume versus price. I mean how do you see that going forward, are you going to try to get more volume out there to, I guess, cover cost the mine or don't want to flood the market and sacrifice some prices. Do you have a philosophy going ahead?

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S. Bradley Griffith, Compass Minerals International, Inc. - Chief Commercial Officer [47]

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Yes, fair point. Because we always want to try to achieve fair value for our products. So to the extent that we are successful in taking Goderich to its potential, which I fully believe we will be the first absorption that will occur there will be the import side, so we will lose the expensive buying import salt, which would be a margin expansion exercise in and of itself. And then from there, depending on what kind of volume, we ultimately decide Goderich ought to be, then we can think about longer market reach as opposed to stealing market share in the current market. So it will give us a longer reach because you'll have the cost structure to be able to do it relative to where we are now. So that's how we're approaching it over a gradual period.

I want to clean up some comments that I made earlier, specific to geology defining it. So on the horizontal drilling, we can go kind of circle a mile in any direction. And as I mentioned drop laterals off, so that gives you a good view of what's in that, and then the ground-penetrating radar is, maybe 100 meters or so, something like that with a little bit more, even more definition. And then the question around Michigan, while I think the data about what's happening in Michigan is interesting and helpful as it relates to defining the sort of the breadth and perspective of the reserve base. What we're focused on is localized geologic issues that impact day-to-day decisions. month-to-month decisions and setting up a long-term mine plan. So I just want to be on record kind of cleaning that up relative to what I said before, just so I was clear.

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Operator [48]

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We will now take our next question from David Begleiter with Deutsche Bank.

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David L. Begleiter, Deutsche Bank AG, Research Division - MD and Senior Research Analyst [49]

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Kevin, staying on the highway deicing issue, you just mentioned, perhaps a longer market reach versus steel and market share. What's the difference between those 2 since it's both involve taking someone else's business at the end of the day?

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Kevin S. Crutchfield, Compass Minerals International, Inc. - President, CEO & Director [50]

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Yes, that's a fair point. But I think you have to think about it from a cost structure perspective and look, we're not talking about steel and market share in Europe or something. We are just talking about moving over maybe a state or a state and a half potentially in Eastern or Western reach, and when we achieve the cost structure there that we think is possible, it will become an option to us. I'm not saying that we will, we'll look at the economics of it and does it make sense to do it or does it not. So we will approach it from a margin perspective. Does it grow margins, is the incremental time worth pushing, pushing it out extra distance, are we happy with sort of the served market that we're in now. It will be a high-class problem when we get to have that discussion, for sure, relative to where we've been, and look forward to having that discussion internally when it presents itself.

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David L. Begleiter, Deutsche Bank AG, Research Division - MD and Senior Research Analyst [51]

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Got it. And this year is 18% increase in bid volumes recapture all this year you've lost the last few years due to some operational issues.

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Kevin S. Crutchfield, Compass Minerals International, Inc. - President, CEO & Director [52]

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So we've recaptured a lot of our share. We think that there is a little bit more to go, because you'll recall when we took our commitments down back in 2018, that was coming off of 2 mild winter, so the market kind of came back and we reduced our commitments. So we believe there is a bit more to go, not a lot we've got most of it back.

Brad, do you want to add a little bit color?

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S. Bradley Griffith, Compass Minerals International, Inc. - Chief Commercial Officer [53]

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Just one comment David, you know, as Kevin has explained, as we become that reliable supplier, what I'm learning from our customers is just how coveted our product is in terms of the product specification as it pertains to other global options. So I think there is no question in my mind either that we're going to improve and there are opportunities on the chemical side of the business, on the commercial packaging side of the business in addition to the highway deicing side of the business, our team is sitting on a book of demand right now. So like Kevin, I like how you term it, it's a personal problem and so we are really looking forward to putting those tons to use.

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Operator [54]

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(Operator Instructions) We will now take our next question from Seth Goldstein with Morningstar.

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Seth Goldstein, Morningstar Inc., Research Division - Equity Analyst [55]

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I will just ask one Salt question, I know we've talked about it a lot today, but over the next couple years, assuming you continue to produce on plan. Can you quantify the continued volume increase and cost decrease margin impact and so on. And in light of the recent geology issues, is there an updated timeline for when you expect to be at full production?

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Kevin S. Crutchfield, Compass Minerals International, Inc. - President, CEO & Director [56]

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Look, we're still in the process of determining what we think full production can be. So over that continuum, we're kind of, I think we sit through October, year-over-year, we're up circa 40%. I expect another step function change into a similar magnitude going into 2020 and 2021. So again, it's going to take some time, because we've got to work towards this long-term mine plan and getting ourselves set for the future, not trying to prove anything in a quarter for example, because you don't want to make a mistake here and compromise 50 years’ worth of reserves through short-term thinking as we work through this. So it's going to take some time, but I'm very confident in the team's ability to generate this mine plan. And then once we have it in place, we'll be able to execute against it.

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Seth Goldstein, Morningstar Inc., Research Division - Equity Analyst [57]

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Okay, great. And then as we turn to 2020 in the North American business, would you expect a strong rebound in micronutrients and SOP from higher acres planted next year or what's your sort of initial read there?

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S. Bradley Griffith, Compass Minerals International, Inc. - Chief Commercial Officer [58]

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Brad, again. Yes, we certainly expect that. And as you know our dry dispersible powder micronutrients take a ride to the acre on the macronutrients. So as more acres are planted and more fertility applied, there is a significant opportunity for our micronutrients to take a ride with those macros to the field. An exciting development that we have, we've implemented a systems-based approach to our nutritional products. We branded it as Compass Crops Edge in the United States, and South America, it's called the Supera System. What we see with this Matt is about a 6% to 8% improvement in yield over grower standard practice for fertility and a win rate of 70% and in some cases 80%. So what we know is our products do create value for the farmer and generate a very attractive return on their investments. So as things normalize, we anticipate, you have to plan for normal weather, if you will, we see more acres, we see acres in the low to mid 90 range in corn and $85 million range in soybeans, and we have a portfolio for both of those key crops in addition to the specialty crops where we sell SOP and some of our micronutrients as well. So yes, we are bullish on 2020.

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Theresa L. Womble, Compass Minerals International, Inc. - Director of IR & Assistant Treasurer [59]

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Thank you, everyone. I think that's going to be it for the Q&A today. If you have any additional questions please contact Investor Relations, they will be here to answer your questions. Thank you.

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Operator [60]

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This concludes today's call. Thank you for your participation, you may now disconnect.