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Edited Transcript of CMP earnings conference call or presentation 11-Feb-20 3:00pm GMT

·48 min read

Q4 2019 Compass Minerals International Inc Earnings Call OVERLAND PARK Feb 18, 2020 (Thomson StreetEvents) -- Edited Transcript of Compass Minerals International Inc earnings conference call or presentation Tuesday, February 11, 2020 at 3:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * George J. Schuller Compass Minerals International, Inc. - Chief Operations Officer * 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 ================================================================================ Conference Call Participants ================================================================================ * Christopher S. Parkinson Crédit Suisse AG, Research Division - Director of Equity Research * David Cyrus Silver CL King & Associates, Inc., Research Division - Senior VP & Senior 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 * Thomas Glinski Goldman Sachs Group Inc., Research Division - Research Analyst * Vincent Alwardt Anderson Stifel, Nicolaus & Company, Incorporated, Research Division - Associate ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good day, everyone. Welcome to the Compass Minerals' fourth quarter earnings conference. Today's conference is being recorded. At this time, I'd like to turn the conference over to Ms. Theresa Womble, Director of Investor Relations. Please go ahead, ma'am. -------------------------------------------------------------------------------- Theresa L. Womble, Compass Minerals International, Inc. - Director of IR & Assistant Treasurer [2] -------------------------------------------------------------------------------- Thank you, and good morning. Today, our CEO, Kevin Crutchfield; CFO, Jamie Standen, will review Compass Minerals' fourth quarter and full year results and our outlook for 2020 as well as some key strategic items. Also on the call today are our Chief Operating Officer, George Schuller; and our Chief Commercial Officer, Brad Griffith, and they will be available for questions following our prepared remarks. 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, February 11, 2020 and involve risks and uncertainties that could cause the company's actual results to differ materially. A discussion of these risks can be found in our SEC filings located online at investors.compassminerals.com. Our remarks today also include non-GAAP financial measures, which we feel are important to provide a full understanding of our businesses and our operating conditions. You can find reconciliations of these measures in our earnings release or in our earnings presentation, both of which are also available at investors.compassminerals.com. With that housekeeping out of the way, I now turn the call over to Kevin. -------------------------------------------------------------------------------- Kevin S. Crutchfield, Compass Minerals International, Inc. - President, CEO & Director [3] -------------------------------------------------------------------------------- Thanks, Theresa, and good morning, everyone. I'd like to start today by broadly summarizing our financial and operational results for 2019, before providing some thoughts on our continued evaluation of the company's strategic direction. This has been a year of challenges, recovery and evaluation for Compass Minerals. Our Salt business delivered substantial improvements in operating earnings and EBITDA for both the 2019 fourth quarter and the full year. While our Plant Nutrition businesses lagged full year 2018 results, both generated modest improvement in the fourth quarter. The improvement in full year Salt results was primarily driven by a combination of increased average selling prices and improved salt production and lower cost at the Goderich mine. Plant Nutrition North America reported a 9% dip in 2019 EBITDA as SOP sales that were lost to poor weather conditions early in the year, only partially recovered in the fall. And micronutrient demand weakened. While volumes were lower versus 2018, our SOP-only price remained steady compared to 2018, and we achieved strong pond-only SOP production at our Utah facility. Our Plant Nutrition South America business was pressured by agriculture trade uncertainty that ultimately resulted in growers being less likely to purchase higher value crop inputs. Even with that pressure, we delivered double-digit growth in our direct-to-grower agriculture sales channel. On a consolidated basis, the strength in the Salt business more than offset Plant Nutrition weakness and boosted our full year operating earnings 26% and EBITDA about 12% above 2018 results. Of course, these financial numbers only tell a part of our 2019 story. As we discussed on our last quarterly call, we've engaged in significant efforts to improve performance at our Goderich mine, and the impact has been very positive. On a year-over-year basis, the mine produced 40% more tons in 2019 compared to 2018 results, and we've reduced per unit production costs by approximately 29%. Importantly, too, we fully expect another step function change in output again in 2020, along with the commensurate cost reductions. Even with those 2 years of improvements, we're nowhere near close to the long-term potential of Goderich. I'm very proud of the work the team has done at Goderich to achieve these results. Some of this includes using very basic exploration techniques to size and map the geological anomalies we've recently encountered and adjust as needed to ensure we're cutting in the highest salt purity areas. We've also worked diligently to improve our overall relationship with our employees there who are now actively involved in finding solutions to problems and opportunities for greater operating efficiencies. And we have a new larger continuous mining unit now underground, undergoing assembly, which should further improve productive capability once it's commissioned early in the second quarter. I'd also like to call out our Cote Blanche mine in Louisiana for achieving strong results as well, despite a direct hit from hurricane and an unfortunate contractor safety incident. In total, the mine experienced 23 days of unplanned downtime and still met their 2019 production targets, and we're grateful to them for overcoming those difficult circumstances. And lastly, we continue to achieve excellent pond-based production of SOP at our Ogden, Utah facility, which has resulted in lower cost for the Plant Nutrition North America business and help the segment maintain strong margin performance for the quarter and the year. In fact, the fourth quarter of 2019 was the second highest sales quarter on record for Compass. We've also been delivered over the past several months, deeply evaluating all aspects of our company. In the past, I referred to this as a business MRI of sorts as we've worked to sift through the layers of Compass Minerals to determine where our strengths lie and identify our true core competencies. A couple of things have come into sharp focus throughout this process. First, Compass Minerals, throughout most of its history, has been and continues to be primarily a mining company. We're uniquely positioned to succeed in the salt industry, but the company has failed to execute on some critical investments and fell short of expectations, particularly at our flagship mine in Goderich. This accentuated the need to strengthen our leadership team with deep mining, technical and operational experience. Since I joined Compass Minerals last May, we've continued to build out our mining expertise with the addition of our Chief Operations Officer, George Schuller, who joins me on the call today as well as numerous others at various levels throughout the organization to bring decades of experience in mining and operations. And I fully expect that we will continue to augment the existing talent in the future as additional needs become apparent. As I've said before, what I've found since being here is that Compass Minerals has a privileged set of assets across the enterprise, in particular, our Goderich mine, where we see a great deal of untapped potential. We will succeed with these assets by working closely with our employees as the business partners they are, having the foresight to be able to course correct when geological or other challenges present themselves and taking a longer-term view on how to operate underground, utilizing best mining practices. The second key finding is this. The people of Compass Minerals are extremely talented and passionately committed to its success, but the muscle and environment necessary for a consistent execution culture needs to be strengthened. People call this many different things: high performance culture; operational excellence, et cetera. I think about it in rather simple terms, doing what we say we're going to do. We're working to build a culture where we routinely deliver on our promises, where every voice is heard and every voice matters, where new ideas to drive better results are supported. And if those ideas have strong business cases, are successfully implemented. In other words, a culture of ownership across the entire platform. That's what the enterprise-wide optimization program we began discussing in November is all about. In addition to driving material operating and financial improvements across the company, this effort is also fostering the skills needed to build that execution machine that we need for the long-term success, all the while supporting improved engagement throughout the organization. From a purely financial perspective, we expect to begin delivering incremental EBITDA improvements from these efforts in 2020 and expect to reach a significantly improved run rate by the end of 2022. I want to be clear, this is not an aspirational go get based on a top-down directly from me for the senior leadership team. Instead, this is a plan built from the bottom-up based on ideas and opportunities solicited from those who know us best, our people. And believe me, they have a lot of ideas and importantly, ownership in the outcomes. Out of hundreds of potential business improvement initiatives, we're implementing those with the most compelling business cases and that work is what's driving these expected improvements. One interesting example of an initiative that should have near-term benefits for us came from our team at Goderich. Our continuous mining machines have a tendency to create fine particles in the rock salt we produce, which can put us out of specification for some customers. As a result, a good bit of those fines never make it out of the mine. We have a team at the mine that we'll be adding a compaction unit underground to harvest these fines and compact them into salable product. Given that the cost of mining this salt has already been incurred, this project has the potential to increase annual production by at least high single-digit percentage points and also lower overall cost at the Goderich mine. In fact, after full implementation, we expect this project to pay back the modest CapEx cost in less than a year and reduce our Goderich mine per unit cash cost by about 5% at current operating rates. We expect to have the system in place in the third quarter of this year. I'm excited about where these optimization efforts are headed, not just because I have a high confidence that it'll drive better financial results, but also because it will improve our customers' experience with Compass Minerals, build stronger employee engagement and invigorate the entire enterprise. Finally, as a leadership team and with our Board, we continue to evaluate the best ways to position Compass Minerals to deliver long-term value to our shareholders, customers, employees and communities. As part of this process, we have begun a strategic review of our South American business to determine if and how it fits going forward with our core strengths and capabilities. We believe we can achieve immense success by focusing on our Salt and SOP core businesses, establishing ourselves as a leading minerals and mining company with difficult to replicate assets, serving essential end uses through low cost production and efficient distribution. While the specialty plant nutrients and chemical products we manufacture and sell in Brazil are very attractive long-term businesses, we're assessing whether we're the right partner to drive its success and unlock its full value. The strategic review will help determine the best path forward for our Plant Nutrition South America business and give us optimal flexibility to execute on our future strategic priorities. The process could result in a variety of outcomes, many of which should provide us with the ability to significantly reduce our long-term debt, generate additional returns to shareholders and potentially put us in a much better position to selectively and strategically complement our core Salt and SOP businesses. Completing this evaluation is one of several critical priorities we have in 2020. In addition, you've heard me say before, we remain steadfastly focused on delivering our full potential. As we work to continue the improvements we've seen in our operations and to deliver the operational and commercial benefits from our internal optimization program. Executing in these areas will also help us improve our balance sheet metrics. Last, but certainly much more important, we'll work to improve our safety results and our culture with a simple imperative, zero harm. In doing this, we'll be working to reduce opportunities for safety incidents by carefully addressing behaviors, key risks and hazards at all of our sites. We will also ensure that we continue to be responsible environmental stewards of all of our resources. And we're likewise focused on our responsibility to serve as partners to the communities, where our employees live and work. So before I turn the call over to Jamie, let me just conclude by saying this. We had a strong end to 2019, but there is much more work ahead to put us on a firm path to increasing value for all of our stakeholders. I'm confident we have the team in place for Compass Minerals to successfully navigate this journey and believe we are well positioned for a stronger 2020 and beyond. Jamie will now provide greater detail on our financial results and outlook. Jamie? -------------------------------------------------------------------------------- James D. Standen, Compass Minerals International, Inc. - CFO [4] -------------------------------------------------------------------------------- Thanks, Kevin, and good morning, everyone. I'll start on Slide 8 with a review of our Salt segment results. Fourth quarter 2019 Salt revenue increased 9% from prior year results on 4% volume growth and 5% higher average selling prices. Looking first at our highway deicing performance, we reported 4% higher sales volumes. And our average selling price for highway deicing products increased 10% from fourth quarter 2018 levels. These sales volume results may seem a little light given the above-average winter we experienced in parts of our North American market. However, our U.K. sales declined more than 50% due to warm winter weather, which offset a portion of the improved results in North America. Our Consumer & Industrial sales volumes grew 5% from 2018 fourth quarter results, while average selling prices for these products dipped 3%. A year-over-year change in product sales mix was the primary driver for the decline. For example, because of Goderich mine improvements, we sold a higher proportion of bulk salt product this year, which has a lower average selling price than some of our other product categories, like water conditioning salt. The Salt segment, as a whole, generated significant growth in both operating earnings and EBITDA of 41% and 36%, respectively. In addition to improved selling prices and lower per unit salt costs, lifting fourth quarter 2019 earnings, prior year results were negatively impacted by approximately $15 million in Goderich strike-related impacts. Before turning to some comments on full year results, I'd like to note that the EBITDA margin for the Salt segment at 31% is the highest we've achieved since transitioning to continuous mining and haulage at the Goderich mine, and beyond that, the highest since the third quarter of 2016. This is a strong indication that we're executing better across the entire Salt business, not just at Goderich. For the full year, Salt revenue increased 4% from 2019 results driven by a 5% improvement in average selling prices, which more than offset a 6% decline in sales volumes. Remember, our first half 2019 Salt sales volumes were impacted by lower highway deicing bid commitments for the 2018-2019 winter season. Operating earnings grew 45% and EBITDA increased 35% from 2018 results driven primarily by a combination of improved highway deicing sales price, favorable geographic sales mix and increased Consumer & Industrial sales volumes. Before moving on to Plant Nutrition results, I'll review the winter weather impact. For the fourth quarter, we did not report any benefit from above-average winter, as a combination of early season snows and warm weather in the U.K. kept sales volumes close to what average weather would have been expected to generate. For the full year, we reported a benefit of $20 million to $25 million in sales and $8 million to $10 million in operating earnings lift from above-average winter. Turning to Slide 9. The Plant Nutrition North America segment reported a 12% year-over-year decline in fourth quarter revenue, primarily driven by lower sales volumes. As we note on this slide, although the sales volumes were 11% below the prior year quarter, they were still quite robust. And in fact, they represent the second highest fourth quarter sales volumes in company history. This, as well as the resilience of our SOP pricing, demonstrate the attractive qualities of this business, particularly in regard to SOP, which is not highly correlated to the row crop economic cycle. Despite lower revenue, this segment generated a 6% increase in fourth quarter 2019 operating earnings and a 2% increase in EBITDA compared to prior year. This growth was primarily due to the continued improvement in per unit SOP production costs we delivered in 2019 compared to 2018 results. For the full year, Plant Nutrition North America operating earnings and EBITDA declined 11% and 9%, respectively. These declines primarily result from lower sales volumes as the business was unable to recoup sales volumes lost in the first half of 2019, when wet and cold weather reduced fertilizer applications in key North American markets. We review our Plant Nutrition South America results on Slide 10. I'll discuss these results in local currency, as this is the best measure of the business's underlying performance. The segment generated 4% revenue growth compared to fourth quarter 2018 results on both higher sales volumes and average selling prices. Fourth quarter 2019 chemical solutions sales volumes increased 17% from prior year results, primarily due to a rise in lower priced water treatment sales. Agriculture product fourth quarter sales volumes were 4% lower versus 2018 results. The decline was driven partially by lower sales through distribution and partially by a product sales mix shift in favor of full year products versus our soilified nutrients. That mix shift was favorable for both average selling price and earnings with fourth quarter 2019 operating earnings and EBITDA, up 23% and 18%, respectively, versus 2018 results. For the full year, this segment delivered 5% top line growth from 2018 levels, but operating earnings and EBITDA both declined, largely due to soil product sales to our B2B customers and lower year-over-year chlor-alkali product prices. We also continue to invest in our sales personnel for the direct-to-grower portion of the agriculture business, where we can more effectively drive increased adoption rates for our higher value and more innovative products. We continue to see strong returns on these investments, as our full year 2019 direct-to-grower agriculture revenue, in local currency, increased about 12% from 2018 results, despite a challenging global agriculture environment. This follows a 30% increase from 2017 to 2018. Some key outlook metrics for our business segments are provided on Slide 11. First half 2020 Salt segment revenues are expected to benefit primarily from improved Salt prices as our Salt cost benefits will be heavily weighted to the back half of 2020. Remember, volumes will ultimately be determined by winter weather activity. The Plant Nutrition North America segment is expected to see more normalized demand for SOP and micronutrients, assuming typical weather conditions in 2020. We note that some customer inventories were elevated at the end of 2019, which could shift the timing of our sales in this segment toward the second quarter. In South America, the first half of the year is typically the slow part of the year for agriculture demand. Although we are expecting a nice rebound of agriculture sales through distribution, we also anticipate that our chemical solutions business will continue to deliver growth in water treatment sales volumes. We provide an overview of full year 2020 sales volumes by segment and our corporate items on Slide 12. Full year salt volumes are expected to be between 11 million and 11.5 million tons as we continue to rebuild our inventories and replace our imports with Goderich tons. As we progress through the remainder of this winter and the upcoming bid season, we will update our full year volume guidance accordingly. We are guiding corporate and other expense, excluding depreciation and amortization as well as noncash stock-based compensation expenses. We will also be excluding stock-based compensation from our adjusted EBITDA results, as we believe this is a better way to view the cash-generating capabilities of the company. Our CapEx is modestly elevated from 2019 results, as we plan to spend about $10 million of capital investments related to efficiency projects with rapid payback periods that are part of our enterprise-wide optimization efforts as well as $5 million to $10 million estimated from new mine development spending. We estimate our full year 2020 effective tax rate to come in around 30%, which is higher than 2019, as a large portion of our year-over-year earnings improvement will be in Canada and Brazil, both of which have higher tax rates than the U.S. Our full year EBITDA range of $350 million to $400 million does include some improvements from the enterprise-wide optimization in 2020, with a much more meaningful impact in 2021 and 2022. Last, I'd like to touch on our free cash flow results and outlook. We did not reach our targeted free cash flow range for the full year due to a couple of reasons. In addition to some fourth quarter capital spending increases, we ended 2019 with increased inventories. A portion of this was driven by lower-than-expected SOP sales. In addition, our strong Goderich mine production allowed us to build some incremental salt inventories, which puts us in excellent position to efficiently serve our markets during the first quarter. For 2020, we expect our free cash flow to increase by $60 million to $70 million driven by improved results across all segments and collection of our $58 million outstanding IRS tax refund, partially offset by a further build of salt inventories and higher capital spending, as previously noted. All of our guidance is based on our business as it exists today. We are very optimistic about the year ahead, given the increased profitability of our Salt business and the expectation of better agriculture fundamentals in both North and South America. The initial benefits from our optimization efforts are expected to occur in the back half of 2020. While we're not providing specific guidance on the expected benefits, we are planning to report the financial impacts of these efforts as they are realized throughout the coming quarters and years. Finally, in regard to our balance sheet and leverage ratio. During 2020, we expect to drive our leverage ratio well below 4x debt to EBITDA through a combination of earnings improvement and debt reduction. With that, I'll now ask the operator to begin the Q&A session. Operator? ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Your first today from Mark Connelly with Stephens. -------------------------------------------------------------------------------- Mark William Connelly, Stephens Inc., Research Division - MD & Senior Equity Research Analyst [2] -------------------------------------------------------------------------------- Last quarter, Kevin, you said that we would hear more about the improvement opportunities in the Salt business. And you said today that we're nowhere near the potential. Can you give us some sense of how we should think about where we are in that progression? And given the heavy seasonality, is it reasonable to expect clear and consistent year-over-year improvement? Or is it going to be a lot lumpier than that? -------------------------------------------------------------------------------- Kevin S. Crutchfield, Compass Minerals International, Inc. - President, CEO & Director [3] -------------------------------------------------------------------------------- Yes. Look, I think it's a progression, Mark. As we talked about, I mean -- Goderich, I mean, we always end up talking about Goderich, but it was up 40%, '18 to '19, we expect another 15% to 20% increase this year. And I mean, we'll start to level out after a while, but I think it'll be a steady progression as we move -- as we integrate this new equipment, as we begin implementing the new mine plan. I think a lot of it will be, frankly, invisible from the outside looking in. But it'll be a steady progression. And as I've said before, I think in our served Salt areas, we'll probably run out of market before we run out of capability at Goderich. -------------------------------------------------------------------------------- Mark William Connelly, Stephens Inc., Research Division - MD & Senior Equity Research Analyst [4] -------------------------------------------------------------------------------- Okay. And just a question on SOP. We were surprised by the size of the margin improvement there. Can you help us understand what went right in Plant Nutrition? And whether you see this as a good operating quarter? Or is this a step change in performance at that asset? -------------------------------------------------------------------------------- Kevin S. Crutchfield, Compass Minerals International, Inc. - President, CEO & Director [5] -------------------------------------------------------------------------------- Yes. I mean, I think kudos to the team out there for -- despite kind of a slow start to the year, doing an excellent job of controlling input costs and running well. Some of it's a function of the internal improvement initiatives that we've talked about, but kudos to the team for really controlling that and finishing the year very strong, especially in the face of all the potash anguish that we saw across the rest of the industry. We were able to hold firm on price, control costs and maintain margins and even grow it in the fourth quarter of the year. So it was a nice finish. -------------------------------------------------------------------------------- Operator [6] -------------------------------------------------------------------------------- We'll hear next from Christopher Parkinson with Crédit Suisse. -------------------------------------------------------------------------------- Christopher S. Parkinson, Crédit Suisse AG, Research Division - Director of Equity Research [7] -------------------------------------------------------------------------------- In your strategic priority slide, you mentioned an evolution of core competencies and the adjacency strategies. Can you just offer a little more color on your initial thoughts on how you see portfolio evolution, 12, 24, 36 months out? As well as including any preliminary views of where you want the balance sheet to be? -------------------------------------------------------------------------------- Kevin S. Crutchfield, Compass Minerals International, Inc. - President, CEO & Director [8] -------------------------------------------------------------------------------- Sure. Look, I think from a priority standpoint, you've heard me pretty consistently say that the top 3 priorities are Goderich, and then after that, it's delivering on our full potential across the enterprise. So we have a lot of work there to do, a lot of upside potential just across the existing platform. So that's really job one. And then, of course, we've announced a strategic review of our Brazil assets, great team, great set of assets. That's going to take up time, and we want to really, really concentrate our focus in those 2 areas and not get distracted. But the senior management team and the Board as part of this process will now begin to kind of phase in and start to think about what adjacency strategies do look like, to take advantage of existing core competencies and work towards the formulation of a longer-term strategic plan, which I think I referenced on the last call that we'd be ready to start talking about midyear, maybe third quarter, sometime in that time frame. But what I want to do is not create distraction for anybody. We've got our hands full with the priorities that we've set forth on. We think there's just a extraordinary amount of internal opportunity for improvement across the platform, and we want to stay focused on that and then running a thorough, fulsome process with respect to Brazil. -------------------------------------------------------------------------------- Christopher S. Parkinson, Crédit Suisse AG, Research Division - Director of Equity Research [9] -------------------------------------------------------------------------------- Great. And just as a quick follow-up. When it comes to the SOP premium versus MOP, just how do you see this evolving in '20 given some MOP price pressure, but alternatively, specialty crop economics seem a little bit better off versus row crops. So can you just -- in terms of your price for value strategy, can you just give us a little more color on how you're thinking about this going forward? -------------------------------------------------------------------------------- Kevin S. Crutchfield, Compass Minerals International, Inc. - President, CEO & Director [10] -------------------------------------------------------------------------------- Yes. So I'll address that at a very high level and then turn it over to the expert, Brad, who's sitting here with me. But I guess, there's a belief that there's a correlation between MOP and SOP pricing. And I guess, over time, there has been some correlation. But when we look at the plants that need SOP, they just need SOP. There is no price at which MOP works because of the damage and potentially damaging the root structure via the chloride content. And as everybody knows, we have a very dominant position in that marketplace. And we think we ask fair value for our products. Now where you do -- you get into a little competition as or -- some of the vegetables around the margin that are a little more sensitive to MOP price vis-à-vis where SOP price is. But our strategy is to continue to run Ogden well, stay focused on costs, supply the folks that need their plants fed with the good stuff. And that's the kind of price that we believe is fair value for that. But for more color, I'd look to Brad to augment that. -------------------------------------------------------------------------------- S. Bradley Griffith, Compass Minerals International, Inc. - Chief Commercial Officer [11] -------------------------------------------------------------------------------- That's -- no, those are great comments, Kevin. And Christopher, I think, as you know, the fertilizer category in general, retail customers, certainly in 2020 are bullish, and we saw a little bit of that bullishness at the conclusion of 2019. So despite some of the challenges in the NPKs versus prior year, specifically around price. In contrast, our SOP pricing has remained steady throughout the year. I think your question around why, there is that premium that growers are willing to pay. As Kevin said, there's certainly the chloride-free premium, as we call it. But there's also the sulfur component that is really overlooked, I think. Remember, our rating is [0050] parts of K and 17 parts of S. And sulfur is a critical component for a number of the crops that Kevin mentioned, it's responsible for chlorophyll production and also nitrogen metabolism. So in the absence of good S you can put that as much in, and you're not going to get the agronomic benefits. I think producers see that in their specialty crops in particular. And I think specialty crops right now, too, when you look at year-over-year view on almonds, they've held. It's held in terms of price, it's held in terms of volumes. So our end use customers are doing quite well in the specialty category as well. -------------------------------------------------------------------------------- Operator [12] -------------------------------------------------------------------------------- From Deutsche Bank, we'll hear next from David Begleiter. -------------------------------------------------------------------------------- Unidentified Analyst, [13] -------------------------------------------------------------------------------- It's [David Long] here for Dave. I guess, first of all, your Slide 6 of all the focus areas you're aligned. Can you just talk about the priorities for each year. And I noticed that commercial is the second largest source of your improvement. Can you also talk about what kind of actions do you plan to take to realize the improvement there? -------------------------------------------------------------------------------- Kevin S. Crutchfield, Compass Minerals International, Inc. - President, CEO & Director [14] -------------------------------------------------------------------------------- Yes. I think I heard -- our volume was suffering there for just a moment. Think I heard most of the question. But on the operating side, I think I gave a pretty good example of -- it's one of the better examples, obviously, of the compaction at Goderich to improve the fines content and turn -- material that we previously left underground to turn that into a product. We've already incurred the cost to mine it. And all you have to do is compact it and pay a royalty on it and get it out from underground to be able to realize almost the full benefit of the FOB price there at the mine. So I think that's a real good example of one of the operating examples on the logistics side. I think as we talked about before, we move product around all over the place, and it's around maximizing water hauls, lake hauls and trying to minimize rail and over-the-road that last mile is the most difficult piece. And we've got some initiatives underway. I don't want to say too much, just in that it's fairly sensitive, but we've got some internal initiatives underway that we think we could optimize around that and save a fair amount of money. And then just in terms of commercial, I guess, the way I look at it is we're on a path here for Goderich to become the long-term low cost swing supplier in the served market, where we operate. And we're going to have a lot of opportunities on the commercial side to expand our market reach, just given the cost profile that's there. There's a bunch of import tons sloshing around in our served market, which we think has a -- they have a target on their back as it relates to Goderich as we continue to ramp it up. So we think there's a lot of opportunity there, and that's kind of one of the areas that we would call a commercial opportunity. -------------------------------------------------------------------------------- Unidentified Analyst, [15] -------------------------------------------------------------------------------- Great. And second one, I guess, just some of your Salt EBITDA guidance for the first half, you mentioned, primarily driven by pricing. Do you expect -- do you see any operational improvement in first half? Or would that be primarily in the second half? -------------------------------------------------------------------------------- Kevin S. Crutchfield, Compass Minerals International, Inc. - President, CEO & Director [16] -------------------------------------------------------------------------------- Yes, we'll see -- I mean, as I mentioned earlier, and George is here, and I'll ask him to comment on it, but we'll see a steady improvement. We'll see a step function change when we get the new unit underground in the second quarter. It's underground now being assembled. But we'll see a step function change when we move that new unit into Salt and take one of the other units to start developing our long-term roadways. So I think just in terms of costs, to be kind of flattish for the first half. But as we work through some of that higher cost inventory and get that flushed out of the system, you'll start to see good cost improvement back half of the year. And we've talked in terms of Salt margins, we think we're going to be pushing 30% all year in 2021, we'll be comfortably in that 3 handle Zip Code, which we talked about previously. Anything you'd like to add, George, just on the productive side of Goderich? -------------------------------------------------------------------------------- George J. Schuller, Compass Minerals International, Inc. - Chief Operations Officer [17] -------------------------------------------------------------------------------- Yes. Thanks, Kevin. I think maybe just a couple of comments, again, probably coming off a very strong quarter. Probably are -- without at -- our strongest 3 months since we went to mechanized mining. Again, there is good operational improvement. Kevin, you highlighted the workforce there. We're going to walk through the operational excellence, operational opportunities. I do think as you go through there, we're trying to reduce that variability that we've seen in production. So again, day-to-day, week-to-week, month-to-month, we're going to see that continue improvement in production as we go through the year. And I do think it'll be more second half loaded, but by the same token, that group and that team up at Goderich are doing incredible job. So I think we'll continue to see that effort. -------------------------------------------------------------------------------- Operator [18] -------------------------------------------------------------------------------- Then on to Jeff Zekauskas with JPMorgan. -------------------------------------------------------------------------------- Jeffrey John Zekauskas, JP Morgan Chase & Co, Research Division - Senior Analyst [19] -------------------------------------------------------------------------------- Can you talk about weather conditions and snowfall through January or up until February, 10 year-over-year or versus your longer-term averages? -------------------------------------------------------------------------------- Kevin S. Crutchfield, Compass Minerals International, Inc. - President, CEO & Director [20] -------------------------------------------------------------------------------- Yes. I think, Jamie, and Brad here, too. But I think through the end of the year, it was about normal, maybe a little bit above average in terms of -- and I mean, bad to our benefit. Obviously, January was a little soft. February is off to a pretty good start. But I think overall, you'd have to characterize the winter season as about average. That fair Brad? -------------------------------------------------------------------------------- S. Bradley Griffith, Compass Minerals International, Inc. - Chief Commercial Officer [21] -------------------------------------------------------------------------------- It is. -------------------------------------------------------------------------------- Kevin S. Crutchfield, Compass Minerals International, Inc. - President, CEO & Director [22] -------------------------------------------------------------------------------- Yes. So we're open for it, but we'll control what we can control. And the weather's going to do what it's going to do. -------------------------------------------------------------------------------- Jeffrey John Zekauskas, JP Morgan Chase & Co, Research Division - Senior Analyst [23] -------------------------------------------------------------------------------- Okay. And in terms of the -- your sort of strategic change. You're interested in exploring sale of the South American nutrient business, not the North American nutrient business. Why strategically South America rather than North America? And you -- I think you talked about wanting to be more of a mining company going forward. Does that mean owning more Salt assets or bentonite assets or other minerals? Can you elaborate your strategy a little bit more? -------------------------------------------------------------------------------- Kevin S. Crutchfield, Compass Minerals International, Inc. - President, CEO & Director [24] -------------------------------------------------------------------------------- Yes. Look, I think with respect to South America, and again, with no negativity at all towards the team and the asset down there. That's a great asset. It really is. I just question, ultimately, whether we are the right owner for it, and we're going to run a fulsome process. And I'm not going to really say anything about timing or what the outcome might be. We're going to run a fulsome process with the Board and our internal team and our external advisers, and we'll keep everybody posted as that progresses. But look, at the end of the day, we're not emotional about any of our assets when it comes down to it, if they're worth more to somebody else than they are to what we think that we can deliver on from an execution standpoint. There ought to be a conversation. I mean, I think that's the fair value proposition in any scenario. So as we move ahead, I think maybe I'd just like to correct what you said about becoming a mining company. I think we are a mining company. I think we've -- and historically always have been, kind of lost our way there for a while. But we're restoring that operational excellence on a day-by-day basis. And I think our ability to mine, transport and market essential materials is going to be key to how we think about our strategy going forward. I don't want to imply what those minerals might or might not be. Right now, it's still premature. But again, as I said earlier, our focus is executing internally. We've got lots of value that can be created internally just by delivering on our full potential. And focusing on a -- running a very fulsome and thoughtful South American process. So that's the near-term focus. -------------------------------------------------------------------------------- Operator [25] -------------------------------------------------------------------------------- We'll hear next from Vincent Anderson with Stifel. -------------------------------------------------------------------------------- Vincent Alwardt Anderson, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [26] -------------------------------------------------------------------------------- I just -- I wanted to kind of dig into the timing of the strategic review. I mean, the assets aren't exiting the year on the best note. And up until now, your focus has been on Goderich and these company-wide improvement efforts. With the timing has -- is it that you've already received some pretty significant interest? Or did you look at the cost assessment of your new Goderich plan and decide that maybe you want to deleverage more aggressively before undertaking large scale change to that mine? -------------------------------------------------------------------------------- Kevin S. Crutchfield, Compass Minerals International, Inc. - President, CEO & Director [27] -------------------------------------------------------------------------------- Yes, if you -- look with respect to timing, I think it's a decision from a strategic point of view, it's a great asset. It's going to have great value in any market. And I would want to very quickly dissuade you of the notion that our interest in exploring options with respect to Brazil, has absolutely nothing to do with what we're planning at Goderich. I think I've been pretty clear so far that our plan at Goderich will largely be invisible from the outside looking in, we'll be able to absorb the cost of the new mine plan inside of previously given CapEx guidance with the exception of the mill. Still working through that because we want to be able to utilize things that are at the mine, and reuse them and not spend extra money, which we could have a little bit of expense associated with the mill. But not something that will cause you to sell an asset to be able to pay for it. We'll be able to handle that comfortably within the bounds of our existing cash flow. So there's no connection between the 2. Absolutely none. -------------------------------------------------------------------------------- Vincent Alwardt Anderson, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [28] -------------------------------------------------------------------------------- All right. Great. That's good to hear. Just switching gears. This was kind of addressed earlier, but the strategy in SOP for a while has been to try to grow into that flex capacity that you have above and beyond the existing pond capacity, and that's generally been by targeting the marginal SOP consumer. So specifically, with regards to 2020 with whereas MOP prices are today, do you look at the market right now in those spreads and say you're going to continue to fight for share at these spreads? Or do you dial that back a bit? -------------------------------------------------------------------------------- S. Bradley Griffith, Compass Minerals International, Inc. - Chief Commercial Officer [29] -------------------------------------------------------------------------------- Yes. Vincent, it's Brad. Good question. I think the way I look at it is, number one, we need to serve our customers. We need to be their primary source of SOP, if not their exclusive source of SOP domestically. And so we're going to focus on the needs of our customers and our key accounts and ensure that our account management team, our logistics team delivers our product when and where it matters. You've heard me also, in prior calls and conversations, talk about the aspect of pricing dynamically. We will continue to price dynamically. We are the only producer of SOP in this hemisphere, and we intend to maintain the strength and the share that we have in the United States and in USMCA for that matter. So that's what I'd say about share. And as it pertains to MOP, listen, the way that we win that one, Vincent, is agronomy. And our team continues to put together a very solid research trials across a number of specialty crops, and I think that we -- as we continue to get more competitive intelligence and agronomic intelligence on these crops, that's what's going to unlock additional opportunities. I'll give you one that we've just really become aware of in recent weeks, and that's really around apples, honeycrisp apples to be precise, not been a focused crop for us on the specialty side of the business, but SOP makes a dramatic difference in the marketability and the potential waste for honeycrisp apples for grocery in the entire grocery supply chain. So that's what we're going to do. We're going to continue on our customers, and we're going to continue to really understand and expand the agronomy for our SOP and specialty potassium business. -------------------------------------------------------------------------------- Operator [30] -------------------------------------------------------------------------------- We'll hear next from David Silver with CL King. -------------------------------------------------------------------------------- David Cyrus Silver, CL King & Associates, Inc., Research Division - Senior VP & Senior Analyst [31] -------------------------------------------------------------------------------- I had a question about the SOP business, but I was kind of maybe coming at it from a different angle. Over a longer period of time, I think your company has had a number of strategies to coax more pond-based tons out of that facility. And given the -- as other people have mentioned the big value differential between the pond-based con and the alternative. Where -- what is the potential to maybe invest to either, I don't know, improve the ceiling in the ponds? Or do some other steps to coax more of those low -- exceptionally low cost, high value tons out of that asset? -------------------------------------------------------------------------------- James D. Standen, Compass Minerals International, Inc. - CFO [32] -------------------------------------------------------------------------------- David, this is Jamie. I would say, back in 2015, '16, we made significant investments in that facility to increase the capacity and improve the production efficiency there, and -- which is what really enables us to have the 550,000 tons of total capacity, which is about 325,000 tons of pond-based capacity. So we used to be at a much lower level. We used to be 225,000. So now we're at 325,000. In order to increase the pond-based capacity, it would take a significant amount of new acres in our ponds, which is -- which would be a significant cost of implementation of capital costs. Because we have the ability to go to the 550,000 using KCl as an input, and we're working hard to grow into that capacity over the next 3 to 5 years. That's just a decision for down the road. Brad, did you want to add? -------------------------------------------------------------------------------- S. Bradley Griffith, Compass Minerals International, Inc. - Chief Commercial Officer [33] -------------------------------------------------------------------------------- Okay. Yes. David, it's Brad Griffith. I'm going to build on Jamie's comments, if I could. I like your phrase, coax more pond tons. I like that. I might use that. But as it pertains to 2018 and 2019, those were record pond-based ton production years. And you know what, we expect 2020 to be a record pond-based ton production year. So while Jamie is absolutely correct. When we look at the kind of spec played on our assets, we would say that it's in that 325,000 ton range. Our team in Ogden, however, has been quick to correct both of us, and they feel like they can do more, and we're going to let them do that. So I'm not going to put a number on their head. I'm going to let them prove to us what they can do, and George as well. What I would say is as it pertains to the enterprise-wide optimization plan that Kevin has spoken about, while it's early days, there is an intersection of innovation advantaged asset like Ogden and grower need. And we're going to continue to work on additional mineral applications from our operations in Ogden and the position that we have as a specialty K provider in this hemisphere, if that helps. -------------------------------------------------------------------------------- David Cyrus Silver, CL King & Associates, Inc., Research Division - Senior VP & Senior Analyst [34] -------------------------------------------------------------------------------- Yes. No, that's great. And just as an aside, feel free to steal anything decent that I say, for your own use. I've been stealing from the other guys on these calls for a long time. So just one other question, and I admit this is going to be kind of wonky. So -- but it has to do with the $58 million of refunds, I guess, or the settlement that you're due to receive from the Canadian authorities. And I was just wondering if you could characterize that? In other words, I'm assuming that, that's maybe a dispute that's been settled over resource taxes, which might be paid on a per ton of production basis. And again, that's just an assumption. I'm coming at this more recently. But are there any implications for your mine -- for your efficiency or your cost basis going forward from that settlement? In other words, where the basis for assigning, let's say, resource taxes or other assessments changed in such a way that in 2020, 2021, there will be structurally lower assessments relative to what was you said -- what you were being charged before the dispute? In other words, are there some longer-term structural implications that we should model in based on that settlement? -------------------------------------------------------------------------------- James D. Standen, Compass Minerals International, Inc. - CFO [35] -------------------------------------------------------------------------------- Thanks, David. I'll take that. I'll try to summarize that quickly. So this goes back to a dispute between -- in terms of our transfer price between the U.S. and Canada, we won that dispute. So we had to pay taxes back in 2017 to Canada revenue and during -- or I'm sorry, 2018. And now we're just now getting our U.S. refund. So that's $58 million that's from a settlement that happened previously. The only impact -- so what that was, was transfer pricing and it comes down to where is -- where does the profit in our North American Salt system, as it relates to highway deicing salt, where is the profit counted? Is it in the U.S.? Or is it in Canada? So the only impact will be around the tax rate. So it's all below the line. The part of that you can see in terms of our tax rate guidance for 2020, right around that 30%. It's already embedded in that. So there's no further implication we would expect. -------------------------------------------------------------------------------- Operator [36] -------------------------------------------------------------------------------- And from Goldman Sachs, we'll move next to Bob Koort. -------------------------------------------------------------------------------- Thomas Glinski, Goldman Sachs Group Inc., Research Division - Research Analyst [37] -------------------------------------------------------------------------------- This is Tom Glinski on for Bob. So just first on capital allocation. If we assume that you generate, say, $100 million to $150 million in free cash next year and sell the South America business. Could you walk through maybe what your capital allocation priorities would be in that scenario? -------------------------------------------------------------------------------- Kevin S. Crutchfield, Compass Minerals International, Inc. - President, CEO & Director [38] -------------------------------------------------------------------------------- Yes. I mean, let me hit it at a high level. I don't want to speculate too much and you can speculate that we'll arrive at that as a conclusion. But to the extent that we did divest Brazil. I mean, you could certainly expect to use a large portion of those proceeds to delever the balance sheet, at least around the prepayable side. And then from there, we would have to make the decision whether we want to warehouse the cash, have a discussion with the Board about proper allocation, be it share repurchase, et cetera. But clearly, if we did end up divesting South America, deleveraging would be at the top of the list. Anything you'd like to add to that, Jamie? -------------------------------------------------------------------------------- James D. Standen, Compass Minerals International, Inc. - CFO [39] -------------------------------------------------------------------------------- No, that sounds right. -------------------------------------------------------------------------------- Thomas Glinski, Goldman Sachs Group Inc., Research Division - Research Analyst [40] -------------------------------------------------------------------------------- And then second, on the interest expense guidance. Sorry if this is a bit of a minor question, but it appears that you expect interest expense of plus $10 million or so year-over-year from 2019 to 2020. Could you just walk through the moving parts here? And perhaps if this implies that you expect additional borrowing? -------------------------------------------------------------------------------- James D. Standen, Compass Minerals International, Inc. - CFO [41] -------------------------------------------------------------------------------- So the primary driver there is the incremental interest expense related to the bonds we issued back in November. So we've got the new $500 million bonds, and they carry a higher interest rate than debt that was previously financed with short-term bank debt. So that transaction really boosted our liquidity by about $125 million. It extended our tenure and pushed all of our maturities out past 2024. So that's kind of -- that's the main driver. -------------------------------------------------------------------------------- Thomas Glinski, Goldman Sachs Group Inc., Research Division - Research Analyst [42] -------------------------------------------------------------------------------- Great. -------------------------------------------------------------------------------- Kevin S. Crutchfield, Compass Minerals International, Inc. - President, CEO & Director [43] -------------------------------------------------------------------------------- Yes. Thank you. -------------------------------------------------------------------------------- Operator [44] -------------------------------------------------------------------------------- We'll move next to Joel Jackson with BMO Capital Markets. -------------------------------------------------------------------------------- Joel Jackson, BMO Capital Markets Equity Research - Director of Fertilizer Research & Analyst [45] -------------------------------------------------------------------------------- Can you give us a sense of -- obviously, 2018, '19, were, I don't know if the right term is high drama at Goderich for lots of reasons. But when you look at what production is going to be at Goderich in 2020 and the cost. Can you comp that -- compare that to where you were in 2017 before you started transitioning to continuous mining? -------------------------------------------------------------------------------- Kevin S. Crutchfield, Compass Minerals International, Inc. - President, CEO & Director [46] -------------------------------------------------------------------------------- I certainly couldn't do that off the top of my head. But I mean, I guess, really, we started first CM unit there, what, 3 years ago? -------------------------------------------------------------------------------- James D. Standen, Compass Minerals International, Inc. - CFO [47] -------------------------------------------------------------------------------- We've had a development miner for a while. See, I would say, when you look back at cash cost, look back to '20 -- you said '17, '18 running $35 a ton. I think our expectation would be, in 2020, to get down to that level. And then we'll take it down to the low $30 range in 2021 as we continue to make improvements, process improvements and improve production and efficiency there. -------------------------------------------------------------------------------- Kevin S. Crutchfield, Compass Minerals International, Inc. - President, CEO & Director [48] -------------------------------------------------------------------------------- And that's a fully loaded cost, noncash. -------------------------------------------------------------------------------- James D. Standen, Compass Minerals International, Inc. - CFO [49] -------------------------------------------------------------------------------- Yes. No, that's cash cost. Cash cost, down to -- down around 30 -- total Salt I'm talking. Total Salt cost, which includes our C&I business. -------------------------------------------------------------------------------- Joel Jackson, BMO Capital Markets Equity Research - Director of Fertilizer Research & Analyst [50] -------------------------------------------------------------------------------- I guess, I was trying toward production. So like 2020 production Goderich versus, say, 3 years ago. Are we above that mark? Or are we below that mark? -------------------------------------------------------------------------------- James D. Standen, Compass Minerals International, Inc. - CFO [51] -------------------------------------------------------------------------------- So we don't disclose Goderich mine production. We [reached fiscal] -- total production annually. -------------------------------------------------------------------------------- Joel Jackson, BMO Capital Markets Equity Research - Director of Fertilizer Research & Analyst [52] -------------------------------------------------------------------------------- So my last question would be it would seem like we've seen some good salt price improvements this year. We had some downtime from yourself, maybe a competitor, it would seem like maybe this year, you're going after market share. I mean, the winter you say is average, so I assume that's what your embedded into your 2020 guidance average for bid season. In that scenario, it seems like you're going after, you have a market share in this. So maybe you could talk about that? -------------------------------------------------------------------------------- Kevin S. Crutchfield, Compass Minerals International, Inc. - President, CEO & Director [53] -------------------------------------------------------------------------------- Yes. So I think the first step for us, Joel, is we need to do a little bit of inventory replenishment. But importantly for us, we need to displace the tonnage that we've been importing. That has a profound effect on margin improvement. And I don't think we've ever disclosed the amount of tonnage that we were importing, but it's not an insignificant amount. And then the next change from there would be targeting the rest of the imports that I talked about earlier that are sloshing around inside of our served market because there will be no way that they can compete with us. We're -- really anywhere inside of that served market. So we think there is the opportunity to do that. Over time, it's not going to happen in 1 year, but our goal this year is to just push out the -- all the tonnage that we've been importing and do a little bit of restocking, getting ready for next winter season. -------------------------------------------------------------------------------- Operator [54] -------------------------------------------------------------------------------- At this time, I'd like to turn things back to you all for closing remarks. -------------------------------------------------------------------------------- Theresa L. Womble, Compass Minerals International, Inc. - Director of IR & Assistant Treasurer [55] -------------------------------------------------------------------------------- Thank you, Kelly. This is Theresa, and thank you all for joining our call today. If you have any follow-up questions, please contact Investor Relations. You can find our contact information on the website. Thank you. Bye-bye. -------------------------------------------------------------------------------- Operator [56] -------------------------------------------------------------------------------- Again, that does conclude today's conference. Thank you all for joining us.