Compass Minerals International Inc (CMP) Q2 2020 Earnings Call Transcript

Good day everyone and welcome to the Compass Minerals Second Quarter Earnings Conference. Today's conference is being recorded. At this time, I'd like to turn the call over to Ms. Theresa Womble Director of Investor Relations. Please go ahead ma'am.

Good morning and welcome to our call today to discuss our second quarter results and rest of 2020 outlook. We will begin with prepared remarks from our CEO, Kevin Crutchfield; and our CFO, Jamie Standen. Joining in for the Q&A session are Brad Griffith, our Chief Commercial Officer; as well as our Chief Operations Officer, George Schuller. Before we get started, let me remind everyone that the remarks we make today represent our view of our financial and operational outlook as of today's date August 5th, 2020. These expectations 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 such as adjusted EBITDA and free cash flow. You can find reconciliations of these items in our earnings release or in our earnings presentation both of which are also available at our Investor Relations website. With that housekeeping out of the way, I now turn the call over to Kevin.

Thanks Theresa and good morning everyone and thanks for participating today. As reported yesterday in our earnings materials, we posted very strong second quarter 2020 results with both operating earnings and EBITDA growth well ahead of expectations. This was achieved through robust year-over-year sales volume growth across all three of our business segments and strong execution within our operations. Year-to-date 2020 cash flow from operations totaled $233.9 million, up nearly 110% compared to last year's first half. The strong performance we accomplished in the quarter achieved in the face of the COVID-19 pandemic demonstrates not only the essential nature of our products, but also the resilience of the core markets we serve. Of course, none of this would have been possible without the deep commitment of our employees to safely serve our customers' needs and execute on our strategic initiatives. I’d like to take a moment to thank them for all they contribute toward the success of our essential business. From those who work in our underground mines, our packaging and processing facilities, or who have been working remotely at our customer service or corporate support functions, I've been deeply inspired by the commitment they've shown to our customers and our company. The ongoing threat of this global pandemic has required careful analysis and implementation of numerous additional protocols across our operating platform to ensure the safety and health of our people. Their well-being remains our paramount concern. Because of the efforts of our employees, we've been able to maintain production across our global operations in order to meet customer demand for our products. While our U.K. mine was idled for a portion of the second quarter due to a combination of lower expected demand due to the mild winter there and the U.K. government's recommendation for COVID-19 spread mitigation, I'm happy to report the mine resumed production at the end of May and is ramping production back up to normalized levels. From the perspective of product demand, we've also experienced only limited impact to date due to the virus. The primary pressure has been almost exclusively within our portfolio of non-deicing salt products. This includes sales through retail outlets which were impacted by stay-at-home orders as well as commercial food producers and industrial customers, who may have faced production outages or slowdowns due to the virus. In most cases, these sales began to normalize in June. We continue to be laser-focused on our liquidity management ending the quarter with $67 million in cash on hand and have further reduced risk through the execution of a $100 million accounts receivable securitization program that Jamie will discuss in more detail shortly. Digging more specifically into the second quarter results, operating earnings from our Salt business doubled compared to second quarter 2019, while EBITDA from the segment grew 60% year-over-year. In addition to increased highway deicing sales volumes and prices, this significant improvement was also driven by lower per unit salt and logistics costs, both of which are beginning to reflect our improved mining performance at Goderich that benefits from our enterprise-wide optimization efforts. Our Plant Nutrition businesses enjoyed meaningful gains as well due to robust demand stemming from improved crop conditions in North America and the continued strength of crop economics in Brazil. Compared to second quarter 2019, Plant Nutrition North America delivered strong sales volume growth of 20% as demand for our sulfate of potash and micronutrients continued to rebound from last year's depressed results. In fact, total Plant Nutrition sales volumes in North America year-to-date represent the strongest first half for that segment since 2014. The segment also reported an 11% improvement in operating earnings with basically flat EBITDA compared to last year. Second quarter operating earnings for our Plant Nutrition South America segment improved more than fivefold year-over-year, while EBITDA for the segment increased approximately 88% compared to second quarter 2019. Improved farmer economics so far in 2020 helped to drive increased agriculture product sales again this quarter and we experienced improved demand for chlor-alkali products in our chemical solutions business. These strong results during a challenging macro environment again demonstrate the resilience of our business and the progress we're making on our strategic priorities. As I outlined last quarter, we have three key priority focus areas as a company: building a sustainable culture; delivering on our commitments; and conducting a deep strategic assessment of our advantaged assets and related capabilities. Despite the pandemic, we continue to make meaningful progress in all three of these areas. Embedded within our strong second quarter is the early impact of our enterprise-wide optimization program as we're beginning to demonstrate the strengthening of our execution muscle. The pandemic has highlighted for us, as well as for all companies, the crucial importance of health and safety. At the end of the day, our number one responsibility is to make certain our employees go home as healthy as they came to work. Building that culture of safety is paramount. As you can see in our presentation deck, we've already made meaningful progress and we'll continue to strive for improvements in critical safety metrics like total case incident rates. We also acknowledge that we have much room for improvement in terms of employee engagement. Shortly after I joined Compass Minerals, we conducted a deep assessment of our culture and how employees view their ability to engage and influence change within the company. As part of our optimization program, we've therefore focused a significant amount of time and energy as an extended leadership team listening to the concerns, ideas and inputs of our people and acting upon that feedback by providing the internal resources to empower success. While we still have work to do to be the company we strive to be, we're seeing a number of leading indicators that our efforts are making an impact. These efforts are foundational in terms of building the execution muscle we've discussed previously. They are also critical to enabling our ability to consistently deliver on our commitments whether that means timely and reliable customer service, hitting our production targets at our mines or innovating new products for our Plant Nutrition customers. We're making clear progress in all these areas as well. Our Salt segment earnings have shown significant improvement over the last three years from improved production in our North American mines, cost savings, logistics strategies and strong pricing. Performance at our Goderich mine continues to hit or exceed targeted production rates, including setting a monthly production record in the month of June since we transitioned to the utilization of continuous miners. We've also progressed roughly 2,000 feet into our built-for-purpose roadways in the Eastern mine development area and are currently in the process of finalizing the design of and development for the new mill we've been discussing on prior calls. These are both very important steps in implementing our new mine plan at Goderich, which is designed to better leverage our continuous mining and haulage equipment while simultaneously reducing long-term mine maintenance costs in the old mine works. While we've been pleased with the progress we're making at Goderich, we continue to believe that we've not yet reached the full mine operating potential. To help us get to that next level, a new mine leader, Peter Baker, has taken the helm at Goderich. Peter brings three decades of mining experience in all aspects of operations with specific continuous mining expertise. Equally important, he brings a firm belief in the value of employee and community engagement and a strong track record of leading an organized labor force. We're confident he will provide the day-to-day leadership we need to drive further progress at the mine and we're delighted to have him joining our team. Overall, I'm extremely pleased with the ongoing work of our optimization efforts and firmly believe without them, we would not have been able to deliver the results we have thus far in 2020. Looking ahead, these results have positioned us well from a volume and underlying cost perspective to help weather any challenges in the second half of the year, including continued uncertainty around what impact a sustained or even a second wave of COVID-19 spread in the fall might have on our supply chain or certain end markets. The current North America highway bid season is a prime example of how our improved production allows us to increase flexibility to execute on our strategy even through a challenged market period. The current bid season for North American highway deicing is about 75% complete. Not surprisingly, it's been a tough pricing environment given the mild winter and the improved supply position for producers. In fact, as we've stated before, we believe that the constrained production we faced at Goderich likely contributed to a price response for the last couple of bid seasons as imported salt began to play a more significant role in meeting seasonal demand. This bid season provided an opportunity for a reset. We've taken a disciplined approach to placing our low-cost production from Goderich to regain market share, while maintaining attractive margins. Overall, we estimate that bid volumes in our served market have declined about 15% due to the elevated inventories following the mild winter. But given our bid results thus far, we estimate we've increased our bid volumes for the upcoming winter season by about 8%. We also expect our average awarded bid price to decline about 11% compared to the prior bid season. Obviously, we always like higher prices, but as you can see in the chart on Slide 8 over the last three bid seasons, our average awarded bid price has increased 14% even factoring in this season's price decline. All in all, we believe we've increased our market share in a disciplined and sustainable way particularly given our improved cost to serve customers, which is making us competitive in more geographies. Given the results of the bid season plus the benefits we're achieving from improved operational execution, we still expect to achieve excellent Salt segment operating and EBITDA margins for the full year 2020. Before hearing from Jamie, I'd also like to point out that our Plant Nutrition businesses have momentum going into the second half of the year. In North America, demand for SOP continues to be stable and micronutrient demand continues to exceed prior year results. We're also cognizant of potential pricing headwinds as some customers may take a more conservative approach to inventories and spend in light of continued COVID-19 uncertainties. In Brazil, we've recently launched two new products including the introduction of our award-winning Rocket Seeds line into our core South American market which will complement an already stellar year out of that business. The way our team in Brazil continues to perform only increases our comfort level with the previously announced pause of our strategic review of this business due to COVID-19 and further highlights our position that any future action involving our Plant Nutrition South America business would have to reflect the intrinsic long-term value of these assets. With that, I'll now turn it over to Jamie to provide additional color on our second quarter financial performance and more detail on our second half outlook. Jamie?

Thanks Kevin and good morning everyone. I'll start on slide 9 with some comments on our consolidated results before discussing our segments, our outlook and then a few balance sheet items. This was a very strong quarter for us given the second quarter is typically our lowest earnings period. We delivered strong sales volume growth across all three segments. Excluding the FX translation impact on our Plant Nutrition South America results, we delivered revenue growth across all three segments as well. Operating earnings rose significantly and our EBITDA results increased 44% compared to the second quarter of 2019. These results combined with the strong first quarter earnings and the U.S. tax refund we received earlier this year generated free cash flow of $191 million, more than double the first six months of 2019. As indicated in the EBITDA bridge on this slide, strong Salt segment performance in the second quarter was the primary driver for the better year-over-year results overall. We discuss these results on slide 10. Second quarter 2020 Salt segment revenue increased 8% year-over-year as an 18% increase in highway deicing sales volumes and an 11% increase in highway deicing selling prices from prior year results more than offset a 9% year-over-year reduction in Consumer & Industrial sales volumes. A bit of April snow, as well as customers purchasing their minimum deicing contract volumes bolstered the improved highway deicing results, while a decline in sales of non-deicing salt products due to COVID-19-related impacts depressed Consumer & Industrial sales volumes in the 2020 second quarter compared to prior year. In addition to increased highway deicing sales, lower logistics and production costs helped us double our operating earnings and deliver a 46% increase in adjusted EBITDA in the second quarter of 2020 compared to prior year. Per-unit logistics cost declined 22% even after excluding last year's $2.8 million cost impact related to extreme flooding along the Mississippi River. The factors driving this improvement include our overall enterprise-wide optimization efforts, improved utilization of Great Lakes vessels, lower fuel costs, as well as a favorable customer and geographic sales mix compared to the second quarter of 2019. Per-unit production costs this quarter were also significantly lower than prior year. We achieved significant benefits from both lower year-over-year North American mining costs and better product sales mix. However, about half of that benefit was offset by higher per-unit costs in the U.K. due to lower year-over-year production levels as we adjusted for lower weather-related demand and compliance with the U.K. government COVID-19 guidance. Consumer & Industrial salt costs were also slightly elevated due to some minor COVID-19 related production inefficiencies, even with both of these short-term cost pressures, we delivered the lowest second quarter per-unit cash cost in this segment since 2006. Looking forward, we continue to expect lower per-unit costs in the second half of the year although not to the same magnitude as the second quarter result. We're managing production downward at our Cote Blanche mine due to reduced deicing demand in the southern portions of our North American market, as well as lower demand from chemical producers resulting from COVID-19 impacts. That utilization rate is expected to negatively impact salt cost by about $0.50 per ton in the second half of the year. We're also expecting a stronger mix of premium packaged deicing versus bulk deicing in the second half of the year when compared to last year. This change in sales mix would also increase total salt cost by about $0.50 per ton. However, it is expected to push Consumer & Industrial average selling prices significantly higher in the second half as well. Even with those cost headwinds, we believe we can deliver $1 to $2 of salt unit cost improvement in the second half of the year compared to the second half of 2019 assuming average winter weather in the fourth quarter. This is based on the elimination of purchased salt and continued improvement in our Goderich mine operating rates. Turning to Plant Nutrition North America results on Slide 11. We note that strong volume growth of 20% compared to the second quarter of 2019 drove a 15% increase in revenue more than offsetting a 5% decline in average selling prices. We remain pleased with the stability of our SOP price which declined about 4% this quarter on a year-over-year basis, but was only $5 per ton below our first quarter 2020 results. The slight sequential decline was largely driven by geographic sales mix including some international sales volumes. On a net sales price basis, our SOP-only price was actually up $3 per ton sequentially. In light of the persistent pricing challenges facing macro fertilizers over the last 12 months, this is a testament to the appealing value proposition of our SOP product Potassium+. Unfortunately, that downward pressure on macro fertilizers does have a negative impact on grower and dealer psychology and is a potential headwind for pricing in the second half of 2020. Operating earnings in the quarter increased about $0.5 million, primarily due to increased sales volumes and lower depreciation expense, partially offset by the lower average selling prices while EBITDA was down just slightly. Our EBITDA margin compressed about four percentage points compared to prior year on the lower sales price, partially offset by some logistics benefits. We discuss our Plant Nutrition South America performance on slide 12. The positive trends we saw in the first quarter gained momentum in the second quarter with continued strength in agriculture product demand resulting in sales volumes increasing 17% from 2019 levels. This has been driven by very attractive grower economics for the Brazilian farmer. We have experienced particular strength in our higher value products sold through our direct sales team, which was the primary driver of the 18% average price increase in local currency for agriculture products. We expect our B2C business to continue strengthening in the second half of the year, although we may have seen some sales pulled forward into the second quarter as barter rates have been very attractive and many soybean growers forward-sold their crop and purchased inputs a little earlier than normal. Chemical solutions sales volumes increased 6%, driven by chlor-alkali demand, which offset some COVID-19-related declines in our industrial process chemical sales. In local currency, these factors combined to produce a 28% increase in revenue for the second quarter of 2020 compared to prior year. This increase in revenue and more attractive sales mix compared to prior year helped drive substantial operating earnings and EBITDA increases as well as margin expansion compared to prior year. Profitability was also boosted by better production costs due to asset utilization improvements, lower energy costs and early benefits from our enterprise-wide optimization efforts. The second half outlook for our segments is discussed on slide 13. I'd like to take a few moments to provide additional color on some of the puts and takes that are shaping this outlook. First, in our Salt segment as Kevin discussed, our highway deicing average selling price is expected to decline as a result of the North American bid season results although the realized decline is likely to be less than the average bid price result. Remember that our reported highway deicing sales results include rock salt sales to chemical producers and sales in the U.K. Taking those other volumes into consideration, we anticipate average selling prices for the second half of the year to be down between 5% and 7% overall compared to the second half of 2019. We expect second half EBITDA for the Salt segment to be similar to the second half of 2019. Several offsetting factors impact the outlook. While fuel costs are certainly lower and helping our logistics costs, we are experiencing increases in barge and vessel rates. As a result, we expect slightly higher year-over-year shipping and handling costs for the rest of 2020. We do expect to offset some of this pressure with lower salt product costs, as we are no longer using purchased salt to serve our highway deicing customers, and our Goderich mine costs are expected to decline about 15% from second half 2019 costs. However, as I previously discussed, we are expecting these benefits to be partially offset by increased per-unit costs at our Cote Blanche mine and a product mix shift toward premium packaged deicing within our Consumer & Industrial business. In our Plant Nutrition North America business, we believe our second half sales volumes will be slightly below prior year results as we pulled forward some international sales activity from the third quarter into the second quarter. Average selling prices for the business are expected to increase as we plan to sell more micronutrient products during the second half than we did in the second half of 2019, as crop and weather conditions are significantly better compared to the prior year. As a result, we could see higher year-over-year second half revenue for the segment. We expect this segment to deliver roughly flat to slightly higher EBITDA for the second half of 2020 compared to 2019 results. We have a couple of factors offsetting a portion of our expected second half revenue increase. We currently expect a modest increase in per-unit logistics costs versus prior year due to rail rate inflation and a step-up in per-unit production costs due to the increased mix of micronutrient sales compared to prior year levels. Strong performance in our Plant Nutrition South America segment is also expected to continue due to attractive grower economics in Brazil. While the weaker local currency is helping with fertilizer affordability, it is negatively impacting our translated results. We are also keeping a close eye on the progression of COVID-19 in Brazil, as we are for all the communities in which we operate. Fortunately, all of our sites there continue to produce efficiently and serve the strong demand we are seeing. Our chlor-alkali plant is working hard to meet increased demand for chlorine products due to the pandemic. This is providing an offset to some lower demand for other chemical solutions end markets. All in all, we are reaffirming our EBITDA guidance for the full year of between $330 million and $370 million. While we have several significant headwinds including currency translation, highway deicing bid season pricing and lower U.K. salt demand, we have taken actions across the entire organization which are expected to offset these headwinds to a large degree. On Slide 14, where we provide our corporate items outlook, you can see that we are reducing our expected range for corporate and other expenses, as we continue to limit all spending to critical items only. In addition, we are lowering our interest expense range due in part to the fact that we completed a three-year U.S. accounts receivable securitization facility, which is now our lowest cost of capital overall at just 1.5%. Furthermore, we expect to reduce our capital spending compared to our initial 2020 plan. These measures, in addition to improved execution on many levels are helping to drive improvements throughout our businesses, demonstrate our progress towards an improved balance sheet and are importantly helping us maintain a strong liquidity position. We ended the second quarter with about $67 million in cash and $300 million in total liquidity. Finally, it's important to note that we expect to generate $125 million to $150 million of free cash flow for the full year 2020 compared to $62 million in 2019. Now I'll hand it back to Kevin for some closing remarks.

Thanks, Jamie. I want to take another moment to emphasize that we are making important progress on our journey to build a company consistently able to deliver value for all of our stakeholders. For the rest of 2020 and beyond, the key factors for us to deliver this value start with the health and safety of our employees and our communities. With or without the current pandemic, this is critical. Second, we're an essential business providing critical inputs across a wide range of markets, most of which are resilient throughout the economic cycle and that is largely the case now. Our employees have demonstrated great agility in meeting our customers' needs during this challenging time. This is a key proof point that we're getting better at execution and growing those capabilities, which we expect to continue building with our enterprise-wide optimization effort. As these benefits are reflected in our future earnings, we expect to continue improving our balance sheet and earn the right to explore additional growth opportunities for our businesses, be they organic or otherwise. I'm extremely pleased with the progress we've made thus far and excited for what lies ahead for Compass Minerals. Now, I'd ask the operator to open up the session for questions. Thank you.

And we will take our first question from Mark Connelly with Stephens.

Thank you. Two things. First, Brad, you recently said that you were pleased with the way Compass approached the bid season. So I was curious if you could give us a sense of what you saw and whether there were any big surprises this year the – last year we had some places where you didn't see a lot of bid competition. So I'm curious, how this bid season progressed. And then the second question on, I don't know, maybe this is for Jamie. I'm curious if you have any sense of how much of a pull-forward you might have seen? Because, it looks like acres are going to be up nicely in the second half. So some producers that we're talking to are figuring that, even though they did pull some sales forward, it may not pull down their overall results very much in the next quarter, so just curious, if you have any visibility on those.

Yeah. Hi Mark, this is Brad. I appreciate the question. I would characterize the season as certainly competitive. As Kevin and Jamie pointed out in their comments, RSGs we would estimate to be down in the mid-teens. We're about 75% of the way through, so we're not done yet. Am I pleased? I am. Our bid team has decades of experience, backed by analytical tools that really help us approach each bid, in a very process-driven disciplined manner. The goal of each one of these bids is to optimize the production tons that we have that are now really from Goderich mine with a degree of consistency, where we're producing more tons utilizing the same inputs. So it's obviously my team's job is to put those tons in the right places. As I reflect on the season, are there surprises? There's always going to be surprises. There are going to be markets that make perfect sense. And we estimated it perfectly through our analytical tools and knowledge and historical context. And there'll be others that are probably more surprising. But yeah, it's certainly been more competitive. I think obviously our production coming online, our competitors having inventories a weaker winter. As we say, a good early winter and a sustained winter is a key catalyst for pricing and volumes. And obviously we didn't really have a lot of that coming into the season.

Just one other thing I’d like to add. One of the main points we've discussed is that, as Goderich faced challenges over the past couple of years, we started importing a significant amount of tons. This year, our goal was to reduce that reliance on imports. To Goderich's credit, the operating team has done an excellent job in getting things back on track and positioning us to reclaim our market share. We're essentially working to regain ground that we previously held. In light of market conditions, we've decided to reduce some production at Cote Blanche to better balance our operations. As Brad mentioned, we are always pleased with higher prices, but our primary focus has been on getting Goderich stabilized. Kudos to the team there for steering us in the right direction. Jamie, would you like to address Mark's second part?

Yeah. Mark, I think you were referring to Plant Nutrition North America and SOP and the pull-forward. Is that right?

No, no, no. I'm thinking about Latin America because we certainly are seeing in other crop inputs some pull-forward from farmers flush with cash. And I know your comments didn't reflect that so much. But with acres in Brazil looking like they might be up, I'm just really curious how those two things might be balancing. And also whether your Brazil mix is shifting to more direct because of that.

Yeah. Maybe Brad can provide some insight on that. It's challenging to predict how things will progress throughout the rest of the season. We're definitely pleased with our volumes, but it's tough to determine the scale of that. We did notice a significant increase in higher-value products purchased during the quarter. We're going to push hard and aim to look back and confirm that our numbers improved rather than just being a case of pull-forward. We're cautiously optimistic that some of those purchases have been made. However, we might not reach the expectations for the second half that we initially had because of the pull-forward. I can't give you an exact figure on how significant that is, but we believe it is substantial, which is why we haven't adjusted our full-year volume guidance for South America. Brad, would you like to add anything further on the direct aspect?

I think you summed it up well, Jamie. Additionally, I want to highlight our direct-to-farm team, which we refer to as the B2C team. This team continues to excel, even during the pandemic when salespeople faced difficulties accessing their accounts due to restrictions in some municipalities and states. Despite these challenges, our team effectively utilized digital methods to connect with customers. We recently concluded our eighth session of NutriExperts, featuring some of the world's top experts on specialty crop nutrition. This two-day program attracted over 350 important crop advisers from Brazil and received excellent feedback from crop consultants. I'm very pleased with how the team has adapted to the current environment. We are starting to see customers gradually opening up and welcoming us back to their farms, although progress is slow in Brazil given the situation with COVID-19 cases in the country.

Sure. No, I can appreciate it. It's very tough this quarter to get a sense of the pull-forward. I appreciate your help. Thank you.

All right. We'll take our next question from Vincent Anderson with Stifel.

Good morning. Great job on the quarter. My first question is for Kevin. What are the main takeaways from your first full annual maintenance shutdown at Goderich under your leadership? Additionally, is there any impact on the lower CapEx guidance from Goderich, and if so, what drove that decision?

I'll start with a high-level overview and then pass it to George for his comments on Goderich. There are many positive developments happening there, and I want to echo George's thoughts that we view the maintenance shutdown at Goderich as highly successful. The process was thorough and well-organized, and everything that was planned was completed. Regarding capital expenditures, we always provide our estimates upfront. As we navigate this pandemic, our focus is on limiting spending to what is absolutely essential. Jamie and I are closely monitoring our balance sheet to ensure we can handle any unexpected challenges arising from the pandemic. George, would you like to share anything further about the Goderich shutdown and the overall situation there?

Yeah sure. Thanks Kevin. Again appreciate the question there Vincent. Yeah, a little bit more on what Kevin said, I would say when I look at the annual shutdown that we had, it was a real success. Some of the major things that we've actually done during that process were, we were actually setting ourselves up for the new Eastern mains that Kevin spoke about earlier. So it's some of that transition we had in that area. We also had the compaction that we talked about in the last quarterly meeting setting that up some of the belt lines and some of the transition areas. So again when you look at it, we're still spending a lot of capital at Goderich. When you look at where it's at, it's very selective capital but some of the things that we're seeing in our shutdown is our lifecycle management, trying to understand in real good detail, our miners, our FCTs and what type of maintenance they need annually, what do they need monthly. Not to say they haven't done that in the past but to put some real good rigor and timing around how we're going to do that on a year-on-year basis. I thought it was an extreme success. I would always go back to safety. We didn't have any injuries during that period of time. There's a lot of work going on. So I'm pretty excited about where we are and where we're heading in the future. Thanks Kevin.

That's very helpful and encouraging. If I could turn back to bid season just a little bit more detail. That's a pretty significant outperformance on volumes. I guess, the question would be specifically are the importers besides yourself losing a lot of that share? Is there any encouragement from the East Coast winter being also exceptionally poor last year? And then finally, did you notice any change in Kissner's bidding under its new ownership this year?

There's a lot to discuss here. To provide some background on the imports, we primarily allowed importers to enter the market due to the production issues at Goderich. While we have made significant improvements over the past year, there’s still more progress needed. I believe this market will begin to rebalance soon. However, I doubt importers will remain competitive, especially once Goderich reaches its target volumes and cost efficiency. It might take a couple of seasons for this balance to occur. Our focus is not on pushing out importers but on long-term sustainability, since we’re developing this mine for the next 60 to 100 years. Importers can come and go as they please, but over time, I expect Goderich will be recognized as the top low-cost supplier. Regarding any encroachment in our market from competitors in the East, particularly those who experienced milder winters, the answer is no. Absolutely not. Finally, I’d prefer not to comment on our competitors' actions. We did experience some intense competition, which was to be expected, though we saw certain areas being more competitive. Overall, we’re satisfied with our results, though we have room for improvement. Our strategy is to optimize production and profit margins, focusing on netback instead of just gross pricing, as that’s what truly matters in the end. Thank you for the question.

Yeah. So I'll pass it on. Thank you.

We will next go to Chris Parkinson with Credit Suisse.

So just to clear up as one the first question. Can you just talk about the margin differential between the incremental increase at the Goderich production versus the imported products year in years past? And how should we think about the differential versus 11% lower prices just in terms of like netbacks and profitability? Can you give us any framework there? Thank you.

You'll take that one?

Yes, yes. So we've historically talked about kind of the $15 million of incremental cost related to import salt back in 2019 and that was going across years. We had about $5 million or $6 million of that cost that was in the first quarter really more like $5 million. There’s been about $6 million year-to-date. It's a significant impact to the tons that we sell. We were selling on an import basis. But you could think of it as I'd say roughly five or eight points, it can be pretty easily if you want to think about that differential.

Got it. In relation to the previous question, we are aware of the 8% increase in awarded bid volume despite a 15% decline in RFQs. Can you discuss any additional shipment strategies regarding your addressable market perceptions? Considering the weaker winter on the East Coast, which is not your primary market, as well as the 12 to 13 key markets in your snow index in the Midwest, how are you approaching this overall compared to how you assessed things before the issues at Goderich? Has there been a shift in perception, or are you just trying to return to your previous state? Thank you.

Yes. Chris, we were having a little trouble hearing you there. I don't know if it's on our end or yours. But we don't see it much differently and it is going back. Like I said, we couldn't pick up a lot of that question. There was a lot there. But when we look at the market as a whole our served market, the East Coast primarily served by imports over there a couple of other players in between, but we don't see the market changing that much. I'm sorry maybe if you had a better signal, I could answer that a little bit better, but I don't really have anything more to add there.

No. I mean I guess as we think about our market we can reach it from Cote Blanche, we can reach it from Goderich and what we'll do is as Goderich gets better and better its reach gets greater and greater and there's probably some areas outside of the traditional served market that become more interesting for us with the passage of time. We're not going to approach those overly aggressively, but we just try to optimize our portfolio on a cost basis to optimize around margins. I'm not sure if that answers your question Chris again because as Jamie said, it broke up pretty badly about halfway through there.

If you can hear me you did get the question. Thank you very much.

We will next go to Joel Jackson with BMO Capital Markets.

I'd like to follow up on the same discussion. I mean if you think in kind of high-level language on bid season pricing here. Well Kevin you came in and you did a strategic assessment and you talk about how it looks like you're playing a long game here and the strategy is to get Goderich back on track. And this is the year to try to push Goderich harder and to do that I guess you have to win more volume push out imports. If we talk about, I don't know $5, $6 a ton lower pricing on the portfolio on the highway deicing portfolio, can you talk about what kind of cost improvements whether it's from freight from Goderich how do you make that up? Like it seems like you have analytical models but in some of the states it seems like you bid so low, it would be hard to be more profitable on the mix you have now through bid season. I don't know if that made sense there but I'm trying to figure out how do you overcome such a large price decrease? What do you have to get out of Goderich and freight costs to make it all make sense?

Number one, again, we're in this for the long haul. This is not an optimized season by season. It's been very important I think given the attention that Goderich has gotten and the issues that it's had to allow it to progress on its plan back towards restored health consistency profitability etcetera. So taking your argument maybe to an extreme one could have said, Well we need out of Goderich for six weeks or two months or something. I just didn't think that was prudent nor did George when they're on such a nice run and making such a nice progression. Because again we're thinking about this over the very long-term. What's going to drive pricing year-on-year is the kind of weather that we have. So we don't have any control over that. What we can control is what our mines look like? How they produce? What their safety record is, their productivity? How we allocate capital to them etcetera? Over the long term, based on what we see the perceived difference in supply and demand we’ll moderate accordingly. I don't have any regrets at all about the position that we took. In fact, I'm quite pleased with where we've ended up thus far. We'll just take it winter-by-winter from here. Do you have anything you want to add to that Jamie?

No, I think it's important to remember that net prices have increased by 14%. We anticipate a decrease in costs. Over the past three years, net prices have risen by 14%. Therefore, we are in a strong position moving forward, and as Kevin mentioned, each bidding season has its own dynamics. We are focused on the long-term management of this business, and that's all.

That's helpful. So my follow-up is looking at Goderich, so getting it back on track the things that you're looking at, if you want to try to push another one million tons or whatever it's going to be can you talk about how you're going to get there? Do you have to look at the equipment? Do you have to bring back drill-and-blast? Do you have to do a hybrid model of drill-and blast and continuous mining to really shove out that volume over the next couple years? Does that add on more cost? Do you need to add on more bodies? Is that why you need to push for more volume for fixed-cost absorption? Can you talk about the interplay in all of that?

Yes. So let me again hit it at a high level and ask George to add some additional color. Number one and this is really important, we haven't added additional inputs at Goderich. Inputs are the same output is higher. So that means efficiency is getting greater, costs are falling. Over the long-term, we will want to moderate our fleet up there. But as we've talked about, we're trying to get the Eastern roadways developed because that's the artery for the next 50 years at that mine and get these new rooms set up. But you could expect over the course of the next few years that our production fleet is going to look different than it has in the past with these newer CM46s et cetera. So, again, it's a work in process. We are on the right trajectory. We still have a long ways to go. We didn't get into this fix overnight. We're not going to get out overnight, but I'm very pleased with the progression. I think this would be a good opportunity for George to add some color, because he's all over this thing on a daily basis with the team up there.

Yeah. Yeah. Thanks, Kevin. And just to add a little bit of color there. I’ll try to temper my enthusiasm here, but Kevin laid it out pretty well. When you – lots of the change that we've seen over the last year, a lot of folks think it's equipment, it's people, it's anything like that as Kevin highlighted. It's really – it is around operational efficiency. It's understanding maintenance. It's taking a look at how we operate our shifts. It's all about our people. It starts with safety. Every time I talk about this lots of times, everybody is looking for a silver bullet I guess, I would call it. But when you look at it, it's not one thing. It's multiple things really in succession that are driving the improvement at Goderich. As I said, we started with our people, again, a great team up there great resource. When you look at it, I'm pretty excited about where we are. I don't see that, in the future. I think what we'll continue to do is see how we optimize that, with looking at the equipment we have. I’d say maybe getting more out of it. We might even look at what we do to potentially reduce unit and increase – and I say reduce a unit, but actually take some metal out of the operation itself, so we don’t actually have to put in additional FCTs and additional miners. As Kevin said, the 46s are really pounding out the tons. Hopefully, that added a little bit of color, Kevin. Thank you.

Just on the question, I was asking, do you have to reintroduce drill-and-blast to get to the volume targets you want?

No, no absolutely not. We may do it opportunistically from time to time, because we've got no issue with drill-and-blast on a limited basis, but it would be opportunistic as the situation presents itself. But no, we do not have to do it, to get where we need to be absolutely not.

It's a mechanized mine – sorry, it's a mechanized mine going forward. As Kevin said, we don't – we have opportunities to do it. But again, that's not to increase production. That's to supplement or do some development areas that we currently have. So I don't see that short term or long term. Thank you.

Thank you.

Next question will come from David Begleiter with Deutsche Bank.

Thank you. Kevin you mentioned, Cote Blanche having lower volumes flowing through. Are there cost actions you can take there to limit the impact on those unit costs?

Yeah. I mean, we're doing everything we can to minimize the cost of the curtailment. But look as we all know, this is a volume game and you have a relatively high fixed-cost set of inputs. When you cut the volume, it's going to make your unit costs look higher than it has in the past. But we're trying to minimize that and manage our way through it. We've spent a lot of time on these calls talking about Goderich, but you got to give a special call-out to the folks at Cote Blanche, who basically hit their plan day-in, day-out and do exactly what they're asked on a regular basis. So, hopefully, we'll have a good winter, and we'll be able to get them dialed back up, so we'll be at full production levels and get that full cost benefit.

Very good. And just on the premium packaged increase what's driving that increase? And how much higher margin is that product?

Can you repeat that question? Sorry.

On the premium packaging increase you're talking about, how much – what's driving that increase and how much higher margin is that product?

Yeah. It's significantly higher margin than bulk. Think of selling massive amounts by the more than truckload by the rail car so to speak versus selling packaged deicing. So it's a significant impact and you'll see a very material improvement in the back half and that will come through the C&I pricing. So I'm not going to tell you exactly how much better those margins are, but they are significantly better.

Thank you.

Next we'll go to Chris Shaw with Monness Crespi.

Hi, good morning. I have a question about Goderich. Everyone seems to be asking about it, and it's clearly important. If we look back a few years, when Compass was planning under different leadership, there was a strategy to reline some shafts and introduce continuous mining equipment to increase production volumes. I would like to know how far along we are in that process. Am I making a fair comparison? Are we close to achieving those initial production goals for Goderich? Specifically, are we around 90% of the way there, considering we are only replacing the imported volumes this year, or are we still not back to where we began? I'm trying to understand the status of the original plan, as I feel a bit lost with it over the years.

That's understandable. I'm not sure how much the past targets have been discussed, and frankly, I don't focus on those original targets anymore. I'm looking at a different set of goals now. As I've mentioned in previous calls, I believe that at Goderich, we'll exhaust the market demand before we reach our full capacity and capability, once everything is operating perfectly. That's when we will begin to adjust our expectations; for instance, we might have a year where production needs to be 20% lower than the previous year. We'll manage that based on supply and demand. Considering the equipment we have and our focus on this long-term mining strategy, I think the past expectations are not particularly relevant because I see greater potential than what may have been recognized before. However, developing this new long-term mine plan will take time. We are about 2,000 feet into the development, and we're transitioning to a chevron pattern, which will simplify the FCTs. As we position the mine, I believe we will achieve very predictable and reliable output, and we will adjust production volumes based on market trends.

Fair enough. And then if I could ask on the South American business. I mean I know you suspended the strategic review I guess last quarter. But what's the sort of signposting you're looking for to sort of bring that back to active status in terms of looking for an alternative home for that maybe?

Yes. I mean look, we'll kind of play it day by day based on what's going on in the environment. Travel is still extremely limited. Capital markets are a little better than they were there for a while, but at the end of the day I think, our pause does nothing but reemphasize the fact that we made a good decision. The team down there gets a ton of credit for the way they're executing this year and any action that we'd ever contemplate it's got to recognize the intrinsic value of those assets or we wouldn't pull the trigger on it. We'll decide when the time is right. Beyond that I really don't want to say too much more about it.

Great. That’s helpful. Thank you.

All right. We'll next go to David Silver with CL King.

Thank you for having me. I apologize for joining the call a bit late and for having some difficulty hearing a couple of questions, so I'm sorry if I need you to repeat anything. Three months ago, Jamie mentioned a cost-reduction target for the Salt business, aiming for an additional $2 per ton reduction in mining or production costs year-over-year starting in the second half. There have been several inquiries about this, and I apologize if this has already been covered, but is the $2 per ton target still on schedule for the second half? Also, does this target apply only to Goderich, or to the entire Salt segment? Thank you.

Yes, no, I think we mentioned in our prepared remarks that we're targeting $1 to $2 of total salt cost improvement in the second half of the year. A couple of things that are impacting that. There are a few mix issues there, but most notably the Cote Blanche curtailment is having an impact there and as well as the U.K. – the impact of lower production at the U.K. So, yes, we still expect lower cost in the back half across all tons of $1 to $2. We don't talk about the Goderich-specific factors on a dollars per ton basis.

Thank you. I have a question regarding a strategic issue in the industry. The owner of Morton Salt has put the asset up for sale, ideally by the end of the year. I understand that acquiring it entirely isn't feasible, but this marks the second time it's been available in just over a decade. I'm sure your team has conducted thorough research on that asset. From an antitrust perspective, do authorities consider the salt business as a whole, meaning one ton of salt is equivalent to any other? Or do they differentiate between segments like highway deicing, consumer, and agribusiness? Additionally, I've noticed that the stock price of Morton Salt's owner doesn't seem to reflect expectations of a significant bid. From Compass' viewpoint, would there be a chance to separate the business for sale and focus on the commercial or non-deicing salt? It seems to me that pairing the leading deicing salt producer with a top branded salt maker would strengthen your leadership position in the industry. I'm curious about your thoughts on how the pending sale of Morton Salt may impact your company. Thank you.

Yes. I will address the parts I feel comfortable discussing. When I arrived, I made it clear that our main priorities are establishing a culture, system, and structure to fulfill our commitments. After thoroughly assessing the company, we realized we weren't reaching our full potential. Our complete focus has been directed towards addressing that, as we have valuable assets that were underperforming. There's significant potential here. In terms of strategy, we are not ignoring the external environment. Our priority is to fulfill our commitments to regain the opportunity to consider strategic intentions, whether through organic growth or other means. The Morton asset is certainly a concern from a regulatory perspective. It's evident that this could pose challenges for us. However, we would be open to discussions about assets that might fit us better should they become available, as long as the valuations align with our expectations, ensuring strong synergies and compatibility with our skills. Beyond that, I won't comment further. Thank you. I'm not sure if Jamie has insights on the HSR situation, as I'm not well-versed in that area.

No. I mean, I think you hit it with fundamentally there would be some issues, nothing to add. Thanks, Kevin.

Yes.

Okay. Thank you very much. Appreciate it.

And ladies and gentlemen, unfortunately that is all the time we have for questions. And that does conclude today's conference call. We thank you all for your participation. You may now disconnect.