Welcome to the Compass Minerals First Quarter 2021 Earnings Conference Call. Your host Douglas Kris, Senior Director of Investor Relations.

Good morning and welcome to the Compass Minerals First Quarter 2021 Earnings Conference Call. Today, we discuss our recent results and our outlook for the balance of 2021. We will begin with prepared remarks from our President and 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 George Schuller, our Chief Operations Officer.

Thank you, Doug, and good morning, everyone. Thanks for taking the time to join our first quarter 2021 earnings call. Before providing an overview of our financial and operating results for the quarter and sharing some color on the recent progress we’ve made executing on a number of our previously communicated strategic priorities, I want to first highlight another new safety milestone achieved by our operational team in the first quarter of this year. When we talk about our safety performance as a leading indicator for operational success, it’s a reflection of not just who we are as a company but who we strive to be. And while I’m deeply proud of the meaningful progress our team continues to make in this area, we will not rest until we reach our ultimate goal of zero harm across our entire operational footprint. With that in mind, I’m pleased to report that we achieved another step change decline in our total case incident rate or TCIR this past quarter, coming in at a multiyear low for our 12-month rolling average with a TCIR of 1.39. I want to personally thank our team for their continued focus on keeping themselves and their coworkers safe, whether they be operating underground at one of our numerous processing plants or in a support role at our corporate offices, nothing we do is more important.

Thanks, Kevin, and good morning, everyone. I’ll start with some comments on our consolidated results and then move on to our segment-specific performance before discussing our outlook for the remainder of the year. As we reported in our earnings release and as Doug highlighted this morning, all the results we’re discussing today are on a continuing operations basis, unless otherwise noted, with our South American and North American micronutrient businesses falling into the discontinued operations bucket. On a consolidated basis, for the first quarter of 2021, year-over-year sales volume growth in our Salt segment more than offset the slight decrease in Plant Nutrition sales volumes compared to prior year results. Consolidated operating earnings grew 40% when compared to the prior year to approximately $63.6 million, while our consolidated adjusted EBITDA grew almost 30% compared to 2020. Over the same period, we saw operating margins grow 180 basis points to nearly 15%. We also generated nearly $200 million in cash flow from operations and $180 million of free cash flow. This compares to free cash flow of about $206 million during the same period last year. However, last year’s total included an approximately $55 million one-time tax refund. Excluding that refund, our consolidated free cash flow is up about 19% year-over-year. Looking now at our Salt segment results. Total Salt sales in the quarter were $369 million, up from $288 million in the first quarter of 2020, an increase of approximately 28%. This improvement was largely due to stronger weather-driven demand for our deicing products. The severe winter weather we experienced during February in the U.S., paired with the strong UK winter season, along with some incremental bookings from snow events that carried over from late December 2020, translated into stronger sales volumes versus the prior year.

Thank you. Our first question comes from Vincent Anderson with Stifel. Your line is open.

Yes. Good morning and congratulations on the CBA up in Goderich. Now that we have a clearer view on unit costs in your SOP business, the brine quality issues aside, would you be willing to talk about how you’re thinking about targeted unit cost levels there?

I think we can give you a little bit of guidance for the rest of this year. So, as we said, they would be a bit elevated when you start to see the year-over-year comparisons of this business, having extracted that micronutrients business. But sequentially, as you go into quarter two, it’s probably up $20 to $25 a ton. And in the back half of the year, it’ll come back down a bit, so probably in the $450 a ton range.

Okay. And then, just kind of sticking with ag. You’ve had a fairly long relationship with Amy Yoder on your Board, and I assume by extension Anuvia. I was just thinking through their portfolio would seem to align pretty well with your organic SOP offerings. Is there any current or future collaboration plan there, now that they’ve begun really scaling up that business?

I don’t think we’d have any comment on that, Vincent.

Sure. That’s fair. And then, I guess, just kind of thinking to the future here, I know it’s a little early, but most of the planned divestments are finishing up. Goderich is at the very least back to good. As you think about what’s next for Compass, maybe if you could talk about your view as kind of your core competencies that you would consider building off of in the future. I’m thinking your production assets are quite unique, but leverage points like brine-based material experience, your salt depot network familiarity with the municipal bidding process, just anything you’d want to highlight there in terms of areas for future growth leverage.

That’s a great question. Rolling the clock back a couple of years, the first priority was get Goderich back on a better track. And I think it’s safe to say, after a couple of years, it’s heading in the right direction. George is sitting and he can comment on it. While it’s doing a lot better, we still believe there is a ton of extra potential up there, which continues to excite us. The second priority was to prove the performance of all the assets, make sure that they’re performing at their full potential. That was the purpose of our enterprise-wide optimization approach that we took. We’re continuing to put runs on the board there and we will continue to do that in the future. The third priority was to assess core versus non-core. We’ve obviously made that decision. Along with that will come delevering. So, I think that gives us a clear path, Vince. That’s act one. Act two is to start to think about where we go from here. Your point around competencies is a good one—whether it’s extracting brine-based mining, et cetera. I would also say that the logistics competency we have in moving materials around, the depot network that we have, is a factor. We’re just starting to roll into that. Over the course of the next couple of quarters, you can expect to hear something back from us in that regard.

Our next question comes from Seth Goldstein of Morningstar. Your line is open.

Hi, good morning. Thanks for the question. Kevin, in your prepared remarks, you mentioned that you think Salt costs may also become lower from this point. What’s the future trajectory here and how low do you think they can get?

I don’t want to throw out a specific number. What we’ve been talking about is trying to run the Salt segment to move it into that low-30s to mid-30s percent EBITDA margin. That’s a function of both costs and what’s happening in the marketplace. What I’d say about Salt segment costs thus far is they’re decreasing, but keep in mind that behind the scenes we’re effectively building a new mine at Goderich. We have a lot of development costs that are blended into that cost, which we could take out tomorrow if we wanted to cease development and you’d see a step function reduction in costs. We don’t think that’s wise because we think this is a viable long-term investment and we’re building these new roadways that’ll be standing for 30 to 50 years. With the passage of time and as we move into this new mine plan, you’ll continue to see step function cost reductions over the next three to five years, at which point it will sustain itself going forward based on the way we’ve designed this new mine plan.

Our next question comes from Joel Jackson with BMO Capital Markets. Your line is open.

Hi, good morning. I’ll ask a couple of questions, one by one. You sold off a lot of earnings this year, one more deal to go. And what does that mean to your corporate costs to scale down lower? Can you talk about why corporate costs are pretty elastic, despite the large asset sale?

They were not particularly related to the acquisition of those assets. We have a number of fixed costs just being a public company operating here in North America. As those businesses are now divested, you’re not going to see any immediate impact. But we’re constantly looking at our corporate costs. As required, we’ll be diligent and make sure we set that level at an appropriate amount given our overall business portfolio.

I want to follow up on a comment. Kevin, I think you talked about that rock salt channel inventories are lower, below average level. I think you said it in the call. So, obviously it was a milder, a little bit below average winter, and March was quite light. So, end of year, I imagine consumption of rock salt in totality is low. And you had a record Q1 volumes of rock salt after a low Q4. So, some shipments obviously deferred to Q1, which it would seem like from the outside that all that would lead to channel inventories being high. So, maybe you can comment on some of that. When you get your data points, you always have people in the field and you’re actually selling that. What are your data points to sort of get these inventory assumption levels?

Good question, Joel. We report data on those 11 cities. We sell salt in a lot of other places. It just so happened that a lot of those other places needed a whole lot more salt and their base commitments in some cases are 150% to 175% of their basic commitments. That speaks to both the production side and the logistics side being able to flex into a demand scenario and move volumes up nearly 1.5 million tons quarter-over-quarter. That’s a testament to the changes in the plumbing that we’ve made here to be able to respond in that fashion. February was significant and it took inventories down deeply. March was mild, but we saw some activity in April. Another factor to consider is the void that Avery Island has created in the marketplace of circa 1 million to 2 million tons. That’s a pretty big void in what is actually a pretty small marketplace. We think all of that sets up for a constructive bid season. Thus far, we’re only about 20% or so in, but we’re not seeing anything out of the ordinary. It’s disciplined so far and feels pretty good. Beyond that, we don’t have much more to say given that we’re only approximately 20% in.

If I could ask a follow-up on that. When you think of deicing, freight costs are up. So, there’s probably upward pressure on delivered salt price. Knowing the strength of the channel inventory, there’s probably some upward pressure on gross delivered prices because of freight costs. How does this play out this year where freight costs will probably be higher and then trying to figure out what the actual netbacks do you want the sensitivity to be?

I’ll let Jamie comment on the actual freight cost to sale. The other phenomenon is it’s not only U.S. freight. Freight in general is up, including seaborne freight, which from our perspective is good news because it makes it harder on the importers. That’s not to say we won’t see them from time to time in our businesses, because they can be challenging competitors. We approach this through optimization and looking at our portfolio of assets and how we can deliver at the lowest cost possible to generate the highest margin possible. Brad, Jamie, do you want to comment on rates and materials?

I’ll make a high level comment, and Brad can add. Certainly we’re going to see elevated freight rates as we go into the second quarter when you look at inflation, just rate inflation, oil prices and sales mix. We expect to see a higher mix of commercial and industrial in our second quarter this year versus last year. We can expect to see higher rates for the rest of the year, but as we go to the bid season, we build those in.

I would add to what Kevin and Jamie said, Joel. As you look at proxies and tender sizes, and as Kevin said, we’re only 20% through the season. Those tender sizes are largely what we have expected. There appears to be good discipline in the market. Bulk freight rates have changed dramatically versus the same time last year. As you’re probably aware, the Baltic Exchange’s main sea freight index gained last week to its highest level since September of 2010 as demand really strengthened across all vessel segments. Economies around the world and supply chains are trying to snap back, and that’s putting a strain on rates. We do expect to see a firm freight market for importers this year for both deicing and rock salt, and to Vincent’s earlier question, SOP.

Our next question comes from Mark Connelly with Stephens. Your line is open.

Thanks. Kevin, you’ve eliminated your salt imports. Avery has taken out some supply there. There’s still a lot of imported salt coming into your target geography. How do you think about growing your volumes as Goderich becomes more productive? Is it mostly staying within the same geography? And as your costs come down, presumably your geographic reach rises too. I’m just sort of wondering how those different things play into your plans.

Importers will always be fungible; they come and go and are inconsistent. With the Avery Island void, there will be jockeying for position. Importers will have their eyes on it; Cargill is not going to let that business go without a fight. At the end of the day, some of that business will inure to our benefit. We want to chase the business that makes sense for us. As we get better at Goderich and Cote Blanche continues to perform, we can think more about footprint expansion and start to grow our marketing region. I think that’s in the cards over the course of the next couple years. I don’t know if that’ll play out this year, but that’s how we are thinking about it, looking at a different footprint.

Okay. And I wonder if we could talk about the union contract. Unions don’t typically sign five-year contracts without some incentive to do that. Can you talk about anything in this contract that might be different from what we’ve seen in the past?

At a high level, I’d say it’s as much a testament to the relationship and the acknowledgement that it’s a partnership up there as anything. In terms of giving away the farm, nothing could be further from the truth. That’s consistent with what you see in any renewal. George, is there any color you’d like to add?

Thanks, Kevin. From our perspective, we’re extremely pleased with this collective bargaining agreement at Goderich. As Kevin highlighted, I think it demonstrates our continued collaboration with our entire team at Goderich. When you look at it, our entire enterprise will continue to build from this as we go forward. There weren’t any material concessions; it’s really around the relationship that’s been built over the last couple of years. I think it sets us up for a bright future. This is one of those brighter ones where our workforce and leadership team consider this positive.

Thank you. That’s helpful. Just a quick question for Jamie. The CapEx reduction, you said just related to the divestitures or is there something else in there?

It’s a little bit of trimming in a couple of different areas, but primarily the removal of the discontinued operations.

Our next question comes from David Silver with CL King. Your line is now open.

Okay. Thank you very much. I had a marketing-based question on your SOP business. Last year you sold 383,000 tons, which is above what your capacity is for solely pond-based SOP production, the lower cost tier production. My sense is ag markets are quite robust; you could probably sell a similar amount or more. From a marketing perspective or managing the business longer term, what is the optimal strategy in an environment like this? In other words, do you want to purchase potash and ramp up internal production to limit the amount of imports, even if it limits the price improvement, or do you pull in just a little bit and try to squeeze out a little more price during the growing season but overall? How do you handle this marketing opportunity where demand is clearly above that threshold for your pond-based SOP production?

Excellent question. You’re exactly right on Ogden pond fee tons available. Remember too that we had our Wynyard Saskatchewan operation of about 40,000 to 41,000 tons, so that’s not an insignificant source of SOP supply for us to market here in the U.S. and MCA. From a marketing perspective, we model this all the time and try to make an optimal financial decision coupled with an optimal customer decision. Kevin alluded to having the right agronomy in talking about Protassium+ and improving drought tolerance. When we think about how we market our specialty micronutrient, a key differentiator is that our product contains both potassium and sulfate sulfur, and both play critical roles in drought tolerance. Potassium facilitates a more robust root system and sulfate sulfur is more readily available for plant uptake compared to elemental sulfur when soil is dry and microbes are less active. That’s the situation our customers find themselves in today. Year-to-date, California is in its fourth driest year. We’re staying close to our farmer customers and some of the difficult decisions they have to make with limited groundwater pumping available. We’re seeing a decrease in vegetable crops and an increase in higher value orchards like almonds and pistachios. We watch the market, stay exceptionally close to our customers and distribution and retailers, and make the call to optimize production, including when we would add a potassium chloride into our facility at Ogden.

Could I follow up, Brad? I remember back in the 2007-2008 timeframe when potash pricing really took off, your company had potash purchase agreements that were uniquely favorable and the price was set maybe earlier in the prior year. I’m wondering if that contract stipulation or that contract element remains in place for your purchased potash needs this year.

No. The one you’re referring to expired around 2013 or 2014. So that is no longer in place. If we’re going to supplement our Ogden operations, it would be buying MOP at market prices and converting it to SOP. We do have an agreement in place specific to our Wynyard facility.

Okay. Thank you for that. Just one quick question on Salt. With Avery Island out of commission, you’ve talked a lot about what it means for your deicing salt business. Does it provide any incremental opportunities on the commercial and industrial side? Historically, cargo has had a full line of salt products with some in institutional and agricultural processing. Are there incremental C&I opportunities for your Salt business as a result of the departure of Avery Island?

It’s tough to get salt from Utah into the markets that Avery Island was serving. The freight differential really eats up the cost. While we have virtually unlimited salt coming off our operations in Ogden, freight costs make it difficult to compete from that distance.

Our next question comes from Chris Shaw with Monness, Crespi. Your line is open.

You guys mentioned the UK had a strong salt quarter. What was the break out exactly about how much impact that was on the quarter? It’s not specifically a bigger number, but your comment—can you quantify it?

A rough estimate is 200,000 to 300,000 tons. There was a pretty even split between the impact in our U.S. market and our UK business.

I’m sorry?

Yes. So the UK specific is a few hundred thousand tons of benefit.

Post the divestitures, particularly in South America, will the tax rate be significantly different? I think I remember moving when you first acquired those.

The rate we’ve guided at 20% includes the divestiture. South America, Brazil, our tax rate is about 32%. We’re shedding one of the higher rate tax jurisdictions in our mix, so that’s how we come down to right around 28% on a continuing operations basis.

There are no further questions in queue at this time. I’ll turn the call over to Kevin Crutchfield, President and CEO, for closing comments.

I just want to thank everybody for tuning in today. I appreciate your time and questions. I look forward to keeping you updated over the course of the next few quarters as we continue to execute on our operations internally and start to think about where we’re going to go from here. Thanks again for tuning in. Have a great day.

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