OVERLAND PARK Jul 28, 2015 (Thomson StreetEvents) -- Edited Transcript of Compass Minerals International Inc earnings conference call or presentation Tuesday, July 28, 2015 at 1:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Theresa Womble Compass Minerals International, Inc. - Director of IR * Fran Malecha Compass Minerals International, Inc. - President and CEO * Matthew Foulston Compass Minerals International, Inc. - CFO ================================================================================ Conference Call Participants ================================================================================ * Garrett Nelson BB&T Capital Markets - Analyst * Chris Parkinson Credit Suisse - Analyst * Joel Jackson BMO Capital Markets - Analyst * Ben Richardson JPMorgan - Analyst * Ivan Marcuse KeyBanc Capital Markets - Analyst * Chris Shaw Monness Crespi - Analyst * Ryan Berney Goldman Sachs - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good day, and welcome to the Compass Minerals second-quarter earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Theresa Womble. Please go ahead. -------------------------------------------------------------------------------- Theresa Womble, Compass Minerals International, Inc. - Director of IR [2] -------------------------------------------------------------------------------- Thank you, Alicia. Today, our CEO, Fran Malecha, and our CFO, Matthew Foulston will be reviewing our second-quarter results. Before I turn the call over to them, 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 July 28, 2015, and involve risks and uncertainties that could cause the Company's actual results to differ materially. These differences could be caused by a number of factors, including those identified in the Compass Minerals most recent forms 10-K and 10-Q. The Company undertakes no obligation to update any forward-looking statements made today to reflect future events or developments. You can find reconciliations of any non-GAAP financial information that we discussed today in our earnings release, which is available in the investor relations section of our website at compassminerals.com. Now I will turn the call over to Fran. -------------------------------------------------------------------------------- Fran Malecha, Compass Minerals International, Inc. - President and CEO [3] -------------------------------------------------------------------------------- Thank you, Theresa, and good morning to everyone on the call. Yesterday, we released strong second-quarter earnings, including an earnings record by our salt segment. Matthew will walk through the key quarterly details with you in a few minutes, and I will review some of the drivers of the strength in the quarter as well as discuss some industry and market developments that will shape our results for the rest of the year. Looking first at the salt segment, pricing continued higher when compared to the prior year due to last year's 25% price increase for highway de-icing salts in North America. Even though this is a light quarter for de-icing, the tons of de-icing salt we did sell had a meaningful impact on our average selling price. In addition, our consumer industrial business delivered pricing improvements in most product categories. Of course, what is of interest to you at this time of year and what we are internally focused on is the current highway de-icing bid season and our preparation to serve customers during the upcoming winter. Our bid season results show that the normal to mild weather in our primary North American service area resulted in downward pressure on awarded bid prices. While we had some strength early in areas that border the Eastern US, where winter was very strong, for the most part bid pricing has consolidated around a lower price point. But that's only part of the story. Our bidding strategy focuses on optimizing profitability in order to deliver on our financial commitments. This requires a balance between price and volume. This year, we had an opportunity to increase our highway de-icing commitment volume because some of our competitors were shifting their supplied to the East, where winter was strong. In addition, we have incremental tons to serve more customers due to our strong operational performance. So we've pursued in one more business. We've increased our commitments for the upcoming winter by about 10% compared to last year. Also important is that the contracts we have one are in areas where we can earn better margins due to their proximity to our mines. With this volume growth, in addition to lower salt cost expectations, which Matthew will discuss shortly, we expect our salt earnings to continue outpacing last year's results assuming average winter weather. These are excellent developments for the Company. We are very pleased with the bid season thus far despite the lower price result because we are positioned to take advantage of winter in areas that are most profitable to us. Now let's turn to plant nutrition. This business has performed as we expected for the second quarter. We did sell fewer tons compared to a very strong result last year, which was primarily due to the strong US dollar that is making the US market more attractive to European imports. In addition, early wet weather in some of our Eastern markets limited SOP sales there. Even with more import availability, our average selling price remains stable, with our SOP-only price at $7.22 per ton, 14% above last year's price. Clearly, the US is an attractive market for SOP, particularly with the current strength of the dollar. That being said, Compass remains extremely well-positioned in North America with a strong brand in the market, strong customer relationships, and logistically advantaged production in Utah adjacent to key markets. We are also approaching the fall season with a proactive distribution plan. We are forward-deploying products in our key markets to serve the fall season, which is an element of our mission as a Company, delivering where and when it matters. You'll notice that our plant nutrition sales guidance for the second half of the year is robust. That's based on our belief in the strength of the specialty potassium market in North America. This is a growing market supported by the recognized need for low-chloride potassium in areas like California, where more and more acres of row crops of being transitioned to permanent crops, which demand SOP. These growers are optimizing usage of acres to maximize their profitability. Further, the underlying demand for SOP-favored crops remains strong. In conclusion, I am pleased with the strong second-quarter results delivered by our employees. We've had excellent operational performance this quarter. The highway de-icing business is set up for strong winter ahead. Our plant nutrition business is ready for the fall season. Furthermore, we are executing on our strategies to optimize margin performance and grow profits while continuing to invest for the future in both businesses and drive improved shareholder value. Now I will turn the call to Matthew for a closer look at the financial results and our outlook for the rest the year. -------------------------------------------------------------------------------- Matthew Foulston, Compass Minerals International, Inc. - CFO [4] -------------------------------------------------------------------------------- Thanks, Fran, and good morning, everyone. Let me start with a brief review of our consolidated results. Similar to the first quarter, adjusted EBITDA and EBITDA margin were up year over year 34% and 6 points respectively on broadly flat revenue. Strong performance in the salt business drove the year-over-year improvement, so let's start there. If you are following with our presentation online, our salt results can be found on slide 8. Salt segment operating earnings of $21.1 million were up over 200% from 2014 and set a second-quarter record. We achieved this earnings growth through better pricing and improvements in salt costs. Touching first on price, as Fran mentioned, we continue to benefit this quarter from last season's 25% increase in highway de-icing salt prices. In our consumer and industrial business, there are some other factors at play. You'll notice that our sales volumes in that business were down from last year. This is partly a result of exiting some low-margin business and a decrease in sales that deicing repackages. These items together put some downward pressure on our volumes but had a positive mix impact on our reported average selling price and cost per ton within the C&I business. Looking more closely, we were able to increase prices modestly in almost every product category this year, with overall C&I pricing up 4%. Our per-ton salt costs were also favorable to prior year. Underlying this was beneficial sales mix, lower depot and SG&A costs, and higher production volumes at our mines. As Fran said, operationally, it was a good quarter for our salt business. These positive developments contributed to an 83% increase in EBITDA and a 12-percentage-point increase in EBITDA margin year over year. Now turning to plant nutrition on slide 9, revenue of $64.1 million was 3% lower than the year-ago period as improved average selling prices only partially offset the decline in sales volumes. As Fran discussed, our earnings were negatively impacted by the lower sales volumes as well as planned higher production costs of our SOP at Ogden. You'll recall that we have discussed over the last several quarters that the four solar evaporation harvests in 2014 limited our supply of low-cost, home-base feedstock. As a result, we're servicing more KCl to supplement our home-based feedstock. We are pleased with the plant's performance this quarter, as we were able to achieve better yields from that feedstock throughout the period, pushing our operating margin above guidance. Season to date, weather at our pumps in Utah has generally been average, and we are currently expecting the evaporation season to be average overall, which should bode well for lowering our costs significantly in 2016. We have added a new feature to the deck on slide 10 where you can see how we stack up against our prior guidance. We intend to continue this practice as part of our move toward increased transparency. On these key segment metrics, we met or exceeded our guidance, yet another indicator of our strong operational performance and overall results. On slide 11, we outline some of the key drivers of our outlook for the remainder of the year. In salt, we expect strong volumes driven by the increased highway de-icing commitments we have won so far. Although our average price for awarded highway de-icing contracts in North America is 6% lower than last year's results, I would like to point out that this is still a net gain of 19% over the last few seasons. Just as important as our price result for the bid season is the fact that the contracts we have won to date are logically situated within our served market to provide strong net backs to our mines. Further, we expect to supply most of our contracts with our own production using less imported salt. That's why we expect further margin expansion in the second half of 2015. Salt segment earnings should also benefit from lower shipping and handling costs and improved SG&A expense. The outlook in plant nutrition also is generally positive. We have excellent customer indications for fall demand, and we are working hard to forward deploy inventory in our key markets. Our production at Ogden is on plan, and we're looking forward to the results of the solar evaporation season. While the price of SOP in North America is moderating, this continues to be an attractive price for us, and SOP remains the preferred source of potassium for the crops we target. We expect that our production costs will remain elevated through the rest of the year for the reasons we've already discussed. That, combined with some potential downward price pressure in the second half, is expected to result in a plant nutrition operating margin between 22% and 24%. Turning to the last slide, let me end with a brief summary. Second-quarter results were strong versus prior year, including a second-quarter record for the salt business. We met or exceeded all elements of our segment guidance. Both segments are continuing to perform well, and we anticipate a strong second half. We remain focused on our capital investment plan and executing those projects on plan and on budget. Finally, and most importantly, we are reaffirming our full-year EPS guidance range of $5.10 to $5.60. With that, I'll turn the call over to the operator, Alicia, for questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Garrett Nelson, BB&T Capital Markets. -------------------------------------------------------------------------------- Garrett Nelson, BB&T Capital Markets - Analyst [2] -------------------------------------------------------------------------------- Congrats on the strong results. -------------------------------------------------------------------------------- Fran Malecha, Compass Minerals International, Inc. - President and CEO [3] -------------------------------------------------------------------------------- Thank you. -------------------------------------------------------------------------------- Garrett Nelson, BB&T Capital Markets - Analyst [4] -------------------------------------------------------------------------------- I wanted to inquire about the slight reduction to 2015 CapEx guidance. Does that represent the deferral of some spending maybe into 2016? Or perhaps the benefit of some cost savings on the plan spending; for example, maybe you've been able to procure some equipment at lower prices or something of that nature. -------------------------------------------------------------------------------- Matthew Foulston, Compass Minerals International, Inc. - CFO [5] -------------------------------------------------------------------------------- Yes, Garrett, this is Matthew. I think, as we have been talking about CapEx, we talked about two big years. And given the lumpy nature of what we're procuring here, the timing could easily flip from one year to the other. So nothing more than putting a boundary around how big we think that slip from one year to the other could be. It is definitely a nice environment, given what's going on in mining, to be procuring some of this equipment, and we are pleased with the results we're getting there as well. -------------------------------------------------------------------------------- Garrett Nelson, BB&T Capital Markets - Analyst [6] -------------------------------------------------------------------------------- Okay. And your capital spending plan for 2016 and 2017, have those changed at all since last quarter? -------------------------------------------------------------------------------- Matthew Foulston, Compass Minerals International, Inc. - CFO [7] -------------------------------------------------------------------------------- There is no material change in our outlook for the next two years on CapEx. -------------------------------------------------------------------------------- Garrett Nelson, BB&T Capital Markets - Analyst [8] -------------------------------------------------------------------------------- Okay. And then your effective tax rate was higher for the quarter. In the press release, you cited a change in Canadian tax law. Could you elaborate on that? Was that a one-time occurrence? And if not, could we possibly see a higher effective tax rate going forward? -------------------------------------------------------------------------------- Matthew Foulston, Compass Minerals International, Inc. - CFO [9] -------------------------------------------------------------------------------- Yes. There was a law change that was enacted in June up in Canada which eliminated a mining company benefit in Ontario. The tax rate for the quarter was about 6 points over what we've been forecasting, and a little over 4 points of that was related to this law change, primarily the write-off of the deferred tax asset. When you think about going forward, we think this is 2/10 of a point or less ongoing effect. -------------------------------------------------------------------------------- Garrett Nelson, BB&T Capital Markets - Analyst [10] -------------------------------------------------------------------------------- Okay. Thanks very much. -------------------------------------------------------------------------------- Operator [11] -------------------------------------------------------------------------------- Chris Parkinson, Credit Suisse. -------------------------------------------------------------------------------- Chris Parkinson, Credit Suisse - Analyst [12] -------------------------------------------------------------------------------- You posted the negative 6% for the de-icing bid season this far. Can you just comment on some of the factors driving that number, including any market share gains, optimizing net backs? You mentioned third-party salt procurement versus just the general competitive landscape. Any general qualitative color would be helpful. Thank you. -------------------------------------------------------------------------------- Fran Malecha, Compass Minerals International, Inc. - President and CEO [13] -------------------------------------------------------------------------------- Sure. This is Fran, Chris. I think if you look at the winter we had last year, it was probably somewhat mild. Milder than average in the Western side of our served area. And to extremely above-average, if you go into the Eastern part of the US, which touches on the Eastern side of our served area, and that goes into markets that we tend to have a hard time reaching given the placement of our mines. I think as the bid season went through the normal state-by-state process, we assessed the market and our outlook on how others are going to approach the market. And I think we saw, obviously, the tons shift to the east. So our competitors were mindful of that, as we were. So we were able to gain share in our core area. And I think as we have talked previously, whether on previous calls or in our investor day, if you go back three, four years in time, we have lost share in our core market, and we had intentions to gain that back. And that was talking about 4 percentage points of share. So we look at this season coming off extremely high pricing last year. And we knew that some of the late-season high pricing wasn't going to last. And imports had come into the market at higher cost to serve some of that high-priced business. We knew that that wasn't going to hold up across the board, but we were able to gain share pick-ups on our commitments in an environment where margins are strong. So I think excellent management by our team to do that. We aren't going to have the level of imports we had last year, so not only are we picking up more tons at nice margins, but we will have lower costs to serve that business in the winter ahead. And now we will just have to wait and see how the winter comes at us because we are positioning those tons in the market closer to our mines and looking forward to hopefully a good winter for Compass. -------------------------------------------------------------------------------- Chris Parkinson, Credit Suisse - Analyst [14] -------------------------------------------------------------------------------- Perfect. Thank you. Just a quick follow-up. You also mentioned that you saw some increasing competition to SOP markets. Can you just comment on if that's specifically pertinent to any specific regions that's affecting you? And then also, do you anticipate the trends to remain stable or accelerate into the back half of the year? -------------------------------------------------------------------------------- Fran Malecha, Compass Minerals International, Inc. - President and CEO [15] -------------------------------------------------------------------------------- I think if you look at imports over the past five or six years or so, they've been growing with the growth in the market. And every year it's a little bit different, but this year is similar to that. We are seeing more imports, and they are spiking in certain months depending on shipments come in. And I think in recent months for the tail end of the spring season here, we saw maybe a slight uptick in the monthly imports. And as we look to the back end of the year, we expect it to be pretty normal. I think we will see imports continuing to come in in the Southeast of the US like they normally do. Occasionally, we see imports that do come into the West Coast, and we would expect some of that to continue as well. Obviously, if you look at the pricing relationship between MOP and SOP, we have widened that spread in the US. And the US is a bit of island of pricing around the world. Combine that with currency. I think all those factors are probably playing at a few more tons coming in but also a market that's growing. And we talk about some of those crop shifts in California and especially that are driving increased demand, and we're well-positioned to meet that demand. So I think it's going to be competitive, and we're well-positioned to compete with our -- not only our location, but we are the consistent supplier in the market. We are the only producer in North America with the quality of our product and the consistency of our product. And as we continue to build on the reliability with the investments that we've made in our production facilities, we think that we're well-positioned to compete in this environment. -------------------------------------------------------------------------------- Chris Parkinson, Credit Suisse - Analyst [16] -------------------------------------------------------------------------------- Perfect. Thank you. -------------------------------------------------------------------------------- Operator [17] -------------------------------------------------------------------------------- Joel Jackson, BMO Capital Markets. -------------------------------------------------------------------------------- Joel Jackson, BMO Capital Markets - Analyst [18] -------------------------------------------------------------------------------- Just sort of the first you guys have really done guidance. You reiterate your guidance ranges from $5.10 to $5.60 for EPS this year and 12 million to 13 million tons of sulfur this year. Just so we understand, are you guiding towards the middle of this range? Would it be fair to say since the last quarter, maybe you are updating to the lower end of these ranges? Maybe you could just give some more color around that, please. -------------------------------------------------------------------------------- Fran Malecha, Compass Minerals International, Inc. - President and CEO [19] -------------------------------------------------------------------------------- I'm not sure about the lower end of the range. I think this is the -- we left the range unchanged. And this is a small quarter for us, even though it was a strong quarter. And so I think we feel good about the range that we are in. There's some dynamics in the back half, mainly weather that can influence our results. But I think we certainly aren't implying here that we're looking at a result that would be at the low end of the range. Matthew, you may have other thoughts there. -------------------------------------------------------------------------------- Matthew Foulston, Compass Minerals International, Inc. - CFO [20] -------------------------------------------------------------------------------- No, I don't feel any better or worse about the guidance range now than I did when we put it out there at the start of the year. We are executing the plan, we are on track, and we think we got that range where it needs to be for the full year. -------------------------------------------------------------------------------- Joel Jackson, BMO Capital Markets - Analyst [21] -------------------------------------------------------------------------------- Okay, that's helpful. Thank you. So my second question would be, you're talking about finding the right balance of price versus volume in bid season and going for more volume this year. So kind of a two-part question, which is that can you talk about -- you said your commitments were up 10%. Can you talk about -- it seems like when I look at the tenders, maybe some of the volumes in your areas are down 10% to 25%. So maybe you can just talk about what overall word of volumes are down in your area. And the second part of the question would be as the Goderich shaft realigning, expansion, all that is done over the next couple of years, would it -- is it reasonable to assume that you would try to maximize volumes out of Goderich to maximize volumes as opposed to maybe strike a balance? Thanks. -------------------------------------------------------------------------------- Fran Malecha, Compass Minerals International, Inc. - President and CEO [22] -------------------------------------------------------------------------------- Yes, I think if you look at the tender size -- this is on the municipal -- the state and provincial bids, it will probably consistent throughout all the commercial business that we do as well. We would see the change being down year over year about 9%. It's actually probably a bit higher on the state bids and less of a downtick on some of the others. So maybe some of the more public bids that you have seen are carrying a higher percentage than what we're seeing on average. And I think we're seeing the bids more at the longer-term average for our served market. And in that served market, we have been able to achieve higher level of commitments, which tells us that we are able to gain share in an environment that it's healthy to do that. And as we look forward with the investments that we are making in Goderich, really the shaft relining is at once in a 50-year type of investment that we are making. So the asset should be able to perform well into the future. And as we reline those shafts, it will allow us to access additional hoisting capacity that we don't have today because one of those shafts is a production hoist. That's not our primary hoist. We are producing at our capacity as we see it today, which is in the 7.5 million to 8 million tons per year. Once we complete the relining of that other production shaft, what should happen sometime in 2017, that will give us access to additional million tons or so capacity. So as the market continues to grow at the rate it's been growing, we should be able to pick up certainly our share of that. If not, hopefully more than our share of that. And then in big winters, also be able to size up our production to meet demand. -------------------------------------------------------------------------------- Joel Jackson, BMO Capital Markets - Analyst [23] -------------------------------------------------------------------------------- Thank you. -------------------------------------------------------------------------------- Operator [24] -------------------------------------------------------------------------------- Jeffrey Zekauskas, JPMorgan. -------------------------------------------------------------------------------- Ben Richardson, JPMorgan - Analyst [25] -------------------------------------------------------------------------------- Good morning. -------------------------------------------------------------------------------- Fran Malecha, Compass Minerals International, Inc. - President and CEO [26] -------------------------------------------------------------------------------- Good morning. -------------------------------------------------------------------------------- Ben Richardson, JPMorgan - Analyst [27] -------------------------------------------------------------------------------- This is Ben Richardson speaking for Jeff. Just had some questions about the C&I pricing dynamic into the back half. If you had any commentary on that. -------------------------------------------------------------------------------- Matthew Foulston, Compass Minerals International, Inc. - CFO [28] -------------------------------------------------------------------------------- Yes, this is Matthew. I don't think we see anything particularly different in the back half on the C&I side. We had a pretty good year last year in terms of pricing opportunities, as I mentioned, across most of the segments within that, and we were up 4% overall. Volumes have been a little bit lower in the second quarter as we got out of some less attractive business. But by the same token, we've been filling in with new business in the back half and feel pretty good about delivering on the second half in C&I. -------------------------------------------------------------------------------- Ben Richardson, JPMorgan - Analyst [29] -------------------------------------------------------------------------------- Okay. And just on the margin guidance for the back half in the plant nutrition segment, just year over year, it looks like there's some compression there. And wondered, other than price, are there other factors in that margin compression? -------------------------------------------------------------------------------- Matthew Foulston, Compass Minerals International, Inc. - CFO [30] -------------------------------------------------------------------------------- Yes, the last couple of calls we have talked about the poor solar harvest that we had at the tail end of last year. And that's cost pressure that was putting on our business as we go through 2015. We previously estimated that in the $90 to $100 a ton range. As I mentioned in Q2, we were somewhat better than that and are cautiously optimistic going through the balance of the year, but the penalty is not as high. But we will be carrying a pretty significant penalty through the balance of the year that we didn't have last year. And if we have a normal solar harvest, which we are about halfway through now, a lot of that cost will fall straight out as we go into next year. -------------------------------------------------------------------------------- Ben Richardson, JPMorgan - Analyst [31] -------------------------------------------------------------------------------- Okay, outstanding. Thank you very much. -------------------------------------------------------------------------------- Operator [32] -------------------------------------------------------------------------------- Ivan Marcuse, KeyBanc Capital Markets. -------------------------------------------------------------------------------- Ivan Marcuse, KeyBanc Capital Markets - Analyst [33] -------------------------------------------------------------------------------- The first one is on the plant nutrition business. If you look at your projects, you mentioned that compaction is up and going, and then your evaporation season is going smoother this year. So outside of it, would you think that you could see a greater fall than the $90 a ton? Or how much higher is today going into next year? How do you think about unit operating costs for the plant business going to 2016? And then as these projects get up and going into 2017, sort of the trajectory? -------------------------------------------------------------------------------- Matthew Foulston, Compass Minerals International, Inc. - CFO [34] -------------------------------------------------------------------------------- Yes, I think take the first piece obviously first. We are hoping if we get a normal solar evaporation season that that cost penalty we are bearing drops out. We had originally thought that to be in the $90 to $100 range. I think our view now is it's $20 to $30 below that as we have been seeing these good margins come through in Q2. So I would expect with a normal harvest that we will be out of that penalty in 2016. And obviously, when we are on the Q3 call, we will update you. We've also been running extremely well after our slow start on the compaction side and been catching up on that progress. So it's been a pretty good year to date so far. Slow start, much better later. -------------------------------------------------------------------------------- Ivan Marcuse, KeyBanc Capital Markets - Analyst [35] -------------------------------------------------------------------------------- (multiple speakers) -------------------------------------------------------------------------------- Fran Malecha, Compass Minerals International, Inc. - President and CEO [36] -------------------------------------------------------------------------------- As an experiment, just one thing to talk about the future there. As we finished the plant expansion and additional compaction that we are just getting started on there, that would be over the next two years and then be available beyond 2017. We are -- we would expect those cash costs because we are not only going to be producing more tons and get some benefit there in the fixed costs, but it should be a yield increase as well off of our pond-based production that will help our cost slightly. I would expect those cash costs on ton-based production to be in the low [200s], which should set us up well to compete against anybody in the world, quite frankly, on SOP. The balance of the production will be using our excess sulfur from the harvest with KCl. That will be determined more by the pricing of KCl at the time. But if you look at how we've been able to separate that pricing in the market and achieve good margins with SOP, I think we're going to be extremely well-positioned for the future as we bring that capacity online. -------------------------------------------------------------------------------- Ivan Marcuse, KeyBanc Capital Markets - Analyst [37] -------------------------------------------------------------------------------- Got you. Thank you for that detail. And then moving over to salt, how big of a tailwind -- you mentioned transportation costs coming down -- is sort of your current expectations in the back half? -------------------------------------------------------------------------------- Matthew Foulston, Compass Minerals International, Inc. - CFO [38] -------------------------------------------------------------------------------- We think it's about a $1-a-ton improvement in the back half. -------------------------------------------------------------------------------- Ivan Marcuse, KeyBanc Capital Markets - Analyst [39] -------------------------------------------------------------------------------- On a year-over-year basis? -------------------------------------------------------------------------------- Matthew Foulston, Compass Minerals International, Inc. - CFO [40] -------------------------------------------------------------------------------- Yes. -------------------------------------------------------------------------------- Ivan Marcuse, KeyBanc Capital Markets - Analyst [41] -------------------------------------------------------------------------------- And then just a quick follow-up on your C&I outlook, if I understood correctly, you've gained some business, so you shouldn't see that year-over-year -- I guess in the first half of the year, you have been in the high teens in terms of volume being down. Would you expect that same sort of trend on a year-over-year basis in terms of volume with pricing moving up, or do you think that -- we start laughing -- you gain the business that you have, so we should be more net flat? Just trying to get an idea of how you're looking at year-over-year volumes in the C&I business. -------------------------------------------------------------------------------- Matthew Foulston, Compass Minerals International, Inc. - CFO [42] -------------------------------------------------------------------------------- Yes, I look as C&I as a percentage of total salt business. And in the second half, you're going to see that ratio be very, very similar to how it was last year. So effectively, a recovery of that volume to its normal proportion of our total business. -------------------------------------------------------------------------------- Ivan Marcuse, KeyBanc Capital Markets - Analyst [43] -------------------------------------------------------------------------------- Great. So in theory, since it's better business, would you expect that pricing to be flat, or do you see the move up as a function of mix? -------------------------------------------------------------------------------- Matthew Foulston, Compass Minerals International, Inc. - CFO [44] -------------------------------------------------------------------------------- Well, there's always an impact of C&I mix on our average selling price. As you know, it's much higher priced. So I think Q3 and Q4 versus Q2, there will be a little impact there. -------------------------------------------------------------------------------- Ivan Marcuse, KeyBanc Capital Markets - Analyst [45] -------------------------------------------------------------------------------- Great. Thanks. -------------------------------------------------------------------------------- Operator [46] -------------------------------------------------------------------------------- (Operator Instructions) Chris Shaw, Monness Crespi. -------------------------------------------------------------------------------- Chris Shaw, Monness Crespi - Analyst [47] -------------------------------------------------------------------------------- I just want to look into the -- about the terminology on the -- where you're talking about the committed volumes that are up 10%. Is that -- and if you are -- is the overall sort of their customer volumes -- what they are asking for down 9% -- I remember last year you had to bring in the imported volumes to satisfy all your customers. So if you're actually increasing your committed volumes for next year, why wouldn't you need the imported product again? Maybe I'm misunderstanding what the committed means. -------------------------------------------------------------------------------- Fran Malecha, Compass Minerals International, Inc. - President and CEO [48] -------------------------------------------------------------------------------- This is Fran. I think the difference there is that with the production from our mines, we are running at capacity, expect to do that throughout the balance of the season. And probably have a little bit better inventory position to service some of that demand that we are committing to. That's why we see less imports to serve our customers in the year ahead. -------------------------------------------------------------------------------- Chris Shaw, Monness Crespi - Analyst [49] -------------------------------------------------------------------------------- So the committed volumes doesn't mean you've contracted for volumes that are so far up 10% versus last year. I'm not misreading that? -------------------------------------------------------------------------------- Fran Malecha, Compass Minerals International, Inc. - President and CEO [50] -------------------------------------------------------------------------------- That's right. -------------------------------------------------------------------------------- Chris Shaw, Monness Crespi - Analyst [51] -------------------------------------------------------------------------------- Okay. Thank you. And then on the pricing front, 6% as we are down -- as we are about 80% through the bid season. I remember last bid season, the last part of it -- when you reported 2Q, I think you were 75% complete. And between the last 25%, it actually drove your overall average price up another 5%. I remember a lot of the late-season deals were -- I'm sure there were some contracts, I remember, I think were maybe -- not necessarily for you guys specifically, but I remember the industry were up over 100% year over year. So is that 6% -- do you think that's going to be for the full 100% of your season, or do you think there's a little -- could be a little pressure on this last 20% that comes in? -------------------------------------------------------------------------------- Fran Malecha, Compass Minerals International, Inc. - President and CEO [52] -------------------------------------------------------------------------------- That's our view on what the full season will be as well. So I don't see that dynamic that you mentioned last year happening again this year. -------------------------------------------------------------------------------- Chris Shaw, Monness Crespi - Analyst [53] -------------------------------------------------------------------------------- Great. Then just one sort of random question at the end. Do you have any idea how of the SOP market that you serve your customers -- how much of that is almonds? Is that a big, big piece, or is it just something that's been growing? -------------------------------------------------------------------------------- Fran Malecha, Compass Minerals International, Inc. - President and CEO [54] -------------------------------------------------------------------------------- It's a core crop, but I wouldn't be able to tell you off the top of my head what percentage that is. But it's one of just a myriad of crops that SOP impacts. So it's an important crop to us, it is growing, but it's not overly significant in terms of the total. -------------------------------------------------------------------------------- Chris Shaw, Monness Crespi - Analyst [55] -------------------------------------------------------------------------------- Great. Thanks so much. -------------------------------------------------------------------------------- Operator [56] -------------------------------------------------------------------------------- (Operator Instructions) Bob Koort, Goldman Sachs. -------------------------------------------------------------------------------- Ryan Berney, Goldman Sachs - Analyst [57] -------------------------------------------------------------------------------- Good morning. This is Ryan Berney on for Bob. Thanks for taking the question. First, wanted to dig a little bit into the comment you made in the slides about the capacity. You guys said you were running at capacity after a little bit of a slow start from the beginning of the year. I'm kind of wondering from an operating or an effective operating perspective, does that mean a 95% operating rate? And I'm really trying to get down to what you view as running at full capacity to kind of back into your total capacity. And then also if you can provide maybe a bridge from where it was in the first quarter to the second. -------------------------------------------------------------------------------- Fran Malecha, Compass Minerals International, Inc. - President and CEO [58] -------------------------------------------------------------------------------- I would say just on the operating level, we were probably -- certainly, as we've called, we were down in (inaudible) launch early in the year. Since then, we have probably been running actually slightly above our nameplate capacity slightly. So we should be in that 95% to 100% of capacity range as we look at the performance second quarter through the full year. -------------------------------------------------------------------------------- Ryan Berney, Goldman Sachs - Analyst [59] -------------------------------------------------------------------------------- Okay, great. That's helpful. And then one follow-up on the plant nutrition side is have you had competitive imports, I presume, from Europe before? Or is this a relatively recent phenomenon? -------------------------------------------------------------------------------- Fran Malecha, Compass Minerals International, Inc. - President and CEO [60] -------------------------------------------------------------------------------- I think, as I mentioned earlier, if you go back and look at the last five or six years, we've had -- certainly there's been imports into the market; we are the only producer in North America. So there have been imports onto both coasts, East and West, either out of Europe or South America primarily. So this is not a new phenomena. And the imports are chunky. They -- depending on shipment sizes and whatnot, they can be chunky. And we saw some of that, what I will call, chunkiness in April and May. But historically, imports have been around 25% of the total demand, and that demand is growing. So I think that the currency certainly helps as people are looking at this market. And the lower price of KCl helps if they are using a process that -- like the Mannheim process that uses KCl, as an example. So that does increase the attractiveness of this market. But, as I mentioned, imports have been in that 25% range historically. -------------------------------------------------------------------------------- Ryan Berney, Goldman Sachs - Analyst [61] -------------------------------------------------------------------------------- And the thought being that maybe a cheaper currency rate elsewhere lowered their production cost, so they were starting to price competitively. Is that an accurate view? And then maybe in addition to that, is there a reason why this quarter we started to see the price crack, if that's kind of a normal import thing over the last couple of quarters? You guys have been pretty successful raising SOP-only price. -------------------------------------------------------------------------------- Fran Malecha, Compass Minerals International, Inc. - President and CEO [62] -------------------------------------------------------------------------------- Yes, I think one of the primary producers is in Europe. And so if you look at the euro relative to the dollar versus a year or certainly two years ago, it's helping them out, and that's just what it is. But I think on the pricing to our customers, recall that there are crops that we're supplying SOP to that are chloride sensitive, and they are going to need SOP. Those crops are improving. The nut crops are an example of that -- increasing in acreage, and other acres are going out of production in California. But as the pricing in relationship to MOP continues to widen, and if crops can substitute some of that, that's going to be a pressure on demand. So there is an impact there. This probably tells me that we've done a nice job of increasing this pricing. And given today's environment, I think we're going to be in this range for the time being. -------------------------------------------------------------------------------- Ryan Berney, Goldman Sachs - Analyst [63] -------------------------------------------------------------------------------- Great. Thank you very much. -------------------------------------------------------------------------------- Operator [64] -------------------------------------------------------------------------------- And at this time I would like to turn the call back over to Theresa Womble for any additional or closing comments. -------------------------------------------------------------------------------- Theresa Womble, Compass Minerals International, Inc. - Director of IR [65] -------------------------------------------------------------------------------- Thank you, Alecia, and thank you all for joining our call today. We appreciate your interest in Compass Minerals. Please feel free to contact the investor relations department with any follow-up questions you may have. Have a great day. -------------------------------------------------------------------------------- Operator [66] -------------------------------------------------------------------------------- That does conclude our conference for today. We thank you for your participation.
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