Compass Minerals Intl Inc

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

Good morning, everyone.

We are very glad to be hosting this call with you during these challenging and unprecedented times. On the call today, we have our CEO, Kevin Crutchfield, and our CFO, Jamie Scandon. Also joining for the Q&A session are Brad Griffiths, our Chief Commercial Officer, as well as our Chief Operating Officer, George Shuler. Several of us are remote, so please bear through any pauses as we organize during the Q&A session. 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, May 6, 2020, these expectations involve risks and uncertainty that could cause the company's actual results to differ materially. We discussed these risks in our SEC filings located online at InvestorRelationsCompassMinerals.com. Our remarks today also include non-GAAP financial measures, such as adjusted EBITDA and free cash flows. You can find reconciliations of these items in our earnings release or our earnings presentation, both of which are also available on our website. With that housekeeping out of the way, I now turn the call over to Kevin.

Thanks, Theresa, and good morning, everyone. As Theresa mentioned, these are indeed unprecedented times for all of us as we address the challenges posed by the current pandemic. Before we get started, on behalf of our leadership team here at Compass Minerals, I'd like to extend a heartfelt thank you to our employees who have continued working to produce our essential products, service customer needs, and maintain business continuity in an uncertain environment. And on behalf of the entire company, we also thank those on the front lines of the COVID-19 pandemic, from healthcare professionals and first responders, to food service and delivery personnel, and to many others who are keeping us going during this period of uncertainty and change. As an essential business, we at Compass Minerals have continued producing and delivering the vital products that support the critical industries such as transportation, agriculture, chemical, food, pharmaceutical, and animal nutrition, all while seeking to safeguard our employees and adhere to governmental protocols and safety recommendations to prevent the exposure to and spread of COVID-19. But before sharing more detail on how we've responded to the challenges posed by COVID-19, our current view of potential impacts from the pandemic and where we think we'll be as we move beyond the current crisis, I want to spend just a few minutes summarizing our first quarter results. Jamie will then provide greater detail on our financial performance and share additional insight into the rigorous scenario planning we've undertaken and our current liquidity outlook. Brad and George will also be available for follow-up questions after these prepared remarks. First quarter 2020 results were very positive, as operating earnings increased 33% from first quarter 2019 results, while EBITDA rose 15% and cash flow from operations increased 78% to almost $229 million. This strong performance was achieved despite lower demand for de-icing salts due to the mild winter experienced in both North America and the U.K. Strong salt pricing, as well as sales volume growth in our plant nutrition businesses, drove up operating earnings and EBITDA improvements in all three of our business segments. Production rates at our North American salt mines have remained strong, and we executed on our March maintenance outages exactly as planned. Among other things, this included commissioning the upsized continuous miner at Goddard. which is now in full production mode, delivering more than a 35% improvement in cutting rates, at times even peaking at 50% improvement compared to the older units. Behind these results are the efforts of our 3,000-plus employees who continue to engage deeply in driving improvements through all areas of our business, from operations to sales and marketing, from logistics and procurement to back office systems and cash management, We've worked hard to leave no stone unturned in our effort to sharpen our execution and enhance our performance. And the dedication, focus, and adaptability that our employees continue to show, despite the challenges of these uncertain times, has been absolutely incredible, and I thank them again for their efforts. Since this crisis emerged, our senior management team has focused on four priority areas. Number one, safeguarding the health and safety of our employees. Number two, fulfilling our responsibilities as an essential business by delivering on customer expectations. Three, maintaining a healthy level of equity. And four, pressure testing our business through rigorous scenario planning and analysis. Our first priority as we face the challenges of this pandemic, frankly, our first priority at all times, is working to ensure the health and safety of our employees. And we've undertaken a number of actions to do so. Specifically, we have implemented staggered shift times and restricted crew sizes at operational sites to enable social distancing, placed significant restrictions on outside visitation to both our operating sites and support offices, enacted a temporary work from home policy at our company headquarters in North America and Brazil for certain support roles at operation sites, temporarily ceased all business-related commercial air travel, both domestic and international, heightened safety protocols around contractor loading and unloading on site, implemented increased professional sanitation of offices and common areas within our facilities organization-wide, increased our emphasis on good hygiene practices, provided ongoing mental health support through our confidential employee assistance program. I'm thankful to report that due to the continued need for our essential products, we've not had to lay off any employees or enact wage reductions across our operating platform as a result of COVID-19 impacts. In addition, our UK employees are receiving their full pay while our mind there is idle. Ensuring we continue to serve our customers' demand for our essential products in a timely and efficient manner is also a top focus for us. Our company has a privileged set of assets that produce an array of essential mineral products for critical industries. Our rock salt helps keep people safe on wintry roadways and is a critical input for chemical and industrial products. Our mechanically evaporated salt is used for commercial food production, water care, and animal nutrition. And our specialty plant nutrients support the growth and yield of healthy crops and ultimately food security. In total, these products remain essential and demand for them has been relatively consistent during the crisis. To meet this continued demand, we have maintained healthy production levels at all of our facilities in North America and Brazil. We continue to review and update business continuity plans for all of our sites, prepare for the unexpected and develop contingency plans, and work proactively with our workforce, customers, suppliers, and logistics partners to prevent any material disruption to our production forecasts or distribution networks. I can report as of today, we've not experienced any material disruptions in our production or ability to serve our customers. While we do not know precisely the impact of this pandemic may have on certain markets in the short term, we are confident that over the medium and long term, our customers will still rely on these essential inputs for their own products and services. This resilience has long been and we expect will continue to be an important attribute of Compass Minerals. Turning now to liquidity, I'm very pleased to report that a combination of a tax refund from the IRS and an intense focus on working capital management resulted in cash flow from operations of $228.6 million in the first quarter. We also ended the quarter with just about $110 million in cash on hand compared to roughly $35 million at the end of 2019. Jamie will discuss in more detail these results, but I want to stress to you all that we have been and will continue to keep a laser focus on liquidity and cash management and on how we deploy capital in these unique circumstances. We're currently well positioned from a liquidity perspective to comfortably navigate this period of uncertainty and have a variety of financial levers to pull should that become necessary. The last priority focus area for our team has been to ensure the preparedness and agility of our business. To do so, we've pressure tested a variety of scenarios to identify the potential for various risks to our operations, supply chains and markets, and what those would mean for our financial outlook. We'll hear more specifics from Jamie shortly about some of this planning and risk analysis. I can tell you, though, that from what we see today, we continue to be confident in the resilience of our business In addition to the COVID related pressure testing we've been conducting, we've also taken a hard look at seasonal demand thus far in 2020, and how it will impact our overall business performance through the rest of the year. As a result, and with an eye toward prudent conservatism, we decided to tighten our EBITDA guidance and lowered it modestly to better reflect our current expectations. Now I'd like to return to what we stated in February as our key strategic priorities for 2020 and update you on where we see these priorities in light of the current environment. First, I'd like to discuss our strategic review of our plant nutrition South America business. We have determined it's in the best interest of our shareholders to suspend this process for the time being due to increased uncertainty and the unexpected impacts to the logistics of capital markets, business planning, and travel caused by the global pandemic. This is an excellent business, and we've also been very pleased with the strong performance that has generated thus far in 2020. This performance reinforces our belief in the inherent value of these assets and its management team, and we remain steadfast in our position that the only transaction that we consider for this asset is one that sufficiently recognizes that value. Turning to delivering on our commitments and our enterprise-wide optimization efforts, I have continued to be both impressed and inspired by the dedication of our people to identify and implement improvements to the way we do business. We're just beginning to see some tangible financial benefits from these efforts and expect them to build as we progress through the year. While a small number of the initiatives have been partially delayed by the current environment, for the most part, we remain on track with our original plans. For example, the Goddard's compaction project we mentioned last quarter has been initiated and we expect to see incremental volumes at lower costs from this project beginning in the second half of the year. As the benefits of our optimization effort build over time, we expect to demonstrate a range of improvements across our company, from top line growth to lower logistics and production costs to other forms of margin enhancement. In the meantime, as we look to the rest of the year, we'll continue to focus on those things we can control, protecting the safety and well-being of our employees, maintaining discipline in our production sites and through our commercial channels, and fulfilling our responsibilities to our customers and communities as an essential business. Before turning to Jamie, let me conclude with a couple of final thoughts. Our business is built on the production, manufacture, and innovation of essential mineral products from a set of strong and unique assets. The essential nature of our products, combined with the inherent advantages of many of our assets, has resulted in considerable stability and resilience through a variety of economic cycles. I believe that will be the case during this crisis as well. A belief that is further grounded in the optimization efforts we have underway and the improvements we've made in our mining operations and the strength of our plant nutrition product portfolio and in the active engagement we're experiencing from our employees. So as we continue to adapt to any short-term challenges over the course of the coming months, I remain confident in our business ability to weather the storm and continue to demonstrate its resiliency. Now we'll hear from Jamie for greater details on our financial results, outlook and liquidity, and risk assessments regarding the COVID-19 crisis.

Jamie? Thanks, Kevin, and good morning, everyone. I'll start on slide seven with some comments on our consolidated results before going into greater detail on our first quarter 2020 segment results and our current outlook. I will also take a few minutes to highlight some of the potential risks we have modeled in light of the COVID-19 pandemic, as well as our liquidity and leverage positions. Strong year-over-year sales volume growth in our plant nutrition businesses in North and South America more than offset lower sales within our SALT business and generated a 3% increase in consolidated first quarter 2020 revenue compared to prior year results. Consolidated operating earnings and EBITDA were bolstered by year-over-year increases across all three operating segments. Excluding the $55 million IRS refund, we generated a 35% increase in cash flow from operations versus our first quarter 2019 results. Our free cash flow for the first quarter, excluding the IRS refund, was approximately $145 million, which is 37% more than we delivered in the prior year quarter. We achieved this through a combination of working capital improvements across our entire enterprise, along with improved operating earnings. I'll discuss the details of our free cash flow result and liquidity position later. Moving to slide eight for our SALT segment results, mild winter weather throughout North America and very mild winter conditions in the U.K. during the first quarter drove a 13% decline in SALT sales volumes and a 6% drop in revenues versus first quarter 2019 results. Despite these declines, the segment still achieved a 9% increase in first quarter 2020 operating earnings and a 6% increase in EBITDA compared to 2019 results. The growth in earnings and the 300 basis point improvements in both EBITDA and operating margins resulted from an 8% increase in average selling prices, which more than offset higher per unit costs compared to our 2019 first quarter results. Some of the factors contributing to the increase in per unit costs this quarter include the significant year-over-year decline in production rates in the UK, which resulted in about a $1 per ton negative impact to our total salt cost. We continue to expect lower operating rates during 2020 at our UK mine, as we took an extended shutdown in order to match our inventory levels with our updated expectations for fall and winter demand. We also completed some planned refurbishment of our continuous haulage equipment at the Goderich mine during our typical March shutdown. Our oldest of these flexible conveyor trains have been in service for about four years, and we're ready for some scheduled maintenance. During these rebuilds, we've upgraded and replaced certain components, which is expected to improve performance and reliability going forward. The replacement of these components contributed about $1 per ton of negative impact to total salt cost in the quarter. Looking forward, we expect salt segment per unit cost in the second quarter to remain somewhat elevated, mainly due to the lower UK production. This lower production level is pulling fixed cost into the second quarter due to certain accounting rules. Under normal production conditions, we inventory those costs until we sell the salt during the subsequent winter. However, as we move into the second half of 2020, we expect salt costs to improve compared to prior year for several reasons. First, we will no longer be selling purchased salt that was sourced in 2019 to supplement our production shortfalls during that time period. Second, we continue to see production rates at our North American rock salt mines come in at or above plan on a sustained basis. And finally, our enterprise-wide optimization efforts are expected to reduce costs and improve efficiency as well. The realization of some of these benefits will be dependent upon early fill demand and how quickly we begin selling our lower cost 2020 production tons. In fact, our 2020 production plan at Goderich, of which all tons are going into inventory each day, is expected to reduce year-over-year per unit cash costs at the mine by about 15%. This comes after delivering a 29% decline in unit costs in 2019 versus 2018 results. Turning to slide nine, our plant nutrition North America segment delivered much improved first quarter results from last year's first quarter when wet and cold weather resulted in depressed sales volumes. This year is off to a tremendous start with sales volumes up 68% from first quarter 2019 results. Lower application rates last spring resulted in many growers mining the soil for nutrients throughout the year. We are seeing some catch-up on a year-to-date basis, which is consistent with the essential nature of our SOP. Average selling prices for the segment declined 4% year-over-year, mainly due to geographic sales mix changes from prior year. First quarter 2020 EBITDA for the segment increased 57% from prior year results. Per unit costs were essentially flat with prior year, while logistics costs were lower on a per unit basis due to selling more tons into key markets in the western U.S. compared to prior year. Now turning to plant nutrition South America on slide 10. We've also had a very strong start to the year in Brazil, with first quarter 2020 agriculture product sales volumes up 31% from 2019 levels, and chemical solutions sales volumes up 10%. The drivers for these improvements include much stronger crop economics and fertilizer affordability for farmers. For example, about a year ago, Brazilian barter rates for soybeans was at about 33 to 1, This means a grower had to trade 30, 60-kilogram bags of beans for one ton of fertilizer. Today that barter rate is sitting around 22 to 1, which means the grower has to deliver a third fewer beans than last year. In other words, affordability for crop nutrients has significantly improved on a year-over-year basis. Our chemical solutions product sales benefited from continued growth in water treatment, as well as an uptick in chloralkali demand, as many of these derivatives go into cleaning products and other disinfectants. In local currency, these trends drove a 24% year-over-year improvement for first quarter 2020 revenue. EBITDA for the segment also improved significantly, increasing to 22 million HAI from 10.9 million HAI in the first quarter of 2019. In addition to the strong year-over-year volume improvement, we also saw lower unit costs due to higher production levels and lower spending. Our second quarter 2020 outlook for our segments can be found on slide 11. This is a light quarter seasonally for the SALT segment. We expect to see increased revenue in this segment driven largely by increases in average selling prices. However, EBITDA is expected to be similar to prior year due to the UK cost pressures I mentioned earlier. We still expect to drive costs lower in the second half of the year and estimate that per unit salt cash costs are likely to decline by more than $2 per ton compared to the second half of 2019. In our Plant Nutrition North America segment, we have not changed our second quarter sales volume outlook materially, as we believe the strong first quarter was consistent with our prior expectations for the first half overall. In this business, sales are concentrated in March and April, so an early sales season can pull significant volumes into the first quarter. Therefore, we expect second quarter 2020 revenue and EBITDA to be similar to second quarter 2019 levels. Our plant nutrition South America segment is expecting to continue ramping up agriculture product sales as crop economics remain positive. We continue to see strong performance in our direct-to-grower sales channel and are beginning to see increased volumes in our business-to-business sales as well. So as Kevin mentioned, we're pleased with the results and outlook for this business, and were it not for a weak Brazilian currency, we would expect this business to be a more significant driver of our consolidated EBITDA growth in the 2020 second quarter and for the full year. We summarize our full year 2020 guidance metrics on slide 12. Key items to note here are that we have reduced our full year SALT sales volumes to take into account the mild winter weather in the first quarter. Our rest of year outlook on volumes remains consistent with our prior view, as we still expect to modestly grow winter season volumes with our improved Goderich Mine production. Mild winter and the expected weakness in the Brazilian and Canadian currency are the primary reasons for our decision to modestly lower our full-year EBITDA guidance range. Just for some context on the currency impacts, we began the year assuming an exchange rate of 4.15 BRL to USD. That rate is now well above 5.25 to 1. While this rate is very supportive for Brazilian farmers and encourages increased input purchases, It's also a significant drag on our results as reported in U.S. dollars. One other item of note, we are taking a conservative approach to our capital spending as we navigate the uncertainty ahead. We are looking to manage our CapEx to the lower end of our 100 million to 110 million full-year guidance. Before turning to the question and answer session, I'd like to provide some color on how we've been pressure testing our business plan given potential COVID-19 scenarios. We do not feel that any of the scenarios are imminent or even likely. However, we believe it is very important to understand the magnitude of these potential risks in order to determine what mitigating actions can be implemented should we start to see COVID-19 related impacts. This will help us stave off or minimize the financial impacts as quickly and effectively as possible. We've looked at a wide range of possibilities as part of this scenario planning, starting first with risks to the health and safety of our employees, the potential impacts on our operations and in markets. We've also looked at the stability of our supply chain and logistics infrastructure. To echo what Kevin said earlier, our employees' health and safety is our highest priority, and we have implemented a variety of additional protocols to mitigate the potential spread of the virus. As we continue to monitor the evolution of the pandemic and see various states, counties, and provinces loosen their stay-at-home orders, we will continue to be vigilant in maintaining these health and safety practices. While we have not had material operational interruptions stemming from COVID-19 to date, we have estimated what an extended shutdown of our facilities would generate in terms of lower earnings and believe even in a worst-case scenario in which all of our primary operations were impacted for an extended period of time, we would not expect to breach our covenants or have any liquidity concerns. Looking at our end markets, our analysis indicates that we would need to see prolonged and significant deterioration across all of our businesses to push us near our debt covenants. This would include a broad-based decline in highway de-icing requests for tenders from states and municipalities in North America as we progress through the current bid season as well as next year's bid season. This decline, in theory, could be driven by a significant reduction in state and local tax revenues and a conscious decision by state and local governments to choose lower roadway maintenance spending over public safety. We don't believe this is an option, because these states and municipalities prioritize safety and also know that if their constituents are not able to shop and travel for work, their tax base will be negatively impacted. But nevertheless, a possibility we must consider in this environment. In addition to that, our worst-case scenario would include a protracted shelter-in-place order and a broad shutdown of retail hardware, home improvement, and supercenter stores, throughout which a large portion of our consumer and industrial salt volumes are distributed. Finally, we would need to see a historic decline in global demand for specialty fruits, vegetables, and nuts in order to drive specialty crop prices significantly lower, thereby deeply damaging specialty crop farmer profitability, which might reduce demand for specialty fertilizer, such as SOP. All of this is hypothetical and in no way something that we expect to happen. I like to think of these situations in terms of reasonable boundaries. For example, could we be partially impacted in all of these areas previously mentioned and in the year at or below our current EBITDA guidance range? Maybe. Although that is certainly at the edge of what I refer to as a reasonable boundary. In fact, looking today at how our North American highway de-icing bid season is developing, I can tell you that the bid requests that we are seeing are right in line with what we would expect after a mild winter. Our plant nutrition businesses were very strong in the first quarter and that has continued in April as well. While there is some uncertainty around specialty crop economics in the second half of the year, we would expect any weakening to be short-term in nature versus a long-term case of demand destruction. Our cautious optimism is based on the fact that our underlying end markets have historically been relatively stable and resilient, even in very challenging environments. However, we know that these are unprecedented times, so we're looking around the corner and prioritizing mitigating activities on a real-time basis. We have established a multi-phased approach to cost savings depending on the severity of any impact to our business. we have already made some changes to help control costs. For example, we have limited hiring activity to critical roles only. After our commercial travel ban is lifted later this month, we plan to restrict travel and entertainment activity overall. And finally, we are looking to reduce discretionary spending in all areas. Now turning to our current liquidity and debt structure on slide 14. Based on our reasonable boundaries and our current liquidity position, we feel very comfortable sitting here today. Our refinancing in the fourth quarter of 2019 significantly improved our liquidity position and pushed our debt maturities out significantly. As you can see in our maturity schedule on the left side of the page, we don't have any large debt maturities until our $250 million in senior unsecured notes come due in 2024. To add further cushion, we are working to put a U.S. accounts receivable securitization program in place as well. This facility would further bolster our liquidity position, particularly in the fourth quarter when our working capital requirement peaks. Last, I'd like to again note that during the first quarter, we generated $200 million of free cash flow, including the $55 million IRS tax refund. which compares to just $106 million in the prior year. And we ended the quarter with an adjusted net debt to EBITDA ratio of 3.7 times. For the full year 2020, we expect strong free cash flow, and we expect to end the year with our leverage ratio at or around 3.9 times. Now I'll ask the operator to begin the Q&A session.

Operator?

Thank you. If you would like to ask a question on today's call, please signal now by pressing star 1 on your telephone keypad. That's star 1 to ask a question.

We will pause for one moment to allow everyone to signal.

We can now take our first question from Vincent Anderson from Stiefel. Please go ahead.

Yeah, thanks, and good morning.

I think you mentioned a $1 per ton cost impact from the continuous miner decommissioning this quarter. How much of that was cash, and do you expect to incur similar charges going forward?

No, so thanks, Vincent. Good morning. Yeah, that was non-cash expense there. You cut out a little bit. I think you were referring to the, you said the decommissioning and the cost at Goderich? Yes. Is that right? Yeah. So when we got into that CT and, you know, kind of giving it its first refurbishment, we were able to upgrade some parts. And so taking some of those older, those parts came out of service. There was non-cash expense related to that. And, you know, have that kind of behind us now and wouldn't expect a refurbishment there for another four years or so. And the depreciable life on those parts we put in will match with that, so we don't expect to see that again. Okay.

And then just following up on that, you know, the unit that was being decommissioned,

you know, are these being fully disposed of or is this going into, you know, carving out the new roadways and mine area development? And then on that, you know, are there going to be expenses that aren't capitalized related with putting these into use for mine development?

Okay, thanks. Those are two different things. The new machine that Kevin referred to that's operating very well at 35% improvement versus the older machine is in service, and that's not the conveyance system, the flexible conveyor train. We took the unit that we pulled out of service, and now it is, in fact, just started driving the new roads that we had previously talked about, the built-for-purpose roadways.

Kevin, do you want to add anything there? Yeah, so the new unit is out in the production area. We pulled the old unit off to start developing the – we call them the mains. There's a map in the appendix that illustrates that. It's in the northeast area. So that work has now commenced, which is part of the long-term mine plan that we referenced on the last several calls. Okay, perfect. I appreciate the clarification.

And then just quickly, you spoke about unit cash costs at Godrich being down 15% in 2020. I assume that's measured directly at the mine as it's going into inventory, so not explicitly comparable to what we'll see in the near term. But as a point of clarification, is that a run rate savings by year end or your 2020 average as you see it today?

That'd be our 2020 average savings, cash cost savings versus 2019 at the mine.

Perfect. Thank you. We can now take our next question from Mark Connolly from Stevens.

Please go ahead.

Thanks. Two things. Kevin, when you took over, you described union relations at Goderich as terrible.

Can you tell us where you think that relation is today relative to terrible?

I don't remember using that word exactly, but it was pretty close to that for sure. I think due to the efforts of George, and he's on the call, I'd like him to comment on this as well. They're much better the way we have addressed The situation there is they are partners with us. We are partners with them and trying to work on things that we can agree on. And we don't agree on everything, obviously, but I would characterize the relations up there as significantly improved. We have a long ways to go. You know, the strike was a tough period, but we view them as partners with us up there, and I would characterize the relations as pretty darn good right now. George, would you like to add anything to that?

George, you're on mute. Looks like we're having a problem with George there.

Looks like we're having an audio problem. Sorry about that. But much improved.

The second question is we're seeing some very disappointing performance from commodity potash producers. and those prices are now in the low 200s, which means that the economics of upgrading to SOP might be changing. Obviously, sulfur is not that easily available, but you guys probably know more about the economics of that upgrading than anybody else.

Do you think we're going to see more MOP upgraded to SOP, maybe putting some pressure on that market?

Let Brad answer that, please. Okay, thanks, Kevin.

Thanks, Mark. It's Brad Griffith. And, you know, I think it's something that we certainly keep our eye on, and I would concur with your assessment around sort of commodity potash. You know, what we look at with SOP, and, you know, I would think we've said this to you on previous calls, we're always going to price dynamically. We are exceptionally proud of our people and our assets. assets in Ogden, Utah, and Wynyard, Saskatchewan. And we have the ability to supply all of North America with our capacity. We do want to ensure that we continue to provide consistent and quality product. We stay closer to our customers. And I think that customer centricity really allows us to keep a pulse on end users and agronomy. And the agronomy piece, I think, is a key point as you talk about specialty sulfate of potash and commoditized MOP. The agronomy is just different, and chloride-sensitive crops respond differently. And again, as Jamie had mentioned, if you reflect upon last year, this time last year, producers were having a difficult time getting applications into the soil at all. And so when you have 1.3 million acres, for example, of almonds in California, and you're supplying 82% of the world's almond supply, you know, you're going to make that investment. And so that's what we're seeing in terms of the strength that we're experiencing right now. So do I have a crystal ball to tell you exactly what's going to happen? No. Is the MOP, SOP spread high? It is. And I think there's a high willingness, again, in utility for the producer to pay for that difference between the compounds. But again, we'll adapt prices we need to, Mark.

And I would just add something there. I think, you know, sulfuric acid prices probably down a bit, which could be a benefit for somebody wanting to convert. Of course, the other side of that is the HCL credit would be down. You know, that's a byproduct of many of the global upgraders, which, you know, is driven by the need for PVC in construction and whatnot. Construction is slower than the age scale is weaker, too. So those kind of offset a bit, and then it goes back to the main point that Brad made about selling that value here for us.

Right, yeah, definitely sounds like a mixed bag.

Thank you. And just if I could squeeze one last one in. Will you be looking to carry more inventory into next winter or about the same?

Yes, so we are, you know, our inventory levels in our salt business were very depressed as we kind of got through the winter of 18, 19. And, you know, we did a good job in 19 of rebuilding that with our improved production at Goderich that we've already talked about. And we imported as well, as we also talked about. We won't be importing this year. The mine is running great at and above plan. We're really excited about that, and we're rebuilding our inventories further. So that would be a draw on cash this year in terms of a working capital draw, you know, upwards of kind of $30 million or so in 2020 to get those inventories at the right levels based on how we look at the upcoming bid season. And, you know, of course, we always plan for average winners.

Sure.

And also with no imports, that's great. Thank you very much. Thanks, Mark.

Thank you. And we will now take our next question from Joel Jackson from BMO Capital Markets. Please go ahead.

Hi. Good morning, everyone. A few questions for me. I heard Jamie or Kenley spoke about it. Jamie spoke about how bid season so far, the bids coming in, the volume seems to be somewhat consistent with what you expect for the low average winter. Can you elaborate on that a little bit? You know, the channel inventory situation you're seeing in the municipalities and the governments and the customers and, you know, what we might expect this early in the bid season for volume to be down, information you can give this early.

Let me just hit that at a high level and look to Jamie and Brad to kind of fill in. I mean, I think we characterized Canadian markets as kind of normal. Eastern and Northeastern markets are kind of weak after the week where they had, but we don't participate over there, so that's not going to affect us. Then the Midwest markets, you know, pretty typical reactions after a mild winter. So, you know, nothing at all related to COVID that we've seen on this front and shaping up to be a very, you know, normal bid season kind of following a mildish winter. Anything, Jamie, Brad, you guys would like to add to that?

If you look back at historic mild and extremely mild winters just a few years ago, we saw extremely mild winter following bid season. We were down 15%. Requests for quotes were down around 15% or so. Just a typical mild season two or three years ago, it was down about 5%. You know, we're seeing, you know, bid commitment requests in that range.

Yeah. No, nothing to add. I think you nailed it. And we're in the throes of the season right now.

That's helpful. Very helpful. At Goderich, you talked about – the only numbers you gave on Goderich about seeing costs down $15, 15%, excuse me, and running above plan, can you comp right now compare where do you expect Goddard's to run in 2020 on a cost and operating rate perspective versus pre-strike, pre-continuous mining levels?

Yeah, let me hit some high-level statistics, and maybe you can read the tea leaves and get what you want out of that. But at 18 to 19, production volumes were up 40% year-over-year. 19 to 20, we're expecting at least 20% more increase. So, you know, the base is beginning to increase, so the rate of improvement will necessarily slow. On an LTM basis, at the end of April, we're up 32%. Cost-wise, as Jamie mentioned in his script, 18 to 19, we're down 29%, expecting another 15 or so this year. The number he quoted in the back half of the year, you know, a couple bucks down, and I would characterize that. He said at least, but I would characterize that as pretty conservative. So I think George and the team there at Goderich have done a nice job of, you know, getting a handle on things and getting us aimed back in the right direction. And I have no doubt, as I've said all along, that we'll get it straightened out long term, and it will be the 800-pound gorilla like it once was. I did want to round back on the labor comment. George got – we had an audio issue, but he's back online now. I do think it's important to hear from him on that, so I would just ask him to add a little color around the labor piece.

Yeah, thank you, Kevin. Can you hear me? Yes, sir. That's great, yeah. And, look, I do want to call that out, as Kevin said. Look, we have a strong, experienced workforce, and I think the common ground that we were able to go back to is – The safety is a core value for us. It completely across compass minerals. But again, it was a real focus area when you look at where Godrich is. We think we started from a good base. As Kevin said, there has been some issues in the past, but I would say at this point, it's much improved. And again, our engagement is really good. We talked a lot about a lot of things at our site, including lifecycle management is Jamie referenced earlier around some of the equipment. So we're doing a lot of great things at that operation. And a lot of that is derived right from our workforce. So thanks, Kevin.

Yes, sir.

And I just have one more question. Obviously, with the wild swings right now, not wild, but the reduction in oil and diesel prices, and this happens before bid season, at the end of bid season, you're pricing on a delivered basis for a lot of contracts. I think carbon stakes are a great risk over the winter. Can you talk about a little bit about, you know, where transportation costs are? Does it really matter for you because you'll be able to basically figure it out through the bidding process, or do you have to take some special levels here to make sure you don't end up, you know, taking the freight risk if you get a more V-shaped recovery in oil prices across the next nine months? Thanks.

Thanks, Joel. Yeah. So, good question. You know, so with Brent crude down around 30 right now, as we look at our full year and a lot of this impact would be kind of fourth quarter as we, you know, use vessels and barge and rail to some extent to shift through the summer and ready for winter. You know, we've built into our plan the assumption that Brent stays – that Brent at 30 now by the end of the year works its way up to about 40. So a pretty significant change. That's in our full year guidance. We haven't talked about back half and specific segment guidance yet. We'll get to that in the second quarter. But I can tell you that if fuel stays where it is today at 30, we could see two to three to four million of benefit, mostly in the fourth quarter, if fuel stays here. Of course, if it rises faster and heads back towards 60, which we've seen some expectation of, just depends on the economy and demand for gasoline and diesel. So those would be some of the variables there. As it relates to our bid season, we absolutely include this in our calculus, in our bid process, in our You know, as we go through the bid season and bid these out, we always take that risk from between booking a bid and delivering it, you know, to a depot in the winter. That's not unusual. So we look at forward fuel prices, include that in our estimate, and make our bids appropriately, always looking, obviously, as we go through the bid season to optimize the value of every ton we produce.

Thank you.

We can now take our next question from David Silver from CL King. Please go.

Okay. Thank you. I'm just going to preface my remarks. I did have to step away. So if I make you repeat yourself, my apologies. My first question would be on your SOP business, the segment results. And I guess I was a little struck by the adjusted EBITDA margin per ton. And when I compare it to a year ago, when I compare it to the fourth quarter, it seems like the cash margin really did contract a bit, and I just found that unusual given the high sales volumes. So I was just wondering if you could kind of walk through why more of the volume at a seemingly pretty attractive price didn't fall down to the EBITDA line in that segment. Thank you.

Sure. I'll take that one. So there's a couple of things there, David. I think geographic mix plays into it. We did see generally the lower prices we talked about. We have three product groups within SOP. So we've got our highest highest price, highest quality production. We actually produce out of Wynyard. And that was unaffected last year. So those volumes are kind of similar year over year. The other two categories are we refer to as compacted or non-compacted or granular versus standard. Last year – Last year, the compacted tonnage was lower year over year and, you know, because of the wet and cold weather. So that is a little bit lower margin business there. So that's part of the impact. Brad, do you want to add a little bit?

You know, the only other thing is we probably had another 8,500 tons that went ex-U.S.

Mm-hmm.

Yeah, so that has an impact on sort of your net sales price. And margin. Yeah, for sure. And, you know, as we look at the margins versus prior year on potassium plus, I think we've actually been pretty pleased with the margins themselves on a per ton basis.

Yeah, and then the other factor would be kind of mixing into that is the micronutrients business in North America.

Yeah, yeah. I mean, our micronutrients business has done quite well. Our volumes are up 63%. As Kevin and Jamie mentioned in their remarks, adjusted gross sales are up over 51%. We're seeing stronger margins there as well.

So, again, I think – I don't know if you can hear me. Okay.

Yep.

Sorry, you're kind of cutting in and out. Okay. Sorry, I'm just cutting in and out. So I'm going to ask one more question, and this is fairly theoretical, but, you know, it's something I've been scratching my head and thinking about. So sometimes when there's a warm winter, you know, around this time on this conference call, people say, well, what are you going to do to get your, you know, inventories back in order for the upcoming year? you know, peak selling season that starts maybe six months down the road. You know, I'm kind of scratching my head, and I'm just going to say it, but, you know, tax revenues at the state and city level could be significantly below prior year levels. And I'd also say that if we're in a global recession, chloralkali demand, you know, could be down – sorry, chloralkali production – could be down substantially, and that would mean that the traditional volumes that the industry moves over the summer, you know, could be substantially lower. So, I mean, from your planning purposes, what's the chance that either from tight budgets at the state and local level or, you know, an unusually soft pull-through of, salt for the chloralkali industry leaves the industry a little too full of inventory, and hence, you know, that would in turn kind of impact your ability to achieve the pricing that you hope to. So I'm just, you know, it's kind of an unusual set of circumstances. I'm just wondering if, you know, we could get to an oversupplied or, you know, too high of an inventory level coming into the next peak season, but kind of getting there from a different, from a non-traditional set of circumstances. Sorry for that word, Sal, but that was my concern. Thank you.

Yes, it's a fair point, and it's not one that's lost on us either as part of this scenario planning and stress test. We thought a lot about that, but at the end of the day, you know, what we believe is, you know, mild winter's mild winter behavior that we're seeing right now is exactly consistent with that coming off of a mild winter. But the tax collection piece is a worthwhile mention for sure because with unemployment rates where they are and where they're projected to be, tax collections are going to be off. But I think it comes down to a public safety question as Jamie mentioned in his script. Is somebody going to say I'm going to compromise public safety on icy roads to save a few bucks. And given the percentage that SALT represents of any DOT's budget, it's a pretty small portion. And, you know, our belief is people are not going to take that risk. It's safety over economics all day long, especially given the fairly minuscule size. So, you know, could somebody make a decision like that and say, well, you know, we're off a little bit because of the mild winter and we're going to buy a little bit less? Yeah, perhaps, but we can't see any signs of that in the bid season thus far.

Okay. Thank you very much. And, again, I apologize if Jamie covered that off earlier. Thank you.

No worries.

We can now take our next question from Chris Shaw from Monash. Chris, please go ahead.

Good morning, everyone. How are you doing? I wanted to follow up on the question earlier on shipping costs and lower oil. I know you're going to give an impact if, you know, crude stays where it is now versus, you know, with the modeling up to $40. But I'm more curious what the year-over-year fourth quarter impact might be. I mean, I think crude was like 60 or 70, you know, for most of last year. Brent, that is. And I know I looked back for the 2008-9 period when oil collapsed. I think the company called out a $5 a ton shipping benefit. So I was just trying to figure out how big of an impact that could be for the – again, if they stay at $30 year over year, what sort of benefit that is for the second half.

Yeah. Thanks, Chris. Let me add a little bit more color to what I said, I guess. You know, remember certain contracts have floors on fuel surcharge. So when fuel falls below a certain level, you're just not getting any benefit anymore. That's the way some of the contracts are. And now that varies by truck, by mode, by truck, by vessel, by barge. I would tell you that we are expecting some rate headwind on the barge side in the second half of the year just because of some contractual issues. agreements that we have in place. That being said, you know, fuel can be a benefit. Fuel being lower can be a significant benefit, particularly in truck and vessel. So, you know, I would – and there's one other element here that, you know, as we work through our enterprise-wide optimization program, we've got benefits coming on the freight side as well. to offset some of those barge headwinds that I talked about, for example. So those are coming back half of the year as they get implemented now and through the summer. So we would, you know, I would expect to see it flat in the back, in the fourth quarter particularly, or better than that, depending on how fuel behaves the rest of the way. That would be just kind of generally where we see it right now.

And what's the reason the barge costs are headland?

You want to give a little bit of color, Brad? It has to do with grain trade and where we are.

Yeah, I think, you know, if you follow the barge companies themselves, they've had a hard go of things over the past 12 to 16 months. Grain movement post-tariff was, you know, impacted. Steel now impacted and fertility last year, certainly in the spring, large shipments of fertility moving up and down the Mississippi impacted. I think a number of barge handlers have had a difficult time penciling a profit. We came to market, you know, at that time, and we've signed a short-term agreement with a carrier that we feel very comfortable with that will meet our needs in a fantastic way. And then we'll, you know, we'll be out to market, you know, in a reasonable amount of time. We did not go in the long term. We want to play markets. You know, our thoughts are, you know, at some point steel may rebound. I mean, coal has certainly been impacted probably for the long term. but there will be other movements along the river systems that we believe will normalize over time, and that'll probably be a better time to come back out to the market. So as Jamie had mentioned, we've worked diligently through the enterprise-wide optimization effort with our logistics and supply chain teams to identify other opportunities for savings in the second half of the year during Festov.

Got it.

And then...

I know in the past few years there have been some supply issues on the salt side, some competitors were having production issues. Is there any – I don't know what the scuttlebutton is doing right now. Is there any sort of supply restrictions from the competitors at this point that are heading into the season that you know of?

None that we're – Particularly aware of, I mean, what we're focused on is making our operations run well through just normal execution, but in addition to our enterprise-wide optimization. And as we've said before, the first goal for us was to displace our own.

Is that your granddad?

Operator, you're on the call with us here. Could you mute, please? I'm sorry. Yeah, not here either. To produce enough to displace our own imports, which we're going to be successful in doing this year, I can tell you that now. And then longer term as Goderich gets up and running and Cote Blanche runs well and our CNI sites run well, we think we can target other imports into the region. So to the extent that this is a soft season given The weak winter, I think it'll be the imports that will take it on the nose first, just because of the lack of margin relative to the folks that are more well-positioned to supply the served markets.

That's helpful, Dan.

There are no further questions on the line at this time. I would now like to turn the call back to Teresa for any additional or closing remarks.

Thank you, Marguerite. We are glad to have you all join us on the call today. If you have any follow-up questions, please contact the Investor Relations Department. You can find our information on our website. Have a great day. Thank you.

That concludes today's conference. Thank you for your participation. Ladies and gentlemen, you may now disconnect.