Compass Minerals Intl Inc

Good morning and welcome to the Compass Minerals third quarter earnings conference call. All participants will begin in a listen only mode. A question and answer session will follow the presentation by management. Today's call is being recorded and replays will be available on the company's investor relations website. I will now turn the call over to Theresa Womble, Director of Investor Relations. Please go ahead.

Good morning and welcome to our call today to discuss our third quarter 2020 results and rest of your outlook. We will begin with prepared remarks from our CEO, Kevin Crutchfield, and our CFO, Jamie Standen. Joining in for the Q&A session are Brad Griffith, our Chief Commercial Officer, as well as George Shuler, our Chief Operations Officer. Before we get started, I'll remind everyone that the remarks we make today represent our view of our financial and operational outlook as of today's date, November 5th, 2020. These expectations involve risks and uncertainties that could cause the company's actual results to differ materially. A discussion of these risks can be found in our SEC filings located online at investors.compassminerals.com. Our remarks today also include non-GAAP financial measures such as adjusted EBITDA and free cash flow. You can find reconciliations of these items in our earnings release or in our earnings presentation, both of which are also available online. With that housekeeping out of the way, I will now turn the call over to Kevin.

Thank you, Theresa, and good morning to everyone. I know this is a busy earnings day for many of you, so thanks for taking the time to join our third quarter 2020 earnings call. As we published in our earnings release last night, our third quarter 2020 results were below prior year levels. There are several reasons for that delta, primarily related to delayed ordering of plant nutrition products in our North and South American markets. Those timing issues were driven by very dry weather in both Brazil, and key North American markets, as well as extreme wildfires in the western part of the United States. We also reported an unfavorable non-cash inventory adjustment related to an error in bulk stockpile measurements at our Ogden, Utah, SOP facility, which Jamie will discuss in more detail shortly. Because we expect these third-quarter market disruptions to be short-term, I'll focus my remarks instead on our year-to-day performance. On a consolidated basis, operating earnings for the year-to-date period increased 19% and EBITDA rose 10% compared to 2019 results. In addition, we generated over $188 million of cash flow from operations, which is a 93% increase from 2019. These are very strong results given the fact that we experienced a mild winter in all of our de-icing markets, in the first quarter, as well as the operational challenges stemming from the global pandemic beginning in March. We also highlight in our presentation the excellent trajectory we're on in terms of the safety of our employees. As many of you have heard me say before, our number one priority as a management team is ensuring our employees go home at the end of their shift as healthy as when they arrived. Our focus on this zero harm culture has been as critical to our ability to navigate the current pandemic as it is toward the sustainability of our organization. And anyone who has spent their career in mining knows the value of this focus benefits all stakeholders, as it has been proven time and time again that over the long term, the safest operations are also the most productive operations. This quarter, we continue to see a decline in our total case incident rate, or TCIR, In addition to achieving a multi-year low for our 12-month rolling TCIR average, I'm very happy to share that our TCIR in September was among the lowest of any month in the history of the company. I would also like to specifically commend the employees at our Ogden facility for their exemplary safety performance. They're very near to achieving 1 million exposure hours with no lost time safety incidents. As a leading indicator for operational success, This continuous improvement in our safety metrics speaks volumes about the discipline and commitment to safe and responsible operations our employees bring to their jobs each and every day. We clearly see the impact of this improved operational discipline and execution in our SALT business, highlighted on slide five of our quarterly presentation. I may sound like a broken record here, but it's a song I'm really glad to sing. Our Godrich mine continued to deliver very strong year-over-year production results. For the quarter, production volumes were 53% ahead of third quarter 2019 results, while the cost to produce these tons declined 24%. On a year-to-date basis, production tons have increased 28% from 2019 levels, and production costs are down 11%. These steadily improving metrics highlight the strength of our continuous mining platform there, which will help to ultimately secure Goddard's position as the leading salt mine in North America from both a cost and volume perspective as we continue to build our new mine plan there over the long term. Our Coke launch mine has also demonstrated strong performance here today, not to mention impressive dose of MOXIE. by meeting the challenges posed by not one but four significant hurricane events in 2020. These storms resulted in seven lost production days during the third quarter and another four lost production days in October. The preparations made by our team to protect the site and the safety of our people meant we've been able to resume production efficiently and effectively after each event. As another testament to our operational agility, we expect to make up most, if not all, the lost production from those unplanned outage days by the end of the year. This quarter, the SALT segment also delivered early benefits from our enterprise-wide optimization effort, particularly in terms of lower logistics costs. Our logistics team has worked diligently to reshape our network of partners to maximize efficiencies across our operations to deliver cost savings while maintaining strong service levels for our customers. Keep in mind that we typically move more than 12 million tons of bulk materials using multiple transportation modalities each year. Their work has helped offset the impact of some of the short-term freight rate inflation we're experiencing this year. Our commercial teams have also been highly engaged in the enterprise-wide optimization effort looking for opportunities to adjust and improve customer mix as well as pricing levels. These efforts were largely responsible for the 8% year-over-year increase achieved for consumer and industrial average selling prices this quarter. These achievements were important drivers for the margin expansion we've reported and helped us overcome the impact of lower sales volumes due to mild winter weather so far in 2020, as well as the COVID-19 impacts on non-deicing salt sales. Before moving on, I'd like to provide a final update on the 2020-2021 North American Highway de-icing bid season. Given the mild weather during last winter, it came as no surprise that the bid season was competitive, as we noted in our second quarter call, with total bid tenders down roughly 15%. We've essentially completed all bidding activity and have achieved 4% growth in our contracted bid volumes, with a price decline of 11% compared to prior bid season results. Consequently, these bid season results, along with slightly elevated customer inventories, have us trimming our full-year salt volume guidance by about 250,000 tons for 2020. Ultimately, our de-icing salt sales are driven by winter weather, and we expect the production and logistics cost improvements we've made provide offsets to lower bid season prices. Similar to the hurricanes hitting Louisiana, our plant nutrition business, particularly in North America, faced some unforeseen circumstances this past quarter, including extreme wildfires and drought. The smoke from these events has delayed the harvest of key crops, particularly tree nuts. This has also delayed the fall fertilizer application season, and thus we believe that a portion of expected third quarter 2020 sales volumes have been pushed into the fourth quarter. Recent conversations with customers have reinforced our confidence that underlying demand remains robust for the remainder of 2020, particularly given that some of these harvests are expected to be very strong, translating into nutrient deficiencies for the soil and thus the need for our products. Similarly, in Brazil, we experienced some timing issues with sales volumes in the third quarter. After a very strong second quarter, we believe some of our agriculture product sales were accelerated. Additionally, the hot and dry weather in that geography has also been unfavorable. So we believe a portion of what we expected to sell in the third quarter has now shifted into the fourth quarter. On a positive note, South American farmer economics continue to be very attractive, particularly for soybeans. In fact, a record level of the soy crop in Brazil has already been forward sold. which means farmers need yield and thus will need our specialty plant nutrients to support that yield. As a result of these underlying positive market fundamentals in Brazil and North America, we're keeping our sales volume ranges for 2020 unchanged for both the plant nutrition North and South America segments. Against the backdrop of the challenges we've all faced in 2020, I'm even more impressed with the efforts of our employees to engage and execute on our enterprise-wide optimization effort. This effort is focused on five broad value streams, namely operations, commercial, logistics, procurement, and working capital. I referenced previously in my comments some of the early benefits coming through our SALT segment results from certain of these value streams. We also highlighted last quarter the progress we're making with engaging our employees through our organizational health focus, as well as the compaction project at Goderich Mine to essentially recycle salt-fine waste into saleable product at a minimal incremental cost. Today, I'd like to share a little detail regarding a very exciting project at our Ogden, Utah facility. As many of you know, our solar evaporation pond-based SOP production at this site is among the lowest-cost processes globally for this specialty form of potassium. Anything we can do to expand our ability to produce with that low-cost feedstock further increases our competitive advantage domestically and globally. In a typical year, the very condensed brines from which we extract both salt and SOP feedstock spend two months in the final evaporation stage. After draining those ponds, we then spend 10 months harvesting, which is essentially scooping up the material from dry pond beds and transporting the material to the production plant. The goal of our optimization project is to extend the evaporation season and decrease the length of the harvest period. Doing so is expected to materially increase the yield of feedstock from the ponds. By insourcing our harvest and haul activities using pond-appropriate equipment, we can do just that. The change in equipment allows us to work faster and deliver more tons per load of material to our SALT and SOP plant. Currently, under this new equipment setup, we're delivering 28% more tons per load for SOP and about 14% more for SALT. As a result, we're able to shorten our harvest season to eight months and extend our evaporation season to four months, which ultimately provides us with more and higher quality SOP feedstock. Further, this new equipment is expected to be safer for our ponds, further reinforcing our sustainable harvest practices. This project highlights our ability to look at old problems and generate new and innovative solutions to help ensure the long-term sustainability and growth of our companies. As we continue to execute on the many projects throughout these value streams, over the next couple years, we expect to fundamentally improve the earnings potential of Compass Minerals. In the near term, we continue to aggressively work to overcome the various external factors which have reduced our earnings compared to our original outlook for 2020. Just to level set a bit, we entered the year with a strong expectation for around 20% EBITDA growth. using the midpoint of our guidance provided in February. We now estimate a combined negative impact of this original forecast of about $45 million from several factors which were largely outside of our control. These include mild winter weather in the first quarter, a Brazilian currency that progressively weakened throughout the year, and COVID-19 impacts, including both the cost of preventative measures at our sites and demand impacts on certain customer and industrial products. Despite these external challenges, through a laser focus on cost and buttress by our improved operational performance, we still expect to deliver EBITDA growth for the full year and additional growth in 2021. This is possible because of the underlying resilience of the markets we serve with our essential products, the strength of our advantaged assets, and the dedication of our employees to drive improvements through our optimization effort. We've also stayed on course with our strategic priorities and maintained close contact with our customers throughout these unprecedented times. I've recently had the chance to talk with a number of them personally about their own challenges and growth opportunities and, through their perspective, have an even greater appreciation for the essential nature of our products and the important role we serve for our customers as well as the communities where we operate. All of these things generate great excitement for me and the entire Compass team. Now let's hear from Jamie, who will discuss the third quarter results and outlook in more detail. Jamie? Thanks, Kevin, and good morning, everyone.

I'll start on slide nine with some comments on our consolidated results, which were challenged by several factors, as Kevin discussed. First, sales volumes were lower in each of our segments versus the third quarter of 2019. However, we're actually performing quite well on a year-to-date basis due to a number of timing issues across all three segments, which pulled sales into the first half of 2020. SALT segment sales volumes are down just 9% on a year-to-date basis, which is more than explained by the weak winter weather we experienced during the first quarter of 2020. As a reminder, First quarter 2020 snow events were 24% below the 10-year average and 30% below 2019 levels. This weak weather caused customers to take their minimums in the second quarter and therefore put pressure on our third quarter early fill orders. On a year-to-date basis, Plant Nutrition North America sales volumes are up 20% versus the 2019 period, which you may recall was very challenging due to the excessive rainfall in our served markets. Our plant nutrition South America segment generated a 5% year-over-year increase in sales volume on a year-to-date basis, as strong and early demand for plant nutrients in the first half of the year offset third-quarter sluggishness. Our third-quarter salt operating results helped offset the lower year-over-year third-quarter operating earnings and EBITDA results in both of our plant nutrition businesses. Lower year-over-year third quarter sales volumes in both plant nutrition segments and an inventory adjustment charge in the plant nutrition North America segment were the primary drivers of the decline. Despite the challenges we faced, we delivered double-digit consolidated earnings growth as well as strong free cash flow of $126 million through the first nine months of 2020. We discussed our SALT segment third quarter 2020 results on slide 10. Third quarter revenue declined 11% compared to the prior year on a 13% drop in sales volume, slightly offset by a 1% increase in average selling prices. Volumes declined for both our highway de-icing and consumer and industrial sales. In addition to lower year-over-year pre-season demand for de-icing products, we are still experiencing some slack in demand for other consumer and industrial products due to COVID-19 challenges. Average salt selling prices in the third quarter of 2020 increased 1% compared to third quarter 2019 results. A shift in sales mix towards lower-priced chemical sales pushed highway de-icing pricing down 8%, while consumer and industrial average selling prices increased 8%, largely due to strategic price increases implemented as a result of our enterprise-wide optimization efforts. On a net price basis, we actually achieved a 5% improvement in average selling price versus third quarter 2019 results, with highway de-icing average net price flat to prior year results and consumer and industrial net price up 8%. Improved production and logistics costs in the 2020 third quarter more than offset lower revenue and resulted in year-over-year increases of 21% for operating earnings and 17% for adjusted EBITDA. In addition to improved Goderich production, we have aggressively implemented initiatives across logistics and procurement that are driving our costs lower. Beyond the logistics improvements Kevin mentioned, we have rationalized our spending patterns to reduce waste. We have also upgraded our global sourcing efforts with comprehensive negotiation of agreements with key contractors and optimization of raw material pricing across all businesses to achieve more favorable scale. These efforts contributed to the expansion of the salt segment EBITDA margin to 30%. compared to 23% in the third quarter of 2019. While these initiatives are expected to drive sustainable improvements for all segments over time, we're pleased to see these early benefits in our SALT results. Turning to our Plant Nutrition North America results, which we discussed on slide 11, we reported a 21% year-over-year decline in revenue on a 22% decline in sales volumes and a 2% higher average selling prices. As already noted, the extreme wildfire conditions in the western U.S. have delayed the start of the application season, and we believe they have shifted the timing of SOP sales toward the fourth quarter this year. Earnings for this segment were further reduced by an inventory adjustment due to an error we identified in our measurement of our bulk stockpiles of standard SOP at our Ogden, Utah, facilities. This is the product that we stockpile and then process through our compaction system into the various high-value grades of SOP that our customers demand. While we regularly estimate the size of our stockpiles, this can be difficult to assess due to the size and limited accessibility of our storage domes and silos. As we depleted our standard SOP inventory, we detected a stockpile shortfall which occurred over a period of time, as these particular domes had not been zeroed out or fully emptied for several years. Once we identified the issue, we reviewed our processes and are implementing several additional operational control enhancements that will improve our estimates going forward and prevent this from occurring in the future. It is important to note that we have determined that this inventory adjustment is not material to any single prior period. And furthermore, this adjustment has no impact on our 2020 free cash flow. And we don't expect these operational enhancements to impact our ability to serve our customer demand or the future profitability of the Plant Nutrition North America segment. We discussed our Plant Nutrition South America segment results on slide 12. This segment delivered a 5% year-over-year increase in third quarter 2020 revenue in local currency, driven by increases in average selling prices for both agriculture products and chemical solution products. These price improvements offset a year-over-year decline in agriculture and chemical solution sales volumes. As we noted on our second quarter earnings call, Demand came early for many of our specialty plant nutrition products due to a very attractive grower economics for the Brazilian farmer. Therefore, some of that pull forward in Q2 is showing up as weakness here in the third quarter. However, we continue to see strong third quarter year over year revenue growth in our direct-to-grower sales channel on flat volumes and improved product sales mix. Both direct-to-grower and B2B sales volumes were also impacted by the late start of the spring rains in the Cerrado region in the central of Brazil. These dry conditions delayed fertilizer applications, and we believe they are therefore pushing some of our sales volumes into the fourth quarter. In local currency, third quarter 2020 operating earnings in EBITDA declined 9% and 7% respectively. which was mostly attributable to lower volumes in our B2B business compared to the prior year quarter, and continued aggressive investment in our direct-to-grower sales force. We discussed our outlook for our segments on slide 13. While we have reduced our full-year SALT sales volume guidance, we still expect an increase in our SALT sales volumes and revenue in the fourth quarter compared to prior year. Our EBITDA margin for this business is expected to contract due to the reduction in average awarded bid prices for our North American highway de-icing customers. Ultimately, our average reported highway de-icing sales price will be impacted by the sales mix we achieve in the quarter based on winter weather activity. In an average winter scenario, we're expecting highway de-icing average selling prices to decline about 8% compared to prior year, and the salt segment overall is expected to see a price decline of around 5%. We continue working to offset the impact on our operating margins with both value creation and cost containment through our enterprise-wide optimization effort. We expect improved sales demand sequentially and year-over-year for both of our plant nutrition businesses. In North America, our sales and earnings are expected to be driven by a rebound in SOP sales to Western U.S. markets that have been negatively impacted by wildfires and dry conditions. The fourth quarter is also typically the strongest selling season for micronutrients, and that seasonality should drive modest improvements in sequential price results. In Brazil, given the fact that so many soybean growers forward-sold their crops, achieving strong yields will be important, and we anticipate a strong rebound in sales volumes in the fourth quarter. Additionally, the spring rains in many of these important growing regions is now well underway, which bodes well for our fourth quarter results. Although we expect increases in sales volumes compared to 2019 fourth quarter results, a weaker currency is expected to keep our reported U.S. GAAP results flat with prior year. In local currency, however, we expect to deliver 20% to 25% EBITDA growth compared to prior year. Full-year outlook items are found on slide 14. Due primarily to the modest reduction in our full-year SALT sales volumes, weaker Brazilian currency, and the ongoing COVID-19 operational and commercial impacts, we've decided to update our full-year adjusted EBITDA guidance. Excluding the inventory adjustment, we are now expecting to deliver $330 million to $345 million of adjusted EBITDA for the full year 2020. Now finishing up on slide 15, we are very pleased to report that we still expect strong free cash flow generation of around $125 million for the full year despite the headwinds Kevin and I have discussed today. Our net debt to adjusted EBITDA ratio is expected to end the year below four times as we continue to make progress improving our balance sheet and maintaining a very strong liquidity position. As we enter these last two critical months of 2020, we remain focused on keeping our people safe, controlling our costs, optimizing our operations, and delivering our essential products to satisfied customers around the world. With that, I will ask the operator to begin the Q&A session.

Operator? At this time, I'd like to remind everyone, in order to ask a question, please press star followed by the number one on your telephone keypad. Please note, In order for everyone to ask a question, we do ask that you limit yourself to one question and one follow-up. If you'd like to ask any additional questions, we do invite you to re-enter the Q&A queue. And we'll pause for a moment while we compile the Q&A roster. Our first question comes from the line of Mark Connolly with Stevens. Go ahead, please. Your line is open.

Thank you. Kevin, you've made a ton of changes since you arrived at Compass, particularly at Goderich, but also in ACT. So I was hoping you could talk a little bit more about the progress you're making with Goderich, because you've got a lot of different efforts there. I'm wondering if you could help us understand where those stand. And on a related note, we've now seen two smaller U.S. salt businesses agree to change hands at prices that are far higher than what people are paying for Compass. Is there anything about those assets that suggests they're more valuable than you're sent for assault from the trust?

Hey, Mark. Good morning. Thanks for the question. I'll talk at a high level a little bit about Godrich, and I'll look at yours and see if he wants to add anything to it. But I think just from an overall standpoint, we feel really good about where things stand at Godrich, the continuation of the development of the long-term plan, long-term mine plan, continues kind of on schedule. We're working on our east built-for-purpose roadways to get that western area opened up and develop some new mining rooms. We've got the new CM-46 on site now. It'll be taken underground in pieces, parts, and put together and should be operational, I think, by certainly by the end of the year, maybe even sometime in December. So We feel really good about how things are going at Goddard's. It's producing much more consistently as the evidence notes in the material this morning. Volumes are much more consistent. They're much higher than where they have been. We're seeing the cost effect of that. And I think I would be loath not to talk about how pleased we are with respect to the safety effort up there and the relationship that we have with the The local union on site, things are going overall pretty well. We still have a long ways to go. We're not at all satisfied with where we are. Still have a long ways to go, but overall very pleased. And I'll look at yours and see if you want to add anything to that before I hit your second question.

Thanks, Kevin, and thanks, Mark. I guess just maybe a couple things. Kevin hit most of the highlights. Again, it is really around optimization as well, around our mechanized mining and what we're doing with some of our maintenance practices. Again, it's taking a long-term look where we used to be a drill-and-blast operation where we went to mechanized mining and really trying to find those opportunities. As Kevin highlighted, we started with safety as a foundation. Clearly, our workforce, our leadership team there is really making some really, I would call it, giant steps. We've got a good, experienced workforce there. There's a lot of things. Compaction steps help as we start to go into the fourth quarter as well. Basically, how we look at our shift rotations, those types of things. You can probably tell from my tone I'm pretty upbeat on where we have been and where we are and where we're going to continue to go. So thank you, Kevin. Yep.

George, are you done with the compaction project?

We're not, yeah, sorry about that, Mark. We're not quite complete. I mean, we actually have it in. We're operating. What we're doing now is I guess I'd call it optimizing. So, you know, we're probably, if I was going to tell you, at about 90%, that's probably where we are, just in optimization. So it's kind of tweaking a little bit to make sure that we get the right sizing, the right material going through, but feeling pretty good about where it's at and where it's going to continue to go. Thank you.

On your second question, Mark, we obviously watched the shift in the salt landscape pretty closely and followed the last process pretty closely. Obviously, the Kistner Consortium is a very well-seasoned and very well-respected group, and they were clearly in it to win it. When you look at the valuation at a headline level, it certainly is. It looks rich, and I think it does point out the difference in the way the public sector views quality salt assets versus the way the public sector values them. But I also think that they probably made some adjustments for the weather, and I think they see some pretty significant cost-out synergy, so I don't think they view that they paid the kind of headline multiple that everybody else is talking about. But you're right, it does point out a pretty significant difference in the way private markets view quality salt assets versus the way public markets view them. And, you know, I guess my view is all boats lift on a rising tide. And I think as we continue to put runs on the board here, we'll see that multiple valuation improve on the Compass equity as well.

Thank you, Kevin. Thank you, Mark. Our next question comes from the line of Vincent Anderson with Stiefel. Go ahead, please. Your line is open.

Yeah, thanks, and good morning. Nice job at Goddard again this quarter. Just trying to true up my estimates. With the quarter up 53% year over year, where does that kind of leave your run rate relative to your near-term targets?

Just particularly about Goderich Mine, Vincent, is that what you're asking?

Yes, sir.

Yeah, so we've still got a little bit of room to run. We're very pleased with the rates we're producing. uh it's hard to put it as a percentage of of where we think that asset can be because there's a lot of upside from here still but um you know i would say i'd say we have significant upside but we're we're we're very very well positioned in terms of productivity and production versus where we have been historically yeah i would add to that see once we get this new unit underground and installed we'll see another um you know appreciable bump

in production, consistency, reliability, and as y'all probably get tired of me saying this, but I think by the time we get done with Goderich, we'll run out of market before we run out of capability at Goderich, and then it'll just be a function of fine-tuning Goderich and then calibrating it with the supply-demand balance and not trying to force tons into the market because it really doesn't want them. that'll be a high-class problem, first-world problem when we get to that point, and we're excited the trajectory that we're on.

Perfect. And you kind of addressed this earlier, and forgive me if I just didn't catch it right, but, you know, when you think about what you saw in the last legs of this bid season, you know, did you pull up on the amount of tons you were trying to place, or did pricing just kind of start to come down at the tail end as maybe people you took share from earlier in the bid season were scrambling to place volumes?

Yeah, look, I'd let Brad comment on this too, but I'd characterize it as, you know, as the season went on, you know, we maintained our discipline, looked at it from a cost production standpoint, what we thought the price might go for. And there were just some things that we had collected not to pursue. We did what we thought it was worth. We didn't win. Sometimes the best deals that you do are the ones that you don't. and we were okay with that. So, you know, we still were able to claw back about 4% market share, which is down a little bit from where we thought we'd be, but we ended up, I think we were pretty happy with where we ended up. Brad, would you add anything to that? No, Kevin, I think you nailed it. You know, just one other comment there, Vincent. We certainly expect the SALT segment to be up in the fourth quarter on revenues versus prior year, and as Kevin said, Overall, I think we're very pleased with the bid season. We have been able to place more of those low-cost, God-rich tons that both Kevin, George, and Jamie were referencing.

All right. Thank you.

Our next question comes from the line of Chris Parkinson with Credit Suisse. Go ahead, please. Your line is open.

Thank you. So there have been a couple of smaller deals announced in Brazil, both ag and just plant nutrition, you know, a few, let's say, comparable substrates. Can you just give us an update on your thought process of the eventual sale of the Brazilian assets? How should we be thinking about that currently? Thank you.

Yeah, thanks for the question. We noted those as well, and we think that bodes well for us, and we're just assessing the situation and thinking through carefully when we want to restart the process. That's probably... in the not-too-distant future, but we think those transactions bode well for our process when we do re-engage and re-initiate. So we're monitoring that very closely, and we'll have something to say about that, certainly on the next call, if not before.

And just a quick follow-up. Can you just offer a little bit more color on the general outlook? I know you mentioned in your remarks, but just on freight costs, How should we be thinking about this for 21 across your different verticals on the US? Thank you.

Yeah, sure. Let me take that one, Kevin. So as we think about freight the rest of the year, obviously fuel, where is fuel going to be? If it stays below 40, we've got some benefit coming in the fourth quarter this year. As we get into next year, let's talk about salt. I think we should be flattish in the first half. of 2021, and then we think, based on some of our enterprise-wide optimization efforts, we'll continue to work those and get some relief in the back half, along with some contractual things we're working through with certain of our suppliers. In Plant Nutrition North America, I think you could expect to see some general inflationary pressure as it relates to freight. Of course, we always have shifts by quarter, depending on whether we're shipping more to the east or more to our southwest markets. And then in Brazil, again, it's just inflationary pressure. And we do see quite a bit of noise down there quarter to quarter in the freight line alone just due to customer pickup versus delivery. That can vary. So it's more of a net sales, net price analysis that we do down there. But we would expect, again, just basic inflationary pressures there. although I would say we're doing a lot of work on the logistics side to give us some upside there or cost improvement in logistics. Thank you.

And again, as a reminder, if you'd like to ask a question, please press star followed by the number one on your telephone keypad. Our next question comes from the line of Joel Jackson with BMO Capital Markets. Go ahead, please. Your line is open.

Hi, this is Brie Murphy on for Jill. Thanks for taking the question. With lower awarded bid season volume assumptions and assuming normal weather, what do you expect soil cost per ton improvements to be in 2021?

So on a normalized basis, the The bid commitments don't have a huge impact on that. We would envision having obviously the price impact in the first quarter of the year, continued improvement at Goderich. We're not quite ready to put an actual cost per ton out there yet, but our goal is to drive into the low 30% EBITDA margins in 2021. And to do that, we're gonna need to see some significant salt cost improvement. So until we – you know, we'll talk more about this specifically on our – in February when we talk about the full year 2020 and give you a full year guidance for 2021. But it would be, you know, a couple of dollars high level is what I would expect across the entire SALT segment.

Thanks a couple. And then you mentioned negative COVID-19 impacts from lost sales and incremental operating costs. I think there were about $7 million through Q3. Have you made any offsetting COVID-19-related savings? And if you have, are these sustainable looking into 2021?

We've got a number of things that have offset some of those costs, you know, you know, thinking about T&E and, you know, just constrained spending through SG&A. But, you know, we think of many of those costs being offset by our enterprise-wide optimization efforts. So, within that number, we've seen a little bit of benefit in our business. from on the sanitation and the chemical side down in Brazil, but it's not that significant. Most of our offsets there have been just our own internal improvements, you know, through procurement logistics, operations, and commercial.

Thank you.

Our next question comes from the line of Mark Conley with Stevens. Go ahead, please. Your line is open.

Yeah, I wanted to come back to... to Brazil for a second. Um, you know, obviously with late planting, it certainly feels like the sales should have been just pushed back. Um, but there's also a compression in the season. And does that raise the risk that you end up with a shift to more foliar? And would that be a significant margin implication?

Hey, Mark, this is Brad Griffith.

Um, you know, I think when we, when we look at, um, that the drought conditions in Mata Grosso and Piranha State specifically, you know, delaying planting, it has delayed soybean planting by three to four weeks roughly. I think by and large, our portfolio is not impacted by that whatsoever. We are driving sales significantly there. In fact, our B2C volumes, that's our direct-to-farm volumes, are up 33%. third quarter today. Revenue is up 37.5% third quarter today.

So I don't see any compression impacting soybeans.

If anything, there may be a bit of a move on safrinha corn. Some of that could be a bit compressed. Our team has been working diligently with producers and some of our aligned retail distribution customers in preparation for that. So our intention is to maximize the sales opportunity with several of our products like Polyblend and Concord specifically for the corn crop. So we're ready.

Okay. And just one more question. SOP prices were down, which makes sense because commodity SOP was down too. Are you comfortable with the current SOP premium? And does the fire challenge in California put downward pressure on SOP prices as you look at 4Q?

Yeah, good questions, Mark. So, you know, as I think about SOP pricing, you've got to look at a number of factors. You know, first of all, pricing for us is in the third quarter was impacted probably two-thirds by non-Canadian and non-U.S., what we would call exports, so product that we're pushing outside of Canada and the U.S., and also by just dynamic pricing to defend our market share versus imports. It's also important to note that because the granulated volumes were lower, for the reasons that Kevin had mentioned earlier, You know, we sold a bit more standard in a percentage in the third quarter than we sequentially did last year. So all of those things combined to put a little bit of downward pressure on us. Now, to answer the second part of your question, you know, I think it's important to note, you know, European producers continue to see strong demand in South America, the Middle East, and South Asia, these markets that they've traditionally served, okay? And as you said, the MOP to SOP premium in the EU is held consistent as it has in the state in that 200 to 225 US dollar range. So I think we feel good about it. The euro has recently strengthened to the U.S. dollar, and freight rates are moving back up, which could bode well for pricing in the U.S. and, of course, potentially price higher if they expect to gain entry into the U.S. Does that help?

Super helpful. Thank you. Your next question comes from the line of David Silver with BL King. Go ahead, please. Your line is open.

Yeah, hi. Thank you. So apologies in advance. I did have to step away at a certain point. So apologies if I'm making you repeat yourself. I had a couple questions, I guess, on the SOP market or the SOP units. First of all, with the variance in the stockpile that led to the $7.4 million charge, back to the envelope, I'm looking at that, and if I use a $500 accounting cost per ton, that's close to 15,000 tons. Is that kind of the ballpark? And then maybe if you could just comment on over what time frame, you know, maybe that buildup of missing inventory or missed measurement occurred, that would be helpful. And then second, also on SOP, I could just get a little bit of color from your perspective on just how disruptive the wildfires have been regarding some of the agricultural regions. If I think of the SOP going to fruit, vegetables, and tree nuts, I'm thinking the fruit and vegetable crops are not generally in areas where I would think the fires could get at them directly. tree nuts or something like that might be a different story so how much of the disruption might be temporary versus you know something that really does damage to the you know the trees or the other you know growth uh elements of of the products that use the sop thank you thanks david let me i'll take the first part of that and then maybe brad you take the second part but you're you're in the right ballpark maybe a little bit low on the ton as you mentioned

As it relates to the time period, this goes back to our expansion at the site. Remember how we've upgraded that facility to be able to make $325,000. plus of pond-based tons. Back in 2016, we did that work. 17 with some commissioning. We ran it really hard to test all the systems. So it goes back to that timeframe of when this accumulation of the inventory, you know, leakage or shrinkage, if you will, has occurred. Fred, do you want to hit on that?

Yeah, I'd be happy to. Hey, David. So on the wildfire, it's a really good question. That is the underlying driver for what delayed the almond harvest. So kind of the lack of those sunlight and the drying time and the ripening of the nuts, if you will. When those things were shaken, they sat on the ground probably a little bit longer than any producer would have wanted them to. we're not seeing a tremendous amount of damage. This is still a record crop, okay? I think that's the important thing to note. These producers are exceptionally resilient. They have still delivered a record harvest crop in terms of volume. So I don't expect, to answer your question, I don't expect any sort of demand destruction at all. With harvest being delayed, call it four weeks, it has pushed the... the fertilizer application window back a bit. Our customers, our distribution and retail customers in California have been extremely confident that they believe they'll be able to meet that narrowed window, if you will, in terms of helping these producers get the appropriate fertility to replenish the soil from what was a record harvest. I think that's great. You're right on fruits and vegetables. We don't see any real issues there whatsoever, melons and berries. You know, if you think about Napa, Napa's been impacted. I think a lot of the Chardonnay grapes came out on time, no impact there. But, you know, some of the reds have been impacted by smoke taint. Anything that was hanging out there while the smoke happened has been impacted, and that's going to be destructive for certain wineries and orchards in that part of the world. But again, the use of SOP is much smaller than what we see in tree nuts. So not something we would consider material. And similarly, there's going to need to be a fertility program that drives production for the grapes as well. And we stand ready to meet that need as well.

Okay, thank you for that. I appreciate it. Then just one question about the adjustment to your bid season, you know, projections from, let's say, three months ago, plus eight down to, you know, plus four. I'm just wondering, I mean, your team is probably, you know, this is an area where you're probably, I don't know, amongst the most sophisticated, you know, operators or players, you know, that I can imagine. I mean, you have databases going back decades and, you know, you've got the territory marked pretty good. So I'm just wondering, but is there a cause that you could cite for the, you know, the drop in the bid success? And in particular, I mean, I'm just, you know, I'm noting that there is a new player in the salt market that might be thinking about carrying a lot of debt and just wondering if that's changing the competitive behavior in any meaningful way that you could cite regarding the tail end of this bid season. Thank you.

Yeah, let me hit the last part of your question. first. Yeah, we've got a new player in there, but again, what I refer back to is these are a seasoned team that's been in this business for a long time, and we've seen nothing that suggests that they're operating to make debt payments or interest payments or anything like that, nothing but rational behavior. And I think with the bigger transaction that they've just announced, they're focused on Yeah, okay, yeah, they probably are going to lever up, but they're focused on margin enhancements because when you look at our margins, even before the improvements we're in the process of making relative to the asset that they acquired, our margins are substantially better. So I think they're going to be focused on that margin enhancement, and one way to do that is not to sell cheap. So I think they're going to behave very rationally in the marketplace. So no worries, and I wouldn't attribute anything – to that as being a phenomena in the marketplace we saw. What we did was, as these bids came out, we provided feedback that we thought was fair value for our product. If we win, we're happy. If we lose, we're okay with it. I've got a little competitive there at the end, but I don't have any and don't make any apologies for passing on business that we don't think makes any sense for us. I'd rather have the 4% at where we ended up rather than that incremental additional 4% at a lesser price. That gives us the opportunity to continue growing our margins out to that low 30% range that we've been talking about all along.

I really appreciate the color. Thanks very much.

Thank you. Our next question comes from the line of Vincent Anderson with Stifel. Go ahead, please. Your line is open.

Yeah, thanks for humoring me. I just had one more for Brad. Just wanted to check in on the new ag product commercialization effort. Maybe broadly speaking, if you could talk about how marketing to maybe some of the larger cooperatives differs from trying to get onto the shelves of the more established retailers and just any general progress you've made on that front heading into next year.

Hey, Vincent, thanks. Good questions. Let me see if I can. get after them. So, you know, first of all, let's start with micronutrients. We've had a solid year to date. Our revenues there are up 26%, third quarter to date. There continues to be good customer enthusiasm for fertilizer-additive products like our WolfTrack PVP and some of the newer nutritional brands like Rocket Seeds that you're referencing. I'm also excited to report that we're launching three new specialty products under the trademark HydroBullet with specialty in row crop utility. So we're going to begin shipping those now for the 2021 USA crop season for on-farm trials. The products there, Vincent, we have HydroBullet Plume, which is micronutrients and seaweed extracts that are intended to mitigate reproductive stress in the plant. We have HydroBullet Battalion. These are all liquid products, by the way, foliar products. HydroBullet Battalion, which is an amino acid-based liquid fertilizer, and that is for abiotic stress prophylaxis, so call it heat, coal tolerance, et cetera. And HydroBullet Big Iron. This one we're really excited about as well. It's an IP-protected novel delivery technology for iron. And, you know, iron is an imperative element for, chlorophyll production and vegetative growth. So we're excited to bring those to market as well. We continue to work in our innovation here in Kansas City and also in South America on a number of projects, both on the salt side of the business and on the plant nutrition side of the business. And we're making good progress on a prioritized set of those projects. So we expect to continue to be able to report new innovation across our portfolio in the future. On the marketing side, Vincent, you know, with co-ops, I think with that we continue to have good success with our customers. We've become a much more reliable supplier on the SOP side of the shop and also on the micronutrients in terms of having product where and when it's needed and really working closely with our distribution customers to educate, and also to facilitate sales to the end-user farmer customers. So I feel good about the progress we've been making. We wouldn't be seeing these double-digit, you know, gains if it wasn't getting to hold water. So thanks for the question.

Yeah, thank you. Actually, just one quick point of clarification, actually. The 2021 season, you said field tests. Are those commercial field tests or university? Commercial. Commercial.

Yeah, so it'll be for sale. But I think what's important to note is farmers aren't going to automatically switch a 3,500-acre farm and put 100% of your foliar product on 3,500 acres. That's very rare. They'll typically give you the worst 50 acres on the farm and see how it performs relative to what has been their standard. And when our products show up well on some of those tough acres, it really reinvigorates their confidence to put it on a much larger portion of their land. So that's what we're doing next year, 2021. We're going to take on the challenges and help them perform and exceed expectations. All right.

Well, thank you very much for that.

And ladies and gentlemen, that concludes the Q&A portion of today's call. I'd like to turn the call back over to Kevin Crutchfield for some closing remarks.

Yeah, I just want to conclude with a couple of things. I know today's a really Thanks for taking time out to tune in. I continue to be very, very excited about what I see here at Compass and the things that we have in progress. Couldn't be more pleased without the direction we've got this all franchise going. We've made a lot of improvements so far, but we've got that much to go again and remain very excited about that. And then the plant nutrition side, the back half of the year or the back quarter of the year, the demand's there. It's just going to be a compressed season, but I have every belief that our team will be able to deliver and we'll end up the year in a good spot. And then last but not least, for those of you not already aware, I'm sad but also excited to report that Teresa is moving on to a bigger and what looks like to be a very significant opportunity. So this will be her last earnings call with us, and I would be remiss if I didn't take just a few minutes to thank her for her over a decade of great, great service to Compass Minerals. We're going to miss her, but it looks like a great opportunity. So we never want to hold anyone back, and we're very excited about her new opportunity. But we'll certainly miss her, but I did want to take a few minutes to thank her for her service on this call. And I'm sure many of you will want to reach out and say goodbye as well because she's changing sectors on this. But anyway, congratulations, Teresa.

Thank you very much.

Congratulations. So that concludes our earnings call today. Thank you very much for your participation, and we'll keep you updated in the future. Have a good day, everybody.

Ladies and gentlemen, this does conclude today's conference call. We do thank you for your participation. You may now disconnect.