Ladies and gentlemen, thank you for standing by. Good day and welcome to the Compass Minerals Second Quarter Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Theresa Womble. Please go ahead Ma’am.

Thank you, Paula. This morning, our CEO, Fran Malecha; and our CFO, Jamie Standen, will review our Compass Minerals second quarter 2018 results and our outlook for the rest of the year. Before I turn the call over to them, let me remind you that today’s discussion may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on the company’s expectations as of today’s date, August 7, 2018, and involve risks and uncertainties that could cause the company’s actual results to differ materially. Please refer to the company’s most recent Forms 10-K and 10-Q for a full disclosure of these risks. And we – the company undertakes no obligation to update any forward-looking statements made today to reflect future events or developments. Also, our remarks today will include non-GAAP financial disclosures which we feel are important to provide a full understanding of our business and our operating condition. You can find reconciliations of these measures in our earnings release or in our earnings presentation, both of which are average at the Investor Relations section of our website at compassminerals.com. Now, I turn the call over to Fran.

Thank you, Theresa, and good morning. We reported another strong quarter in terms of our year-over-year top line growth. We accomplished this while enduring an 11-week strike at our Goderich Salt Mine, as well as week long national trucker strike in Brazil. Cost pressures, however, reduced our operating earnings and net results, while adjusted EBITDA increased 13%. Despite these challenges, there are several positives, I think, are important for our stakeholders to take away from our second quarter performance in this call today. These developments reinforce my commitment to our strategy for sustainable long-term growth and that we should begin to experience some tailwinds, as we progress through the rest of 2018 and into 2019. The first takeaway I’d like to discuss is the positive market developments in our salt business. In North American Highway, deicing market is improving from the supplier perspective due to stronger winter demand last season following two mild winters. The results of the North American Highway deicing bid season are clearly demonstrating this to be true. We estimate that average bid volumes market-wide are returning to more typical levels and pricing has been very strong in several regions. With approximately 75% of our bid season completed, we’re currently estimating that our average contracted price for North American Highway deicing customers will be up approximately 15% for the upcoming winter. This average price not only includes contracts that were bidded this year, but also rollover and multi-year contracts. Our awarded sales volumes are lower than last year’s levels due to the production constraints we faced at our Goderich mine. However, the margins that we expect to earn and the volumes that we have been awarded have largely compensated for the limits on our bidding activity in terms of full-year earnings expectations for the salt business, which…

Thanks, Fran. Before diving into our segment discussions, I’d like to touch on our consolidated results. Our net loss this quarter totaled $7.6 million, compared to $6.4 million in the prior year. The increase in depreciation expense reported this quarter was the primary driver for the decline. On an adjusted EBITDA basis, our earnings grew 13% as a result of EBITDA improvements in each of our business segments. Furthermore, during the first-half of the year, we generated cash flow from operations of $182 million, which was a 25% increase from prior your results and reduced our total debt by about $77 million. Now let’s turn to Slide 9 to discuss our Salt segment results. Salt segment revenue increased 11% on a 17% increase in sales volume, offset by a 5% decline in average selling prices. This year, we benefited from April snow events, as well as strong demand in the UK following a severe winter there. It is typical for our customers in the UK to begin restocking early – earlier than in North America. So this was a nice boost to our sales volumes in revenue in the second quarter. The decline in average selling prices was driven completely by product sales mix, as we sold more highway deicing salt versus higher price consumer and industrial salt this quarter when compared to the 2017 period. Salt operating earnings for the quarter increased 17% from second quarter 2017 results and operating margin expanded slightly. This growth was primarily due to better operating rates in the UK, partially offset by the pull forward of costs associated with the Goderich ceiling fall last year. Recall that we had expected about $3 million of carryover logistics costs in the second-half of 2018. This expense is related to the shipment of Cote Blanche salt…

Thank you. [Operator Instructions] And our first question will come from Jeff Zekauskas with JP Morgan.

Thanks very much. How much was your salt production in theory curtailed by all of the different issues that afflicted the company this year?

Yes. So I think, we’re not going to be specific. We don’t disclose our production levels, but it was a material decline for the full-year. Remember, in the first quarter, we were coming up to the end of a collective bargaining agreement and had a workforce that was looking forward to that. And then having gone through the strike and now having to go through a transition back, having finalization of the new CBA and going back to those employees, it’s a fairly significant impact to our full-year production.

So let’s try it a different way. How much do you – how much more do you think you could produce in 2019 in salt than you produced and you will produce in 2018 under more normal conditions?

Jeff, it’s Fran. I think, we expect to ramp up coming out of this work stoppage the kind of monthly rate that would drive our production up to – we’ve always kind of talked about the 7 million ton range at Goderich. And we expect to be able to operate at that level with the equipment, with the employees there going forward, as we ramp up and come out of the strike. So I think, I would think about our production capability to kind of be at a level in 2019 that would meet the demand of a solid winter, which we hope to have this coming year and producing at very cost effective production levels for both Goderich and our Cote Blanche mine.

Great. Thank you very much.

And next we’ll go to Vincent Anderson with Stifel.

Good morning. Thanks. So I just – I’ll stay on salt then. I just want to parse out your expectations for salt sales more into 2019. Why is it too early to give some more detail on the year-over-year award shortfall? And when you look at which markets those shortfalls are coming from, have you committed to fewer tons on certain awards, or is the delta entirely from RFPs thtas you’ve passed on? And all that kind of just builds to what kind of opportunities do you see to make up any volumes on the spot market if weather cooperates?

Yes. It’s Fran, Vincent. I think, as we went through the bidding season obviously knowing that our production at Goderich was going to be impacted and impacted by the – by a work stoppage. So that certainly went into our bidding strategy and we ended up with commitments that, that we’ve described. And I think as we ramp up our production coming out of this – out of the strike and get towards full production for the balance of 2018 and then in 2019, our hope is that, we’ll have some additional salt to sell assuming the winters – the weather doesn’t impact us negatively in the season and we’ll just have to see how that plays out. So we obviously were aware of the risks to our production, and we took that into account as we went through our bidding cycle.

Thanks. I’ll go to SOP next. A lot of positive read through is coming out of KCL prices, but maybe some pressure on some of your customers from the tariff disputes. With all of that, we haven’t really seen significant movement in the published SOP prices, and you’ve raised volume guidance for the year. So should we interpret this as a conscious effort to prioritize volume over price as your current go-to-market strategy?

I mean, I don’t think our go-to-market strategy has changed at all. We’re always, because it’s a competitive environment going to try to optimize price and volume and we expect to continue to do that going forward. So I think, we’ve seen the price of SOP inch up over the last season and probably not keep pace with some of the price increases you’ve seen in MOP to date. But really no difference in our approach to how we impact the market area commercially.

All right. Thank you.

Moving on, we’ll go to Mark Connelly with Stephens Inc.

Thanks. Fran, just two questions. Beyond the higher depreciation, are there any other meaningful changes in the cost position which to expect at Ogden after the investment you made?

No, I think, that’s the main one. Obviously, we need to make that asset work. And that really, I think, as we look to the future of SOP in North America really is about building demand and growing the volumes from Ogden consistent with my comments just recently just on how we’re approaching the market trying to optimize price and volume, we expect to maintain our share as the market grows. And from a commercial standpoint, we just need to build that demand in the right places on the right crops.

And I would just add that, as we do grow, remember, we use KCL on our incremental production ton. So to the extent we’re using KCL, that would drive, Mark, that would drive a higher cost.

Right. Right, okay. And then just one follow-up. Did you experience anything very different in Southern Brazil versus the North, given the huge difference in logistics and distribution? Was one materially better or worse for you?

No, as I think, we’re – our busy season is kind of coming up now, all right? So that I think the volumes in the first – the last quarter when the strike was going on weren’t as significant as they will be going forward. That environment is still uncertain in terms of how the freight costs will be passed on and who absorb them. I think, what we’ve done is, we’ve been proactive in booking freight with larger carriers, so forward booking that to get us through the season. Our team down there was very proactive on that front. And we’ve also put some warehouses or we’ll be putting warehouses kind of as we speak further out into the North and into places like – states like Montegrosso to help us manage those logistics more effectively ultimate to the grower. So I think, we’re – we think we’re as well positioned as we can be in this environment to make sure that our products get to the farmers when they need them, and also kind of managing costs, I think, pretty effectively given the changes down there and some of the uncertainty.

Thank you.

Next we’ll go to Chris Shaw with Monness, Crespi.

Hey, good morning, everyone. How are you doing?

Good morning.

Good morning.

Can I ask a question about salt. Now looking forward to the 2019 just sort of the cost structure, I mean, what’s the sort of net delta from do you think from, I guess, the number of things, the higher cost from absorbing higher fixed cost in 2018 from lower production, but everything from the – also the sort of greater efficiency you’re getting from the continuous mining equipment. I mean, is there delta you can find for me to that the cost that won’t repeat, I guess, for the salt business in 2019 that occurred now in 2018?

Sure. I’ll take a shot at that. I think, the distribution costs are feeling more permanent. So we will see higher logistics costs, I referred to higher freight rates, we’ve talked about 5% plus increase this year. I’m not necessarily saying the increase another 5% next year, but that, that new level of freight is – has been established and wouldn’t go away in 2019. Also remember, fuel is up about $20 year-over-year. So depending on what fuel does, that will obviously have an impact in 2019. And then as far as the cost side, you could – we would expect to be – costs that are going to run at $1 a ton higher probably in the second-half of the year versus prior year, so on total salt cost. And then depending on how effective we are in ramping up through the second-half of the year here, our continuous mining like Fran mentioned before, if we continue to make the improvements, we think we can well into next year, then we will really start to see the benefits of continuous mining as we get those volumes back up. And then you could see some significant benefit in the P&L in the second-half of 2019.

There are no like specific discrete costs from the strike at all that won’t repeat, or those were offset by the, I guess, the savings of not having to pay workers. Is that right?

Yes. So there’s a couple of factors. It depends on how many tons we end the year with, right? So this year’s production has a cost, I talked about it in my prepared remarks, the fixed cost absorption, and we’ve estimated that to be about $1 a ton for the second-half of the year. And then depending on our inventory levels, we end with, which is a function of winter weather in the fourth quarter, then some will carry over into 2019. It’s difficult to say exactly right now. And I’m not going to tell you how much would carry over, it just depends on our production during the second-half of the year and the actual sales that occur based on whether.

All right. That helps. Thank a lot.

And next we’ll hear from Christopher Parkinson with Credit Suisse.

Hi, this is Graeme Welds on for Chris. Good morning, everyone.

Good morning.

Just had a quick question again on SOP. Just wondering about in the market what you’re seeing is driving higher volumes with respect to the absolute kind of market demand in North America versus what you’re seeing on the import front?

Yes. I think, as I mentioned earlier, we’re maintaining our share of the market. And our market share in SOP has been pretty consistent going back a number of years. So we’re not looking to capture volumes at the expense and share at the expense of price. But if you go back to the 2014 timeframe, the demand in the market was higher than it is today. So I look at it as we’re getting back to demand that has been in the market previously and then look to continue to grow – this market should grow at 5% or so a year, at least, that’s our expectation going forward. And so we – I think we started a little bit of demand to pickup from prior years and then grow from there.

Got it. Thanks so much. If I can just have one quick question on salt. I’m just going to following up on some questions before in terms of the back-half margin outlook. I was just curious what in that is embedded from what you expect to achieve in terms of savings from continuous mining? And then how we should kind of maybe think about the margin standpoint in 2019, assuming that we kind of have a more normalized production here?

Yes. So you – are you referring to the back-half of 2018 in terms of…?

Of 2018, correct. Yes, in terms of continuous mining, yes?

Yes. So we are – we feel like the $5 million of savings is in, and that would be the only savings we would see this year, which is embedded in our forecast. So like I said before, I think, as we ramp up production in the late – in the second-half of the year here with our employees back in place. And if we hit our targets and continue to improve our targets into 2019, then you’re going to see the savings in the back-half of 2019. So I’m not ready to give 2019 margin guidance yet. But we certainly expect them to improve next year.

Got it. That’s helpful. Thank you.

And next we’ll go to Joel Jackson with BMO Capital Markets.

Okay. If you may know the margin guidance question, maybe just understanding a bit about the 15% higher rock salt pricing on new contracts, excluding, I guess, chemicals SOP in the UK to upper higher freight cost and other things going on. Can you give us a sense of what kind of the net back expansion would be net-net at – factoring all of this, maybe the greater ask would be first-half of 2019, if it’s a normal winter or whatever that is. Is this mean, you should see an expansion in margin 300 basis points, 500 basis points. Can you give any kind of color that would help us understand what 15% means when sort of drag down for other factors?

So, again, are you talking about the second-half of this year, or are you talking about second-half next?

No, I’m talking about first-half of 2019, I mean, you’ve given second-half?

First-half of 2019?

Yes.

Yes.

Just generally, what it means for the winter, but first-half of 2019 would be helpful? Thanks.

Yes. So, I anticipate if we hit our plans and end the year with average weather and end the year with – we’ll end with some carryover inventory, which would be something that would be non-repeat in the future. So you could think of that as being, at least, several million dollars. So when we see this price unfold in the first quarter, you could see a couple of percent of improvement. And again, so much of it, Joel, depends on our production rates through the rest of the year and into January and February, because those will be the tons we’re set – we’re going to be selling. So if you wanted to estimate a couple of hundred basis points, I think, that would be fine.

That’s actually quite really helpful. Second question is, you talked about your awarded volumes being down this year because of various factors Goderich, et cetera. How do the overall markets do in terms of order volume? I mean, you were, I guess, at lower volume, I guess, cargo’s at lower volume, I guess, the other players benefited from that?

I think it’s probably a fair way to look at it.

Okay. And how do the overall market grow in terms of the order volume so far?

I think, we’re, as I think mentioned in my remarks, I mean, the volumes are up – back up to kind of that historical level coming off the previous winter. So I’m not going to put an actual percentage on it on this call, but I think we’re optimistic to see those volumes there. As I mentioned, if and as we produce more of at Goderich coming out of the strike into the back-half of the year, we hope to have some maybe more in season demand than we historically probably would have looking at previous bidding seasons.

And I’ll sneak one more in. You have a lot of different types of products in PDQ, some niche products, seed treatment, flow of these nitrogen micronutrient, how does that – like is the shift to more beans in Brazil versus corn and other crops, would that be positive or negative for your business?

Well, it’s positive. We actually have a kind of a menu of products geared specifically to all crops, but specifically to soybeans. And if growers are on our program, we’ve proven that they get better yields. And so we see that those additional soybean acres in Brazil, as you know, very positive for our business down there.

Thank you.

You’re welcome.

And moving on we’ll go to Bob Koort with Goldman Sachs.

Good morning. This is Dylan Campbell on for Bob. A quick question on free cash. I think, the track in there around $130 million for the first six months. Do you have any updated kind of guidance for how we should expect that to track in the second-half of the year?

We’re going to in the year around flat and it’s really a function of some – the net tax payments that we need to make related to our Canadian tax settlement. So we’re planning on making those settlements. We think we can get that done, which would drive the $70 million in net payments. If they don’t get done this year and they slide into next year, that would have a meaningful impact, not saying that’s going to happen, we still plan to execute and get that done this year. But that would put us down around flat to up $20 million, so $20 million of free cash flow before dividend.

Got it. Thank you. And I was encouraged to see, I mean, North America shipping and handling costs decreased year-over-year. It seems a little bit different than what we’ve seen across the Americas with increased logistic pressures. Do you have any additional color on that decrease?

Plant nutrition.

Yes. So specifically in plant nutrition, yes.

Yes.

That was up a bit. But I think that, remember, fuel is less impactful to us there. We use rail as shipment. Now there are – the railroads do have a running at capacity and are having trouble even hiring trainmen. So they’ve had pricing power. But we’ve offset some of that with some warehousing things we’ve done and some direct rail shipments out of the plant versus out of our warehouses, so we manage our – we managed our costs lower that way, shipping direct from the plant.

Got it. Thank you.

Moving on, we’ll go to David Begleiter with Deutsche Bank.

Thank you. Good morning. Fran, on the 15% the Highway deicing pricing for next year, or this upcoming winter season. How much would you have required just to offset the rise in logistics and fuel costs that you’re realizing this year and expect to realize next year, would be roughly half perhaps of that 15%?

I mean, that’s – that wouldn’t be a bad estimate, I think, that would be fair to say.

Very good. And Fran, just on the – I’m sorry. Just on the water volumes this year, if you’ve lost "some market share" and want to get back next year once Goderich ramps up. Would that imply some potential pricing pressure as you regain this loss share that you give up this year?

I mean, I guess, that’s speculative, it’s hard to say. I think, as our production ramps up, I would expect that, we would increase our volumes closer to the mine and and just be more competitive in the market. So lots going to dependent on winter and it’s just hard to speculate on that. I think, we’ve seen in the past though that we’ve been able to increase our share, get share back, if we go back a number of years in a – if we have a reasonably good market to do that and I would say, average volumes are above. So we’ll just have to wait and see what winter brings and then go from there.

Thank you.

Thanks.

And next, we’ll go to Christopher Perrella with Bloomberg Intelligence.

Good morning. A question on the South American Plant Nutrition business. How has the currency move impacted raw material costs down there? And how does that play in – I know the translation headwind, but maybe some translational headwind as well on operating margins in the second-half?

Sure. So it has been significant. Many of the – many of our input costs are denominated in U.S. dollars when you just think of general commodities such as copper, I always refer to. So we have seen significant increases in those prices in those costs – input costs. However, the business itself and the innovative nature of our products and the importance of our products to growers and their yields, we do have pricing power. So we’ve been able to pass those along to our customers. We use dynamic pricing in the field. So we’re constantly watching our replacement costs and adjusting our pricing in the marketplace. One risk, however, to that is the volatility. So we think of a weaker reais or a strong dollar as benefiting the grower ultimately, but we do prefer stability over volatility. Dynamic pricing in the field with the currency moving quickly can cause significant lag issues.

All right. And then that would be – you would see that more in the season with the plant – in the planting season down there, or how – did that impact 2Q to some degree?

Yes. So it did impact 2Q, but we’re building our inventories in 2Q. We do have some sales as well. So we’re passing along that pricing, and now we’ve built much of our inventory and we’re going into the seizing and we’ll be selling that product that we’ve already made plus we’ll be taking new orders and we’ll be producing new material and constantly adjusting that, that pricing to match and maintain our – maintain or improve our margins.

All right. Thank you. And one quick follow-up on the salt business. With the purchased material and the shipping from South to North, will most of that cost flow through inventory in shipments in 3Q, or is that spread evenly between the two quarters in the back-half of the year?

It’ll be allocated based on the sales volumes, so heavier to Q4.

Okay. Thank you very much.

It’s the cost come through when the sale occurs.

Okay. Thank you.

[Operator Instructions] We’ll return to Vincent Anderson with Stifel.

Thanks. Just a really quick housekeeping question. Sorry, if I missed it. Did we get an SOP only price? And if not, are you willing to give us one for the quarter?

Yes. We didn’t put it in the business deck this quarter, but SOP only in Q2 was $596 a ton.

Thank you.

And we’ll move on to Mark Connelly with Stephens Inc.

Thanks. Just two things. The weakness that you saw in the Brazil chemical business, is that extending into Q3? And if you could help us understand what’s driving that? And second, if we think broadly about the specialty fertilizer product pipeline, should we expect that to be lumpy, or is that going to help keep the growth fairly steady?

So let me take the first one there regarding the chemical business. The main impact to the chemical business was related to the 10 days trucker strike. Remember, that business is more consistent through the year. So, losing the 10 days in the quarter was very impactful. So regarding the product pipeline, can you as that again?

Sure. I’m just wondering if you think about your specialty fertilizer introductions. Is that going to add lumpiness to your revenue, or is it going to actually keep things relatively steady? It sort of depends on how you’re planning to roll those things out?

Yes. So it’s – I don’t think it would cause any particular lumpiness. So we’re – we’re really focused on innovation. We expect to deliver new formulations and new products over the next several years, and we’re very excited about some of the things we have in that pipeline. Some of them are replacement products. So we think we can stop, move or move away from certain older formulations and replace them with new ones to really drive growth. Will there be a little bit of lumpiness? Absolutely, if we have something particularly innovative in a particular year. But all in all, we would expect steady growth profile going forward.

Super. Thank you.

And next we’ll go to Joel Jackson with BMO Capital Markets.

Sorry, Jamie. I have a follow-up for you. You had given some good guidance about maybe, how all things play out a certain way, maybe 200 basis points of salt margin expansion. Can you just clarify, I think, you’re talking about Q1 as opposed to the first-half?

Yes.

But I think, your comp was what – Q4? Was it versus Q4 of 2018, or was it year-over-year?

Yes.

Okay.

I was thinking sequentially.

Thank you very much.

And that does conclude our question-and-answer session. I’d like to turn things back to Theresa Womble for any additional or closing comments.

Thank you, Paula, and thank you all for joining us today. Once again, we appreciate your interest in Compass Minerals. Please feel free to contact the Investor Relations department with any additional questions you may have. Have a great day.

And that will conclude today’s conference. We’d like to thank, everyone, for their participation. You may now disconnect.