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Text: Joining in for the Q&A session are Brad Griffith, our Chief Commercial Officer; as well as George Schuller, 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 5, 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.
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 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-date 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 and all of our deicing markets in the first quarter as well as the operational challenges stemming from the global pandemic beginning in March.
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 continued 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.
I may sound like a broken record here, but it's a song I'm really glad to sing.
Our Goderich 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 Goderich's position as the leading salt mine in North America from both the cost and volume perspective as we continue to build our new mine plan there over the long-term.
Our Cote Blanche mine has also demonstrated strong performance year-to-date.
Not to mention, an 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 enterprisewide 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 to offset the impact of some of the short-term freight rate inflation, we are experiencing this year.
Our commercial teams have also been highly engaged in the enterprisewide 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 that 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 deicing 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 had us trailing our full year salt volume guidance by about 250,000 tons for 2020.
Ultimately, our deicing 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 spoke 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 enterprisewide 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 a compaction project at Goderich mine to essentially recycle salt fine waste into salable 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 the 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 convinced brines from which we extract both salt and SOP feedstock has been two months in the final evaporation stage.
After draining those ponds, we then spent 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 company.
As we continue to execute on the many projects throughout these value streams, over the next couple of 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 buttressed 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 in 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.
I'll start on Slide 9 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 with 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 discuss 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 deicing and consumer and industrial sales.
In addition to lower year-over-year pre-season demand for deicing 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 toward lower price chemical sales pushed highway deicing pricing down 8%, while consumer and industrial average selling prices increased 8%, largely due to strategic price increases implemented as a result of our enterprisewide optimization effort.
On a net price basis, we actually achieved a 5% improvement in average selling price versus third quarter 2019 results, with highway deicing 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've 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 margins of 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 discuss 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 US have delayed the start of the application season and we believe they have shifted the timing of SOP sales for 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 with standard SOP at our Ogden, Utah facility.
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 in 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 discuss 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 solutions products.
These price improvements offset a year-over-year decline in agriculture and chemical solutions 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 and 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 discuss 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 deicing customers.
Ultimately, our average reported highway deicing sales price will be impacted by the sales mix we achieved in the quarter based on winter weather activity.
In an average winter scenario, we're expecting highway deicing 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 enterprisewide 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 US 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 under way which bodes well for our fourth quarter results.
Although we expect increases in sales volumes compared to 2019 fourth quarter results, the weaker currency is expected to keep our reported US 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 have 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 4 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.

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full-year 2020 adjusted ebitda outlook of $330 million to $345 million.

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