Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Compass Minerals International Inc. (NYSE:CMP)

Q2 2014 Results Earnings Conference Call

July 28, 2014 10:00 AM ET

Executives

Theresa Womble - Director, Investor Relations

Fran Malecha - Chief Executive Officer

Rod Underdown - Chief Financial Officer

Analysts

Jeff Zekauskas - JPMorgan

Mark Gulley - BGC Financial

Chris Shaw - Monness, Crespi

Chris Parkinson - Credit Suisse

Joel Jackson - BMO Capital Markets

Bob Koort - Goldman Sachs

Eugene Fedotoff - KeyBanc Capital Markets

Operator

Please standby, we are about to begin. 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 Ms. Theresa Womble, Director of Investor Relations. Please go ahead, ma'am.

Theresa Womble

Thank you, Aaron. With me today are Fran Malecha, CEO of Compass Minerals; and Rod Underdown, our Chief Financial Officer.

Before I turn the call over to them, let me remind you that today's discussion may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

These statements are based on the company's expectations as of today's date, July 28, 2014, and involve risks and uncertainties that could cause the company's actual results to differ materially. The differences could be caused by a number of factors, including those identified in Compass Minerals' most recent Forms 10-K and 10-Q.

The company undertakes no obligation to update any forward-looking statements made today to reflect future events or developments.

You can find reconciliations of any non-GAAP financial information that we discuss today in our earnings release, which is available in the Investor Relations section of our website at compassminerals.com.

With that, I will now turn the call over to Fran.

Fran Malecha

Thank you, Theresa, and welcome everybody on the call. We are here today to talk about our second quarter results and outlook for the remainder of the year. I will begin by saying these results were driven by some short-term softness in the Salt business, but the second quarter results aren’t really indicative to the underlying health of the business.

More important development in the quarter was our North American bid season activity, which laying the foundation for a strong highway deicing environment for the upcoming winter season. In our newly expanded and renamed plant nutrition business continues to perform well, amidst broader fertilizer turbulence.

This morning I will touch on some of the high level factors influencing our results and outlook, as well as discuss our ongoing strategies to drive growth and improve performance.

Turning first to our Salt segment, we underperformed on our volume expectations for highway deicing. The primary factor here was that we expected our North American highway deicing customers who had not yet reached a maximum purchase allowance under the 2013/14 contracts to take this tons in the core in order to take advantage of this past season prices.

Not all of these orders materialized and we instead we understand this customers are waiting for the next fiscal year to begun to make these purchases for the timing of these sales has been delayed into the third quarter.

The other primary factor limiting our quarterly Salt results was our average reported selling price, which was lower in both Salt business versus the prior year, and in both cases, shifts in salt and sales mix to lower-priced product categories cause a decline. We saw the higher percentage of lower-priced tons to chemical producers this quarter in our highway deicing business.

And in the consumer and industrial business, we saw more lower-priced bulk salt to re-packagers, which is best in for local deicing distribution this fall. The combination of lower sales volumes and lower prices reduce Salt operating earnings versus the 2013 second quarter, but again these results aren’t indicative of market conditions.

Despite the over -- year-over-year decline in second quarter Salt earnings, we have strong positive momentum entering the second half of 2014, result an expanded operating margins for the Salt segment.

The North American highway deicing bid season is proven to be just the reset needed to restore the industry market fundamentals following two mild winters. Customer carryover inventories were fully depleted as a result of last winter’s weather, particularly in the comparison to the prior two years when many customers carried significantly higher inventories out of the winter and producer inventories were low exiting the winter.

While we expect that all producers are stepping up production, demand appears to be outstripping supply. Not surprisingly, these dynamics are producing favorable bid season results for Compass Minerals.

With bidding three-fourths complete, our average awarded highway bid price is up more than 20% from last season and bid volume requested by our customers has increased above historical levels, again, following two years that have normally low request due to customer carryover inventories.

We also believe that the extreme winter of 2013/14 depleted inventories of packaged deicing products throughout North America. This is expected to result an increased sales volumes for our consumer industrial salt business especially in terms of pre-winter orders in the third quarter as retailers begins to stock up.

Thus we expect our Salt segment assuming normal winter weather will sell between 6 million and 6.5 million tons of salt in the second half of 2014 and we expect that our weighted average selling price for all salt products will climb at least 12% higher than last year’s results.

Due to such strong customer demand and bid requests, we have been and will continue to run at full capacity, which will yield operating efficiencies for the Salt segment. We have also decided to source some offshore salt at a higher cost than our own production. These additional tons will allow us to meet customers winter demand whelm marginally increasing total salt costs.

If this puts and takes we expect our operating margin percentage to improve each of the next two quarters. We estimate operating margin for the second half of 2014 to be in the range of 24% to 26% compared to 21.5% for the second half of 2013.

Now turning to our plant nutrition business, we had another steady quarter of sales volumes and stable prices. Healthy demand for our specialty sulfate of potash products continued in our key North American markets. We close our purchase of Wolf Trax on April 1st, which added to our results as well.

Greater availability of our SOP products when compared to the last year’s production driven shortfalls, as well as the addition of our Wolf Trax product sales pushed sales volumes up to nearly 100,000 tons, compared to almost 70,000 tons in the second quarter of 2013.

You will notice that we haven't broken our Wolf Trax results and that’s because we are managing the plant nutrition business as a single unit and we expect to develop combined SOP micronutrient blends as we move forward into the future.

We do know that the market is interested in our SOP price performance. For the quarter, our SOP only price was essentially unchanged versus the prior year price of $638 per ton. Our cost ran higher this quarter when compared to the prior year, largely due to our decision to convert purchased potassium chloride into SOP in order to increase production Ogden.

We resume this unique production route in the third quarter of 2013 when the economics became attractive. These additional tons are allowing us to build the North American market, while we work to maximize our production capacity within our existing footprint and evaluate future expansion opportunities.

Integration of Wolf Trax micronutrient business has gone well and we are excited about the growth opportunities and product development potential in combination with our SOP products. We are in the process of rolling out our first micronutrient product, which is called Nu-Trax P+.

This is a phosphorus nutrient that has been processed into our patented dry dispersible powder. It is combined with specific micronutrient to enhance the uptick and significantly reduce the amount of phosphorus that growers need to apply in order to achieve the same benefit.

Not only does the product provide cost-effectiveness for the grower but it also reduces the environmental impact of phosphate use. As we said at our Investor Day, we believe this is a breakthrough product for the industry.

I know many of you listening our -- curious about our Ogden production rates and improvements there. We are producing more pond only tons at the facility but we have not yet install the upgrades to the equipment that we believe will further enhance our yields there.

These include enhancements to major pieces of equipment like our thickeners and SOP crystallizers and dryers. Both projects are slated to begin in the back half of 2014. Keep in mind though that the improvements from these projects won’t be immediately apparent but we will provide updates as progress warrants.

Similar to our Salt segment, we expect strong results from the plant nutrition segment for the rest of the year. We anticipate selling between 175,000 and 185,000 tons of plant nutrition products at an average selling price between $725 and $750 per ton, and from a profitability standpoint, we expect an operating margin uptick of 28% to 30% compared to 20% margin during last year’s second half after excluding the fourth quarter special item and also higher than the 26% reported in the first half of this year.

This brings to our strategy that we outlined in our June Investor Day. It is a straightforward strategy to strengthen and improve the productivity from our existing assets and sharpened our go-to-market strategies in our product offerings in order to grow sales and earnings. The Ogden investments that I just mentioned are part of the capital budget that we established in support of our five-year sales and earnings growth objectives.

We are also in the early stages of relining our older shafts in Goderich. These investments are at the heart of strengthening and improving our operations at our two most unique advantage production sites and will be the primary focus of our capital spending for the next couple of years.

In addition to our capital -- in addition, our capital plan includes standard maintenance of business spending and strategic payback projects, such as investment in the new packaging and distribution site in Buffalo, New York, that is scheduled to be complete by the end of 2014.

Other investments are expected to include improving our on-site storage capabilities and depot network for our Salt business, just to name a few. And we’ll continue to look for attractive external opportunities that meet our rigorous hurdle rates for return on investment and stay within our vision of being an essential minerals company. As we move through this five-year period, we will provide periodic updates as to how we’re progressing towards these goals.

And with that, I’ll turn the call over to Rod to discuss more financial specifics before beginning our Q&A session. Rod?

Rod Underdown

Sure. Thanks, Fran, and I'll begin today with a look at our Salt segment results. A 3% increase in consumer and industrial sales was not enough to offset the 19% decline in highway deicing sales year-over-year.

As a result, total Salt segment sales were 7% lower than prior year and as Fran just described our quarterly results are certainly counterintuitive, just given the market dynamics that have developed.

So I'd like to discuss in a granular way the second quarter results with a bit of detail. So for our highway deicing salt products, both average selling prices and sale volumes declined when compared to last year.

And sales volumes for the highway deicing products are a bit fickle in the second quarter of each year, as much of those sales typically depend on our customers own internal decision making factors that really have nothing to do with current period product demand drivers.

Obviously, this is not a time when the customer typically need highway deicing salt for wintry conditions, though occasionally early April weather result in a sales boost. In this particular year, most of our customers had maximized their purchase under their prior winter contracts and there was no additional salt for them to purchase until this fall when the customer -- new customer contracts going to affect.

But we did have some customers who haven’t taken their full maximum commitments and we had expected them to complete those purchases in the second quarter. Some of those final sales to reach the maximum commitments were not requested during the June quarter.

Given the rising price environment, we certainly expect those customers to complete their purchases very shortly and as a result of these unanticipated customer order timing, our sales were lower than we had originally inspected -- expected and in fact, we’re lower than any other second quarter for Compass Minerals since 2007.

And while highway deicing sales volumes reduce revenue, it had further impact on our reported results by reducing our average sales price and our salt operating margin, let me explain.

Many of you will remember that there is a mix of products and end uses on our highway deicing sales line. We also sell the same mined rock salt to customers in the chemical industry to utilize the salt as one of their key ingredients on a year-round basis.

As a result of fewer deicing end-use sales tons for this quarter, the lower-priced chemical sales were higher proportion of the total, thus reducing price and contributing to a squeeze in salt profit margin comparables.

Those are all just seasonal impact that bear no impact on the real fundamental market dynamics in our business. But those impacts were anticipated by us on our prior Salt segment guidance.

We had a similar though distinct situation during the second quarter in our consumer and industrial product sales. We actually sold more tons of these products than in any second quarter over the last five years. The driver of the sales increase was deicing products.

Those consumer and industrial deicing sales were heavily weighted to a customer segment we refer to as re-packagers. They want more bulk salt deliveries, so they can secure supply for them to package and distribute smaller lots to their own customers this fall.

This bulk, non-package product sale surge, which we expected, unfavorably impacted our sales price and related profit margin percentage, similar to the impact on our highway deicing products, I just mentioned. I want to be clear that on a mix adjusted basis, consumer and industrial product prices were flat to slightly improve.

We expect to see year-over-year consumer and industrial sales price and margin lift in the third quarter in similar magnitude as the second quarter compression, because our deicing sales surge switches to packaged retail customers, who will be seeking to position their supply chain just in advance of the upcoming winter season.

All the C&I factors were anticipated in our prior segment guidance, but we were expecting a little demand from retailers in the second quarter that is been going to materialize until the third quarter, again all of that is just simply timing.

So after considering all these items, but principally related to the highway deicing reduce tons and at lower average prices, EBITDA and margin for the segment declined from the prior year.

One final contributing factor there is, as Fran mentioned, we’re seeing higher shipping costs, principally in our consumer and industrial product area and we expect higher trucking costs impact the Salt segment for the remainder of 2014 as a result of pressures being felt through the transportation sector, our upcoming -- our guidance factors in that upcoming expectation.

So for that second half of the year, we expect to continue to see strength in the consumer and industrial sales volumes, driven by higher demand for packaged deicing products from retailers, who were essentially fully depleted as a result of the extreme winter last season.

These packaged products carry higher prices than average C&I product. So, in contrast to our second quarter price performance, we expect to report a similarly sized year-over-year third quarter average price increase.

Most significantly for our Salt segment profitability, we expect to see highway deicing selling prices to improve and get sequentially stronger in Q3 and Q4. Given the North American bid season results, Fran has just outlined.

Historically, there have been minimal changes to the end of season bid price results, when we get through this point of the bid season. When combined with our sales expectation for all of Salt, we anticipate that our average selling price for all Salt product in the last half of the year will improve at least 12% from the prior year results of just under $70 per ton. This is a weighted average result of our salt products. We expect our salt operating margin for the second half to range between 24% and 26%.

As you’ll note from history, the fourth quarter is typically better than the third quarter on those margin percentages, mostly driven by product mix. I will also point out that the impact of the bid season are expect to be most significantly pronounced in the second half of the winter when compared to year-over-year results. Our early expectation as noted during Investor Day is for our salt operating margin to expand around 500 basis points next year versus 2014.

One final point about the second half of the year for Salt, we are coming up on the third anniversary of the tornado which struck both our salt production facilities in Goderich, which are miles apart from each other. It was a big impact for Compass Minerals reported results and we endeavor to provide you with relevant information about how that event subsequently impacted our financials in 2011 and ‘12.

I'm happy to report that we expect to close the chapter on that event in the third quarter of this year. We expect to receive the final $10 million or more in insurance proceeds on top of the $100 million we’ve already received. The result of settling the claim will mean we can recognize again. The accounting rules required us to defer the income recognition of the insurance proceeds for much of the claim.

As we reported in our release, we expect the gain to be more than $80 million. We will -- gain, so that you can assess our underlying performance next quarter. It goes without saying therefore, that our Salt guidance does not factor in the expected tornado gain.

When looking at plant nutrition, the second quarter was a continuation of the steady SOP pricing and year-over-year growth in sales, driven by both SOP and our newly acquired Wolf Trax micronutrient business.

Wolf Trax micronutrient products have a higher per unit sales price and total costs, and a similar EBITDA margin percentage profile as our sulfate of potash products. So keeping those in mind, total sales volume for the segment increased 29,000 tons from the prior year to 98,000 tons. Well, the average selling price improved 5% to $670 per ton.

This produce total segment revenues of almost $66 million a year-over-year increase of $22 million and as we noted in the material this morning, our SOP only price was very near the prior year price of $638 per ton.

Shipping and handling costs for the specialty segment -- plant nutrition segment increased approximately $12 per ton and was primarily related to fewer customers taking delivery of our Ogden product as well as some regional mix. However, we expect similar logistics costs for the remainder of the year.

Plant nutrition EBITDA increased to just under $25 million, which was a 25% increase from the prior year. This equates to a healthy EBITDA margin of 38%. And as Fran noted, in the second quarter of 2013, we had not yet resumed supplementing our production with potassium chloride. So our per unit costs were higher this year as incremental tons we produce from that potassium chlorite route are more expensive than the solar pond-based feedstock tons. In addition, this is the first quarter to include the impact of our micronutrients business.

So to recap the outlook for our plant nutrition in the second half of 2014, we expect sales tons between 175,000 and 185,000 tons, including our micronutrient products, a little heavier weighted to the fourth quarter. Average selling price guidance of $725 to $750 per ton includes the heavier mix of micronutrient product sales from Wolf Trax in the third quarter than in the second quarter but does include a modest increase related to SOP only selling prices.

We expect our operating margin to remain consistent with last year's levels of between 20% and 30%, and this would be a significant improvement over last year’s pro forma improvement, which included an insurance settlement of $9 million in the fourth quarter last year. Without that benefit, operating margin in the second half was 20%, demonstrating our expectation of some significant margin expansion this year.

Now turning to our consolidated results and some corporate items, we reported a small net loss in the quarter of approximately $700,000. Our net income was reduced by $5.1 million after-tax from costs associated with the early redemption of our $100 million, 8% senior notes due in 2019. In June, we issued $250 million and 4.875% senior notes due in 10 years and used a portion of the proceeds to early redeem the 8% notes.

Because we upsized the offering, even with the lower interest rate we expect that our quarterly interest expense will pick up modestly for the rest of the year. Our net results for the second quarter were also negatively impacted by a year-to-date true-up to a higher expected full year effective tax rate. For the full year, we now expect the tax rate of around 26% compared to the prior forecast of near 24%. For accounting purposes, we trued up year-to-date results in the quarter. So therefore, we have a change in the full year rate estimate.

Selling, general and administrative costs were down just over $3 million this quarter compared to 2013 results, which included a $1.7 million uptick in corporate restructuring cost last year.

Cash flow from operations for the six months ending June 30 was a $161.8 million compared to $175.8 million in the prior year period, primarily reflecting year-over-year seasonal differences in working capital. Year-to-date the company has invested $49 million in capital expenditures. We expect spending to accelerate just a touch in the second half of the year as we begin spending on our multi-year shaft enhancement project at the Goderich mine. Currently, we expect to invest $110 million to $120 million for the full year of 2014.

Finally, our depreciation and amortization was $19 million for the quarter. This amount is expected to increase about $1 million per quarter for the remainder of 2014.

So with that, I will turn the call over to the operator, Aaron, for our Q&A session.

Question-and-Answer Session

Operator

(Operator Instructions) And we will take our first question from Jeff Zekauskas with JPMorgan.

Jeff Zekauskas - JPMorgan

Hi, good morning.

Rod Underdown

Good morning.

Jeff Zekauskas - JPMorgan

You spoke about your prices being up 20% for the bid season. Did you round it to the nearest 5%? Is 20% the best estimate or is it the number like 25% or 23% or 22%, a more accurate estimate?

Rod Underdown

Sure, Jeff. This is Rod. In a year like this, the range of price increases has been fairly wide. It's been a little more than 20% as we've gotten to this point in the bid season. And recognizing that there's just a little bit of time remaining, we didn't want to provide a specific point number. We certainly wouldn’t have provided a number of more than 20% unless we thought it was going to exceed that by the time we get to the end of the bid season. It has been more than 20% up until now. And I would say that gives us a little room once we report the final number, following the third quarter results.

Jeff Zekauskas - JPMorgan

So if your prices are supposed to be up, I don’t know 12% in the second half of ’14, or I don’t know, let’s assume that the fourth quarter price increases 12% than I don't know maybe average price increase for the first quarter of 2015, must be like I will call it 25% or some materially larger turnover. Is that right?

Rod Underdown

Jeff, I want to make sure that the 12%, we try to put that in proper context, the 12% is a weighted average across all of our salt products. That includes chemical in U.K., that are in highway deicing, that aren’t part of the North American bid season. It also includes all of our consumer and industrial salt products in that weighted average. So the 20-plus percent on the highway, on the North American highway bids factors in those actual expected bid season results that were run through the rest of our salt products aren’t increasing at those kind of rates. And so that’s where we get the weighted average of more than 12% for the second of the half year.

Jeff Zekauskas - JPMorgan

Okay. Why is your tax rate higher this year? What was the factors that seem to be driving it up?

Rod Underdown

Sure. Well, just a couple of things. Our primary tax jurisdictions are the U.S. and Canada and the U.K. Those all have different rates of corporate tax and there was a bit of a mix shift there towards our U.S., which is a higher tax rate. But you’ve probably also heard me in the past talk about how some of our rate benefits that we get that reduce our rate below the statutory rate are fixed. And so when we have a rising earnings expectation environment, those fixed benefits aren’t as significant to the rate as when earnings are going in the other direction. And so you know there's an element of VAT that also comes into play in that rate change.

Jeff Zekauskas - JPMorgan

Okay, great. Thank you so much.

Operator

And we'll take our next question from Mark Gulley with BGC Financial.

Mark Gulley - BGC Financial

Good morning. On the Salt segment, this is the first I can remember ever having to purchase competitor salt for the North America highway deicing season. Is that because your sales force maybe did a little bit too good of a job in getting volume, or the production shortfalls maybe in some of the mines, maybe help explain the need for the purchased salt?

Fran Malecha

Sure, Mark. It’s Fran. I mean, I think that it really points to the strength of the demand in the market and probably not just Compass’ production impacts but others as well. I mean. I suspect we’re all producing at or near capacity to fill that void, but the demand is still greater. And so the market is importing salt and I think we look at our customer base and our ability, our capability to do that, given our transportation agreements and our distribution capability, as something that makes a lot of sense for us to meet the demand to the extent we can this year and then go from there. So I think it’s just managing our customer base and trying to do that as effectively as possible in a fairly unique environment for us this season.

Mark Gulley - BGC Financial

And a second question. You were talking about the negative mix impact of having to sell more C&I product to bulk people. When your Buffalo plant is onstream, is that going to enable you to have a positive mix shift back to your own packaged products and then you kind of cut back on some of the low-margin stuff to the bulk guys?

Fran Malecha

Yeah. I think that's right. I mean, we’re always looking at our customer base and where we can get closer to the customer and expand those margins and earn the kind of returns that we look to earn on our capital investment, we’ll do that and Buffalo is an example of that.

Mark Gulley - BGC Financial

Okay. Thank you.

Fran Malecha

Welcome.

Operator

And we’ll take our next question from Chris Shaw with Monness, Crespi.

Chris Shaw - Monness, Crespi

Good morning everyone. How are you doing?

Fran Malecha

Good morning.

Chris Shaw - Monness, Crespi

Couple questions. About the volumes you think that might have got pushed out of 2Q to 3Q from customers fulfilling the remainders of the contract. Are you seeing that volume now or are you just assuming it’s going to happen, based on a rational business decision? I mean, is there potential that they just don’t and then they -- because their budgets are under some flux and they’re just waiting for that to happen, to actually be buying it later maybe under the new pricing. Is that possible?

Rod Underdown

Yeah, we -- it’s a good question, Chris. We actually haven’t seen it yet, I would say in July. From our perspective, if the customer doesn't make the right business decision and go ahead and purchase that salt under the contract that should be a net positive for us. It would free up those tons to be able to be allocated into the current better price environment in upcoming winter.

Our customers, we stay in contact with them. Some of them have told us the remainder of the contract they expect to purchase here in the third quarter. So we are talking about huge volumes but in order of magnitude on that uncertain portion is just south of couple of 100,000 tons. So in the scheme of things, not a huge amount but to a quarter like the second quarter, it’s meaningful just because it’s seasonally weakest quarter for our salt business.

Chris Shaw - Monness, Crespi

Okay. Maybe somewhat following up on Mark's question, with 25% of the bid season left. You are already accessing that additional capacity -- sorry, not additional capacity, but additional supplies from overseas. What happens to the last 25%? I mean, I assume there is a really -- as those last customers put out bids, there's a real even more tightening of the supply/demand. Are there going to be some customers that are going to be left without salt if they wait too long to have their bids done or does the pricing then accelerate from here? I'm just curious how the dynamics work at the end of a bid season.

Fran Malecha

Yeah, we’re nearing the end of the kind of the state-bidding process. There is certainly industrial customers and some other customers that are still looking to secure supplies for their upcoming season. And I think as we look at the last 25% or so to be priced -- and I think starting -- as the bid season starts back in April, you learn a lot as you go through it. And the market, certainly, I think, has done that as we’ve seen kind of escalation in pricing.

I would expect that. As we manage our customer base, we’ll do the best to supply those customers for the upcoming season. I would say if it’s a kind of an average winter, we would expect that our customers to find salt and are planning to set up for that and manage the pricing accordingly.

It’s a year where we’re resetting the market. And I think if you look back in history over last 10 or 15 years, you'll see years where you get some follow-on in the second year depending on the strength of the winter. I mean, we’re managing this business for -- certainly to optimize short term but the long term as well and are mindful of that as we price our customers throughout the season.

Chris Shaw - Monness, Crespi

Just a quick one, you mentioned again the, sort of, guidance that you first said at the Investor Day, more like 500 bps improvement in margins for salt next year. If pricing, sort of, comes in the way you think, is that now, I mean, with your sort of guidance for second half sort of a pretty good margin as well. Is that 500 bps on top of the, I guess, sort of expanded margin that you're seeing now in the second half?

Rod Underdown

Yeah, Chris, that’s a full year expectation. So if you look at, kind of, expectation based on our guidance for this year, we roughly be flat because the first quarter, first half was lower than the prior year in 2013.

Chris Shaw - Monness, Crespi

Okay. Thank you.

Operator

And we'll go next to Chris Parkinson with Credit Suisse.

Chris Parkinson - Credit Suisse

Thank you. You hit on this a little but can you offer a little more color on which regions within the U.S. are seeing the largest increases and then also, which regions remain in the 25% with still having bids outstanding? Thank you.

Fran Malecha

Yeah, Chris, this is Fran. I mean, we don’t talk about specific geographies and specific customers in terms of contracting. And I would just say that when you look at the state bids, which are tendered and those results are made public. I mean, that's basically almost complete and our industrial customers and some of the other customers from throughout our service area are continuing with the contract. So I wouldn't say it’s specific to anyone region anyways. But we just don’t really want to get into those geographic specifics when we talk about activity with our customers.

Chris Parkinson - Credit Suisse

Perfect. Fair enough. And just a quick follow-up, on the Ogden improvements in the second half of the year, can you just give a little bit more of a timeline regarding the benefits of that and how you expect them to roll through the first half of ‘15, and possibly the second half of ‘15? Thank you.

Fran Malecha

Sure. I think those capital projects will be initiated this back half of the year and depending there is a few projects that are depending on the timing and length to get them complete. That implementation will continue into the first half of the year. So I really wouldn't expect to see a significant yield change in Ogden as an example until I would probably get into the last half of ‘15.

The other thing we have to manage is as we take the plant up and down for maintenance, the timing of implementing those projects gets matched with that operating cycle. And we’re -- we want to make sure that we continue to produce as much as possible even as we go through those changes. So I would just anticipate more of that benefit being realized in the back half of ‘15.

Chris Parkinson - Credit Suisse

Perfect. Thank you.

Fran Malecha

You’re welcome.

Operator

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

Joel Jackson - BMO Capital Markets

Thanks. Good morning. Just want to follow up a little more on some of the pricing you’ve seen so. So we’ve seen obviously highly pricing. We’ve seen a lot of situations, at least I have where you've had single bidders winning at well above the award ranges last year. So what I know is, in your crystal ball here, if you look at the next year's bid season, which is a long way away -- is it reasonable to assume that prices would go back to the normal ranges, assuming normal weather and normal inventories and more bid situations or multi-bidder situations?

Fran Malecha

I mean, Joel, that’s pure speculation on our part or anybody’s part from that -- for that matter. I guess the way I think about it is the inventories for our customers and for producers are basically completely depleted going into this season. Production is being ramped up. We mentioned there’s some imports that are going to come in which we’re participating in. And I think it all boils down to winter and if we have a -- I would say normal or average winter or greater than, then that will certainly impact pricing in the next season as we just wouldn’t replenish or really be able to build much on inventories throughout the season heading into the following year.

So conversely, a mild winter would allow the market to probably build some inventory. So I think that's what you have to look at is as we get into late '14 and '15 until we really start to maybe get an idea of what pricing might be into '15. And if you go back and look at pricing as I mentioned earlier over last 10 or 15 years, I think you’ll see. And if you kind of look at those seasons, you'll see what can happen with follow-on winter seasons.

Joel Jackson - BMO Capital Markets

Okay. And also following up on the import questions. So, can you give us a sense of sort of types of volumes of imports you expect to buy, the types of prices you'll be paying? Will you be profitable on those purchases? And are you doing this because you did end up winning a lot of nontraditional business in some of the single bidder situations that maybe you didn't think you’re going to win, and you did?

Fran Malecha

We want to comment on the actual tons and the prices. I will say that two things, I guess, one, when you look at those tons in isolation, they are profitable tons. But we look at the business holistically and really setup to manage our customer base in the short term as well as in the future and we are looking to build our market share.

I think as we mentioned in June at the Investor Day over the next four to five years and want to make sure that we’re in position to do that. And I think imports in this current year will help us with that. So it’s not something that’s unplanned. We thought going into the season early that market would need more than it could supply through North American production.

I think we’re able to get on that early and continue to make those purchases effectively throughout the season and that includes a lot of logistical setup and requirements as well to get that product to the market. So I think our team has done a great job of that and will certainly help our customers get through this year and deliver more profit as a result for Compass for the entire season, if we had -- if the winter does progress on an average basis.

Joel Jackson - BMO Capital Markets

Okay. And finally just going through all the commentary you've made on this call, just do you think that in Q3 the preseason sales for highway deicing will be average, a little bit above average, below average; sort of putting it all together? Thanks.

Fran Malecha

Joel, I guess it depends on, again, our customers. Usually there is pre -- early season bids and those contracts typically allow the customer to take it any time between the contracts signing and October 31. Some years they tend to be early purchasing. Others years they wait towards the end. So, at this point, it’s hard for us to guide specifically about the third quarter number. That’s kind of why we did this second half guidance because all that potential timing noise is out of the system by then.

I will say that the early fill bids have been a bit larger than they have in the past and typically you would expect that government would want to make sure their supply is secured as they enter the winter. And many times that will result in a healthy bid of ordering earlier into those early bids, you know those preseason bids. But it’s too early to predict that at this point.

Joel Jackson - BMO Capital Markets

Just one more. Why do you think that the government entities are not taking advantage of buying under their maximums from last season, and instead paying 20% to 50% higher? Is it just straight budget when their funds are available?

Fran Malecha

Yeah. I don’t think we’re saying that they won’t take all the salt on the previous contracts. We just expected or anticipated them to do that a bit earlier and that those tons would have hit this quarter rather than the third quarter.

I mean, it’s in their best interest to take those tons and not leave them for higher pricing in the next season. I think it’s just timing. And as Rod mentioned, we’re talking about a couple 100,000 tons, which you know isn’t a lot, but does impact certainly to a greater degree on our second quarter than you would see on any other quarter. So it would be in their best interest to take those tons. We expect them to do that and certainly have a salt earmark for that at this point.

Joel Jackson - BMO Capital Markets

Okay, thank you. Thank you very much.

Fran Malecha

You’re welcome.

Operator

(Operator Instructions) And we'll go next to Bob Koort from Goldman Sachs.

Bob Koort - Goldman Sachs

Thanks very much. Good morning.

Fran Malecha

Good morning.

Bob Koort - Goldman Sachs

Fran, I guess I'm a little confused. So the folks that have deferred their purchases from when you expected to take them -- they will still be able to make those purchases under their prior contract terms. It's just going to happen more in the third quarter than the second quarter, is that right?

Fran Malecha

That’s correct. Those contracts -- everyone is a bit different on timing, but some may go through August and even early September. So by the third quarter, all those tons will either be picked up or will be moving on to new contracts by that time?

Bob Koort - Goldman Sachs

And the volumes of imported salt you are going to use, which port do those come into? Because I know in the past, you've talked about not really accessing the East Coast from a cost standpoint and that water transportation is critical to cost. So where will you receive those tons and where will they go?

Fran Malecha

I think the majority of those tons will come up through the southern markets, so come up through the Louisiana Gulf and make it up through the river system into the southern. That’s the majority of those tons. You may see some tons come up through the northern -- northeastern side. But I think the majority are going to come up from South.

Bob Koort - Goldman Sachs

And then my last one is, is there any hope of inking a long-term MOP contract that you can convert to SOP, given the price declines you've seen there? Would you consider doing it now? Do you think there's more room to file an MOP with some of the projects on the horizon? How do you think about sourcing your MOP for any medium-term or long-term contract opportunities?

Fran Malecha

That’s a great question. I mean -- we certainly think about that and as we look at our suppliers and talk to them, if the timing and the pricing was right for us. And we could construct an agreement that was longer term in nature, we would do that. And this is my personal -- from a personal standpoint, I think with the capacity that’s going to come online over the next one or two, maybe three years, I think bodes well for that type of an arrangement. And I think the pricing will be kind of attractive to us as well. So just the overall MOP pricing, I’m not expecting a huge run-up here over the next couple of season.

So we’re taking that today on a, kind of, more short-term and near- term contracts. That’s been working well for us with our suppliers and we have ongoing conversations for that supply and for as I mentioned for longer type opportunities, if they meet with our requirements.

Bob Koort - Goldman Sachs

Great, thanks.

Fran Malecha

Thank you.

Operator

And we'll go next to Eugene Fedotoff with KeyBanc Capital Markets.

Eugene Fedotoff - KeyBanc Capital Markets

Good morning guys. Just to follow up on a previous question, what's driving your assumption of higher SOP prices in the second half of the year?

Fran Malecha

Eugene, one of the things that that we mentioned is that there will be, we expect, some SOP price lift. However, the bigger effect on the prices that we’ve guided to is just that the Wolf Trax micronutrient business should be a larger, richer mix in the total. And so that is -- that's driving the topline gross price number higher, just on average.

Operator

And this does conclude today's question-and-answer session. I would like to turn the call back over to Theresa Womble for closing remarks.

Theresa Womble

Thank you, Aaron, and thank you, everyone, for joining us today. As usual, we invite you to contact our Investor Relations department with any additional question. Have a great day.

Operator

This concludes today’s conference. Thank you for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Compass Minerals' (CMP) CEO Fran Malecha on Q2 2014 Results - Earnings Call Transcript
This Transcript
All Transcripts