Compass Minerals International's (CMP) CEO Fran Malecha on Q4 2015 Results - Earnings Call Transcript

| About: Compass Minerals (CMP)

Compass Minerals International, Inc. (NYSE:CMP)

Q4 2015 Earnings Conference Call

February 09, 2016 09:00 AM ET

Executives

Theresa Womble - Director of IR

Fran Malecha - President and CEO

Matthew Foulston - CFO

Analysts

Chris Parkinson - Credit Suisse

Bob Koort - Goldman Sachs

Garrett Nelson - BB&T Capital Markets

David Begleiter - Deutsche Bank

Eugene Fedotoff - KeyBanc Capital Markets

Joel Jackson - BMO Capital Markets

Chris Shaw - Monness, Crespi, Hardt & Company

Christopher Perrella - Bloomberg Intelligence

Operator

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

Theresa Womble

Thank you, Diana and good morning everyone. Today, we have Fran Malecha, our CEO; and Matthew Foulston, our CFO to review our fourth quarter and full year results as well as our outlook for 2016. Before I turn the call over to them, let me remind you that today’s discussions 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, February 09, 2016, and involve risks and uncertainties that could cause the company’s actual results to differ materially. These differences could be caused by a number of factors, including those identified in the Compass Minerals’ most recent Form 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.

Now, I’d like to turn the call over to Fran.

Fran Malecha

Thank you, Theresa. Good morning and thank you for joining our call today. As many of you know by reading our press release or looking at our investor presentation for this quarter Compass Minerals face some challenges as we exited 2015. Clearly most of these challenges fall under the category of things we can’t control. Things like the weather, the global economies impact on commodity prices or the strength of the U.S. dollar. We continues to make Compass Minerals a compelling investment though as the resilience we demonstrate through our earnings performance in the face of these headwinds.

I’d like to stress three key points that I hope you take away from this call today. First is our operational performance proved extremely important for us in order to offset weakness in our key markets despite lower sales in both businesses adjusted EBITDA margin increased for the quarter and the full year. We did this by executing on our margin maximization strategies and by working diligently to improve operating rates and efficiencies at our production facilities.

The second key point is that our investment plan is largely on track in terms of delivering on time and on budget projects. As you know we are in the middle of a significant capital plan and we are well on our way to completing the key projects that we expect will drive profitable long-term growth.

In addition this quarter we made an important plant nutrition investment by purchasing a 35% stake in Produquímica this is a leading specialty plant nutrition company in Brazil with a strong history of growth. This company is a great strategic fit for us because of the strong presence in one of the world’s most important agricultural markets where there is more opportunity for agricultural growth than potentially anywhere else in the world.

The company has an excellent portfolio of products and more than 50 years of history in the specialty plant nutrition business in Brazil. We hope to partner and learn from their expertise before taking full ownership of the company at some point between now and early 2019. The third key point here is that we’re taking the necessary steps to respond to the current market conditions and position the company for long-term success.

As Mathew will discuss shortly this will evolve more than the typical belt tightening around discretionary spending, we will be streamlining our management, moving ahead with the personnel reductions and Goderich related to continuous mining and taking every opportunity to maximize our assets in terms of human and physical resources in order to be as lean and agile as possible.

We believe these actions are not only necessary given current market conditions, but they are also important in order to increase our effectiveness and resilience going forward. We’re a strong company and I believe will be even stronger as a result of these actions. Before I get into our capital plan and where we stand with our goals of earnings and cash flow growth I’d like to review some of the drivers of our 2015 results.

Starting with the salt segment, winter weather was slightly mild than the first quarter and extremely mild in the fourth quarter in terms of both number of snow events and temperature. Even with limited demand for deicing products we still earned near record high EBITDA for the full year. The factors driving this result include the benefits of strong highway deicing pricing that we enjoyed for the first half of the year, a successful bid season which resulted in Compass Minerals regaining market share in profitable geographies, lower fuel prices throughout the year and improvements in our cost structure due to strong production rates for most of the year.

Most of these factors reflect our ability to effectively manage the things we can control and leverage our competitive advantages where possible. In our plant nutrition results you can see a growing impact from the downturn that has been affecting most other agricultural and fertilizer companies. With U.S. farm incomes at 13 year lows and a strong dollar environment pressure pricing and just about all agricultural inputs it’s been a difficult market for our products as well.

These developments are certainly impacting our business when growers aren’t buying N, P or K due to profitability concerns we see some of the same hesitation to purchase SOP and micronutrients. In addition to that demand pressure we’re experiencing more competition because of a strong dollar attracting European imports.

Further pressure on sales comes from the depressed price of MOP, which is increasing the threat of functional substitution on the less chloride sensitivity crops we serve. Despite near-term weakness we remain committed to the specialty plant nutrition market. Long-term macro-trends continue to support the need for more efficient and sustainable farm production and our products are well positioned to respond to this. That’s why we’ve invested in growing our SOP production capacity and that’s why we’re expanding our presence globally with the investment in Produquímica. Our efforts to reduce cost and streamline the organization will also increase our ability to leverage growth when the ag market does recover.

Moving on to our capital projects, I’d like to provide an update on the multiyear capital spending plan that we initiated back in 2014 and how we’re executing on that plan. The major capital projects we’ve outlined for the market are currently on budget if not better and are largely getting completed within the established timeline. We have shifted some of our spending related to the Goderich shaft relining from 2016 to 2017 in order to improve our near-term cash position. Even with this modification we continue to expect to access additional hoisting capacity by the 2017-2018 winter, should market demand require it.

We’ve also been able to reduce the total capital budget for the 2015 to 2018 period, including the $225 million that was spent this past year the current plan calls for about $100 million less in capital spending through 2018. We’re able to make this adjustment through more efficient execution, aggressive prioritization of smaller projects and the help of some modest foreign exchange benefits. The investment projects included here will be critical in achieving our 2018 goal of $500 million plus of EBITDA.

I am confident that we have the ability to overcome the near-term weakness in the ag factor, which has reduced some of our original assumptions for growth in the business. With the expected addition of Produquímica at some point between now and early 2019, we believe we have the opportunities available to reach our target.

With our investment plan largely complete by 2017 and our growth initiatives underway, we continue to expect increasingly robust free cash flow in 2017 and 2018. This cash will allow us to grow our dividend, reinvest in the business to ensure long-term growth and to explore other opportunities to return value to shareholders.

Now I’ll turn the call over to Matthew for a more detailed review of our financial results.

Matthew Foulston

Thanks, Brian and good morning, everyone. First the quick review of our consolidated results. Total sales and operating earnings in the quarter were 33% below 2014’s results. Adding a bit to Fran’s comments the two primary drivers for the decline were very mild winter weather in our North American and UK service areas in terms of both snow events and temperature on the salt side and weakness in the plant nutrition sales compared to very strong sales in the 2014 period.

For the full year, sales declined 14% while operating earnings and EBITDA were only 2% below prior year’s results, excluding the special item related to the Goderich insurance settlement, which occurred in the third quarter of 2014. These results represented operating and EBITDA margin growth of 2 points and 3 points respectively. The primary factors driving the profitability of the company for the year and the quarter despite top-line weakness have been the strong performance of our salt segment and healthy SOP prices, which have largely offset the planned higher SOP production costs, which I will discuss shortly.

If you are following with our presentation online, I’d like to move to slide 10 and review our salt results. Weather was not in our favor this quarter as snow events were near historical lows and temperature were near historic highs, not a good combination for deicing demand. As a result our sales volumes were 29% below 2014 results. As expected the average selling price for our products in the fourth quarter was also lower driven by lower highway deicing contract prices.

In addition, because we sold fewer terms of deicing products both in the highway business and the consumer and industrial business, our average selling price was negatively impacted by this less favorable product sales mix. While obviously we would have prefer to ship more salt this quarter we are pleased with the profitability of the tons we did sell. As you can see here our operating and the EBITDA margins expanded 2 points as a result of continued benefits from lower fuel cost and lower logistics cost from the freight logical customers we are serving as a result of our successful bidding strategy as well as a lower impact from imported salt and strong operating rates at our North American mines.

These profit drivers as well as improved highway deicing selling prices for the first half of the year also helped us achieve the second strongest full year salt earnings on record. In fact while salt segment revenue was 15% lower than in 2014 the business actually generated 2% more EBITDA and the margin percentage expanded 6 points when we exclude the benefit of the insurance settlement from 2014 results.

Turning to slide 12, I will review details of the plant nutrition segments’ performance. Plant nutrition revenue was down 34% on 41% lower sales volumes in the fourth quarter. General slowness throughout the ag factor and increased SOP import activity from Europe largely driven by the strength of the U.S. dollar kept sales low in the quarter. It is also likely that depressed MOP prices have increased some functional competition for SOP in crops that are less chloride sensitive.

These realities are what will be driving our price outlook for 2016, which I will discuss shortly. Earnings in this business remain pressured by higher production cost due to the planned use of more source potassium feedstock to supplement last year poor solar-pond harvest. Low sales volumes also drove cost higher, as fixed cost in the business was spread over fewer tons. This means that we will be entering 2016 with some high cost inventory that will continue to pressure our operating and EBITDA margins during the first-half of the year.

Our full year plant nutrition results, which is summarized on slide 13 were impacted by the severe decline in demand during the second half of the year. Offset partially by improve at average selling prices compared to 2014. Before I turn to our 2016 outlook if you look at slide 14 you can see how we performed versus our guidance. We equaled or beat guidance on all corporate items and had higher average selling prices in both segments. The fourth quarter story is really all about volume. We were extremely pleased with our margin performance in both segments given the lower than plant sales volumes in the quarter.

As we look to 2016 we expect to face some headwinds from the challenges that impacted our fourth quarter results. While there is still a good deal of winter ahead of us temperature and snowfall trends continue to mute de-icing demand. Despite the early mildness we expect to sell more salt in 2016 assuming normal winter weather for the remainder of the year.

Fran has outlined the key factors impacting our plant nutrition sales volumes and pricing. Let me take a few minutes to walk you through what’s impacting our margins in plant nutrition this year. Clearly we anticipate price having the largest impact on our profitability. The price adjustments we are planning for the first-half of the year drive about two-thirds of the margin compression in our guidance.

As I mentioned earlier because of the lower sales volumes in 2015 we have a significant amount of high cost inventory going into 2016. We expect this to have a large impact in the first quarter. Additional pressure on our margin expectations include higher royalties due to less use of purchase KCL in our feedstock in our 2016 production and increased distribution cost as we are storing more inventory in warehouses closer to our customers to improve service levels.

On the bright side we do have more pond-based feedstock from the 2015 solar season available for 2016 production. So we expect about of a $50 per ton decline in Ogden production costs as we get into the back half of the year resulting from less purchase feedstock. We anticipate that we will see about half of that amount in our reported results with the offset being a higher mix of Wolf Trax products.

We expect our operating margin in the second half of the year to improve significantly, but still remain the low 2015 levels. As Fran noted we have determined that market conditions want some aggressive action in order for us to offset the current weakness and build a more nimble efficient organization going forward. To that end we are reducing our workforce by about 150 people. Most of these reductions will occur in 2016.

Let me walk you through some of the key areas of focus for that reduction. The majority of the reductions are related to the implementation of continuous mining at Goderich. Because of the milder winter we are able to pull forward some of those reductions. The balance is expected to be achieved by the end of 2017. We are eliminating one shift at our UK mine and we plan to centralize and rationalize our support staff across the company.

In addition some management positions will be reduced as we seek to streamline our organization and speed up decision making. These actions are expected to save the company around $15 million annually once complete. Of that total about $9 million relates to the savings that were already anticipated from the expansion of continuous mining at Goderich. We expect these actions to result in a restructuring challenge of approximately $4 million in the first quarter and given the savings we expect the payback on the charge should be less than one year.

Now turning to our 2016 guidance summarized on slide 16. Salt sales volume of between 5.9 million and 6.3 million tons represents a modest increase over what we achieved in 2015. This increase is driven by the expectation of average winter weather for the remainder of the period coupled with the fact we want more highway deicing contracts for the current winter.

I’d like to draw your attention here to our operating margins outlook at a range of 26% to 28% we expect to significantly outperform the 2015 results. Drivers of this improvement include the positive impact of our freight-logical contracts following the success were 2015 highway deicing bid season, no impact from imported salt cost, we estimate that those were about $1.30 per ton in the first half of 2015 and lower fuel prices.

Summarizing our plant nutrition outlook, while we expect an increasing fully a sales volumes in the first half of the year, we are projecting a slight decline in sales volume from the prior year. The average selling price of our portfolio of products also is expected to decline driven primarily by lower SOP pricing. These expectations are consequently weighing on the segment’s operating margins.

As I've covered in some detail for the first half for the year our margin guidance is down significantly from the second half of 2015, but we do expect margins to improve in the second half of the year as we begin selling lower cost 2016 SOP production. With these factors in mind, we are establishing a full year EPS guidance range of $3.80 to $4.20 and this includes about $0.07 for the expected restructuring charge.

Before turning the call over to the operator for question-and-answer session, I’d like to recap some key points that make us very optimistic about Compass Minerals’ future despite the current business environment. We’ve demonstrated strong margin performance in the phase of short-term headwinds; we’re making excellent progress, executing our major CapEx projects and a significantly reduced capital spending while retaining the key elements of our investment plan, which will drive future growth.

We’ve made a strategic investment in Brazil, which gives us a foot hold in one of the most important agriculture regions in the world through a deal that provides a part to full ownership by early 2019 at the latest. We’ve taken the tough tactical decisions around right sizing our company to enhance our agility and meet the current challenges. And most importantly, we remain on track to reach our target of $500 million in EBITDA in 2018.

With that, I'll turn the call over to Dana.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] We’ll take our first question from Chris Parkinson with Credit Suisse.

Chris Parkinson

Perfect. Thank you very much. What type of discussions are you having with your SOP customers as the price of MOP continues to fall? I am sure it’s well understood the differences between potassium, sulfur and chloride, but how your customers really thinking about the subsequent spread at this point?

Fran Malecha

Sure Chris. This is Fran. I think if you look at our customer base there is a portion of that customer base that is growing crops that are sensitive to chloride. So it’s a different discussion I think with them on SOP and that spread that you talk about then it wouldn’t be with customers that are growing crops that maybe have some substitutability there. So, depending on that discussion, we’re looking at pricing relationship and in some cases we would be dropping our pricing more to compete with tons that we feel like we’ve watch to MOP due to that substitutability.

Chris Parkinson

Perfect. And just a quick follow-up, you mentioned the $50 cost reduction for Ogden beginning in the second half, can you just walk us through the cadence of this benefit as we head into the longer-term and just how should we really think about the intermediate to long-term cost now that you’re kind of closing in on that benefit? Thank you.

Matthew Foulston

Yeah. This is Matthew, Chris. As you know when we went into 2015 we were coming off a very poor solar-pond harvest and we talked about the magnitude of penalty that would burden us in 2015. With the very steep sales decline that really primarily occurred in the fourth quarter on SOP, we ended up carrying over some of that high cost inventory into 2016. So we think first half to the tail end of ‘15 cost to be about flat and then we start accessing materially the new harvest, which although below average was significantly better and that’s where we see this $50 improvement coming in.

Obviously, when you go into ‘17, we’re expecting at some point here return to normal weather and normal harvest out of Ogden and we think there is probably in the region of $20 to $30 of improvement yet to come when we get back to type of harvest.

Chris Parkinson

Perfect. Thank you very much.

Fran Malecha

And Chris if I just might add something there. We’re scheduled to complete our expansion at Ogden basically by the end of the year here. So as we move into 2017 the way that I think about and we’ve just gone back through the numbers is on our pond-based production which will maximize through this -- through the capital that we’re spending because we get additional capacity lift and we also get a better yield impact on all our pond tons.

So as we think about maximizing those pond tons of about 325,000 tons. Our cash cost should be around $200 a ton, our all in cost should be somewhere probably slightly less than $300. And we should be able to achieve maximum margin on those tons and fit into this non-chloride market effectively. The balance of our capacity we’ll be able to you just making the access sulfur from our ponds with KCL and that’s where that pricing relationship will be more important, but we’re confident that we can continue to meet the growth in the market, be the low cost producer and kind of hit those incremental tons with this KCL based production. And that’s how we look at the future. So as the ag business rebounds we’re going to be well positioned to take advantage of that.

Chris Parkinson

That’s great color, thank you.

Fran Malecha

You’re welcome.

Operator

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

Bob Koort

Thank you very much two quick questions. Fran first SOP and you mentioned the chloride sensitive and non-chloride sensitive markets is it possible to have a binary price structure there or you’re pressured on the non-chloride sensitive, but you maintain that nice healthy premium in the chloride sensitive application?

Fran Malecha

I would say it is possible, I think there is some regional differences in some parts of the U.S. As example take California it just has more of those non-chloride crops and so you can separate that from maybe other parts that have crops that are more chloride sensitive. But at the same time as we go through the distribution system that we go through that creates a bit of a challenge. So I think that’s something that we’ll need to continue to fine tune as we focus on our customer base and the supply chain partners that we’re using out there to reach those customers.

Bob Koort

Great. And the import pressure you’re feeling, I mean should we think of that as a function of currency issues mainly and an improvement in the euro would help there? Is it new capacity from competitors is it the competitors having their base fertilizer businesses really get hurt and forcing them to be more aggressive. Can you help us sort of characterize those components, which is maybe driving the changes?

Fran Malecha

I mean those may all be factors, but the significant factor is the exchange rate in currency. And that move in the euro over the past year has probably been…

Matthew Foulston

Close to 30%.

Fran Malecha

Close to 30%. So that’s really been the impact. And as we came into the fall last year, we made a conscious decision on SOP to hold our price and kind of see how this market plays out. And we’ve seen kind of the final leg down here on MOP and more of an impact from currency. And so I think that certainly impacted our volume. And producers may have been holding back on some purchase as well. So we think those are the three factors that impacted our volumes in the back half of ‘15 and we’ll just have to see all those volumes come back here in ‘16.

Bob Koort

And then last quick one on the guidance you’ve given for ‘16 coming out of very weak fourth quarter weather season. Does that assume for the balance of this winter you get normal weather or going forward or how do you think about that and maybe snow events so far in the quarter?

Fran Malecha

Yeah. The guidance that we’re giving today is based on normal weather plus normal snow events and normal temperatures from this date forward.

Bob Koort

Great, thank you very much.

Fran Malecha

You’re welcome.

Operator

[Operator Instructions] We’ll go next to Garrett Nelson with BB&T Capital Markets.

Garrett Nelson

Hi, good morning.

Fran Malecha

Good morning.

Garrett Nelson

On $100 million of CapEx savings are these savings are mainly related to the Goderich or Ogden or both?

Matthew Foulston

Hey Garrett this is Matthew. We’ve been taking a hard look at all of our CapEx project by project both the big projects and the smaller ones, underpin it we’ve gone through a very strict prioritization process and just been brutal on CapEx across the board here. So I think it’s everywhere clearly the biggest chunks came out of those two places.

Fran Malecha

I think as [indiscernible] just said I think if you look at the entire capital spend it was more heavily weighted to salt. And so there’s a bigger overall impact on salt and on Goderich where the majority of that salt spend has been initiating.

Garrett Nelson

Okay, great. And where does your inventory stand for both businesses right now is that a contributor to why you’re expecting higher shipments for both segments in 2016?

Matthew Foulston

This is Matthew again. Obviously we exited 2015 with higher inventory on both sides of the business it’s very difficult on salt to call how Q4 looks like until you get deep into December because it’s such a big month and then you’ve got a lag for notifying employees and then responding and taking production out which we acted on pretty quickly. So we did go out of 2015 with more salt inventory than we expected and accordingly we are addressing that with lower production in 2016. And similarly the demand fell off late in the year on the SOP side and we’re carrying about 30% more inventory than we normally like there which we’re planning to work off as we go through the year. As I mentioned we should certainly be through that high cost inventory by the time we get to the middle of the year here.

Garrett Nelson

Great, thanks a lot.

Operator

And we’ll go next to David Begleiter with Deutsche Bank.

David Begleiter

Thank you, good morning. Fran on your Brazilian acquisition can you discuss expectations for growth and margins in that business going forward? And looks like you pay about 7 times EBITDA is that how do you view that multiple in context of other acquisitions you’re looking at or have looked at?

Fran Malecha

Sure that business has a long history they’ve been in business down there for 50 years and I think over the last 10 years or so have shown significant growth and that’s really due to investments that they’ve made in new products and having people on the ground selling these products to growers they have a strong distribution system in Brazil, which is extremely important to reaching the market and continuing to tap in into that growth. So we look at this as a platform business for a specialty fertilizers in Brazil, they have got that kind of reach to the customer base down there and that’s driving and will continue to drive more growth in the future.

In the micronutrients business, globally it’s been growing in that 7% to 9% range and we would expect this business to meet or exceed that in Brazil, which is a growth market. So -- and the Brazilian ag economy has been strong through this past year or so and that getting the benefit of currency and continue to increase acres and continue to increase their use of nutrients as the soils down there are nearly as good from that standpoint as we find here in North America for comparison.

So we’re very bullish on the business and entering the market down there. In terms of the multiple we look on an enterprise value, multiple of about 9.5 times and that’s about where our complexes has historically traded. So we look at this as we’ve acquired a strategic foothold in the Brazilian market growth business, write down the fairway of our strategy at our current multiple and I think it’s a good investment that we can also build on as we go down the road.

David Begleiter

And why you think they’re willing to sell now at this time was it just their own cash needs or other excuse?

Fran Malecha

It’s hard to say -- to answer that exactly. The only thing I would say is that we spent about a year and half on this business with the owners, getting to know them, getting to understand it and this was the combination of that process. So that’s the only color that I would add there.

David Begleiter

And just last Fran on your salt margins given the step up we are seeing now in the first-half due to some good activities by you. Is this now a sustainable margin going forward for salt over the next couple of years?

Fran Malecha

We think so weather does impact this business and we do all seen the impact of that in the last quarter here. We think the measures that we’ve taken managing on margins more sustainable, we still think the long-term pricing over the long-term in this business is plus 3 or so percent and we’ve invested in our assets to continue to become more efficient and also through continuous mining at Goderich to lower our cost and that will take effect primarily in ‘17 forward. So we think out of there certainly sustainable and just the real strong cash flow generator well into the future.

David Begleiter

Thank you very much.

Fran Malecha

You’re welcome.

Operator

We’ll go next to Eugene Fedotoff with KeyBanc.

Eugene Fedotoff

Good morning, guys. Thanks for taking my questions. Couple of follow-ups on SOP prices, can you sort of comment about the current prices in SOP and your expectations the 645 to 675 level do you expect a gradual decline in pricing through first and second quarter or it’s more sort of going to be a drop in the first quarter?

Fran Malecha

It’s more of drop that’s the current now in the first quarter. So we’ve adjusted our pricing down as we’ve headed into the beginning of the year here in the spring planting season in our geographies and we expect to proceed from here.

Eugene Fedotoff

Got it. And just a follow-up. From the volume decline in SOP in 2015, can you comment on how much you think was driven by lower end market demand and how much was driven by increased import competition and at what prices do you think those import pressures will decline? Thanks.

Fran Malecha

I think as I commented earlier we think it’s a combination of the impact of currency that led to import competition to some substitutability that would have gone to the MOP market and also we think just maybe some delay from growers where they just delayed the decision in 2015 and we’ll look to purchase that SOP in 2016. So it’s a combination of those three and I think the other thing that’s impacting us maybe throughout the late fourth quarter and a bit here early in the first quarter has been, it has been wet in California. So that it appears like the drought is breaking maybe not totally broken, but certainly they are getting rainfall and that has maybe delayed some applications that might have gone down in the fall or early here in 2015. So that’s kind of a good news story long-term it just impacts more timing in short-term.

Eugene Fedotoff

And the volume assumption for 2016, do you expect any market recovery there or it’s all going to be driven by market share gains?

Fran Malecha

I don’t think it’s all market share gains. I think some of that’s market recovery for sure.

Eugene Fedotoff

Got it, thank you.

Fran Malecha

You're welcome.

Operator

[Operator Instructions] We will go next to Joel Jackson with BMO Capital Markets.

Joel Jackson

Hi, good morning. I thought I’d pursue a bit more the private [indiscernible] right. Can you talk about what the earnings contribution is in your guidance from that business in ‘16 and talk about the unique dynamic of that investment where the seller can buy you at as early as ‘17, but I believe you cannot buy them out until also they can buy out -- they can force you to buy out the stake as early as ‘17, but you can’t force until ‘19. Just talk about that dynamic and if that means you need to basically keep cash on your balance sheet in advance of not knowing exactly when you’ll notified of them buying out that or selling that remaining state. Thanks.

Fran Malecha

Okay. Let’s break that into a couple of pieces. I’ll take the first one. And when we -- sorry Joel, can you just go back to that first part of the question again. Just slipped out of my mind.

Joel Jackson

Okay. The first part of the question was what would you expect in your guidance of around $4 of EPS in the middle point.

Fran Malecha

Got it.

Joel Jackson

What is that model in for earnings contribution out of Brazil?

Matthew Foulston

Got it. We will be using the equity method for accounting for this. So we’ll be taking out 35% of their net income. And we’ll be operating on a quarter lag. So we’ll have three quarters of 35% of their net income, so it will be a low single-digit impact on our earnings.

Fran Malecha

And then Joe to answer your question on the food call [ph] provision that we agreed to. They do have the ability at the end of ‘16 and the end of ‘17 to sell the company the balance of the company to us. And in ‘18 they have related to sell we have the ability to buy the company from them. There is a notice period in there. So we will have ample time in regardless of when that happens from our perspective to ensure that we’ll have the appropriate financing in place and use our balance sheet accordingly. And we’re working closely with the group down there getting to know the business, the people and all that’s part of building relationship that does two things from our perspective. We’ll create a dialogue about when and if they are looking to sell the business to us and to we’ll service well because those are the people that today are managing that business we’ll continue to manage it going forward as we own the 100% and go through the integration process. So that’s kind of the dynamic there.

Joel Jackson

If I understand what you’re saying is the seller can only at the end of each calendar year exercise the option is a certain number of months or weeks of a notice period is that correct?

Fran Malecha

There is a notice period within the year and then they will be using the EBITDA that is generated in that year. So the transaction will close off of the EBITDA at the end of those years depending on when they -- if they trigger the notice period within the year. So within the year we’ll have -- then have ample period to prepare for closing of the transaction that would happen I would guess early in the following year.

Joel Jackson

And is your base case that you’re running right now that they would exercise that option at the end of ‘16 so you would have that business consolidated for most of ‘17 is that your base case?

Fran Malecha

It’s not our base case. I think we are looking at this as to what would happen if we acquired it and any one of those three years and plugging that into our thinking. But I wouldn’t say that our base case is to own this 100% this next year.

Joel Jackson

Okay. And then moving on your salt operating margin guidance the first half of the year is quite attractive I think 26%, 28% if I recall. I mean it looks like you are assuming some improvements in salt cost specifically in Q1 year-over-year. Can you maybe talk about what’s happening in the business to lower per ton salt cost because I know volumes are not going well because of the mild weather you think you’re at the higher to the fixed cost absorption issues in the per ton cost?

Matthew Foulston

I think in the first half of the year, we’re beginning to -- continuing to see good news shipping and handling. So the very favorable fuel price environment and oil price environment is certainly helping us. We also are getting some benefit from the U.S. dollar versus the Canadian dollar. As we’ve talked about when you chase it all the way down to EPS it tends to be relatively neutral within the year. But it certainly helps us on the cost line. And also we won’t any imported salt impact in 2016 and that hit us about a $1.30 a ton in ‘15. So we feel pretty good about the margin structure taking into account the production volumes and the selling prices, which are pretty locked and loaded going into the year.

Joel Jackson

Okay. And my final question is I mean, historically you don’t really give much guidance and where bid season will go for pricing and how could you know it, it’s only middle of February or beginning of February. It seems like when I look at your guidance, the midpoint of guidance would assume roughly a 5% decline expected decline in average highway deicing realized salt pricing. Can you maybe comment on what the midpoint of guidance assumes for bid season or maybe what the upper or lower end of the range imply, that would be very helpful?

Fran Malecha

Sure I don’t it’s the 5%. So we’re not assuming that so I’m not sure how you got to that and that maybe something to look at a later time with Theresa. So we’re not assuming that it’s too early to predict the pricing here, but we’re managing inventories and we have a view of where the market will end the year based this what we’re doing, what others may be doing given the mildness to-date and the [indiscernible] average going forward but there is also a bit of a mix issue that comes into play here as well. But we’re certainly not looking at this point time a 5% reduction in deicing pricing.

Joel Jackson

Thank you very much.

Fran Malecha

You’re welcome.

Operator

We’ll take our next question from Chris Shaw with Monness Crespi.

Chris Shaw

Yeah. Good morning everyone. How are you doing?

Fran Malecha

Good morning.

Chris Shaw

Just to go back to that question from earlier. Is there any way to quantify maybe total percent benefits in margin in salt the reduction in oil gas, the diesel cost for shipping I mean, how margin benefit has that been since I guess maybe from the top out here to the bottom?

Matthew Foulston

Yeah. This is Matthew. Let me kind of take that in two halves in ‘15, I would say we were down $0.50 to a buck in the first half, but we really saw some significant improvement in the second half while we’re probably down over $2 a ton on shipping and handling. So the fuel has really started to help us in the second half of the year. And obviously as we go into next year, we’re making a guess on oil like everyone and we’re thinking round about $40 a barrel going through next year.

Chris Shaw

Okay. And then on the 2018 outlook for plant nutrition, what sort of SOP price have you forecasted in that and the increase in profit from that segment?

Fran Malecha

We’re not disclosing that SOP price today. As I mentioned earlier, we have made an adjustment to our pricing here for the first half for the year and we think that will spur some more demand going forward and allow us to meet those net volume guidance that we’ve given.

Chris Shaw

Okay, fair enough. Thank you.

Fran Malecha

Thank you.

Operator

We’ll go next to Christopher Perrella with Bloomberg Intelligence.

Christopher Perrella

Good morning. Thank you for taking the call. Question on the SOP business you had mentioned that you’d place some of the tonnage close to the customer. Is that -- do you see that as more of a structural shift in the way the SOP business is going similar the way MOP is going or is that sort of a special tactic or strategy in light of the way the market has been behaving lately?

Fran Malecha

I think the work that we’ve done on SOP over the past couple of years has been to focus our supply on the best margin highest netback business and that had shifted some tons out of export markets more into the U.S. and then especially in the California where there is more chloride sensitive crops as close to our production facility in Ogden. So, that helps us to deliver to those customers consistently so when they need the product and despite the changes that we’ve talked about and the impact on SOP from a competitive standpoint with imports. We are the only producer in North America, we’re closest to our customers those value we think we deliver to those customers by being the consistent supplier year in, year out in the market.

Christopher Perrella

All right. And the competitive pressure from the SOP imports over from Europe is that mostly in the Mississippi river or the Eastern sea board or is some of that found its way over to the West Coast?

Fran Malecha

Majority would be on the Eastern side of the U.S. there has been, historically has been imports that do come into the West Coast as well.

Christopher Perrella

All right. And then the last question. With the put call option on Produquímica does that preclude you from doing a similar sized acquisition over the next one, two years if one presents itself or does that limit you or does eliminate you to bolt-on acquisitions in the near-term?

Fran Malecha

I don’t see that’s eliminating that possibility more we’re certainly spending time getting North market down there and the business that we’ve acquired a portion of spending a lot of time focusing on that as well as the current business. If other acquisitions opportunities come up that are attractive in the plant nutrition space we would certainly take a look at those.

Christopher Perrella

Alright, thank you very much.

Fran Malecha

You’re welcome.

Operator

And that does conclude today's question-and-answer session. I'd now like to turn the conference back over to Theresa Womble for any additional or concluding remarks.

Theresa Womble

Thank you, Dana and thank all of you for joining us today. If you have any additional questions feel free to follow-up with me and you can find my contact information on the Investor Relations website. Thank you.

Operator

Again, that does conclude today’s Compass Minerals Fourth Quarter Earnings Conference Call. We thank you for your participation.

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