Compass Minerals' (CMP) CEO Fran Malecha on Q1 2018 Results - Earnings Call Transcript

Compass Minerals International, Inc. (NYSE:CMP) Q1 2018 Earnings Conference Call May 2, 2018 9:00 AM ET

Executives

Theresa Womble - Director of Investor Relations

Fran Malecha - President and Chief Executive Officer

Jamie Standen - Chief Financial Officer

Analysts

Vincent Anderson - Stifel

Dylan Campbell - Goldman Sachs

Joel Jackson - BMO Capital Markets

Christopher Shaw - Monness, Crespi, Hardt & Co.

Operator

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

Theresa Womble

Thank you, Anny. Good morning to all on the call. Today our CEO, Fran Malecha; and our CFO, Jamie Standen, will review our first quarter results and outlook for the remainder of the year.

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

The statements are based on our expectations as of today's date, May 2, 2018, and involve risks and uncertainties that could cause our actual results to differ materially. The differences to be caused by a number of factors including those we identify and 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.

Lastly our remarks also may contain non-GAAP financial disclosures which we feel are important to provide a full understanding of our business and operating conditions. We provide reconciliations of these measures in our earnings release and in our earnings presentation both of which are average on Investor Relations section of our website at Compassminerals.com.

Now, I will turn the call over to Fran.

Fran Malecha

Thank you, Theresa, and good morning. Revenue growth across each of our business segments drove over 13% year-over-year increase in first quarter of 2018 consolidated revenue.

Stronger sales in our salt business resulting from better winter weather activity in our deicing markets. Increased demand for special specialty nutrients in both Brazil and North America support sales growth in our plant nutrition business as well.

However, increased costs, particularly in our salt segment and our plant nutrition North America segment producer operating margins and resulted in a 36% decline in operating earnings compared to prior year results.

Despite the weakness in our operating and net earnings, we did generate strong growth in our cash flow from operations this quarter. As underlying fundamentals improve throughout our markets, we expect to be able to deliver more cash flow, given many of the strategic initiatives, we have undertaken.

Looking specifically at our salt segment, we believe market fundamentals and highly deicing portion of the salt business are improving. After two mild winters, we are pleased to see a return to more typical winter in North America.

Our sales in the first quarter also benefited from a strong contribution from the UK where demand was robust in the replenishment orders are expected to be strong throughout the summer for our customers.

While we don't typically discuss April snow activity, the snow events continue in the spring in many of our North American markets. In fact, our data indicate April winter events were more than four times the 10 year average in cities we track.

Overall we been pleased with the increase in sales volume throughout the first quarter and into April, but that’s balance a bit by the fact that we have been production constrained at our Goderich mine due to the ceiling fall last year and ramping up of a new continuous mining, continuous haulage system.

Overall, we think these developments are supportive of a stronger bid season in North America. There is one caveat and that is that many of our customers are seeking to take their current contract maximums in this quarter due to the expectations of upward price pressure. This dynamic might offset some of the expected growth in bid volumes.

So we feel very good about the demand side of the equation for the salt business. In terms of our production capabilities, we are facing the challenge of the strike at our Goderich mine, which was announced on Friday.

As I have stated in that announcement, we have been in negotiations with the union since early March and we believe we have made an excellent offer to our workers that recognizes their importance to our organization, while also representing the mine's current operational environment.

Specifically, our transformation of the mine with investment and continuous mining and continuous haulage. While we are clearly disappointed, the union decided to strike, I have been very pleased with our supervisors and management employees are executing our contingency plans.

As of Saturday, our team had continuous miners running underground, salt was being hoisted. Jamie will discuss a few of the financial details of the situation over moving forward and expect to maintain our original earnings outlook in the salt sales volumes for the full-year is also unchanged.

We also expect that the collective bargaining agreement we eventually reached with our employees with our Goderich employees will be an important component of getting where we need to production. In addition, we have made important progress on the new optical sorting equipment that will help us address the salt quality issues we have recently encountered.

Turning to plant nutrition, we continue to see steady improvement in our agricultural markets, even though weather has delayed application of fertilizers in some North American areas, our sales volumes in the quarter were above prior year results. Our earnings for the segment were pressured by increased production costs compared to the prior year, partially due to increase depreciation cost and selling some higher cost carryover inventory.

In South America, direct sales to farmers was strong in the quarter and sales to distributors improved for us, although competition in that sales channel has increased. We continue to focus on our proprietary higher value products, which deliver increased values to growers.

There are several unknowns in terms of how the agricultural market will continue to develop throughout 2018 given questions around tariffs and trade. We have yet to see any meaningful impact on our sales for the end markets we serve in North America.

Regardless, we feel that our geographic balance between South America and North America will serve us well during this period as Brazilian producers are likely to benefit from any U.S. tariff constraints on North American market.

This is why we remain pleased with our investment in South America, the products developed in Brazil and the commercial and ergonomics teams that support these product products have proven to be strong and continues to demonstrate their value in the marketplace.

In fact our results this quarter, which is typically a very low earnings quarter in the year were ahead of expectations. I’m extremely confident the team we have in place in Brazil and in our ability to increasingly leverage the advanced specialty products they have developed to grow our specialty plant nutrition business in North America and eventually beyond.

While some short-term challenge have offset the benefits of our investments and actions to reduce cost, we have demonstrated this quarter that Compass Minerals has the ability to generate solid cash flow from operations.

We are increasingly confident in our ability to deliver on our growth objectives in our salt and plant nutrition businesses. Given the positive developments we are seeing across those businesses. As market conditions continue to improve and as we execute on delivering value from the investments we have made, we expect to deliver increased free cash flow as we get into 2019 and beyond.

We intend to continue our disciplined approach to capital allocation as free cash flow increases. This approach focuses on returning value directly to shareholders paying down debt and improving our balance sheet and executing strategic value creating investments.

Before turning to questions from our callers, Jamie will review details of our financial results in our rest of 2018 outlook.

Jamie Standen

Thanks Fran. Before I jump into the segment discussions, I would like to discuss our free cash flow from operations and our leverage ratio as of the end of the first quarter. We generated cash flow from operations of the $173 million, which was up 37% increase from prior-year results.

We used approximately $125 million in trade working capital improvements during the quarter to pay down more than $110 million of debt. This allows us to reduce our leverage ratio as measured by our lenders to 4.1 times EBITDA. Overall, this quarter was a good reminder of our cash generation capability under more normal market conditions.

Now let's turn to Slide 8 and discuss the salt segment, which was the main driver behind our stronger cash flow generation. As Fran noted, winter weather was certainly more active this season compared to the prior two seasons and that boosted our Highway deicing sales.

In total salt segment revenue increased 15% year-over-year on a 22% increase in Highway deicing volumes, partially offset by a 7% decline in consumer and industrial sales volumes. Average selling prices for the segment declined 3% primarily due to our sales mix shifting in favor of Highway deicing sales, which have a lower average selling price.

Looking at the pricing for our two primary salt categories, Highway deicing pricing was essentially unchanged from prior year while consumer and industrial selling prices were up 6% year-over-year, due to price increases introduced throughout 2017.

Operating earnings for the quarter declined 25% compared to the 2017 first quarter as a result of two primary factors. First, as we discussed on our fourth quarter call we are experiencing inflationary pressures on our logistics costs stemming from higher freight rates and increased fuel costs.

The good news on this front is that we will consider these cost increases as we complete our bids for new Highway deicing contracts in North America. As many of you know, these bid prices include the cost to deliver salt to the customers locations.

The second primary factor which depressed earnings this quarter was related to the short-term costs primarily associated with the ceiling fall at Goderich mine last year. We recognized about 20 million of additional cost related to this incident which we previously outlined during our fourth quarter earnings call.

These costs include increase unit costs as a result of lower production levels at the Goderich mine, as well as the logistics cost of using salt from our Cote Blanche mine to serve customers in the Great Lakes.

Our underlying logistics costs which excluded the impact of the logical shipping were approximately 6% above prior year. We estimate there is only about three million of these incremental short-term distribution costs remaining and they should be incurred throughout the remainder of the year. We have also fully depleted the higher cost carryover inventory from 2017.

I would like to make one last comment on the salt business around our winter weather impact disclosure before turning to the plant nutrition North America segment. We estimated that variations from average winter weather provided a positive impact for the quarter of between $15 million and $20 million on salt revenue and $4 million to $8 million on salt operating earnings. When combined with the fourth quarter's negative winter impact, we estimate variations from average winter weather had a negligible impact on our sales and earnings this season.

Now turning to Slide 9 where we discuss our plant nutrition North America results. We generated 8% year-over-year revenue growth in the first quarter, driven primarily by increased sales volumes of both SOP and micronutrient products. Average selling prices declined modestly primarily due to lower micronutrient prices caused by sales mix.

Operating earnings for the quarter declined from prior-year results due to increased depreciation and an uptick in production costs as we sold SOP this quarter that included some tons produced with KCL versus last year when we were only selling pond-based SOP from our Ogden location.

Our logistics costs however, were lower than prior year due to the fact that we had more customer pickup orders and shipped more product directly to our customers, which reduced warehouse cost. That being said, our average SOP selling price was $583 per ton in the first quarter 2018 of about $20 versus the fourth quarter of 2017.

In our plant nutrition South America segment, revenue increased 8% from prior-year results on higher sales volumes of both agriculture and chemical solution products while pricing was stable. In local currency however, revenue increased 11%.

Operating earnings and EBITDA were ahead of our own internal expectations part of this was driven by increased selling into the distribution channel as Fran mentioned. In addition, we benefited in the chemical solutions business from the fact that one of our competitors in the water treatment market had a temporary production outage.

I would also like to mention that operating earnings and EBITDA would have been ahead of first quarter 2017 results. If you exclude the one-time benefit that we enjoyed last year from a purchase price adjustment. This prior-year benefit boosted our results by about 1.9 million.

On Slide 11, we discuss our outlook for our business segments focusing primarily on the second quarter. Our salt business is expected to benefit from the continuation of snow events in April, which will likely push Highway deicing sales volumes higher and keep revenue at or above prior year results.

Our operating margin is expected to improve from first-quarter results due to the absence of impacts from high-cost carryover inventory. Our full-year volume guidance remains unchanged despite the ongoing strike at Goderich. We have implemented a very thorough contingency plan focused on safely producing the salt needed to serve our customers. This includes a short-term plan to use management employees to produce for the next several weeks.

If the strike is prolonged, we plan to bring in contract workers to maintain production levels. That being said, we look forward to continued negotiations with union representatives in order to reach a new contract that supports our employees and allows us to optimize our mining operations.

While the length of the strike is uncertain, we estimate that the cost of our contingency plan is unlikely to reduce our full-year earnings expectations. Given this situation plus our ongoing gradual ramp-up of continuous mining and haulage system, we currently do not anticipate flexing up our production to match potential increases in deicing demand. This is the primary reason our volume outlook remains unchanged.

Plant nutrition North America sales are expected to be somewhat pressured by the challenging weather in North America. This has created a shortened application season for fertilizers, so we are expecting a modest decline in revenue from first-quarter results, although these sales are likely to be similar to prior year levels.

The operating margin for this segment is expected to be similar to the first quarter 2018 results. Many of the factors I have outlined impacting our operating income in the first quarter are expected to continue into the second quarter. Lastly, I would like to mention that our full-year volumes in this segment remain unchanged.

Plant nutrition South America outlook is fairly similar to what we expected at the beginning of the year. With a strengthening U.S. dollar and better soybean prices, we expect fertilizer demand in Brazil to be strong this year. The second quarter is seasonally weaker for agriculture sales as we noted in our presentation, but we are experiencing better sales so far this year in our distribution channel.

We have also updated several of our corporate items, which are outlined on Slide 12. Noted here is that we have increased our anticipated interest expense to reflects higher interest rates which are impacting the cost of our floating rate debt. Also, we are reducing our full-year view of capital expenditures for less than 100 million as oppose to the prior the prior range of 100 million to 110 million.

We are diligently monitoring every dollar of capital spending to make certain we are optimizing our investments and focusing on delivering returns on the capital we have already deployed. Given these factors, we expect normalized free cash flow before the dividend to be approximately 80 million in 2018.

This normalized free cash flow excludes approximately $70 million of transferred price settlement tax payments we expect to make later this year, which will largely be offset by a 2019 tax settlement refund of approximately $55 million.

In conclusion, we are very optimistic about the supply and demand dynamics which are shaping to be favorable this year in salt. In plant nutrition, we continue to make the appropriate investments in our people and enhanced commercialization efforts. And finally, we remain focused on driving waste out of the business and strengthening our balance sheet.

With that, I will turn the call over to Amy to begin the Q&A session.

Question-and-Answer Session

Operator

Thank you sir. [Operator Instructions] And will take our first question from Vincent Anderson with Stifel. Please go ahead, sir.

Vincent Anderson

So you are able to maintain the guidance despite the strike was the possibility of the strike already anticipated at your full-year guidance range or has your outlook improved enough elsewhere in the business to offset the strike impact.

Fran Malecha

Vincent this is Fran. As we mentioned in our remarks, we have been negotiating the agreement with the union for the last roughly a month. So coming into the year as we established our plans and our guidance, we weren’t anticipating a strike at that time, but I think there we are expecting improvements in other parts of the business and we expect to produce tons as Jamie mentioned as we go through the strike situation using management and third-party contractors. So this has been a good winter, so that's helpful, but I think we are tempering our enthusiasm by the improvement on the production side in terms of our forecasting.

Vincent Anderson

Okay that makes sense. And if you could clarify quickly you said earlier and I missed it. You would have otherwise captured additional tons in the following bid season if it not for the ramp-up of the continues mining units or the strike.

Fran Malecha

I think our production is as I mentioned, we are been prudent in our forecasting as we look forward here, because we are in this strike situation and we would expect that in normal circumstances our ability to ramp-up would have been greater.

Jamie Standen

Right. So given the strike circumstances we are being conservative and we don't feel like depending on how the bid season goes and those commitment levels. We don't feel like we can ramp up beyond what we had already planned to produce.

Vincent Anderson

And is there a point of no return on the strike or if it doesn't break you are held to the high-end of guidance for this year or if you are back in business by June for instance, you can participate. Is there any kind of timing that works accordingly.

Fran Malecha

That will just depend on the timing as you mentioned, because our bid season has begun and that will go through usually through July, and may be August. We end up with a few stragglers bid. So it would all be based on the timing of that bid season and keep in mind then it gets down to what the winter actually is and our ability when we are in season to meet our commitments and/or make some additional sales at that time. So we are managing the business, kind of with all those factors in front of us and hopeful that we will reach an agreement with our union employees and be back to more normal working conditions as soon as possible.

Vincent Anderson

Great thanks. If I could ask one more quick one on North American Ag. just in terms of the progress on commercializing your new product platform, do you have all the necessary people hired and trained at this point. Are there still some upfront costs associated with those products rollout work through this year?

Fran Malecha

I think we have pretty much the team in place both on the R&D side and on the sales and marketing side. So I wouldn't expect any additional cost or significant change in our cost to create and produce and deliver these products to the marketplace.

Vincent Anderson

Great. Thank you.

Fran Malecha

Thank you.

Operator

[Operator Instructions] And we will take our next question from [Mark Connoli] (Ph) with Stevens. Please go ahead.

Unidentified Analyst

Thank you. Fran can you give us a sense of the regulatory process and the cost and the other issues involved in bringing the [photochemical] (Ph) product into the U.S. and help us understand sort of how that processes is going to rollout.

Fran Malecha

Yes I mean most of those products I mean they have been approved and they have gone through that the registration process to initiate that business in North America. So I think now…

Unidentified Analyst

Is that finished?

Fran Malecha

Yes, I think we brought in about 19 product that we mentioned and so those products are in the market and our ability to sell them in North America, we have run through kind of those requirements to get them registered and be able to do that on an ongoing basis. So that really just get down to managing the production and logistics to meet our customer demands and that’s what we will continue to do going forward?

Unidentified Analyst

Okay. Second question, how much of your current North America Ag sales are California versus the rest of the market and is that mix going to change significantly as you integrate photochemical.

Fran Malecha

We don’t break our sales out by state or region or geography. We are heavier weight to California, especially in our SOP business and crops like almonds are the drivers there. So as the more specialty products grows, I would expect we would get continue diversity geographically across North America, both in terms of geography as I mentioned, but also crops and that’s really been part of our strategy from the onset.

Unidentified Analyst

Okay. And that’s really what I was looking for. Thank you.

Fran Malecha

Thank you.

Operator

We will hear next from Joel Jackson with BMO Capital Markets. Please go ahead Mr. Jackson. [Operator Instructions]. And we will move to our next question that is from Goldman Sachs we have Bob Koort.

Dylan Campbell

Hi this is Dylan Campbell on for Bob. Going back to the salt segment, I notice you guys delivered pretty strong revenue growth of 15% during the first quarter, but then in the second quarter it seems like at the midpoint of your guidance only it assumes mid-single digit type of growth despite saying that April was very strong snow season. Can you help me to bridge that kind of quarter-over-quarter or that growth rate implied in your guidance for second quarter?

Fran Malecha

Sure. So considering the change is interesting, because typically are operating margins are better in the first and fourth quarters than in the second and third because of the natural profitability of Highway versus C&I and so C&I makes a heavier weighting in the second and third quarter. So the fact that it's going up is actually unusual in and of itself and it's primarily driven by mix impact of C&I versus Highway. So we are selling more Highway tons, which is more profitable, which is helping drive that quarter higher and that's how I would help you kind of bridge that.

Dylan Campbell

Got it, thank you and were the higher freight cost from the Goderich mine any at all magnified by the [tightness] (Ph) risk currently seen in the freight markets?

Fran Malecha

Not really, are you talking about the illogical freight that we had to move?

Dylan Campbell

Yes, just the average logistics cost.

Fran Malecha

Yes, so there is natural rate inflation occurring across all modes of transportation. So it was kind of indirectly impacted, but the bulk of the cost of it is purely related to the illogical nature, not the actual freight rate.

Dylan Campbell

Got it. Thank you.

Fran Malecha

Thank you.

Operator

And we do have Mr. Jackson again from BMO capital markets. Mr. Jackson, your line is open.

Joel Jackson

So just think some concern that maybe what is going on in Goderich in the interest of continuous minors that some of the products that you are selling aren’t meetings spec. So are there any products right now that you are currently not able to spec on. How are you dealing with it, has it been fixed with the optical orders, what are those products and how might it get resolved?

Fran Malecha

Well I think, this is Fran. As we have been communicating over the past couple of quarters here we have had the quality issues at the mine, but not driven by truck or caused by the continuous minors, but more of the area of the mine that we are mining in and the geology that we are incurring is just including more off spec product than we have ever experienced there you know in the past.

So to deal with that, we have put screening and sorting equipment into operations at the mine, and we initiated and finish that projects as we did our annual shutdown which occurred in March. So now we are confidence going forward that we can deal with those quality issues and effectively meet our customer specs and some of those would be mainly into our chemical customers and in some cases to highways depending on the location just we are able to outer screen more refines underground and deliver those products to different spec that our customers demand and depending on - in Canada or the U.S. or different regions within those countries.

Joel Jackson

Okay. So some of the competitors are also talking about how the government customers are maxing it their optional tonnage is kind of the [81/20 or 81/30] (Ph), contract setups this quarter and just been higher pricing. So - bid seasons where produced inventories are low, but channel inventories are average or high. So would you expect bid volumes to be similar year-over-year or down, because it’s been a interesting dynamic, can you elaborate on that?

Fran Malecha

I can speak for us, not for our competitors. I think that we don't see our inventories above average and I think we have talked about the reason for that. Some of that being our production constraints at Goderich, but also simply good winter. So if you think about the last couple of years being mild and this winter being slightly above average, stronger certainly in the last two years and I think also more consistent from East to West in our geography and the eastern geography, that's a bit outside of the area that we serve. I would expect that levels to go up.

Joel Jackson

Just one more question. You talked about the screening the optical sorting at Goderich completed in March. In some of the stuff we see the union talk about [indiscernible] optical sorting only went in a few days before the strike hit. Is that true, have you been able to ramp up the optical sorting and screen to see what the issues, or is that something that have to wait to do after the full labor team is back.

Fran Malecha

As I mentioned, we put that equipment in during our annual shutdown which basically covered the month of March, it’s in line and operating.

Joel Jackson

Thank you.

Fran Malecha

You are welcome.

Operator

We will next hear form Chris Shaw with Monness, Crespi. Please go ahead.

Christopher Shaw

Good morning everybody. I just wanted to I guess ask questions or clarification from something earlier. I might have missed part of an answer. In regards to strike in the upcoming bid season and I guess volumes and I know you adjusted the - sort of 2018 levels, but I mean is the strike going to impact how you bid. I wasn’t sure if you are answering that you can only sort of have more, I guess the limited volume bidding ability if the strike persists. Did I hear that correctly?

Fran Malecha

I mean the way I would think about the upcoming bid season, which we are just beginning. So we are just starting to see bids and running through our normal process of how we assess the market and certainly our supply and that’s the heart of our strategy so that includes both production in the year plus inventory levels.

We are just beginning that process and as I mentioned on the call I expect that you would seem, given the winter that we have incurred, especially in the north that was either at or above average kind of across our region and into the east that we should see higher bid commitments and I would say just a more normal kind of distribution given the low patience of the mine.

That would be our expectation and we will continue to proceed through the bidding process and we always make kind of end season adjustments based on what is happening.

Christopher Shaw

You don’t really foresee any real constraint on your bidding based on you know the strike.

Fran Malecha

I think as Jamie mentioned in his remarks, given the fact that we are in this strike situation and producing through it, our ability to ramp up our production if the demand is there. We are being prudent on our guidance here and don’t think that we will be able to do that or do what we would normally do if the demand was there given that situation.

So if the demand is stronger that might limit our ability on some of the bids and then as I mentioned also later in the Q&A that it depends on winter and our production ultimately will be what it will be and that will determine our ability to maybe capture some end season demand if there is more that as we go through the winter.

Christopher Shaw

And is there any I mean like you did I guess in this past, is there any chance to sort of offset some of that with Louisiana production.

Fran Malecha

I think we will always layer into the line if you will North and South, we have increased our production in our Louisiana mine this year compared to last year. Most of that’s because the winter was stronger this year than last year in the markets that we serve, but I would expect that we might see that line move further North for us given the situation that we are in.

Christopher Shaw

Great. Thanks for the answer.

Fran Malecha

Thank you.

Operator

And from Credit Suisse we have Chris Parkinson. Please go ahead.

Unidentified Analyst

Hi good morning everyone. This is [indiscernible] on for Chris. I just had a quick question again kind of earlier we think at Goderich, in terms of the outline that you guys have previously put out for the cost savings you expected to achieve there as you ramped up I think if memory serves I think you are expecting something along the lines of kind of the incremental $10 million of savings in 2018 versus 2017. I'm wondering if recent development there have caused you to kind of reconsider this outlook or whether that's still consistent with what you are planning for in your guidance for this year?

Jamie Standen

Yes, so within our guidance as mentioned in the prepared remarks, we do continue to ramp up the CMCH equipment. So as we continue to go through that process, you know, we expect to see those savings materialize. It's difficult to say right now. It is a dynamic situation. If the union comes back that’s a different circumstance and than a current plan to have management run it and then bring in contract workers, but as those volumes increase and we ramp-up that equipment we do expect to see those savings, most of which would occur in the second half of the year, the $10 million I'm preferring to.

Unidentified Analyst

Right. Okay got it that makes sense. And then just another good question on the plant nutrition business, just wondering in terms of the margin outlook there, I know 2Q you are expecting still to have some of those kinds of lagging higher cost inventory in addition to the impact the higher DNA is having on margins there. I’m just wondering kind of when should we be through kind of the bulk of the higher cost inventory in that business and as you think about kind of the back half relative to what your guidance implies for the first half. Are you thinking about margins in the plant nutrition business or what should be the kind of the key drivers for you guys there.

Jamie Standen

Yes, sure. So it will deteriorate the costs rather will decline overtime here. That being said, as we continue to grow that business and start utilizing our incremental capacity which requires KCL, there is an impact from that as well. So on an EBITDA margin basis, we feel very good about ultimately getting this business up into the mid-30s EBITDA margins which is significantly higher than where we finished last year and 25. So this year feels similar to that area and then out into 2019 and forward, we can utilize the operating leverage as we continue to grow our sales volumes and drive that EBITDA margin into the mid 30s.

Unidentified Analyst

Got it. thanks Jamie. I appreciate that.

Operator

And from KeyBanc Capital Markets we will hear from [indiscernible]. Please go ahead.

Unidentified Analyst

Good morning. Can you remind us you know or maybe talk about how much higher you think pricing will be in the Highway deicing this bid season, given the cost pressures that you talked about just sort of how pricing should compared to maybe a normal year.

Fran Malecha

As I mentioned earlier, we just dig on the bidding seasons here and we aren’t talking about pricing at this time, our expectations around pricing. I think we have talked about winter and our view on inventories, but we won't actually be talking to the market about the pricing in the bid season until our next call, which consistent with past practice.

Unidentified Analyst

Okay, but it’s fair to assume then because of the pull forward you talked about in 2Q or the higher volumes that in the marketplace anyway there is expectations that pricing would be meaningfully higher, is that a…

Jamie Standen

We have made remarks that we like the supply and demand dynamics that are set up for the season. I mentioned in my remarks that core inflation in freight was up about 6% and that's not unique to us. So those are the data points that we have given you, we really don't making remarks on price specifically. We will give that on our second quarter earnings call, a status update on pricing, but we just don't have any more color to add this time.

Unidentified Analyst

Okay. Fair enough. And then just one plant nutrition South America, would you expect similar levels of profitability in the second half as you saw last year with typical seasonal benefit that you normally get and can you talk about the increased competition that you called out in your slide deck that you are seeing in the distribution channel and just a little more color around that if you expect that to weigh on profitability at all this year.

Fran Malecha

I think on that point we tend to see more of that volume, more of those sales in the first half than the last half of the year in Brazil, and in last half more of the sales are higher value products that go direct to farmers. So I think that's a positive and the environment in Brazil year-over-year I think is much more positive, because of commodity pricing, because of the currency and how that reflects in the pricing to growers.

And we expect a strong rest of the year in South America, we are growing sales there, we are growing sales in the areas that are important to us, so we expect that to continue throughout the year and I think it's really a sign and a reflection of our products and our people down there that are making that happen.

Unidentified Analyst

Great. That’s helpful. Thank you.

Fran Malecha

Thank you.

Operator

Follow-up question from Mark Connoli with Stephens.

Unidentified Analyst

Thank you just one more Fran. You mentioned more direct sales in Brazil, do you expect that proportion to move up or are the two sides sort of growing more or less the same?

Fran Malecha

The growth in the direct side is higher and it's really the growth in those higher value products which are more - a higher percentage goes direct to growers and through distribution, but we do utilize both channels as well. But I think that will pick-up certainly overtime.

Unidentified Analyst

Superb. Thank you.

Fran Malecha

Thank you.

Operator

That concludes today's question-and-answer session. At this time, I would like to turn the conference back to our speakers for additional or closing remarks.

Theresa Womble

Thank you, Amy, and thank you all for joining us today. Once again, we appreciate your interest in Compass Minerals. Feel free to the contact the Investor Relations department with any follow-up question. Thank you.

Operator

This concludes today's conference. Thank you for your participation. You may now disconnect.