Compass Minerals International, Inc.
Q1 2014 Earnings Call Transcript

Published: 29 Apr 2014

[Operator:]

Good day, and welcome to the Compass Minerals First Quarter Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Peggy Landon. Please go ahead, ma'am.

[Peggy Landon:]

Thank you, Jennifer. And thank you, all, for joining us this morning. I have with me here Fran Malecha, our President and CEO; and Rod Underdown, our CFO. 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, April 29, 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. Now I'll turn the call over to Fran.

[Francis J. Malecha:]

Thank you, Peggy, and good morning, everyone. I'm happy to report strong demand drove improvement for both of our businesses in the first quarter and lifted total company sales 10% above prior year results, while net income rose 8%. Adjusted EBITDA increased slightly from the prior year to $85.4 million as our EBITDA margin fell to 20% from 22% due to lower highway deicing prices, which I will discuss shortly. I'm sure many of you have experienced the severe winter weather throughout our core North American service area this winter, as snow events were substantially above long-term averages. This fueled a 9% increase in highway deicing sales volumes and the highest salt sales volumes since 2008. Mild weather in the U.K., however, hampered our ability to equal or surpass that record for our entire salt business. Highway Deicing revenue increased 2% above the prior-year quarter, as our average selling price for these products fell 6% due to the lower contract pricing that was established during last summer's bid season and we incurred some additional costs from serving our customer during this extreme frigid winter. Winter weather also had a very positive impact on our consumer and industrial business. We sold 22% more tons of these products this quarter compared to last year. This is the second quarter we've reported 20%-plus year-over-year growth and reflects the influence of winter weather on sales of our consumer and professional deicing products. And just like in our highway deicing business, we believe packaged deicing inventories at the customer level have been cleared out and the return to more typical weather-driven sales patterns will occur later this year. So our current expectations for this portion of the salt business includes solid volume growth of 10% for the second quarter, and we are optimistic that customers will place early orders for packaged deicing products later this year in preparation for next winter. Looking forward for the highway deicing business, this past winter certainly appears to have cleared the inventory overhang from the 2 prior mild winters at both the customer and producer level throughout the North American market. We expect that this will trigger a significant increase in the volumes requested by customers during the summer highway deicing bid season. At the very at least, we expect to return to levels that we achieved 3 years ago or could even be higher. And very few bid requests have been issued thus far, so we can't quantify the expected total market volume increase at this time, but our expectations are for at least a 10% improvement. In addition, we won't talk specifically to projected pricing without having actual bids completed. If we step back and look at history, pricing for the industry has a long-term growth rate between 3% and 4%. The price change for any given year really falls on that trend line, as the weather experience of one winter often has a directional influence on where price lands for the next winter. So while we are optimistic about the improved market dynamics for this coming bid -- in this coming bid season, we will not be able to make definitive comments on price until later in the summer. Thus, I will limit the discussion of our salt segment outlook to the second quarter. We expect salt volumes to increase 10% from last year's results, but our average selling price is expected to continue to trend about 4% lower, similar to the results we reported in the first quarter as we experienced the final effects of the prior bid season. As a result, we expect a segment operating margin of 9% to 10% in the second quarter. In our specialty fertilizer business, we have several positive developments to note. First, solid demand for our sulfate of potash continued in North America. Our sales volume total of 107,000 tons marked a first quarter record for domestic sales volume. That segment revenues we generated were a first quarter record as well. Our average selling price of $616 a ton was essentially unchanged from the prior year, and demonstrated again that we've been successfully marketing the value of our SOP that it provides in terms of improved yield and quality. With a strong start to the year, we have raised our full year outlook for SOP sales volume by about 20,000 tons to range between 370,000 to 390,000 tons. And specifically, in the second quarter, we expect to sell 90,000 tons, expect our second quarter average selling price to increase sequentially to $635 per ton. We expect per unit SOP cost to hold steady with first quarter levels, which should yield an operating margin of between 25% and 27%. We have continued to augment our production of a supplemental KCl to improve selling volumes and to continue our steady growth in the North American market. While those incremental sales are at attractive margins, this has and will suppress our near-term operating margin percentage. We are producing more tons at our Ogden operations than we ever have from pond-based feedstock, but still have lower yields than designed, which elevates cost beyond what we had expected. We continue to pursue a variety of process improvements to restore yield rates and, ultimately, lower costs. We will provide further updates on this as we progress. We're also excited to have completed our acquisition of Wolf Trax on April 1. This addition to our company allows us to expand and strengthen our portfolio of plant nutrition products. Wolf Trax has been an innovator in the micro nutrient market by offering technology-driven products with a strong value proposition to retailers and growers. Their unique Dry Dispersible Powder nutrients provides superior uptake by crops and allows retailers and growers flexibility in marketing specialty prescription blends to match soil and crop needs, and the unique formulation of the nutrients allows the growers to use smaller amounts in their applications than competing products. So we look to build on the existing platform of Wolf Trax products with several new products scheduled to launch later this year and next year, then there are others in the pipeline. We expect Wolf Trax to be accretive to earnings during the next 12 months. Our acquisition of Wolf Trax and entry into the micronutrients market is the first step in our strategy to expand and balance our specialty fertilizer revenue stream. We continue to evaluate the proper scope and capital requirements for an expansion of our SOP production capability at the Great Salt Lake. We intend to develop an expansion strategy that matches the needs of the SOP market as we fine-tune our operations there. And when we consider any potential expansion projects, we would pursue, we continue to believe that the scalability of our Ogden operation and our proven technical -- technological approaches are the best at preventing significant market disruption. So now, I'll turn the call over to Rod for a closer look at our financial results.

[Rodney L. Underdown:]

Yes, thank you, Fran. And I'll start this morning with a recap of our salt segment results, where, again, we believe the winter provided a pivot towards better business dynamics for the remainder of 2014. As Fran discussed, the strong winter weather demand pushed total sales up 8% to $353.2 million. This improvement resulted from higher deicing sales volumes of both highway and consumer uses for salt. These higher volumes also helped to lower our per unit operating cost from the prior year, despite the impact of a negative mix on that metric. Salt operating earnings for the quarter were modestly lower than in the first quarter of 2013. And as Fran mentioned, by far, the most significant factor in the limited earnings leverage from the higher sales volumes was the lower average selling price for our highway deicing salt. The prices we achieved this quarter were established during the bid season last year and reflect the impact of 2 consecutive mild winters. Those bid results will continue to influence our average selling price through the second quarter. In addition, the first quarter highway deicing price was negatively impacted about 1%, by weakness in the Canadian dollar. A few other factors also impacted our salt segment earnings. We incurred incremental costs due to extreme winter conditions, including about $2 million for some contractual service shortfalls. And the year-over-year increase in sales of consumer deicing products improved our operating earnings, but had a compressing impact on our reported operating margin percentage. Now, these products have higher prices, but also higher costs. Lastly, consumer and industrial -- or excuse me, last year, consumer and industrial sales represented about 11% of salt sales volumes, while this quarter, they represented 16%. Every winter quarter, as most of you know, we report the estimated impact of deviations from normal winter weather on our sales and earnings. This quarter, we estimate that above average winter weather conditions contributed about $40 million to $50 million to salt segment sales, and $8 million to $12 million to our operating earnings. Both of these estimates impact -- estimated impacts are larger than last year's first quarter impacts and reflect many factors, including the role of awarded volume and pricing from last year's bidding. And as always, I like to remind everyone that we use a consistent methodology from year to year for these calculations. We use long-term data that analyze highway deicing sales volumes deviations from contractual commitment volumes, as well as actual sales in comparison to average consumer and commercial deicing volumes. So before turning to specialty fertilizer, I'd like to give a few details around the salt segment guidance Fran spoke of moments ago. We do expect strong sales of consumer and industrial salt as the demand for packaged deicing products is likely to remain robust and retailers look to restock inventories after such a severe winter. This will have a more significant impact on the second and third quarters than it will the fourth quarter, which is more driven by in-season winter weather demand. We do expect to run salt operations at or near capacity, which should further improve our salt cost. We're expecting a higher relative portion of salt sales to consumer and industrial customers later this year, and this product mix exchange will increase both our salt segment average per unit cost and price in the second half of 2014. So our outlook for the second half of the year does remain positive, but we can't quantify the highway deicing expectations until we get further into the bid season. But to put our current thinking on expected volume increases into context, I'd like to take a moment to recap the recent history of bid season results. The summer of 2011 was really our last normal deicing bid cycle. Although for us, it was somewhat curtailed at the end by the Goderich tornado that year. As the winter of 2011-12 unfolded, it proved to be one of the mildest on record in North America. And for the first time, since I've been at Compass, we were talking about significant and unusual carryover inventories at the customer level. As a result, customer bid requests in the 2012 bid season fell dramatically around 20%. Average pricing for these contracts declined 2%. Now when you factor in the combined bid volume reduction with higher-than-normal producer inventories that existed coming out of that '11, '12 winter, we were somewhat pleased with a 2% lower price result. Then, the winter of 2012-13, season got off to a very slow start, but it did end strong last year. Still, snow events for the full season remained below long-term averages. So not all customers had worked through their salt inventories, and the supply demand for deicing salt remain imbalanced entering the 2013 bid season. While we did achieve a partial rebound in bid volumes, we did not return near the 2011-12 levels and the average price, again, uncharacteristically fell another 3% for us due to, in our view, that continuing imbalance. What makes us optimistic this year is that the severe winter has now depleted essentially all customer inventories. So municipalities, counties and states should increase their bid volumes to be prepared for next winter. We expect that requested bid volumes will recover at least 10% to the 2011, 2012 levels at a minimum. But whether or not they move above that will only be known when a significant number of bid requests become available well into the bid season. We also experienced, in the past, a fully depleted inventory situation throughout our core North American markets, that it does put a strain on the existing capacity of salt mines to supply the market-wide bid season request. In our view, that was the primary factor supporting healthy price gains we achieved in the bid seasons of 2008 and 2003, both of which followed severe winters. So now turning to the specialty fertilizer segment, sales increased 22% to $69.5 million, strong seasonal demand pushed sales volumes to 107,000 tons, up 22% from the first quarter of 2013, while our average selling price remained steady with the prior year quarter, at $616 per ton. Unfortunately, higher per unit costs this quarter compared to last year pressured our operating margin. As a result, the specialty fertilizer segment earnings of $16 million -- $16.3 million were about 6% above last year. The higher Q1 costs largely resulted from our decision to purchase KCl in order to increase our production at the Great Salt Lake through a process that is unique to this facility. We began converting potassium chloride into SOP last year in the third quarter of 2013. And as we've discussed in the past, this is a higher cost production method, but at the current price difference between SOP and MOP, it makes solid economic sense for us. In addition, it has allowed us to fully serve the growing demand in the domestic market that resulted from the customer's knowledge of the value of SOP. It is important to note that we are producing record levels of SOP from our pond-based feedstock now in Ogden and our solar pond-based unit costs were below prior year costs in the first quarter. We expect to see further improvements in per unit costs as the year progresses, which should provide a lift in operating margin percentages later in the year. And we continue to expect that our full year per unit operating costs, including increasing amounts of KCl conversion compared to prior year, will decline. In addition, the Wolf Trax acquisition closed April 1. Due to the acquisition and purchase accounting allocations, we do not expect any accretion in the second quarter. We expect the Wolf Trax acquisition to make contributions to earnings in the second half of 2014. Now before closing, I'll discuss some other items influencing our income statement. Interest expense for the quarter held steady at $4.4 million. We reported other income this quarter of just over $3 million, as a result of foreign exchange gains, primarily due to the weakening of the Canadian dollar. Our tax rate for the quarter was 24%. And for the full year, we expect the rate of approximately 25%. Higher collections from seasonal deicing sales and other non-cash working capital changes pushed cash flow from operations 25% above prior year results. We invested $25 million of capital expenditures to maintain our assets, and we expect around $75 million for the remainder of the year. This does exclude the investment in the Wolf Trax, which we funded with cash on hand. Depreciation and amortization totaled $18.4 million, within the range of our guidance. We do expect a similar quarterly rate for the remainder of the year, excluding any incremental amortization of Wolf Trax assets. And lastly, our corporate and other expenses was $12.8 million in the first quarter, compared to $13.3 million in the year-ago quarter. We continue to expect full year corporate and other expenses of about $50 million. And so with that, I'll turn the call back to the operator for our Q&A session. Jennifer?

[Operator:]

[Operator Instructions] And we will take our first question from Chris Parkinson from Crédit Suisse.

[Christopher S. Parkinson:]

It's fairly clear that a lack-luster winter in the U.K. held your volumes back on the salt front. Can you give us a little more color on the year-over-year comps in this business? And also how this fits in onto your, let's say, intermediate and longer-term outlook over the next year or so?

[Rodney L. Underdown:]

Sure. Thanks, Chris. Yes, I mean, we've always described our U.K. business was about 10% of our highway sales or about $1 million tons roughly. And most of that, in a typical year -- I shouldn't say most, but a large percentage of that would be sold in the first quarter. It was very, very mild in the U.K. and sales were very low there. The good thing about the U.K. is that there's no, really, carry forward into the next winter. So to the extent winter returns in the fourth quarter next year, we would expect volumes consistent with a normal year there. So we don't expect any long-term effect. And the bidding market is a bit different there, and so it shouldn't have any long-term repercussions.

[Operator:]

And our next question comes from Chris Shaw from Monness, Crespi.

[Christopher L. Shaw:]

I was just reading -- it was just an anecdotal example of one town was talking about their upcoming bid for the next season. And one thing they mentioned was that they were shrinking the range. So instead of 80% to 120%, they were going to do 90% to 110%. And I forget the exact reasoning. Is that something you think could happen more with customers this year? And have you seen that happen in -- like this in past years following a tough winter like 2008, 2003?

[Francis J. Malecha:]

This is Fran. I mean, I think every state is a bit different on those percentages, and may have a different view on kind of the risk reward of maintaining those ranges. I don't think we'll see a material shift on that in the year ahead. And kind of with the winter that happened, the depletion of inventories and what kind of could happen in a real severe winter, I doubt that our customers would be looking to narrow those ranges at all.

[Christopher L. Shaw:]

So there's no -- I mean, they were -- this town was suggesting it's a benefit to them. I don't seem to remember what their exact reasoning was. But there's a -- do you see a benefit for them? Or do you think actually that it's worse for them do that?

[Francis J. Malecha:]

I think it allows them the flexibility, given the variability that can happen with winter to manage their requirements. And so I would expect it across the board, kind of across our geography to remain unchanged. It doesn't mean that you wouldn’t have a community or municipality that might have a different view. And every municipality out there has different storage capabilities and things like that, that may impact their specific needs or requirements.

[Christopher L. Shaw:]

Just curiously, if -- for the narrower ranges, would that be something that you would typically, all other things being equal, something you would bid higher -- I'm sorry, bid lower for? I just think that a tighter range, I think, would be favorable for you guys, right?

[Francis J. Malecha:]

Well, I think a tighter range would be favorable for us, if you just looked at that one component. I think you're right there. Obviously, the risk that we have to produce to those maximums, there's a cost to that. There's a cost to carrying larger inventories through the system, but that cost is offset by the benefit of having those stocks there, if and when needed. So I think, it -- it all gets down to risk reward, and I think we always are mindful of that and want to make sure that we're pricing the business commensurate with that, with the risk that we're taking.

[Operator:]

And next we will hear from Ivan Marcuse from KeyBanc Capital Markets.

[Ivan M. Marcuse:]

Do you look at your mines -- you talked about how you'll be able to run these -- run your salt mines full out come for 2014. If you look back at 2009 after the 2007, 2008, you were sort of in this $29 per ton unit operating cost. Is that sort of how to think about -- and I assume you're running at full out there, is there anything different that -- comparing 2009 until -- to today? Or how do you sort of expect unit operating cost to trend...

[Rodney L. Underdown:]

Sure, Ivan. I think a couple of things that are -- of course, there's been some inflationary factors that you'd want to factor in. The other thing that I mentioned in my remarks in our -- and we mentioned in our remarks is that we expect just in a normal winter, average winter situation for the rest of the year, that our consumer and industrial products are going to become a larger percentage of the mix. And that's because, really, highway sales are more driven by whatever the winter event result were -- or require for our customers. The consumer deicing business becomes one more of an early restocking and retailers and others kind of getting ready for winter. And so that the timing of sale for the winter and for preparation of the winter, does vary between consumer deicing customers and the highway customers. So I mentioned in my remarks that we expect a positive impact on average price from that mix, but there's also a higher average cost associated with that. Having said that, we do expect that if we were to break down costs by subsegment within the rock salt and the consumer salt, we expect lower costs year-over-year.

[Ivan M. Marcuse:]

Got you. But all in, you would -- I'll just follow-up with you after the call in regards to that. And then as a follow-up, if you look at your -- on the Wolf Trax acquisition, you mentioned that it was -- this is sort of your first in sort of a first step in -- further expanding your fertilizer business. So how do you look at doing other type of Wolf Trax-type of acquisitions that may be outside of SOP going forward? And also as a part 2 of that question, does your 25% to 27% margin in the fertilizer for the second quarter, does that include the impact of Wolf Trax?

[Francis J. Malecha:]

This is Fran. When we look at Wolf Trax, this is actually is a -- was an acquisition that is still a specialty fertilizer business with a margin profile that's equal to or better than our SOP business. But it gets us on more acres, gets us on different crops, expands our geography. At the same time, we think there's opportunity to include that technology on SOP blends and create more value for our current customers or allow us to extend our reach on these crops that we're currently meeting customers' needs on. So it's a great fit from that standpoint. And we're just a month into this business, but already hitting the ground running and working on some of those things that I just mentioned in terms of SOP blends and whatnot. So positive for us to expand this business. And if there's other acquisition opportunities out there, I mean, we would consider them. This -- that micronutrients base is fragmented, and so the real driver, from my perspective, is the technology and the differentiation that technology brings to customers. And Wolf Trax, we felt, was the best at that in the industry. We can build on that organically and we plan to, continue to drive increased sales and do more business. If there's other acquisition opportunities that fit, we'll consider them at the appropriate time. And in terms of the -- Rod, maybe you want to answer the question on the margin percentage?

[Rodney L. Underdown:]

Yes. Yes, Ivan, and that guidance would be, including both our historical SOP business, as well as the Wolf Trax business, combined.

[Ivan M. Marcuse:]

And that includes the costs associated with the acquisition, sort of the one-time, or I guess, one-time acquisition cost?

[Rodney L. Underdown:]

Yes, that's right. The accounting effects that you must take -- that we must take into account, yes.

[Ivan M. Marcuse:]

Great. And then, last quick question on the EBITDA of the Wolf Trax. I think you said it was around $8 million or expected to be $8 million in your presentation. How much that is DA?

[Rodney L. Underdown:]

Well, we are in the process of finalizing our accounting purchase allocation there, and so we aren't in a position to really talk about knowing that exact figure at this point.

[Operator:]

Our next question comes from Mark Gulley from BGC Financial.

[Mark R. Gulley:]

Fran, you may have already addressed this in connection with the question regarding future acquisitions in micronutrient. But I'm wondering, and I know it's early days, there's a bit of windfall in terms of earning from the prior 3 quarters that are affected by the winter in the upcoming one. Have you thought about maybe returning -- in terms of return on capital -- return of capital to shareholders in the form of a share buyback? Perhaps, turning some of that, what I'll call, windfall over to shareholders?

[Francis J. Malecha:]

Sure, Mark. Thanks for the question. First off, I'd say I don't actually consider it a windfall. We look at our business as being maybe suppressed in fall for the last couple of years and getting back to more normal driven by this above average winter. So we expect that we'll continue to drive earnings and cash flow going forward appropriately. Having said that, in terms of our approach on allocating capital and investments, as I'm sure you know, we've increased our dividend every year over the last 10 years. And just recently did that again this past year. And so that's kind of the top of the pyramid as we look at uses of cash. And then, we look at internal investments, and after internal investments, acquisitions that are accretive and all those investments have to exceed our -- meet or exceed our cost of capital. And then after that, we would look at ways to return cash to shareholders through other means. So the hierarchie's in place. And when we look at investments, we always are mindful of and compare that to returning that cash to shareholders. So I don't anticipate any change in our approach. We're going to be disciplined in our use of cash to make sure our analysis is sound, and then we're going to act decisively to deploy the cash.

[Mark R. Gulley:]

And then this is the most optimistic you've sounded about the Great Salt Lake operation for some time. Yields are getting better, you've increased your deice per shipment, so this is a fairly positive backdrop. Are you any closer to making a decision on expanding the pond capacity?

[Rodney L. Underdown:]

Yes, we're -- we continue to feel real good about the business that we're building here. And as you mentioned, the demand increased. I mean, the volume increase for us is really driven by our approach with customers in achieving more value for them and the value then that we achieve from our products. That continues to build over time, I think, in a sustainable way. And as we build those volumes, the -- we certainly think there is an opportunity to convert those volumes from kind of the interim step, from my perspective, of upgrading KCl to the more permanent -- through our SOP process. So we're moving that forward and certainly getting, I think, closer to a decision on that. And I think, as we talked in the past call or 2, it doesn't have to be just a one-time large uptick. It can be staged as well. And so we want to make sure that we get that right. And then as I said earlier, once we make a decision, we'll move quickly to employ whatever decision we make. So we're confident in the way we're building this business. And think that we certainly have the best opportunity with our process at the Great Salt Lake to continue to match capacity with that demand growth.

[Operator:]

And next we have David Begleiter from Deutsche Bank.

[David L. Begleiter:]

Fran, in highway deicing, how do you think about the market share and in terms of how it's been trending? And how are you looking at this upcoming year in terms of balancing perhaps gaining back some share versus the push in price?

[Francis J. Malecha:]

Yes, I think over the last probably 3, 4 years, now our share's been declining. And certainly, over time, we plan to call that share back and do that in a disciplined way. I think we probably lost 1% or so share of the market over the last 4 years. The five years has been -- and our plans are to call that back. This year is going to be interesting because most likely, the market's going to be challenged to supply -- to produce and supply all the salt required. And so we're -- as we get into the bidding season, obviously, we're going to manage that closely. And just with the kind of increase in volumes, we may or may not see a change in our market share this year. And we're always managing price and share volume effectively from my perspective. And we want to make sure, over the longer term that whatever pricing increases that do transpire, that we can keep them -- keep that and then build share over time.

[David L. Begleiter:]

And given the attractive market in the U.S. for deicing, do you expect to increase imports into the U.S.? And I know they mainly come on to the coast, do you think they can impact your region?

[Francis J. Malecha:]

There may be slight increases in imports into the U.S. Most of those are going to come into the Eastern seaboard, which had a real strong winter as well. And there could be imports into other parts of the U.S., but I think it'll be limited.

[Operator:]

And our next question comes from Joel Jackson from BMO Capital Markets.

[Joel Jackson:]

If you look out for the next year, starting the third quarter, what percent of the highway deicing sales would you guess are locked up in your -- well, on your chemical salt sales in your multiyear? So I guess I'm trying to get at what percent will be exposed to the highway deicing bid season?

[Rodney L. Underdown:]

Yes, Joel, we really haven't seen a big change in our chemical business. So that runs roughly 2 million to 2.5 million tons per year. And it's roughly consistent quarter-to-quarter. There can be variations. So that's the amount that we would expect to sell. And at chemical, I would say -- I would guess -- I don't have the number at my fingertips, but I'm just guessing based on, obviously the knowledge that [ph] the multi-year highway contracts probably represent a little less than 10% of total highway volumes. So that wouldn't be much of the available potential winter sales that we expect.

[Joel Jackson:]

Okay. So basically, if I do that with the U.K. the multiyear, the chemical salt, it's something like 40% to 45% are sort of not exposed to bid season, correct?

[Rodney L. Underdown:]

Yes, I think the -- in the U.K., that there are some multiyear contracts there. There's fewer in North America. So if you think about our chemical business being about 2 to 2.5 and about 10% of the West being multiyear, I don't think you'd get to 45%.

[Joel Jackson:]

Okay. And the second question I had was back on the SOP business. You had great volume Q1. The premium over MOP has basically done quite well. What -- how do you look at this in the performance? How much of this comes from the fact that [indiscernible] has continued to have significant challenges in their production that [ph] and has hurt their exports or their imports to the U.S.?

[Francis J. Malecha:]

It's true that imports to the U.S. are down. And it's hard to speak to any one competitor, but I'd suspect that we're enjoying the fact that there's markets -- other markets that some of the offshore production is securing. And I think we've continued to focus on North America because it's the best net backs for us, and we've been fortunate to be able to do that and really reduce some -- the amount that we've exported over the past 2 or 3 years. So the production is shifting, I think, to meet that demand. And it's just hard to say that the customer or the competitor that you mentioned, what that real impact is.

[Joel Jackson:]

I guess, I'm trying to get at -- and I now recall [indiscernible] processes had production challenges to one of their operations. If you're seeing stronger SOP demand in North America or if you've been able to take share of some production problems by some offshore competitors?

[Francis J. Malecha:]

I would say, it's probably some of both currently.

[Operator:]

[Operator Instructions] We will now hear from Edward Yang from Oppenheimer.

[Edward H. Yang:]

Fran, maybe just levering further on the SOP pricing, the price spread that you're getting for you specialty fertilizer versus commodity KCl, that continues to widen. And I guess, looking at it from a longer-term perspective, 1 year from now, 2 years from now, what do you think will be the driver of SOP prices? Do you think that it will recouple back to MOP in that spread that you normally get?

[Francis J. Malecha:]

I think it's, longer-term, more really a function of the economics of the crops that we're supplying. The customers' economics on those crops and the additional value that if they're able to capture that SOP is bringing to the table. So sure, I mean, there's always going to be some substitutability. And I think, on the production side, some capacity for producers to -- offshore producers to produce a bit more SOP than MOP and compare those economics. But in North America, we're really the only [ph]producer here. So I think it's going to be more a function of, what I would call, a basket of the economics of the crops; a basket of crops that we're serving, more so than kind of the absolute spread to MOP.

[Edward H. Yang:]

And on the supply side, are there any sort of arbitrage opportunities near to intermediate term in terms of whether producers that can take advantage of this -- the margin in that business? I mean, why aren't more producers, I guess, upgrading KCl, or what are some of the practical constraints there?

[Rodney L. Underdown:]

Well, I think it's difficult to do that effectively. I think our process is the most effective, certainly in this part of the world, to do that. And so we're trying to do as much of that as we can to meet that demand. And I know the Mannheim process, that's probably the most prevalent out there, is quite -- it comes at quite a higher cost than our production process. So I suspect there is some shift going on, as well as we probably exited even some lower net back North American markets that -- and that moved to higher net back markets more in the West where our plant's located that may have created some opportunity in the East -- Eastern side of the U.S. for imports. But other than that, I don't think it's that easy to make this stuff. And I think even some of the projects that are out there that have been talked about in various stages of trying to bring it to the market, they come with unproven technology. And so I guess we feel like we have the -- even though, we've talked about some challenges with our yields, the lowest cost proven technology at the Great Salt Lake.

[Operator:]

And that concludes our Q&A session. I will turn the call back over to Ms. Peggy Landon.

[Peggy Landon:]

Thank you, Jennifer. And thanks to everyone for joining us today. We'd also like to invite you to listen to our live webcast on June, 4, when we will be providing the more in-depth review of our strategy at our Investor Day. You'll find details about this event on our website in a couple of weeks. Again, thanks for your time today and have a great day.

[Operator:]

And that concludes today's call. Thank you for your participation.