Compass Minerals International Inc (CMP) 2018 Q4 法說會逐字稿

Good day, everyone. Welcome to today's Compass Minerals Fourth Quarter Earnings Conference. Today's conference is being recorded.

At this time, for opening remarks, I'd like to turn things over to Theresa Womble. Please go ahead, ma'am.

Thank you, and good morning. Today, our interim CEO, Dick Grant; and our CFO, Jamie Standen, will review Compass Minerals' Fourth Quarter and Full Year 2018 Results. We will also be discussing our outlook for 2019.

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, February 12, 2019, and they involve risks and uncertainties that could cause the company's actual results to differ materially. Please refer to the company's most recent Form 10-K and 10-Q for full disclosure of these risks. The company undertakes no obligation to update any forward-looking statements made today to reflect future events or developments.

Our remarks also include non-GAAP financial disclosures, which we feel are important to provide a full understanding of our businesses and operating conditions. You can find reconciliations of any of these measures in our earnings release or in our earnings presentation, both of which are available at the Investor Relations section of our website at compassminerals.com.

Now I'll turn the call over to Dick.

Good morning. I'm very pleased to have my first opportunity, since becoming interim CEO, to share with you the progress, I believe, we're making in improving the performance of Compass Minerals.

My comments today will focus more on our full year results and our strategic developments, beginning on Slide 3 of our earnings presentation, while Jamie will provide greater detail on our quarterly results and the various inputs throughout 2019 financial outlook.

As you've seen in our earnings release, we reported healthy full year revenue growth of 9% as a result of increased sales at each of our businesses compared to 2017. While consolidated earnings did decline from 2017 levels, largely due to salt production cost increases and currency translation, there are many areas of improvement that I would like to highlight today. Additionally, even with the challenges we've faced in 2018, we delivered almost $191 million in cash flow from operations, which was a 30% increase from 2017.

First, our Plant Nutrition business performed well in 2018. In North America, our SOP business ended the year very strongly as our customers began building their inventories for the spring planting season. In total, this segment delivered full year revenue growth of 11% and EBITDA growth of 14%. This performance was underpinned by better operating outcomes at our Ogden, Utah facility, where we had a record year for our low-cost pond-based SOP production. The investments we've made over the last few years in enhancing our ponds and upgrading our processes are now starting to deliver the outcomes we planned. We also achieved near maximum production at our Canadian SOP production site. I believe these achievements bode well for future margin enhancement as we move into 2019. They also demonstrate to our customers, our commitment to be the supplier of choice for SOP in North America.

Our Brazil business also demonstrated strong growth due to the favorable grower economics that Brazil enjoyed throughout most of 2018 and the attractiveness of our portfolio of products. In local currency, this segment delivered year-over-year revenue growth of 22% and EBITDA growth of 19%, including a 34% increase in EBITDA growth in our critical direct-to-grower business. Overall, Brazil is delivering the outcomes predicted when we have fully acquired the business in 2016.

Moving on to our Salt business. 2018 was a difficult year as we worked through a strike at our Goderich mine and the ramp-up of our continuous mining systems. In addition, this business had a disappointing end to the year due to lack of snow events in December in both our Great Lakes market in North America and in the U.K., which we estimate impacted our earnings by $6 million to $8 million in the fourth quarter compared with an average winter. The first half of January continued the pattern of lower snow events in both North America and the U.K, although we have seen significant improvement in demand in the last several weeks in North America and a slight pickup in the U.K. These weather patterns impact both our rock salt business aimed at highway safety and the de-icing portion of our consumer and industrial business. At our key Goderich mine, we continue to make progress in increasing production rates from our continuous miner and haulage system in both tonnage mined and tonnage hoisted to the surface. As was indicated in our snow data released last month, volume produced in Goderich in the fourth quarter of 2018 exceeded volume produced in the third quarter. And I can share with you that, that improving trend has continued in January with our mined output in January being the best monthly result since we converted the full use of the continuous miners. We're also nearing completion of our shaft relining investment which will secure our hoisting capacity for the future.

During a visit to Goderich in late January, I reviewed existing and potential plans to maintain the momentum of improvement. This included the input from external experts in support of our mine management and for an additional continuous miner planned by the end of this year. I also felt a positive change in the cooperation with our employees compared with my previous visits and was encouraged by an open exchange on issues with the union leadership on site.

Completing the process change to continuous mining and haulage at Goderich remains a top focus for our management team.

Our U.K. salt mine, where we have been using continuous mining for more than a decade, and our North American evaporation plants operated at/or near full operating rates in 2018.

In addition to these operational achievements, our sales team focused on maximizing the value of every ton available for the 2018, '19 highway de-icing bid season. And this resulted in strong price increases for our highway de-icing business in North America in the second half of 2018.

Lastly, our CEO search committee of independent directors is progressing in identifying a permanent CEO.

So looking forward for the company, I see our combination of production improvements and commercial focus on value creation leading to significant profit improvement in 2019 and beyond.

And with that, I will hand over to our CFO, Jamie Standen, to cover the 2018 results in more detail and the inputs for our 2019 outlook. Jamie?

Thanks, Dick. Before discussing our segment results, I'd like to recap our quarterly consolidated results.

For the fourth quarter, we generated revenue growth of 6% due to increases in Salt and Plant Nutrition North America revenue, offset by a 13% FX headwind, mainly impacting our Plant Nutrition South America results.

Consolidated operating earnings and EBITDA were both lower primarily due to CEO transition costs of $5.1 million and negative FX impact of $4 million.

In addition, our fourth quarter results included several tax items. First, we had 2 tax benefit items related to the release of deferred tax asset valuation allowances and the finalization of the impact of U.S. tax reform on our 2017 income tax expense. We also had a tax expense item related to the repatriation of approximately $150 million of foreign earnings. Our 2018 full year tax rate ended up higher than expected due to the finalization of U.S. tax reform impacts on our 2018 earnings as well as some FX losses on intercompany transfer price settlements that aren't tax deductible.

Turning to our Salt segment results, which we discussed on Slide 7 of the business update presentation. Fourth quarter Salt revenue increased 9% compared to the prior year quarter, due to a 12% increase in average selling prices, partially offset by a 3% decline in sales volumes. Average price results were significantly improved due to the better pricing achieved on highway de-icing contracts in North America for the 2018, '19 season. We've also been able to achieve price improvements in our consumer and industrial business through our focus on being a reliable supplier when and where it matters. These strong price results were an important offset to modestly lower sales volumes and increased product costs.

Fourth quarter Salt segment EBITDA declined 6% to $71 million. This decline resulted from a 16% increase in our all-in per-ton operating cost and a 16% increase in shipping and handling per unit cost. These elevated costs were partially offset by the price improvements previously discussed.

As Dick mentioned, our Salt results continue to face headwinds from the lingering impacts of the Goderich strike and the related impacts on the ramp-up of continuous mining and haulage. In addition to reducing our committed sales volumes in the North American highway de-icing bid season, Goderich strike-related costs include higher unit cost impacts due to lower operating rates, purchasing offshore salt and illogical logistics. In the fourth quarter, the operating earnings impact totaled approximately $15 million.

Turning to Slide 8. Despite a strong increase in 2018 Salt revenue, driven primarily by increased sales volumes, our adjusted EBITDA declined 12% or $23.1 million from 2017 results. This decline was due to the full year impact of the Goderich strike and related production issues along with increased logistics costs, which more than offset the 12% increase in revenue.

We begin our quarterly discussion of Plant Nutrition results on Slide 9. In Plant Nutrition North America, we generated 24% revenue growth year-over-year on a 25% increase in sales volume, offset by a slight decline in average selling price, which was product mix driven. SOP average selling price, as we noted on the slide, was up 4% versus the fourth quarter of 2017. The increase in sales volumes improved our per unit cost and we saw lower shipping and handling unit cost as well. As a result, the segment's fourth quarter EBITDA rose 25% year-over-year to $25.4 million. This is the strongest quarterly result for this segment since the first quarter of 2015 when SOP-only average selling prices were $730 a ton.

For the full year, our Plant Nutrition North America segment reported an 11% increase in revenue and a 12% increase in adjusted EBITDA, again essentially all volume driven. Adjusted operating earnings fell 12% due to the step-up in depreciation impacting the segment. This increase was generated by the final commissioning of new equipment at our Ogden SOP plant to increase efficiency and productivity.

Moving to Slide 11. Our Plant Nutrition South America segment continued to demonstrate strength with sales volumes up modestly from prior year results. Recall that last year, growers in Brazil delayed fertilizer input purchase decisions as they waited for commodity prices to stabilize and for the Brazilian real to weaken. That ended up pushing an unusual amount of our sales volumes into the fourth quarter. This year, we saw more typical seasonality. In addition, we saw higher demand for our soil micronutrient products in the quarter as farmers planned for the corn safrinha crop. These soil-applied products have a slightly lower margin profile than our full year products.

Our specialty chemicals business in Brazil experienced 5% volume growth due to a rebound in demand for chlorine products.

Looking specifically at local currency results, this segment generated 9% revenue growth primarily from price improvements, of 12% for agricultural products and a 3% decline for chemical solutions products. EBITDA and margin did decline from a combination of the less favorable product sales mix as well as continued increases in SG&A as the company reinvest profits in sales and marketing resources, which are essential to driving future growth.

Full year 2018 results for South America were very strong in local currency. Again, the main drivers were volume growth and price improvements, reflecting the value proposition of our products and the attractive grower economics in Brazil for most of 2018. We continue to see strong growth in our direct-to-grower sales channel.

Before diving into our 2019 outlook, I'd like to explain our rationale for shifting to EBITDA guidance instead of EPS guidance. Our focus continues to be on maximizing our free cash flow through strong operational execution, prudent capital spending and minimizing cash taxes, cash interest and working capital to ultimately drive shareholder value. Going forward, we will continue to provide interim revenue guidance as well as full year sales volume guidance along with expectations around key corporate components that impact EPS. With this in mind, we will be focusing on EBITDA guidance at the segment and the consolidated level.

I'll start with the full year outlook on Page 13. We expect a sizable increase in consolidated EBITDA in 2019, driven primarily by the recovery of our Salt business and steady growth in our plant nutrition businesses. As we continue improving production at Goderich, we expect to see margin improvement throughout the second half of 2019 and to begin recapturing some of the commitment volumes we shed this winter. These factors are expected to lift Salt segment EBITDA by at least 25% from 2018's depressed levels. In Plant Nutrition North America and South America, we expect steady volume growth along with some efficiency gains to result in low double-digit EBITDA growth. In total, we expect to generate EBITDA between $310 million and $350 million for the full year.

Before moving on to discuss our first half 2019 outlook, I'd like to discuss our full year tax outlook. Now that we have finalized our assessment of U.S. tax reform and understand all of the impacts, we expect our tax rate for 2019 to be between 27% and 28%. We are also pushing to finalize our tax settlement payments and refunds in 2019. We're planning to make a $35 million tax payment to Canada revenue in the second quarter of 2019 and then we expect to receive a $50 million refund from the IRS at the end of 2019. I would like to mention that given current uncertainty in Washington, it is possible that this refund could slip to Q1 2020.

Turning to our first half outlook on Slide 14. This year, we expect our consolidated results to have a more balanced split between first and second quarter. A key driver of this is the fact that we are still experiencing the overall impacts from lower 2018 Goderich mine production. Our Salt volumes, assuming average winter weather, are expected to be lower than prior year, given our depressed commitment levels for our North American highway de-icing business and the mild weather we've experienced thus far in the U.K. As a result, we expect the first half consolidated EBITDA to be similar to last year's results but with more of the earnings weighted to the second quarter. Given the pressure on Salt earnings as well as the negative FX impact on our translated results for Plant Nutrition South America, we expect our first quarter consolidated EBITDA to be between $40 million and $50 million.

Despite the expected first quarter dip in earnings, we remain confident that we will, in the first quarter of 2019, well within our debt covenants, given the credit agreement amendment we executed late last year.

Before we begin our Q&A session, I would like to comment on our free cash flow outlook and our commitment to the dividend. As you can see on Slide 15, we expect to manage our capital expenditures to around the $100 million level as we focus on achieving increased returns on the major capital investments we've completed over recent years. This would include our improvement and expansion of productive capability at our Utah SOP facility and the continuous mining systems we operate in Goderich. While we always consider high-return investments in our operations, we are keenly focused on delivering returns on the investments we already have in place. As we also note on this slide, we generated 2018 free cash flow of nearly $100 million, which funded our dividend payment last year. We currently expect to generate a similar level of free cash flow in 2019. So given these expectations and our view of improving operations and attractive market conditions for our businesses, we believe our dividend continues to be manageable at its current level. With attractive market dynamics continuing for our Salt and Plant Nutrition businesses, we expect we can further increase our free cash flow in 2020 as we maintain normalized production levels at the Goderich mine.

As our free cash flow levels increase, we expect to continue our direct returns to shareholders and increase our focus on debt reduction.

Now I'd like to hand it back to the operator to begin the Q&A session.

(Operator Instructions) We'll hear first today from Christopher Parkinson with Crédit Suisse.

This is Graeme Welds on for Chris. Just had a question about the evolution of op rates at Goderich and where -- what's the time line that you guys expect to be able to achieve, kind of, your target rates there? I believe previously, so your documentation has suggested that by midyear '19 we would see that. And along with that question on where the op rates at Goderich go, I'm curious if you could give us your thoughts on how operating margins within the Salt segment will trend as we get this improvement? Because obviously, our 1Q results here look like they're still being impacted by the lower operates from last year?

This is Dick. Basically, we have a plan for incremental monthly improvement throughout this year which will put us in a great position as we get into the second half of the year and move on into 2020. We're taking a very measured approach to this process in order that we have sustainable, consistent production over the long term. This is more about being consistent and delivering month after month than a particular rate at a certain time. So that's where we're headed. And we are on track with that. As I said in my opening remarks, things were better in Q4. And in January, we hit new targets and produced more in that month than we have in any previous months on the continuous mining. So those -- that progress is underway, and I think it's encouraging that we're getting through to seeing production rates which will sustain us through the second half of the year and beyond.

And I'll just -- yes, answer the second part of the question here, Graeme. So yes, the EBITDA margins, which we're really focused on going forward will be depressed in the first half of the year because of what we described in the prepared remarks there. And then as we get into the second half of the year, you'll start to see those -- the higher production levels and that consistent increase in production come through the financials as we would expect to be 30% EBITDA margins plus and as we get into the second half. And then you'll really see the value of the investment as we move forward beyond 2019 as we move into mid-30s EBITDA margin results.

We'll go next to Vincent Anderson with Stifel.

I want to stick with Goderich for a second, maybe squeeze a little bit more detail out of where we are today. So one, how many of the continuous mining units are running and running continuously as they're designed to be? Have you begun reducing contracted labor yet or they're still necessary? And what are your goals for the March turnaround this year at the mine?

Vincent, I mean, basically, all of the mining units are operating. We have a schedule of how we operate those units. And one of the things that we have moved forward on recently is improving our plant maintenance of those units. So what that means is that we're deliberately taking the machines down on certain days in order to get planned maintenance because as we all know, 6 hours down because of planned maintenance is better than 12 hours down because of the unplanned maintenance. And so as we work through these production rates, what we're seeing is consistent production coming out of the combined fleet of units that we got in operation. And so that is beginning to hit rates. Now in -- back in November and December, we were having good days and poor days. What we're beginning to see now is strings of good days being put together. So I think we're encouraged that, that planned maintenance is beginning to show through and get us onto a much more consistent production rates with the units.

That's helpful. I'll move over to SOP then. SOP prices have kind of stayed a little bit below the ceiling here despite the strength in MOP, despite the strength in fruit, vegetable, nut prices. But you've managed to grow volumes quite rapidly. Is it safe to say that you're taking a volume approach to your go-to-market strategy right now rather than maybe maximizing price at this level?

I think how I'll put it is more of it, we've started to get much better yields out of our pond-based production, which is our low-cost source. And I think that has allowed us to serve them, our customers, well this quarter. Now we've had -- there was a fair amount of prestocking went on in the -- at the end of 2018 in preparation for the spring season. And at the moment, there's a little too much rain in California, which is halting the use of some of that product. But as it comes through, I think -- and if MOP continues to go up in price, there should be opportunities for us to move our price as well.

Yes. And I'll just add on to that. I think regarding price, certainly higher volumes have to find a home. And we're extracting all the value we can on the highest-value crops and customers, and we're finding other opportunities to place tons and functionally getting the conversion from MOP to SOP and sometimes those can have a little bit lower price, which on balance in total SOP can limit the upside there. So your point is correct in that, as we find some new customers and place additional tons, those aren't all necessarily in the high -- highest-value markets.

And from BMO Capital Markets, we'll hear from Joel Jackson.

I do have a couple of questions. So first question, I wanted to understand a little more about your Salt volume guidance for the year. You did give a bit of a color. It is -- you aren't guiding to the lowest Salt volume. If you get to the midpoint of the lowest salt volume that the company has ever had as a public company, let's call it 20 years, so are you embedding into this -- look, I understand that you have low commitments for this winter, but are you embedding into this also the belief that you'll have below average commitments for that -- for Q4, and I guess the next winter because of Goderich not fully running as you would like?

Joel, this is Dick. Basically, the short-term volume -- the short-term issue in Salt volumes, and if you look at our predictions for this year, most of the shortfall in volume compared with previous years is actually coming in the first quarter. And as you correctly said, that really relates to our decision last summer to bid lower salt volumes which affects both the second half of '18, but also unfortunately affects the first half of '19. In fact, that's the main driver behind our lower volumes. And so the shortfall volume is less about Goderich production rates, which is -- which we've said is improving, and more about that lower commitment rate which gives us lower volumes in the first quarter based on a normal winter. But as we look at our production rates that we're predicting through the second half of the year, we see our sales returning much to a more normal situation as -- in the second half of this year and, of course, the first half of 2020 when it comes along. So that's one of the reasons because of this shortfall in commitments from last year is why we are so confident that we can make up and be a much more normal sort of production rate and sales rate in the second half of the year and in 2020.

And I'll just add that, Joel, I think, on an actual basis, we were less than 10 million tons back in 2012. There were some -- a number of reasons that drove that. But don't forget that -- so as I mentioned on the third quarter call, we expected commitments to be down the 15%. So round numbers, that's -- that could be a 1 million tons, right, in the grand scheme of things as it relates to highway. Also what's exacerbating it in the first quarter is the year-over-year comparison to -- when I talked about first quarter 2019, is that the U.K. was particularly strong last year. So that's about a 0.5 million tons. So the first quarter looks particularly weak because of that. So then in the fourth quarter, as we go through about bid season next summer, and if we produce as expected through this summer, we'll be able to recapture a good portion of this lost -- these lower commitment levels, which will be spread over Q4 '19 and Q1 2020.

That was very good helpful guidance, guys. One more question. I'm going to go back to Goderich. The actual continuous mining machine that you're bringing on at year-end or later this year, is that going to be the same -- one of the same machines you have currently? And then when you're working with you machines now and you're taking time down, you're doing more maintenance, are you -- have you also been adjusting the machines in terms of cutting services? Or how you're attacking the upper part of the seam versus the lower part of the seam? Like, have you had to go back and now redo how you're attacking the face, and with the new continuous miner machine coming into the exact seam?

Joel, we've been learning as -- over the period about how the right way to operate the machines. And I think they're working pretty consistently. But we're fundamentally operating them in a similar way that we have been doing just as we've gained experience with our operators and our management we're available to get this better uptime on these machines. With respect to the actual machine, we are thinking about whether we want to have a larger capacity machine and whether we upgrade to a larger size or whether we just stay with the current size we're working at. And we're working through that at the moment with the supplier and trying to finalize exactly what we're going to get delivered. But we see this the way of really improving the uptime of our whole fleet of miners and ensuring that we get to production we're looking for, plus giving us an upside if we get a particularly heavy winter come along that we can actually turn up and get some extra production in order to meet customer demand. Does that give you a feel for what we're doing at least?

Yes. So is it possible we could end up where you will decide down the road to get a new fleet of continuous miners, the larger machines maybe to overcome some of the challenges you've had? Is there a possibility here?

I think that would be a very progressive change if we made it. I mean, these machines should last 10 years in operation, including a major rebuild. And so we certainly wouldn't want to scrap a machine before its time. But if we decide that moving to the larger machine gives us better consistent output, then I think what you would see is as those machines come up for replacement, we would replace them with upgraded machines rather than just a straight one-for-one replacement. So that's the sort of thought pattern that the local management and our mine specialist team have been working through.

We'll hear next from Robert Koort with Goldman Sachs.

This is Dylan Campbell on for Bob. I guess my first question, again for Goderich, how much does Goderich represent of its regional market? And then I guess, when we kind of move towards more of a fuller production level, do you anticipate any type of pricing headwinds from the strength that you saw in this last pricing season?

So we look at things as the North American market, which is the combination of our Cote Blanche mine which we serve through the river system and the Great Lakes out of Goderich. So I don't have a specific comment on what it is in terms of that share up in the Great Lakes, but it is significant. However, that being said, as it relates to pricing pressure, we -- as we went through the season and contained our bidding based on the strike and our ramp-up expectations last -- through the summer and last fall, we passed on quite a few bidding opportunities, particularly late in the season. And a lot of that business either went unserved or is being served at very high prices that are not sustainable. So as we bring our production back up to normalized rates and start to recapture that business, we think there's plenty of room for us to not have significant pricing -- price pressure -- downward pressure as we go through that process next fall.

Got it. That's helpful. And on CapEx, I remember, you guys were referencing, I guess, last year going into 2019 that you'd start to see some type of decline in CapEx spending. But looking at slides, it appears more flattish for 2019. Is there something that changed in your capital spending forecast or did you pull forward any type of investment or

is it more of a Goderich impact there?

So. Yes, the $100 million is a bit higher than we had been previously thinking, but as Dick mentioned, procuring another machine is a significant impact there. We're also really focused on scheduled maintenance, which can include capital spending to make sure that these miners and our equipment out in Ogden to be sure and include that as well that we maintain reliable assets. So it might mean that CapEx is a little bit higher than our, sort of, $75 million range for MOB. So is it -- is $100 million the new number? Absolutely not. But it's probably somewhere between the $75 million and $100 million.

And from Stephens Inc, we'll hear from Mark Connelly.

Sorry to ask more questions on Salt, but just one more. With the lower commitments that you've got at this part of the season, if we do have a normal winter from here on, what does that imply about where your inventories might fall out? And how much are you going to be able to manage where your inventories end?

Basically, so far, this year, we've pretty much met all the demands from our customers. So -- and we've been a little bit lucky in that the ice buildup in the Great Lakes is a bit slower this year, despite the so-called polar vortex. And we've been able to get a normal number of ships out of our Goderich plant so far. And at the moment, we've got a couple of ships coming in this week, and it looks like we're going to be able to keep shipping and replenishing our stocking points around the Great Lakes for a few weeks yet. So I think that's put us in a reasonable position as far as our stocks go. And so I think with a normal winter for the rest of the -- of this quarter, I think we're going to be able to meet the demands of our customers. If it carries on at the rate of the last couple of weeks, there could even be an upside in any of our projections building in weather forecasts. I mean, which we -- all our comments are about a normal winter. But right now we've got -- right now, we have salt at Goderich and the issue is we're obviously shipping out much by road for the Canadian market as we can. But it's -- we're optimistic that we're going to get more ships out than we had originally planned for February and get our distribution points replenished.

Right. So the -- so as we -- so the ending inventories would then be -- depending on whether, if they're normal, we'll have some at the end of the season. And our planned production rates will enable us to recapture some of those lost commitments that we had last summer, and that's built into our second half guidance.

South America, your volume guide looks quite confident relative to good numbers this year. Can you give us a sense of where that confidence is coming from?

Yes. I think that in -- Dick mentioned in his prepared remarks, direct-to-grower is a major area of focus, and we saw north of 30% growth in earnings in that segment. We continue to see that. We continue to reinvest in SG&A and sales and marketing resources to continue that growth rate. I guided full year in the low single digits in US dollars. We would -- that -- based on translations rates, that translates into mid-teens EBITDA growth in South America. So we expect to see stronger volumes on the chemicals side year-over-year, as we've seen improvements on the water treatment side and then just the continued growth in micronutrient demand in South America. We're adding sales people and we're driving higher adoption and covering new acres.

We'll move next to Jeff Zekauskas with JPMorgan.

This is Katie Zhang on for Jeff. So I think previously your target for free cash flow generation in 2018 was about $80 million and you delivered $94 million, but it looks like you took your 2019 outflow down by a touch. Could you just talk a little bit about what drove the delta in '18? And what changed in your '19 outlook? And then I have a follow-up on for Goderich, if I may?

Yes, sure. We -- when I think about '18, we had some working capital improvements that we were able to take advantage of, particularly in the fourth quarter. And the difference in '19 is really there's some tax noise in there. As I mentioned, we've got some -- remember, the transfer pricing settlement that we reached in 2017 and kind of got finalized documentation-wise in 2018 and now these payments are going to come due -- or additional payments are going to come due, which is $35 million of payout in the second quarter and then we're expecting a $50 million refund in the fourth quarter. The $50 million refund is uncertain. We're going to do everything we can to pull that into the year. So if we don't get that, probably working or probably free cash flow comes in the $70 million range, but if we get it, it'll be up well over $100 million. So that's one of the major drivers in free cash flow for 2019.

Okay. That's really helpful. And then you previously talked about '19 possibly having a $15 million to $20 million negative impact from the production shortfall at Goderich. Is it still your expectation?

Yes. So we've got -- when you consider lower commitments and higher cost inventory that we're carrying into the year, we're carrying in about $12 million or so of cost. It's a combination of lower production and purchased salt and some of the logical shipping that occurred, plus the lower commitments that Dick talked about earlier. All-up, all-in together, that's close to $20 million of impact in Q1 that is embedded in that first quarter guidance.

So if I'm thinking about the '19 impact, it's probably something higher than the $20 million then?

No, it's right at the $20 million. That kind of -- that carries in. And then we're producing at our current rates. And as we ramp up our production rates through the year, I don't see any other cost implication other than the $20 million that's -- this first quarter.

(Operator Instructions) We'll hear next from David Begleiter with Deutsche Bank.

Jamie, you referenced a mid-30s EBITDA margin for Salt longer term. It won't to be there, I know, in 2020. But in 2021, could that be the year that we do achieve a -- that mid-30s type EBITDA margin for Salt?

Yes. Yes, I think that that's -- we'll creep up above 30% in 2020, certainly. And beyond that, that's when we would expect to be hitting the mid-30s.

Very good. And just -- when does this continuous mining operation become fully optimized, maybe it's never fully optimized? And when do you get through all the learnings? And I know your production was very high in January, but when do we get to a level that we think is steady-state?

This is Dick. I mean, basically, I think as we get through the -- as we get into the second half of 2019, we should be -- we should probably stop talking about the ramp-up and more talk about our planned production rates. So I think we should -- in my mind, we should be in a normalized position by the time we get into the '19, '20 season. So I think that's how we're looking at it. But we've got to make this progress, we've got to get ourselves on top of the situation through the shutdown. And I see the second half of 2019 and on into 2020, us talking less about Goderich build-up and more about our progress overall in driving the Salt business forward.

And at this time, I would like to turn it back to you all for closing remarks.

Thank you, everybody. This is Theresa. Thank you for joining. And if you have any follow-up questions, please contact the Investor Relations department using the contact information on our website. Have a great day.

Again, that will conclude today's conference. Thanks all for joining us.