Compass Minerals International Inc (CMP) 2004 Q1 法說會逐字稿

Good afternoon. My name is Julie, and I will be your conference facilitator today. At this time I would like to welcome everyone to the Compass Minerals International first quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question and answer period. (OPERATOR INSTRUCTIONS). Now it is my pleasure to introduce the Director of Investor Relations, Ms. Peggy Landon. Ms. Landon, you may begin your conference.

With me here today are Mike Ducey, our President and CEO, and Rod Underdown, our Vice President and Chief Financial Officer.

Before we begin, I'd like to take a moment to remind you that today's discussion may contain forward-looking statements. These statements are based on the Company's current expectations and involve risks and uncertainties that could cause the Company's actual results to differ materially. Differences could be caused by a number factors, including those factors identified in our annual report on Form 10-K for the year ended December 31st, 2003, on file with the Securities and Exchange Commission. The Company will not update any forward-looking statements made today to reflect future events or developments.

Also, you can find reconciliations of any non-GAAP financial information discussed today in the investor relations section of our website at www.CompassMinerals.com.

Now, it is my pleasure to introduce Mike Ducey.

Good afternoon. As you probably just read in our press release, we posted the highest quarterly sales and earnings in our company's history this quarter. Sales were up 18 percent compared to the first quarter of 2003, to more than $250 million. And net income was up 22 percent to more than $30 million, which translates to earnings of $0.94 per diluted share.

I am particularly pleased by the fact that only a small percentage of these record sales and earnings are due to variations from normal winter weather. The primary drivers behind our first-quarter sales were our December 2003 acquisition of IMC Global, a Carlsbad-based sulfate of potash business, and expansion of our North American highway deicing business, more typical winter weather in the U.K., compared to last year, and above average consumer deicing sales on the East Coast. We also analyze our business on an April through March basis because this allows us to access the impact of the full winter season on our business.

For the twelve months ended March 31st, 2004, gross sales were 638.4 million, up 15 percent to the twelve months ended March 31, 2003. Net income was 39.6 million, up 63 percent. And adjusted EBITDA was almost $157 million, up 17 percent over the twelve months ended March 31, 2003. We firmly believe that almost all of these increases represent true intrinsic growth. We sold an additional 43,000 tons of SOP in the first quarter of 2004, when compared to the prior year, principally because we have successfully integrated the Carlsbad SOP acquisition into our business. This volume increase boosted sales by 77 percent in the quarter. And we expect this acquisition to contribute another 2 million or more of EBITDA for the remainder of the year in addition to the benefit of the acquisition in the first quarter.

Our salt segment sales increased 14 percent in the first quarter with strong improvements in both highway deicing and general trade product sales. The increase in our highway deicing sales for the last 12 months was not the result of unusual weather. In North America, our last 12 months sales were 102 percent of our winter season commitment levels. When actual sales are approximately the same as our sales commitment, such as this, we view the deicing season as average, with no significant weather impact.

What makes the last 12 months different from the previous years was the increase to the contract and commitment volumes in our North American service area during the bidding season that ended last fall. We also saw modest price improvements in North America. These volume and price improvements are what drove our North American highway deicing sales, and we believe that both are sustainable.

In the U.K. highway deicing market, sales were higher than from the prior year, because the prior year was unusually mild there. For the twelve months ended March of 2004, sales in the U.K. were approximately what we would expect in a normal winter season. So globally, our highway deicing business had no significant impact from unusual weather in the last 12 months. This may surprise some of you along the East Coast, but keep in mind that our highway deicing business doesn't serve the East Coast. The weather was about average in the markets that we do serve.

Our notable variance from a normal winter was in our consumer deicing business. Over the last 12 months, we had a 100,000-ton increase in consumer deicing volumes, which we attribute to more severe weather on East Coast where our highway deicing business doesn't participate. Plus, we expanded our premium consumer deicing product line this year. Consumers responded extremely well, which improved our product mix and expanded our consumer deicing margin.

In addition to the sales growth, we've continued to successfully manage cost through our operational excellence program, which is designed to drive improvements in our day-to-day operations, reduce costs, and enhance our bottom line. We've seen benefits in areas such as more stable energy costs, improved material handling, and lower production costs. Virtually every area of the Company is making positive contributions that are sustainable into the future. Needless to say, management and our Board are very pleased with our performance and our outlook. As a result, they have chosen to increase the normal dividend by 33 percent to $0.25 per share for the quarter. At that payout of a approximately 7.6 million in quarter 2, our dividend expense will be about the same percentage of net income and free cash flow as our first-quarter dividend was following our IPO. Given the new level of reoccurring cash flow generation that we've achieved, we can increase the dividend and continue our same deleveraging strategy.

Our fundamentals moving into the summer highway deicing bidding season appears strong. With inventories about normal in most of our markets and perhaps below average in the eastern portions of our North American market. That should support at least historical pricing improvement. Despite the spike in energy and fuel prices, these costs don't pose a significant threat to us. In total, from all of our business units, we expect maybe an additional 1 million in costs in the next nine months. And, as we prepare for the 2004/2005 winter deicing season, our business will take the possible increases to these costs into consideration. By the way, bidding for the upcoming winter season has just gotten under way, so we don't have any significant results to share with you yet. We'll update you at the end of the next quarter.

Lastly, before I turn the call over to Rod Underdown, or CFO, I want to mention that in April environmental Canada released its code of practice for the environmental management of road salts. I am pleased to report that their solution is to improve the storage and use of road salt. We firmly believe that this is the best possible outcome for all of the involved parties. There's no question that everyone benefits from road salt if it is used properly. And we will continue to do whatever we need to assist Environmental Canada's effort on this issue.

Now I am going to turn the call over to Rod so that he can walk you through the details of our first-quarter performance.

Thank you, Mike. I am going to walk you through the quarterly results. But, as Mike pointed out, we also look at the business on a last 12 month basis, ending in March, so that we can assess the impact of the full winter season on our business.

For the first quarter, sales of $250.5 million exceeded any previous quarter in the Company's history. This also represents an 18 percent increase over first quarter 2003 sales, which were slightly depressed due to mild winter weather in the U.K. last year. The components of our first-quarter sales include salt sales of 228.7 million, which is a $28.3 million, or 14 percent, increase over the prior year. And SOP sales of $21.8 million, which is a $9.5 million increase, or 77 percent increase, over the prior year.

Our North American highway deicing salt sales were in the normal winter weather range this quarter. As Mike explained, this increase was from sales resulting from increased commitment volumes and moderate price increases. Weather was mixed in the markets we serve in the Great Lakes and Midwest, such as Toronto, Detroit, Chicago, St. Louis, and Pittsburgh, but overall, weather was average.

In our U.K. highway deicing sales -- where in the U.K., our highway deicing sales were in the normal winter weather range as well, which helped boost our year-over-year numbers since they experienced mild winter weather last year. Because of the U.K. increase to more normal levels and our volume growth in North America, we increased our highway deicing sales volumes by about 300,000 tons over the prior-year quarter.

Our general trade business did benefit from more severe winter weather this quarter. General trade sold 53,000 more tons of salt in the first quarter of 2004 than in 2003. Primarily because of sharp increase in consumer deicing sales on the East Coast.

Another factor impacting our salt sales was the foreign exchange rate. Salt product sales increased $8.8 million due to the strengthening of the Canadian dollar and the British pound against the U.S. dollar. Our SOP sales increased 77 percent when compared to the prior year, primarily due to the integration of our Carlsbad SOP acquisition, which was completed in the fourth quarter of last year. The result was an increase of approximately 43,000 tons of sales volumes for our business in the first quarter. We also announced a price increase in the first quarter 2004, which should begin benefiting us in future periods.

Our gross margin for the quarter was improved almost 4 percent when compared to the gross margin in the first quarter of 2003. Our salt segment benefited from the cost improvement Mike mentioned earlier, and slightly better pricing. Our SOP business made good margin gains because of the Carlsbad acquisition. Both segments benefited from our operational excellence program, as well as increased production through our facilities, as we've expanded the SOP and North American highway deicing businesses and experience higher volume requirements from our consumer deicing products.

Our selling, general and administrative expenses increased by $2.8 million when compared to the same quarter in 2003. The chief components of that increase are the costs associated with variable compensation and benefits and the impact of the weakened U.S. dollar.

Our interest expense was $15.4 million, a $3.5 million increase over the first quarter 2003. We had $5.7 million in non-cash interest expense for the payment in kind interest on our senior subordinated discount note and our senior discount note, which represents a $3.6 million in additional non-cash interest this year, principally due to the discount notes that were issued in May of 2003.

Our income tax expense was $11.4 million for the first quarter 2004. As you recall, we have NOLs that offset some of our U.S. income tax liabilities. We currently estimate that our income tax rate for 2004 will be approximately 27 percent.

Our net income has increased 22 percent to $30.3 million, or 94 cents per diluted share. This is compared to $24.9 million in net income last year, or $0.58 per diluted share. The impact of the stronger Canadian dollar and British pound against the U.S. dollar only increased our net income by $1 million when compared to the prior year to year. Given the substantial movement in these exchange rates since last year, we believe that this clearly illustrates the Company's relatively minimal exposure to fluctuations in these exchange rates.

EBITDA improved to $67.6 million this quarter from $51.6 million in the first quarter of 2003. Adjusted EBITDA, which excludes other income and expense, improved to $58.1 (ph) million in the quarter from $51.3 million in 2003. This improvement reflects the impact of the improved sales volumes and production costs we previously discussed. Trailing 12 month adjusted EBITDA, which we believe is a good measure of our ongoing earnings, is now almost $157 million.

We generated roughly $102 million in cash flow from operations in the first quarter. That's an increase of about $29 million over the same quarter last year. We have used the cash generated during the first quarter to repay the $14 million that was outstanding on our revolver at the beginning of the year, and to voluntary repay another $10 million on our term loan. We also paid an 18.75 cents per share dividend in the first quarter, totaling $5.7 million.

Our first-quarter capital expenditures were $3.9 million, which keeps us right on target for the 22 to $23 million of maintenance capital expenditures we expect for the year. And, as you will recall, we mentioned in the past that we've earmarked an additional 2 to $4 million for discretionary payback projects, for a total capital expenditure level of 25 to $26 million this year. After all of these items, we have just over $71 million of cash at March 31st.

During the first quarter, our debt, net of cash, declined $87 million. Our total leverage on adjusted LCM EBITDA stands at 3.3 times at March 31, 2004, a seasonal low point, compared to 4.3 times at year end. During the second quarter, we will finish collecting our receivables from the winter season and begin building inventory for the upcoming 2004/2005 winter deicing season.

As always, we continually assess our options for deploying the cash generated by our operations to create maximum shareholder value. Our priorities are to deleverage, to pay dividends, and to consider small bolt-on acquisitions that would be immediately accretive to shareholder value. As Mike mentioned earlier, the Board has declared a $.25 per share dividend for the second quarter, an increase of 33 percent. Based on our new level of earnings, the free cash flow payout ratio at the new dividend rate will be less than the free cash payout ratio at the IPO. And, we will continue to be able to deleverage our balance sheet in accordance with our original plan. We continue to expect to repay a total of approximately 30 to $40 million of debt in 2004, while our reduction in net debt, after considering accretion of our discount notes, will be approximately $25 million.

Now, I'm going to turn the discussion back to Mike for some concluding remarks.

Thank you, Rod. To briefly recap the quarter. We increased sales in every segment of the business. Our highway deicing improvements were due to volume increases, modest price increases, and more normal winter weather in the U.K. Our general trade sales increases were driven by increased consumer deicing sales on the East Coast. Our SOP sales increases were driven by the successful integration of our recent Carlsbad acquisition. And, we had topline increase due to the strength of the Canadian dollar and the British pound, so that net effect of F-ex was minimal. We simultaneously reduced costs through our operational excellence program and the benefit of increased production at our plants. Based on all of these improvements, we have increased the dividend by 33 percent to $0.25 per share payable on June 15th to shareholders of record on June 1st.

Of course, we will continue to focus on operational excellence, including our emphasis on cost reduction, disciplined cash management supporting our deleveraging strategy, margin improvement, and increasing the intrinsic value of the Company.

With that, we'll open the call up for questions. Operator?

(OPERATOR INSTRUCTIONS). Michael Judd, Greenwich Consultants.

Congratulations on a great quarter. I have a question for you. When you did your -- when you released your information for the IPO, you supplied a lot of good information in terms of volumes for highway deicing and the general trade and specialty potash fertilizers on an annual basis. But since your business is fairly seasonal, I'm wondering if you had any information on -- for instance, what the numbers were in the second quarter 2003, the types of volume numbers, so that we have some way of looking at the seasonality of the business?

Yes, I think probably the best place for you to get those, Michael, is -- I know when we have the -- our subsidiary is also a public company, Compass Minerals Group, it has some public debt. And if you look in the 10-Qs of those filings, you'll be able to find the volumes by highway deicing, general trade, and SOP.

On a quarterly basis?

On a quarterly basis. And if you have a hard time finding those, just let me know.

Okay. How about the specialty potash fertilizer business for this coming second quarter? It seems like the fertilizer industry, in general, demand has been pretty strong. Can you give us any sense of what's going on in that business, at least in terms of how demand looks so far in the second quarter?

It looks very good. The first quarter was pretty much as we expected. The order pattern right now -- as you know, the planting season is moving along pretty briskly. We've had some pretty good weather in most of the planting areas that we serve. And we see pretty brisk demand for SOP at the moment.

Okay. That's great. I just have a quick accounting question -- on the balance sheet, did you have a number available for what your current or short-term debt is? You gave us your long-term number, right?

Yes, I think when I was giving you the number, it would have been inclusive of the short-term amount. But it has not changed very much. It is .7, $700,000, the current portion of long-term debt.

All right. I'll get back in queue and let somebody else ask a question. Thank you.

David Begleiter, Deutsche bank.

Thank you. Mike, in terms of the additional volumes you won last year in highway deicing during the bid season, do you expect similar wins and gains this year as well?

Yes, we do. The increased volume that we enjoyed during the last winter season principally was driven by just the increased commitment levels that we saw during the season. If you remember, the prior season, while it was good, the commitment levels had decreased because they came off of a mild season the winter before. So what we're seeing now is pretty much what we believe to be the sustained normal winter demand commitments. So yes, we expect those to remain fairly constant. While we can't say right now what the success we'll have in the bid season, we are optimistic that we will be able to maintain the gains that we have seen in some of our market share.

And just on pricing, can you actually state what the pricing was in highway deicing last year?

What the pricing was?

Yes, I think the pricing in the market was slightly up, about 1 percent price improvement last year in the bid season.

Are you expecting a similar increase this year as well, Rod?

I believe that we will, based upon the fundamentals right now, the inventory levels, at least some of the demand that we saw heavy in the east, particularly in eastern Canada, I think we'd be disappointed if we did not see our normal 3, you know, 2.5 to 3 percent inflationary price increase, if not better than that.

Thank you very much.

Marybeth Connolly, Goldman Sachs.

Hi, how are you? I am good, thanks. Two questions for you -- as I look sequentially at the SOP business, it looks to me, although the year-over-year margins have improved a lot, it looks like sequentially they are down, maybe from around 20 percent in the fourth quarter? Yet your volumes have increased a lot, and mentioned you've gotten some pricing through. Do I have my numbers wrong? Or have margins declined, and why?

No, I think you are looking at the numbers right. Because we have some seasonality to the domestic versus the export market, you can end up with sequentially numbers that don't make a trend. So I think, different times of the year we're selling internationally, and different times of the year we are selling more domestically. So I think what you see this year is -- versus the fourth quarter -- is a more robust export business in the first quarter than we had, on a percentage basis, then we had in the fourth quarter of last year. But, year-over-year, you do see the improvements in the margins.

Okay, so you're saying in the first quarter, the export market was stronger and so that's a lower margin business than the domestic?

Right. And that's typical of during the year where the second quarter will have a greater percentage of domestic business. The third quarter, more exports. The fourth quarter, more domestic. It is just the way the seasonality of when the sales happened during the year.

Okay. And then my second question is just on Minosis (ph). Do you have an update on the waste storage business and how the activity is going in terms of getting a permit?

We're still -- the final permit is still being heard by the court system in the U.K. It is being adjudicated by what their equivalent to our Supreme Court. The last time I talked to David Gobi (ph) in the U.K., it is scheduled for a June hearing date in front of that court. But, as you know in the past, we have been predicting dates on this for some time and it has dragged out. So, right now June hearing date is scheduled for that permit.

Okay. Thank you very much.

Nancy Traub, CSFB.

Hi. Most of my questions were answered, but maybe you could talk a little bit more about the -- you said the commitment volumes are higher, and that's more because of a normal winter. So customer restocking was not really involved and maybe market share gains?

Well, I mean, last year, the year before was a pretty good restocking year. Remember, most of our customers don't carry a lot of inventory at their level. So the restocking really comes at our depot level. So, we restocked our depots pretty good last year. We'll have a pretty good significant restocking of our depots again this year. That's more of a production and timing issue than a sales issue. We believe, from a sales and commitment level, that what you're seeing right now is sustainable. There's been about a 3 percentage market share gain that we had last winter. We believe that that is a level of market share that we can sustain. We do not see gaining market share any further in the bid season this year.

Okay. And the deicing, I guess that would be an unusual thing here in the northeast for your --

Yes, that is something that we cannot expect to get year-in-and-year-out unless New England continues to have the kind of whether they've had the last two years. So that was kind of a bonus for us this year.

And how much was that, that you said we got -- an extra 100,000?

Yes.

On a last 12-month basis, that would be about the number of tons, an extra 100,000 tons. You know, the estimate of a normal winter season is not an exact science, but we really think we can get it pretty close. And I guess, as we look at our last 12 months, the way we think about it is, as we look at our last 12 month's results and consider better-than-average weather along the East Coast for our consumer deicing business, and then offset that by taking into account the piece of the Carlsbad business that we have not seen the full year effect of because we did not begin servicing those customers until December of last year. We sort of look at that as mid single digits in terms of millions of dollars of benefit the company got for above-average winter.

And you mentioned how the weak dollar really did not have that big an impact on the bottom line. How about the top line?

Yes, the increase to the sales was $8.8 million, had we had the same exchange rates this year that we had last year.

And it was like 1 million?

It was $1 million on a net income basis.

Net income? Thank you.

David Silver, J.P. Morgan.

Hi. I just had just a couple of quick questions. And I guess the first might be like a cash flow question. So, you have raised your dividend, which is great. Rod laid out the maintenance for sustaining CapEx. And you kind of mentioned the possibility of bolt-on acquisitions. I guess, in looking back over last year, the middle two quarters is typically a cash use period for Compass. Is there any way you could bracket what you think the cash usage would be this year? Should it be similar to last year's middle two quarters? Or because of the operational excellence, rather steps that you have taken with the cash used during the off-season, so to speak, change markedly? Thanks.

Yes, I think what I can say -- and I will comment without regard to debt paydown or dividends or anything like that in terms of uses of cash, and just purely talk about the operations. We are ending the winter season with slightly higher inventories than what we had last year. We would plan to enter the winter season with roughly consistent inventory that we had this past year. That would suggest that, in terms of using cash to build inventory and working capital for the winter season upcoming, that it would be slightly less, although it's probably just a matter of rounding when you get down to that. So, I would say if you look at the builds from first quarter last year to year end, that you can expect a similar kind of working capital build this year.

Okay. And that was in -- would $30 million or so be in the ballpark for the working capital build?

I don't have that number. If that's consistent with last year -- yes.

Okay. That's fine. I just wanted to clarify one thing with Mike, if I could. And that would be -- I think you've already had a question on the sustainable increase in the North American deicing business. I just want to make sure, Mike, that what you're making reference to is the increased level of overall commitments up to what you consider kind of a normalized level. Is that the source of the quote, unquote, sustainable increase? Or could you point me to maybe to a -- (multiple speakers)

Dave, it's really two things. It is sustainable commitment level, plus we've gained 3 percent market share in the highway deicing North American market. So when you couple both of those together, that makes up the increase that we have seen in the marketplace.

Okay. And you view the share gains as sustainable because this is just part of maybe your longer-term optimization strategy based on your bidding -- (multiple speakers) -- things like that?

Right.

Okay. Thanks for the clarification.

(OPERATOR INSTRUCTIONS). Michael Judd, Greenwich Consultants.

Yes, on the cost side, I wonder if you could just walk through some of the factors that you see currently? Obviously, we're seeing higher energy costs both on the natural gas side and also on the oil side. But also, we're seeing higher freight rates and logistical costs and things like that. Can you address that issue in terms of what kind of impact you're expecting both in the second quarter and for the rest of the year, please?

Yes, we tried to indicate some of that in our remarks. Natural gas has not been a significant impact for us. We do have a hedging program that has, I guess, mitigated the impacts of any significant price spikes that we've seen on that side.

In terms of freight, we have looked out, and knowing that fuel prices are increasing, and I think Mike mentioned in his prepared remarks that the impact of that for the remaining nine months of the year we would estimate at about $1 million. For some of our business, we can actually recover that as a surcharge to our customer, so it is just a pass-through. So the impacts are not, maybe, as significant as what you might expect them to be. And that $1 million would be roughly at current level gasoline and diesel prices.

And some of our capital OE investments we've made the last couple of years, on the natural gas side of it, has also been on the efficiency side. So we are seeing the benefits of two major investments that we made, and we've got one underway right now at another one of our facilities. That is significantly impacting the BTUs per ton of salt that we are using. So not only relying on the hedging program, but we are also driving our consumption of energy down per ton of production also.

Thank you very much.

Steve Pazza (ph), Pazza Capital.

Actually, Eric for Steve. What are you projecting your CapEx? Should we take the run rate for this quarter and assume that it's good for the rest of the year? Or will it be greater than that?

Yes, we estimate that, on a full-year basis, we're looking at 25 to $26 million of capital spending, with roughly $3 million of that earmarked for payback projects.

Eric, you have to be somewhat careful looking at our first-quarter capital numbers because of the way we view our capital within the business. We don't know going into the first quarter -- fourth quarter and first quarter of each year, we're rather -- first quarter, in particular, we restrain our capital spending because we don't know what kind of winter season we're going to get. So we tend to escalate going out of the first quarter once we know what our sustainable cash flow is for the rest of the year. And then we start making higher commitments on our capital going forward. So the first quarter you just can't take times 4 and get an accurate representation.

Fair enough. Thank you.

At this time, there are no further questions. This concludes today's Compass Minerals first-quarter earnings conference call. You may now disconnect.