Compass Minerals International Inc (CMP) 2004 Q4 法說會逐字稿

Good morning. My name is Marvin and I will be your conference facilitator today. At this time I would like to welcome everyone to the Compass Minerals fourth quarter and full-year earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer period. (OPERATOR INSTRUCTIONS) Ms. Landon, you may begin your conference.

Thank you operator. Good morning, everybody. With me here today are Michael Ducey, our President and CEO, and Rod Underdown, our Vice President and Chief Financial Officer.

Before we begin today I would to take a moment to read the following Safe Harbor statement to you. 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 current expectations 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 the factors identified in Compass Minerals International's registration statement on Form F-3 filed with the Securities and Exchange Commission on November 16, 2004. The Company will not update any forward-looking statements made today to reflect future events or developments.

Also you can find reconciliations of non-GAAP financial information in our earnings release and in the Investor Relations section of our website at Compass Minerals.com.

Now it is my pleasure to introduce Mike Ducey.

Good morning. Thank you for joining us. I'm pleased to be able to report that we had a very good quarter and also a very good year. The fourth quarter was our eleventh consecutive quarter of year-over-year sales growth and once again every business line contributed to that growth. Our highway deicing markets, which include the Great Lakes region and Central Canada, had moderately more severe winter weather than normal in the fourth quarter, leading to a year-over-year increase in highway deicing salt sales.

Our general trade business posted steady gains this quarter thanks to organic growth in our water conditioning business and a good early fill packaging on consumer ice melter products. And of course, our SOP segment continued to perform wonderfully. Sales were up 69 percent quarter-over-quarter on a volume increase of 62 percent. We have been successful in implementing and broadening the market by converting standard potash customers to SOP for this application.

The best news of course is that we posted steady gains throughout the year, making 2004 a record year for sales, operating earnings and EBITDA. At the same time, our operational excellence programs have helped us remove approximately $5 million worth of cost from the business this year. Included in that figure are productivity improvements and cost reductions, some of which are from the changes we continually make in our procedures and processes and some are the result of cost reduction capital expenditures we have made in prior years.

Our continual focus on improving production processes combined with an aggressive work force safety education program has help us make significant gains in safety in our jobs. We approved our gas efficiency by 5 percent year-over-year and our natural gas costs have remained manageable with our hedging program. We expect to see some price appreciation in natural gas costs in the coming year and we will focus -- we will factor this cost change into our contracts negotiations for 2005 as we go forward. We are currently about 60 percent hedged for the calendar year.

As we have planned, our capital expenditures totaled $27 million in 2004 and about $4 million of those funds were invested in discretionary products where we expect to see paybacks in future years. More than a third of our 2004 discretionary capital expenditures were focused on energy reduction projects, so we expect to continue to make strides in our energy management program.

Other 2004 discretionary capital includes an expansion of our evaporated pond system at the Great Salt Lake which will increase our production harvest and reduce our production costs. That project will be completed in 2005 but since the evaporation process takes about 2 years, we will begin seeing the benefits for that project in 2007.

We expect our 2005 capital expenditures to be about the same as they were in 2004 with about the same level of discretionary spending devoted to payback projects.

I think most of you are familiar with Minosus, our joint venture in the UK that operates a document storage business and is working to launch a waste disposal business. In December, the High Court in the UK cited very strongly with the government's position that all necessary approvals for the project had been properly granted. This paved the way for us to begin finalizing our strategy, which we expect to have in place by the next earnings call in which we will report to you at that time. I want to stress that we don't expect Minosus to have much of an impact in 2005, but 2006 will show the benefits of the project. At the earliest, waste operations would start sometime in the late second or early third quarter.

As we look ahead to 2005, we are expecting North American transportation industries to continue to have bottlenecks, so we're then developing strategies to try to work around them. The transportation shortage had no material impact on us in 2004 and we're working hard to ensure that it’s true in 2005 also, though we are experiencing cost increases.

I am just as optimistic about the coming year as I was about 2004. Weather has been on pace with last year, though there is a lot of winter left to go. As we did last year, we will discuss the full winter season after the first quarter including a qualitative assessment of the winter season and its effects on our results.

So in summary, I will just say that we had a great first year as a Public Company and we're looking forward to more of the same in the coming year. With that, I will turn the call over to Rod, who will take you through the details of Compass' performance.

Thank you, Mike. Our fourth-quarter gross sales were $236 million and our product sales, which exclude shipping and handling costs, were $170.7 million both of which are 17 percent increases over the fourth quarter of 2003. For the year our sales increased 16 percent to $695.1 million and product sales increased 16 percent to 504.9 million.

Our fourth-quarter salt sales of 210.1 million reflect modest volume growth and improved pricing in both the highway deicing and general trade product lines. Our shipping costs as a percentage of salt sales has remained consistent with last year, so you can see that the transportation cost increases we have built into our pricing have been on target to date. As a reminder, we achieved a 5 percent increase in highway deicing pricing this winter season but we anticipated that approximately half that gain would go towards increased transportation costs.

Changes in foreign exchange rates also created a $5.3 million benefit to salt sales. For the year, salt sales are up 11 percent to $607.5 million, reflecting higher volumes from increased awarded bid volumes, higher prices, and fluctuations in foreign exchange rates.

Fourth quarter SOP sales increased 69 percent over the prior year to $25.9 million. And full year sales increased 62 percent to 87.6 million on significant volume and price growth.

Our gross margin for the quarter was 30 percent, up 2 points from last year and for the full year our gross margin was 27 percent, which is a 3 point improvement over last year. These improvements came from both price improvements, higher production levels, and our operational excellence programs.

Fourth quarter SG&A expense was $18.6 million, which includes some variable costs associated with our increased sales such as selling expenses and variable compensation, as well as higher professional services fees and the impact of foreign exchange rates. For the year our SG&A was $58.9 million. In addition of the factors that contributed to the fourth-quarter increase, we incurred no expenses this year as a result of becoming a publicly traded company.

We had a secondary offering in November for which we incurred charges of $400,000. Following that offering, Apollo Management exercised their right to terminate our management consulting agreement for $4.5 million, so our other charges for the quarter were $4.9 million on a pre-tax basis. For the year we also incurred an additional $1 million in other charges for public offering expenses.

Fourth-quarter interest expense was roughly the same this year as last as accreted interest was offset by lower average borrowings. For the full year, our interest expense was $61.6 million, which was $5.3 million higher than for 2003 primarily due to the discount notes that were issued in May, 2003.

Our other expense of $3.8 million for the quarter and $7.8 million for the year were primarily due to foreign exchange losses on intracompany transactions. Our tax rate for 2004, up 29 percent is approximately what we had expected. As I mentioned in our third-quarter call, we expect our tax rate to increase modestly in 2005. Cash tax payments were $9.6 million in 2004, however, we expect that our improved profitability will cause our cash tax payments to almost double in 2005.

Net income for the quarter was 19.9 million or 62 cents per share. Excluding the special items I mentioned earlier, net income was 23.1 million or 72 cents per share for the quarter. For the year, net income increased to $49.8 million or $1.57 per share. Excluding the previously mentioned special items and the $11.1 million non-cash tax benefit we received last quarter when we released part of the deferred tax asset valuation allowance, our net income was $42.9 million or $1.35 per share.

Our fourth-quarter EBITDA improved $4.5 million to 54.5 million. For the year our EBITDA improved 18 percent to $157.6 million and our full-year adjusted EBITDA improved 22 percent to $171.3 million. We believe that it is important to assess our underlying operating performance exclusive of weather impacts. We had moderately above-average winter weather in both the first and fourth quarters of 2004 and while quantifying the weather impact is not an exact science, it is even harder to do in the middle of the winter season. We have estimated that approximately 7 to $10 million of our 2004 operating earnings were due to above normal weather.

As Mike mentioned, we started the current quarter with winter weather similar to last year. In addition, we have made improvements in the Company's underlying run rate quarter-over-quarter. It is still too early to assess the weather impact on the first quarter so on our next earnings call we will have a complete financial and qualitative assessment for you.

Mike spoke earlier about our discretionary capital program that helped take cost out of the business. Approximately 4 million of our $27 million capital spending was on projects where we expected a payback. We believe those projects will be successful at continuing to improve our results in 2005.

Our debt balance, net of issuance premium was $580.4 million, which reflects another $10 million voluntary paydown of our term loan in the fourth quarter, bringing our total voluntary principal payments to $40 million in 2004. The third- and fourth-quarter debt balances are seasonally the highest and the first and second quarters are typically when the Company generates the majority of its free cash flow. We did borrow $11 million on our revolving credit facility during the quarter for short-term working capital requirements.

Our cash flow from operations was $99.7 million for the year, a $30 million increase over 2003. We used that cash flow to pay dividends, pay down our debt, and invest in our business as I previously mentioned. As Mike said, 2005 is off to a strong start. Our first quarter deicing sales have kept pace with the first quarter of 2004 so far and we have had growth in the underlying run rate of the business thanks to price and volumes improvements in every product line. And we're looking forward to making additional strides in our operational excellence programs.

And with that, we will open up the call for questions. Operator?

(OPERATOR INSTRUCTIONS) Amy Vang (ph) with Goldman Sachs.

Actually I have a quick question regarding your volume, volume change looking forward. Actually the first half of '05, do you think the volume trend for salt and potash can continue the same level or you're going to see some decrease?

Our potash volumes in 2004 benefited from an acquisition that we did in December of 2003. So we had higher growth in that product than we would have experienced from market growth or switch over from our KCL products to SOP during 2005. So I think the pace of growth we are expecting would certainly be slower in 2004 -- 2005 than we saw in 2004 primarily due to the acquisition in late 2003.

I think, Amy, from a salt perspective we kind of see the normalized -- if you say we are above average in the first quarter last year, right now we're running slightly above average this year, the general rate of volume growth in these type of markets are somewhere between 2 to3 percent. So I think if you are comparing first quarter to first quarter you should see just organic type growth rates because we didn't increase significantly in market share in those areas.

Okay, thank you.

Bob Koort with Goldman Sachs.

Sorry to monopolize, guys. A couple questions and I also have to applaud you for calling out unusual weather impact as opposed to just trying to bank it and annualize it. So I think that's pretty noble. At any rate, the question is if you -- one, if you look at the chloralkali business, that industry is absolutely humming now and they're making darn near all-time record margins. IS there any opportunity for you to jack up your prices to those end markets? Are you pretty much contractually limited on an annual basis?

We are pretty much contractually limited on an annual basis. A lot of those contracts that we signed, as with anybody who provides a key product to somebody, like chloralkali, they are long-term contracts. They have some escalator clauses in them but not to the degree that we should be able to capture some of their increased profitability. So -- and unfortunately that is the state of affairs with dealing in the chloralkali industry, which we basically look at as not a significant growth market for us. It is kind of -- it helps balance out production over the year because of the seasonality that we experience in our rock salt, so consequently we look for a longer period of time contracts and we may give up some flexibility in order to do that, Bob.

Got you and then I noticed the SOP volumes came in a little healthier than you had expected. Is there a danger of some prebuying ahead of price hikes that are in place for the first quarter?

Absolutely correct. We announced a $20 price increase on I think January 11 or something like that and we did experience what we believed to be some heavy prebuying; however, I can say also that we have a heavy backorder, backlog. The orders were so heavy and we are experiencing such a great degree of disruption along the Union Pacific Rail Line System that we had a significant backlog of orders going even past January 11. So while they tried to beat it, the ability to move it quickly is just not there in the system today.

Got you and the last question and I appreciate your time. In terms of your cash flow your dividend has creeped down a little bit from where you initially put it at that sort of 5 percent target rate. Is there scope for raising that? And then secondly, given your solid cash flow is there any opportunity or is the penalty too onerous to go into the public markets to buy back some of your high-cost debt?

I will just say a quick thing and then I'll let Rod probably respond a little more in-depth. Both those issues are constantly under review by management and the Board. And based upon this performance level, they will continue to be discussed at our next Board meeting coming up. Rod?

I would say as it relates to the debt, Bob, that they are trading at very high levels and we have continued to look, as Mike said, at what our options are there. It does not appear that that a straight -- early tender is very attractive to us right now. But we continue to assess that and there are other options available to us and we are just trying to come up with what the right approach is.

Okay, great. Thanks.

Michael Judd with Greenwich Consultants.

Good morning, everybody. Congratulations on a good quarter. My question is also on the SOP business and I understand that the December comps versus this year. I also want to try to get understanding of some of the underlying changes that you have made in that business. Obviously there was the customer list and all these things are helping out with the volumes and you have a reinvigorated salesforce, but can you just talk a little bit about maybe some of the underlying drivers in terms of demand trends? Have you been -- I don't know to what extent export market is important for you and whether there has been a benefit from a weaker dollar -- you know, those types of issues?

Sure, I can give you a quick overview of all those. First of all this business historically has been viewed as an organic growth rate of 2, maybe 3 percent. I think once we bought the business back we challenged that and said that we thought there were opportunities to grow this organically more if we went back to really selling the differentiated nature of the product versus regular MOP. And by the way, we felt competitively expanding the pie was a lot better than fighting with imports over a smaller or the same piece of pie.

So we have been spending a lot of money on market development and researching at universities to build the case of differentiating the product and its performance into areas like turf and grass -- grasses turf -- and nuts, fruits, vegetables, all that kind of stuff. So we are building up a whole war chest of information necessary to convince people to spend the incremental dollar to buy SOP over MOP and I think you're seeing that start to pay off as we made some inroads. And by the way under the MOP volume, anything that we take is basically unrecognized within the whole total MOP market place.

The second issue is correctly all-around the import and the rising rates and of ships coming in from Europe and Chile; also the dollar, and of course the depreciation of the dollar against both the euro and also the Chilean peso has basically really benefited us, encouraged our competitors to recover those cost increases. So all of those have been very favorable to the price increases that we have seen, along with the general price increases that MOP has been getting in the marketplace. So the wind has been at our sail from the standpoint of both volume growth and also from a pricing standpoint in this marketplace.

Also the additional volume that we brought in really is benefiting the plant from a cost standpoint. As you can imagine when you're running a plant at about 55 percent of capacity and now we're running it at 85 or greater than 85 percent of capacity, the value that that is generating through our OE philosophy at the plant has been tremendous. And from an export standpoint, from our view we want to be the best performing potash supplier, SOP supplier to the North American market. While we do export, we do not want to rely as we did in the past or as IOC did in the past on export volume. We are more focused on being the premier supplier of SOP in the North American market. That summarizes it.

A follow-up -- actually not a follow-up but a separate question on Minosus. I know you have been working on that for some time now but for those of us I guess who just don't have as much experience understanding the opportunity there, could you discuss maybe on a -- from a longer-term perspective maybe '06 kind of perspective, what kind of magnitude would we be talking about potentially in terms of profits or revenue or just anything?

I think right now, Michael, we would like to defer that until after the third quarter, until we get a little more feel for it. The only thing I can tell you, from a general standpoint in the UK is they are under tremendous pressure to find a place to dispose of the type of materials we're talking about, fly ash, pretty low hazardous products that by the EU edict has basically said that they can no longer co-dispose those. And you are talking -- I think our market study in the UK is like a million tons plus of type of product that we are looking to put as suitable for our mine.

And right now like 250 approved sites in the UK, only about 3 or 4 of those have applied for co-disposal permits. And we are actually the first one to get a permit for co-disposal. July 1 of this year they gave, the EU gave the UK 1-year extension because of the issues that we have been having on getting it permitted. They have until July 1 and they have to come up with a solution because they can no longer co-dispose. So we look at it as a very significant long-term market for us.

So if it is a million tons, help me out with just overall market opportunity, not so much your opportunity. What would be sort of the revenue associated on a total basis on a million tons? Realizing of course that is probably never going to happen?

Michael, this is Rod. I think Mike was talking about the whole market. Our capacity at that joint venture is going to be somewhere around 100,000 tons, so that would be where we are at. We are currently in the market trying to determine what the optimal price is to achieve the greatest return on the project and I think we will have more to report as we move down the road in future quarters on that. So we will be forthcoming with information when we feel more confident about talking about those kind of numbers.

You have got to remember we're in a joint venture here with our friends, Veolia. Veolia. They are really the market drivers. They are the people who are out negotiating the contracts. We could not even negotiate contracts until we are reasonably sure that the project was going to go forward and that only happened in December. So right now our partner is out there in the marketplace firming up the contracts that will support the opening of the facility come July/August.

Lastly, I guess is there some opportunity at some point maybe it's not this year or next year to actually refinance some of the debt?

Yes, as I had maybe just mentioned earlier, we have certainly been looking at the potential for tendering or buying back some of the existing debt. It is trading at very, very healthy premiums and so we continue to look at our options there. The first prescribed call date under any of our notes is in the summer of 2006. So 12 to 15 -- or about 15 months from now, 18 months from now. So I would expect that sometime between now and then we would take some action. It is really not extremely attractive today.

But every month we get closer to August of '06, that cost starts to diminish greater and greater and greater and you're absolutely right, Michael. Next year there is an opportunity to significantly impact the value of the Company going forward by reducing our interest costs and as we get closer to that date, those economics tend to flip and that is what we keep monitoring.

Thanks again and great quarter.

(OPERATOR INSTRUCTIONS) Tony Delserone with Federated Investors.

Hello Gentlemen. Could you please walk through the balances on your various pieces of debt?

I sure can, Tony. Of course the senior subnotes are at 325 million face and those still have a $2.7 million premium on them. The term loan is at about $37.7 million and we have $11 million on the revolver. And then the two discount notes are at 85.8 million and 120.9 million.

120.9?

That's right.

Current portion of long-term debt?

It is just 400,000.

Could you also break down your interest cash versus non-cash?

I sure can. In the quarter had $15.7 million of interest expense; 6 million of that was non-cash. For the year, $61.6 million of interest expense; 23.6 was non-cash.

I'm sorry, what was the total amount in the year again, please?

61.6.

61.6 and 23.6 of which was non-cash?

That's correct.

Tony, we continue to focus on debt reduction. We have made I don't know how many straight quarters of $10 million voluntary debt paydown. Since the only debt that we currently have any options on right now is our bank debt, the Board continues to support the very active paydown of debt by the Company and its philosophy and we will continue to focus our excess resources on paying down that bank debt.

I support that concept as well. Thanks a lot guys. Congratulations on another good quarter.

David Silver with J.P. Morgan.

I had a question I guess on your salt segment results. And I guess when I just do some simple analysis, the margin per ton or EBITDA margin per ton 4Q versus 4Q was kind of exactly even, it didn't rise or fall. And given the increase in volume, the increase in average price, etc., I probably would have anticipated a little bump up there. Could you maybe talk about some of the other factors that may have worked in to kind of limit the improvement in your cash margin per ton on your salt segment this quarter?

That's a good question, David. Within the salt segment, there are a variety of products in there. There is water conditioning. There is consumer deicing, agricultural, some industrial chemical and of course highway deicing all within that salt segment. So when you look at it on an overall basis, it is difficult to assess just from an overall standpoint on why the margin per ton would be up or down or unchanged but for the fact that there is within the sales mix quite a mix effect on a per ton basis of what the EBITDA is per ton for any particular product. So more highway deicing product on a percentage basis would usually equate to a lower EBITDA margin per ton.

Okay, so you're citing maybe a mix effect 4Q versus 4Q?

That is correct.

From a pricing standpoint, David, every product line we had in the fourth quarter experienced price increases on a year-over-year basis, on a comparable line item to line item.

And you addressed a couple of the issues earlier in terms of maybe -- I was wondering if maybe there was some additional transportation? I am also semi-wondering if foreign exchange or the variable comp accruals are factored in there.

Well, in terms of some of the variable accruals that we made, that did have an effect as the operating earnings and the cash flow of the business grew, so did some of those accruals both from a selling cost perspective, because some of those costs are variable and from an incentive perspective all of those things were variable. But I don't think the effect on a margin -- EBITDA margin per ton would have been that great from any of those items.

Rod, if I could just ask you one other question about an earlier comment you made regarding cash taxes, you indicated I guess due to the nature of your profitability -- you having a high-class problem here -- but you expect the cash tax percentage or the portion of your tax accrual paid in cash to rise pretty significantly. I was wondering if you could speak to that issue and maybe talk about some longer-term opportunities to kind of keep that cash tax rate down?

Thanks for asking that question, David. From a tax payment perspective, many times you're after the end of a calendar year truing up in your final payment to the government for previous year earnings and that can also affect your estimated tax payments as you move forward. So both of those things are causing our cash tax payment expectation for 2005 to be 8 to $10 million higher than it was in 2004.

We are looking at some opportunities to reduce our cash tax expense as well as our book tax expense with some tax strategies. I would say we are sort of in close to the final stages on some of those projects and we will be moving forward to the extent we are comfortable as an organization with some of those changes. And if those happen, I would say the cash taxes would be reduced from the levels that I indicated in this call during 2005.

Okay and just the last question also maybe on the debt structure. I appreciate the previous caller having you lay out your debt security by security. But I just want to double check that other than the term loan you said with the 37 million balance and the revolver which you said was for seasonal needs here, those are really your last remaining kind of debt increments that can be paid off I guess I would say costlessly or without some premiums either market premium or prepayment premium? Is that correct?

That is correct. The next opportunity after that roughly $48 million of debt is the $325 million senior subs with a prescribed call date of August '06.

August '06 and then the others are through '07 and May '08? Right?

That's correct.

Okay, very good. Thank you.

There are no further questions at this time. Thank you for participating in today's conference call. You may now disconnect.