Compass Minerals International Inc (CMP) 2005 Q2 法說會逐字稿

Good morning. My name is Vanessa, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Compass Minerals second quarter 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. If you would like to ask a question during this time simply press star, then the number one on your telephone keypad. If you would like to withdraw your question please press the pound key.

I would now like to turn the conference over to Peggy Landon, Director of Investor Relations. Ms. Landon, you may begin your conference, ma’am.

Thank you, Operator. And good morning, everyone. 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 read our 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 those factors identified in Compass Minerals International’s Annual Report on Form 10-K filed with the Securities & Exchange Commission on March 16th, 2005. The Company will not update any forward-looking statements made in this call 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 web site at compassminerals.com.

Now, it is my pleasure to turn the call over to Mike Ducey.

Good morning, everyone. As you read in our press release, we had our 13th consecutive quarter of YOY sales and EBITDA growth. While that’s a good achievement we are more proud of our progress in some other key areas, by following our business plan and executing the basics.

In the first six months of the year we’ve improved our productivity per man hour by 7%. Our fixed asset velocity has increased by 14%, and our sales per employee has been up 9% compared to the same period of 2004.

Also, YTD our operational excellence initiatives have reduced our costs by more than $2 million, as we focus on reducing waste, providing our employees with more productive work environments, and making the right kind of internal decisions around investments.

This focus on the fundamentals has helped us increase the intrinsic value of the business by 14% over the past 12 months. Intrinsic value is measured, is a measure I use to evaluate how successful we are in creating value on a normalized winter basis. Intrinsic value factors in net debt, cash flow or EBITDA, less any benefit or decline that has been caused by an atypical winter season.

I’m particularly pleased that our second quarter growth was the result of improvements in all of our product categories. There were a couple of unusual snows in April that gave our highway the icing sales a minor lift, and we had some early rock salt buying ahead of our 2005, 2006 winter season. However, the advanced buying hasn’t had a significant enough affect to materially impact our upcoming winter season sales.

Speaking of our upcoming winter season, we’ve completed about two-thirds of our bid season, and we’ve seen approximately 2% growth in the highway deicing commitments for the market as a whole. Our share of sales is about the same as last year, and on average our pricing has improved by approximately 9%. However, it’s very important to keep in mind that we’re still roughly a third of the way to go in the bid season and our future awards might be substantially different from the bids we’ve won so far.

One difference between this year’s bid season and last year’s is that we’re winning more of the better priced seasonal business, and we’re letting some of the lower price early fill business go to competitors. That means that we can expect a modest seasonality shift in some of our sales volume, with some highway deicing volume moving out of the third quarter into the fourth quarter and first quarter of 2006.

Our internal forecasts indicate that our industry will be facing higher transportation and depot handling costs, at least through next year. We believe that the sharpest increases are likely to be in the barge rate which, as an industry, are increasing anywhere from 30% to 65%, depending on the shipping point when you factor in fuel surcharges.

Trucking costs have been rising also at a rate of about 2% to 7%, also depending upon your location, with additional fuel charges in the 10% to 15% range. And industry wide, depot costs are increasing by as much as 7% depending on the depot location. Our key job is to minimize the impact of these increasing shipping and handling costs on our Company, and we’re working hard to stabilize those shipping and handling costs as a percentage of our gross sales.

Turning to our general trade product line, we’ve made some nice gains in the second quarter, particularly on our water-conditioning and industrial sales. We had both volume and price improvements in North America. However, they were partially offset by a decline in the U.K. sales.

Our U.K. general trade business is our smallest business unit, and they’ve been facing some very tough fundamentals. The market has contracted because of recent chemical plant closures and which have resulted in excess capacity in the marketplace. Thus, as you would expect, we are experiencing reduced sales volumes and prices are struggling to keep up with the higher costs, particularly in natural gas.

Our sulfate potash business grew by 21% this quarter, which is mainly due to the price improvements we’ve made over the past 12 months. We recently announced another price increase of $20 a ton effective on July 1st.

The Great Salt Lake area has had one of the wettest springs in 20 years which, of course, is slowing our evaporation process. The impact on our salt production is negligible, but it is likely to affect our SOP production capacity for the next few months. While we don’t expect this to have a material impact on sales volumes this year, it could have an affect on SOP sales volumes in 2006 depending upon how the rest of the evaporation season goes in the Great Salt Lake. We’re currently working on ways to compensate for the missed evaporation days, and will give you an update on our progress on our next earnings call.

Recently, Minosus, our British joint venture with [Deolia], signed its first contracts with the waste disposal customers, and we’ll begin accepting the first deliveries this month. The contracts range in size from 500 to 20,000 tons per year with prices ranging from 60 pounds to 85 pounds on a delivered basis. The prices vary based on the type of material being accepted and the length of the contract we’ve entered into. We currently anticipate that we should be operating at about 50% of our 100,000 ton per year license limit for most of 2006. When we achieve sufficient economies of scale, we expect our operating margins in Minosus to approximate 35% at these current prices. Of course, we will reflect half of that profit, and will record the other in other income.

With that, I’m going to turn the call over to Rod, who will discuss the details of our financial results with you. Rod, please.

Yeah, thank you, Mike.

YOY our gross sales increased by 14% to $110.4 million, and our product sales which excludes shipping and handling costs grew 11% to 82.2 million. Our salt revenues increased 12% to 83.1 million principally due to higher volumes in both highway deicing and general trade. Salt product sales also increased 7% reflecting higher sales volumes offset by higher transportation costs. SOP revenues increased 21% over the prior year quarter to $27.3 million, reflecting higher prices and modest volume gains.

On the transportation side, our Logistics Team continues to work with transportation providers, particularly rail and trucking providers, to find creative ways to increase efficiency and reduce costs. Our gross margin percentage narrowed slightly by more than 1% this year because of higher transportation and energy costs.

As you read in our press release our gas hedging program saves us approximately $500,000 compared to the [pot] market, even though our total natural gas costs were up approximately 700,000 compared to last year’s second quarter. We are currently about 75% hedged through the rest of 2005, and we have continued to make forward purchases during the year. Despite these pressures, gross profit grew $1.4 million for the second quarter.

SG&A costs increased $500,000 this quarter which was mainly the results of changes in foreign exchange rates in our British and Canadian SG&A costs when compared to the prior year. Operating earnings grew 18% this quarter to $8.4 million.

The accreting non-cash interest accruals on our discount notes drove a 5% increase in our interest expense. However, our total debt has decreased by $18.6 million since December 31st of last year. This reduction includes another $10 million voluntary payment that we made on our term loan this quarter. That payment reduced our term loan balance to $17.6 million.

We have an income tax benefit of $7.6 million, which was largely attributable to the partial release of a tax reserve. In June taxing authorities announced that they had established the framework to treat cross-border tax matters between the U.S. and Canada more consistently. As a result of this new agreement, we were able to release previously established tax reserves totaling $4.8 million net of other adjustments. As I’ve previously mentioned, we currently expect our 2005 cash taxes to be about double the amount of our 2004 cash taxes, primarily because of our improved profitability.

We continue to examine ways for the Company to repatriate earnings from our foreign subsidiaries in ways which could help match our debt financing with the operations in each country in which we operate, so that we can fully minimize our tax burden. We would expect to make a decision on that later in 2005.

Our other expense of $800,000 was chiefly the non-cash affect of changes in foreign exchange rates. These non-cash charges contributed $.04 to our loss per share this quarter. This was partially offset by interest income.

Our net loss for the quarter was $700,000 or $.03 per share, however, excluding the $4.8 million onetime tax benefit, our net loss was $5.5 million or $.18 per share which is the same as the second quarter of 2004.

However, our EBITDA increased 7% to $17.9 million, and our adjusted EBITDA increased to $18.7 million, an 8% improvement over the second quarter of 2004.

For the six months ended June 30, our cash flow from operations was $103.4 million, compared to $108.4 million for the six months ended June 30, 2004. The decline is largely due to an increase in Canadian cash taxes as we reported last quarter.

We continue to be slightly ahead of 2004 in our capital spending. YTD our capital expenditures were $9.8 million compared to $8.6 million for the same period in 2004. We’ve budgeted our 2005 capital expenditures to match 2004 expenditures, so the difference to date has been caused by differences in the timing of the projects.

With low amounts of prepayable debt for the next year, the Company has been reviewing a modest amount of other potentially high returning investment projects. We will keep you informed should our annual capital spending plans change.

As I mentioned earlier, our debt has declined over the first six months of the year from $58,583m to $564.5m at June 30th. Our debt net of cash was $509 million at June 30, compared to $573m at December 31st of last year, a decline of $64.4 million.

We are entering the time of year when the working capital build is at its greatest, so the third quarter is typically the time of the year when we use cash from operations. We believe this amount will be comparable with 2004.

And now, I’ll give the call back to Mike for a few concluding remarks.

Thank you, Rod.

In closing, I’d like to say that I think our staff did a really good job of blocking and tackling during this quarter. And quite frankly, that’s what this business takes. We’ve made gains in each business segment, and we’ve worked hard to contain our costs. We’re particularly focused on bringing the shipping and handling costs back in line on a percentage of gross revenue basis and on managing our energy consumption.

We also remain focused on finding ways to take strategic advantage of our strengths in our assets that we’ve put in place, meaning we continue to look for ways to deliver prudent value enhancing growth for our shareholders.

On our next call, we’ll give you further updates on the Minosus Project, and, of course, we’ll give you our final result on the highway deicing bid season.

With that, let’s open the call for some questions. Operator.

[OPERATOR INSTRUCTIONS.]

Your first question is from Michael Judd with Greenwood Consultants.

Hey, Michael.

Hi, Michael.

Good morning, everyone. A couple of questions. Last year in the third quarter you reported a loss of around $.17, so I’m trying to understand, it seems like some of the volume or production has been pulled into the second quarter. Does that imply that basically the loss could be less in the third quarter than it was last year? Is that the right way to look at that, or is that the wrong way?

Well, I think, you know, we don’t, Michael, we don’t give forecasts of our results. What I can say is that we have a couple of significant factors. We have had some improving pricing net of shipping and handling costs compared, when you look at it compared to last year. And so that would be, you know, that would be a plus compared to last year.

On the negative side, you hear Mike talk about the fact that we have secured more of the better price in season business than the early sale business, and that could possibly push some volumes out of the third quarter into the fourth quarter and the first quarter of next year. And so you have a couple of offsetting factors there. But, certainly, the price improvement that we received in the bid season should have continued through the rest of the bid season, as well as the price improvements on the SOP business are all positive, as you look at the results for what you might expect in the third quarter versus last year.

Okay. Well, let me ask another question. So, this is along the lines with the gross margins, the declining to around 19.4% in the second quarter versus 20.7% last year. You know, you obviously discussed in detail the fact that, you know, the shipping and handling costs are up, you know, significantly. What types of actions are you taking specifically to, you know, to address the margin pressure issue?

Well, I think there’s a couple of things. We have, of course, recognized that transportation and energy costs are higher and we’ve been working on, you know, pricing improvements in each of our product lines. We are, we do continue to hedge natural gas and that’s been a favorable impact for us. And we have invested in energy efficiency projects that have helped reduce the amount of natural gas that we need. So, for every ton of evaporated salt we produce we need less natural gas, and those investments have paid off for us.

I think in the second quarter you had two different things, of this year, specifically of this year. You had the higher natural gas that accounted for about half of the margin decline on a percentage basis. And then at our largest facility in Goderich, we did have some higher maintenance costs this year that weren’t, that aren’t indicative of a trend but are just a different timing when we slowed the mine this year to do some of our major maintenance. That impacted the second quarter where we would normally have that more in the first quarter, of a first quarter focus on that, that ended up impacting the second quarter a little more this year.

Yeah, we decided since, you know, we had a fairly strong winter season that we would continue to operate the Goderich Mine up until June rather than taking our normal March maintenance two-week turnaround, so the timing that you saw this year in the second quarter around the Goderich Mine maintenance was a choice that we took to build inventory during the season and take a late turnaround.

Okay, and just, lastly, on the tax rate. I’ve noticed on a clean basis, you know, excluding special charges, I’m calculating a tax rate in the second quarter of around 34%, that’s up from around 32% in the first quarter. And I think that you had previously provided guidance on the tax rate around 32%? So, is the 32% still the right tax rate to use for the third and fourth quarters?

Yeah, I’ll have to work you through the math on that, but 32.5% is still the rate that we’ve been using for the year excluding the special items.

I’ll get back in queue, and let somebody else have a chance.

Yeah, thank you, Michael.

[OPERATOR INSTRUCTIONS.]

Your next question is from [Amy Zanc] with Goldman Sachs.

Good morning, This is Amy.

Hi, Amy.

Hi, Amy.

Hi. I have a quick question regarding the SOP pricing. It looks like, you know, second quarter, the average sales price was up around $20 from first quarter level? And then in the press release you announced another $20 per ton price increase. So, I just sort of want to, you know, clarify this 20% price increase. Is this based on YOY or quarter over quarter?

Well, it’s based on – well, there’s a lot of factors, Amy, that when you look at historical you’ve got to be careful, because the contract timing that comes up, when is that negotiated, when is it put through? A lot of this stuff that we sell on the SOP market is based upon annual contracts, so as they come up we implement not only let’s say the recent price increase of $20 in July, but we may go back and recapture the October or November increase, also.

So, comparing quarter to quarter is kind of a little bit iffy. The progress that you see, the $20 you see and the $20 increase in July are on top of what you’ve seen so far in the gains that we’ve made on the SOP side of the business.

Right, I’ve got you.

And the second question, just trying to get a sense of how to think about the shipping, the handling costs going forward? So, would you expect the same difficulty will be existing throughout the whole year, and the costs will trend up sequentially? Or just be flat sequentially?

We think they’re going to be – it’s going to be a step function for the next year. I mean as you renegotiate your annual contracts or biannual contracts with your barge companies, your shipping companies, you’ll see the step function go into place at that particular time and then level out, and for a period of 12 to 24 months, depending upon the length of contract timing that you have with your vendor. So, I don’t think you’ll continue to see a compounding of it, you’ll just see a step function as it goes up throughout the year.

Okay, thank you.

Your next question is from [Jessica Thom] with Goldman Sachs.

Hi, good morning. I just had one quick question. Have you guys thought about maybe refinancing some of your debt since the interest rate that you’re paying currently is considerably higher than what you could possibly get in the market? Any thoughts about that?

Constantly, Jessica, we look at it! It’s a constant focus for us. As Rod mentioned, we keep making our $10 million prepayment on the term debt that we have, and we’re getting that down to a point that assuming that we continue to make the progress we’ve made by yearend, that debt will be extinguished. And the question then becomes what do you do with the cash flow generation that we’re getting from the business?

The first callable date on the 10% bonds is August of next year, and then, of course, the more expensive senior discounted notes are all sequentially after that.

Right.

We, right now everything is very favorable in the high yield market. As you noted, or may have noted, Moody’s just recently gave us a positive, while they didn’t address our bond rating as well as I would have liked them to do, they did reaffirm a positive outlook.

Was that requested by you? For the Company?

We constantly work with Moody’s. We go in, we talk to them. We present our business plan to them. The market is pricing our bonds at a more favorable rating than what Moody’s or Standard & Poor’s, in our view, rates our Company.

I think the timing would be beautiful. The problem is it’s just very costly on a call provision basis to take early calls on those notes. And weaken in bonds. We continue to look at it, Jessica, but right now, we just haven’t been able to come to a very compelling reason to want to call those notes.

It depends on how you all view us as a cash flow or an EPS company. We view ourselves as a cash flow company, taking out pre-call cash payments, you know, it may or may not be in the best interests of the Company on how we’re being viewed from the financial community.

Okay, fair enough. Thank you.

[OPERATOR INSTRUCTIONS.]

Your next question is a follow-up from Michael Judd with Greenwood Consultants.

Yes, on the subject of SOP, what is the increase in price starting in July for MLP?

I don’t believe that our pricing per ton really has followed or has, you know, been a reaction to any particular price announcement on MOP.

I think MOP, if I remember, Michael, and again I may be wrong, but I think it’s $10 that they were floating out. And I’m not sure if it stuck or not. Right now, we believe we have a great opportunity to start to differentiate ourselves from the trap that IMC basically positioned our SOP business in before we acquired it. And that is trying to tie SOP pricing in North America to MOP.

In Europe, they, the people there, the KMSs of the world, they’ve been able to price SOP at about 1.6 times the MOP price. Here in the States that had degraded to about a 1.3 or 1.35. So, what we’re trying to do through our marketing efforts is once again, establish SOP as a premium product to MOP, and also get the premium pricing that demands in the segments that we’re focusing on.

Okay. And, secondly, I just want to go back to my initial question. I mean for those of us who aren’t, you know, involved as closely as you are in your businesses, I mean I can’t say that, you know, given that there’s a bit of a change this year in terms of volume moving into the second quarter, I can’t say that I really have any particular sense as to whether your earnings could be sequentially in the third quarter up or down. I mean I really, to be honest with you, is there anything that you can provide at all to give us any sense as to the direction of earnings in the third quarter?

You know, Michael, I don’t see anything, again as Rod reiterated, we’re not in the business of forecasting because of the nature of the business. We threw a couple of crumbs on the water, so to speak, to tell you that there’s a couple of things that’s changing, i.e., a strategy change on our part because we’re running at such high levels of mine capacity, to take some higher value business in season versus the early fill discounted business. That will mean that there could be a slight shift of some volume. Is it going to be a catastrophic shift from third to fourth quarter? No, it’s not going to be. We’re also looking at a 9% price increase.

Although we will have some increased costs to deliver that product, we think we’re doing a very good job to minimize that, despite what’s happening in the industry. So, I don’t see a dramatic shift taking place in the third quarter, a $.17 number that you laid out last year that’s going to dramatically impact the business. That’s about as good a feedback I can give you.

Okay, great. And then I noticed that, obviously, the inventory numbers are up, but that’s because you’ve built inventory ahead of, you built more inventory this year?

Yes, it is. Number one, we had a very above average winter season last year, as we talked about before. So, naturally our inventory going into this winter yearly period were slightly lower. So, we started to build them earlier because the only free capacity we have, and that’s part of the reason we delayed our mine turnaround at Goderich.

If you look historically, the off season, the February, latter part of February, March and April has been kind of the low point of capacity utilizations. Because capacity is not instantaneous in this business the only free capacity we have to grow with right now at Goderich is being able to better utilize that off season available capacity.

So, we made the conscious decision this year to build, to continue to run till July, June, July, take a downturn spread it over a longer period of time, and build inventory. Because if we don’t build it then we have no instantaneous capacity to grow the business.

Okay, great. Thank you very much.

Your next question is from David Silver with JP Morgan.

Hi, David.

Good morning. I have a couple of questions, maybe on the U.K. side of the business. So, the first thing is I was wondering if you could provide a little bit more detail on the nature, I guess of the changing industry or customer structure there? You mentioned some plant closures, and I’m just trying to get a sense of, you know, is this some chloralkaloid capacities?

Yes, you’re – yes, it is.

Oh.

There basically is one chloralkaloid producer left in the U.K. today, and that is [Ineus].

Oh, okay.

In the last 12 months Ineus basically took [Grotie] out of the business, and they recently announced a supply agreement to [Albion]. So, consequently, those were the last two non-Ineus chlorine producers in the U.K. So, they are now down to just one producer. And, of course, Ineus provides their own stream of salt mine. So, you’ve seen a dramatic change over the last five years.

And, by the way, the U.K. general trade business differs significantly from the U.S. business, because chloralkaloid producers here use rock salt. In the U.K. and in Europe, in general, they use evaporated salt in the chlorine process. So, consequently, you have seen a market in the U.K. go to about 50% utilization rate. Now, granted there’s only three producers in the U.K. One of them, by the way, is currently being bought or proposed to be bought by BSL.

So, the fundamentals there are not good. They stink. They have, you’ve seen a period of time of margin compression. You’ve seen a period of time where now natural gas has been rising. An inability to pass that on to the industry users over there and consumers. So, the U.K. business fundamentals just are not good.

Yes. Well, no, thanks, you’ve kind of jumped on my second and third follow-up questions there.

Now, you did mention natural gas, and I’ve heard all kinds of, you know, little snippets of what the situation is over there. So, I was wondering if you could maybe just broad brush, first off, kind of give us a sense of your total gas exposure in the U.K.? And then if there’s any guide that you can put just, you know, round figures what the YOY increase in the cost of gas in that market in terms of I don’t know, you know, dollars between MMBT, or however you feel it’s most relevant to your business. Thank you.

Well, I’ll give you kind of an overview, and maybe Rod can give you a little more specifics. I mean I don’t know what portents natural gas over there.

Right.

I do know they are fundamentally different than what we are here. We have a very, I call it a very aggressive forward hedge program in North America. There is no hedge program in the U.K. It’s so frustrating because I go over there and I keep saying, you know, ‘guys, we have a vulnerable business. We ought to be able to hedge our exposure.’ And the trading market in the U.K. for natural gas is so fundamentally flawed that we basically are relegated to buying on a monthly spot basis.

Now, we don’t buy the gas, by the way. We have a code generation agreement with Scottish Power who actually buys the gas. So, you know, we would actually be buying a financial hedge against a future, but there is no working hedge program in the U.K. at the moment. So, we have seen the gas over there just go up and down like a yo-yo. It’s unplanned and unmanageable, quite honestly. Rod?

Hi. Yeah, David, I don’t have any exact figures, but we, rough numbers we spend around $3 million a year on gas in the U.K.

So, let’s say $3 million for last year and something above that this year, is that kind of the rough way to look at it?

Yeah, that’s right.

Yeah. I mean we’re painting a pretty bleak picture here, but this business doesn’t represent a big piece of our income stream. But it is a challenge, as I like to call it a strategic quagmire. You know, for us to figure out what we’re going to do there.

So, while it’s not a big exposure for us, it certainly eats up some of our management time figuring out how to best go value in the U.K. [salt] business.

Right, and it is, just as you say, it seems like just fundamentally a different business model.

It really is.

Harder to control.

You’re right.

Okay. And then I’m going to just ask one question about maybe your bidding in North America or in the U.S. So, you mentioned the 9% increase, and if you could just remind me, but in general, what level of delivery costs are kind of included in that? Or is it all, you know, or is it largely all kind of FOB, or the delivery costs are tacked on to your bid price?

David, we are generally at risk for the changes in whatever the delivery costs are. The 9% figure so far through the bid season is 9% on the delivered price. So, the, whatever changes there are in shipping and handling costs would be, you know, a variance to that 9%.

Got you. That’s what I thought. Okay, thank you very much.

At this time there are no further questions. Mr. Ducey, are there any closing remarks?

No, thank you, Operator.

And we appreciate everybody joining us this morning. As always, we look forward to talking to you and bringing you up-to-date on the business at the end of the third quarter.

Good-bye.

That concludes today’s Compass Minerals second quarter earnings conference call. You may now disconnect.