Compass Minerals International Inc (CMP) 2006 Q3 法說會逐字稿

Good morning. My name is Tonya and I will be your conference operator today. At this time, I would like to welcome everyone to the Compass Minerals third-quarter 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 session. (OPERATOR INSTRUCTIONS)

Thank you. I would now like to turn the call over to Peggy Landon, Director of Investor Relations. Ma'am, you may begin.

Thank you, Tonya. Good morning, everyone. Representers today will be Angelo Brisimitzakis, our President and CEO, and Rod Underdown, our Chief Financial Officer.

Before I turn the call over to them, I will read the following Safe Harbor statement. Today's discussion may contain forward-looking statements within 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 identified in Compass Minerals' most recent Form 10-K. The Company will not update any forward-looking statements made today to reflect future events or developments.

You can find reconciliations of any non-GAAP financial information that we discuss today in our earnings release, which is available in the Investor Relations section of our website at compassminerals.com.

Now I'll turn the call over to Angelo Brisimitzakis.

Thank you, Peggy. Good morning everyone and Happy Halloween. This has been a very exciting quarter for Compass Minerals because it is the first time since our Company went public that we've made a profit in the third quarter. This illustrates that Compass Minerals is a broader company than we sometimes get credit for.

We have a strong portfolio of nonwinter products and a diverse consumer, agricultural and industrial customer base. What's more, we've demonstrated the pricing flexibility to respond to increasing cost pressures, and we have the ability to manage our products, our customers and our application mix.

Our pricing flexibility was the primary driver behind the turn to profitability this quarter. We've sufficiently improved pricing across virtually all of our product lines to allow us to more than cover cost inflation. As you saw in our press release, we achieved a 10% season-over-season price improvement in our North American Highway deicing bids.

There is no question, though, that our base transportation rates are higher than last year, particularly barge rates, which increased on January 1 of 2006 and which affect rock salt shipments out of our Cote Blanche, Louisiana mine.

The volume of our bids was lower this season for a couple of reasons. First, we saw the market that we serve shrink by about 2%. We believe this is a short-term shrinkage due to some minor amounts of inventory carryover from last year. You may remember that producers hold the vast majority of highway deicing salt inventory. So the channel wasn't full, but there are small pockets of customer inventory that can affect the overall bid sizes on the margins.

In addition, we will produce between 300,000 and 400,000 fewer tons than we originally expected this fiscal year because of the eight-week strike at our Goderich mine. Our reduced production in turn reduced the volume that we felt comfortable bidding on.

As a result of these factors, we bid on and were awarded fewer tons this year than in the 2005-2006 season. However, we expect our average bid price improvement to more than offset the volume decline and to generate full winter season revenue growth from our North American highway deicing product line on a normal winter basis.

As most of you already know, we tried to guide you to think of our business in terms of normal winter because our highway and consumer deicing sales are so heavily influenced by weather events. You may recall that there were record snowfalls in the fourth quarter of 2005, and it was unusually mild in the first quarter of 2006. So neither quarter gives you a good guide for normal winter deicing sales volume. We told you at the end of the season that the two quarters just about offset one another to create a roughly normal to slightly milder than normal winter season.

We recently announced an $18 per ton price increase on water conditioning products, food-grade salt, and other consumer and industrial general trade products, which we will negotiate with customers as their contracts are renewed throughout the upcoming year.

Our specialty fertilizer volumes should be roughly the same in the fourth quarter of 2006 as in the 2005 quarter, but with pricing continuing to outpace the prior year by more than $20 per ton.

We've just finished harvesting SOP from our new evaporation tons and we're projecting a 20,000 to 25,000 ton capacity increase for the 2007 fiscal year. This is a very important accomplishment for us, because the additional tonnage will allow us to prudently pursue some business that we had to forego in the past.

We recently completed the $12 million expansion of our magnesium chloride plant, which commenced construction last year. We are projecting to nearly double our current 20,000 tons per year sales of dry bagged consumer deicing product in 2007. This product has better than average gross profit for us. We also sell magnesium chloride in liquid form, and we're making inroads into nonseasonal markets with that product, such as year-round dust control applications.

At our Goderich mine, we are still running full out to produce rock salt for the current season. We want to maintain this high level of production, so we decided to delay approximately $2 million of mine-related CapEx until early next year to help us produce at peak efficiency during the remainder of 2006.

We are also working with our partner Veolia to determine the best way for both parties to extract value from our UK storage joint venture, Minosus Limited. The Minosus sales forces are continuing to grow the document storage business and are gaining a foothold in the inert waste disposal segment. We like the progress we've made in document storage, and we are continuing to focus on the growth potential of that business.

We are headed into the fourth quarter with momentum, though as I previously mentioned, we do have a tough comparison because of the severe winter weather in the fourth quarter of 2005. Overall, I'd have to say that we're staying true to our promise to seek and develop long-term profitable growth. In fact, we just realigned our leadership team to better capitalize on organic growth opportunities and to evaluate any highly complementary external growth prospects that we may develop.

Now I'll turn the call over to Rod for details on our third-quarter financial results. Rod?

Thanks, Angelo, and good morning. As you saw on our press release, our revenues were up $16.1 million, or 15% year-over-year, and product sales grew by $12.6 million, or 16%. The majority of the increased revenues were price-related, as total sales volumes grew at around 2%. Our pricing improvements have clearly been successful at more than offsetting our rising costs.

We've experienced sharply higher transportation cost throughout this year because of increased shipping rates and fuel surcharges. The most notable increase has been on barge rates, where significant increases affected approximately 25% of our highway deicing salt shipments beginning January 1 this year. And we're experiencing rate increases from other shippers as well.

The good news is that diesel prices have somewhat moderated from their historic highs. Now, since diesel is the primary driver of fuel surcharges, our costs could end up being as good or better than last season.

Our product costs were up, reflecting increased cost pressure for a variety of items, including potassium chloride, which we purchase under a long-term contract at market-adjusted discount prices; higher natural gas prices; and, of course, higher sales volume. Despite these pressures, our gross profit increased by $5.4 million year-over-year and operating earnings grew over $6 million compared to the prior year.

Interest expense declined by $1.9 million compared to the 2005 quarter because of the senior debt refinancing we executed in December of last year. The benefit from this December refinancing was partially offset by higher accreted interest on our discount notes, and, in the 2005 quarter, we allocated interest to discontinued operations. We continue to expect our full-year 2006 interest expense to be around $8 million less than in 2005.

Other expenses improved by $3.8 million compared to the 2005 quarter due to year-over-year changes in the effect of foreign exchange gains and losses. Our income tax expense was $1.5 million this quarter compared to a $3.3 million benefit last year. We continue to expect our full-year 2006 effective rate to be around 25%. For 2007, we will continue to enjoy the benefit of the tax planning strategies that we put in place for 2006, with a rate that will likely be similar to, although slightly higher than, the 25% rate in 2006.

On our last conference call, we indicated that we expected strong improvement in third-quarter earnings, and as you can see that is what happened. Net earnings from continuing operations increased $7.1 million over the third quarter of 2005, which is an improved result we are quite proud of.

Our EBITDA grew by $9.6 million and our adjusted EBITDA, which primarily removes the effect of foreign exchange gains and losses, grew by about $5.8 million, or 28%.

Debt was $572.3 million at the end of the quarter, which is a 7% improvement since December 31st, largely due to $32.5 million of payments on our term loan and paying off the $31 million that was outstanding on our revolver at the end of the year. As of September 30, we had $8.4 million in cash, with no balance on our revolver. At the end of September 2005, we had cash of $23.8 million and a revolver balance of $29 million.

Depreciation, depletion and amortization was $30 million for the nine months ended September 30, 2006, and is still on track to total $40 million for the year. For 2007, we anticipate our DD&A to be modestly lower.

As Angelo mentioned earlier, we have decided to move approximately $2 million of our capital expenditures related to the Goderich mine from 2006 to early 2007 to ensure that we don't compromise the mine's efforts to build inventory for this winter's business. This will bring our expected capital expenditures for 2006 to approximately $38 million.

In 2007, we will spend the $2 million we moved out of 2006, along with the $11 million mine expansion that we announced in July. That should bring our 2007 capital spending to over $40 million. Once we've finalized our 2007 plans, we will update you on the 2007 capital spending expectations.

Before we open up the call for questions, I want to take a minute to review what Angelo said about the expectations for this year's fourth quarter and full winter season as compared to last year. When we spoke about our $10 per ton improvement in highway deicing bid award prices, we said that we expect those prices to generate stronger revenues this winter season. I want to stress that we're talking about the winter as a whole on a normal winter basis, which is how we think about the business.

We can't tell you exactly how the winter will play out by quarter. Angelo mentioned that in the fourth quarter of 2005, we had record snowfall and it was a record sales quarter for us. In fact, we said that severe weather added $35 million to $45 million in sales and $8 million to $12 million in operating earnings to fourth quarter 2005 results.

Now, we're not in the business of predicting the weather, but it would be highly unusual to have two fourth quarters in a row with record snowfall. So if the weather over the next couple of months is normal, we would expect to have lower highway deicing and consumer deicing sales volumes revenue and gross profit in the third quarter of this year than in the fourth quarter of last year, and we'd expect the converse to be true in the first quarter of 2007 if the weather is normal.

It would be fair to use the 2005-2006 full winter as your benchmark for normal winter sales volumes. Without knowing what the winter will bring, that is as much as we could possibly tell you at this time.

So now, I will open up the call for questions. Tonya?

(OPERATOR INSTRUCTIONS) David Begleiter of Deutsche Bank.

Good morning. It's actually Jason sitting in for David today. Congratulations on a good quarter and Happy Halloween.

I'm wondering -- the tax rate looks like it might have been a little higher versus your normalized expectations in the quarter. Is there anything that drove that up for sort of a onetime increase?

I think the tax rate is booked on a year-to-date basis. And obviously, if there is a slight increase or decrease in the expected effective tax rate for the year, then you book that all -- the effect of that all in the current quarter. So the quarter rate was just a little higher, but if you look at the full-year rate, it is still around that 25%. I think it was a little higher than what we had projected as the second-quarter year-to-date.

Okay, very good. Thanks. And then can you give a little color on what is behind the 6% drop in SG&A?

Yes. I think, Jason, there is no trend there. I would say two things. Following the mild winter, we did go into somewhat of an austerity program on some of our SG&A, and where there were discretionary spends, we have pulled back on some of those. And that has been moderately impacting our SG&A for the first half to three quarters of this year.

But I really think the impact in the third quarter was a series of smaller things -- some outside services that were lower -- but I wouldn't call that a trend.

Okay. And just lastly, on the Goderich strike, although the overall market was down with some higher inventory, I'm wondering do you foresee any spillover effects possibly of your constrained volume this year and subsequent -- your resulting lower bidding into next year, given that sometimes there is a connection between contracts you bid and win on this year and what you have next year?

Yes, this is Angelo. That is a good question. We purposely reduced the amount of volume we bid on this year just based on what we saw in terms of production at Goderich. We wanted to make sure we had adequate inventory to service our customers in case of severe weather.

What's nice about this segment is typically there isn't much customer retention year-to-year because the award goes to whoever the low bidder is the prior year or the next year. So it basically nets out every season and you start with a clean slate. So I fully expect our position going into next bidding season to be normal again -- we obviously don't anticipate strikes; we have a long-term contract already concluded at Goderich for a number of years.

So I would expect we are going to start with a clean slate going into next year's bidding season and we will return to our well-established market position then. So I do not see a spillover effect.

Okay, very good. Thanks.

David Silver with JPMorgan.

Good morning. I was momentarily distracted here, so I'm going to ask this question, and I hope it's slightly different than the question before me.

But I wanted to ask about the production shortfall that you highlighted in your comments, in that I guess earlier this year when there was a strike, I guess you guys had said that it would kind of change the pattern of production overall. But due to the timing of the strike and timing of your sales, that there would not be any shortfall on a full-year basis in production. Is there something that happened between then and now or did I misinterpret what you had said earlier this year?

Yes, this is Angelo. I think what we tried to convey earlier this year is we felt there wouldn't be an earnings impact due to the strike. We had built some inventory before the strike. We were going to run hard in the third and fourth quarters to recover. We sensed an optimal pricing environment because of the tightness in the market and the increasing tightness that the strike actually created. And we still believe that played out as we predicted or is playing out as we predicted, and will play out as we predicted going forward.

However, the reality is, in spite of our catch-up on production and with now delaying some discretionary capital into early '07, we're going to be a couple hundred thousand tons short versus what we thought we would do going into '06. And the prudent thing for us is to not overextend ourselves, not take the risk of alienating a very important customer base who is, frankly, absorbing some price increases that they are struggling to absorb -- I mean, budgets are tight.

So we thought the prudent thing to do was to, again, play the game for the long-term, position ourselves well for the upcoming bid season. But we believe we protected our revenue and earnings base through some pretty aggressive pricing actions that we've been successful on for this bid season.

Okay. Thanks for that explanation. I had a quick question about natural gas. I guess the markets have been pretty volatile here, and I know you have a base hedging program and maybe you alter it a little bit in response to market conditions. Can you talk about how your gas hedging looks heading into the winter? Thanks.

Sure, David. I would say overall, our strategy hasn't changed in that we are still taking a dollar cost averaging approach and layering in gas over the course of a couple of years. So that as we end a year, as we go into the next year, we are at least 50% hedged and can be greater than that, hedged up to 80%.

So overall, our strategy has not changed. I guess I would say our strategy is -- we know based on that strategy that we always aren't going to beat the market. But what it does is it should take out the peaks and valleys out of the prices and give us a little bit more stability in our cost structure.

As we head into the winter season, our price for the fourth quarter is really close to what it was last year, so I wouldn't anticipate a great change in costs in the fourth quarter. And our full-year '07 price is a little higher than '06, but not much. So you shouldn't hear us talking a lot about natural gas as we move into '07.

Okay, and one last question. This would be with the UK business that is now listed as discontinued. But I guess based on the gas markets and some other issues, they had a pretty volatile winter last year.

Have you guys figured out what the discontinued operations effect would be in the 4Q '05 period so that we can kind of strip that out and do an apples-to-apples comparison?

Sure, I do have the numbers on the fourth quarter and what those were. But as we reported the numbers last year, they were reported net of the discontinued operations. So if you look at last year's reported results, including our earnings release, those would already have been net of stripping out the white salt. The UK general trade business has discontinued operations.

But in that quarter, that business had about $14 million of revenues and about $2 million of gross margins. But again, if you look at last year's reported results, those numbers would not have been in there.

Sorry about that. Thanks for the clarification. Okay, great. Thank you.

[Nils Wahlen] with Credit Suisse.

Good morning. Nice quarter there. One question, on the $18 price per ton increase that you have, does that cover reasonably most of the general trade business? Or maybe another way is what percentage of general trade business does that cover? Because you've mentioned a lot of things here, but I'm not sure.

Yes, this is Angelo. If you noticed, I mentioned this segment, and in our press release we talked about the segment that the price increase covered. And it essentially covers all if our general trade products, except consumer deicing, which those prices have already been established since were going into the season. So the vast majority of our sales are covered with this $18 a ton pricing action.

Okay. Second question, it looks like the last two quarters you guys have been around 3 times net debt to EBITDA. Is that sort of the comfortable level for you or is there any change to that?

No -- well, let me start over. Yes, I would say it is a comfortable level for us. When we start getting at levels much below that, I would think we are probably maybe underleveraging the Company a little bit. So the three times is comfortable.

And really what is happening, Nils, is as we are paying off the term loan, our accreting interest is adding to debt. And so although -- the net effect of that is we have a higher average interest cost, because those accreting notes are in the 12% range and the call dates on those aren't for another 12 and 18 months.

So yes, I would say overall we are comfortable with that.

And then just one last question, if you would. In sort of the slightly higher sales volumes in the highway deicing, I noticed there was some maybe -- you said some modestly higher preseason sales. Is there anything going on there with that? I mean, it seems somewhat unusual, but just maybe you could give us a little bit more color on what happened there.

It's Angelo. I wouldn't read much into it. I think there's some timing benefits there, but I think the season is playing out so far in a normal way.

You might remember, Nils, last year we talked about not having as much of the early fill business for the winter season. This year, I think we've gained a little more back. But in the end, it's like Angelo said; it is mostly timing.

All right. I'm sorry, just one other question -- I apologize. With diesel prices coming off moderately, is that going to have any impact on your shipping and handling? I mean, are you going to be able to keep some of the price increases and maybe have a slight little margin expansion, or does it really have no effect whatsoever?

This is Angelo. You know, it so hard to predict where the cost will be of diesel when we are actually shipping the tons to the customer over the winter season. If they continue the trend downward and since our sales are on a delivered basis, we both take the risk when diesel goes up, but we get the benefit when diesel goes down. So we are hoping.

And Nils, you may have heard us, on the general trade side of the business, a lot of that is pass-through diesel cost. So there is little less of an impact there, [but] definitely true on the highway side.

All right. Well, thanks a lot.

(OPERATOR INSTRUCTIONS) Amy (indiscernible) with Goldman Sachs.

Good morning. This is Amy on behalf of Bob Koort. Actually, I have a couple follow-up questions. First, related to deicing (indiscernible) volume growth in third quarter. I guess probably a couple factors contributed to this growth. I think first, as mentioned in the press release, the preseason sales. And then also, I think also a higher utilization rate following the completion of the Goderich strike in June. And also I think you guys might be benefiting a little bit from the easy comp from last year due to the [comparison] down in third quarter of last year.

Can you give us some sense on how much each of these factors contributed to the volume growth for this quarter -- I mean for the third quarter?

Okay, great. I would say, Amy, in this business, because we are really building inventory all through the spring and summer in anticipation of the winter -- of the upcoming winter season. So our inventories are constantly growing. Our sales volumes really bear little resemblance to production declines or increases on a short-term basis.

So the growth in the third quarter is really just a timing issue. It isn't significant in terms of a hint at the rest of the winter season. And probably is a little more based on the fact that last year we had lost some of the early fill business, which is nonwinter dependent business -- some of the [fetes] and municipalities and counties just take the volume regardless of whether it snows, because they know they're going to need a certain amount of salt during the winter season.

This year, we regained a little bit of that early fill business back. And so I think you just saw a little slight shift in volumes into the third quarter because of the early fill business. So hopefully, that helps.

The production shutdown that we had last year and the higher volumes that we had this year do favorably impact our costs this year, just because we have a little bit better [mine] utilization rates, but do not affect salt sales volumes at all.

Okay. And my next question is really to SOP profit margin. I just saw that profit margin dropped in third quarter to 24.5% from about 29% of last year and about 30% of last quarter. So can you just provide some color on this profit margin and contraction during the quarter for SOP?

Sure. That is something where we would say there has probably been a little bit of a step change in the margin of that product. Mostly because parts of the production process there involves supplementing our solar pond harvest with potassium chloride. And we have a contract there where the price rose and gave us some higher costs. Of course, our sales price has been growing as well, so year-over-year, our margin dollars stayed the same, operating earnings stayed the same, but the margin percentage did compress.

Okay, thanks.

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

Yes. Thanks, Tonya. I'd like to conclude today by once again summarizing the third quarter and providing a look ahead to the fourth.

To me, the third quarter was a showcase for Compass Minerals. Our results demonstrated that the Company isn't all about winter weather. We offer a broad array of mineral products to an extremely diverse customer base. And we had the flexibility and creativity to respond to market forces in ways that allow us to continue to grow.

We expect more of the same in the fourth quarter. Sure, in the fourth quarter, a lot of it is about the weather and we're going up against a tough comparison to the fourth quarter of 2005. But the same strong base of products and customers that boosted sales and profitability in the third quarter will be at work again in the fourth quarter. And with some of the early snows we've seen around the Great Lakes, who knows -- maybe the weather will be friendly to us also.

Thanks again for joining us today. We look forward to talking with you again early next year. Take care, and again, Happy Halloween.

This concludes today's Compass Minerals International conference call. You may now disconnect.