Compass Minerals International Inc (CMP) 2016 Q1 法說會逐字稿

Good day, and welcome to the Compass Minerals first-quarter earnings conference. Today's call is being recorded. At this time I would like to turn the conference over to Theresa Womble. Please go ahead, ma'am.

Thank you, Melanie. Today our CEO, Fran Malecha, and our CFO, Matthew Foulston, will review our first-quarter results and rest-of-year outlook. Before I turn the call over to them, let me remind you that today's discussion may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on the Company's expectations as of today's date, April 26, 2016, 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 and 10-Q. The Company undertakes no obligation to 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, or on the Investor Relations section of our website at compassminerals.com.

Before I turn the call over to Fran, please note that we reissued our earnings press release last night to correct an error in our Salt segment outlook table. All materials on our website are correct. We apologize for any inconvenience this may have caused.

Now I turn the call over to Fran.

Thanks, Theresa. Good morning, and thank you for joining our call today. The headwinds of mild winter weather and a weak agriculture sector continued to impact our results this quarter. Total revenue declined about 12%, and operating earnings declined 13%, compared to the first quarter of 2015. That being said, our consolidated margin performance has held steady and has continued to improve in our Salt business.

These results demonstrate that we continue to make progress on what we can control, and we are working to maximize the value of our unique assets. We have taken necessary steps to reduce costs and align production with demand in both businesses, and we remain keenly focused on executing the major capital projects that we believe will sustain our Company and drive long-term growth.

Let's start with a closer look at our Salt segment results. As you all know, winter weather was very mild this year. Snow events in the 11 cities we track were 24% below the 10-year average for the first quarter, and 38% below the 10-year average for the full winter season. It was even milder in the UK. Given how mild the winter was, we were encouraged by the fact that our Salt volumes were only 3% lower year over year. In fact, our highway deicing sales in North America were actually better than in the first quarter of 2015. The volume declines were primarily in UK highway deicing, as well as package deicing sales in our consumer and industrial business.

The improvement in North American highway deicing sales was directly tied to the fact that we won more deicing contracts during the 2015/2016 bid season. Further, these contracts were logistically favorable for us, so we have been able to improve our margin performance as well. These factors, combined with lower fuel costs and transportation rates, drove a 6% year-over-year increase in EBITDA for the Salt segment, and a very robust EBITDA margin of 32%.

Now we turn our attention to the upcoming North American highway deicing bid season. While it is far too early to make any quantifiable statement on where price or volume for bidding will land, we know that the mild winter will impact market dynamics. Given the fact that customer inventories will be elevated, we do expect some contraction in bid volumes, and that has been factored into our final guidance which Matthew will discuss shortly.

As is our historical practice, we will give out our first meaningful bid season update at our second-quarter earnings call in July. Regardless of bid season results, we are diligently working to control our costs and match our production to expected demand. We have taken advantage of the lower demand to accelerate our work installing continuous mining at our Goderich facility, which is expected to meaningfully improve production costs once complete.

Now moving on to our Plant Nutrition segment, this business is performing in line with our recent expectations. As with many other companies operating in the ag sector, we are dealing with the challenges of the broad market weakness. We are beginning to see some stabilization in this market in terms of where the euro/dollar exchange rate is, and the pace of SOP import growth in the North America. What remains a risk is the price of MOP, which we've discussed as being a functional competitor to SOP in some crops.

We believe our price actions have been beneficial to our efforts to compete in this environment. We also have inventory position in market to make certain that our customers see us as a consistent supplier of choice. Now that we have made pricing adjustments, our sales are beginning to rebound from lower results for the second half of 2015.

Our Wolf Trax micronutrient products have experienced strong sales this quarter, compared to the 2015 period. We've been particularly encouraged by interest in our phosphate and micronutrient product called Nu-Trax P+. Sales in these products really peak in the fourth quarter, but we are seeing a positive uptick in demand thus far this year.

In Brazil, where we recently purchased a 35% stake in the specialty plant nutrient and specialty chemical company Produquimica, the ag market remains strong. Early 2016 results demonstrated the company is performing better than expected and better than last year. And we continue to increase our knowledge of this market in the products produced and sold by Produquimica in preparation for the time when we plan to own the entire company.

Before turning the call over to Matthew, let me just say a few words about where we are in terms of our progress as a company. While we have certainly faced some headwinds in both of our key businesses, we have made the tough decisions in terms of streamlining our organization, which is creating a leaner, more agile company. We continue to execute on several important capital projects that we believe are essential to maintaining the integrity of our unique core assets, improve our efficiency, and expand our productive capacity.

We have completed our special MOB projects at our Ogden facility, and are making our way towards completion of others. In fact, we believe we are nearing the inflection point where we transition away from this high-capital investment period to one of generating significant free cash flow. Having been able to continue making progress on these initiatives in the face of external headwinds has been a testament to our belief that these are the right decisions and strategies that will deliver long-term growth and value for Compass Minerals and its stakeholders.

With that, I will turn the call to Matthew for some greater financial detail on our results.

Thanks, Fran, and good morning everyone. If you're following with our presentation online, I'd like to turn to our first-quarter Salt results on slide 8. A quick look at the price and volume chart gives a great visual representation of how resilient our Salt segment sales were during the quarter, despite the lack of snow events.

As Fran mentioned, we actually sold more deicing sales volume in North America than we did in the same period last year, due to the increase in bid volumes we won. In total, highway deicing volumes were only down 3%, compared to the first quarter of 2015, while consumer and industrial volumes were 5% lower. As expected, the average selling price for our products in the first quarter was lower, due to the year-over-year decline in highway deicing contract prices. Consumer and industrial pricing was essentially flat.

Like last quarter, we are pleased with our margin performance in the Salt segment. Both our operating margin and our EBITDA margin expanded 4 points from the first quarter of 2015. This represents the seventh consecutive quarter of year-over-year Salt margin improvement. As Fran mentioned, we continue to benefit from lower fuel costs and shipping rates in our consumer and industrial business, and lower logistics costs in our highway deicing business, resulting from the freight-logical customers we are serving as a result of our successful bidding strategy.

The first quarter of 2015 was also impacted by some short-term costs that depressed Salt margin performance. As we noted then, these costs included imported salt use, unplanned weather-related downtime at Goderich, and some additional reserves for a 2010 labor-related legal matter. We estimate that those costs negatively impacted our first-quarter 2015 EBITDA margin by just over 2 percentage points.

As you can see, our Salt results were good in absolute terms, and very good given the mildness of the winter weather this year. We indicated in our press release that we estimate the variations from average winter weather negatively impacted our Salt revenue by between $70 million and $80 million, and our operating earnings by $35 million to $40 million.

Turning to slide 9, I will review details of the Plant Nutrition segment's performance. First-quarter Plant Nutrition revenue was down 31% from 2015 results, on 24% lower sales volumes and 9% lower average selling price. We've discussed how a combination of the depressed ag sector, increases in SOP import activity from Europe -- largely related to the strength of the US dollar -- and lower MOP prices have negatively impacted our results. The good news is that we're seeing more stability with these factors, although as Fran mentioned, MOP pricing remains a risk.

Taking a minute to look specifically at SOP pricing, our average price in the quarter was $644 per ton. This compares to $730 in the first quarter of 2015, and to $703 in the fourth quarter of 2015. This reduction is in line with our expectations and our intention to aggressively protect our market share in North America.

This segment's earnings were also impacted by higher costs. I discussed at length on the earnings call in February the factors driving these higher costs. These included high-cost carry-over inventory from 2015 that is still being sold this year; higher royalties due to less use of purchased KCl feedstock in our 2016 production; increased distribution costs, as we are storing more inventory in warehouses closer to our customers to improve service levels; and some higher SG&A costs as we invest in sales and marketing to grow our Wolf Trax business.

We continue to expect per-unit costs to improve throughout the year. We expect this metric, which we define as net income minus operating earnings divided by tons sold, to decline by more than $50 per ton in the second quarter, and remain around that level for the balance of the year. Note that the underlying improvements in SOP production costs will be somewhat offset by changes in product mix in the fourth quarter, when micronutrient sales are seasonally high. These are higher-cost products but generate good margins.

Before moving on to our outlook, I'd like to mention a few corporate items. The first is regarding our Brazilian investment. Our purchase of 35% of Produquimica closed late in 2015. You can see in our earnings press release that we recorded approximately $400,000 in net income from Produquimica in our income statement. Because there is a quarterly lag in the reporting of their results and the timing of the transaction, this amount represents only a small portion of their fourth-quarter income.

Second, I'd like to update you on our restructuring progress. We reported a $3.2 million charge in the quarter, related to elimination of about 150 positions. The majority of reductions relate to the continuous mining investment in Goderich. We expect to generate savings this year, which we anticipate will ramp up to annualized savings of $15 million by the end of 2017. We also completed the refinancing of our senior secured credit facilities, which now comprise a $400 million term loan and a $300 million revolver, both of which mature July 1, 2021. The refinancing enhances our financial flexibility at a lower interest rate compared to the prior facilities.

Looking at the bottom of slide 10, we outline some of the factors that are shaping our outlook for the remainder of the year in our two businesses. We are just beginning the highway deicing bid season. Fran has outlined the dynamics at work this year, so our guidance includes the expectation of lower bid volumes throughout the market. We have a range of pricing expectations built into our guidance. However, we will not go into detail on those due to the competitive nature of this business.

On the consumer and industrial side of the business, we're pleased that the business has largely been stable, notwithstanding lower deicing demand. Pricing at the category level has generally been improving. Our margins are likely to continue to benefit from lower transportation costs, resulting from more fluidity in the trucking market, as well as lower fuel costs. For those of you on the call modeling this, we're now assuming oil at about $40 a barrel for the year. We expect lower production levels in our rock salt mines, which are likely to offset the benefit of cost improvements we're making throughout our Salt operations in 2016.

In our Plant Nutrition segment, we expect our average selling price to be similar to the first quarter, and as I mentioned earlier, per-unit costs are expected to improve in the second quarter, which we expect will drive a doubling of our operating margin percentage, when excluding the impact of the land sale in the first quarter of 2016.

You can find a summary of our second-quarter outlook on slide 11, as well as how this guidance stacks up against our initial expectations for the first half of 2016. Our only areas of downward variance relate to the impact mild weather has had on our volumes and margins in both North America and the UK.

Before turning to the question-and-answer session, I'd like to recap the highlights of the quarter. We've taken the tough tactical decisions around rightsizing our Company to enhance our agility and meet current challenges. We refinanced our credit facilities to provide added flexibility at lower interest rates. Our Salt segment demonstrated continued strength despite mild weather, with strong underlying margin performance.

Our Plant Nutrition segment is finding some firmer footing, as the euro/dollar exchange rate has stabilized, and may even be strengthening. SOP imports are [burning] at a much slower rate this year. And Produquimica is performing as expected and is positioned for a strong 2016.

We remain on budget and largely on track on the timing of our major capital projects that we expect will sustain our assets and allow us to grow the profitability of both businesses. With that, I'll turn the call over to Melanie, the operator.

(Operator Instructions)

Ivan Marcuse, KeyBanc Capital Markets.

Great, thanks for taking my questions. The first one would be, in terms of, I just wanted to make sure I heard you correctly, in terms of that cost per ton, your operating results for plant nutrition. Do you expect that to drop $50 sequentially, or on a year-over-year basis in the second quarter?

Sequentially, Ivan.

Got it. And if you look at your sort of, you've had a lot of headwinds and moving parts over the past couple of years. Your 2018 guidance of $500 million in EBITDA, you still remain sort of confident that you're going to get there, or what needs to happen for that to, for you to accomplish that goal?

Ivan, it's Fran. We're still confident that we'll get there. Obviously mild winters don't help with that, and our plans as we make them and describe them are based on normal or average weather. So that has to be factored in.

But I think as we've said all along, we've made the capital decisions, and we're making those investments today to drive increased bottom line performance and give us some additional capacity on both the sell side and the plant nutrition side that we think we'll be able to use over the next few years.

And there is still a portion that will need to come from acquisitions. But with the PDQ transaction, we think we've pretty much bridged most of that gap. So I think we're still tracking on to the $500 million. We're a bit more challenged given the headwinds we faced here in the last year to 18 months, but we think we're well positioned in the market to take advantage of when those headwinds turn to tailwinds.

Thanks. Are you going to need use debt to fund the rest of your capital projects due to the lower level of profitability?

Ivan, this is Matthew. No, we feel comfortable about the level of debt we have in place right now. I think when we obviously get to the put option, or the call option on Produquimica, depending on the timing, we'll probably be back in the debt market especially if it occurs earlier in the three or four alternatives there are for that.

Right, no, but for your capital projects that you have remaining, you know, it's a lower level of profitability. You still feel confident you're going to be able to fund those with cash from operations, or would you have to go borrow some to fund those?

No, we're absolutely fine to finish the projects we've started.

Great, thanks.

Chris Parkinson, Credit Suisse.

Perfect, thank you. Within the SOP markets in the US, is most of the pressure from imports in the Southeast and if prices held a little bit on the Pacific coast? And then also you mentioned some susceptibility of MOP, or SOP to MOP switching. Can you just comment on which crops are the ones we should be looking at there? Thank you.

Sure, this is Fran. The imports do come in primarily into the eastern ports, and are more competitive into the foreign market in that part of the US. But there are imports that do come into California through the port of Stockton that compete in that market.

We have seen, I would say, better returns in California. It's a key market for us given the crops that are growing there, as well as the location of our operation at Ogden relative to that market.

I think in terms of that chloride sensitivity, we see more of that in markets like the Pacific Northwest, and through the Midwest where you have crops like potatoes and tomatoes and other crops like that, that have that ability to use a blend of MOP or SOP, are less chloride sensitive.

Perfect, thank you. And just a quick follow up. Obviously it's too early to comment on pricing volumes for the upcoming [RQ] seasons, but over the last few seasons you've strived to maximize netbacks and develop a few new regional specific strategies.

I'm sure the overall health of the market will dictate the pace of which you can realize these improvements. But is there any more low hanging fruit there in things you're preparing your team to do as you approach the bid season? Thank you.

I wouldn't characterize it as low hanging fruit. There are differences in the markets north of the border in the US. We do have some contracts that are multi-year, and we have some contracts that have a min/max to them, and some of the states in the US maybe just at or even below those minimums. And all those will impact the pricing dynamics coming up this spring and into the summer.

But the markets mature, and I wouldn't characterize it as having any low hanging fruit. We think we positioned ourselves well over the last couple years in the places where we've gained some share, and we'll just have to see how the season here, the bid season, turns out.

Perfect. Thank you very much.

(Operator Instructions)

Jeff Zekauskas, JPMorgan.

Thanks very much. When you calculate the estimated defective winter weather on salt segment performance, do these tons, or this tonnage change, does it apply both to highway deicing and to consumer and industrial, or just to highway and deicing?

This is Matthew. It applies to both, and the dynamics are little bit different in both segments, because you get a lot of big box retail stores take their initial fill and get ready in Q4, so whether it snows or not, you don't see as much of an impact in Q4.

And then when you get to Q1 and it hasn't snowed, you get a lot of not refilling because there's no pull-through. So we tend to see, if it's a mild winter, a bigger impact on the C&I deicing side in Q1 than we do in Q4.

Right. So what would you say your normal tonnage is for the first quarter of 2016, if there were no weather effect? And do you think of that -- I guess I'll just leave it at that. And has your idea of tonnage in a normal winter changed over time?

We look at 10 year averages as [asar we get] for where we are compared to normal, and the 10 year average for Q1 on the salt side, I think it's about 4.8 million tons, and [20]16 was down at about 4.2 million tons.

There's lots of moving parts within that because as we mentioned we did like the bid season results and the commitments were up a little. But again that was put against winter mildness in Q1. So we think we were down about 600,000 tons from a normal average winter.

And what would have been the normal winter number for the fourth quarter of 2015, in tonnage terms?

If you look at 2015, I think the 10 year average is somewhere around 4.2 million tons.

Okay, great. Thank you so much.

Bob Koort, Goldman Sachs.

Good morning, this is Ryan Berney on for Bob. When you come out of an especially underwhelming or unfavorable weather season for salt in the past, does that typically affect the competition strategy between you and your competitors with municipalities, and is there pressure to cover your fixed cost with some volumes in that scenario, that might come out of price?

I would characterize the business as significantly geared towards the fixed cost. We try to variableize what we can, but these large unique assets tend to have more fixed costs than variable, and our competition, I would guess is they're very similar to us in terms of that. So we all have fixed cost to cover.

And as to the approach through the bid season, I won't speak for our competitors, but we certainly will take that into account as we go through the season.

Great, thank you. And then one quick one on the SOP volume. It seems like the guide is for a nice little step up in the second quarter from the first quarter. Historically it looks like maybe the first quarter's been a little bit stronger, so was this a function of a little bit of delayed farmer spending, or was this more of a shift in strategy given the pricing guidance you've given?

There's been no shift in strategy. There may be more timing than anything else, but no shift in our pricing strategy that would drive additional volume into the second quarter from the first.

Thank you very much.

(Operator Instructions)

Joel Jackson, BMO Capital Markets.

Hi, good morning. Two questions. First in salts. Your Q2 salt volume guidance is pretty average looking historical, obviously with the mild winter. Does this mean you do not expect to see a lot of rollovers with your customers, since they probably do not meet the minimum commitment under the contracts?

I think we will have some states or municipalities that may fall just below the minimums, and part of our bidding strategy would be to roll as many contracts over as we can, so that is a work in progress. In terms of the volume in the quarter, Matthew, is anything else that stands out?

I don't think so. I think the market size is just likely to be a little smaller as we go into this year when we look at remaining inventories. So I think we're just thinking across the board, slightly lower volumes.

Okay, and then my second question, coming back to SOP imports. You made a lot of commentary how SOP, rate of SOP imports growth has decelerated, and only up 7% in Q1. You look at the TFI data from January and February, through February, SOP imports were down 40% year-over-year.

So if I take what you have presented, it's looks like there's huge reacceleration in SOP imports in March. Is that what you're seeing in March, and is that we should expect for the next, for Q2, for the SOP import has reaccelerated?

We're talking relatively small numbers and the percentages that you're talking about when you say huge, the tons aren't that significant, Joel. I think if you look at the numbers that we have through the first quarter, through March, there's only about a 1,500 ton difference between first quarter of this year, slightly higher than first quarter of last year. And that's the timing of when vessels or shipments land, more than anything else.

Do you see a big pick up in March, is that fair?

A slight tick up in March, right.

Okay, thank you.

Ivan Marcuse, KeyBanc Capital Markets.

Just a couple quick questions on the equity line that you refer to, this being a small quarter. So what would you expect for this on a per quarter basis, and will there be seasonality to this line, or do expect it to be pretty even throughout the year?

Ivan, this is Matthew. As we mentioned, we're going to be reporting this on a quarter lag, so in Q2 we'll be reporting the Q1 results. I think we mentioned on the last call that we expected the full year result from this to be a single digit number, so in total not large. And there's certainly will be some seasonality to it. The start of the year tends to be very slow there, and a lot of the volume is weighted towards the back end.

So one of the things that you will see is that their fourth quarter is going to fall over into the first quarter of next year. So we should be sitting here in a year, hopefully looking at a very strong fourth quarter, where we've picked up the whole quarter, not just a few days.

Okay, thanks. And then for SOP pricing, do you anticipate you're going to have to lower prices again this quarter, or it is pretty stable so I'm assuming that the price decreases that you had last quarter are working, or is it still to be decided?

I think it is still a bit to be determined. As we've mentioned, both my comments and Matthew's, that with the price of MOP still trying to find a bottom, some of the action that we've seen in the pricing in the first quarter in the US on MOP, even as we've lowered the price of SOP, that pricing relationship hasn't changed significantly.

And so we probably haven't picked up as many tons from the more less chloride sensitive crops than we would have hoped. We're just continuing to watch that and manage it and stay close to our customer base, and we'll just have to see how the quarter plays out ahead of us, before we would make any pricing decisions.

Okay, thanks.

Chris Shaw, Monness, Crespi.

Good morning, everyone, how are you doing. When you picked up the bid volumes last season, I can't remember if that was a stated strategy, or was this sort of a fortunate result of the bidding season. Looking ahead to this bidding season, is that something that you're, the volumes, are you looking to hold on to, or, and is that possible?

And I think last year I thought some of that added good volume that you won was in part due to the strong snows on the East Coast and the, I guess, a lot of the salt being diverted that way. So just looking ahead, are those increase bid volumes, is that something you're really looking to look into sort of hold on to this year, and do you think you can?

Picking up those additional volumes and additional share was definitely part of our strategy, our longer term strategy, and last year the timing was right to do that for a variety of factors. And we've signaled that we expect the size of the bids this year to be smaller. We would expect to hold our share, we aren't looking to grow share beyond this level that we're at, and we'll just have to see how it plays out.

Okay, thank you.

(Operator Instructions)

It appears we have no other questions at this time. I'd like to turn the call back over to Ms. Womble for any additional or closing remarks.

Thank you, Melanie. We appreciate your interest in Compass Minerals. Please feel free to contact the Investor Relations department with any follow up questions you may have. You can find the contact information on the IR section of our website. Have a great day.

That does conclude today's conference. We thank you for your participation. You may now disconnect.