Compass Minerals International Inc (CMP) 2017 Q3 法說會逐字稿

Good day, and welcome to the Compass Minerals third quarter earnings conference. Today's conference is being recorded. At this time, I'd like to turn the conference over to Theresa Womble. Please go ahead.

Thank you, Ashley. Today, our CEO, Fran Malecha, and our CFO, Jamie Standen, will review our third quarter results and outlook for the rest of the year. 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, October 31, 2017, 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 Forms 10-K and 10-Q. The company undertakes no obligation to update any forward-looking statements made today to reflect future events.

Our remarks may also include non-GAAP financial disclosures, which we are -- which are important to provide a full understanding of our businesses and operating conditions. You can find reconciliations of any of these measures in our earnings release or in our earnings presentation, both of which are available on the Investor Relations site at compassminerals.com

Now I'll turn the call over to Fran.

Thank you, Theresa. Good morning, and thank you for joining our call today. Our results this quarter were slightly below our expectations given the pressure on our salt business from a second consecutive mild winter and delays in some sales in our plant nutrition business.

On a consolidated basis, our total revenue and operating earnings increased significantly, largely driven by the addition of Produquímica to our results, which offset expected weakness in our salt business. We also continue to focus on the things we can control to drive better performance. In fact, our cost-savings initiatives have already generated $7.9 million in savings year-to-date with savings impacting our salt and plant nutrition business as well as of our corporate expenses.

While lower de-icing demand pressured salt segment results, we have made progress with our capital projects at the Goderich mine. I'm also glad to report that our team there has addressed all the issues related to the collapsed roof, and the mine is fully operational and running in line with our current production plans. The other important salt result that we report in the third quarter is the conclusion of the North American highway de-icing bid season. This process shapes our pricing and sales volumes expectations, which assume average winter weather, for the highway de-icing portion of our salt business. Expected this year, our average awarded bid price declined approximately 3% as did our awarded bid volumes. Given how mild winter was last season in much of the U.S., I'm pleased with how our salt team has responded to market-wide challenges and limited downward pressure on these results.

Our plant nutrition business in North America posted solid results this quarter with volumes dropping modestly due to a slowdown in sales late in the quarter related to hurricane activity in the Southeast U.S. while operating earnings for the segment increased.

In Brazil, we face near-term headwinds from the delayed planning season although we believe underlying demand for our innovative plant nutrition products remain strong, the compress selling season can be a challenge from a logistics perspective. As a result, some of these expected sales may not materialize. As important as these quarterly results, the fact that we continue to make significant progress on our strategic objectives, as we discussed at our recent Investor Day, we are executing a consistent strategy designed to achieve sustainable growth based on strengthening the foundation of our company, increasing the balance between our salt and plant nutrition businesses, and improving the margin performance of our company through efficiency improvements, innovation and organic growth opportunities.

Today, I'd like to touch on how we progress in these areas throughout the quarter and what executing in these areas will mean for us in terms of improving our company and delivering shareholder value. First, in strengthening the foundation of our company, we are nearing the end of our major capital investment program, which has focused on ensuring the longevity, efficiency and capabilities of our key assets at Goderich and Ogden. Our Goderich shaft relining project continues on track and is expected to be complete in 2018. Installation of continuous mining and haul systems at the Goderich mine is also on track, even with the partial roof collapse we experienced in September. We are currently commissioning the final continuous mining system and expect to complete this in 2017 in fourth quarter.

At Ogden, we've completed commissioning the compaction facility and are working through final commissioning of other equipment, which should be completed by year-end. While I know we've been discussing these projects for some time, keep in mind that these projects represent an investment of approximately $525 million and underpin many of our strategies for improvement and growth. Once we complete these projects, these assets will be very well positioned to deliver safe, efficient production for years to come and to better serve additional markets' demand in both our salt and plant nutrition businesses.

The next strategic priority for us has been creating more balance between our salt and plant nutrition business in order to diversify our earnings stream and improve our ability to address winter weather variability. This quarter helps demonstrate the positive benefits of our investment in Produquímica. The addition of this innovative specialty plant nutrition company drove an increase in total revenues and earnings in what is typically a lower earnings quarter for us due to the seasonality of the salt segment. On a year-to-date basis, combined plant nutrition revenue, that's a percent of total sales, was about 43%, or it was only 20% in 2016 by this point in the year.

We believe that over time this diversification will improve our earnings stability and increase our growth potential. The third area of focus for us is driving margin improvement and organic growth. There are a couple of things I'd like to discuss in this area. Our cost-savings plan initiated in July as part of this overarching effort to improve our operational performance and increase efficiency. This plan to eliminate $20 million in ongoing costs in 2018 is on track. While we recorded a charge of $4.3 million this quarter related to this plan, as I mentioned earlier, we've already generated almost $8 million in savings. These savings are in addition to the $30 million in cost reductions we expect to achieve in 2018 from our investment in continuous mining at Goderich. Another key driver here is improving our innovation and commercialization capabilities to capture growth from the acquisitions of Produquímica and Wolf Trax.

We have a couple of successes to mention here. First, sales of Wolf Trax' micronutrients in North America were double what they were in the 2016 third quarter. This is a good sign that our sales and marketing teams are starting to get more traction, particularly, in the U.S. Second, so far in 2017, we have introduced 22 new products in total between Brazil and the U.S. This includes an entirely new line of liquid specialty fertilizer products in North America based on technology we brought up from Brazil. While it's too early to make any statements about the contribution of these products to sales or earnings, we can say we are delivering our goal of increasing innovation and building out a full portfolio of specially planted nutrients that we believe will increase the relevancy of Compass Minerals in the agricultural market throughout the Western hemisphere.

With the progress we're making in these 3 areas, I'm confident that Compass Minerals is well positioned to deliver growth as our key markets begin to recover from current trough levels. Even in the near term, as our capital expenditures taper off, we expect to improve our free cash flow and achieve significant increases in 2018, and we anticipate returning to our targeted leverage ratio in 2019.

With these factors in mind, we will end the year having made significant progress on our strategic goals, which we believe will position us to benefit from normalization in our key markets and drive near-term earnings growth.

With that, I'll now turn the call over to Jamie for more financial details.

Thanks, Fran, and good morning, everyone. Before getting into the details

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results, I'd like to briefly explain the restructuring charge this quarter. As we announced in July, we instituted a cost-savings plan, which is expected to generate about $20 million in annualized savings beginning in 2018. We recorded a $4.3 million charge this quarter related to the plan, and we've already achieved $7.9 million in savings. We have noted in our press release and our presentation where the charges have been recorded. They include a $2 million charge in our salt segment, $1.2 million charge in our Plant Nutrition North America segment, and $1.1 million charge in our corporate SG&A expense.

As I talk through our results, I will be excluding these charges where applicable. We also reported a special item this quarter for the release of tax valuation allowances related to our Plant Nutrition South America segment. This was $13 million benefit in the quarter. Excluding this benefit, our third quarter tax rate was lower than normal, and we also expect our full-year tax rate to be depressed due to overall lower income and other refinements to our assumptions.

Now let's turn to our salt segment results, which can be found on Slide 9 for those of you looking at our presentation. Our total sales this quarter declined versus the 2016 quarter, primarily, as a result of lower sales of package de-icing products. This would typically be the time when retailers begin purchasing to stock up on de-icing supplies prior to winter, but many of our customers are still holding inventories left over from last winter. This decline in consumer industrial sales this quarter also created a negative product mix for this overall segment average selling price. Excluding mix, average selling prices for highway de-icing and consumer -- were each off about 2% from prior year. It's important to note, however, that for highway de-icing sales, this improvement was primarily driven by geographic sales mix. We sold more products to customers in the U.S. West, which increased average sales price but also increased logistics cost. On a net price basis, highway de-icing average sales price dropped 6%. Our decline in operating earnings was primarily a result of lower revenues as well as increased logistics and depreciation expense. Production costs were slightly higher for our highway de-icing business, but the shift in sales away from consumer and industrial products and toward highway de-icing tons offset the impact of the higher cost in our reported results.

Our Plant Nutrition North America results on Slide 10 were a bit mixed in that our revenues were slightly below prior year, but our operating earnings improved, excluding the restructuring cost. Sales volumes dropped 7%, reflecting the impact of hurricane activity in the Southeastern U.S., which disrupted sales late in the quarter. However, even with the hurricane activity, we sold about 50% more micronutrient products this quarter when compared to the 2016 quarter. This helped push the average sales price for the segment up 6%. We believe that most of the lost sales in the quarter will occur in the fourth quarter, and we are seeing strong SOP demand in other regions. As a result, we are leaving our full year sales volume guidance unchanged.

This segment also posted 40% earnings growth as well as margin improvement when excluding the $1.1 million restructuring charge that was incurred this quarter. This improvement was driven by better sales prices

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sales mix. In the plant nutrition segment, sales volumes declined 8%, mainly due to a 16% decline in chemical solutions sales. As we have discussed previously, our customers have been ordering higher concentrated chlorine products. This reduces sales volumes but increases average selling prices. In addition, we continue to experience lagging sales in the oil and gas industry.

On the agricultural products side of the South America business, sales were slightly below prior year and below our original expectations. This is partially a timing issue as the weaker U.S. dollar has caused farmers in Brazil to hold on to their grain inventories from the prior harvest longer than expected. This, in effect, delayed crop input purchases and initially impacted our B2B sales. As we move through the third quarter, which is typically our strongest sales quarter for this business, our sales mix shifts more toward the B2C channel.

The portfolio of products we sell here includes nutrients for the full life cycle of the plant, with full year products being a very important component. Because farmers delayed plantings this season, orders for full year are also delayed. This is creating a compressed sales season and putting pressure on the Brazilian trucking market, which causes challenges. Our U.S. dollar reported results benefited from a stronger Brazilian reais, with the exchange rate improving about 11% versus prior year. In local currency, total Plant Nutrition South America revenue declined less than 1% as increased selling prices offset lower sales volume.

Operating earnings were 13% lower year-over-year. This decline was driven primarily by increased marketing spending and depreciation true-up and higher public company compliance costs. One point to keep in mind is that this is a more SG&A intensive business than our semi-specialty SOP business. Although, we've trimmed expenses, as we adjusted to lower earnings expectations in this segment, we continue to invest in sales, marketing and innovation in Brazil. Our agronomous and sales force make more than 4,000 contacts annually with farmers in Brazil. And together with our marketing and innovation efforts are critical to driving the long-term growth of this business. Because underlying demand for our specialty plant nutrients in Brazil remains strong with customers, we believe this is largely a timing issue although we're likely to be at the low end of our guidance range for full year sales volumes.

Before turning to our outlook, I'd like to briefly discuss the depreciation true-up, I just mentioned. This true-up is related to the finalization of our purchase accounting review process on the Produquímica acquisition. In this process, we have adjusted our book value and recalibrated certain asset lives, which increased our depreciation expense by about $500,000 each quarter since the acquisition date. This quarter we had to book that catch-up depreciation. We have now completed this process and we'll have no more purchase price accounting adjustments to report related to the Produquímica acquisition.

On Slide 12, we've included our 2017 outlook summary. Little has changed from what we presented at our Investor Day last month. In our salt segment, we've slightly lowered the bottom of our range to account for lower package de-icing demand and a little additional contraction in bid volumes. Plant Nutrition North America and South America volumes for the year are unchanged. Although, given the issues I had

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both are likely to be at the lower end of the ranges

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however, are expected to expand due to the product mix improvements when compared to prior year. As a result, we expect earnings growth in both plant nutrition segments.

Before beginning our Q&A session, let me recap the key points of the quarter. Importantly, our Goderich mine operations have been fully restored. Plant Nutrition North America achieved earnings and margin growth in the third quarter. And we expect continued growth in the fourth quarter. In our South America segment, we expect a subtle shift in high-value agricultural sales from the third quarter to the fourth quarter, which should help drive sequential margin improvement.

Finally, we remain focused on controlling the things we can, taking out costs wherever possible and completing our major capital projects.

With that, I'll turn it over to the operator so we can begin the Q&A session.

(Operator Instructions) We'll go to our first question from Christopher Parkinson with Crédit Suisse.

This is Graeme Welds on for Chris. I wanted to kick off with a quick question in Plant Nutrition North America. You guys talked about how sales of micronutrients up substantially this quarter versus the same quarter last year, and how you're expecting kind of better mix to go forward into the year. I was wondering if you can walk us through a little more of the details about what you're seeing on the ground in terms of the demand for micronutrients, and what's driving some of that success that you're seeing and how you kind of see that playing out going forward.

Yes, this is Fran. I just think we're continuing to build our sales and marketing effort out there on these products and continue to make progress with our distribution customers in North America. Keep in mind that in North America, we're going through distribution with these sales. And in South America, it's a combination, but primarily direct to the growers. So we are making progress there. I think the demand is really being pulled by the farmers. They like our products, and we just continue to build on that. And traditionally, the fourth quarter is our biggest quarter for this business. So I think that's why we

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about kind of that outlook going forward.

Got it. And then just switching to the South American business, really quickly. I know you guys are, kind of, expecting that to catch up some of the sales you missed out on the agricultural portion in 4Q from 3Q. I'm just curious, kind of, beyond the next couple of quarters as you think about the -- actually, the chemical side of the business, I want to try and get a better sense of how to think that moving forward. You mentioned oil and gas seems to still be lagging, but there are some, kind of, shifts in purchasing patterns in the chemical chlorine section of that business, I'm wondering how should we think about that looking forward.

True. The -- I mean the bulk of the earnings in that chemical business is the chlor-alkali business, the chlorine business. And I think it's a combination there of -- it's a good business, it's a solid business with good margins. It has been growing and we expect that to continue. And so it's really driving the

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To talk about that part of the business. But it's still only about

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business. And our growth in this business -- and the reason why we acquired is, really, on the ag side. So we expect the -- with improved cost accelerative pricing, kind of, globally that, that business will continue to perform well. But it's really not the focus of our growth in Brazil.

And we will move to our next question from Vincent Anderson from Stifel.

I just wanted to go through some of the noise around the quarter in salt North America related to the volumes and what that means for fourth quarter operating earnings. So in both segments, we saw unit cash cost coming, really, pretty strong considering the light volumes in both plant nutrition and salt. And so it looks like fourth quarter operating earnings could maybe a bit conservative. Can you just walk us through maybe some of the things we're seeing, whether it's on the transportation side, whether it's on SG&A, whether it's on asset commissioning. Just trying to get a feel for reconciling that.

Yes, sure, Vincent. This is Jamie. I think as far as the quarter goes, we really saw a mix impact there from the lower C&I sales. So we talked about it impacting the price side of the business, but it also impacts the cost side. C&I products are more costly to produce. So as we -- as the mix shifted more toward highway, we kind of got a benefit on the cost in the quarter from that mix shift. So as you move into the fourth quarter and the mix, let's say, normalizes, you would see some of that benefit go away, as we would expect winter to start coming. And then if we get close to average mix between highway and C&I, that's why we feel like that operating margin guidance isn't necessarily conservative, we would just go back to more normal mix, which would increase the cost a bit.

And then in North America, I know, it's a heavy SG&A quarter for you, but considering where your unit costs were for in 4Q '16 given the step up in volume guidance, I kind of what -- I would have expected comparable operating earnings -- looks like you did margin close to 18% for 4Q '16. Can you talk about the year-over-year variance there?

Are you talking -- are you over to North America plant nutrition?

Yes.

Yes, so what we're getting there is the price benefit. When we look at fourth quarter '17 versus fourth quarter '16, the improvement is mostly on the price side and the improved mix. So we feel pretty comfortable with our 13% to 15% operating margin guidance in North America for fourth quarter.

(Operator Instructions) And we'll go to our next question from Joel Jackson from BMO Capital Markets.

This is Fahad on for Joel. First question I had was, we're having a tough time trying to reconcile the Q4 guidance for salt as well as the price guidance. Is it possible that -- the highway de-icing prices are down 3% for Q4, but is it possible that there's an offset in pricing from the U.K. sales or multiyear contracts or anything like that, that would end up making highway de-icing prices flat year-over-year versus down? That's my question.

So I think we mentioned some mix in terms of where we were placing tons. We talked about U.S. West, for example, in the third quarter, so it wouldn't be -- it would be reasonable to assume that year-over-year, in the fourth quarter, in highway, you could see flat or better highway de-icing pricing. Of course, there is an offset to that, that would come through on distribution cost.

Okay, that's helpful. And then just a quick follow up. For the lower C&I sales that happened in Q3, are those lost sales? Or that can that be recovered, in part, in Q4?

So there's a -- although, we're disappointed with missing in the third quarter. Every year, predicting the presale in the C&I de-icing market is very difficult. You have us trying -- we're talking to our customers trying to find out what they need, what they're ordering and our customers themselves, large big-box companies are evaluating their own inventories, watching the weather themselves, trying to predict how much John Smith has in his

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a bag of salt from last year. So there are a lot of factors that make the fourth -- the third quarter sales difficult. But specifically to your question, at this point going forward, the C&I de-icing sales in the

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will only be a function of winter weather activity. So (inaudible) continue to take early fill even through October, and as weather starts to pick up, we would expect that alone at this point to drive sales.

And we will go to our next question from Robert Koort from Goldman Sachs.

This is Gavin on for Bob. I was just wondering, real quickly, if you could run through the SOP premium that you guys are currently seeing in the MOP in the market. And then, kind of, what you guys are baking in your expectations over the next 12 months?

Yes, so we -- when you think about SOP-only price currently at $578 this quarter and MOP prices in the $250 range, we've seen stability in SOP over the last several quarters. We don't have any reason to believe that, that would change. We're seeing strong demand at this price level, and would expect that to continue through the rest of the year and into 2018.

Great. And then as a follow-up, I'm just kind of curious if you guys can kind of walk us through how you drop your full year effective tax outlook down to 14% from 20%. Is that just a function of kind of what we saw flow through this quarter? Or is there anything else in particular you can call out?

Yes, sure. There are always as -- I would say that it was -- at Investor Day, we were talking about 18% and now we're down to 14%. So excluding the discrete tax benefit of $13 million, there are a number of things occur. So as our income drops, we have some fixed tax -- fixed benefit tax base that lowers the effective tax rate as income drops. We've had some other releases of evaluations that are related to the current period. So those are the 2 main drivers, lower income, fixed benefit from some tax structure items and then some other reserve releases in the period.

(Operator Instructions) And we will go to our next question from Dave Begleiter from Deutsche Bank.

Fran, on highway de-icing pricing, you mentioned you were, I guess, a little bit possibly surprised or -- with the minus 3% for the year. Can you talk about why and what gives you the confidence that next year -- I think this is the third year in a row of lower highway de-icing pricing. What gives you the confidence that this is not structural and that we can get back to, assume your normal winter weather, some positive pricing for highway de-icing in the 20 -- in the next winter season?

Sure. I don't -- I wouldn't say we were surprised. I think we -- it was in line with our expectations, how we've described this pricing season given the weather that we did have. And keep in mind that we were average-ish winter in Canada where we saw price increases. And much below average in the U.S. where we saw price declines. And we have greater weighting in the U.S. than Canada. So overall, we're down at

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we had a stronger season out west and that kind of plays into

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but that's kind of the flavor of the season from a bid standpoint. And so as I think about an average year and to get back to more normal weather, we saw price increases in Canada. We would expect to see price increases throughout the market if the weather's there to drive it. And we're coming off of I think 3 years in a row of milder winter and lower pricing. So I would expect the market would spring back with the normal season ahead.

And Jim, just on the 2018 tax rate. Any additional color for the next year?

Yes, so I would do -- we would envision 2018 normalizing in the high 20s, approximately, anywhere around 28%.

At this time, I would like to turn the conference back over to Theresa Womble for any additional or closing remarks.

Great. Thanks, Ashley. Once again, we appreciate your interest in Compass Minerals. Please feel free to contact the Investor Relations department with any follow-up questions you may have. And have a safe and happy Halloween.

That concludes today's conference. Thank you for your participation. You may now disconnect.