Compass Minerals International, Inc. (CMP) on Q1 2021 Results - Earnings Call Transcript
Operator: Welcome to the Compass Minerals First Quarter 2021 Earnings Conference Call. Your host Douglas Kris, Senior Director of Investor Relations.
Douglas Kris: Good morning and welcome to the Compass Mineral’s First Quarter 2021 Earnings Conference Call. Today, we discuss our recent results and our outlook for the balance of 2021. We will begin with prepared remarks from our President and CEO, Kevin Crutchfield; and our CFO, Jamie Standen. Joining in for the Q&A session are Brad Griffith, our Chief Commercial Officer; as well as George Schuller, our Chief Operations Officer.
Kevin Crutchfield: Thank you, Doug, and good morning, everyone. Thanks for taking the time to join our first quarter 2021 earnings call. Before providing an overview of our financial and operating results for the quarter and sharing some color on the recent progress we’ve made executing on a number of our previously communicated strategic priorities, I want to first highlight another new safety milestone achieved by our operational team in the first quarter of this year. When we talk about our safety performance as a leading indicator for operational success, it’s a reflection of not just who we are as a company but who we strive to be. And while I’m deeply proud of the meaningful progress our team continues to make in this area, we will not rest until we reach our ultimate goal of zero harm across our entire operational footprint. With that in mind, I’m pleased to report that we achieved another step change decline in our total case incident rate or TCIR this past quarter, coming in at a multiyear low for our 12-month rolling average with a TCIR of 1.39. I want to personally thank our team for their continued focus on keeping themselves and their coworkers safe, whether they be operating underground at one of our numerous processing plants or in a support role at our corporate offices, nothing we do is more important.
Jamie Standen: Thanks, Kevin, and good morning, everyone. I’ll start with some comments on our consolidated results and then move on to our segment-specific performance before discussing our outlook for the remainder of the year. As we reported in our earnings release and as Doug highlighted this morning, all the results we’re discussing today are on a continuing operations basis, unless otherwise noted, with our South American and North American micronutrient businesses falling into the discontinued operations bucket. On a consolidated basis, for the first quarter of 2021, year-over-year sales volume growth in our Salt segment more than offset the slight decrease in Plant Nutrition sales volumes compared to prior year results. Consolidated operating earnings grew 40% when compared to the prior year to approximately $63.6 million, while our consolidated adjusted EBITDA grew almost 30% compared to 2020. Over the same period, we saw operating margins grow 180 basis points to nearly 15%. We also generated nearly $200 million in cash flow from operations and $180 million of free cash flow. This compares to free cash flow of about $206 million during the same period last year. However, last year’s total included an approximately $55 million one-time tax refund. Excluding that refund, our consolidated free cash flow is up about 19% year-over-year. Looking now at our Salt segment results. Total Salt sales in the quarter were $369 million, up from $288 million in the first quarter of 2020, an increase of approximately 28%. This improvement was largely due to stronger weather-driven demand for our deicing products. The severe winter weather we experienced during February in the U.S. paired with the strong UK winter season, along with some incremental bookings from snow events that carried over from late December 2020, translated into stronger sales volumes versus the prior year.
Operator: Thank you. Our first question comes from Vincent Anderson with Stifel. Your line is open.
Vincent Anderson: Yes. Good morning and congratulations on the CBA up in Goderich. Now that we have kind of a clear view on unit costs in your SOP business, the brine quality issues aside, would you be willing to talk about how you’re thinking about targeted unit cost levels there?
Kevin Crutchfield: I think, we can give you a little bit of guidance for the rest of this year. So, like we said, they would be a bit elevated when you start to see the year-over-year comparisons of this business, having extracted that micronutrients business. But sequentially, as you go into quarter two, it’s probably up $20 to $25 a ton. And in the back half of the year, it’ll come back down a bit, so probably in the $450 a ton range.
Vincent Anderson: Okay. And then, just kind of sticking with ag. You’ve had a fairly long relationship with Amy Yoder on your Board, and I assume by extension Anuvia. I was just thinking through their portfolio would seem to align pretty well with your organic SOP offerings. Is there any current or future collaboration plan there, now that they’ve begun really scaling up that business?
Kevin Crutchfield: I don’t think we’d have any commenting on that, Vincent.
Vincent Anderson: Sure. That’s fair. And then, I guess, just kind of thinking to the future here, I know it’s a little early, but, most of the planned divestments are finishing up. Goderich is at the very least back to good. As you think about what’s next for Compass, maybe if you could talk about your view as kind of your core competencies that you would consider building off of in the future. I’m thinking your production assets are quite unique, but leverage points like brine-based material experience, your salt depot network familiarity with the municipal bidding process, just anything you’d want to highlight there in terms of areas for future growth leverage.
Kevin Crutchfield: Yes. That’s a great question. Again, I guess, what I’d say, just kind of rolling the clock back a couple of years, the first priority was get Goderich back on a better track. And I think, it’s safe to say, after a couple of years, it’s heading in the right direction. George is sitting and he can comment on it. But, while we -- it’s doing a lot better sort, we still believe there is a ton of extra potential up there, which continues to excite us. The second priority was to prove the performance of sort of all the assets, make sure that they’re performing at their full potential. And that was the purpose of our enterprise-wide optimization approach that we took. And, I think we’re continuing to put runs on the board there and we will continue to do that in the future. And then, sort of third priority was to assess core versus non-core. And we’ve obviously made that decision. And then, along with that will come a delevering. So, I think that gives us kind of a clear path, Vince. So, that’s act one. And then, act two is to start to think about where, where we go from here. And your point’s a good one around competencies, around whether it’s extracting brine-based mining, et cetera. But I would also say that the logistics that work, how we -- the competency that we have in moving both materials around, officially the depot network that we have is kind of a factor of our businesses, et cetera. So, we’re just starting to kind of roll into that. And I think over the course of the next couple of quarters, you can expect to hear something back from us in that regard.
Operator: Our next question comes from Seth Goldstein of Morningstar. Your line is open.
Seth Goldstein: Hi, good morning. Thanks for the question. Kevin, in your prepared remarks, you mentioned that you think Salt costs maybe also become lower from this point. What’s the future trajectory here and how low do you think they can get?
Kevin Crutchfield: Yes. Look, I don’t want to throw out a specific number. What we’ve been talking about is trying to run this -- the Salt segment to try to move it into that low-30s to mid-30s percent EBITDA margin. So, that’s a function, both of costs and what’s happening in the marketplace. And look, what I’d say about Salt segment costs thus far is, they’re decreasing, but keep in mind too that occurring behind the scenes is just kind of invisible to the external world. But, we’re effectively building a new mine at Goderich. So, we got a lot of development costs that are blended into that cost, which we could take out tomorrow if we wanted to cease development and you see a step function reduction in costs. We don’t think that’s wise because we think this is a viable long-term investment and we’re building these new roadways that’ll be standing for 30 to 50 years. So, I think, with the passage of time and as we move into this new mine plan, you’ll continue to see step function cost reductions over the next really three to -- three to five years, at which point it will kind of sustain itself going forward, based on the way we’ve designed this new mine plan.
Operator: Our next question comes from Joel Jackson with BMO Capital Markets. Your line is open.
Joel Jackson: Hi, good morning. I’ll ask a couple of questions, one by one. You sold off a lot of earning -- earning this year, one more deal to go. And what that does mean to your corporate costs to scale down lower? Can you talk about why corporate costs are pretty elastic, despite the large asset sale?
Kevin Crutchfield: Yes. So, they were not particularly related to the acquisition of those assets. We have a number of fixed costs, just being a public company operating here in North America. So, as those businesses are now divested, you’re not going to see any immediate impact. But we’re constantly looking at our corporate costs. And as required as needed, we’ll be diligent and make sure we set that level of the appropriate amount, given our overall business portfolio.
Joel Jackson: I want to follow up on a comment. Kevin, I think you talked about that -- I think you said that rock salt channel inventories are lower, below average level. I think you said it in the call. So, I mean, obviously it was a milder, a little bit below average winter, and March was quite light. So end of year, I imagine consumption of salt -- rock salt in the totality is low. And you had a record Q1volumes of rock salt after a low Q4. So, some shipments obviously deferred to Q1, which it would seem like from the outside that all that would lead to channel inventories being high. So, maybe you can comment on some of that. And when you get your data points, you always have people in the field and you’re actually selling that. What are your data points to sort of get these inventory assumption levels?
Kevin Crutchfield: Yes. Good question, Joel. I mean, I think what I’d say is that, we report data on those 11 cities. We sell salt in a lot of other places. And it just so happened that a lot of those other places needed a whole lot more of the salt and sort of their base commitments in some cases are 150% 175% of their basic commitments. And again, to those, to both the production side and the logistics side for being able to flex into a demand scenario and move volumes up nearly 1.5 million tons quarter-over-quarter. So I think number one, that’s a testament to sort of the changes in the plumbing that we’ve made here to be able to respond in that fashion. But look, February was snow again and it took everybody down really, really deeply. And we think that coupled with -- March was mild, but we saw some activity in April. But, the other factor that I think you have to consider too here is the void that Avery Island has created in the marketplace of circa 1 million to 2 million tons. That’s a pretty, pretty big void in what is considered actually a pretty small marketplace. So, we think all of that sets up for, like we said, in the prepared remarks a constructive bid season. And thus far, we’re only 20% or so in. But we’re not seeing anything out of the ordinary. It’s disciplined so far and feels pretty good. And beyond that, I don’t think we’d have to say too much, given that we’re only approximately 20% in.
Joel Jackson: If I could ask a follow-up on that. When you think of did season, freight costs are up. So, there’s probably upward pressure on delivered salt price. So, knowing the strength of the channel inventory, even there’s probably some upward pressure on gross delivered prices because of freight costs. So, how does this play out this year where freight costs will probably be higher or should be coming, if that’s the case, and then trying to figure out what the actual netbacks do you want the sensitivity to be?
Kevin Crutchfield: I’ll maybe let Jamie comment on the actual freight cost to sale. The other phenomena, you’ve got going on here too, as well is, it’s not only U.S. freight. Freight in general is up including seaborne, which from our perspective is added even in good news for us, because it makes it harder on the importers. That’s not to say that we won’t see them from time to time in our businesses as we have and probably will continue to, because it makes a little more challenging for them. So, again, I’ll just answer with the way we approach this is optimization and looking at our portfolio of assets and how we can deliver at the lowest price possible to generate the highest margin possible. So, I don’t know, Brad, Jamie if you want to come in on rates and materials.
Jamie Standen: I’ll make a high level comment, and Brad you could add. But, I think, certainly we’re going to see elevated freight rates as we go into the second quarter, when you look at inflation, just rate inflation, oil prices and sales mix. We expect to see a higher mix of C&I in our second quarter this year versus last year. And then, we can expect to see higher rates for the rest of the year, but as we go to the bid season, we build those in. Brad, do you want to talk a little bit about that?
Brad Griffith: No. That’s right. I would just add to what Kevin and Jamie said, Joel, the first fall, as you look at proxies, you look at tender sizes, and as Kevin said, we’re only 20% through the season. Those tender sizes are largely what we have expected. And there appears to be a good logical discipline in the market. As Kevin has alluded to though, bulk freight rates have changed dramatically versus same time last year. As you’re probably aware, the Baltic Exchange’s main sea freight index gained last week to its highest level since September of 2010 as demand really strengthened across all vessel segments. So, economies around the world of supply chains are trying to snap back, and that’s putting a strain on rates. So, we do expect to see a firm freight market for importers this year for both, deicing and rock salt, and to Vincent’s question earlier, SOP.
Operator: Our next question comes from Mark Connelly with Stephens. Your line is open.
Mark Connelly: Thanks. Kevin, you’ve eliminated your salt imports. Avery has taken out some supply there. There’s still a lot of imported salt coming into your target geography. So, how do you think about growing your volumes as Goderich becomes more productive? Is it mostly staying within the same geography? And as your costs come down, presumably your geographic reach rises too. So, I’m just sort of wondering if you can help us think about how those different things play into your plans.
Kevin Crutchfield: Yes. Look, I mean, I think the importers will always be kind of a fungible thing. They’re going to come, they’re going to go, they’re going to be kind of inconsistent at best. I think with Avery Island void that that creates, you think about the jockeying for position that’s going to occur there, importers are going to have their eyes on it. I mean, Cargill is not going to let that business go without a fight. They’re going to try to figure out how to backfill the other strategics to go figure out how to try to take some of that business. And look, at the end of the day, some of that business will inure to our benefit. We want to chase the business that makes sense for us. I’m not going to speculate right now about how much that’ll be. But here, the second -- or the other question around how do we grow? There are a couple of options there. You can take market share in the existing footprint, or as you point out, as we get better and better at Goderich and Cote Blanche continues to perform the way it does, we can think about it more from a footprint standpoint and start to grow our marketing region. I don’t think that’s -- I think that’s in the cards over the course of the next couple years. I don’t know if that’ll play out so much this year. But, that’s how we are thinking about it, just looking at a different footprint.
Mark Connelly: Okay. And I wonder if we could talk about the union contract. Unions don’t typically sign five-year contracts without some incentive to do that. So, can you talk about anything in this contract that might be different from what we’ve seen in the past?
Kevin Crutchfield: Yes. At a high level -- George is there and he was involved day-to-day. I mean, I think it’s as much a testament to the relationship, the acknowledgement that it’s a partnership up there as anything. And look, in terms of giving away farm, nothing could be further from the truth. That’s very consistent with what you see in any sort of renewal. But George, is there any color you’d like to add to that?
George Schuller: Yes. Thanks, Kevin. Look, I’d like to say, from our perspective, we’re extremely pleased with this CBA at Goderich. As Kevin highlighted, I think it demonstrates our continued collaboration with our entire team at Goderich. And really, when you look at it, our entire enterprise will continue to build from this as we go forward. But as Kevin highlighted, there weren’t anything. It’s just really around that relationship that’s been built over the last couple of years. And I think it sets us up for a bright future. So again, I think, this is one of those brighter ones where I would say our workforce and our leadership team consider this as well.
Mark Connelly: Thank you. That’s helpful. Just quick one question for Jamie. The CapEx reduction, you said just related to the divestitures or is there something else in there?
Jamie Standen: Yes. No, it’s a little bit of trimming in a couple of different areas, but primarily the removal of the discontinued ops.
Mark Connelly: Okay. Thank you, guys.
Operator: Our next question comes from David Silver with CL King. Your line is now open.
David Silver: Okay. Thank you very much. I had kind of a marketing-based question on your SOP business. So, last year you sold 383,000 tons, which is something above what your capacity is for solely pond-based SOP production, the lower cost tier production. And my sense is, ag markets are quite robust, you could probably sell a similar amount or more. And I was just wondering from a marketing perspective or managing the business longer term, I mean, what is the optimal strategy in a environment like this? In other words, do you want to purchase potash and ramp up internal production to limit the amount of imports, even if it limits the price improvement, or do you kind of pull in just a little bit and try to squeeze out a little more price during the growing season for sure, but overall? I mean, how do you kind of handle this marketing opportunity where in my opinion the demand is clearly going to be above that threshold for your pond-based SOP production? Thank you.
Brad Griffith: Hey David, Brad Griffith here. Excellent multisectoral question. What I would say first is, you’re exactly right on Ogden pond fee tons, available Ogden pond fee tons. Remember too that that we had our Wynyard Saskatchewan operation of call it 40,000, 41,000 tons. So, that’s not an insignificant source of SOP supply for us to market here in the U.S. MCA. From a marketing perspective, we -- listen, we model this thing all the time, and we try to make an optimal financial decision coupled with an optimal customer decision. I think, in Kevin’s comments, he alluded to having the right agronomy in talking about Protassium+ is improving drought tolerance. When we think about how we market our micronutrient, our specialty micronutrient, a key differentiator is the fact that our product contains both potassium and sulfate sulfur, and both of those play critical roles in drought tolerance. Potassium will facilitate a more robust root system and sulfate sulfur is more readily available for plant uptake in comparison to elemental sulfur when soil is dry and microbes are less active or available for sulfur oxidation. And that’s the situation our customers find themselves in today. Year-to-date, California is in its fourth driest drought. And so, we’re really staying close to our farmer customers and some of the difficult decisions that they’re having to make with limited groundwater pumping available. We’re seeing a decrease in vegetable crops and increase in higher value orchards like almonds and pistachios. So, again, back to your question on volume we watch the market, we stay exceptionally close to our customers and our distribution and retailers. And we make the call and try to optimize production, including when we would add a potassiumchloride into our facility at Ogden.
David Silver: Could I just maybe follow up real quick, Brad? I’m scratching my brain here, but I remember back in the 2007-2008 timeframe when potash pricing really took off like a rocket ship, your Company had potash purchase agreements that were kind of uniquely favorable and that the price was based or the price was set maybe early in the prior year. In other words, when the posted price was lower, I’m just wondering if that contract stipulation or that contract element kind of remains in place for your purchased potash needs this year.
Brad Griffith: No. So, we’ve got a couple of pieces there. The one you’re referring to, David, expired in, I want to say, 2013 or 2014 or so. So, that is no longer. So, if we’re going to supplement our Ogden operations, it would be buying MOP at market prices and converting it up to -- converting that, upgrading that up into SOP. So, we do have an agreement in place as it relates to our Wynyard facility. But that’s specific to Wynyard.
David Silver: Okay. Thank you for that. Just one quick question on Salt. But, with Avery Island kind of out of commission, you’ve talked a lot about what it means for your deicing salt business. But, I was wondering if it does -- if in your opinion it provides any incremental opportunities on the C&I side? In other words historically, cargo has had a full line of salt products with a lot in like institutional and agricultural processing, and certainly some products on the grocery shelf. Are there incremental C&I opportunities for your Salt business as a result of the departure of Avery Island?
Kevin Crutchfield: I’ll that that one. It’s tough to get salt from Utah into the market and where that Avery Island was serving. The freight differential there just really eats up the cost. I think, everybody understands, we’ve got virtually unlimited salt in -- coming off of our operations in Ogden. But, the freight cost eats it up and you just really can’t compete from that distance.
David Silver: Okay. Very good. Thanks very much.
Operator: Our next question comes from Chris Shaw with Monness, Crespi. Your line is open.
Chris Shaw: You guys mentioned UK had a strong salt quarter. What the -- break that out exactly about how much impact that was on the quarter? It’s not specifically sort of bigger number, but your kind of comment?
Kevin Crutchfield: I would say rough estimate is 200,000 or 300,000 tons. So, there was a pretty even split between the impact in our U.S. market and our UK business.
Chris Shaw: I’m sorry.
Kevin Crutchfield: Yes. So, the UK specific is, call it a few hundred thousand tons of benefit.
Chris Shaw: Yes. Okay. And then, post the divestitures particularly in South America, will the tax rate be significantly different? I think I remember moving when you first acquired those.
Kevin Crutchfield: Yes. So, we’ve -- the rate we’ve guided at 20% includes the divestiture. So, South America, Brazil, our tax rate is about 32%. So, we’re shedding one of the higher rate tax jurisdictions in our mix there. So, that’s how we come down to right around 28% on a continuing operations basis.
Operator: There are no further questions in queue at this time. I’ll turn the call over to Kevin Crutchfield, President and CEO, for closing comments.
End of Q&A:
Kevin Crutchfield: I just want to thank everybody for tuning in today. I appreciate your time and questions. I look forward to keeping you updated over the course of the next few quarters, as we continue to execute on our operations internally and start to think about where we’re going to go from here. So, thanks again for tuning in. Have a great day.
Operator: This concludes today’s conference call. You may now disconnect.
Related Analysis
Compass Minerals International, Inc. (CMP) Earnings Preview: Key Insights and Financial Outlook
Compass Minerals International, Inc. (NYSE: CMP) Quarterly Earnings Preview
- Wall Street anticipates an EPS of $0.23 and revenue forecasts of approximately $393.95 million for CMP's upcoming quarterly earnings.
- Legal challenges are impacting investor confidence in CMP's financial disclosures.
- CMP's valuation metrics show a mixed picture, with a high debt-to-equity ratio but a positive current ratio indicating short-term financial health.
On Tuesday, May 7, 2024, Compass Minerals International, Inc. (NYSE: CMP) is set to announce its quarterly earnings after the market closes, with Wall Street anticipating an earnings-per-share (EPS) of $0.23 and revenue forecasts around $393.95 million. This financial event is closely watched by investors, especially in light of the company's current legal challenges. CMP is embroiled in a class action securities lawsuit that accuses the company of securities fraud, specifically related to allegedly overstating the likelihood of securing a renewed U.S. Forest Service contract for its magnesium chloride-based product. This lawsuit covers the period between November 29, 2023, and March 22, 2024, a timeframe that is crucial for investors monitoring the upcoming earnings report.
The lawsuit has prompted legal firms, including Levi & Korsinsky, LLP, and The Schall Law Firm, to seek recovery for shareholders who suffered losses during the specified period. These legal actions underscore the heightened scrutiny on CMP's financial and operational disclosures, potentially impacting investor confidence as the earnings release date approaches. The allegations of making false statements and concealing information have cast a shadow over the company's financial health and operational integrity, factors that are vital for evaluating CMP's earnings outlook.
Financially, CMP's valuation metrics provide a mixed picture. With a price-to-earnings ratio (P/E) of approximately 34.59, the company is seen as having a higher valuation compared to earnings, which could be a point of concern for value-focused investors. However, the price-to-sales ratio (P/S) of about 0.45 and an enterprise value-to-sales ratio (EV/S) of roughly 1.08 suggest a more favorable view of the company's sales value. These metrics, along with an earnings yield of around 2.89%, offer insights into the company's financial performance and market expectations ahead of the earnings announcement.
Moreover, CMP's debt-to-equity ratio (D/E) of about 1.56 and a current ratio of approximately 2.15 highlight aspects of the company's financial leverage and liquidity. The debt-to-equity ratio indicates a significant use of debt in financing the company's assets, which could be a concern if earnings do not meet expectations or if legal challenges impact financial stability. Conversely, the current ratio suggests that CMP is capable of covering its short-term liabilities with its short-term assets, a positive sign for immediate financial health.
As Compass Minerals International, Inc. prepares to release its quarterly earnings, investors and analysts will be keenly watching how these financial metrics, coupled with the ongoing legal challenges, will influence the company's performance and future outlook. The earnings report will not only reflect CMP's financial health over the past quarter but also offer clues on how the company is navigating its current legal and operational hurdles.