Compass Minerals International, Inc. (NYSE:CMP) Q1 2024 Earnings Call Transcript

Compass Minerals International, Inc. (NYSE:CMP) Q1 2024 Earnings Call Transcript February 8, 2024

Compass Minerals International, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Ladies and gentlemen, good morning. My name is Abby and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Compass Minerals First Quarter Fiscal 2024 Earnings Call. Today’s call is being recorded and 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]. And I will now turn the conference over to Brent Collins, Vice President of Investor Relations. You may begin.

Brent Collins: Thank you, operator. Good morning. And welcome to the Compass Minerals fiscal 2024 first quarter earnings conference call. Today, we will discuss our recent results and update our outlook for 2024. We’ll begin with prepared remarks from our President and CEO, Edward Dowling; and our CFO, Lorin Crenshaw. Joining in for the question-and-answer portion of the call will be George Schuller, our Chief Operating Officer; Ben Nichols, Chief Sales Officer; and Jenny Hood, our Chief Supply Chain Officer. Before we get started, I’ll remind everyone that the remarks we make today reflect financial and operational outlooks as of today’s date, February 8, 2024. These outlooks entail assumptions and expectations that involve risks and uncertainties that could cause the company’s actual results to differ materially.

A discussion of these risks can be found in our SEC filings located online at investors.compassminerals.com. Our remarks today also include certain non-GAAP financial measures. You can find reconciliations of these items in our earnings release or in our presentation, both of which are also available online. I’ll now turn the call over to Ed.

Edward Dowling: Thank you, Brent. Good morning, everyone. And thank you for joining us on our call today. I look forward to engaging with you as Compass Minerals new President and CEO. I’ll begin my remarks today by discussing some of the announcements we’ve made over the past several weeks. Yesterday, we shared within our quarterly earnings that we decided to terminate our lithium project in Utah. As I expect most of you know, this was a brownfields project that would have enabled the extraction of one additional mineral salt, in this case, lithium fluoride to carbonate as a co-product within our existing SOP salt, magnesium chloride production streams at the Ogden operations. Unfortunately, the environment surrounding this project has evolved drastically from when we began advancing this project several years ago.

The proposed regulatory changes have led to significantly increased uncertainty. When you combine an uncertain regulatory environment with other changes that have occurred within the commercial landscape for lithium with all the project it has a higher than acceptable degree of risk and uncertainty. This requires a higher return in order to justify such investment. So I understood that projects like this carry risk and willing to take and manage measured risk. However, we will not invest into uncertainty. We ultimately concluded there’s just too much uncertainty in this project. I will note that the lithium content in the Great Salt Lake is a significant resource that’s not going anywhere. We have the ability to revisit the potential to develop the resource in the future.

Clearly, that’s not today. We’ll continue to monitor and engage the appropriate legislator and regulatory processes in Utah as well as watch emerging commercial developments to preserve the long term optionality of that resource. As a result of the decision not to move forward with the lithium project, we have disbanded the lithium development team. Chris Yandell, Head of our Lithium, has left the company, as have another of talented individuals who’ve worked to advance the program. I want to thank Chris and the Lithium team for their efforts over the last couple of years were some of the best in their future endeavors. In concert with these actions, we’re taking charge in this quarter that reflects our decision to exit the lithium program, which includes severance costs for the employees that are leaving the company as well as impairment of certain lithium related assets and future commitments, which Lorin will discuss in more detail.

Next, I’ll discuss our recent CEO transition. When Kevin Crutchfield joined Compass Minerals in 2019, his mandate from the Board was to address the following; one, fix what has been a challenging production period at the Goderich Mine and repair significantly strained relationships — labor relationships at the mine; two, [entering] South America; and three, determine if there was any areas of growth adjacency through the company’s core business of salt and plant nutrition. I’ve known Kevin for three decades. He’s a talented executive of the highest integrity and personal character. Over his time here, he successfully addressed all three of these challenges. As we know, the last year has been a challenging one for Compass Minerals. Ultimately, the Board and Kevin agreed that a change in leadership was in the best interest of the company.

This change allows employees and the investment community to refocus on our advantage assets that underpin our core salt and plant nutrition businesses, as well as the emerging and exciting fire retardant business. On behalf of the Board and personally, I want to thank Kevin for his leadership over the past several years and his continued support during this transition. Looking forward, I’m excited about the opportunities ahead of us at Compass Minerals. I’ve been on the Board here for just under two years. More broadly, I spent the totality of my career in mining industry, both in executive and operating roles around the world. I’ve been fortunate to work in almost every mining environment you can imagine. And I think I bring an acute understanding of what it takes to achieve operational excellence and drive improved profitability in mining.

I successfully led numerous cost reduction and capital efficient efforts for several companies in the past. Given these experiences and my familiarity with the company’s advantaged assets, the Board determined that I was the right person to lead the Compass Minerals at this point in its journey. In addition to maintaining a safe and responsible operations that Compass Minerals is known for, the mandate I have is pretty simple, its to improve free cash flow generation and returns on capital we provide to our shareholders. I’m confident that we can get there by improving production effectiveness and asset efficiencies in our salt and plant nutrition businesses. We’ll adopt a more stringent approach through evaluating capital requirements and we’ll execute strategies aimed at reducing working capital.

We’ll also thoughtfully build out our emergency fire retardant business. Our company has a tremendous set of unique and proven assets that would be almost impossible to replicate today. But we must and we will take actions to maximize the performance of these assets. During our most recent earnings call, we laid out six strategic focus areas for fiscal 2024. Those were, build on our strong safety performance and our continuous drive for zero harm across each of our facilities. Two, maintain a disciplined pricing strategy in our North American highway deicing business and focus on geographically advantageous at markets. Three, execute on strategies to deliver more reliable sustainable Ogden production. Four, achieve clarity regarding Utah’s regulatory regime as it relates to lithium production.

Again, as we’ve gained increased clarity on this matter, we’re now pens down on lithium. Five, continue to scale the manufacturing and supply chain capabilities of our fire retardants business on its path of full commercialization and increased market share. And sixth, maintain a strong balance sheet and prudent fiscal policy. Those areas remain the same today and we’ll approach them using improvement, cost improvement and capital discipline and tool sets and a renewed emphasis on improving the management of our operating expenditures, capital expenditures and working capital. In the coming quarters you can expect to hear more from us about the progress we’re making in these areas. Again, I’m extremely excited about the opportunity to lead Compass Minerals through this next chapter in its history.

In addition to a great set of assets, the company is blessed with a talented and committed group of employees. My wife and I are looking forward to relocating to the Kansas City metro area and now becoming more involved in the local community here. With that, I’ll turn the call over to Lorin to review the quarter.

Lorin Crenshaw: Thank you, Ed. On a consolidated basis, revenue was $342 million for the first quarter, down 3% year-over-year. Our profitability this quarter was impacted by the $75 million impairment we took related to our decision to terminate our lithium project in Utah, which Ed referenced earlier. The consolidated operating loss was $55 million versus operating income of $28 million last year. We reported a net loss of $75 million for the quarter, which compares to a net loss of $300,000 last year. Adjusted EBITDA was approximately $59 million, slightly lower than the $62 million in the prior year period. I’ll begin with the salt segment, where revenue totaled $274 million for the quarter, down 11% year-over-year. The main theme here is that we experienced extremely light volume on account of exceptionally mild weather we saw across our core markets during the first quarter.

Specifically, highway deicing volumes were down 22% year-over-year to 2.3 million tons and C&I volumes, which include retail deicing products, were down 5% over the same period to 589,000 tons. Total salt segment volumes were down 19% year-over-year and reflect the fact that the first quarter was the fourth worst quarter with regard to snow event activity within our served markets that we’ve seen over the better part of three decades. In fact, December ’23 three was the worse December over that span. So despite the fact that our commercial group did a fantastic job on pricing, highway deicing price increased 7% and C&I price increased 3%. The weather didn’t cooperate the way we’d like to begin the year. While the snow data is disappointing, it is important to remember a couple of things about the weather.

First, over the long term, about 70% of the snow days in our served markets occur in the second fiscal quarter, so there is a lot of winter left in this season. Second, statistically, looking at historical data, a weak first quarter, one that is below the historical average, has not historically foreshadowed a below average second quarter. Specifically, when we look back over the past couple of decades, we see that in the 10 first quarters with recorded snow days below 90% of the long term average, 70% of the time, the second quarter of that year was at 90% or greater of the long term second quarter average. So again, it is simply too early to state with any confidence how the rest of the winter season will play out. Distribution costs on a per ton basis were basically flat year-over-year.

All-in product costs on a per ton basis rose 9% year-over-year and reflect C&I salt sales, representing a higher percentage of the sales mix this quarter and fewer sales tons to absorb cost in the period. Despite these challenges, we earned more this quarter year-over-year as measured by operating earnings for the segment, which were $51 million, up nearly 7% year-over-year, and as measured by adjusted EBITDA, which came in at $66 million, up 8% year-over-year. Our adjusted EBITDA margin improved by over 400 basis points and adjusted EBITDA per ton was $23. We worked diligently over the past couple of years to control the things we can control and improve and maintain the profitability of the salt business. These effects were reflected in this quarter’s results and reflect a positive takeaway during a quarter in which we didn’t get any help from the weather.

Moving on to our plant and nutrition segment. You’ll recall that calendar ’23 saw incredibly dry conditions early in the year in California quickly shift to historically unprecedented flooding conditions, the combination of which severely impacted sales throughout last year. From a commercial standpoint, the good news is that demand has returned as we expected in our core West Coast markets and we had sales of 75,000 tons this quarter, which is an increase of 67% from the prior year quarter. The pricing dynamic for SOP continues to reflect the excess supply of potassium based fertilizer in the market, which led to a 29% decrease in price per ton year-over-year to $660 per ton. The net effect of higher volumes and lower pricing was an increase in plant nutrition revenue of 19% year-over-year.

A significant portion of the plant nutrition business’ distribution costs are fixed, so the increase in sales volumes benefited distribution cost per ton in the quarter by 11%. All-in product cost on a per ton basis were up 4% year-over-year. The net impact of these drivers is that first quarter adjusted EBITDA declined from $19 million to approximately $6 million year-over-year as the favorable impact of higher volumes was more than offset by significantly lower pricing and higher cash costs. At Fortress, our results related to the calendar 2023 contract were a little better than we expected. We recognized approximately $13 million in adjusted EBITDA during the quarter associated with the take or pay provisions of that contract. Also regarding Fortress, we recognized a roughly $3 million noncash charge related to an increase in the valuation of the liability associated with the Fortress acquisition and the contingent consideration related to that transaction.

As a reminder, when we purchased Fortress, approximately 50% of the purchase price was contingent with roughly half of that linked to the achievement of certain business development milestones and the other half based on volumes sold and paid over a 10 year period. As of December 31st, the net present value of this liability was approximately $47 million. Each quarter, there will be gains and losses as the liability is mark-to-market to reflect changes in the discount rate used in the valuation and changes in our outlook for the business. Because this liability was established as part of an acquisition, the accounting guidance does now allow for the noncash mark-to-market to be added back to reported adjusted EBITDA. However, our adjusted EBITDA would have been $3 million higher if we added back that noncash charge.

That $3 million expense is captured in other operating expenses on the income statement. Lastly, with respect to our lithium program. As Ed mentioned, we have made the decision to not move forward with that project. As a result of that decision, in our view, that the risk adjusted returns on capital of moving forward with the project are inadequate, we have disbanded the lithium function and our recognizing a charge of approximately $77 million related to the impairment of associated assets and future commitments, as well as the severance costs of those team members that will be leaving the company. Before leaving the income statement, I’ll make a couple of quick comments on income taxes. First, the effective tax rate for the quarter is not meaningful due to the impact of the impairment that we took in the quarter.

Second, in periods like this year when our US businesses are under earning, it creates income mix issues where our worldwide income consists of foreign income driven by our salt business that is significantly offset by US losses, driven by our plant nutrition business. These dynamics are driving the estimated tax guidance for the year, which excludes the impact of valuation allowances and the lithium impairment. Moving on to the balance sheet. At quarter end, we had liquidity of $246 million, comprised of roughly $38 million of cash and revolver capacity of around $208 million. Net leverage stood at 4.3 times at the end of the quarter. Moving on to our outlook for the rest of the year. The 2024 adjusted EBITDA guidance for the salt business that we rolled out on our last call depicts the bell curve showing earnings outcomes ranging from a mild winter on the low end, a normal winter in the middle and a strong winter on the high end.

Our goal in taking this approach was to provide a reasonable distribution of results that could be anticipated across different weather outcomes. With 70% of the winter still ahead of us, we continue to feel comfortable that we will fall within our guidance range. And that it would be premature to make any adjustments at this point in time, other than to acknowledge that the odds of a strong winter are now remote. As a quarter-to-date update, January snow events in our service markets came in around 94% of the long term average and there was quite a bit of cold weather in January that generated good demand across our platform. Overall, at this point, we think the range we provided is still a fair estimation of the potential outcomes as we continue closely monitoring how weather during the second quarter plays out.

Shifting to plant nutrition. Unfortunately, the macro environment for fertilizers remains challenging from a price perspective. Recent data points within the broader MOP market indicate what is at least short term downward pressure on potassium based fertilizers. Our team has done a great job maintaining what we see as a fair premium value for SOP relative to MOP. However, we see more downside than upside risk over the balance of the year. Against that backdrop, we are adjusting our plant nutrition guidance down to reflect several risk factors over the balance of the year. First, MOP prices continue to face pressure as I indicated and we must manage and attempt to balance available market value versus targeted demand. Second, the continuing weakness in fertilizer pricing is resulting in a large number of buyers remaining inventory conscious.

In deflationary environments, buyers move to just in time purchasing behavior, further adding to the competitiveness of every time we compete to sell in the market. And third, first quarter pond based production at Ogden tracked at the lower end of our initial projections. As a result of those factors, we now expect the adjusted EBITDA for the year to be in the range of $15 million to $35 million. Moving on to corporate. Our corporate expense includes everything not related to salt and plant nutrition, so it includes our corporate overhead, the cost of our now terminated lithium program and the positive contribution of Fortress. Overall, our total corporate guidance is not changing at this time. Lithium related expenses for the year will be at the lower end of the guidance we provided given the elimination of the lithium function.

However, this reduction is being largely offset, at this time, by the noncash expense related to marking to market of the Fortress contingent liability that I discussed earlier. These two items offset one another and therefore our guidance for corporate is unchanged. Digging in a bit more on each of these. Regarding lithium, as a result of our lithium program termination, we will see the amount of lithium expense decline to approximately $5 million. This reflects cost up through late January when we move forward with our headcount reductions. The 1 time costs associated with exiting that program like severances won’t be captured in this guidance since they are an add back for adjusted EBITDA purposes. Regarding Fortress, subsequent to our last earnings call, which occurred in November, the U.S. Forest Service changed the solicitation contract requirements for the calendar ’24 contract and this has resulted in delays in the negotiation and finalization of a contract for the ’24 fire season, which starts in the April, May timeframe.

We continue to expect to have a finalized contract prior to deployment for the upcoming fire season. As a reminder, we do not have anything currently baked into our ’24 guidance for the calendar ’24 U.S. Forest Service contract. Accordingly, we are leaving guidance unchanged with respect to what we’ve included in for Fortress at this time. Once our contract is finalized, we will adjust our guidance appropriately. Finally, our corporate adjusted EBITDA guidance does not include the costs associated with certain senior executive management changes that we have announced in recent weeks. Such costs are expected to be in the range of $6 million to $9 million and these costs will be recognized in the second quarter and treated as an add back to adjusted EBITDA at that time.

Finally, moving on to CapEx. We have lowered CapEx slightly by $7 million at the midpoint to a range of $120 million to $130 million, consistent with Ed’s prior remarks regarding our focus on reducing the capital intensity of the business. Specifically, we are reducing our estimate of sustaining CapEx by $10 million at the midpoint to a range of $80 million to $90 million. Lithium expenditures for the year are expected to be around $30 million, reflecting in flight spending prior to suspending the projects. I would note that not all of that $30 million will ultimately be reported in the cash flow statement as capital expenditures due to the timing of the impairment and when we ultimately pay for some of those in flight items. Finally, we continue to expect to invest approximately $10 million to support the continued growth of Fortress, and that guidance is unchanged.

That summarizes our first quarter results and our outlook for the remainder of the year. With that, I’ll turn the call over for questions. Operator?

See also 12 Highest-Paid Women CEOs and 25 Countries That Gave the Most Foreign Aid in 2023.

Q&A Session

Operator: [Operator Instructions] And we will take our first question from Joel Jackson with BMO Capital Markets.

Joel Jackson: I have a couple. I’m going to ask one by one. So can you talk a little bit about the balance sheet and liquidity and free cash flow? The fiscal Q1 cash flow burn was quite a lot. Should we expect a really good return to good inflow of cash in Q2, if you can talk about it’s going to look — it looked like prior years? And then it looks like you’re really pushing up against the covenants here. Do you need to issue equity right now and to stabilize the company?

Lorin Crenshaw: This quarter we did see a meaningful cash burn, and there are several factors related to it that are unique and will not repeat. One, from a lithium CapEx perspective, cash out the door and actual accrued was $20 million. We will not spend $20 million on lithium going forward, and so that was a onetime factor. Inventory was roughly flat sequentially. AR was up as you would expect. The big factor was accounts payables where DPOs, as we ended the year, were abnormally high. You saw them normalize this quarter. The bottom line is this coming quarter, the 3/31 quarter, you should expect a significant positive from change in working capital and I expect that this will be the largest — this will be the only quarter where we have this sort of a cash burn.

So you should see a major positive in terms of cash flow in this quarter, and there were some unique factors that drove the burn in the first quarter. I’d also add the SEC settlement payment was made, and so several unique factors in that regard.

Edward Dowling: I’d just like to complement what Lorin just said is that our focus, which has historically been around earnings, has changed in the company and primary focus is cash production. And it’s our intention going forward to reduce our debt and improve the ratios that Lorin previously mentioned at the 4.3 net debt to EBITDA. We want to get this back into historical and where our peer groups are.

Lorin Crenshaw: And Joel, the 4.3 was well within the 5 times covenant for this quarter. And so, no, we were well within that covenant. We’ll see substantial cash flow going forward. And equity, I think, is not anything at all to even contemplate as it relates to our covenants. We are comfortably within those covenants. And I would say the nature of our business is that we do scenario planning every year. We look at mild, we look at normal, we look at strong winters. And we are blessed to have an exceptional bank group, many of which have been with us for over 20 years, and we’ll be prepared for any scenario. But no, equity, I think that’s not anything that anyone should imagine.

Joel Jackson: My follow-up question on salt is most of your official commentary, although, Lorin or Ed, I think Lorin did comment about what — it was Lorin, what January looked like. But a lot of your official commentary is acting like it’s January 1st when it’s actually February 8th. So I did appreciate Lorin updating on this call what’s happened in snow for the last five, six weeks. But the question I have for you is, such a mild winter anything can happen. We’re getting to — we’re deep into the key winter months now and it’s getting into March. You have to start making decisions, like customers are probably now quite below, trending quite below their 80% minimum or their minimum spend, minimum volume equipment, you have to make mine plans at Goderich and elsewhere to make sure you don’t over produce.

So can you talk about what discussions are happening internally or externally, start making mine plan decisions, customer, minimum decisions, whether you’re going It’s been into rollovers next year, those must be discussions you have to start planning for in such a mild winter?

Lorin Crenshaw: Joel, historically, we plan for certain winners and produce to that. And when you end up with a weak winner, we end up with too much inventory stored, which — versus a cost to the balance sheet. We’re running the different — the business differently. At this point, we’re building flexibility into the operations. We’ll be reviewing where we stand going forward and adjust production side accordingly to better manage capital in the company going forward. So there’s a lot of detail behind that. Happy to chat to you about that separately. But philosophically that’s where we are and we’re going — things are already being done. Do you want to add anything more…

Edward Dowling: I think it is worth adding, Joel, that it’s funny, a lot of questions several years ago were around Goderich and its production levels. And now in times like this, these are times where you actually would consider tapping the brakes. And as we look to protect our balance sheet and George can elaborate, we are thrilled on the one hand that we have restored Goderich to the levels that we have. But at the same time, we’re also pleased that we’re in a position where we can take actions to tap the brakes as necessary. George, maybe you can talk about…

George Schuller: I just wanted to add on a little bit what Ed said and also Lorin. We’ve already taken an action over the last several weeks to better align our mine production to match its inventory levels. So just a little bit more than what Ed said, we’ve already taken action to adjust that, and I feel confident that, that will improve both our inventory levels, where they need to be, but also make sure that we’re maintaining our mine cost at the right level.

Operator: We will take our next question from David Begleiter with Deutsche Bank.

David Begleiter: Ed, besides lithium, are there other assets in the portfolio that you and the Board are looking at or considering other options for?

Edward Dowling: Look, the lithium, of course, was predominant in our mind. We want all of our assets to performed in terms of returning ROIC, return on invested capital, in excess of our weighted average cost of capital. I’ve been here three weeks now. I haven’t been able to review all my thoughts with the Board yet, but that will become clear in time. We’re working really hard to see what this business can be and we’ll make the decisions accordingly.

David Begleiter: And just on plant and nutrition given the earnings pressures this year. Are you considering taking additional cost actions here for either temporary or permanent on the cost side?

Edward Dowling: I’m sorry, I missed the…

Lorin Crenshaw: It’s regarding plant nutrition. And David, this business is $100 a ton above where it should be from a cash cost perspective, half of that relates to our use of KCL. We are absolutely focused on getting those costs back in line with historical averages through a combination of fixed cost reductions, as well as restoration of the ponds so that we don’t have to use as much KCL, which is burdening our results.

Operator: And we will take our next question from Jeff Zekauskas with JPMorgan.

Jeff Zekauskas: In your agricultural business, your volumes were up, I don’t know, 50% more than the fourth quarter, but the EBITDA wasn’t really very different. And I get it that prices were down a little bit. But what was the magnitude of cost overruns or the problems with pond production, how much did that burden you in the quarter, and what exactly happened?

Lorin Crenshaw: I’ll approach that two ways and then ask Ben to comment. As I look at the year-over-year impact to profitability, it is predominantly for the first quarter related to price. There’s a $2.60 difference between the price a year ago and the price today, which is quite substantial. I would say about two thirds of the decline is attributable to price and about a third is attributable to cash costs. I mentioned earlier the KCL dynamic and I would characterize it that way, but it’s predominantly related to price.

Jeff Zekauskas: But sequentially, your prices are down just a little bit though, right? Can you analyze how you’re [Multiple Speakers] sequentially?