Compass Minerals International, Inc. (NYSE:CMP) Q2 2024 Earnings Call Transcript

Compass Minerals International, Inc. (NYSE:CMP) Q2 2024 Earnings Call Transcript May 8, 2024

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Operator: Hello, and thank you for standing by. My name is Regina, and I’ll be your conference operator today. At this time, I would like to welcome everyone to the Compass Minerals, Inc. Second Quarter Fiscal 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] I’d now like to turn the conference over to Brent Collins, Vice President of Investor Relations. Please go ahead.

Brent Collins: Thank you, operator. Good morning, and welcome to the Compass Minerals fiscal 2024 second quarter earnings conference call. Today, we will discuss our recent results and update our outlook for fiscal 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 Gordon Dunn, our Chief Operations Officer; Ben Nichols, our Chief Sales Officer; and Jenny Hood, Chief Supply Chain Officer. Before we get started, I’ll remind everyone that the remarks that we make today reflect financial and operational outlooks as of today’s date, May 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 our call today. I’ll begin with a few remarks today about the quarter, then discuss some of the actions were taken to enhance the company’s ability to free-up and generate more cash and pay down debt. These actions include some tough choices, but ones which I believe are necessary to unlock the intrinsic value of our company. As we all know, the winter has been especially mild across much of North America. In the representative cities that we track for snow event purposes, this is the second worst winter in 27 years of snow events. Our operating results for the quarter clearly reflect that reality with Salt segment volumes down 21% year-over-year.

Notwithstanding these recent challenges, the basic fundamentals of the Salt business remain sound. Gross revenue per ton was up 9% year-over-year, net revenues was up 11% per ton, adjusted EBITDA was 19% per ton to just under $24. The problem is that we just didn’t have enough weather to generate sales volume, which resulted in salt revenue declining 14%, adjusted EBITDA declining 7% year-over-year. In the Plant Nutrition business, the results for the quarter are a bit of a mixed bag. On the positive side, we’ve seen demand in our core markets normalized to around historic levels after the last year’s weather-driven suppressed demand. [Indiscernible] sales price per ton for SOP increased 3% on a sequential basis after five quarters of price decreases.

So there are some positive things happening in that business. We changed the leadership of the Ogden facility during the second quarter, and I’m pleased with the operational improvements we are seeing there and we are making a fresh set of eyes renewed energy in every facet of that operation. One of the primary things the team Ogden is focused on is improving our cost structure. It’s early days, but I’m confident we will continue to see positive impacts as that team continues to drive increased value out of that asset. The obvious negative for the quarter was the impairment of goodwill in the Plant Nutrition segment. Lorin will provide detail on that in a moment. Moving on the Fortress, our fire-retardant business. We’ve previously announced the path forward for magnesium chloride-based aerial fire retardant is uncertain.

Accordingly, we’ve recognized a $56 million non-cash loss on impairment of goodwill and intangible assets in the quarter. We are evaluating various alternatives regard to path forward for the fire retardant business, given the development over the last few weeks. Now I’ll transition to the actions that we announced yesterday to improve our ability to maximize cash flow and to paydown debt. After several consecutive mild winters and several substantial investments in the past years aimed at trying to grow the business, the fact is the balance sheet is clearly not in a place where we or most of our investors want it to be. We believe that the best thing we can do at this time to help unlock the intrinsic value of our company is to deleverage.

To do that, we need to maximize cash available for paying down debt. To that end, and most immediately, yesterday, we announced the company’s Board of Directors decided not to declare quarterly dividends for the foreseeable future. This step frees up approximately $25 million on an annual basis. A second action, which we announced earlier, was our decision to temporarily curb production at our Goderich mine. This is being done to build and enhance operating flexibility as well as address excess inventory we are currently – following two mild winters. As part of this curtailment, we’ve laid off approximately 20% of the mines represented workforce. If and when market conditions improve, we will be ready to recall impacted employees as needed.

Assuming normal winter ahead, our plan is to aggressively reduce production to position us to substantially reduce inventory levels and release the cash as the next winter’s deicing season begins and we start selling highway deicing salt. Third, we’ve advanced the multifaceted G&A cost saving initiatives that is intended to improve cost competitive of the company over the next 18 months. Our goal is to position ourselves as a leader in SG&A among our proxy peer group. As part of this effort, we’ve recently implemented another headcount reduction at the company headquarters. We’ve begun the process of rationalizing functional support across the organization, restructuring contracts, eliminating or pairing back on professional services to name a few.

We expect some of the improvement SG&A will be recognized in 2024 and increasingly in 2025, and the full run rate improvement will come in fiscal 2026, we enjoy a full-year contribution from the various actions that were advancing. Lastly, we’ve rolled out a more rigorous standardized methodology for evaluating and prioritizing MRO expenditures and assessing the relative criticality of individual projects will be a tool that enables us to challenge historical assumptions around what is the right amount of maintenance CapEx for the business. While improvements from this action are not as readily visible to investors, some important cultural change that I believe will positively impact sustainable cost-effective operations. Ultimately that will allow us to maximize cash generation and returns on capital.

This is just an initial step toward our operational excellence objectives. As I mentioned on our last quarterly call, my mandate is to improve cash flow generation and returns on capital we provide to our shareholders. These actions are discussed today. Help us make progress toward these goals. As a leadership team, we are acutely aware that most of these actions are outlined have had direct impact on shareholders and employees. We do not take these steps lightly, and most were not easy decisions to make. However, for us to realize the inherent value of the company, we need to take divisive and decisive actions now and accelerate our ability to generate free cash and then paydown debt, particularly when we begin relieving inventory in the coming deicing season.

My vision for the company over the coming years is that we will lower our cost structure and capital intensity such that the company generates free cash flow even in mild winters, strong free cash flow during normal winters and outstanding cash flow in strong winters. As the health of the balance sheet is restored over time back towards 2x or 2.5x net leverage, we would expect to consider turning our focus to returning capital to shareholders through share buybacks and/or dividends. Over the medium-term, we’ll continue to work on plans to improve the production effectiveness, asset efficiency of our Salt and Plant Nutrition businesses, maximize the potential performance of our unique proven assets. We’ll share more details of these plans over time.

For those of you attending our Goderich mine tour in mid-June, we’ll show you some of the things that we are planning and then we’ll expect the mine to be more efficient and profitable. Compass Minerals is composed of high quality assets and benefits from contribution of talented and committed employees. I’m excited to lead the company through this period of balance sheet restoration and believe that we’ll have a great opportunity to create value for shareholders over time. With that, I’ll turn the call over to Lorin to review the quarter in more detail.

Lorin Crenshaw: Thanks, Ed. There were a lot of moving parts this quarter that impacted our financials. Consolidated revenue was $364 million for the second quarter down 11% year-over-year. Our profitability this quarter was impacted by the $107 million aggregate loss on impairments we recognized during the quarter related to write-downs of goodwill and intangible assets related to the Fortress fire retardant business and a goodwill impairment in the Plant Nutrition segment. As further background on the write-downs, given the sustained decrease in the company’s share price and market capitalization continuing into fiscal 2024 and recent developments related to its mag chloride-based fire-retardants business impacting Fortress, we determined that there were indicators of impairment and therefore, perform long-lived assets and goodwill impairment testing across our portfolio of assets.

The analysis for Plant Nutrition resulted in no long-lived asset impairment, but did result in a goodwill impairment while the Fortress analysis resulted in an impairment of our magnesium chloride-related assets and goodwill. For the quarter, the company recognized $107 million in impairments, which were partially offset by a recognition of $21 million of other operating income, primarily related to the decline in the valuation of the contingent consideration liability associated with the Fortress acquisition. The change in that liability reflects substantial changes to our assumptions regarding the future value of the associated milestone and earn-out payments, given the obstacles that gave rise to the U.S. Forest Service, deciding not to award us a contract for mag chloride-based fire-retardants for the upcoming fire season.

Ed touched on those items briefly, and I’ll elaborate on them a little more in a moment. The consolidated operating loss for the quarter was $46 million versus operating income of $48 million last year. We reported a net loss of $48 million for the quarter, which compares to a net loss of $22 million last year. Adjusted EBITDA was approximately $87 million up 13% year-over-year. In the Salt segment, revenue totaled $310 million for the quarter down 14% year-over-year. The mild weather that we experienced in the first quarter, unfortunately continued through the second quarter, and we ultimately experienced one of the mildest winters that we have seen in our served markets over the last 25 years. Highway deicing volumes were down 22% year-over-year and C&I volumes, which includes retail deicing products were down 14% over the same period.

Total segment volumes were down 21% year-over-year. As Ed mentioned, the Salt business is operating well from a production standpoint. However, we unfortunately simply didn’t have much weather this winter to pull sales through the income statement. As one would expect with these kinds of volume declines, we saw segment operating earnings and adjusted EBITDA declined by 9% and 7% respectively in absolute dollars. However, the profitability of the business improved year-over-year with adjusted EBITDA margin increasing by approximately 200 basis points and adjusted EBITDA per ton increasing by 19% to just shy of $24. Moving on to our Plant Nutrition segment. Investors and analysts will remember that calendar 2023 saw very abnormal weather conditions that impacted sales throughout last year.

Demand has continued to be in a more normalized range with volumes up 23% from the prior year. The pricing dynamic for SOP continues to track with global trade of potassium-based fertilizers, which led to a 15% decrease in price per ton year-over-year to $680 per ton. However, as Ed pointed out, sales price per ton actually increased this quarter on a sequential basis after five consecutive quarters of price declines. The net effect of higher volumes and lower sales pricing was an increase in Plant Nutrition revenue of 5% year-over-year. A significant portion of the Plant Nutrition business’ distribution costs are fixed, so the increase in sales volumes benefited distribution costs per ton in the quarter by 12%. As noted in the press release yesterday, we recognized an impairment of goodwill in the Plant Nutrition segment of $51 million during the quarter.

In the context of impairment indicators, evidenced by the sustained decline in our share price and market cap, the impairment reflects tempered long-term financial assumptions for this asset. U.S. GAAP requires that these impairment costs be reflected in operating earnings, and as a result on a reported basis, you get an all-in product cost on a per ton basis that isn’t very meaningful. Excluding the goodwill impairment, all-in product costs per ton were down 12% year-over-year due to higher absorption of fixed costs resulting from higher sales volumes. The net impact of these drivers is that second quarter adjusted EBITDA declined slightly year-over-year as the favorable impact of higher volumes was more than offset by significantly lower pricing and higher cash costs.

As a result of the developments in the fire-retardant business and the uncertainty surrounding the future use of these mag chloride-based products, we recognized a loss on impairment in the quarter of $55.6 million related to write-downs of goodwill and intangible assets at Fortress. We also recognized a non-cash gain of $24.3 million for the quarter within other operating income line item related to the decline in the valuation of the contingent consideration liability associated with the Fortress acquisition. As a reminder, when we purchased Fortress, approximately 50% of the purchase price was contingent, was roughly half of that linked to the achievement of certain business development milestones and the other half based on volume sold and paid over a 10-year period.

As our expectations of the future value of those liabilities rise, we recognized non-cash losses reflecting that change. When our expectations of the future value of those liabilities decline as they did this quarter in a major way, we recognized non-cash gains to reflect the change in value. As in March 31, the net present value of this liability was approximately $13 million. Each quarter, there will be gains and losses as the liability is revalued to reflect changes in the discount rate used in the valuation, changes in our outlook for the business and the passage of time. These changes are not included as adjustments in the calculation of adjusted EBITDA in accordance with accounting guidance. Overall, our adjusted EBITDA as a company would have been $24 million lower if we removed that non-cash gain.

Moving on to the balance sheet. At quarter-end, we had liquidity of $278 million, comprised of $40 million of cash and revolver capacity of around $238 million. During the quarter, the company amended its existing credit facility to provide covenant relief and provide for greater flexibility over time across a broad range of operating scenarios. At quarter-end, the consolidated total net leverage ratio was 4.3x, well within the amended covenant of 6x. As Ed noted, the actions that we have undertaken will improve our ability to generate more cash for paying down debt. Given the seasonal nature of the majority of our sales and the timing of when most of the SG&A initiatives we are working on will manifest in the financial statements. We expect the benefits of our cash flow enhancing actions will start making a major impact on debt in fiscal 2025.

Moving on to our outlook for the rest of the year. Regarding our Salt segment, with the conclusion of the highway deicing season, we can now narrow the range of guidance for fiscal 2024. As a reminder, we entered the year with guidance resembling a bell curve that laid out $205 million in adjusted EBITDA in the event of a mild winter, $290 million in the event of a strong winter, and somewhere between $230 million and $270 million in the event of a normal winter. Clearly coming out of a winter that saw snow events track at only approximately 60% of normal. Our current guidance for the year, a range of $200 million to $210 million reflects the weak side of the original bell curve of possible outcomes we initially shared for guidance. Specifically, while sales volumes and revenues are expected to be slightly lower than what we originally projected in a mild winter scenario, our projected adjusted EBITDA for the fiscal year is in line with our original mild winter guidance of approximately $205 million.

Mild weather is not the only driver of the decline in full-year guidance for the Salt segment. We are also reducing full-year guidance to reflect our expectation that we will incur certain costs in connection with temporarily reducing production levels at Goderich. Ed mentioned that we are taking steps to lower our production at Goderich mine. The decision to curtail production at Goderich mine results in incremental costs that adversely impact adjusted EBITDA guidance for this year by approximately $14 million. These costs are split roughly evenly between the remaining quarters of the year and include accelerated recognition of certain production costs. When operating within normalized production levels, fixed production costs are inventory and then recognized as cost of goods sold expense when inventory is sold.

As a result of curtailed production levels being implemented at Goderich mine being well below the mine’s long run average, U.S. GAAP requires a portion of the company’s fixed production costs to be reflected as expense in the periods in which they are incurred rather than as a component of inventory. Our current guidance for this segment of between $200 million and $210 million would be roughly $215 million to $225 million absent these costs we will be incurring as a result of the actions we are taking at Goderich mine. We are confident that the focus on cash flow rather than short-term impacts on EBITDA is the right approach to driving cash flow to apply towards debt reduction and ultimately the right approach to creating shareholder value.

Shifting to Plant Nutrition. We have trimmed the high end of our Plant Nutrition guidance by $5 million to $30 million and left the lower end unchanged from prior guidance at $15 million, reflecting the passage of time and our current thinking on the most likely range of potential outcomes between now and year-end. Our commercial team has managed to maintain strong product pricing relative to alternative products, staying disciplined not to chase sales volumes, which are tracking towards the lower part of the provided range. Moving on to corporate. Our corporate expense includes everything not related to Salt and Plant Nutrition, so it includes our corporate overhead. The costs are now terminated lithium program, and the impact of Fortress.

Overall, at the midpoint, our total corporate cost guidance is $10 million more favorable than our prior guidance, including approximately $21 million in year-to-date non-cash gains related to the decline in the Fortress contingent consideration liability I referred to earlier. This gain is being partially offset by a $10 million reduction in our expected earnings contribution from Fortress, which has fallen to a new range of $2 million to $3 million from $13 million previously. This decline reflects the absence of a 2024 U.S. Forest Service contract and the cost of maintaining staffing while the company evaluates various alternatives for the path of this business. Our corporate expense excluding Fortress is tracking in line with prior guidance.

Lithium-related costs are included in this number and are unchanged from what we previously reported. With respect to planned CapEx for the year, we lower the bottom end of the range and we now expect to invest $115 million to $130 million in 2024. The change relates to the fire-retardant business where we expect CapEx to be in a range of $5 million to $10 million. That summarizes our second quarter results and our outlook for the remainder of the year. With that, I’ll turn the call over for questions. Operator?

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Q&A Session

Operator: We will now begin the question-and-answer session. [Operator Instructions] Our first question will come from the line of David Begleiter with Deutsche Bank. Please go ahead.

David Begleiter: Good morning and thank you. Given the mild winter weather and the elevated inventories, do you have any early thoughts on pricing for the upcoming highway deicing season?

Ben Nichols: Yes. Good morning. This is Ben. I would first say we’re just starting to get into our bid process for the 2024-2025 season. So it is a bit early to start extrapolating against the data points that we have in-house. So I would just – I’m not going to offer up anything of substance. The one thing I would say though is what we’ve seen today, the team is working hard against. I think we’re going to find a way to continue pushing momentum in that business and we’re going to remain focused on driving the type of values we’ve driven in the past.

David Begleiter: Very good. And Ed, in terms of Fortress, what’s a timeframe to determine which path to pursue? And yes – and what are the various options you are looking at right now? Thank you.

Edward Dowling: Look, I mean, we’re limited in what we could say because of things going on in for the investigation. Much of this information is new and we’re looking at a number of strategic alternatives. And when we got that information, we’ll share that. Jenny, do you want to add anything?

Jenny Hood: I think that’s perfect Ed. I would just say it’s too premature at this point. Obviously there’s been several developments over the last several weeks. So we’re just evaluating the options at this point. Thank you.

David Begleiter: Thank you.

Operator: Your next question will come from the line of Jeff Zekauskas with JPMorgan. Please go ahead.

Jeffrey Zekauskas: Thanks very much. From a longer term standpoint, I think if you look at your 10-year Salt sales on average, and you compare it to the previous 10 years, maybe it’s down by 13%. The weather has changed in the United States. It seems. Each year you talk about weather, you’ve had a good winter or a bad winter as though it’s random rather than that there’s a downward pattern. Do you think in doing your longer term forecasts and trying to determine what your staffing should be and how many mines you should have? That using sort of an idea of that there’s no change in the weather, it is not the best base case that maybe the cost structure needs to be rethought over a longer period of time in the light of the longer term demand trends. Or you think that there’s just not enough evidence to do that and that the way you’re going about it is reasonable?

Edward Dowling: Yes. Look, it’s a totally fair question. But we totally agree with you that – and that’s why speaking operationally, we’re working on the changes that we make to build flexibility in our mines to ramp up or ramp down to manage inventory and cash flow in the business. We’ve taken some of those actions now and we’ll continue to do that as things progress. Our crystal ball is no better than anyone else and weather is variable. And we need to have a business that accommodates that. Ben, do you want to add something to that?

Ben Nichols: No. I think that’s right. The other factor is you think about how we plan and look at annual operating plans. We get information from our customers directly which ties to our contractual obligations. And so I think in aggregate, your point is spot on and what Ed has said is correct. But there’s another factor of – we’re planning our business to fulfill our contractual obligations that are a function of what our customers are telling us.

Jeffrey Zekauskas: Do you have a target for what your inventories might be at the end of the year and what your payables might be at the end of the year?

Edward Dowling: We don’t have a target that we would share around either of those numbers. But what I would tell you is that all of the efforts we’re taking and that we’ve announced today specifically around Goderich are in the service of driving our inventory days down through next winter. As we approach this year, 9/30 of this year, at a total company level, our days were in excess of 200. Every 10-day reduction is worth $20 million to $25 million of cash. And if you look at our five-year average, we’re 30 to 40 days away from where we ought to be. How long it takes us to get there is in part a function of mother nature. But everything we’re doing is not in the spirit of EBITDA, but in the spirit of driving cash flow. And so we won’t share with you a target for inventory days.

I would tell you that coming on the heels of a 60% winter, you should not expect the end of the year inventory to be that different from 9/30/2023. But that the harvesting of cash would happen through next winter. And so that’s what I would say.

Jeffrey Zekauskas: Okay, great. Thank you so much.

Operator: [Operator Instructions] And your next question will come from the line of David Silver with CL King. Please go ahead.

David Silver: Yes. Hi. Thank you. I’m following up I guess on your action plan, the fourth initiative MRO reassessments and whatnot. I guess there is still some portion of the Goderich underground mine plan that is yet to be completed. And with this reassessment, is there – could you maybe just update us on your thinking about the underground improvements at Godridge? Will they be continued in full or is there some reassessment, let’s say compared to not last quarter? Thank you.