Compass Minerals International Inc

NYSE:CMP

Earnings Call Transcript

[Operator]

Hello, and thank you for standing by. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Compass Minerals' First Quarter Fiscal 2025 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Brent Collins, Vice President, Investor Relations and Treasurer. Please go ahead.

[Brent Collins, executive]

Thank you, operator. Good morning, and welcome to the Compass Minerals' Fiscal 2025 First Quarter Earnings Conference Call. Today, we will discuss our recent results and update our outlook for fiscal 2025. We will begin with prepared remarks from our President and CEO, Edward Dowling; and our CFO, Peter Fjellman. Joining in for the question-and-answer portion of the call, will be Ben Nichols, our Chief Sales Officer; and Jenny Hood, Chief Supply Chain Officer.

Before we get started, I will remind everyone that the remarks we make today reflect financial and operational outlook as of today's date, February 11, 2025. 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 includes 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 will now turn the call over to Ed.

[Edward Dowling, executive]

Thank you, Brent. Good morning, everyone, and thank you for joining us on our call today. Before I begin, I want to make a few comments about the senior leadership additions we announced a couple of weeks ago. An important aspect of executing on our Back-To-Basic strategy is operational discipline and intense focus on continuous improvement. The appointments of Pat Merrin and Peter Fjellman as COO and CFO, respectively, bring 2 executives to Compass Minerals with proven track records of leading teams and building cultures focused on disciplined operational management. Pat will join the company officially in early March. Peter has been with the company a short time and is quickly getting up to speed. He's with us on the call today. I am excited about these additions and these 2 leaders to our core team and look forward to their contributions to the company.

Peter is succeeding Jeff Cathey, who stepped down for personal reasons, though we will continue to benefit from his knowledge as he serves in the consulting world for the next several months. Jeff first served as our Chief Accounting Officer then as CFO, and he was instrumental in leading the finance and accounting organization through a number of important matters. On behalf of Compass Minerals, I want to thank Jeff for his many contributions to the company, and we wish him well in his future endeavors.

I'll start with making a few comments on the business, beginning with our Salt business. Consistent with prior comments we've made, one important area of focus this year has been to flexibly manage the business and to reduce our absolute inventory levels of highway deicing salt. You'll recall that this was a key driver in our decision to curtail production at Goderich mine in 2024. Reducing inventory obviously has the benefit of freeing cash that is hung up in working capital, but also helps remove supply-demand balance in the market that is long on supply following last year's weak winter. Salt is like any other commodity. When there's too much of it in the system, it will weigh on price, all things being equal.

We're making good progress in reducing our inventory volumes with North American highway deicing inventory volumes down approximately 10% year-over-year, and that is despite the fact that winter began slower than we'd hoped in October and November. We typically see both prefill activity and replenishment early in the fiscal first quarter generated by early snow events. Unfortunately, we really didn't see any weather in our certain markets early in the quarter to drive our orders given that large parts of our customer base had adequate inventory following last year's exceptionally winter. December saw an increase in winter weather that was consistent with the 10-year average in our served markets and is significantly above what we saw last year.

Looking outside the quarter, we saw winter weather further strengthened in January, which allowed us to claw back some of the shortfall from the first quarter. We'll see how the rest are winter deicing season progresses, and that will inform our production plans for the coming year.

One new factor that could influence production plan is the tariff on Canadian imports that the U.S. administration announced and then quickly paused last week, and the impact that this would have on both Salt and SOP produced in Canada and sold in the U.S. should the tariff eventually be implemented. There's obviously a lot of details to work through, but I'll share a few of our initial thoughts.

Regarding our highway deicing business, we don't expect the tariff would materially impact the current year's deicing season as the inventory is largely forward deployed and available for our customers. It does have the potential impact next year as we will need to produce and then move salt across our deepwater network. We're evaluating options to minimize the more immediate impact of such tariffs could have on our C&I, chemical and [ Wineyard served ] SOP business. As we see, this matter will likely be very dynamic for some time, and we will continue to monitor it closely. As the situation continues to evolve and settle out, we will update the investment community as appropriate.

In the Plant Nutrition business, we've talked in the past about the goal of restoring upon complex at Ogden. This is a multiyear process that we engaged with for several years and focus is improving consistency of the grade of SOP raw materials going to the plant, acknowledging that this has not been a quick recovery process, that are beginning to see positive results from these efforts, which are having an impact on our cost structure. The site has been focused on finding opportunities to improve operational efficiency. While pricing in the quarter was a little weaker than expected, we had stronger sales volumes and lower costs that allowed us to exceed forecast and this in turn is enabling us to increase guidance for this segment.

At Fortress, we're continuing to evaluate all options for the business, including ongoing discussions with the U.S. Forest Service regarding the evaluation and testing of the company's conditionally qualified technical grade ortho phosphate-based aerial fire retardant, Qela.

With respect to guidance, we are moving the range for total adjusted EBITDA down by roughly $15 million. The main driver of this change is the lighter start in sales in our Salt business attributable to the mild weather in October and November, I mentioned earlier. Again, January came in better than forecast, we've included some of that outperformance into our revised guidance.

Plant Nutrition is up by about $4 million based on the factors previously mentioned. Corporate EBITDA is unchanged from what we guided in December. To offset this reduction in adjusted EBITDA, the company is reducing the range of capital guidance by approximately $25 million. When we laid out our guidance for the year on our last earnings call, we noted that we had sculpted the CapEx program such that we can modify our spend to adjust to how the deicing season shaped up, and we're pulling that lever as a vision. I'll note that the operational initiatives are underway to improve reliability and lower cost, which will have a positive impact on CapEx over time, and we're already seeing benefits from some of that work.

With respect to the balance sheet, our plan remains to refinance our debt stack this year with the intention of restructuring in a way that better aligns with our current strategy. We believe that we'll be able to move forward with a structure that provides more flexibility around our covenants.

Our vision for Compass Minerals remains unchanged, to build a company that generates free cash flow even in mild winters, strong free cash flow during normal winters and outstanding cash flow in strong winters. We have more work to do to get there, but the company has made important strides over the past several quarters on improving areas that we have the most ability to influence. Said differently, we're doing a better job of controlling the controllables. I'll expect our progress on this front to continue and accelerate with the arrival of Pat and Peter.

We remain focused on delivering on our back-to-basic strategy, I'm excited about the progress we're making in the organization to execute on that goal.

With that, I'll turn the call over to Peter.

[Peter Fjellman, executive]

Thanks, Ed. Good morning to everyone. I'm extremely excited to be joining Compass Minerals and working with the team here. My background and skill set aligns well with the Back-To-Basic strategy that the company has embarked on. I want to echo the sentiment shared by Ed earlier about Jeff. He's been incredibly helpful and generous with his time and knowledge as we transition the role. I'll comment briefly on the financial results for the quarter before turning the call over for Q&A.

For the first quarter, consolidated revenue was $307 million, down 10% year-over-year. It's important to remember that the fiscal first quarter of 2024 included contribution related to Fortress from the U.S. Forest Service contract we had in that year.

From an operating earnings perspective, we essentially broke even in the current quarter. Consolidated net loss was $24 million and adjusted EBITDA was approximately $32 million for the quarter.

Drilling down in the segment results. In the Salt business, revenue in the first quarter was $242 million compared to $274 million a year ago. Pricing was up 1% year-over-year to approximately $97 per ton, with volumes down 13% compared to the prior year period.

Net revenue per ton, which accounts for distribution costs, increased 3% to over $68.

On a per ton basis, operating earnings came in lower year-over-year at $11.79 per ton, down 34%, while adjusted EBITDA per ton decreased 17% to $19.17. The decrease in margin reflects the increase in production cost per ton due to the curtailment of production at Goderich mine last year.

In the Plant Nutrition business, revenue for the first quarter was $61 million, which is up 24% year-over-year from $50 million. Sales volumes were up 36% from prior year period, while pricing was down 9%. Distribution costs per ton decreased 2% to around [ $91.55 ] per ton and all-in production cost per ton decreased 10%.

At quarter end, we had liquidity of $126 million, comprised of $46 million of cash and a revolver capacity of around $80 million. At quarter end, the consolidated net leverage ratio was 5.9x, within the company's net leverage covenant of 6.5x.

Last week, the company had approximately $195 million of liquidity with $65 million of cash and $130 million of revolver capacity. With that, I'll turn the call over for questions.

[Operator]

[Operator Instructions] We'll take our first question from the line of David Begleiter with Deutsche Bank.

[David Begleiter, analyst]

Ed, given the recent winter weather activity, can you kind of frame the outlook for highway deicing volumes in both Q2 as well as the full year?

[Edward Dowling, executive]

Well, we're in February now. January was -- I mean, as we said, October, November were not good months for us as winter really didn't materialize in our served markets. December was a really solid month for us, really being relatively equal to our 10-year average. January was really great. And really mainly in our southern markets remember the storm tracks largely in the south. And of course, now what we've been seeing more recently, the storm tracks are really into our core served markets, and we hope that sort of continues.

The -- we'll see -- so February is looking pretty good so far. We'll have to see how March lays out, and we'll -- and that effect on inventory, and we'll do our production planning based on really how we sort of wrap up the season kind of at the end of March.

[David Begleiter, analyst]

Very good. And just on Fortress, when you say conditionally qualified, what does that actually mean?

[Edward Dowling, executive]

There are several steps that the Forest Service uses to approve products. The first step is sort of a lab-based product to conditionally qualify it. There're several really things that go into that. Once that is conditionally qualified, which it is, then you take it into the field through what's called an operational field evaluation, OFE, and that's what we're talking to the Forest Service right now. Jenny, do you want to add anything to that?

[Jenny Hood, executive]

I'll just add. As far as the field evaluation the OFC that Ed just mentioned. During that process, they'll also be doing integration testing with the legacy retardants that are in the market. Thanks.

[David Begleiter, analyst]

And is that -- does this mean you've solved the corrosion issues you highlighted last year -- what they highlighted last year?

[Edward Dowling, executive]

It's a different base chemistry. Initially, the chemistry was a magnesium chloride-based chemistry. And that's where we were all surprised about this time last year to learn when we were very close to having a contract that inspection of the airplanes found the corrosion. That investigation is still going on. We can't comment on it because it's going on within the NTSB. What we're talking about with Qela, it is a different chemistry based on a phosphate-type chemistry and it's been through the testing and evaluation, which is obviously getting a lot more scrutiny given where we ended up last year. So anything you want to add to that?

[Jenny Hood, executive]

No. Thanks, Ed.

[Operator]

Our next question comes from the line of Joel Jackson with BMO Capital Markets.

[Joel Jackson, analyst]

First question, surprised that you lowered your full year volume guidance and to this snowing a fair bit, I live in Toronto, Ed, as you know, I'm shoving a lot, we're all shoving a lot and talking about it. American Rock Salt is having production right? It seems like there are some shortages in Western New York. I understand that we started light to the beginning of the winter in December, but I'm surprised that you lowered your volume guidance considering everything going on. Can you talk about that?

[Edward Dowling, executive]

Well, it's just what we've done is we're not weather forecasters. We can't project going forward. What we're doing -- in the past, you'll recall we were using more of a distributed approach to guidance. What we're doing is, as we've talked about in the past, a little different approach to it now where we're -- given the shortfall in the first quarter, we're really -- we've taken that, and we've added a little bit back in January, and that's kind of what we're seeing right now. Now if we have knockout February and knockout March, we'll probably adjust it back up. But we're just being careful about it.

[Joel Jackson, analyst]

And my second question is going to be 2 parts. The first part will be following up on that. But you gave guidance in the middle of December and it's only snowed very strongly since then. That's why I'm surprised you lowered your volume guide. And the second question is, Ed, talk about what you're doing on SG&A because that's been a big focus of yours when you came in about a year or [ 13 ] months ago, and SG&A in the first quarter was extremely flat with SG&A in fiscal Q1 of '24. So what progress are you making? And can you make on SG&A?

[Edward Dowling, executive]

Yes. We have made progress in SG&A. If you think about sort of the headcount, we are down probably about 80%, running with a team of about 80% of the number of people that we had here in not too distant past. The -- what's been offsetting us are things like legal costs associated with some of the class action lawsuits and things like that has been offsetting sort of SG&A. It remains a really important focus for us. It's a very active discussion going on with management as we speak.

[Joel Jackson, analyst]

And just about the strong guidance -- you gave guidance in December, right?

[Edward Dowling, executive]

Yes. I was just going to say, in the middle of December, to kind of follow up on that, we really was -- we did that in mid-December, we had only closed in October before that, right?

[Operator]

Our next question comes from the line of Jeff Zekauskas with JPMorgan.

[Jeffrey Zekauskas, analyst]

Can you talk about what's going on in your accounts receivable line, and where you expect that to go? And likewise, do you have targets for where you want to bring your inventories down to?

[Edward Dowling, executive]

Yes. Well, we can tell you that we talked to inventories a lot. We are bringing them down. We'll bring them down to lower than historical norms, delivering to cash associated with that. Ben, do you want to add anything to that?

[Ben Nichols, executive]

I think that's right,Ed. Just where the winner is tracking all things being equal. And if you kind of take the midpoint of our guidance, that's relative to last year, that's roughly 0.5 million tons alone on the demand profile. So we're also taking actions at the mine that as you've seen published, and we anticipate to draw the inventories down significantly.

[Edward Dowling, executive]

Yes. We continue to run Goderich at the curtailed rate, and we won't ramp it back up until we've got a better level on our inventory. Do you want to talk AR? Brent.

[Brent Collins, executive]

Yes, Jeff, this is Brent. So AR, that's just sales. So as we talked about in the prepared remarks. October and November were pretty light, but December was a strong month. So that's just the cash conversion cycle, things coming out of inventory going up into accounts receivable, and then we'll start collecting that here in the second quarter.

[Jeffrey Zekauskas, analyst]

Okay. And then it looks like your -- I don't know if you're deferring $25 million in CapEx or canceling $25 million in CapEx. Can you talk about what it is that you're not spending, and whether you'll see that in the future?

[Edward Dowling, executive]

Let me remind everybody that we -- last year, we installed a more disciplined approach to capital, where we rank projects based on really the risk associated with kind of not doing the project. And we're not going to cut environmental health or safety. Let's just say that. And we do get emergency capital requests that come through that we have to have a provision for. What we're talking about are projects that we've ranked from kind of higher risk to lower risk that are in the capital plan for 2025. And what we're planning at this point is not doing about $25 million worth of that with the lower end of those projects, which would have scored lower in terms of that risk profile.

Now they'll probably show back up in 2026, and we'll go through that process again. So what the -- so we put the process in place last year. What we've done this year is organize our capital plan so that we could ramp it up or ramp it down depending on how the year went. Given the first quarter was behind plan, we've ramped it down accordingly.

[Jeffrey Zekauskas, analyst]

Okay.

[Brent Collins, executive]

Jeff, this is Brent. I did want to clarify one thing on the accounts receivables that I was thinking about. So on the product recall that we announced that was disclosed last quarter, the way the accounting for that works is that you -- we expect that to be covered by insurance. The way that you have to handle that from an accounting perspective is you have to do a gross-up of the claim and then the receivable. So that could be something that you're seeing there is that there's just a gross-up on the balance sheet to reflect that.

[Jeffrey Zekauskas, analyst]

How much is that?

[Brent Collins, executive]

$35 million gross debt.

[Operator]

Our final question will come from the line of David Silver with CL King & Associates.

[David Silver, analyst]

I do have a couple of questions. So first one would be about your managing your salt business through the balance of the winter season. In reading through the press release, a couple of words that I don't usually see there, toggle and tariffs. And when I think about it, I'm guessing, officially, the tariffs would not kick in until, I don't know, March 3 or 4 in a worst-case scenario. And in the meantime, I'm guessing that you are leveraging the Cote Blanche production to kind of meet the needs in your target market area, marketing radius to the greatest extent possible. But could you just kind of talk through why would the tariffs, at least for this winter, be an issue in kind of a worst-case scenario? In other words, between now and March 4, you can produce and position and then you can run Cote Blanche or toggle, I guess, running Cote Blanche a little harder and moving product up the river. But between the toggles and the tariffs, what is kind of a -- what do you fear, I guess, at least in terms of the current winter season through March 31 or April? My assumption is you should be able to get through unscathed, but is there kind of a worst-case scenario there?

[Edward Dowling, executive]

Yes. Thanks, Jacob. The in terms of the highway deicing we don't really see much risk associated with the tariffs for this fiscal year. As we said, most of our inventory is already forward from Goderich in Canada is already forward deployed so that the customers can access it this year. We're going to have to see what happens with and if the tariffs are reinstated here in a month or so. So you need to be prepared for that. You mentioned one potential contingency, and this would be really more for next year, not this year, but some flexibility associated with Cote Blanche to serve some of our historical markets. And -- but there would be, over time, a reordering that would happen within the served markets for all the salt producers. We just have to see what happens. And there's many, many, many potential scenarios that come out of that.

We did mention that product made from like our SOP product and C&I product made in Canada and imported into the U.S. could be affected through tariffs this year. And there are scenarios where that could be both negative obviously. But it could -- ironically, it could end up being positive for SOP produced in Utah. So we'll just have to see how it goes.

[David Silver, analyst]

Okay. Next question would be maybe a follow-up to -- on a certain extent to the CapEx question, but then also about your SOP business in particular. So the wording in the press release indicated that, I don't know, remediation or repair efforts, and I apologize, I forget the exact term. But you're doing things with the SOP ponds and whatnot that are generating some better results. You also talked about optimizing the use of KCL. So I'm kind of scratching my head, but within the context of knocking or taking $25 million out of the CapEx budget, I mean, are the efforts or are the steps you're taking at Ogden on the SOP business, are those capital projects? Or is the spending that you're doing there actually flowing through the income statement by quarter? So just maybe a comment on what most recently you've done at Ogden and the SOP ponds that are generating better results? And then how does that kind of play into the capital budget that you've established as of this quarter?

[Edward Dowling, executive]

Dave, thanks for the question. We've been working for some time to restore the -- that's the word we're using, restore the health of the ponds that we mine basically scrape up the material and to really control the brine chemistry more properly along with a prudent use of KCL, which does help that restoration. That's really the first step in terms of restoring this business to its historical level of business performance. And what we're really pointing out is after a year of work, and of course, remember, this is a multiyear cycle, the -- we're seeing the benefits of that. What we're seeing is what we expected to see is higher grade SOP in the material that we mine and send to the plant. Now there's 2 plants. There's a wet plant where we separate SOP for magnesium chloride then the SOP then goes over to the dry plant. There will be some capital projects in that dry plant in the future to get the water really the moisture and the SOP right for compaction when operating that plant for some period of time and a less optimal -- less than optimal process in terms of the moisture feeding compaction and we suffer losses associated with that.

So we're seeing benefits now to operating costs just by managing our business better. That's more just operating costs. In the future, we will have capital costs, and this is not something that we want to defer. There are really 2 really critical sort of business projects that we want to do on the capital side. One, as I mentioned, the dry plant at Ogden, which will help us reduce our costs even more. The second, which is really a sustainability project is the mill relocation at Goderich mine, which will occur probably in 2027. So we're preparing to do those projects doing the engineering and doing the engineering right. We are spending capital on those, but those projects themselves will be coming in the future.

[Operator]

And that will conclude our question-and-answer session. And with that, I'll turn the call back over to Ed Dowling for closing remarks.

[Edward Dowling, executive]

Okay. Thank you for your interest in Compass Minerals. Please don't hesitate to reach out to Brent, if you have any follow-up questions. We look forward to speaking to you in the next quarter. Thanks very much.

[Operator]

That will conclude today's call. Thank you all for joining, and you may now disconnect.