Compass Minerals International, Inc. (NYSE:CMP) Q1 2023 Earnings Call Transcript
Compass Minerals International, Inc. (NYSE:CMP) Q1 2023 Earnings Call Transcript February 8, 2023
Operator: Good morning, ladies and gentlemen. 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' Fiscal First Quarter 2023 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 . And I will now turn the call 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 2023 first quarter earnings conference call. Today, we will discuss our recent results and update our outlook for fiscal 2023. We will begin with prepared remarks from our President and CEO, Kevin Crutchfield; and our CFO, Lorin Crenshaw. Joining in for the question-and-answer portion of the call will be George Schuller, our Chief Operations Officer; Jamie Standen, our Chief Commercial Officer; Chris Yandell, our Head of Lithium; and Ryan Bartlett, Senior Vice President, Lithium Commercial & Technology. Before we get started, I will remind everyone that our remarks we make today reflect financial and operational outlook as of today's date, February 08, 2023.
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. The results in our earnings release issued yesterday and presented during this call reflect only the continuing operations of the business other than amounts pertaining to the condensed consolidated statements of cash flows or unless noted otherwise. I will turn the call over to Kevin.
Kevin Crutchfield: Thank you, Brent. Good morning, everyone. And thank you for joining us today on our call. We continue to make strides in our efforts to reposition Compass Minerals for accelerated growth, reduce winter weather dependency and create sustainable value for our shareholders by expanding our essental minerals portfolio into the adjacent markets of battery grade lithium and next generation fire retardants. As communicated on our last quarterly call, we entered 2023 focused on achieving six strategic goals. I'll take just a few minutes to provide a status update on each of those areas, and I'll comment in on the quarter before turning the call over to Lauren to discuss our financial performance in more detail. Our first area of focus continues to be the safety and wellbeing of our employees.
Last year was an outstanding year for safety performance across our operations. In fiscal 23, we intend to build on that strong performance and our continued drive towards zero harm across each of our facilities. We acknowledge that achieving zero harm or no reportable injuries across our entire platform will be a challenge in the complex operating environments that we operate in. However, in several of our sites, we've already proven it's possible and we owe it to our employees and their families to strive for that goal every day so the employees go home to their families in the same condition as they left. The next goal we outlined in some detail on our last call is our aim to restore the profitability of our salt business to levels we have demonstrated in the past.
As many of you know, inflationary pressures created a significant headwind in 2022 that had a direct impact on our salt segment EBITDA per ton. In an effort to mitigate those challenges and more effectively leverage our expansive salt depot logistics network, we approach the 2023 winter bidding season with a disciplined pricing strategy and a focus on winning sales commitments in markets that are geographically advantageous for us and relatively efficient to serve. The results of this strategy were evident in our financial performance this quarter with salt segment EBITDA up 7% year over year to just over $17. Our goal is to continue to make progress on EBITDA per ton and get back to the levels that we've enjoyed historically. We've made strides in that direction during the quarter and expect to make continued progress toward that goal through the balance of the year despite facing some headwinds on the cost front that we'll discuss more in a moment.
With our plant nutrition segment, we're deep in the process of honing and executing strategies to improve the reliability and sustainability of our SOP production. As indicated on our last earnings call, SOP production volumes are expected to be flat in fiscal 23 as the 2022 evaporation season was impacted by less than favorable weather conditions, in turn, reducing the potassium levels deposited in our solar evaporation ponds. We continue to believe, however, that the steps we're taking now should enable improved production levels at our Ogden site over time. We'll provide relevant updates on our progress towards this objective throughout the year. I'll touch on our outlook for the plant nutrition segment in a moment. But I think it's important to note that the decline in the first quarter sales volumes was driven by lower demand, not production challenges.
In fact, we were and continue to be prepared to service average customer demand if and when it improves. On the lithium front, our goal this year is to achieve several commercial and project related milestones on our roadmap to advance Phase 1 of our lithium development in Ogden. A key milestone we expect to reach by mid-year is to have a more robust capital cost estimate for Phase 1. In September, we shared an FEL-1 level engineering estimate. The next major milestone for this project is to complete an FEL-2 level estimate by the end of March, also known as a prefeasibility study or PFS. Later this calendar year, we expect to have completed an FEL-3 engineering estimate, also known as definitive feasibility study or DFS. Each of the progressions along the FEL stage gate are expected to increase the level of engineering, tighten the accuracy of the capital spin and mitigate operational risks.
Finally, we continue to make progress on our commercial scale DLE unit. Consistent with our prior plans, we expect commissioning and operations to begin in early calendar 2024. With respect to our other growth initiative, namely our minority ownership interest in Fortress, North America, we were very pleased by the December announcement of a major milestone when the Fortress team received notice that their two primary aerial fire retardants, liquid concentrate and dry powder had officially been added to the US Forest Service qualified product list or QPL. This is an extraordinary achievement as Fortress is the first new fire retardant company in over 20 years to accomplish such a listing, and it comes as a result of a six year development effort in order to meet and exceed the US Forest Service rigorous testing criteria within such categories as environmental effects and toxicity to aquatic and mammalian species, corrosion on a variety of aircraft metals, burn retardation efficacy and other qualifiers in the form of long term storability, acceptable viscosity, pumpability and finally, the completion of a live wildfire operation field evaluation.
Building upon this positive momentum heading into the 2023 wildfire season, the next step is for Fortress to be awarded an initial tranche of air tanker bases by the US Forest Service. We're optimistic that such awards will occur ahead of the fire season this year. But in order to be conservative, we've not factored in the associated financial results of such an award into our outlook. We stand ready to continue supporting Fortress in their efforts to ramp up the full commercialization of their products with a focus on gaining measurable market share within this approximately $300 million revenue addressable market, not to mention a profit pool in excess of $90 million currently served by a single market participant. The recent QPL listing was a major hurdle to clear on our path to providing a magnesium chloride-based product that is more environmentally friendly and has a greater efficacy than the existing diammonium phosphate-based product that is dominated the market for decades.
You'll recall that we increased our strategic investment in Fortress last year and currently own approximately 45% of the company. We believe Fortress has a bright future and we look forward to the business gaining market traction in the coming months. Lastly, our final strategic objective hitting into fiscal 23 was to enhance our financial standing and overall credit profile. We took a meaningful step in that direction this past October when we closed on a gross $252 million strategic equity investment by Koch Minerals & Trading, LLC. In addition to funding the first two years of our Phase 1 lithium development that investment by Koch also allowed us to strengthen our balance sheet by paying down some debt during the quarter. We expect to build on this momentum through the restoration of the salt segment's profitability, which should result in additional deleveraging as our EBITDA rises.
So for long term, we continue executing on our plan and are pleased with the progress being made. Unfortunately, in the shorter term, we continue to experience challenges placing negative pressure on our quarterly profitability. As a casing point, our first quarter results reflected a mixed bag in terms of business trends. Year-over-year, we saw an improvement in select financial measures with consolidated revenue increasing 6% to $352 million, consolidated operating earnings up 37% and consolidated adjusted EBITDA around $62 million, up 6%. We had a decent start to the winter deicing season with snow events in the first quarter in line with historical averages and significantly above last year's historically weak number of snow events. This supported higher salt sales volumes, which combined with a 12% year-over-year price increase in highway deicing that we realized resulted in stronger salt performance.
Within the plant nutrition segment, although pricing during the period held relatively firm at historically high levels, demand was deeply disappointing and well below our expectations, driven by exceptionally dry weather conditions that discouraged fertilizer application in our largest markets in the Western US and customers deferring purchases in anticipation of the market softening. Ironically, weather conditions in California abruptly shifted from drought conditions during the first fiscal quarter ending in December to epic flooding in January, the beginning of our second fiscal quarter seemingly overnight. As a result, our visibility related to near term SOP demand is currently speculative at best, as it's not clear if growers will apply at historical levels.
Aside from the demand variability I just described, there is also elevated uncertainty from a global perspective to what degree both MOP and macro fertilizer pricing dynamics may amplify this pressure, resulting in the need to recalibrate our plant nutrition segment profitability outlook for the year. Despite the challenges we are encountering as the fertilizer market enters a new phase of its cycle, at a higher level, nothing we see suggest a change in the long run through the cycle earnings power of our plant nutrition business. Our salt business is delivering year over year improvement and our growth initiatives are advancing positively as we work to unlock the embedded value within our company. As I consider this start to our fiscal year, it's clear we've got a lot of work to do, both strategically and operationally to navigate these near term challenges.
As we do so, our focus remains on delivering on our 2023 strategic goals, controlling what we can control and continuing to take steps toward creating value for our stakeholders over the long term. We will also address the challenges being caused by cost pressures across the business by executing on opportunities to reduce our cost structure where appropriate. Size of the price is large as measured by the combined intrinsic value of our salt, plant nutrition, lithium and next generation fire retardant businesses and we remain confident in our plan and our ability to realize that value overtime. And with that, I'll now turn the call over to Lorin.
Lorin Crenshaw: Thank you, Kevin. On a consolidated basis, revenue was $352 million for the first quarter up 6% year-over-year. Consolidated operating earnings rose to $27.9 million, up 37% while adjusted EBITDA from continuing operations was $61.8 million, up 6% year-over-year. Beginning with our salt segment, salt revenue totaled $308 million for the quarter, up 12% year-over-year, driven by 10% higher price and 2% growth in sales volumes. The highway deicing business experienced 12 % higher pricing year over year to just shy of $66 per ton and sales volume growth of 3% year over year. Delivering growth in sales volumes reflects a relatively strong result when you consider that our team deliberately took 9% fewer sales commitments as part of our value over volume commercial bidding strategies last year.
Photo by J Yeo on Unsplash
A key driver of the positive volume development was weather, which improved year over year. We experienced solid winter activity on average across our markets but lower than projected sales to commitment ratios in certain key areas such as Detroit, Milwaukee and Chicago, where we have relatively heavy commitment levels. These areas experience somewhat mild weather and relatively low quality events during the quarter. Across the 11 representative cities we've discussed in the past, 43 snow events were reported during the quarter, up 48% year over year and in line with the 10 year average. Within our C&I business, volumes declined 2% year over year, driven primarily by the timing of water care sales and slightly weaker consumer deicing demand, while price rose 9% to approximately $190 per ton.
Higher fuel and logistics expenses drove per unit distribution costs 14% higher compared to last year. Operating costs were higher by 6% year over year to approximately $45 per ton reflecting the 2022 inflationary environment embedded in the cost of goods sold of our highway deicing salt now being sold out of inventory. Overall, this translated into higher operating earnings and EBITDA for the salt segment with operating earnings rising 20% year over year to $47.1 million and EBITDA rising 10% to $61 million. As Kevin discussed earlier, a strategic objective of ours this year is to restore the profitability of the salt segment back to levels that we've historically realized. We made progress on that goal this quarter and continue to see a path towards achieving profitability in the range of $19 to $20 of EBITDA per ton, assuming normalized winter occurs the rest of the second quarter with the second half higher than the first, reflecting the fact that our higher margin per ton C&I business makes up a greater percentage of our revenue in the second half than it does in the first.
Turning to our plant nutrition segment. Grower purchasing behavior had an adverse impact on sales volumes resulting in weak revenue for the quarter, more than offsetting higher sales price. Specifically, revenue declined 24% to $41.6 million, driven by 46% decline in sales volumes. We believe there were two significant dynamics in play here, deflation and drought conditions across our primary served markets. Regarding deflation, during the quarter, buyers appear to defer purchases on the expectation that fertilizer prices would continue to come down from the recent highs we have seen over the past year. In our experience, during deflationary environments, especially early in the application season, it's not uncommon for customers to wait as long as possible to buy, displaying real time purchasing characteristics, more or less, and we believe this dynamic was in play during the quarter.
Regarding the second driver of lower volume, drought conditions, our major markets for our premium SOP product are on the west coast, which broadly speaking, experienced exceptionally dry weather during the quarter. We believe this caused farmers to defer purchases as they typically want to apply fertilizer when there is sufficient moisture available to efficiently deliver SOP into the soil. Distribution costs increased 19% year-over-year on a per ton basis due to higher fuel rates and fewer sales volumes to absorb fixed rail fleet costs. Similarly, operating costs were up 26% year-over-year due primarily to the inflationary environment over the last year. From a profitability perspective, plant nutrition EBITDA came in at $19.3 million, up 5% year-over-year, despite lower sales volumes and higher product costs on strong pricing, which rose 40% to roughly $924 per ton.
In terms of cash flow, the most notable event during the quarter was closing the previously announced investment by Koch Minerals & Trading of $241 million net of fees. We've earmarked approximately $200 million of the net proceeds towards funding the first two years of spending related to Phase 1 of our lithium development. Additionally, this transaction allowed us to reduce debt and puts a meaningful amount of cash on the balance sheet, both of which improve our leverage profile as reflected by net debt declining by approximately 24% to $686 million. Turning to our outlook for the rest of the year, beginning with salt. On our last earnings call, we shared a modified approach to providing EBITDA guidance for salt, shifting away from assuming normal winter weather at the beginning of each year.
Instead, we're now providing a range of potential earnings outcomes that consider various winter weather scenarios with EBITDA projected to range from a low of $175 million in the event of a mild winter to a high of $275 million in the event of a strong winter, and between $215 million and $255 million in between. With that middle range reflected profitability levels in the event we experience snow events and sales to commitment ratios in our core markets in line with long range historical trends. The range shown for the salt segment remains unchanged. However, four months into the year, we now believe results are more likely to come in below the midpoint of the 2023 range for sales volume, revenue and EBITDA. The factors shifting profitability below the midpoint relate to volume and costs.
From a volume perspective, in aggregate, across our core markets, the first quarter was decent weather wise, as I indicated earlier. But sales to commitment ratios in certain of our core US north markets, Milwaukee, Chicago and Detroit, where we have a disproportionate book of commitments, were below trend, translating into an EBITDA drag versus normalized levels. We had 42 snow events in our core markets in January, which is in line with the 10 year average. It's worth pointing out, however, that while this deicing season has tracked with the 10 year average for snow events, those have generally been what we would describe internally as lower quality snow events. Snow events that are clustered into a short time period are not as impactful as the same number of events spaced out over a longer period.
Furthermore, high accumulations can actually discourage salt application. An example of this was the series of winter storms that hit the Buffalo area earlier in the season. Furthermore, snow events surrounded by periods of warm weather are considered lower quality when compared to events surrounded by cold weather. So far this season, the snow events that we've experienced have been followed by relatively warmer weather. As we look at the deicing season to-date, snow events in aggregate have been normal. But we would characterize this year's snow events, particularly within the US markets where we have somewhat outsized commitments, as relatively lower quality overall. These year-to-date trends, weather wise, are contributing to earnings power for salt trending below the midpoint of the 2023 range.
We also see salt trending below the midpoint of the 2023 range due to slightly higher cost trends year-to-date. We've experienced higher natural gas costs in 2023 related to the supply and demand dynamics impacting the regional gas pipeline serving our Ogden facility. Extremely cold weather drove a surge in demand from energy producers, draining already low regional inventory levels. Prices have now stabilized in the region. While our hedging program for Ogden has historically been highly effective in reducing the volatility of natural gas costs, the dynamic in play temporarily rendered our hedges ineffective. We have since recalibrated our hedges to protect us in the event a similar episode presents itself in the future. Our full year outlook for Plant Nutrition from an EBITDA perspective is lower and wider versus our prior guidance.
Our current view of profitability outcomes ranges from $30 million to $60 million of EBITDA compared to our prior range of $55 million to $70 million. Investors should interpret this widening as reflecting higher uncertainty and lower visibility than we had heading into the year. Given this reality, we developed several scenarios to inform our range. The lower end of the range reflects the prospect of volumes tracking well below the five year average for this segment, while simultaneously pricing declines in the second half to levels approaching the 10 year average for this business. The midpoint of the range reflects a scenario where volumes are roughly three quarters of the five year average for this business, while second half SOP pricing tracks near the average price we experienced in fiscal 2022.
The higher end of the range reflects a scenario where our western markets bounce back quickly, volume lines, and global MOP and SOP pricing trends reverse themselves due to supply demand dynamics, resulting in MOP pricing bottoming near current levels, then rising the second half of the year. Against this fluid and uncertain backdrop, we are preparing for each of these scenarios while maintaining a focus on agility and controlling what we can control. Cost wise, per unit production cost for the balance of the year in plant nutrition will be higher than expected due in part to the same increase in natural gas cost at Ogden I described earlier. Our solar evaporation pond complex in Utah produces salt, SOP and mag chloride. Therefore, higher production costs there impact the profitability of both the salt and plant nutrition businesses.
Turning to our CapEx guidance. In line with our lowered overall profitability outlook, we have lowered our spending plans by $10 million at the midpoint to the $165 million to $220 million range. Notably, our expected spending on Lithium is unchanged from our prior estimate of $75 million to $120 million to be funded by proceeds from the recent Koch transaction. However, sustaining CapEx has been lowered by $10 million at the midpoint to a new range of between $90 million and $100 million. As far as the mix of CapEx spending by quarter, we expect the cadence of lithium spending to be very second half weighted with approximately 80% occurring in the second half, while sustaining CapEx is expected to show a pattern split roughly one third first half and two thirds second half.
Kevin already outlined the positive news regarding two of Fortress' products achieving QPL status. However, I want to reiterate that we have no positive EBITDA contribution from Fortress baked into our outlook. We assume Fortress is a drag on our result this year profit wise, but are working closely with Fortress to assist them in their efforts to be prepared to fully capitalize on their recent success upon receiving their first base allocation, which could occur this wildfire season. Finally, as a reminder, whereas in the past we issued two snow reports a year, one in January and one in April, we will no longer issue standalone snow reports as press releases, but we will continue to provide perspective as we have today as part of our first and second quarter earnings calls.
With that, I will turn it back to the operator to open the lines for Q&A. Operator?
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