Compass Minerals International, Inc. (CMP) Q4 2012 Earnings Report, Transcript and Summary

Good day, and welcome to the Compass Minerals’ Fourth Quarter Earnings Conference. Today’s conference is being recorded. At this time I’d like to turn the conference over to Ms. Peggy Landon. Please go ahead.

Thank you, Noah. And thank you everyone for joining us this morning. I am pleased to be joined this morning by Fran Malecha, our new CEO who joined us about three weeks ago, and Rod Underdown, our CFO. I will turn the call to them in just a minute but first let me remind you that today’s discussion may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on the company’s expectations as of today’s date, February 6, 2013 and involve risks and uncertainties that could cause the company’s actual results to differ materially. The differences could be caused by a number of factors including those identified in Compass Minerals’ most recent Forms 10-K and 10-Q. The company undertakes no obligation to update any forward-looking statements made today to reflect future events or developments. You can find reconciliations of any non-GAAP financial information that we discuss today in our earnings release, which is available on the Investor Relations section of our website at www.compassminerals.com. Now I’ll turn the call over to Fran.

Thank you, Peggy. Good morning. I am pleased to be here today and pleased to be leading Compass Minerals and I want to tell you a bit about myself and why I believe Compass Minerals and I are a good fit. I spent my entire career in agri business, so I understand many of the dynamics that can affect fertilizer businesses by Compass Minerals specialty fertilizer segment. And during my career I have come to understand that an efficient and competitively advantaged distribution system can create significant value. That has direct application to Compass Minerals because moving materials efficiently and effectively is one of our – one of the keys to our businesses, especially salt. And most importantly I have extensive experience working and in running large multinational operations, and even though I have only been here short time, it’s already clear to me that we have a powerful arsenal of competitive strengths and attractive businesses. We have a strong portfolio of assets including our mines and our solar evaporation leases that gives us an advantage over much of our direct competition. Other strengths is a range of product sets that serve essential needs and hold leading positions in the markets in which we participate. And finally, we have dedicated and resilient employees intent on maximizing value from our assets while serving our customers’ needs. Those elements, advantaged assets, essential products and great employees are the core elements of any successful business, and it explains why I'm pleased to be here and confident about our future. All that said, this company has faced some substantial challenges recently that significantly affected our results in the last couple of years, and those challenges include wet weather at the Great Salt Lake that disrupted the evaporation process and raised our per unit product…

Thank you, Fran. So I will take a few moments to run through the details of our fourth quarter and year-end financial results and then look at some of our current expectations for the first quarter of 2013. Starting with our salt results, total sales in the quarter were 306.7 million, down from 250.1 million in the fourth quarter of 2011, largely due to lower weather driven demand for de-icing products and the effects of customers’ carryover inventories. Although not as mild as last year’s December quarter this year's winter has been slow to develop with almost all of the fourth quarter’s snow events occurring at the end of December. This mild winter weather combined with high customer inventory levels resulted in lower de-icing salt sales to highway consumer and commercial de-icing customers. Total salt segment sales volumes were up 16% compared to the fourth quarter of 2011. Within our salt segment, highway de-icing experienced a 17% sales volume decline and consumer and industrial sales volumes dropped 13%. Looking at sales by end use (ph) rather than by business unit, all of the volume weakness was attributable to lower de-icing demand. In other words, sales to all of our non-de-icing uses combined, such as water conditioning, chemical processing and other industrial uses, food and agriculture were not impacted by the weather and were above the prior year fourth quarter. Highway deicing prices were essentially flat with the prior year quarter at 52, 56 per ton. Consumer and industrial average selling prices, however, dropped 4% to $150.95 per ton, reflecting the impact of reduced sales volumes of higher-priced deicing products this quarter compared to the fourth quarter of 2011. Operating earnings for the salt segment totaled $47.9 million compared to $53.4 million in the prior year quarter. Both of these quarterly…

Thanks Rod. First a few words about 2013. As Rod mentioned the first-quarter of 2013 will continue to reflect the effects of the higher per unit cost of our salt and SOP inventories. If we return to more typical winter weather in the remaining -- remainder of the first quarter, we would expect customers’ salt inventories would be much more depleted than last year and this would result in the bidding season returning to higher volume levels. These factors would greatly aid in lowering our per unit costs. Early indications are that our specialty fertilizer segment has the opportunity to have a great year both because of consistent demand and pricing and because we should see per unit cost improvement on our SOP products as a larger solar pond harvest enables us to transition away from more expensive source feedstock. I am in my early days here at Compass Minerals and my primary task is to continue to learn all I can about the company. So over the next few weeks and months I will be talking to employees and customers and visiting our facilities. I will also begin to meet our investors and the analysts who follow us, including a number of you on this call. I look forward to getting to know you and learning about your perspective on the company. As I gather information, I will work with the Board of Directors and the leadership team to fine tune our strategic agenda. In the meantime I can say that I don't see a need for sweeping change, but we will continue to sharpen our game and make the adjustments that will enable us to improve and grow. In particular the market fundamentals of our especially fertilizer business are strong and I believe will continue -- and I believe that will continue well into the future. And so I think the business can be an important source of growth for us. Our salt business is clearly a business in which we have a strong foundation of solid assets. In particular our expanded capacity at Goderich will enable us to increase production when severe weather causes demand to spike and position us to make more than our proportional share of long-term market growth. Let me close by repeating my confidence that the elements are here to create profitable growth and superior shareholder value over the long-term. And over the coming months I look forward to sharing our plans to do that. That completes our remarks. So now let’s open the call for questions.

(Operator Instructions) We’ll take our first question from David Begleiter – Deutsche Bank David Begleiter – Deutsche Bank: Fran, just on SOP given the good evaporation harvest last year, what's the potential for volumes in the back half of the year?

I think obviously the volumes on the back half pretty similar to what we have been talking about here for the first half.

Yeah Dave, as you know in the potash world things can change and have in the past changed rapidly but we seem to experience a period of relative stability here over the last several years for SOP in relation to MOP even in the last couple of years. So we don't have any formal guidance out there but there is no reason to think that it would change from its current rate that we saw last year at this point. And as you’ve heard us talk we’re a bit constrained compared to our what would have been (inaudible) our historic normal sales volumes. So that would be our current outlook. David Begleiter – Deutsche Bank: And Fran, just on your salt production costs, is the $34 long-term target in your view, is that aggressive, conservative, the correct one? Just thoughts on that.

I think it’s probably the correct target. I think we can always work to increase our efficiency and lower our costs and one of our strategies here is around the operational excellence and I think we will continue to find ways to be more efficient going forward. David Begleiter – Deutsche Bank: And just lastly Fran, just on normalized pricing in highway deicing, do you think it is 2% to 3% per year or should it be higher given the value you provide to your customers?

I will have Rod to take that question.

Dave, we always talk about long-term averages here and you know that following a mild winter there is usually pressure on that long-term average and following a very severe winter they tend to – the pricing tends to expand out. Those are really just based on basic supply demand fundamentals -- for example, a severe winter really results in the industry having a hard time surveying the entire market even through the following year. So that was one of the basis of our expansion of our Goderich mine et cetera. But I would say on pricing we never really know. Think about it differently other than our typical 3% to 4% price per year.

And we will take our next question from Joel Jackson of BMO Capital Markets.

I wanted to talk about C&I a little bit. It's been several quarters now and consecutively we've had year-over-year declines in C&I and pricing. Can you talk about how C&I pricing is trending for both the consumer deicing side of it and the non-consumer deicing side of it and how we should look at it going forward?

Sure Joel, we recognize that the price -- the reported price has been lower for several quarters in a row and I really hate to keep using mix, it sounds like a bit of an excuse but our average highway – I mean our average consumer salt product is higher priced. We just completed a calendar year where we sold less consumer deicing products than in any period in our 10-year history and it was by far the lowest deicing volume result we’ve had in a calendar year. So the non-deicing prices are actually higher year-over-year and that has been a trend, I will say it’s not a lot that -- probably around 1%, I don’t remember the exact number but the impact of the mild winters has dragged on the average price in C&I.

And on the deicing part of it, how have prices fared?

Those prices are typically set in the spring kind of timeframe, similar but a totally different process to highway. So over the spring and summer the winter prices are set there and I would say this last season, they were down just a little bit but not enough to cause an average 4%, 5% price declines like we've seen quarter over quarter in that business unit.

And switching to SOP, you've had a few quarters now of some good SOP over what seems to be good SOP over MOP spread expansion -- SOP over MOP, sorry, spread expansion after we had it seemed like several quarters of the reverse. Even I think your SOP average price went up in Q4 versus Q3. It could've been on mix. But could you talk about where do you see SOP prices going? Would you expect them to -- in 2013 -- to fall lagging some of the MOP price declines we've seen the last several quarters? Maybe you can just comment on that please.

I think maybe the one comment on the SOP prices is they have compared to MOP and recent declines in MOP pricing over the last quarter, that’s really been driven by offshore – lack of offshore demand for MOP. Our SOP business isn’t heavily geared toward offshore demand. So I would expect that our prices will remain stable and the fundamentals in the commodity markets are strong, so we would expect our fertilizing pricing in general to be relatively strong and stable in the year ahead.

So just extrapolating, do you expect Q1 SOP prices to be similar to Q4?

I think what we guided to Joel was about $600 per ton which would be a less rich Western U.S. mix in the first quarter than we saw in the fourth quarter.

But North American pricing level similar in Q1 versus Q4?

Yes.

We’ll take our next question from Ivan Marcuse of KeyBanc Capital Markets.

A couple of quick questions. First, on where we stand today, and you talked about there's upside to your 3.3 million tons of deicing. How below average was January versus historical norms, or what are we tracking at right now on a below average rate?

It’s interesting the sales for January were off of what we would've expected but not as much as the weather would have suggested. The snow events in January were only about half of the normal amounts. But one of the dynamics that happened during January is most of the fourth quarter storms and weather occurred very late in December and so we saw kind of a pop in early January as people came back from their vacations and holidays and reordered salt from what were very full inventory levels. We’ve become a little bit more bullish and I mentioned in my remarks because our recent activity, very recently in the last week has been strong and just as we look out over the next couple of weeks both the rest of this week and next week it does – there does appear to be some a number of events that should be happening in our markets. So that’s kind of a synopsis of how the quarters unfold at this point. As I mentioned in my remarks, it’s really dangerous for us to be forecasting in the middle of the winter of what we kind of expect volumes to be because weather events can change dramatically in a really short period of time.

And on your salt down in Louisiana, your salt mine down there, is there -- are you seeing any pressure on transportation costs with -- because I know you put the salt on barges and move it up. Are you seeing any sort of pressure there due to the water level and some of the things, the news headlines you've been hearing about there, or is that not a big deal for you?

Well it currently has not been a material factor to us. But of course anytime they talk about closing the waterways it could be a material factor for us. The Cote Blanche mine is on an island and the only opportunity for us to ship salt from there is by barge. We can't truck or rail from that facility. So we always are monitoring for that. This past fall there was some periods of time where we had reduced the amount of salt for short periods of time that we actually put in each barge to adjustor for draft levels and there have been some tributary river closings that have moderately affected us. But I would say today it's been touch and go but no significant issues.

And then moving over to SOP real quick, you -- I understand your guidance for $325. Is that $325 in the last three quarters, is that sort of $325 straight across or are you looking for just sort of a continual downward improvement in your costs and average would be $325. How do you think about that?

We think of it mostly as steady. There are things that happen in an individual quarter that cause some to be up or down but goal there was to say it should be that for each of the three quarters.

And then my last question is you talked about a true-up in your -- at your Saskatchewan facility. How much did that impact profits and is that something that happens every year? Or is this year big enough where you had to sort of point it out?

Yes and yes, it does happen every year but for the last two years we've owned that facility last year was just a very minor adjustment, this year it was more significant and was on order of magnitude across our entire SOP business about $15 per ton. So it was a fairly sizable adjustment this year.

And we’ll take our next question from Christopher Parkinson with Credit Suisse.

Just a real quick question. Based on what you have seen thus far this winter, can you comment on what you're hearing from customers regarding their current inventory levels? And do you have any sense of where they are relative to the beginning of the year, particularly in the last week or two?

Good question Christopher, at the end of the day wherever our customers and their inventory waste (ph) at March 31 the end of the winter season will be a direct effect on the bid season. And if they end with low inventories we’d expect a very large pop back up in our bid sizes and that would be a very good thing for the industry. The inventory that’s in the system is very disperse, there is literally thousands of locations. And so talking generally about inventory in the system is kind of a tough thing to do. I will say that in southern locations places like say Tennessee, Kentucky those kind of things, it’s likely that they still have pretty full inventories. Areas across the northern tier of our service territory there has recently been enough activity that we suspected that those inventory levels are coming down. So ultimately what we need is enough snow events to not only sell our product but also for our customers to use -- to use not only what we sell them but what they have in the inventory. And it’s really – if that won't become apparent until we start getting the bid requests kind of in the April-May timeframe although I suspect that by the end of March we’d have a really good sense of where customer inventories are.

And just a real quick follow-up, and this may be a little early, but you mentioned CapEx is going to be essentially in line with what you saw in 2012. Do you have any preliminary thoughts on what we are looking for next year as well or is it too early?

I guess – I think what I heard you ask was whether we’d given any guidance on the 2013 capital investment.

Well, I thought you said that was similar but just heading into 2014 do you have any kind of sense of what that’s going to look like?

I'm sorry. So that to a large extent will be dependent upon the progress of our phase 2 expansion at our Great Salt Lake facility. And I would say it is too early to predict -- project what that would look like at this point.

And we’ll take our next question from Edward Yang with Oppenheimer.

Given your guidance for highway deicing salt for the first quarter, if you did sell that 3.3 million of volume, would most of your customers be above or below your take or pay agreements?

At that kind of volume level there would be not very many take or pay minimums left. Of course the take or pay is by region – I mean by customer and so depending on the regions that the snow events occur and the sales occur, there’d kind of always be exceptions to that. But at 3.3 million tons we wouldn’t expect there to be a lot of minimums remaining.

And we will take our next question from Robert Koort with Goldman Sachs.

Good morning. This is Neal Sangani on for Bob. Just a follow-up to the previous question. Looking at last year's inventories and the way you renegotiated some contracts to normalize the inventory situation for your customers, is there something in the works for this year as well that could be taken if the demand doesn't match up to expectations?

Yeah I think it’s way too early for that. February is a very important month, March is a big month for deicing use, salt use. So there isn’t any real urgency to start any kind of contract negotiations. If demand shapes up as we’re expecting it to and as recent and forecasted weather events happened, we wouldn’t expect there to be nearly as much of that this year as there was last. Is that helpful, Neal?

Yes Thanks. Sorry, I was on mute there. And in that 3.3 million ton guidance, is there an assumption around what's expected for demand versus the obligations that were either renegotiated from last year or minimums under this year?

Yeah the 3.3 million is really an assessment of what normal average winter weather would give us. If we were to have a mild weather or pockets of mild weather that resulted in some customers needing to take their minimum that isn’t really factored into the 3.3 million tons. So I mean the 3.3 million is meant to be if we had normal amount of winter events for the remainder of the season and it doesn't factor in any minimum take or pays regionally.

We will take our next question from Elizabeth Collins with Morningstar.

A question about your CapEx expectations for this year of about $130 million. I think that’s a little bit less by about $20 million than what you have mentioned in the past. So could you talk about any areas that you're holding back on?

Yeah I think in the past we had talked about it being around $150 million and our program could end up of that size again in 2013. I think as we think about where we are with our -- with some of our more major projects we assessed that the spending is going to come in a little slower than we had previously anticipated. And that’s primarily around some of our expansion plans as we continue to fine tune our phase 1 completion. So I think that is the probably one of the more major factors in the change in the guidance there.

And then next (ph) question on the SOP cost outlook for the remainder of 2013 at $325 a ton, I think that's a little bit higher than what was mentioned recently. So could you talk about more like what type of conditions $325 reflects? Are you -- does that still reflect purchased potassium-based products? Just more comments on that $325 please.

Yeah great question, Elizabeth. And I did mention in my remarks that it does include some purchased potassium feedstock and maybe just add a little more to that, we did purchase some potassium based minerals in 2012. We are no longer purchasing any of those minerals because we expect our pond harvest will – was adequate and in fact we were actually starting to see that it could be a record in terms of the mineral deposit at our solar ponds in Ogden. But when we purchased the product in 2012 we completed the purchases last year but just in order to optimize our plant production yields we decided not to use all of that potassium based feedstock. Our current projection is that we will use the remaining part of that in 2013 and that as I mentioned in my remarks we added about $15 to our full year cost estimate. So that’s kind of the color, it’s possible that we will decide to not use the that feedstock and really just retain it for kind of a future, some might call it a weather hedge. But at this point, the operating plan would call for us using that. I will say that the forecast also includes getting to and sustaining our phase 1 design rates and we’ve been getting closer to those and closer and more sustained recently but it would require completion of that by the middle of the year in a very sustained way for the back half of the year. So those are the parameters upon which our cost estimate is based.

That concludes the time allotted for the Compass Minerals’ fourth quarter conference call. You may now disconnect.