Compass Minerals Intl Inc

Good morning, my name is Abby and I will be your conference operator today. At this time, I would like to welcome everyone to the Compass Minerals Fiscal 2022 Second Quarter Earnings Conference Call. Today's conference is being recorded and all lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press the star key followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one once again. Thank you. And I would now like to turn the conference over to Douglas Criss, Head of Investor Relations for Compass Minerals. Mr. Criss, you may begin your conference.

Thank you. Good morning and welcome to the Compass Minerals Fiscal 2022 Second Quarter Earnings Conference. Today, we will discuss our recent results and our outlook for fiscal 2022.

We will begin with prepared remarks from our President and CEO, Kevin Crutchfield, and our CFO, Lauren Crenshaw. Joining in for the question and answer portion of the call will be George Shuler, our Chief Operations Officer, Jamie Spandon, our Chief Commercial Officer, and Christiane Depp, our Head of Olympians. Before we get started, I will remind everyone that the remarks we make today reflect the financial and operational outlooks as of today's date, May 6, 2022. 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 filing 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 also are available online. The results in our earnings release issued last night and presented during this fall reflect only the continuing operations of the business, other than the amounts pertaining to condensed, consolidated, cash flow risk or unless otherwise noted. The company's fiscal 2022 second quarter results and fiscal 2022 outlook from the earnings release and discussed during this earnings call reflect the previously announced change in fiscal year end from December 31st to September 30th. All year-over-year comparisons to fiscal 2022 second quarter results refer to the corresponding I will now turn the call over to Kevin. Thanks, Doug, and good morning, everyone. Thanks for taking time to join today. Since our last call, we've taken a number of actions as we continue to make progress against our strategic plan and prioritize our core assets. First, we completed the final step in our previously announced strategic exit from the South American market through the successful sale of our chemical business in Brazil. We also continue to advance engineering work on our lithium development project, increasing its expected ultimate annual production capacity as a result. In addition, we welcome the new board member, Ed Dowling, who brings more than three decades of executive and board-level minerals extraction experience to Compass Minerals. And lastly, I'm very proud to share that our safety performance this past quarter was among our best since we began tracking our total case incident rate or TCIR, which represents the total number of injuries per 200,000 exposure hours. As many of you have heard me emphasize before, our leadership team places no priority higher than the safety and wellbeing of our employees. And we continue to see exceptional safety improvements throughout the company. We finished the second quarter with a TCIR of just over one, reflecting a more than 50% improvement from the prior year quarter. We're maintaining focus on both engineering solutions and behavior safety training in order to minimize risk and to help ensure that every employee is provided a safe and healthy work environment and an optimal quality of life. Moving to our fiscal 2022 second quarter results we announced late yesterday, the quarter was certainly not without its challenges. Like numerous other companies across industries and supply chains, we continue to grapple mightily with severe unpredictable inflationary pressures across our business. We're also still managing through ongoing production headwinds at our Ogden Solar Evaporation Facility, which produces our premium sulfate potash, or SOP product. We've shared details related to both of these issues in recent quarters, and they each continue to manifest themselves during the second quarter, with fuel surcharges soaring due to the ongoing crisis in the Ukraine while production levels have not met expectations. We believe these challenges will remain through the balance of the fiscal year. While not every facet is within our control, we are focused on executing strategies to reduce the impact of these impediments to our businesses, realizing their full potential. Against the difficult operating landscape, our management team and nearly 2,000 employees remain focused on operating safely, maximizing the profitability of our businesses, serving our customers, and supporting the communities where we're privileged to operate. Going forward, we'll continue to actively seek opportunities to manage each value driver of our business to successfully navigate through these challenging times and toward more normalized solid-segment profitability levels and plant nutrition production levels. With that high-level framing, I'll now spend a few minutes briefly summarizing our Then I'll discuss the short and intermediate term steps we're taking in an effort to restore profitability of our business. Finally, I'll provide a brief update on our efforts to progress our lifting growth opportunity. As reported in our earnings release yesterday, second quarter revenue was approximately $449 million, up 5% year-over-year, primarily driven by volume gains in our salt business. While our top line results show year-over-year improvement, profitability was negatively impacted primarily by the continued inflationary pressures on distribution and production costs in our salt segment and continued production challenges in plant nutrition that I referenced previously. As a result, despite a relatively average winter season, our consolidated adjusted EBITDA for the second quarter declined by approximately 42% year-over-year to $65 million. reflecting an adjusted EBITDA margin of 14%, which is entirely unacceptable, as it's considerably below what I believe is the normalized earnings potential of this business. In our SALT segment, revenue grew by approximately 6% year-over-year on higher sales volume, reflecting substantial growth in our North American bid season commitments and improved pricing in our consumer and industrial businesses. However, this top line significant cost pressures we've encountered resulting in salt segment EBITDA from the second quarter declining by approximately 40% year-over-year to $66 million. A key area where we've seen greater cost pressure than anticipated during our last earnings call has been distribution costs in our salt business, specifically escalating fuel surcharges in connection with the recent sharp increase in oil prices. Transportation and handling costs makes up a significant component approximately 40% on a per-term basis of the total delivered product costs for our SALT product. For example, we contract bulk shipping vessels, barges, trucking, and rail services to move our products from our production facilities to distribution outlets and customers. The most mixed for the SALT segment of calendar 2021, inclusive of transfers required to reach the final destination, was approximately 45% truck 37% vessel, 15% barge, and 3% rail farm. The cost of each of these modes is impacted when oil prices rise, as the underlying contract architecture allows our service providers to pass through fuel surcharges. In contrast, this is not a cost that we're able to pass on within our North America Highway De-icing business, given the structure of those contracts until the next bidding season. In just one category of these increased costs, the recent oil price surge has caused fuel surcharges to rise meaningfully during the quarter across all modes and represents intensifying inflationary pressures we've been contending with since last quarter. To combat these pressures, in the CNI segment, we're working to recapture these costs during negotiations with our customers and are endeavoring to do the same thing during our North America highway bid season. While we do not expect to see meaningful recoupment of fuel costs in our North America highway business until our next fiscal year, we're committed to broad steps to return historic profitability levels within our salt business. Our approach for the bid season is to work to secure geographies where we believe we can harness our logistics efficiencies and capture margins. Through our improved production profile at Goderich, we also now have a better agility to ratchet that production then requires, and we plan to do so. We expect these steps will help ensure a fair value for our central products, thereby ultimately improving profitability. Our plant nutrition segment EBITDA of $13 million, down 6% year-over-year, and its available price impact of high global fertilizer market conditions was offset by our higher unit costs and lower sales volume. constrained by our reduced inventory levels. Our current expectations at these trends, tight fertilizer supply demand dynamics, and our limited inventory available for sale are likely to persist for the balance of the year. As we've highlighted in the past several quarters, our SOP production from Ogden's farm-based solar evaporation process have been under pressure from the persistent weather events over the last several years. mainly drought and limited snowpack. The impact of these weather events has an adverse impact on the SOP process due to the fine balance of the pond chemistry required for this specialized product that does not meaningfully imply our salt or magnesium chloride production. It's also not expected to impact our future lifting production at the site. We've been acutely focused on implementing both short and long-term solutions to this challenge to our SOP production. In the near term, we're in the process of further refining engineering controls in time, such as raising our dikes for optimal deposition of potassium levels in our ponds and upgrading pumping systems, while our oxygen plant continues to aggressively manage against the lower potassium content of animals in our harvest here today. For the longer term, We've undertaken a detailed holistic review of our end-to-end process to minimize the impact to our pond chemistry and ultimately ensure stable SOP production levels. It's also important to note that historically, we've regularly managed through periods of low potassium concentration in our solar evaporation season and offset the variability of nature by augmenting that lower quality feedstock with MOP when it's been cost-effective to do so. Switching gears to portfolio management, the recent closing of the sale of our South American chemicals business represents another significant step in the prioritization of our core assets. With the sale, we've now completed the divestment of all of our businesses in that region and successfully completed this phase of the reshaping of our portfolio. We also recently received the maximum possible plant nutrition business to ICL last year. Proceeds from these two events have enabled us to continue our debt reduction efforts. Specifically, upon applying the combined net proceeds toward reducing our debt outstanding, we will have reduced our total debt outstanding by approximately $476 million, or approximately 35% from December 31, 2020 levels. We remain mindful of our leverage and expect starting the next fiscal year, a substantial leg of leverage reduction to come from restoring the profitability of our solids, which we believe is currently earning well beneath its potential due to the factors I've already discussed. I would now like to turn our strategic growth initiative toward lithium. In early March, we announced an increased projected annual production capacity of our lithium development opportunity by roughly 60 percent at the midpoint from 20 to 25,000 metric tons of lithium carbonate swivel for LCE to a new projection of 30 to 40,000 metric tons LCE. Additionally, we shared our plans to achieve this annual capacity target in a phased approach with initial commercial production capacity of up to 10,000 metric tons LCE projected to come online by 2025. These updates to the project were informed by our engineering assessment, or FEO1, which has entailed multiple evaluation scenarios from the project. It's important to recognize that the scope of our operations in Ogden, Utah, along with leaseholding, water rights, and infrastructure we already have in place, provide us with a wide range of production options. Specifically, our solar evaporation farms are located on both the east and west side of the Grace Hall Blank, with the west side of the complex connected to our east ponds by a 21-mile underwater hydraulic channel. Our current thinking is the advancement of our lithium project would occur over the course of two distinct development phases. Production of the initial 10,000 tons LTE would commence on the east side, which is where much of our existing infrastructure is currently located. This would be considered phase 1. This phase of the project would include a DLE processing facility and a conversion plant designed for either lithium hydroxide or lithium carbonate production. Phase 2 of our development provides the potential to build an additional DLE processing facility and conversion plant to produce an incremental 20,000 to 30,000 tons of LCE, likely on the west side of our augen facility. Two-phase approach is a function of the inherent nature of the significant asset we have the privilege of owning and operating. It also has the potential benefit of de-risking the project from an engineering perspective by allowing us to scale into our production profile. It additionally de-risks the project from a financial perspective by reducing our initial capital outlay and creating the prospect of cash flows associated with Phase 1 helping to fund the capital requirements of Phase 2. Overall, we continue to believe we are well positioned to serve the widely forecasted increase in market demand for battery-grade lifting and remain on track to reach previously announced critical project milestones during the summer of 2022. These include a selection and announcement of a DLE technology provider, disclosure of a completed FEL1 level estimate of operating costs and capital, and completion of the initial life cycle analysis. We remain confident we're on a prudent path to advance this officially high-returning initiative via a range of funding options, including but not limited to project-level finance partners and offtake agreements. We look forward to sharing additional information later this summer and in the coming quarter. In closing, our organic growth strategy is focused on leveraging our core advantage assets, extraction capabilities, and logistics expertise at the adjacencies where we expect increased earnings power, thereby recalibrating our weather dependency over time. Ultimately, these identified opportunities are designed to expand our essential minerals portfolio to comprise four pillars, salt, plant nutrition, lithium, and fire retardant. As we progress toward our stated objectives, we plan to manage each of the key value drivers in our business with a keen focus on mitigating defects of the current highly inflationary environment. Now I'm going to turn it over to Lauren, who will discuss in more detail our financial performance and our updated outlook for fiscal 2022. Lauren? Thanks, Kevin. Consolidated revenue was $448.5 million for the second quarter primarily driven by higher sales volumes in our North America highway business and favorable pricing in our plant nutrition segment, where pricing rose 28% year-over-year, and within our consumer and industrial business, where pricing was up 9% year-over-year. Despite the revenue increase, our consolidated operating earnings declined to $20 million, and adjusted EBITDA declined to $64.8 million, or by 42% year-over-year. in the salt segment and higher SOP production costs more than offset favorable plant nutrition pricing. From a profitability perspective, consolidated operating margins for the quarter were 4.5% and adjusted EBITDA margins were 14.5%. On a segment basis, salt revenue totaled $391.3 million, up 6% year-over-year, driven by 6% higher sales life, specifically Highway deicing volumes rose 6% year-over-year, primarily reflecting higher commitment levels achieved during last year's bid season. Consumer and industrial sales volumes increased 8% year-over-year based on strength in both deicing and non-deicing products. Thought segment average selling prices were relatively flat year over year, reflecting a 3% decline in highway de-icing sales price, offset by a 9% increase in consumer and industrial average sales price. In our consumer and industrial business, broad-based price increases continue to be implemented across most product categories, primarily in response to the high inflation environment, enabling us to recoup a portion of the overall inflation-related drag on our profitability. Despite higher revenue, SALT operating earnings declined 46% year-over-year to $49.3 million, while EBITDA declined 40% to $65.5 million. Both results primarily reflect the effects of inflation on distribution and production costs and the impact of lower pricing. From a cost perspective, Of the approximately $9 drop in EVA dot and operating profit per ton year-over-year, roughly $6 or two-thirds was driven by higher shipping and handling costs, which rose 25% to roughly $29 per ton, and roughly $3 or one-third was driven by higher cash costs, up 13% to roughly $32 per ton. The increase in per-unit shipping and handling costs primarily reflected inflationary impacts such as fuel surcharges and higher costs to serve our markets due to geographic mix and impact of the Coke launch outage last quarter continuing to flow through our P&L. The increase in per-unit cash costs was primarily driven by inflationary impacts and unfavorable mix. We don't expect these inflationary pressures to subside through the balance of the current fiscal year, as the nature of our North America Highway de-icing contract structure with various states and municipalities does not permit the pass-through of inflationary costs, such as field surcharges, on a mid-year basis. Overall, the challenges impacting our salt segment profitability during the period were primarily related to cost pressures and not weather. as we experienced above average second quarter winter weather activity in our North America served market compared to the 10-year historical average. Despite snow events during the quarter tracking above average, our estimate of the net impact of weather on our operating profits was slightly negative, reflecting below average sales to commitment ratios within our market. Historically, our experience has been that several factors can drive relatively low sales to commitment ratios despite relatively normal snow events, including the timing, severity, and exact location of snow events and customer inventory levels. Turning to our plant nutrition segment, revenue for the second quarter rose 1% to $54.3 million year over year, despite 21% lower volume on higher pricing. Specifically, the average sales price for our SOP product rose 12% sequentially to $736 per ton and was up 28% year-over-year, reflecting the supply-demand dynamics impacting the global fertilizer sector at this time. Operating earnings were $4.4 million, and EBITDA was $13.2 million, down 6% year-over-year. and the unfavorable impact of lower production volume on sales and per unit cash costs more than offset higher average selling prices. From a balance sheet perspective, we ended the quarter with net debt of $867 million, down $47 million from our 2021 fiscal year end, and with net leverage of approximately four times as defined under our credit agreement, which includes EBITDA from discontinued operations. As Kevin referenced, The combined net proceeds related to the recent sale of our South American chemical business and the earn out related to the prior sale of the South American plant nutrition business, both of which occurred in April, were immediately applied to debt reduction, further improving our debt profile. Nevertheless, in the coming months, we will proactively engage in discussions with our bank group with the aim of amending our net leverage covenant to provide sufficient flexibility as we continue to manage through this period during which our businesses are performing below what we believe to be their potential. Finally, an attractive feature of the debt portion of our capital structure that we often underscore is that beyond our AR securitization facility, which matures next summer, We have no debt maturities prior to 2024, as detailed on slide eight of the accompanying earnings presentation. Overall, our financial flexibility with over $300 million of liquidity as of quarter end and balanced manageable debt maturity profile give us confidence in our ability to manage through the current period with the ultimate restoration of the profitability of our soft business expected to drive the next leg of the leveraging. Now turning to our outlook for the balance of the year. Largely due to the order of magnitude of the escalation in fuel surcharges across all transportation modes in our salt segment in particular, and the continuation of SOP production yield challenges resulting in higher than expected fixed costs and lower than expected sales lines, we have lowered our projected fiscal 22 consolidated adjusted EBITDA to a range of $170 million to $200 million from our previously announced range of $200 million to $235 million. These impacts are expected to only be partially offset by higher pricing and nutrition and targeted productivity initiatives. Specifically, we are introducing second half fiscal 22 SALT segment adjusted EBITDA guidance in the range of $60 million to $75 million. down from our expectation at the time of our February earnings fall, and second-half plant nutrition segment adjusted EBITDA guidance in the range of $25 million to $35 million, roughly in line with our February outlook, reflecting our expectation that the substantially higher-than-expected SOP pricing will be largely offset by lower-than-expected sales and higher-than-expected unit costs due to the lower production levels at our August facility. As we consider the range of our revised adjusted EBITDA guidance, among the key drivers of potential upside or downside to the midpoint of that range for the balance of the year are the same themes that have weighed so heavily on our first half results, including production yield rates at our Ogden facility, the impact of global fertilizer market dynamics on ultimate SLP average selling price levels and sales volumes, and the direction of the trend and inflationary pressures on key inputs, including whether oil prices average around current levels, rise or fall through the balance of the fiscal year. In the face of the challenging operating environment we are experiencing, in the short run, we are executing targeted productivity initiatives to partially offset the cost pressures we have encountered year to date. Specifically, in addition to raising prices in markets where that's possible and where contracts allow, We are also tightening our belt from a fixed cost perspective by taking actions expected to result in lower plant operating costs and S&A expenses. Looking further out and into the next fiscal year, within our consumer and industrial business, we expect to continue to leverage the flexibility we have to pass through inflationary costs on a more expedited basis. With regard to our North America Highway de-icing business, as we have previously stated, The bid season process is our only meaningful opportunity to pass along the higher costs we are experiencing. With that in mind, in our approach to this year's bidding season, in addition to restoring profitability by recapturing the significant inflationary pressures we have faced this year, our focus is on capturing margin by recalibrating our business mix even further toward geographies where we have natural competitive advantages even if that entails curtailing production volumes by whatever degree is necessary. In executing our bidding and production strategy, our focus will be to carefully balance our commitment to serving our customers when and where it matters with the need to maximize profitability and minimize suboptimal logistics moves and the associated costs. From a capital spending perspective, Though we continue to reexamine certain areas that may provide for potential further reductions, our fiscal 22 full-year guidance remains $100 to $110 million, which was lowered by $25 million last quarter. Finally, with a reduced EBITDA expectation for the year driven by lower U.S. income, we have recorded additional non-cash tax expenses in the form of valuation allowances against certain U.S. deferred tax assets. Our effective tax rate for the year is approximately 30%, excluding the additional expense from the valuation allowances, and a negative 227%, including those expenses. We are likely to take additional, though smaller, allowances in each of the next two quarters, assuming our earnings outlook tracks in line with our current expectations. With that, I will turn it back to the operator to open the lines for the Q&A session. Operator?