Compass Minerals International, Inc. (CMP) Earnings Call Transcript & Summary

Great. I think we're now heading into the afternoon sessions. And I never thought I'd be saying this, but I'm actually truly missing the basement of 11 Madison Avenue at Crédit Suisse's headquarters and the ability to get a coffee when needed. But on a positive note, next up, we do have Compass Minerals, one of the world's largest producers of rock salt and specialty plant nutrition with a presence across the Americas as well as obviously, some assets in Europe as well. For the first time at our conference, I'm very pleased to have with me the CEO, Mr. Kevin Crutchfield; and also the CFO, Jamie Standen, whom I'm sure you all have known over the last few years. I do believe Kevin had -- just has some very brief remarks for us, but then we're just going to dive right into the Q&A. So gentlemen, I think you are both -- should be both on with me. Just hopefully, you're off of mute, but to welcome you. And then Kevin, I didn't know if you wanted to start off just in terms of brief comments on your strategic priorities in the midst of COVID, which includes the sea of several cost programs, there's been a deferral in the sale of the [indiscernible] plant nutrition business. So before we dive into the details, do you just have some quick updates on how investors should be thinking about the Compass story?

Well, yes, I guess what I'd first say is number one, thanks. It's a pleasure to be here with you today. The onset of this pandemic, I mean, we got really squared up on sort of 4 priorities. One was making sure our employees were safe and healthy and kudos to our site leadership who kept -- we've had some cases here and there, but the majority of our sites have not experienced any cases. So kudos to our site leadership for adhering to all of the protocols that we put in place to keep our employees safe. The second order of business for us was to continue to take care of our customers to the best of our ability, given that we are essential status, and I think we've done a pretty good job of that thus far. And then thirdly, just stay -- Jamie and I have just stayed laser-focused on the balance sheet, liquidity because you just never know what's around the corner. And then fourthly, and just as importantly, too, speaking of that is trying to look around the corner to see what's kind of coming our way. So I think I give a lot of credit to our team for managing pretty well through sort of an unprecedented period of time in all of our lives, especially across our business career. We have taken some hits here and there as a result of COVID, but we've got an internal optimization effort underway that we think there's extraordinary amount of internal potential to improve the status of our operations and our productive capacity and ultimately our profitability. And I'm sure we'll get into some of that, Chris. But again, many thanks for the opportunity to be here with you today. Thank you.

It's probably a perfect, but I couldn't help but notice that there's a salt mine in the background, presumably, that's Goderich. So for anybody who may be unfamiliar with it, it's probably a good place to start the conversation. You've gone through a multiyear process. Obviously, you've only been CEO for part of this. But in terms of operational improvements, let's start with Goderich and we can go to some of your other mines of all, like Cote Blanche. But can you just give us a quick update on where you were -- just very quickly, where you are and where you want to be specifically with that mine? And kind of how investors should be thinking about that, especially for those who have the ability to look past just the second half of 2020?

Sure. Maybe a little bit of historical context. Decision was made some years ago to move away from drill and blast towards mechanized mining units. They secured 4 [indiscernible] CMs with the continuous haulage systems behind them. And it was a bit of a bumpy implementation, to say the least, and created a series of footfalls along the way. But I mean look, what I'd say is first 6 months of this year relative to the first 6 months of last year, production is up 16%. It's producing in a much more reliable predictable fashion than it has in some years, quite frankly. We're pleased with the progress that's been made, but I would say that we are probably in the third inning of a 9-inning game just in terms of where Goderich can be in terms of utilizing its full potential. There's a diagram in the material that we provided today that provides very high-level overview of what the mine looks like. And part of our strategy is to drive these 2 new built-for-purpose roadways that connect the skip shaft with the active mine workings, which will become the permanent method of ingress and egress out of the mine, which will effectively then allow us to, for the most part, abandon that older part of the mine. It'd been standing for 60 years. It consumes time and materials and resources. We have to light it, have to ventilate it, support the roof, all that sort of thing. So just the cost effect of that alone will be step function change. And then when we get out into the developing the new mine plan with these kind of the Chevron mine pattern and developing these rooms, that will give us 5-year mining units. We'll mine in those panels for 5 years. And when you pull out of that panel, you just close it off. That way, you're not creating this massive footprint that you've got to maintain for the next 30 to 50 years. So we are setting the mine up for the next 30 to 50 years. And we've got to get it right. So it's going to take a little bit of time. There were several thousand feet now of drive in these new roadways. And things are going pretty well, but it still pales in comparison to what future state will look like at this moment from a cost perspective, from a productivity perspective and also from a reliability and predictability standpoint. It's going to be, for sure, the 800-pound gorilla to be reckoned with across the industry. The other thing that I would say, too, that's just as important up there is we have a representative organized labor up there, it's Unifor. And suffice it to say that, well, the relationship wasn't great post strike period. So we've extended an olive branch to them, trying to work with them, treat them as partners because, they are partners with us. They responded nicely. We've resolved a lot of really tough issues that were kind of standing between the mine and progress. We've resolved all of those and have a good working relationship with the team up there. We think that will only get better with the passage of time. So very well pleased with kind of where Goderich is in terms of its evolution. But I'm more excited about, we've improved a lot, but we have that much to go again. I'm excited about what future state looks like and where we're headed.

In terms of salt costs, the focus has overwhelmingly been on Goderich and rightfully so. But it also doesn't exactly appear as if you've been complacent, in any sense of the word, at Cote Blanche. And you've even mentioned the U.K. in the past. Can you just talk very briefly about the other 2 mines and some of the things you're looking at there as well?

Yes. Sure. The team at Cote Blanche is quite an extraordinary team. And it's interesting just because Goderich tends to get the lion's share of the attention, a, because of its size and, b, just because of its malaise over the past few years. But full credit is due to the team down at Cote Blanche as well as the team in the U.K. They just deliver day in and day out on their plan. And in fact, the Cote Blanche team just avoided the last hurricane to come through. It looks like the one that's sitting on top of New Orleans now is probably going to miss us, but they get a ton of credit for the level of prep that they go through to prepare the site, keep our people safe and minimize loss to quite a valuable asset. So the Cote Blanche team is doing very, very well. We got them dialed back just a little bit right now just because of market conditions. And same could be said for the U.K. We went through about a 7-week idling over there, in part due to just kind of softness in demand, but also the COVID restrictions in the U.K., we're trying to work with the authorities over there and be compliant with their policy. So it came at actually a good time for us because we didn't need the production anyway. But -- so it's still a little soft in the U.K., but they've been through this. They know how to manage through it. And they do a good job of delivering on a day in day out basis, just like the Cote Blanche team does.

So there's also been -- as much as I think, the long-term focus has been on salt operations and the improvements there. There has been also a discussion and a debate regarding near-term pricing, just ASPs and just where you stand in the 3-year average. You gave an update on your 2Q call in terms of where you're currently trending during the RFQ season. Can you just give us any additional thoughts on how we should be thinking about how the remainder of the RFQ season went and how we should be thinking about supply dynamics into 2021. And just very quickly, I would also ask, in the context of those -- that framework, how should we be thinking about the competitive dynamics in the U.S. market?

Yes, sure. So yes, this year was obviously a little soft. I mean we finished the winter last year with a bit of a whimper. So everybody came into the new bid season fairly inventoried up, created some softness. And you never know how much of the sort of the tax consequence that the municipalities are dealing with factors into the decision making. We don't think it's too much, but there could be some unconscious bias there. So it's kind of soft, it's very competitive. We're kind of -- on a portfolio basis, we're going to be off probably 5%, 7% compared to the second half of last year. But our volumes are up about 8% on the U.S. deicing side. So we regained a little bit of what I would consider market share that had been historically ours anyway. So at the end of the day, we'd love to have had better prices, but prices are going to be what they're going to be. So we entered this bid season with the thought of we're going to place all the Goderich tons. And just given its cost reductions, if we've got a tweak somewhere, we'll tweak elsewhere, which is what we did with Cote Blanche. So we think in the average winter conditions that the market will come out of this winter season with the market being at equilibrium. And so you could see -- again, if it's average winter, you could see prices sideways to up modestly, in which case, we think we'll be well positioned to continue to participate and maybe grow market share a little bit, but we're really more focused on our margins and margin growth entirely. So hopefully, that's helpful.

No, that's very helpful. Just as an extension of that, just as we think about things, I mean, each year is going to be kind of, obviously, a corollary of where inventories are the exiting year and weather and a bunch of longer-term trends. But if we can just think about in the context of a normalized environment, a few assets have changed hands. Obviously, one of your competitors is attempting to sell an asset right now. Do you see -- in terms of your key 11, 12 key markets, wherever you want to characterize that, do you see any actual long-term shifts in the competitive dynamics in the U.S. salt market in your specific markets? Or is that -- do you believe that would be more so of another one of your competitors' issues?

No. I mean I think what I've observed anyway or at least from a far, fairly new to this business. But with the production issues that we experienced coupled with pretty well reported production issue experienced by one of our competitors, it did allow the entrance of some unnatural market participants, à la, merchants, salt, I'll call them, traders. We think over the long term, that's not a natural market for them. And as we've sort of restored our internal health as well as our competitors, we think we're going to see less and less of them. So I believe the market remains pretty well balanced from an equilibrium standpoint. And I think what's going to drive pricing more than anything related to competitor behavior is going to be the weather, which is completely out of our control. So we're going to control what we can control, which is minimizing our costs, looking closely at our logistics network, which is quite substantial. I mean we've got a big advantage over a lot of our peers in that we've got a deep water port there at Goderich, which allows us to use light vessels for a lot of transportation, which is by far the cheapest mode of transportation. So just optimizing around that, optimizing around our logistics to generate the best netback we can for the mine to enhance our profitability. And we get a lot of questions about where do you think you can be from a cost perspective and a profitability perspective. And I would just ask our shareholders to judge the efficacy of our efforts by looking at how we were able to grow our salt franchise margins over the next couple of years. We still think low to mid-30% EBITDA margins is achievable. We think we're -- next year, we'll be kind of where we were cost-wise in 2016, 2017, even excluding sort of inflationary adjustments. And longer term, we think we can be in the -- approaching $30 a ton, low-30s for sure, from a cost structure perspective. So if you go back historically and look at the cost of our salt franchise, where it was and where we think it's going, the margin enhancement just internally is quite extraordinary, and it's something that excites me a lot of having rode across this kind of opportunity in a long time, and it's very exciting to be at the helm of an organization that has some internal potential.

So just as -- you hit on 2 very quick topics there, but I think they're very important just to ask 2 very quick follow-ups. The first is what are you currently seeing in transportation, logistics costs, barge river rates? It's something your shareholders have been closely monitoring. What's the update against COVID? So -- I think moved fairly quickly. So what's your thought process on freight in the second half and into '21.

Yes. So we've seen some puts and takes. And we've seen some pressure on freight rates, just in general, on an upward trend, offset somewhat by inputs, i.e., fuel costs. But we've been able to mitigate that to a large degree just through internal optimization efforts to make sure that, again, just in order of preference, the light-bearing vessels, barges, railroads and over-the-road. So maximizing the ones I mentioned first and minimizing the ones I mentioned last, just to optimize around freight at sort of that last mile is where you incur a lot of costs and minimizing that to the extent that you can. So all in all, I think we've had -- we've been able to mitigate those upward pressures pretty significantly. And I think we'll continue to be able to do so. And I think, again -- once again, I'd just say that we are advantaged relative to our peers just through this deepwater port that we have at Goderich. Our ability to move salt out of there cheaply is frankly unparalleled.

In terms of -- you mentioned also just your desire for shareholders to judge you of the ultimate netback in terms of how things trend and the costs and everything else over the next several years and some ideas of where margins could recoup to. Is there anything else that the investment community should be thinking about in terms of netback maximization? Anything else that's within your control that you could further do to basically make sure kind of try to get back up to those margins? Or is really weather and competitive behavior is really going to be a driver along with the cost aspect of it in terms of [indiscernible] along those lines?

Yes. Look, I mean, competitor behavior and the market are going to do what they're going to do. So the best thing that we can do is be the low-cost producer. So part of our goal is to move Goderich squarely into that first quartile, but there's not a doubt in my mind that they will be the low-cost 800-pound gorilla. So when you think about maximizing netbacks or maximizing margins, it becomes all about your cost structure at your mine and having a good logistics team in place that understands how to move product from A to B as efficiently as possible and as cheaply as possible. So we are all over that. We added a lot of new folks to our supply chain team, logistics team. We've continued to complement. We don't talk a lot about it externally, but we've continued to complement the mining group here. And we've got a lot of folks on board now with deep continuous mining background, technical backgrounds, et cetera, so that when we plan and make commitments, we'll be able to deliver on those commitments. I think that was kind of an opportunity missed here in the past. But now we've got folks with deep, deep, deep continuous miner experience on staff and definitely believe we're on the right trajectory to make Goderich the low-cost producer, squarely in the first quartile and generating those kind of margins that we're talking about.

Got it. So shifting gears a little bit just to the Plant Nutrition in the U.S. Just what are your general -- obviously, you've guided a similar framework as you did previously. But just what are your expectations for the demand environment versus your initial expectations? Are there any quick updates? And within that, is there any effect thus far due to uncertainty in the fires of California, presumably one of your larger state geographies? Just do you have any brief comments on those moving variables?

Yes. I'll make a few. And Jamie has some color he wants to layer in, be helpful as well. But as it relates to the fire, it's really more a function of the droughts than anything. I think it's possible that it could have delayed the decision to add nutrients. We don't think it's going to affect anything in a material way. It could push some deliveries into the fourth quarter, perhaps, more of a just-in-time type of approach. Like the almond harvest seasons, a couple of weeks late getting underway. But it is underway. So we still think that we're good in terms of the guidance that we've offered up. The back half years will be a little softer than the first half because we have been having great first half. But we feel pretty decent about the back half of the year. And thus far, we're not seeing any impacts from the fire. It's -- fires. It's more related to the drought conditions that have occurred out there. So it may delay the fall application a little bit. But I think we'll be okay. Anything, Jamie, you want to add to that?

Well, yes, thanks, Kevin. I think what we're watching closely is that timing. So we're seeing some of these -- because of the conditions, some of the growers are waiting to make their fertility decisions. So it's going to put a little bit of pressure on our supply chain as we get into September, October, November, and we're probably going to need to move a larger amount of material in a smaller window than we typically would. So it adds a little bit of risk. And so that's why we remain cautiously optimistic. Pricing has been stable for quite a long time. And our growers, our customers understand the value of SOP, and they will continue to buy it because it performs. So that's all I'd add there, Kevin.

Thanks, Jamie.

Just speaking broadly, I inadvertently focused those comments on California, just given its agricultural economy. Can you speak to just the broad SOP environment right now? Just what you're hearing from customers, specialty crop growers? Is there anything new on that front out of the COVID world because there's a lot of, let's say, inconsistent remarks from the industry back in March and April. So where do we stand now that we're at, I guess, we're September 15.