Despite a surge in winter weather in April, a mild 2015 winter is expected to weigh on Compass Minerals' sales this year. Image source: Getty Images.
Compass Minerals International, Inc.(NYSE: CMP) released second-quarter financial and operating results on July 25, reporting "an increase in salt operating earnings partially offset a significant decline in plant nutrition operating earnings." To sum it up, a mixed bag of slightly better results in one segment and very poor results in another, combined with what has been a weak winter de-icing bid season, and the rest of 2016 could be tough.
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Here's a closer look at Compass Minerals' earnings report, and what management said about the outlook for the remainder of 2016 and beyond.
Revenue and net income in millions. Data source: Compass Minerals.
Keys to the quarter
The overall numbers don't tell the whole story since Compass Minerals' salt and plant nutrition segments produced very different results.
- Salt segment revenue increased 2% because of a 5% increase in highway de-icing volumes.
- Late-season snow in April, increased contract volumes, and customers fulfilling minimum purchase requirements were behind the late-quarter surge.
- Both higher EBITDA and EBITDA margin resulted from improved mix and lower shipping and handling costs.
- Average per-ton sales prices of highway de-icing and consumer & industrial salts increased slightly in the quarter.
- Plant nutrition segment revenue fell 25% in the quarter, on a 13% decline in product volumes and a 14% decline in prices.
- EBITDA of $13.1 million was down 45%, due in large part to sell-through of sulfate of potash (SOP) produced at a high cost in 2015.
- There's good news, here: Per-unit costs improved 4% from Q1 as the company sold through the last of its 2015 SOP inventory in the quarter and started selling lower-cost pond-based SOP.
- Compass also reported a $1.7 million loss from its overseas investment in Produquimica Industria e Comercio S.A., though $1 million of that is non-cash and related to the purchase of Compass' equity investment in Produquimica.
- Sales, general, and administrative expense fell 3% in the quarter.
All-in, the big declines in volume and realized revenue in the plant nutrition segment, along with higher-cost product, hurt the company a lot more than the small bounce the salt segment recorded in the quarter.
What management said
CEO Fran Malecha didn't waste any time on the earnings call, immediately addressing the current environment while emphasizing the actions management is taking to work through the downturn and better-position the company when the agriculture cycle recovers:
Malecha also addressed the ongoing highway de-icing bid season. To put it bluntly, prices and volumes for the upcoming winter are set to fall:
Here's Machela on the downturn in plant nutrition and how Compass' efforts to improve its costs have not yet borne fruit:
When Compass Minerals last reported earnings in April, management cut full-year earnings guidance from $3.80-$4.20 per share, down to $3.25-$3.65 per share. Unfortunately, the continued downturn in agriculture demand and the early results of the winter de-icing bid season led to another guidance reduction. Management is now expecting full-year earnings of $2.60-$2.90 per share, a 20% reduction at the midpoint.
The bottom line is, it's shaping up to be a tough year for Compass, both because of weak cyclical demand from the agricultural industry for its specialty plant nutrition products, and a series of mild winters weighing heavily on its biggest business, providing deicing salts for highways. But as Malecha said in the release, these are seasonal and cyclical things that will eventually shift back into the company's favor (maybe as soon as this winter), and they are focused on building the core business, and on the things that differentiate it from its competitors. Furthermore, the investment in Brazil-based Produqumica should help with seasonality at some point.
The unanswerable question, though, is how long it will take for those efforts to pay off.
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Jason Hall has no position in any stocks mentioned. The Motley Fool recommends Compass Minerals. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.