CMP - Compass Minerals International

[LC]

Has anyone taken a look at this? I could not find a topic on it.

 

Compass was formed, well around 1990 when a bunch of salt mines were aquired and combined. This entity was picked up by Apollo Mgmt in 2001 and IPO'd in 2004 as Compass Minerals.

http://www.compassminerals.com/who-we-are/our-history/

 

Compass operates in a few divisions:

 

Salt and Magnesium Chloride

http://www.compassminerals.com/what-we-do/salt/

Various types of salts and magnesium chloride are sold to governments/businesses/municipalities/homeowners as de-icing tools for snow and ice on roads/walkways/etc.

 

Salts are additionally sold as water conditioning/softeners, to ranchers for livestock, as pool salts, in food-grade form, and in industrial-grade form (for things like dyes, leather tannings, etc.)

 

Plant Nutrition

http://www.compassminerals.com/what-we-do/plant-nutrients/

CMP sells mineral plant feeds (various brands with things like potassium, phosphorous, potash, nitrogen, magnesium chloride, etc. etc.)

 

DeepStore

http://www.compassminerals.com/what-we-do/sustainable-storage/

 

Finally they have this weird division that provides underground storage services in the United Kingdom. I guess when they get close to exhausting a mine they can use it for secure storage. They store things like legal/contract documents, artifacts, etc. Apparently they have 1000+ clients.

 

Revenue split is: 41% Plant Nutrition / 36% Highway De-Icing / 23% Commercial&Industrial

 

 

The company uses a few techniques to mine/refine these minerals:

-Mining - using explosives to blast out salt rock, or steel cutting into the rockface

-Solar evaporation (Utah/Great Lakes) - essentially letting the sun evaporate salt-rich waters

-Mechanical evaporation - two different techniques (ion exchange, glaserite) that I don't know much about

 

They set up mines that pretty much use one of the above techniques.

Here's a handy fact sheet:

 

http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9NjY2MDYwfENoaWxkSUQ9MzczOTI5fFR5cGU9MQ==&t=1

 

You can see the layout of their mines globally - mostly located in the upper-midwest of the US and Canada, and Brazil.

 

De-icing sales are obviously weather dependent.

Plant nutrition sales and sales/ton are both growing. October 2016 they took out a $450M loan (libor+2) and acquired the rest of a plant nutrition company in Brazil hence their operations down there (they already owned 35% for a little over $100M prior). Their prior large acquisition was 2014 where they acquired Wolf Trax brand of plant nutrition powder.

 

Investor presentations here:

http://phx.corporate-ir.net/phoenix.zhtml?c=148615&p=irol-presentations

 

The company does around 1.0-1.2 billion in sales/year

Gross margins are quite variable, but generally around 25-30%

Net margins around 15%

 

The negatives are...

Capex as you can imagine outpaces depreciation and is pretty bumpy and eats up a lot of FCF. This is my real concern...my guess in these slower, capital heavy, industries is that over time the glut just builds up in the company until they burst, get put together by a PE firm, and re-IPO'd.

They've gone thru 2 CFO's in the last year or so. One dude went to another company, the other left due to an "unforseen personal issue".

 

So what initially attracted me to the company is a few things:

Relatively stable business (compared to the rest of the mining space - these guys sell salt pretty much).

Decent valuation on a relative basis vs the S&P as a whole. Trades at like 13.5x last year's earnings.

Pay about a 4% dividend that has been continuous and growing since the company was initially listed in 2004.

 

I haven't purchased any shares, not even sure if I will, but I figured I would toss it out to the board since some of these businesses have been around for ages and I couldn't find a topic on it here.

[SI]

I believe this is a better business than you previewed but it is unpredictable and episodic. I worry about the debt most and allocation of capital second because this is a strong fixed income-like investment but the reinvestment risk is high especially with that debt load.

 

I owned CMP in size after the east coast missed winter a few years ago for ~ 15 months and have recently put on a seed position until I either get more conviction in capital allocation or see the debt fall.

[LC]

Can you talk more about your thoughts on capital allocation? My understanding is (aside from the capex) their only major move recently was the brazil expansion, which is responsible for the debt load. So the two issues you mention seem tied at the hip.

 

On the Produquímica acquisition, they paid in total about $575M. Produquímica did about $370M in sales and $60M in EBITDA in their prior year (jun15-jun16), so a little under 10x ebitda. Expensive, but Produquímica has doubled sales and ebitda from 2011 to 2015, so there is some future growth in there.

[SI]

I have not been close enough to these decisions to dissect them but while I owned it, I liked the probabilities of snow returning at some point with a pretty low risk venture which made it attractive in the low $70s. Mgmt has made some investments I worried were high risk not just in their nature but mostly given the debt load and at best at the edges of their circle of competence so I sold in the high 80s/low 90s before the potash mkt imploded.

 

In general terms, they have long had a high debt load. The two staged Brazil investment make the debt uncomfortable for me now despite the respect I have for the salt business. Before that it was in nutrition via wolftrax as you mention but before that it was continuous mining investments in the great lakes and before that pond buildout costs. I believe there was more than deferred maintenance coming out of Apollo and this mgmt has needed to make these investments but they have also been using salt cash flows to make the SOP investments even when potash prices were high. Now I think the potash cartel could come back and I think there is some decent probability that mgmt was making smart investments in brazil, the ponds, continuous mining and wolftrax. Collectively they could be worth taking on that debt for so at a price in the mid 60s I find it worth being a seed position as I reengage but the debt better fall and I want to see the majority of those 4 investments pay off.

 

 

[LC]

http://phx.corporate-ir.net/phoenix.zhtml?c=148615&p=irol-newsArticle&ID=2292358

 

Q2 earnings out. Net loss of (6.4M).

 

The company initiated a restructuring plan in July 2017 designed to reduce ongoing costs and further streamline the organization. In addition to reducing personnel, the company has reorganized its operations team to report directly to the respective business units. These changes are expected to drive more effective decision-making and greater efficiency. These initiatives are expected to result in a charge of approximately $4 million in the third quarter of 2017. Combined with other cost-saving actions taken in the first half of 2017, which resulted in charges of $1.3 million, the company expects to achieve about $10 million in cost reductions this year and approximately $20 million in ongoing savings beginning in 2018.