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Compass Minerals Sags on Bid Weakness, Hurricanes

By Dan Caplinger - Oct 31, 2017 at 8:50AM

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Acquisition-caused rises in sales and profits hid underlying fundamental challenges.

Operational challenges are a constant threat to companies that rely on producing things, and with its specialty in road salt and plant nutritional products, Compass Minerals International (CMP 2.68%) has worked hard to protect itself from potential disruptions by balancing its fundamental business to a greater extent. Yet businesses can only do so much to prevent problems, and Compass' announcement in September that it would have to operate at a reduced rate temporarily was bad news that the company didn't need.

Coming into Monday's third-quarter financial report, Compass investors had already adapted to the reduced guidance that the company had issued a month earlier. However, its results revealed some other pressures that not everyone was prepared to see, and shareholders will be anxious about how various trends play out in 2018 and beyond. Let's take a closer look at what Compass Minerals said and what's next for the salt and plant nutrition specialist.

Compass Minerals salt plant on a coastline with cargo ships ready to pick up shipments.

Image source: Compass Minerals.

Compass handles tough times

The company's third-quarter results showed considerable growth, but not enough to satisfy everyone. Revenue soared by more than 60% to $290.7 million, but that wasn't close to the 80% growth rate that most of those following the stock had wanted to see. Similarly, net income more than tripled to $32 million, but after making allowances for some extraordinary items, adjusted earnings of $0.65 per share fell short of the consensus forecast for $0.73 per share.

Compass Minerals' salt segment didn't deliver the performance that many had hoped. Segment revenue dropped by $11 million, or 8%, taking operating earnings down by roughly a quarter. Reduced preseason orders for packaged deicing products weighed on the company's consumer and industrial sales volumes, which more than offset benefits from higher sales prices for sale and highway deicing products. Higher logistics and restructuring costs also weighed on segment profit.

In the plant nutrition segment for North America, decreases were smaller but still notable. A 3% drop in revenue stemmed from 7% lower sales volumes, with potash demand falling due to hurricane activity in the southeastern part of the U.S. market. Higher sales prices weren't sufficient to offset those declines fully, although adjusted segment operating earnings were higher as a result of stronger pricing and a more favorable mix of sold products.

Even the South American plant nutrition business didn't perform up to expectations. Sales of $123.2 million reflected delays in planting in Brazil, and operating margin was substantially less than what the company saw in its other segments.

CEO Fran Malecha tried to keep a positive view on the results. "We posted solid earnings this quarter, including the positive impact from the addition of our Plant Nutrition South America segment and margin improvement in our Plant Nutrition North America segment," Malecha said, "and our North American highway deicing bid season results were in line with our expectations following the mild winter."

Can Compass Minerals recover?

Compass Minerals did give investors some good news on the production front. After the ceiling collapse at its Goderich rock salt mine in Ontario, Compass completed repairs quickly, and production has now returned to normal levels.

However, the results of the recent bidding season were mixed. Compass said that awarded bid volumes were down 3% from the 2016 season, and average awarded sales prices were also down about 3%. That means that even if winter weather is normal, fourth-quarter sales volumes of salt products will likely fall modestly from year-ago levels. On the plant nutrition front, Compass hopes that delays in third-quarter purchases will add to fourth-quarter results.

In terms of guidance, Compass kept its adjusted full-year earnings expectations at $2.50 to $2.80, down from three months ago but identical to what it stated in its September release. Salt volumes will finish between 10.6 million and 11 million tons, with 320,000 to 340,000 tons of plant nutrients in North America and 750,000 to 800,000 tons in South America.

Compass Minerals shareholders weren't happy about how the company did, and the stock lost another 4% in after-hours trading following the announcement. Investors will now be in a position in which they'll be rooting for cold winters to help the salt segment outpace expectations, or else they might see further fundamental deterioration in the business.

Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool recommends Compass Minerals. The Motley Fool has a disclosure policy.

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