Compass Minerals International Inc Q1 FY2022 Earnings Call

Good morning, ladies and gentlemen. My name is Julie and I will be your conference operator today. At this time, I would like to welcome everyone to Compass Minerals. I would now like to turn the call over to Douglas Kris, Senior Director of Investor Relations. Please, go ahead.

Good morning, and welcome to the Compass Minerals fiscal 2022 first quarter earnings conference call. 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, Lorin Crenshaw. Joining in for the question-and-answer portion of the call will be George Schuller, our Chief Operations Officer; Jamie Standen, our Chief Commercial Officer; and Chris Yandell, our Head of Lithium. Before we get started, I will remind everyone that the remarks we make today represent our view of our financial and operational outlook as of today’s date, February 9, 2021. These expectations 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 filings 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 are also available online. The results in our earnings release issued last night and presented during this call reflect only the continuing operations of the business, other than announced pertaining to the condensed consolidated statements of cash flows or unless otherwise noted. The company’s fiscal 2022 first quarter results and fiscal 2022 outlook in this earnings release and presented during this earnings call reflect the previously announced change in fiscal year end from December 31 to September 30. All year-over-year comparisons of fiscal 2022 first quarter results refer to the corresponding period ending December 31, 2020. I will now turn the call over to Kevin.

Thanks, Doug. Good morning, everyone, and thanks for taking the time to join our call today. I'm excited to welcome our recently appointed CFO, Lorin Crenshaw, to his first Compass Minerals quarterly earnings call. Lorin brings a new perspective to our business and I'm appreciative of the contributions he's already making in his short time here. Throughout the first quarter, our team continued to demonstrate its resiliency and the ability to adapt to the many challenges of operating a weather-dependent business in a high inflation environment. The culture we've established has allowed us to focus our efforts on the common goal of creating value, while continuing to maintain a safe and responsible operating environment. After providing a brief review of our fiscal 2022 first quarter performance, I'll spend a few minutes discussing our long-term vision for Compass Minerals, and specifically why we believe our strategic shift toward the adjacent markets of lithium and next-generation fire retardants makes sense for our business, how we’re advancing these opportunities, and what to expect as we work to unlock value for our shareholders. As reported in our earnings release yesterday, first-quarter revenue growth was 7% year-over-year, primarily driven by volume gains in our salt business, and higher pricing in our Protassium+ SOP product, as well as throughout most of our consumer and industrial product lines. While our top-line results showed year-over-year improvement, profitability was suppressed primarily by previously cited headwinds that are likely to persist throughout this year including inflationary pressures on distribution and input costs particularly within our Salt segment and low inventory levels constraining our ability to grow plant nutrition volumes. The net result of these factors combined with a weak start to winter in our served markets caused consolidated adjusted EBITDA for the first quarter to decline by approximately 6% year-over-year to $58 million, a result that we believe is well below the normalized earnings potential of our business. In our Salt segment, revenue grew approximately 20% year-over-year on higher volumes partially offset by lower pricing. This revenue increase despite the relatively weak winter weather during the quarter reflected a combination of growth in our bid season commitments and volumes in the comparable year period being below historical average. Due to higher costs and lower pricing in the segment, however, this top line growth did not translate to increased profitability resulting in Salt segment EBITDA for the first quarter declining by approximately 10% year-over-year to $56 million. Our Salt business has not been immune to the rapidly growing inflationary pressures impacting the broader economy. We've experienced this phenomenon across our business and everything from higher fuel costs and transportation rates for trucking, vessels, and rail to higher prices on input items such as pellets and bags. And while the contract structure within our consumer and industrial business has generally allowed us to pass along certain of these costs year-to-date, the nature of the highway de-icing business is such that we must recapture costs as part of the upcoming bid season recognizing this timing challenge. We're determined to pass inflationary costs along in both the short and intermediate term in an effort to protect the profitability of our business. In addition to inflationary costs we also experienced higher costs during the first quarter to position our products in certain of our Southern U.S. locations, initiated several months earlier than originally planned. Although conducting this outage during the winter quarter was inopportune from a logistics and financial perspective as it occurred at a critical time for us in terms of filling our Salt depots for the winter season, it was definitely the right thing to do from a safety and business continuity perspective which took precedence over the short-term impact on financial performance. Certain costs related to this outage impacted the first quarter while others will flow through as products are sold throughout the year. Now turning to Plant Nutrition; this segment delivered a sharp year-over-year improvement in EBITDA for the quarter of 49% to $18 million and an increase in EBITDA margins year-over-year to roughly 34%, up approximately 18 percentage points driven largely by higher pricing as we continue to keep pace with a constructive macro backdrop in the fertilizer market. It's worth noting that these strong profit results were achieved despite volumes being down 42% year-over-year. As we shared when we issued guidance last quarter throughout the fiscal year, we expect plant nutrition volume levels to track below the inherent potential for this business, reflecting the fact that we entered 2022 with a depressed inventory level primarily due to yield challenges at our Ogden facility and sustained demand levels across our market. For over a year our team has worked diligently to holistically re-examine our SOP end-to-end process. As a result, we put in place a number of process improvements at our Ogden facility designed to help optimize our performance, increase our efficiency, reduce downtime and ultimately drive higher yields and production volumes. In addition, our R&D team has done significant work to try to better predict the consistency of our feedstock year-to-year, including building a lab-scale model to conduct in-depth studies on the effects of naturally occurring factors such as temperature, humidity, and precipitation levels on our stockpiles and PON deposit concentration levels. As we continue to manage through a multiyear drought with low-grade salt lake levels we remain focused on restoring yields and production costs closer to historical performance. At this time, I'd like to switch gears and spend a few minutes highlighting the strategic growth opportunities that lie before us. What we've already accomplished and anticipated milestones in the year ahead. I'll also review why we believe the right path for our company to drive long-term shareholder value is to expand upon our position as a premier essential minerals company and into select high-return adjacent markets. As we think about how to execute on our vision for the future of Compass Minerals, we've carefully considered how we can best leverage our core competencies of mineral extraction, experience in optimizing mining and manufacturing assets, and logistics and supply chain expertise, while continuing to honor and build upon our strong safety culture and core purpose. Having already leveraged these core competencies into leading positions within our existing product categories, we view our strategic decision to expand thoughtfully into two high-return natural adjacencies; lithium and next-generation aerial fire retardants as both a potential value creator and an opportunity to rebalance a portion of our revenue away from weather-dependent products. Since announcing the identification of our lithium resource seven months ago, our focus has been on advancing five key dimensions of the project; people, testing, capital and operating cost intensity, identifying a direct lithium extraction or DLE technology provider, and ensuring sustainable operations through a third-party conducted life cycle assessment of our development option. Among the most notable recent accomplishments have been in the areas of people and testing. In terms of people, we successfully bolstered our Senior Management and Board of Directors through the addition of key executives with deep industry experience, including our new CFO, Lorin Crenshaw, Head of our Lithium Operations, Chris Yandell, and Independent Director, Gareth Joyce. Each has already contributed significantly to our go-forward strategy and decision-making process and I look forward to working closely with them and the additional technical professionals we've added to help navigate our lithium development. From a testing perspective, we achieved a critical proof point this past October with the successful third-party conversion by Veolia of our brine to battery-grade lithium hydroxide which can be used in electric vehicle and energy storage markets. We believe that this is the first known conversion to be proven from brine originating in the Great Salt Lake and we're very encouraged by the results. As we look forward, an additional critical milestone that we expect to reach in 2022 is the completion of an economic assessment with FEL-1 level of accuracy of the capital and operating costs required to develop the resource. This project phase will allow us to narrow our options and is expected to be defined at an FEL-2 level shortly thereafter. As some investors may be already aware, the engineering cost estimating process is a multistage progression from FEL-0 through FEL-3 and detailed engineering. We're approaching the end of the first phase. As the FEL process progresses, the accuracy of the cost estimate continues to be improved, until the project becomes fully defined, ready for construction, and eventually commissioning and operation. I shared this synopsis to say that while our FEL-1 level cost estimate should provide a solid foundation and insight into the economics of the project, by their nature, they're subject to a relatively wide confidence interval, which narrows upon advancing the project through the varying FEL stages and cost estimates. Another milestone expected this year relates to our formal selection of a DLE technology provider. As we've discussed on past calls, we've been rigorously evaluating a range of DLE technologies, and are increasingly confident we'll be able to announce our selected technology provider by this summer. Our pilot projects in connection with this evaluation are structured to help prove out the technologies and provide input as we progress in our engineering and design. Finally, we also expect the completion of the life cycle assessment of our lithium project by this summer. As previously announced, we've engaged Minviro, a global industry leader in this field to conduct a lifecycle assessment, and our ongoing discussions with numerous potential partners, and based on various structures we're considering for the business. We believe that the sustainable aspects of our current Great Salt Lake operation provide a differentiator to other projects in development. Ensuring, we're minimizing the environmental impacts as we work towards supplying a domestic battery-grade lithium resource is of paramount importance. Being responsible stewards of our assets and engaging proactively with stakeholders, from Friends of the Great Salt Lake to the Audubon Society is core to our DNA. When thinking about the best path to maximize value for our shareholders related to our lithium development opportunity, at a high level, there are three options; going alone, advancing with one or more partners, or monetizing the asset via an outright sale. Our assessment of each of these options remains ongoing, with a view towards deciding which path to take sometime later this year. Overall, I believe Compass Minerals is in an excellent position to deliver a battery-grade lithium product by 2025, and there's arguably no better backdrop against which to be engaged in discussions with interested parties and potential partners than now, given the global supply and demand outlook for providers of sustainable, domestically sourced lithium. I'm pleased with the project milestones we've already accomplished in a brief timeframe. We remain confident that there is a prudent path to advance this potentially high-returning initiative, as we look forward to being in a position to share additional information in the coming quarters. We're also excited about our investment in Fortress North America, which we announced a few months ago. Wildfire frequency and intensity have been steadily increasing for decades and wildfire solutions have become a fast-growing specialty business, with larger government budgets being appropriated for the abatement of, and fighting of wildfires. Fortress, at its core, is a disruptive next-generation fire retardant technology company. By leveraging the magnesium chloride currently produced at our Ogden facility, Fortress has developed and is in the early stages of manufacturing their proprietary portfolio of highly specialized aerial and ground retardant formulations, with unique properties for fighting wildfires and abating fire risk. Importantly, the US Forest Service testing has shown that Fortress retardant products result in more effective and eco-friendly fire retardants. One of the additional features of the Fortress business is that it is primarily a spring, summer, and fall business which we expect to provide a natural complement to our winter season-focused deicing salt business. For many years there has been only one supplier of aerial fire retardants; a supplier who utilizes a diammonium phosphate-based retardant formula. Together through Compass Minerals' essential materials and extensive supply chain capabilities and Fortress' anticipated position and unique chemistry, we're confident in our ability to be successful in this growth industry, which we estimate represents a total addressable market of approximately $300 million. As evidence of Fortress's progress to date, I'd like to touch briefly on some of the accomplishments of the Fortress team and anticipated development milestones over the 2022-2023 time frame. Notably, Fortress has successfully obtained conditional qualification of certain of its products on the US Forest Service qualified product list. Specifically, two of its aerial retardants are conditionally qualified, while a third ground-applied retarded is fully qualified. With the capital infusion we recently provided, Fortress is in a position to accelerate the build-out of infrastructure, production facilities, and its team. Fortress also has recently hired Tom Davis as its Chief Manufacturing and Supply Chain Officer. With 30 years of direct experience in the chemical industry, Tom was formally responsible for building the global operations and supply chain organization for Perimeter Solutions, the primary current global supplier of fire retardant products. In terms of future expected milestones, by 2023 Fortress expects to receive further approvals from the US Forest Service for select products currently in testing and to make additional submissions for products in development including mobile and helicopter distributed retardants. Lastly, Fortress has built an intellectual property moat around mag chloride-based fire retardants supported by a portfolio of issued and pending patents. In closing, we continue to work to optimize our core business as we look to mitigate inflationary elements impacting our cost structure to help restore the earnings power of our legacy Salt and Plant Nutrition businesses. The team continues to see improved production performance in our flagship Goderich mine as we progress our long-term mine plan. On a parallel track, we expect our organic high-return opportunities to allow our company to unlock additional value from our advantaged asset base, raise the economic profit potential of our business, accelerate growth and drive long-term shareholder returns. Our capital allocation approach with a dividend payout more closely aligned with peers and a company with captive growth opportunities is an output and an enabler of our corporate strategy. I'm thankful for the efforts of our dedicated workforce whose unwavering focus on safety and sustainable growth is reinforced by their commitment to achieving the goals we set forth for fiscal 2022. Their efforts are instrumental in creating value for the benefit of all Compass Minerals stakeholders. Now, I'm going to turn it over to Lorin who will discuss in more detail our financial performance and our updated outlook for fiscal 2022.

Thanks, Kevin. Consolidated revenue was $331.5 million for the first quarter of fiscal 2022, up 7% year-over-year, primarily driven by higher volumes in our North America highway business, favorable pricing in our plant nutrition segment, and C&I business. Despite the revenue increase, our consolidated operating earnings declined to $20.4 million and adjusted EBITDA declined by $3.6 million to $58.4 million or 6% year-over-year as upward pressure on distribution and product costs within the salt segment in particular, more than offset exceptional plant nutrition price performance and EBITDA growth. On a segment basis, salt revenue for the quarter total $273.9 million, up 20% year-over-year, driven by 24% higher sales volume. Specifically, highway de-icing volume rose 27% year-over-year, despite a weak start to winter, reflecting higher commitment levels achieved during last year's this season. C&I volumes also rose up 9% year-over-year, reflecting strength in both the icing and non-de-icing products. With the icing reflecting a stronger prefilled demand and non-de-icing reflecting higher water and conditioning and Ag volume. Salt segment volume growth also benefited from volumes in the comparable year ago periods being below average. Salt volume gains were partially offset by lower prices, with a 1% decline in the highway de-icing average sales price offsetting a 3% increase in the C&I average sales price. In our C&I business, broad-based price increases were implemented across most product categories, primarily in response to the high inflation environment, protecting an area of our business where the potential exists to pass through costs on a more real-time basis, enabling us to claw back some portion of the overall inflation related drags on our profitability. Overall, despite higher revenue, salt operating earnings fell 11% year-over-year, while EBITDA fell approximately 10% to $55.6 million for the quarter, primarily reflecting the inflationary effects on distribution costs not fully captured during the most recent salt bid season and higher product costs. While it is too early to predict how the rest of the winter season will play out, we believe we should be in a position to recoup a meaningful portion of these higher costs during the upcoming bid season. Turning to our plant nutrition segments, revenue for the first quarter fell 30% to $54.6 million year-over-year on lower volume. Lower volumes primarily reflect the combination of low inventory levels related to the yield issues Kevin detailed earlier, sustained demand levels across our SOP product range, and the impact from extreme wildfires in the western US last year, delaying planting and pushing orders into the comparable year ago period. Overall, despite the decline in revenue, plant nutrition operating earnings were $9.5 million and EBITDA was up 49% in the quarter to $18.3 million, primarily driven by higher prices, and also by lower per unit cash costs. Specifically, the average sales price for our Protassium+ SOP products rose 5% sequentially to $660 per ton, and was up 20% year-over-year, reflecting the continued positive macro backdrop in the fertilizer sector. From a balance sheet perspective, largely due to the seasonality of our de-icing salt business, historically, our working capital tends to be highest in the quarter ended December 31. That dynamic played out this quarter with net debt rising by $69 million versus fiscal year-end levels, reflecting higher working capital requirements and cash required to fund our incremental investment in Fortress. Now, turning to our outlook for the balance of the year. Three factors year-to-date represent meaningful headwinds to our original full-year earnings guidance. Inflationary pressures across our salt business have resulted in distribution and product costs tracking higher than expected. Lower volumes due to the relatively weak start to winter in the markets we serve for the quarter ended in December, and higher-than-expected product costs, primarily due to the need to use optimal routing methods to position product at our salt depots in certain of our southern markets caused by the accelerated outage at our Cote Blanche mine. Taking these factors into account, we have lowered our expectations for the 2022 fiscal year and currently expect our adjusted EBITDA to be in the range of $200 million to $235 million, driven by erosion in the outlook for our Salt segment. Accordingly, we have lowered first-half EBITDA guidance for that business to a range of $120 million to $160 million. The midpoint of our guidance assumes that winter weather transpires in line with historical averages for the balance of the season in the markets that we serve. The upper and lower bounds of our updated Salt segment guidance broadly reflect our estimates of the profitability levels we would expect if snow events are meaningfully higher or meaningfully lower than the historical average. As Plant Nutrition has started the year strong, first half of fiscal 2022 EBITDA guidance for this segment is unchanged at between $25 million and $35 million. We continue to expect SOP pricing strength in the first half of fiscal 2022 to more than offset lower sales volumes, resulting in improved margins and profitability year-over-year with improvement in Plant Nutrition productivity anticipated during the second half of fiscal 2022. From a CapEx perspective, given the weather-dependent nature of our business, it's essential that our approach to CapEx be agile, particularly during the first two quarters of our fiscal year, which represent the bulk of the winter season. Given that we not only face the typical weather-related uncertainties but also a wide range of cost pressures that are quite evident at this time, we've reduced our CapEx guidance by $25 million at the midpoint to a range of $100 million to $110 million. We believe taking a disciplined approach to capital management is an effective lever to offset our lower profitability outlook and to help ensure we also ultimately deliver cash flow results in line with our original expectations heading into this fiscal year. Finally, our effective tax rate guidance has been reduced to a range of 14% to 17%. The decrease stems from the overall refinement of projected income levels including lower income overall and the mix of income between the US and Canada and certain tax benefits. In closing, I would just like to add that two months in, I'm thrilled to be a part of the Compass Minerals team and to join the leadership team Kevin has assembled and to join the over 2000 Compass Minerals employees across our locations, as we build on the strengths of what is already a leading essential minerals company. As we leverage our core competencies into new areas, I'm confident that there is a prudent path forward to achieving our goals, bringing our vision into reality, and ultimately creating shareholder value. With that, I will turn it back to the operator to open the lines for the Q&A session.

Thank you. Your first question comes from David Begleiter from Deutsche Bank. Please go ahead.

Thanks. Good morning. And Lorin, welcome aboard. Look forward to working with you again. Kevin and Lorin, just on the quarter what are the Cote Blanche outage cost you guys in Q1 and what will it cost you guys in Q2?

Thanks, David. It's Lorin. As you think about the reduction in our guidance which was $18 million at the midpoint, about 50% of it relates to volume and about 50% relates to costs. Of those costs, I would say about two-thirds related to inflation and a third related to product movements. And it's that product movement that you touched on. And I would say about $2 million or $3 million hit the quarter and the balance will be spread throughout the year as we sell the product that now has higher costs embedded in it.

Very good. And just on CapEx. What was the $25 million reduction? What was that tied to that you're not you've pushed out now?

I'm sorry, Dave. Would you repeat?

On the CapEx reduction by $25 million what projects have you delayed or deferred to achieve that reduction?

Hey, David. This is Kevin. We had a handful of projects that we felt like made sense to the extent we could afford on their costs reduction efficiency types of things that we decided just based on kind of the reduced guide that it would make sense to push those off a little bit but nothing that would jeopardize the continuity of the business on a day-to-day. They were very discretionary.

And David, I would also add if you just look historically at this business as you know it's been able to be supported by CapEx to around $80 million. We do now have the lithium CapEx on top of that. But this is a business that over long periods of time has been able to comfortably support itself at much lower levels of CapEx than where we are today.

Thank you very much.

Your next question comes from Bob Koort from Goldman Sachs. Please go ahead.

Hi. This is Emily Kech, on for Bob. In the C&I business how sticky do you guys expect the broad-based price increases mentioned to be?

Yes sure. I'll take that. Pretty sticky. It's interesting historically when we've experienced inflationary pressures and we have a lot of opportunity to pass those on through to our customers it sticks for the long-term. And so for example, if freight rates and other disruptions that are causing higher costs start to fall we typically would retain that. Now we do that through great customer relationships. We spent a lot of time tracking our net promoter score. And we've made significant improvements over the last couple of years and that's really caused a lot of stickiness in customers and really creates a lot of opportunity to create more value through those customer relationships. So we expect those to stay in place and improve pricing where we can across all product groups going forward.

Okay, great. And then just one more. Could you guys talk about actions taken to manage inventory levels during the quarter?

Well historically this quarter we just closed is the quarter where we generally have the highest amount of working capital, is where we are building inventory in order to position ourselves for the upcoming winter season. And so that's our typical pattern. I don't know if there's anything more to add.

Anything unusual?

Nothing unusual, typical seasonality.

Great. Thank you.

Your next question comes from Seth Goldstein from Morningstar. Please go ahead.

Hi, good morning, everyone, and thanks for taking my question. Just to clarify is the updated guidance based on average winter weather to start 2022, or does it factor in the strong snowfall in the Midwest that we had in January and early February?

Yeah, so the guidance at the midpoint assumes normalized weather for the season from January on. And so that midpoint reflects our experience through December. It does not reflect our experience through January, February, etc. And so that's what that midpoint anticipates. If you look at the width of the guidance, you'll notice our guidance is wider than it has been in the past. And so at the midpoint you have normalized winter and on either side of that you've got roughly a standard deviation on either side to reflect a lower than normal levels of snow days or a higher than normal level of snow days.

Seth, I would just add that we still have a fair amount of winter left. But January and first part of February are off to a pretty good start. In fact, I'd call it normalish. Again, we still got a lot of winter left to go and we'll see where we land. But good start to the calendar year.

Okay, great. I appreciate the clarification. And then will you update us on the timeline for when you expect SOP production to be fully restored with the brine process, or is that still an ongoing work-in-process?

Sure. This is George Schuller. As Kevin mentioned, the situation has been ongoing. The drought doesn't directly impact our production, but it does influence the brine we receive from our west pond. We have made significant efforts to enhance our processes and improve efficiency. It's difficult for me to provide a specific date for when we will return to normalized production, but I am confident we are on the right path to reestablish ourselves in the future. This is a long-term view, and given the drought over the past few years, we must implement certain measures at the site to ensure sustainability looking ahead.

Okay, great. Thanks for taking my questions.

Yeah. Thank you, Seth.

Your next question comes from Chris Shaw from Monness Crespi. Please go ahead.

Hi, good morning everyone. How are you doing?

Hi, Chris.

It seems like the timeline for the lithium asset has suggested that a decision regarding the DLE partner or provider would be made in the summer of 2022. Additionally, it appears that the decision on which of the three paths you outlined has been delayed. Is my understanding correct? If so, what are the reasons for the delayed timelines?

No, I don't think we've pushed back the timeline at all. I think on the last call actually we referred to summer as a point when we would do a reveal around estimated CapEx at the FEL-1 maybe FEL-1 plus level, the DLE provider selection testing results where we're going to show up on the cost curve. So, I think, from our standpoint, we're tracking right consistent with everything we said in the last quarter.

And I'm going to say one of the common questions that we get is around what our path forward be? And that's why we added the slide on slide 7 of the earnings deck. But it's right in line with what Kevin said on the last call. We just thought it'd be helpful to have a slide to share with you what our intentions are.

Right. Do you recall if it was during the last call that you mentioned pushing back the timeline? Perhaps I forgot that you had done that, or am I just misremembering the details?

Well, we never gave a time, we've yet to give a timeline per se. When we announced this in July, we shared that we would be investigating three different paths. We didn't say within what period of time we would conclude that investigation. But on the last call, Kevin did share that by this summer, we'd be in a position to be able to talk about our operating our capital intensity around this asset, which should allow investors to apply some sort of net present value to it.

Right, right. Okay. That's all I had. Thanks so much.

Yep. Thank you.

Your next question comes from Joel Jackson from BMO Capital Markets. Please go ahead.

Hi. This is Alex Chen on for Joe Jackson. Thanks for taking my questions. So I know earlier, you talked about the CapEx reductions to $25 million. Are you able to provide a bit more specific color on how this might impact the timelines to progress the Fortress and lithium project? Because the urgency to develop these projects does the weaker outlook increase the odds that Compass will need an equity raise this year?

I'll address that in two ways. Fortress is not included in the CapEx of our numbers. We've made an investment in Fortress that should provide it with adequate capital to advance its initiatives. And that is done and not a part of our CapEx. When you think about the $25 million reduction in our CapEx, it does not entail a reduction to the lithium dimension of that. And so Chris and his team are proceeding on pace with regard to the pilot plants and that CapEx reduction does not impact the lithium-oriented aspects of our CapEx budget. As far as our guidance and the implications on our funding, and I have been here for 60 days and have thought about our path forward with regard to lithium. I'm confident that we will be able to find a prudent path forward. And the way that I would encourage you to think about it is three forms of capital. The first one is free cash flow. The cheapest form of capital is free cash flow. And frankly today we're underearning. We're underearning on the order of magnitude of $30 million. And when we wake up we're thinking about how do we restore the possibility of our salt business and restore the profitability of our Plant Nutrition business. And to the extent that we do that, that's going to throw off significant free cash flow over the next couple of years. The second form of capital what you often see with pre-revenue lithium companies is prepaid capital in connection with offtake agreements. And so as Chris and his team are engaged in dialogues, we don't think there'll be any shortage of interest to the extent that we chose to pursue an offtake agreement of some sort. The third form of capital that I would encourage you to think about is, what you also see pre-revenue lithium companies do, which is, take through strategic private equity at the asset level, not at the Compass equity level, but at the asset level. And so again, given the backdrop and the attractiveness of this asset, we don't think there'll be any shortage of interest to the extent that that became a requirement. And so, that's the way we're thinking about things, no decisions have been made. But we think that we will find a prudent path forward. And when I say that, I mean, a path that allows us to maintain our credit profile, while still advancing this initiative, if that's the direction we chose to go into.

Great. Thanks for that clarity. And my second question is with regard to the below-average snowfall so far this winter. Will Compass need to reconsider the Goderich production strategy, even if that might mean not achieving the per ton cost targets that the company is looking to achieve?

Yes. Good question. I think we've got to let winter play out first. And once we do that, that will inform how we think about Goderich. I would just add that George and this team have Goderich running really, really well. But I also want to emphasize that we'll take a balanced approach this season. If we finish strong, I think it was set up for a good bid season. And if we finish kind of with a whimper, we're prepared to take whatever steps are necessary to adjust our production to match what we think the anticipated demand is going to be. So we're building in that flexibility to calibrate what we think the market wants, as opposed to trying to overshoot it.

Perfect. Thank you.

Your next question comes from David Silver from C.L. King. Please go ahead.

Yes. Hi. Thank you. So a couple of questions. I think the first question I'd like to maybe ask you a little bit more about the selection of the DLE process. So firstly, the timing. So you mentioned earlier in your comments that decision might be forthcoming this summer. And I'm just wondering has that timeline changed, let's say, over the last three months to six months? In other words, is the decision point sooner than maybe was anticipated at the beginning of your strategic evaluation?

Thanks for those questions. I'll take the first one and I'll let Chris discuss the second one. But, look, I think with respect to the DLE, the selection of the DLE provider, that's a huge decision and you've got to get that right. And we'll take whatever time is necessary, but we continue to believe that we'll be in a position by mid-summer to be able to make that selection and announce it externally. But what we want to do is just go through and continue to test, because if you get this wrong, you're going to have a problem. So, it will take as long as it takes. But we feel based on the progress to date and the technologies that we're testing that sometime in the summer we'll be in a position to make that announcement.

Hey, thanks Kevin. So David with regards to looking at the process itself, I would say that the process it is pressing on the DLE. After the DLE going into the conversion portion of the process, it would be very standard. So when you look at the DLE and one of the things that you take into consideration is that not all brine is equal; not all DLEs are equal. And you have to match the DLE technology to your brine as well. And so that's what we've been doing. And we look at that brine that we have certainly is high in magnesium. And one of the things that we want to do is make sure we have a higher rejection of magnesium, a high recovery of lithium. So we try to get as close to parity as you will on magnesium-lithium ratio. We would love to be lower impurity on magnesium-lithium but the goal is to get parity and then from there the conversion process is pretty much a general process. Does that answer your question, David?

Thank you for the information. I was curious about magnesium concentrations and will look into that more. My second question is about financial flexibility and covenant situations. Many covenants depend on trailing 12 months EBITDA levels, which I’ve been monitoring. My TTM decreased this quarter due to the underperformance you mentioned, and I suspect there might be another decline next quarter. If that occurs, will there be a need for adjustments to your current financing or any actions necessary to ensure more flexibility in meeting key covenants in your main credit agreements?

Yes, David thanks for the question. What I would say is first of all, we're thrilled to have and blessed to have a strong bank group that over many, many years has been very understanding and supportive of our business. I think the right way to think about it is to say at the midpoint of your guidance, do you think that you would need any sort of headroom? And what I would say is that at the midpoint of our guidance we start to approach those covenants. However, there's a couple of things I'd remind you of. One, this is a business that again has historically been able to sustain itself off of CapEx levels that are considerably below where we are today. And so that's something well within our control that to extent the circumstances suggested, we could tap the brakes further on CapEx. The second thing I'd say is that the ICL sale that we executed last year had an earn-out associated with it. That was in Brazilian reais that at today's exchange rates are in the mid-teens in terms of what it could be. That business will close its books. And in the coming months, we will know to what extent we receive proceeds from that earn-out. I would also say that, in the most recent quarter, we had a pretty heavy working capital. By the end of this year, our 9/30 quarter, we expect that working capital drag to not be quite as much as it was this quarter. But broadly speaking we think we've got the ability to stay within our covenants. But we also are blessed to have a very strong and supportive bank group during a time when this business is earning below its potential. And I think that's the focus of this leadership team is on restoring the earnings potential for salt and for Plant Nutrition. And I think we'll manage through it.

Thank you for that. The earn-out was about 4% I believe of the announced price right? Maybe $16 million or so. Is that the ballpark?

Yes. BRL88 million. About BRL88 million.

Right.

So that's about $15 million today but it's subject to their performance.

Okay. I'd like to squeeze in one more, if you don't mind. And this has to do with the salt kind of marketing opportunity. So there's a lot of things going on this quarter. But my assumption is that the long-term mining program at Goderich and bidding strategies and things are kind of working towards a multi-year conclusion or a goal where Compass is able to market a structurally larger amount of their overall salt volume on an annual basis. And one competitor's mine is no longer operating we know about that. But I am wondering about how you view the freight markets globally? And what kind of incremental opportunity that might provide let's say over the next year or two to widen your marketing radius a little bit or maybe squeeze out some offshore supply above and beyond what's happened let's say, over the last year or two. So is the structurally higher freight rates or maybe other factors that you might say is that, a piece of the puzzle maybe to improving the sales volume structurally going forward and kind of clearing the way for that anticipated increasing Goderich production?

There are several points in your question that I want to address, and I'll let Jamie provide some additional insights. First, in the upcoming bid season, our goal is to recover some of the inflationary pressures we've encountered. We have factored some of these into our plans, but they have surpassed our expectations. Therefore, we aim to recapture those costs. Transportation remains a significant limitation for our business. High transportation rates restrict our ability to expand our reach. As a result, we may need to make some adjustments. We view our salt operations as a portfolio and aim to align our production with anticipated demand to ensure we receive fair value for our products. Regarding imports, we continuously monitor the market, and if we find that imports can be secured at a lower cost than producing them ourselves, we will certainly consider it. However, up until now, this has not been the case due to fluctuating seaborne transportation rates. The cost of products across various regions remains relatively stable, but transportation rates are quite volatile and currently elevated, which we believe hinders their ability to enter the US market as they have in the past. While we keep an eye on this, there has not been any action required so far. Jamie, would you like to add anything?

It is really important. International shipping rates are important to both our Plant Nutrition and salt business. We like to see the higher shipping rates ocean-wise. It does prevent imports from penetrating and competing with us. And also prevents European SOP products from coming into the US cost-effectively. So that is – and then you mentioned the mine the Avery Island mine shutting down that bodes well for the interior US market. And as we set up our strategy for our bid season, Kevin mentioned earlier, we will see how winter unfolds. We'll assess all those supply and demand dynamics and optimize the value of every time as we go through our bid season. And we think the combination of recapturing many of these inflationary and transportation costs as well as some improvement in the portfolio itself are going to drive a tremendous amount of value particularly as we go into 2023.

That's great. Thank you very much.

Your next question comes from Roger Spitz from Bank of America. Please go ahead.

Thanks very much. So regarding your salt volumes up 24%, I just want to be clear was that all due to the – or mostly due to the market share gain that you spoke about on your last call? And I mean as – if so was a lot of that from cargoes Avery Island mine shutdown, or did you take share you think from other North American competitors?

Yeah. So yeah, our commitments were up significantly in this last bid season. So part of that is Avery Island related, part of it is some territories we're serving that are newer for us, but yeah absolutely related to our higher commitments.

Got it. And I see that in fiscal Q1 2022 salt shipping and handling in the press release was – spending was $39 million or 25% of salt sales. What is that as a percent of salt COGS your shipping and handling? Do you have that?

Compass Minerals International Inc. - President CEO & Director Shipping and handling costs.

I don't have that number. So of the total cost, yeah, I mean, we kind of – you can see our unit shipping costs as a line item is separate from COGS. So we have shipping and handling separately. Salt shipping and handling on a unit cost basis was about $26 per ton. And our gross price was $80 and you can see our all-in costs for the fourth quarter was about $42. So it's – in our first quarter December quarter, it was about a third of the total cost, if you combined our COGS and our shipping and handling.

Got it. And then for North American freight, which I guess you do probably by various methods vessel what have you. Sort of – can you talk about the contracts you have? How long are those contracts? How often the prices set or reset, I should say, for different modes of transportation for shipping your highway deicer salt?

It varies across the different modes of transportation. We typically enter into multi-year agreements for barge services. Vessel agreements can last five to seven years, depending on the specifics. These agreements often include built-in inflationary adjustments. For trucking, the arrangements are less formal; we tend to engage in spot shipping during the season. While we have established pricing relationships, the situation varies widely across the regions we serve.

Trucking is probably more of a spot type of a range year-to-year. We're experiencing cost pressure just like everybody else's.

Got it. So, I guess my last question based on that is, when you think about your salt deicer, sort of what percent of that freight for the season is sort of known, because it's contracted for the season versus sounds like more truck where it's more spot and it's going to move up and down depending presumably on diesel costs and things like that?

Yes. As we ship throughout the summer and produce for our depots, we have good visibility on this process. Most of the shipping involves vessels and barges. However, we face challenges during the winter when delivering salt from a depot to customers, as this last-mile transportation relies heavily on trucks. Trucking costs significantly more per unit or mile than barges and vessels, which contributes to some unexpected expenses we've encountered for this winter season. The costs associated with trucking are a key factor.

And your last question comes from Brian DiRubbio from Baird. Please go ahead.

Good morning. So I think you partially answered my first question. Was hoping you could give some more granularity in the cost and inflationary pressures that you've experienced, particularly on the salt segment. So did I hear you right it was primarily with the trucking part?

Yes. The truck segment has had a significant impact, particularly regarding fuel related to trucks. As I mentioned with barges and vessels, there is a fuel surcharge component, but those are multi-year agreements with predictable escalators. The availability of trucks has also played a role, leading us to pay higher rates to secure them. Currently, there is a 10:1 load to truck availability ratio nationally in the US, which is affecting everyone and has been quite influential on our results, particularly as we approach this winter season.

And Jamie, just one question. I guess the inflationary pressure to those some of that's related to our input cost around bags and pallets; literally everything that we have in input costs. We've seen that inflationary pressure as well.

Absolutely.

Got it. Unfortunately misread those company and everybody is experiencing the same. Just one final part on the truck. So just to be clear so even though you have long-term pricing arrangements, you basically just got hit with surcharges because of just all the various issues that you encountered. Is that correct?

Yeah. So it's kind of year-to-year as Kevin said. We don't have as much. In certain markets, we do have some multi-year agreements on the truck side. But a lot of its year-to-year. Remember, from year-to-year, our portfolio shifts around. So we do need different truckers in different geographies. And we're just really facing this national headwind of truck availability. We do a lot of things to mitigate it. We try to get flip things around and get customers to pick up salt, so that we don't have to manage that directly where we can. But we work. It's a geography-by-geography exercise. And we're doing everything we can to minimize the impacts.

Understood. I have one final question. Considering the challenges you're currently facing, how are you planning to approach the upcoming bid season?

I think we'll see how we conclude that process. As Jamie mentioned, we want to review our portfolio to ensure we are targeting markets that are a good fit for us while being cautious about those that aren’t. We’ll also consider supply and demand to ensure that we maintain a balance that allows us to achieve fair value and improve margins in the salt sector. Our goal is to recover the inflationary costs we've incurred and, if the market allows, to raise prices further. However, it's still too early to predict what that will look like, and we'll provide an update in the next couple of months.

Got it. I guess put it another way, is your preference to run the mine as full as you can or to sort of maximize profitability per customer, which I guess you need to do? Somewhat you got to run those mines at a pretty high rate anyway.

Yeah. Look, you always want to run your mines kind of flat-out. But at the end of the day, you don't want to overshoot the market either. So it's a fine balance between being good stewards of the market and achieving fair value for our products. But to the extent we've got to make adjustments at the mine level to match supply and demand, we are absolutely prepared to do that. And we have ways that we can do that and maintain good efficiency as well.

And there are no further questions at this time. I will turn the call back over to the presenters for closing remarks.

Thanks again for participating today. We really appreciate your continued engagement as we work towards what we believe is an exciting future for Compass Minerals. We look forward to talking to you soon.

This concludes today's conference call. You may now disconnect.