Compass Minerals Intl Inc

Good morning and welcome to the Compass Minerals second quarter 2021 earnings call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. Instructions will be provided during that time. Please be advised that today's conference is being recorded. I would now like to turn the call over to Douglas Criss, Senior Director of Investor Relations. Please go ahead.

Good morning. And welcome to the Compass Minerals Second Quarter 2021 Earnings Conference Call. Today, we will discuss our recent results and our outlook for the balance of 2021. We will begin with prepared remarks from our President and CEO, Kevin Crutchfield, and our CFO, Jamie Standen. Joining in for the Q&A session today are Brad Griffith, our Chief Commercial Officer, as well as George Shuler, our Chief Operations Officer. 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, August 16th, 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 Friday, August 13th and presented during this call reflect only the continuing operations of the business unless otherwise noted. The results also restate historic amounts for comparative purposes and reflect adjustments to information presented in the company's previously filed annual report on Form 10-K for the year ended December 31, 2020, and quarterly report on Form 10-Q for the quarter ended March 31, 2021. As previously announced, the nine-month 2021 Fiscal year reflects the change in fiscal year end from December 31st to September 30th. I will now turn the call over to Kevin Crutchfield, our President and CEO.

Good morning, and thanks for taking the time to participate today. While I'll kick off my comments with a brief overview of our financial performance for the second quarter, I also want to take a few minutes to review where we stand as a company in light of our leadership team's previously communicated strategic priorities. As reported, we maintained solid momentum in the second quarter, controlling what we could control in pricing and salt sales volumes. Ultimately, that work resulted in strong consolidated revenue growth of 14% compared to the prior year period, as meaningful contributions from both salt and plant nutrition enabled us to exceed our top line revenue expectations for the quarter. We continue to work through our previously reported sulfate of potash feedstock inconsistencies and managing around supply chain disruption and inflated shipping costs, which are not unique to our industry. While both our consolidated operating earnings and adjusted EBITDA saw second quarter declines compared to the prior year, largely due to margin compression during the quarter, year-to-date we've seen measured growth in these categories of 20% and 13% respectively. I'm pleased with the way our team continues to navigate this challenging environment, staying laser-focused on execution in our core businesses. In fact, during the first half of 2021, we generated strong positive free cash flow of $220 million, an increase of approximately 23% versus the prior year. On the cost management side, we've taken prudent steps to control our selling general and administrative expenses compared to the prior year. We also continued to actively manage our capital plan with spending in that category coming in at approximately $34 million year-to-date. Focusing on our solid segment for a moment, second quarter revenues were better than expectations at over $142 million, while operating earnings of approximately $19 million and EBITDA of $37 million were both down primarily driven by a 28% increase in shipping and handling costs for the segment. Our reported SALT segment results for the quarter were also impacted by an accounting methodology change that Jamie will discuss in more detail. When considering our SALT results on a year-to-date basis, however, we've achieved meaningful growth of 23% in operating earnings and 20% in EBITDA for the segment. Regarding the 2021-2022 bid season for our North American highway business, we continue to take a disciplined approach, balancing market share with margin capture, while always looking for opportunities to strategically expand our footprint. With our bid season approximately 80% complete, we expect the average contract pricing for this winter season to be generally consistent with prior season results. while our total committed bid volumes are expected to increase by approximately 7%. Leading to our plant nutrition segment, an increase in average selling price of 6% and relatively flat volumes in the second quarter compared to prior year translated to $54 million of revenue for the segment, which was slightly better than expectations. Operating earnings for the segment were $5.6 million lower compared to second quarter 2020, while EBITDA came in at $9.8 million, roughly in line with expectations given our previously discussed feedstock inconsistencies that are anticipated to weigh on segment costs at least through the third quarter of this year. We continue to believe the impact of the feedstock quality issues on the cost structure of our plant nutrition business is short-term in nature, and the proactive adjustments that we've implemented to address the issue have shown favorable incremental results. We're also actively monitoring the ongoing drought conditions in the western U.S. and continually assessing how they may potentially impact near-term demand for our potassium plus SOP product. SOP sales volumes remain stable through the quarter, and we expect volumes to remain steady through September compared to the prior year quarter. However, we'll continue to keep a close eye on demand as the drought season continues as there could be volume impact later in the 2021 calendar year. As I alluded to at the beginning of my comments today, I'd like to now shift gears from the quarterly recap to provide some color on our strategic execution as a company. When I joined Compass Minerals in mid-2019, one of my first tasks as Chief Executive Officer was to set a course for Compass Minerals that acknowledged but didn't dwell on the challenges of the past. that recognize long-term success must be built on a foundation of consistent execution, and then providing clarity to both our employees and our external stakeholders as to what kind of company we were committed to becoming. With the help of my senior management team, I outlined early in 2020 three priority focus areas for our company. Building a sustainable culture, delivering on our commitments, and conducting a deep strategic assessment of our advantaged assets and related capabilities. It's been approximately 18 months since we laid out those priorities, and while there still is certainly work to be done, I'm extremely pleased with how far we've come in that short time span. Over the course of the last six months in particular, we have successfully executed against a number of strategic priorities that provided the company with a platform to generate material long-term benefits to our shareholders. Paramount to building a sustainable culture is ensuring the safety and well-being of our workforce. We focus on a zero harm imperative for our people and our environment by continuing to strengthen safety and environmental stewardship processes across all sites with the ultimate goal of zero injuries or incidents in the workplace. We continue to enhance employee safety training, which focuses on elimination of at-risk behaviors, and we maintain a culture of open communication and trust by empowering every employee to stop any work process they deem to be unsafe. I'm proud to say the results of our safety focus was reflected in the first quarter of this year by a multi-year low for our total case incident rate, or TCIR, 12-month rolling average. That strong safety performance continued through the second quarter with a rolling 12-month TCIR of 1.48, representing a significant improvement over the previous five-year period. As you've heard me say before, we believe our safety performance is a leading indicator for operational success and one of our fundamental commitments to creating a sustainable business. The other half of building a sustainable culture requires increasing our levels of employee engagement and our execution muscle, which has been a key focus of our internal optimization effort that we launched in the fall of 2019. Making improvements in this area doesn't come easily or quickly, and it requires a certain level of humility as an organization to gain self-awareness about what we do well, where we can get better, and what steps are required to get there. While I'm generally pleased with the strides we've made in this category, including but not limited to our commitment as a board and senior management team to ensuring diversity and inclusion throughout all levels of the organization. This will continue to be an ongoing area of focus for our company. Through our increased execution muscle, we've enabled improvements in our second strategic imperative, delivering on our commitments. The foundation of this priority is simple. Be clear with our stakeholders about our goals, capabilities, and challenges, and then do what we say we're going to do. We've talked a lot on these quarterly calls about the other half of our internal optimization effort, creating value for the organization through a bottom-up process of innovation and continuous improvement. We're purposeful in not calling these efforts a program as they permeate through all levels of the organization and are increasingly becoming simply how we do business here at Compass Minerals. As it has clearly been a strategic focus for our team, I'd offer recent performance at our Godrich mine as probably the most salient example of our efforts to date. Over the course of the last two years, we've made meaningful improvements in both production and safety, hitting internal records in both categories. We've implemented a new long-term mine plan to increase production efficiencies and extend the longevity of this strategic core asset. And as reflected in the historic five-year collective bargaining agreement secured in late March, we've buttressed those efforts by committing time, energy, and resources towards rebuilding strong and lasting relationships with both our represented workforce at Goderich and the community they call home. But despite this progress, I still believe we have room to grow at Goderich before we can say it has fully reached its operating potential. Which brings me to the final area of strategic focus I've often spoken about, positioning our company for success by getting our core asset mix right, finding new ways to leverage those advantaged assets, and strengthening our balance sheet in the process. In this area, our actions have been well documented. With the completed sale of our North American micronutrients business in April, followed July 1, With the completed divestment of our South American plant nutrition business, we achieved the financial flexibility needed to consider strategic growth opportunities, whether organic or otherwise. Specifically, these transactions have enabled us to reduce our long-term debt by approximately $400 million. In addition, we continue to pursue a sale of our South American chemical business and look forward to sharing more information around that expected transaction when appropriate. And finally, as we announced several weeks ago, we're excited by the opportunity to broaden our essential mineral portfolio through the identification of a sustainable lithium resource at our Ogden, Utah, solar evaporation site on the Great Salt Lake. We're currently undertaking a strategic evaluation to assess development options for this lithium brine resource in order to service growing domestic market demand while maximizing the long-term value of the asset. As a co-product of our existing SOP, salt, and magnesium chloride production processes, the addition of lithium to our Ogden production portfolio is not expected to have an impact on the essential minerals we already produce on site. Equally as important, by leveraging existing operational infrastructure, permits, and pond processes at our Ogden facility, we believe we're uniquely positioned to capture this newly defined lithium resource with nominal incremental impact to the beds and waters of the Great Salt Lake. We feel this organic opportunity is well aligned with our strategic imperatives, and we're excited to share more details soon on this and other future projects that lie ahead. But opportunities like this are only feasible if the underlying fundamentals of our operating segments are sound. I remain highly confident about the inherent strengths of our advantaged assets, the resiliency and commitment of our people, and the discipline with which we operate. As we continue to advance our strategy and grow our essential minerals business, we do so with a deep commitment towards generating sustainable earnings growth and EBITDA margins, thereby creating value for all stakeholders. Now, at this time, I'll turn it over to Jamie, who will discuss in more detail our second quarter financial performance and a rest-of-year outlook. Jamie?

Thanks, Kevin, and good morning, everyone. I'll start with a few comments regarding our consolidated results before moving on to our segment specific performance and then finishing with our rest of your outlook. On a consolidated basis for second quarter 2021, the company achieved strong year over year sales volume growth in our salt segment and increased pricing in our plant nutrition segment compared to prior year results. Despite this top line revenue uplift, our consolidated operating income was below the prior year period by approximately $9 million, while our consolidated adjusted EBITDA fell 21% compared to 2020. Over the same period, we saw both operating margins and EBITDA margins compress. This compression is primarily related to unit costs associated with the feedstock inconsistencies for our SOP production that we've highlighted over the last two quarters. as well as elevated shipping and handling costs in the SALT segment. We are pleased to report that during the first six months of the year, we generated about $255 million in cash flow from continuing operations and approximately $222 million of free cash flow. As announced in June, our Board of Directors approved a change in our fiscal year end to September 30th from December 31st. We're optimistic this change will improve our full-year forecasting accuracy going forward, as we will have the benefit of embedding complete highway de-icing bid season results within our full-year forecast at the beginning of each fiscal year. From an accounting perspective, the shorter nine-month year in 2021 impacts our results in a couple of different ways. First, it temporarily increased our expected effective tax rate to 40%. and therefore increased our year-to-date tax expense to $17.7 million. However, this is not expected to impact our effective tax rate or cash taxes over the typical 12-month period. Similarly, changing to a shorter year temporarily increases our unit costs in both the plant nutrition and salt business during the second and third quarters by about $20 per ton and 50 cents per ton, respectively. Looking now at our salt segment results, total sales in the second quarter of 2021 were 143 million, up from 122 million in the second quarter of 2020, an increase of approximately 17% and ahead of expectations. This improvement was largely due to additional demand related to customers taking minimum volumes as well as the timing of certain chemical sales. In addition, Our consumer and industrial sales volumes returned to more typical levels as demand normalized compared to last year, which was negatively impacted by the early months of the pandemic. As expected, highway de-icing prices at $59.42 per ton were slightly lower versus the prior year quarter. I think it is important to note that while we have seen lower highway de-icing prices over the last four quarters, Highway de-icing prices have actually shown a 4% average annual growth rate since 2017. On the other hand, consumer and industrial average selling prices increased over $8 or 5% to $158.78 per ton due to broad-based inflation-related price increases across all of our product groups. Operating earnings for the SALT segment totaled $19.2 million for the second quarter versus $22.5 million in the 2020 quarter, while EBITDA for the SALT segment totaled $36.8 million compared to $39.7 million in the prior year quarter. On a year-to-date basis, these segment results are at the high end of our second quarter guidance expectations. our operating and EBITDA margins contracted approximately 5 and 7 percentage points respectively compared to the 2020 second quarter, which is mostly due to a 28% increase in shipping and handling unit costs, impacting both our highway de-icing and consumer and industrial businesses. Again, when comparing on a year-to-date basis, SALT operating margins are flat year over year, EBITDA margins contracted only one percentage point, and shipping and handling unit costs are flat as well. That being said, we did expect these higher shipping and handling costs this quarter, which fall into three primary buckets. First, vessel and barge costs were higher year over year, largely due to higher fuel costs as well as modest rate increases. Another bucket is related to our depot costs. In this area, we added some long-term capacity and saw higher overall rents. The last piece was related to distribution costs in our CNI business. While mixed played a role in the increases, we saw significantly higher truck rates as well as some illogical shipping required to overcome supply chain disruptions during the quarter. Overall, we believe the entire salt industry has been similarly impacted by shipping and handling costs. Therefore, we expect to adjust our future bid prices and product group pricing as appropriate to offset these costs just like we have in the past. Second quarter salt per unit cash costs were relatively flat from second quarter 2020, as improved UK production costs were offset by higher production costs in the consumer and industrial business. Turning to our plant nutrition segment, Second quarter 2021 revenue was 5% higher than the prior year quarter at $53.8 million. This reflects steady sales volumes and an increase of 6% in our average selling price compared to the prior year quarter. It's worth noting that during the second quarter there has clearly been strong global demand for all fertilizer products. We've generally continued to see strong demand in North America, for our potassium plus SOP product. And though that was partially offset by the severe drought conditions in the West and Southwest, we are pleased to deliver 6% sequential improvement in our average sales price compared to the first quarter of 2021. Plant nutrition operating earnings were down 5.6 million and EBITDA was down 6.1 million to 9.8 million for the second quarter compared to the second quarter 2020. With higher prices and lower earnings, we experienced some short-term compression in our operating margins from 12% down to 1%, while our EBITDA margins also compressed by 13 percentage points to 18% versus second quarter 2020. As we have previously discussed, we continue to experience higher per unit operating costs during the second quarter as we work through the feedstock inconsistencies impacting our SOP production rates. While this continues to impact our financial results, these elevated short-term costs are factored into our guidance, and we have implemented proactive measures to address the situation. We also made a change to our interim period inventory evaluation methodology. As we worked through our normal quarterly closing process, we identified the need to correct our interpretation of the accounting guidance as it relates to our SALT segment interim period inventory evaluation reporting. It is important to note that this correction impacts interim periods only and does not impact our historical full year results. When compared to our new method, our historical interpretation overstated first quarter product costs and understated subsequent quarter product costs with no impact to the full year results. For 2021, this resulted in shifting approximately $12 million in costs from first quarter 2021 to subsequent periods. About 11 million of those costs were recorded in the second quarter this year. Our second quarter 2021 Form 10-Q described this change and restated our year-to-date 2021 financial information, as well as our prior year-to-date information. Because we are making corrections to these prior periods, we also restated our financials for other immaterial items, including shifting a few of these items into the appropriate periods. It's very important to note that the change in methodology as well as the other corrections are now reflected in all periods presented in our second quarter 2021 financial statements. Now I'll spend a few minutes on our reporting as well as our third quarter and nine-month 2021 outlook. Given the change in our fiscal year end to September 30th, the company will file a transition report on Form 10-K for the shortened 2021 fiscal year sometime in November. After this shortened period, full-year reporting will consist of four full quarters beginning October 1st and a year end of September 30th each year. At this time, we are providing nine-month 2021 guidance on a pro forma continuing operations basis, which excludes results from our discontinued operations. As we head into our final quarter of fiscal year 2021, we continue to be optimistic about the overall business. We anticipate the SALT segment will provide steady revenue and EBITDA generation for the remainder of our new fiscal year. We expect third quarter SALT segment revenue of $160 million to $190 million and EBITDA of $45 million to $55 million, with our consumer and industrial business continuing to deliver steady sales volumes. In our plant nutrition segment, we currently anticipate relatively flat year-over-year sales volumes during the third quarter. However, the continued drought in the western U.S. could put some pressure on our sales volumes in the back half of the calendar year, so we continue to closely monitor the situation out west. Given this demand backdrop, coupled with our expectation of rising shipping and handling expenses, as well as unit costs slightly higher than those realized in the second quarter, we are expecting plant nutrition revenue of $28 million to $36 million and EBITDA in the range of $5 million to $8 million for the third quarter of 2021. While we continue to optimize our portfolio through efforts to balance price, demand, and customer relationships, we are focused on operating this business sustainably for the long run and plan to carefully navigate these dynamics. On a consolidated basis, for the nine-month 2021 period, we expect our adjusted EBITDA to be between $175 million and $185 million. Now a few corporate items. Our interest expense estimate for the nine-month stub year is approximately $46 million, as we significantly lowered our debt levels in July. Our nine-month capital spending forecast is approximately $70 million, and our free cash flow is expected to be in the $70 to $75 million range. With the closing of the Plant Nutrition South America agribusiness sale, along with the completed North American micronutrients sale, we have been able to meaningfully reduce our absolute debt levels and continue to expect our leverage ratio to be in the 2.75 to three times net debt to EBITDA range upon completion of our Brazil chemical business divestiture. As we consider our short and long-term paths forward, we are pleased with the continued efficiency we've been able to capture from our internal optimization plan, and we're excited for the future as our strategic assessment of our newly defined lithium resource progresses. As Kevin noted in his comments, Our entire senior management team is unified in our focus on executing against the strategic imperatives we have laid out for the company. As we continue to optimize our existing assets and build our essential minerals portfolio, we will continue to aim to optimally allocate capital in a way that maximizes shareholder value. With that, I'll ask the operator to begin the Q&A session. Operator?

At this time, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Your first question comes from the line of David Begleiter with Deutsche Bank.

Thank you. Good morning. Kevin, just on the bid season pricing and the lack of any pricing, Is that due to you couldn't get pricing or you didn't try to get pricing in order to maximize some of your volume gains?

I'm not sure I caught all that question, David. Would you mind repeating that? I apologize.

Yeah. On the lack of any pricing and the highway de-icing, is that a function of you couldn't get the pricing because of given competitive dynamics in the marketplace or you chose not to push pricing in order to focus on volume and market share?

No, I mean, look, we always take it. I mean, first thing I'd say is, you know, every bid season is different. I mean, our focus is to take a holistic, comprehensive review and match, you know, our production plan with what we anticipate the demand side to be. So when you think about the winter other than February, I guess I'll probably characterize it as generally unremarkable. So inventories to deal with. But, you know, I think on balance, ending up the year kind of flattish and having the ability to grow our volumes by roughly 7% turned out pretty good for us. And as you look back from sort of 2017 to now, I mean, we're still in a sort of a 4% compound annual growth rate on the price side. So I consider the season, at least thus far, we're 80% through. I consider it a very successful season. having picked up some market share and grown our footprint on a modest basis.

Understood. And just on the lithium asset and the Great Salt Lake, can you discuss some of the risks and challenges you see with DLE technology for that resource?

Yeah. You know, look, as we announced, I guess it was about a month ago, I mean, our plan is to conduct a deep, thorough analysis strategic assessment of both, you know, the resource and the technologies as well as, you know, the type of structure we think would be appropriate to allow this asset to realize its maximum value. And I think, you know, obviously the first bridge we have to cross is the direct lithium extraction technology. And as we discussed during that previous period, you know, we're well on our way to making a choice there. We've evaluated a handful of technologies. We're down to a couple that we want to make sure that we make a good selection, but we're very long into that process and would expect to be able to make an announcement pretty soon. But everything that we've seen thus far in terms of lithium recovery, and rejection of non-lithium materials, contaminants, if you will, has been very, very positive. But we want to take our time and make a good selection, and we're getting pretty close and look forward to updating the market more.

Thank you.

Thanks, David. Your next question comes from the line of Mark Connolly with Stevens.

Thanks. Kevin, can you remind us whether the newer continuous miners are fully ramped and what your operating plan is for the second half? And could you give us a rundown of which CMs are doing what at this point?

Yeah, so George is here. I'll let him add some color. The units are running well, especially the two newer units. They're bigger, stronger. um you know as i mentioned during the first question we we've kind of calibrated our volumes based on what we see the demand um as being so um we're not producing at the level that we can because we felt like the market um we wanted to balance our supply with what the anticipated market market side was but in terms of how the units are running um

very very well i'll let i'll let george provide some additional color but the two bigger units the 46s are uh are running um overall very very well yeah just just a couple comments on that mark thanks uh again uh looking at those units as kevin said they're performing extremely well we're real pleased with those units As Kevin highlighted, our new mine plan, our new mains development, we've taken some of the, I'll call it older miners, and keep it in mind that we're continuing to develop in those areas with those miners. So, again, as Kevin highlighted, you know, we still have a lot of upside. Our workforce there, our management team still believes there's a lot of upside in both the new equipment and plus that we have our 36 Joy miners as well. Again, as we go through the next couple of years, as we start to finish off that new mine development, it'll give us a continual opportunity to improve our productivity and our costs at that location.

Thanks. One more question. On the SOP quality issues, clearly this sort of thing comes and goes. When will you have visibility into when you're past this?

Yeah. Yeah, look, maybe I'll start on that, and Jamie will kind of weigh in. And look, you know, as Kevin highlighted there, we've continued to make some real good progress, both operationally and from maintenance improvements over the last couple quarters at our site at Ogden. Again, you've heard from both of them, we have seen some cyclical nature in regards to this. And we see it, you know, it's kind of hard to put a finger on it, but I'll call it maybe every five to seven, eight years, we'll actually see this phenomenon. But we've taken a very methodical approach over the last, I'd say, quarter and a half, two quarters at Ogden, you know, to take a look at our feedstock through harvest methods, sampling, and our operating practice to not only allow us to deliver what we expect to deliver in 2021, but also as we encounter this in the future as we go through there. So I feel, you know, again, it's one that we don't, you know, you don't have year in and year out where you actually have exposure to kind of keep working on it. Again, with this phenomenon happening every, as I say, five to seven years, you've got to take everything you possibly can during this period of time to try to learn from it so we see it again.

Jamie? Yeah, and I would also, I'd just add that, obviously, we're coming up on the end of this evaporation season, so we'll have the fresh raw material feedstock, which, as George alluded to, we're doing a lot more testing and monitoring. And we've really learned a lot over the last six months in terms of how to manage through this. in terms of our mixing and prepping. And so with more data by pond, by section of pond, it enables us to mix and blend to optimize the plant given the suboptimal quality of last year's harvest.

It's really helpful. Thank you.

Hey Mark, I want to just go back for a sec on your first question. There's an image in our prepared materials on page 14. It's an illustrative view of the Goderich mine and as George pointed out, we pulled off some of the older units to develop these new roadways. So we're, you know, we continue to be implementing a new mine plan, putting a new mine basically in place while at the same time continuing to produce and even this year. So I think it's important to note that that's occurring in a way that you really can't see from the outside looking in. So we're incurring a fair amount of cost as we develop this new mine plan and put these new bypass roadways in. But once we get those in, as we've talked about before, I think we'll see a step function change both in terms of productivity and cost, et cetera. So we still have a couple more years to go on that, but it's progressing nicely. And I thought that would be some nice added context.

Very helpful. Thank you.

Your next question comes from the line of Seth Goldstein with Morningstar.

Hi, good morning, everyone. Thanks for taking my question. With prices flat, how do you think about the profit per ton next year, and how do you view unit production costs? Have you hit the first step change, and we should stay flat until the new mine plan is complete? Do you want me to take that one?

Yeah, go ahead, then I'll answer. Yeah, so we're not going to talk specifically about profitability in the upcoming year. So I can tell you we will see our salt costs fall in the third quarter relative to both sequentially and year over year. And there's still, as George and Kevin were alluding to, the step change has not yet occurred yet. That is still down the road as we complete the new mine plan and finish our bypass roads and ultimately shut down old mine works that are expensive to maintain and a long way to travel through. So you'll have to wait for our full year guidance that we roll out in November for the full year beginning October 1st through September 30th, 2022.

Okay, I appreciate that. And then just a quick follow-up on lithium. Once you select the DLE partner, what are the next couple development steps as you move forward in the process?

Well, I think once we make the DLE selection and, you know, we're doing the on-site pilot testing now, then the strategy will be to, you know, how do we set those modules up in a way from a from a logistic standpoint, location standpoint, pumping standpoint, et cetera, to start the production of chloride. So that would be the key next step. So I think, and I don't want to put a time limit on the DLE technology provider selection, but I think in the relatively near term, but, you know, also during the strategic assessment, you know, we've indicated that we're open to discussions and it's been, you know, far, and we think that that will inform how we think about this project going forward.

I appreciate the details. Thank you.

Thanks, Sam.

Your next question comes from the line of Joel Jackson with BMO Capital Markets.

Good morning, gentlemen. Hi, Joel. Hi. Jamie, Kevin, I think you talked about being able to get maybe a dollar or two of lower salt costs. I think that was kind of, you know, looking, well, you know, yeah, looking in the future year. Now, if you think of September fiscal year and you try to comp it to the right comp, so September 20 fiscal year, what can you do on cost here in SALT, considering, you know, the improvements you're trying to do at Goderich, but obviously the multiple buckets of inflation and costs and shipping that you laid out earlier in the call? Thanks.

Yeah, so we've still got good opportunities there, Joel. I think one thing to remember about our business is we're extracting minerals. Many of our labor costs are set. We've got multiple collective bargaining agreements. Within our C&I business, we've obviously got some direct inputs, bags, and other things that drive that business. But I would say overall, we've got We're going to see lower costs. If you just look at the nine-month over nine-month, salt costs are going to be down significantly, you know, order of magnitude 10%. And then as we get into 2022, we're not going to talk much about that. We continue to work on our long-term mine plan. You know, that step change is forthcoming. We haven't said exactly when that will be as we progress through that. And then you're going to see another, that's when you're going to see that next step down when we complete that mine plan. So I think that's all we really have to say. We're not giving any outlook or any information around 2022 just yet, but we do expect to continue to see improvement for the reasons of our limited exposure in many instances to inflation. Obviously, we'll continue to see shipping and handling uh inflation on that side but but as i said in my prepared remarks we'll also look to recapture those costs as we go into our next bid season next year and then we do it dynamically constantly within our cni business okay so my follow-up on that is then so your salt netbacks for fiscal 22 should be lower what you just said and then just following up on that

I think it's important because you've talked about your strategy, you know, that you've come in and what your big season strategy, what's your mind production plan and strategy. You're very clear on what you want to do and really trying to optimize daughterage. You know, that has led to a lot of production and a lot of competitive response. Here we are with flat pricing and inflationary environment. It would really be helpful if you can explain the entire picture. What does running more volumes mean? at flat pricing and inflationary environment mean? Does that mean lower netbacks for you next fiscal year? Does that make you want to reassess your strategy when you're doing Goderich down the road, when you look at what the market size is and what the competitors did?

Joel, I would say I would answer that not specifically, but just that we've recaptured some share that we have historically had. And our commitments are up to 7%. Pricing's flat. I mentioned in my prepared remarks prices on a CAGR basis up 4% since 2017. So prices went up high when supply was not available. Supply is now available. They've come back down. We feel like there's an equilibrium now. I don't think there's any difference in strategy or how we run the business. I think we're going to, now that we've set our market share where it is now, we're going to you know, be disciplined and operate that way going forward.

Yeah, it allows us to focus on execution, Joel, because, again, like I mentioned before, we've calibrated our volumes to match what we anticipate to be the market demand. We could do more, but we made the election not to, you know, so that we could, you know, regain some of the market share that Jamie said was, you know, ours originally anyway. and grew our footprint just a tad. But with that, then on the commitment side, it allows us to focus on execution, both at Goderich and our other facilities, and run them as a portfolio, and then attempt to optimize the resulting margins as a consequence of that holistic approach. May I ask a question? Kevin, if I could make.

Oh, I'm sorry.

Please. Go ahead, Troy.

Yeah, I was going to make one comment just on that Kevin said lots of times from an operational perspective. as Jamie and Kevin referenced, there's always about tons in production, but I can assure you there's a real cost and financial acumen across our site leaders that is going to continue to, you know, as we start to look at our cost as we go into 2022 and 2023 that I think is extremely important and recognized across our business. Thanks.

To answer your question, you know, obviously, SOP is not potash and it doesn't see the same ranges of highs and lows. And we're seeing that, I guess, here in pricing. You're getting very good price for SOP. But it is interesting that in one of the better years for ag in a decade, maybe not so good for California, but you're achieving some of the lowest earnings in June and December quarters for SOP in like 14 years, any quarterly earnings. And you're probably going to achieve the lowest SOP premiums to Midwest potash prices in, in, in forever. Can you talk about that? Is that where the Midwest products prices are just out to lunch? They're not liquid. They're not real. There's some other things operation you've talked about, but how do you think about this business? Is this become now the child you have to really focus on the business? You've gotten some stuff at Goderich. Now it's really about trying to make Ogden, you know, try to be the asset compass has talked about for well over a decade.

Yeah, no, that's it. That's a, that's a good one. Um, Joel, I think, let me make a couple of comments. I think Brad has a couple of comments. You hit on a couple of good points, but it's not good timing, obviously, for in terms of when you look at our profitability in this quarter, we've got these feedstock inconsistencies, and that's absolutely unfortunate. I think on the spread side, as you referred to, SOP versus MOP, not a lot of MOP has traded at some of those prices you've seen. There's not a lot of MOP even available.

so that remains to be seen um brad do you want to add some color on the yeah general market yeah thanks jamie hey joel um your question on midwest potash are those prices real um what i would say and i think you're probably referring to the 570 dollar uh corn belt price for kcl um in our discussions with producers and with our distribution customers they they don't feel like transactions are occurring rapidly at that dollar figure farmers farmers are kind of pushing back the crop economics don't make a lot of sense and in some cases you know crops who have who have been you know quote unquote chloride uh tolerant like potatoes have have migrated to kcl those same crops now there's a renewed interest in sop simply because of the price delta between KCL and sulfate of potash. I'd make one more comment, Joel. You know, we took our third price lift on August 1st in the market. Our prices vary by region, and given current market dynamics that you're referring to, we do anticipate further ton appreciation of our Potassium Plus products. We're in active discussions right now with our customers, and I would expect us to announce specifics to them in the coming days.

Your next question comes from the line of Chris Shaw. Mr. Shaw, please state your company name and proceed with your question.

Yeah, that's Crespi and Hart. Hey, everyone. How are you doing? Just some quick ones. You know, on the bid season, the pricing, and I was curious, you know, the higher shipping and freight costs, did they start coming about too late for you to start planning that into your bid season? I know a bid season may start in March or maybe in February for some, but even in some of the later bids, you weren't able to budget that into some of your bids?

We monitor it very closely. As it relates to the highway business, a lot of what we're doing right now is the vessel and barge We were expecting higher rates. We built that into our bidding process. And so now we're kind of booking these bids. And, you know, last mile freight still remains to be seen. We'll deliver these tons through the December quarter and the March quarter, as we always do. And we've got an estimate around those things. So, you know, and then on the CNI side, truck just got real expensive. And, you know, more than we thought. So while, you know, unit costs for shipping and handling and salt is up, you know, kind of, you know, $6 or so a ton year over year, we were expecting $4, $4.50. So most of it we were planning on, we really just got hit on truck and some fuel was a bit higher than we expected.

Got it.

That's helpful.

And then... I guess the guidance for SOP volumes for third quarter was similar to last year or somewhere in that sort of 50,000 to 60,000 tons. You know, you're saying that's sort of not normal, but in the past I always thought that would be a really sort of weak quarter, and I know it's similar to last year. Is there increased seasonality that I'm not aware of or don't remember, or is that some evidence of the drought impacting volumes already?

Yeah, you want to take that, Brad?

Yeah, thanks, Jamie. I don't think there is any kind of a seasonality change, Chris. I think right now our distribution customers just want to get product in place so that they can position it adequately for applications. And I think there's still a significant amount of demand by nut growers, by citrus, you know, berries, these chloride-sensitive crops for sulfate or potash. So I don't see any changes in seasonality. I think I've been surprised at the Southwest Fertilizer Conference. Our team heard, you know, fairly optimistic reports from our distribution customers and some of our larger end-user producers. So it's a very resilient group of people. And so I would expect to see things relatively consistent, Chris. Okay, great.

That's helpful.

Thanks a lot, guys.

Thank you.

As a reminder, to ask a question, you will need to press star 1 on your telephone keypad. Your next question comes from the line of David Silver with CL King.

Yeah, hi. Good morning. I think I'd like to start with a question on your salt volumes. So in the second quarter, I mean, from a historical perspective, both your de-icing volumes and your C&I volumes were both kind of, you know, at the very upper end or even above the upper end of maybe the last 10 years. And the combination, I think, is the highest in more than a decade. So I'm just wondering, you know, why you found incremental demand for salt in the seasonally slow second quarter. And in particular, I'm kind of scratching my head, and I'm wondering if this is an Avery Island effect. In other words, are you capturing some incremental share that maybe used to go to a competitor? Thank you.

I would say generally C&I, hitting C&I first, the business has done a really good job. Those volumes are solid. Last year was obviously depressed from the pandemic, but we did see some modestly higher volumes when you look back over the last five years or so, for sure. On the highway de-icing side, We were able to book some nice business in the chemical franchise there. That could be a little bit of timing. Sometimes those ebb and flow, whether you get some of those contracts in the second quarter or the third quarter in terms of deliveries. And then you had a combination of a little bit of hangover weather. April, you remember how weak March was? April picked up. We saw a little bit of sales from that. And then we really saw, as Kevin alluded to, the overall market, the overall season outside of the really strong February, there were a number of our customers that just didn't take their minimums during the season. So those were really flowing through the quarter as well. So, you know, it's a combination of things. And, you know, that's kind of the summary.

Okay, thanks. Yeah, I was just kind of scratching my head, especially last year. I think there was a benefit from some contract minimum shipments in the second quarter. Okay.

Remember, we did increase our commitments last year as well. So, you know, that kind of builds from year to year.

And I think, too, David, with freight, it's kind of constraining imports. And while I think, you know, some inventories acted as a little bit of a buffer as it relates to Avery Island, I mean, there could be some of that effect flowing through. It's kind of hard to tell. But we do think just kind of given where seaborne freight rates are, it's going to be more challenging for the more traditional importers.

Weaker dollar, higher freights, right? That gives you a little extra advantage. Okay. I'm going to switch over to the lithium thing. So I know it's very early days and there are a number of decisions and options to consider probably in a sequential manner. But I guess one option would be to partner with another company. And I guess I'm just wondering if you could maybe discuss what you would consider an ideal partner to bring to the table. So in other words, you're going to have a separate technology provider. I'm guessing the partner has to bring some capital to the table. And anything beyond that that you would consider especially attractive in considering choosing the partner or joint venture route as opposed to a go-it-alone strategy? Thank you.

Yeah, that's a great question. And I would just reemphasize what I said the last time is we haven't decided that anything is definitely on the table or off the table. We're really trying to think this through. And as we think about the bookends of the options, it could be go it alone. We develop the expertise internally to go to market strategy. We fully capitalize it, which we think we could do. Or the other extreme would be to sever that estate out there and just sell that asset as an estate. And it would be co-producers on site there at Ogden and then everything in between. And then as it relates to the partner, I think unlike a lot of the folks that are trying to get into this space, capital is not a big concern for us. I mean, look, capital is always a concern, but it's not the kind of concern for us that it would be for, you know, some lithium type startup. So I think what we'd be looking for, yeah, I mean, capital is certainly among them, but I think a higher priority would be expertise in the space, whether that's on the, you know, the technical side or the commercial side, that's probably how we, the lens through which we would evaluate a partnership is we have the, you know, we have the resource and all the rights necessary to develop it. And I think from an operating standpoint, I don't want to underplay the difficulty, but it is a co-product. We're good at extracting products from the Great Salt Lakes. But there's aspects of this business that are new to us, and we want to be intellectually honest about that. So I think a partner that has expertise in the space in areas that we don't, would be something that we would view very favorably.

Okay, and I'm just going to squeeze in one last one, but also on lithium. I was wondering if you could maybe give us your early read on the labor outlook there. So, in other words, you're going to need a surge of construction workers at a certain point and then a smaller but, you know, long-lasting workforce to operate the facility once construction is done. And I apologize, not an expert on the labor situation out there, but any idea, just roughhouse what a construction crew size might be? And then, you know, how do you assess that availability, you know, the regional availability for the type of labor that you need? Thank you.

Yeah, I would want to speculate on headcount at this point. What I would say is, you know, probably consistent with the rest of extractive businesses, labor's tight. You know, it's creating some inflation on the price of labor to create an inducement for people to go, you know, take a new job. So we're fully aware of that. But everything we've seen thus far, you know, We're convinced that we can fill the slots that we want to fill. And then as it relates to construction of ultimately what the project looks like, we would need to decide that first. But I think I would just say right now we'll cross that bridge when we get to it. And I wouldn't want to speculate too much on how fast we can get it done.

Your next question comes from the line of Jeff Sikoskis. Mr. Sikoskis, please state your company name and proceed with your question.

JP Morgan. Thanks very much. Given that the Avery Island plant was, I don't know, 1 to 2 million tons that got knocked out, are you surprised that salt prices are likely to be flat in the bid season this year? Wouldn't you have expected them to be higher? And can you talk about what the dynamics were, why the closing of that plant didn't make any difference?

Yeah, look, I mean, I guess what I'd say, Jeff, it's a good question. And I think, as I mentioned earlier, there were some inventories were a little elevated, so I think that probably acted as a bit of a buffer. And I think in this business, sometimes it moves a little slower than businesses that we're used to on the full commodity side that um it might take another bid season for the full effects of avery island to kind of flow through um something that we're we're watching carefully and you know look i'm sure that the folks that closed avery island did everything that they could to replenish their own sources of supply so as to maintain their economics to the extent possible. But I would say that it'll take another sort of bid season for that full effect to flow through.

Any color you'd add to that, Brad? I think that's good, Kevin. Just to reiterate a comment you made earlier, which is that there's 20% of the season in front of us. And so there are a number of tons that would have historically been served from that Avery Island location that we have yet to bid.

Okay. On lithium, you've spoken about what your resources are. In general, how much lithium carbonate equivalent tons can you produce annually? And in the production of those lithium tons, will that affect your SOP output or your output of any other mineral? Or do they remain unchanged?

Yeah, so we spoke when we announced the resource production target of 20 to 25,000 tons a year of LCE. And, you know, based on early pilot testing, we don't believe that pulling the lithium ions out of the existing stream there impacts the SOP stream, the mag chloride stream. We just view it as a co-product. We're just taking the lithium ions out of existing streams and don't think that that process will compromise the production rates or costs of any of our other products.

Great. And then lastly, in the change in your fiscal year, can you state a little bit more clearly what you know at September 30th that you don't know at June 30th because you You have an idea of what your bid season is going to be like or 80% of the volume. You have an idea of what your price is like. And September 30th is still before the snowfall. So what incrementally do you know? What do you really get from changing your fiscal year?

Jeff, it's actually not relative to 630, but instead to January 1st. So when we announce historically our full year guidance for the year, like we did this year in February, we are estimating how the winter was going to unfold through March, how the entire bid season would go through September, and then winter weather activity in the fourth quarter. Now, we will have the full bid season under our belt as of 9-30, and so we will have price for the season for our portfolio. Now the only variable becomes winter weather activity. So we'll announce our full year guidance in November with the benefit of the full bid season knowledge. So we can now more accurately predict our full year expected outcome. Always impacted by weather. We cannot do anything differently around weather.

There are no further questions. I will now turn the call over to Kevin Crutchfield for any closing remarks.

We appreciate you tuning in today and appreciate your interest in Compass Minerals and look forward to keeping you updated as we move forward. Thank you again for attending. Have a good day.

This concludes today's conference call. Thank you for participating. You may now disconnect.