Compass Minerals Intl Inc

and welcome to the Compass Minerals third quarter and fiscal 2021 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you'd like to withdraw your question, again, press the star one. We ask that you please limit yourself to one question and one follow-up. Thank you. I'd now like to turn the conference over to Douglas Criss, Senior Director of Investor Relations.

Mr. Criss, please go ahead. Thank you, Jack, and good morning, and welcome to the Conference Minerals Third Quarter and Fiscal 2021 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, Jamie Standen. Joining in for the Q&A discussion will be 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, November 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 last night and presented during this call reflect only the continuing operations of the business unless otherwise noted. The company's fiscal 2021 results and fiscal 2022 outlook in this earnings release reflect the change in fiscal year end from December 31st to September 30th. The fiscal 2021 results are reported for the nine month period from January 1st, 2021 to September 30th, 2021. And the company has presented comparable results for the January 1st, 2020 to the September 30th, 2020 period. I will now turn the call over to Kevin. Thanks, Doug.

Good morning, everyone, and thanks for taking time to join our call today. I want to start by extending my appreciation to our workforce at Compass Minerals for another strong quarter in their safety performance. Our people continue to execute safely and responsibly with a relentless focus on continuous improvement. I sincerely appreciate everyone's commitment and drive toward operational excellence in every facet of their job, including safety. I'll now provide a brief review of our third quarter in fiscal 2021 performance, then spend a few minutes discussing the unique and lasting value proposition I believe we're building here at Compass Minerals. As a reminder to those of you on the call, we've recently instituted a change in our fiscal year end from December to September, which shortened our 2021 fiscal year to a nine-month period. While we understand this change created a bit of noise around the financials the past two quarters, which Jamie will address in more detail, We believe going forward that this new approach will enable us to improve our forecasting accuracy by including the complete highway de-icing bid season results within our full year guidance at the beginning of each fiscal year. As reported in our earnings release yesterday, we've achieved meaningful consolidated revenue growth in fiscal 21, up 20% versus the comparable period a year ago. This improvement was delivered through strong sales volumes across both our core business segments despite a number of headwinds we faced throughout the shortened fiscal year, from a strained supply chain, inflationary pressures, and the impact of Hurricane Ida. For fiscal 21, increased sales volumes in our salt segment also drove operating earnings 5% higher than the prior year period, and adjusted EBITDA was nearly 4% above the prior year period. These incremental gains were offset, however, by lower SALT pricing that compressed margins compared to the prior year period. Capping off our consolidated results, we ended the fiscal year in a strong liquidity position of nearly $220 million, which includes just under $3 million in cash from discontinued operations. Drilling down into our SALT segment results, SALT revenue was up in both the third quarter and fiscal year compared to the prior year periods. Conversely, while operating earnings in EBITDA also increased in fiscal 21 compared to the prior year period, they were down in the third quarter as we proactively tapered production to manage inventory levels after a weaker than average winter. In addition, during the latter part of the third quarter, Hurricane Ida disrupted the U.S. Gulf Coast. As always, our workforce down in Cote Blanche did a stellar job of preparing the mine for the storm, and thankfully the mine remained out of out of harm's way. However, the barge provider experienced significant disruption and the shipping channels along the inland waterways remained constrained for a number of weeks. This ultimately pushed some highway salt sales volumes into the next quarter and also spurred lost sales volumes for a handful of chemical customers. The resulting impact to the bottom line we experienced was approximately $2.6 million, which had a relatively equal negative effect on both revenues and costs during the third quarter. Touching briefly upon the completion of the bid season for our North American highway business, we were able to take advantage of opportunities to strategically regain footing in historically served markets. We do believe these gains will balance out a bit over time, but we're pleased with our ability to serve customers and compete across a broad geographic footprint due to the increased output in recent quarters from an optimized Goderich mining operation. Overall, committed salt volumes for the 21-22 North America Highway de-icing bid season increased approximately 17% compared to prior year bid season results, while pricing has remained relatively flat year over year. As a reminder, while this past February provided a number of strong snow events across the U.S., overall for the full winter season, snow events were 8% below the 10-year average, leading to more modest pricing during the early part of the bid season. Moving to our plant nutrition segment, we experienced significant revenue growth in the third quarter, up 60% compared to the prior year period. Despite the strong demand pool for our products, profitability in this segment declined year over year due primarily to the higher costs we incurred out in August. As a result, we reported lower operating earnings in EBITDA for fiscal 21 compared to the prior year. SOP production costs at our Ogden facility remained elevated in the third quarter due to the temporary feedstock inconsistencies we continue to manage through on the most recent harvest. While we aren't out of the woods yet, I'm optimistic we'll begin to see lower year-over-year unit costs during the second half of fiscal 22. Taking into consideration these production and market factors, as well as the continued headwinds we're experiencing, we're targeting a fiscal 2022 adjusted EBITDA range of $220 million to $250 million. Jamie will provide more detail shortly with regard to our quarterly and fiscal 21 results and our 22 outlook. Prior to his doing so, I'd like to now spend a few minutes addressing the strategic building blocks we put into place this past fiscal year and how we view those actions as enablers for the future success of our company. As I outlined on our second quarter call several months ago, We've made significant strides throughout the year that have enabled the company to deliver on our strategic commitments. Financially, the sale of our South American plant nutrition business and North American micronutrient assets earlier in the year allowed for a meaningful reduction in the amount of outstanding debt, enhancing the financial flexibility of the company. Operationally, the new long-term Goddard Mine Plan continues to come into form with progress made on the new main roadways which are expected to ultimately increase efficiency and decrease mine maintenance needs in the older operating sections of the mine. We're still a few years out from completion of the new mine plan, but believe the change in salt segment costs as a result of this new mine plan will be measured in dollars per ton rather than nickels per ton. And culturally, we continue to focus during the year on building execution muscle, filling skill gaps where needed, adding process rigor through our internal optimization program, and prioritizing employee safety, wellness, and engagement. The enduring economic moat that fundamentally exists by way of our unique and advantaged assets is further buttressed by a skilled and engaged workforce. Along with market leadership, efficient scale, balance sheet strength, and cost advantage, I believe we've laid a foundation upon which the company can not only thrive but grow. While headwinds might be introduced from time to time, such as the current inflationary environment or isolated short-term operational issues, we believe our privileged assets and long-term strategy allows for a compelling return on capital. To begin seizing upon that opportunity for growth, we've progressed forward on two recently announced organic opportunities within high-growth or underserved markets. namely the development of a sustainable lithium brine resource to support the battery industry and securing a 45 minority ownership state in a next generation fire retardant business both of these exciting ventures leverage our existing production stream and significant infrastructure already in place at our solar evaporation operations on the great salt lake both also provide a counter seasonal balance to our core de-icing business It's only been four short months since we first announced our plans to assess development options for our approximately 2.4 metric ton, 2.4 million metric ton lithium brine resource. And I'm extremely pleased with the project milestones we've already accomplished during that brief timeframe. As we detailed in a more recent announcement, successful conversion testing of our lithium brine resource has been completed by Veolia, a respected third-party technology provider. Utilizing a proven commercially viable conversion process, the resulting sample of lithium hydroxide monohydrate met established battery grade specification thresholds, providing increased confidence that we'll be ready for market entry with a battery grade lithium hydroxide product in 2025. To ensure we're leveraging the appropriate level of expertise as we further navigate the development process for this high demand essential mineral, we've also recently announced new key leadership appointments with extensive experience in the lithium and advanced battery industries. These include our new head of lithium, Chris Yandel, and incoming chief financial officer, Lauren Crenshaw, both of whom recently served in leadership roles at an established player in the global lithium industry, and our newest board member, Gareth Joyce, who brings deep expertise in both sustainability and electric vehicle battery technologies. I'm pleased to have Chris and Lauren joining our senior management team and look forward to Gareth's continued insights and guidance on our board of directors. Turning to the recently announced investment in Fortress North America, we're equally excited about the potential of this emerging business. This next generation fire retardant company has developed a patent portfolio of highly specialized aerial and ground retardant formulations with unique properties for fighting wildfires and evading fire risk. Their products, which leverage confidence minerals, magnesium chloride production on the Great Salt Lake, are designed to be more environmentally friendly than the traditional products on the market today. In recent burn tests by the U.S. Forest Service, they were also shown to be 20 to 30 percent more effective in retarding fires. Taking into consideration the sole source nature and high barriers for entry of the current market, we view Fortress as a disruptor with meaningful potential upsides. Our involvement brings to the table not just the capital associated with our minority stake investment, but also our capabilities and expertise in supply chain, logistics, and providing essential products through a government procurement process, something we've been doing successfully for decades. As such, we're confident we can help them scale more quickly and effectively. In just a few minutes, I'll let Jamie provide some additional details on the investment and the long-term growth opportunities. As we continue to evolve our essential minerals portfolio through organic growth opportunities like these, it became clear that we needed to reassess our company's historical capital allocation strategy, as we alluded to in our lithium announcement back in July. As also announced yesterday, our board of directors has approved a reduction in the dividend for the third quarter, enabling us to leverage our operating cash flow for what we believe is a higher and better use of capital. supporting strategic growth and ultimately creating long term and lasting shareholder value. Importantly, yesterday's announced dividend level is also better aligned with the dividend yields of peers and the general market. Going forward, our board will continue to evaluate the company's capital allocation needs on an ongoing basis in an attempt to strike a balance between supporting the investment needs of the business with returning cash to shareholders. I believe that this past fiscal year was truly an inflection point for our business. We've taken strategic measures to recalibrate our business model in an effort to better position our company towards sustainable earnings and margin growth. Our path forward through this business transformation is also clear. We'll work to continue strengthening our core assets and production capabilities to become more efficient and sustainable. We remain committed to protecting a healthy balance sheet and lower leverage while concurrently increasing focus on the high growth opportunities I've outlined here this morning. Our senior management team and board are aligned with this strategy. Our people are ready to execute on it, and I'm encouraged by our recent momentum that we can be successful in creating value for the benefit of all Compass Minerals stakeholders. So with that, I'll now turn it over to Jamie, who will discuss in more detail our financial performance, strategic investments, and our outlook for fiscal year 2022. Jamie?

Thanks, Kevin, and good morning, everyone. I'll start with a few comments regarding our consolidated results before moving on to our segment performance. Then I'll provide a bit more color on the Fortress investment and capital allocation framework before discussing our full year fiscal 2022 outlook. As we reported in our earnings release and as Kevin highlighted earlier, all the results we're discussing today are on a continuing operations basis and reflect our fiscal year change the current or comparable period unless otherwise noted on a consolidated basis for third quarter 2021 our sales revenue increased approximately 20 year over year due to higher sales volumes and pricing in both segments but operating income and adjusted ebitda declined as those top line increases were offset by elevated unit costs as well as impacts from hurricane ida for fiscal 2021 The company achieved strong sales volume growth in our salt segment and in our plant nutrition segment versus the comparable nine-month period in 2020, along with increased pricing in both segments compared to the prior period results. Due to this top-line revenue uplift, our consolidated fiscal 2021 operating income and adjusted EBITDA were both higher compared to the prior year period by approximately $4 million and $6 million respectively. However, 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 at our Ogden facility that we highlighted previously, as well as lower prices in the SALT segment. We are pleased to report that for the nine months ended September 2021, we generated about $163 million in cash flow from operations, and approximately $91 million of free cash flow. This includes free cash flow from our discontinued operations. As we discussed in prior guidance, the change in our fiscal year temporarily increased our expected effective tax rate to approximately 41% and therefore increased our fiscal 2021 tax expense to $14.2 million compared to $10.3 million in the prior year period. However, This is not expected to impact our effective tax rate or cash taxes over the typical 12-month period. Now looking at our SALT segment results. Total sales in the third quarter of 2021 were $159.5 million, up from $141.2 million in the third quarter 2020, an increase of approximately 13%. This improvement was due to 10% higher sales volumes and 3% higher average selling prices. Our consumer and industrial sales volumes increased to more typical levels as demand seems to have normalized when compared to third quarter 2020, which was negatively impacted by the pandemic. These volume gains during the quarter were slightly offset by the effects of Hurricane Ida on logistics at our Cote Blanche mine in Louisiana. While our mine was not directly impacted, our barge provider was affected not only sustaining disruption to its fleet, but also experiencing delays due to inland waterway constraints. From a sales perspective, this means we lost some sales to chemical customers that can't be recovered, and we expect to push certain customer de-icing shipments to the first quarter of fiscal 2022. This translated into approximately 2.6 million of negative salt segment margin impact split evenly between revenue and cost in the third quarter. For fiscal 2021, salt segment sales increased 22% to 671.1 million from 550.9 million in the 2020 comparable period, primarily due to severe winter weather during the month of February, driving strong highway sales volumes, partially offset by 5% lower average salt prices. It's important to note that a 33% increase in highway deicing sales volumes compared to the prior year drove a significant mixed impact in our salt segment average salt prices. On a year-to-date basis, highway deicing prices were lower by approximately 4%, while CNI prices rose approximately 4% when compared to the prior year period. For the third quarter, highway deicing prices at $57.92 per ton were slightly higher year over year, while consumer and industrial selling prices increased approximately $3.50 or 2% to $166.45 per ton due to inflation-based price increases across most of our product groups in that business. Operating earnings for the SALT segment totaled $22.4 million for the third quarter versus $26.2 million in the 2020 quarter. while EBITDA for the SALT segment totaled $40.1 million compared to $43.6 million in the prior year quarter. Our operating and EBITDA margins contracted approximately five and six percentage points respectively compared to the third quarter 2020, mostly due to the proactive tapering of our Goderich mine production to manage inventories, as well as the impact from Hurricane Ida. Excluding the impact from Hurricane Ida, SALT segment operating margins were 16% and EBITDA margins were 27% for the third quarter. For fiscal 2021, the SALT segment generated $133.2 million in operating earnings and EBITDA of $186.5 million, increases of 14% and 13% respectively from the comparable 2020 period results. Fiscal 2021 operating margins were down 130 basis points, and EBITDA margins were down 230 basis points compared to prior period results, primarily driven by lower highway de-icing average selling prices and lower operating rates at some of our C&I plants due to regional labor shortages. Turning to our plant nutrition segment, third quarter 2021 revenue was 60% higher in the prior year quarter at $49.3 million. This reflects 46% higher sales volumes and an increase of 9% in our average selling price year over year, which was impacted by a weaker application season last year due to wildfires in certain of our western sales territories and delayed application in other key markets. Fiscal 2021 revenue was $156.8 million, again, driven by higher volumes and pricing versus the 2020 comparable period. We continue to see strong demand in North America for our potassium plus SOP product, and we are pleased to see continued improvement of approximately 3% in our average sales price compared to the second quarter of 2021. Plant nutrition operating earnings were down 1.3 million, and EBITDA was down 1.7 million to 8.7 million. compared to the third quarter 2020. For the quarter, we experienced significant operating margin compression going from approximately 4% last year to slightly negative this year, while our EBITDA margins also compressed by 16 percentage points to 18% versus third quarter 2020. For fiscal 2021, operating earnings were down 6.2 million to 5.8 million, while EBITDA was down 8.1 million to $32.6 million versus the 2020 comparable period. As expected, we continue to see elevated per unit operating costs during the third quarter as we work through the feedstock inconsistencies impacting our SOP production rates at our Ogden facility. While this impacted our financial results throughout the fiscal year, these elevated short-term costs are expected to start declining in the second half of fiscal 2022 as our proactive feedstock management and plant optimization efforts start to flow through the P&L. Now switching gears, I would like to spend a few minutes building upon Kevin's comments regarding the recent announcement of our strategic investment in Fortress North America. We are extremely excited about this partnership. Fortress is a next-generation fire retardant company and their product line has the opportunity to be a major disruptor in a market that has historically been served by just one producer. Their business meshes well with ours, and we believe it has the potential to offer us a high-growth, cost-advantaged business that is breaking into a market hungry for competition. The organic nature of the opportunity has roots in our asset optimization model we have developed. As a primary raw material input in Fortress's retardant formulations, is the magnesium chloride we already produce from the brine of the Great Salt Lake at our Ogden facility. The commercial aspect of the forest fire retardant business has many similarities with our highway de-icing business in terms of selling bulk products to government entities under multi-year agreements. Ultimately and importantly, both are used to keep people safe. The North American long-term fire retardant market represents between 60% to 70% of the global market, with 20% estimated U.S. usage of approximately 72 million gallons and a five-year average use of approximately 58 million gallons per year. Based on data from the U.S. Fire Service, Bureau of Land Management, and California Department of Forestry and Fire Protections, These three agencies represent the largest of the North American consumers. Notably, fire retardant business is counter seasonal to our de-icing business, which we anticipate should ultimately improve our profitability during the summer months, historically a lower earning period for us. Through leveraging our logistics and sourcing for competencies, our partnership is also expected to enable Fortress to scale more quickly. As a point of reference, the current market leader was recently purchased at a valuation of approximately 15 times EBITDA. To sum up, given the potential addressable market, we feel this represents a high growth opportunity that is able to unlock additional value for our existing magnesium chloride production stream. I would now like to briefly discuss our capital allocation framework. This framework has four key priorities. sustain and improve productivity and efficiency at core operations, invest in organic growth opportunities, maintain financial flexibility, and return capital to shareholders. I'd like to offer some additional perspective regarding how we're executing against these priorities. The core underlying base businesses of salt and plant nutrition are cash flow generative, and we believe that incremental investment opportunities are embedded in each of these businesses have the potential to increase our production and earnings growth these businesses have been and are expected to remain the foundation of compass minerals however when the divestitures the company announced earlier this year allowed us to reduce our outstanding debt by 30 percent and strengthen our balance sheet it provided us with more flexibility to build upon this foundation organic high growth opportunities such as our lithium resource and the fortress investment are expected to allow the company to again unlock additional value from our advantaged asset base while also providing the opportunity for higher growth and long-term shareholder returns. Over the last decade, we have provided a lofty dividend to shareholders that was well above market levels in terms of yield and payout. As we evaluate the investment opportunities in front of us, we believe we have the ability to generate risk-adjusted cash-on-cash returns in excess of 20% over the long term. Return levels such as this simply can't be ignored. Given this backdrop and following a detailed analysis, management has recommended and our board of directors has approved a strategic shift in our capital allocation philosophy to better align with our strategic priorities, which includes a reduction of the quarterly dividend by approximately 80% to 15 cents per share. This dividend represents an approximate 90 basis point yield, which is well aligned with market levels and our peers. To be very clear, this decision was not taken lightly, but one that we believe will create long-term value for shareholders. Now, looking forward, I would like to discuss our fiscal 2022 outlook and the role this capital allocation plays in our guidance and ultimate long-term success as a company. This outlook covers 12 months and only represents the continuing operations of our business. As we head into fiscal 2022, we continue to be optimistic the long-term performance of the overall business. We expect the SALT segment will deliver improved revenue and lower EBITDA generation during the first half of the fiscal year as strong sales volumes will be more than offset by higher shipping and handling costs and slightly lower average sales prices. We expect SALT segment revenue of $675 million to $725 million and EBITDA of $145 million to $170 million during the first half. It is important to note that shipping and handling costs increased materially throughout the highway bid season last summer. While we were able to build some of those expected increases into our bid prices in certain markets, most of those rising transportation costs were not captured. However, we believe all of our competitors were similarly impacted by increased costs, and our expectation is that we should be able to recover these costs during the 22-23 bid season that begins next spring. In our plant nutrition segment, we currently anticipate significantly lower year-over-year sales volumes during the first half of fiscal 2022. However, second half sales volumes should be consistent with prior year levels. The feedstock inconsistencies in fiscal 2021 has prevented us from being able to replenish inventory levels at the same rate in which market demand has unfolded, which is putting pressure on our first half sales volumes. However, we have incorporated a number of recent value-based price increases to customers, which should drive strong margin improvements compared to fiscal 2021. Given this backdrop of elevated first half unit costs, as well as our expectation of rising shipping and handling expense, we are expecting plant nutrition revenue of $85 million to $110 million, EBITDA in the range of $25 million to $35 million for the first half of fiscal 2022. We remain focused on running this business sustainably for the long run and will continue to balance price, demand, customer relationships to optimize the value of every ton. On a consolidated basis for fiscal 2022, we expect our adjusted EBITDA to be between $220 million and $250 million, which includes a $3.7 million executive transition expense add-back that will be recorded in our first quarter fiscal 22 results. Now a few corporate items. Our interest expense estimate for fiscal 22 is expected to be $55 million to $60 million, Additionally, our corporate and other segment will include the addition of operating expenses related to our lithium resource development in Ogden of approximately $10 million. These costs represent the onsite pilot plants, front-end engineering, as well as staffing the appropriate expertise for the project. All of this results in a guidance range for total corporate and other expense of approximately $65 to $70 million for fiscal 2022. Our capital spending forecast is approximately 125 million to 135 million for fiscal 2022. This level of capital spend incorporates not just our historic ongoing maintenance levels of approximately 80 million, but additional spend on long-term projects that are expected to add efficiency, ensure reliability, reliable production and safety, as well as provide a benefit to our long-term cost structure. We expect to spend approximately $15 million to upgrade our Cote Blanche barge dock, approximately $15 million on lithium extraction assets, as well as several other smaller cost reduction and efficiency enhancement investments across both businesses. For fiscal 2022, our free cash flow is expected to break even, and we now expect our fiscal 2022 end-of-year leverage ratio to be at or around 3.8 times net debt to even dock. As Kevin noted in his comments, our entire organization is unified and focused on executing against the strategic imperatives we've laid out for the company. As we continue to optimize our existing assets and build out our essential minerals portfolio to help solve nature's challenges for our customers and communities, we will continue to allocate capital in a way that is designed to maximize shareholder value. With that, I'll ask the operator to begin the Q&A session. Operator?

Certainly. Again, as a reminder, if you'd like to ask a question, please press star 1. To remove your question from the queue, please press star 1 again. Please limit yourself to one question and one follow-up. David Begleiter with Deutsche Bank, your line is open.

Thank you. Good morning. Kevin, Jamie, just on the first half guidance, can you help us with the cadence of the Q1 versus Q2 earnings for both salt and plant nutrition?

Sure. Yeah, so I'll start with plant nutrition quickly. You know, I think the volume mix for the first half for plant nutrition will be a little bit stronger in the second quarter, in that March quarter. You're also going to see stronger profitability in that second quarter. So I would weight those earnings to the March quarter as it relates to plant nutrition. And then on the on the salt side obviously winter weather is going to drive the distribution of profitability across our first quarter and our second quarter so you're going to see you're going to see that unfold. As weather. Demand and pull through occurs, so you know typically our first quarter is our strongest so that's where you would see. um, stronger EBITDA would be our first quarter, uh, 2020, uh, I'm sorry, second quarter, 2022.

No, very helpful, Jamie. And just also, uh, in plenty of fish, you mentioned in second half EBITDA should be a little better as some of these other costs headwinds, uh, go away. How, what do you think about second half EBITDA for that segment versus the first half?

Yeah. So I, we'd expect it to be a bit, a bit stronger. Um, you know, maybe 10 to 15% stronger EBITDA in the second half of the year.

Very helpful. Thank you very much. Thanks, David.

Jeff Tsoukakis with JP Morgan. Your line is open.

Thanks very much. Can you tell us something about Fortress' revenues or EBITDA or what you expect in the coming year? And what do they plan to spend the $50 million on that you've injected into the business?

Yeah, good morning, Jeff. I'll take that. I mean, we're not going to be overly transparent about what we think about Fortress. I mean, there's some materials in the document that talks about the addressable market. It's typically expressed in gallons. um you know over over the long term we think that um you know just based on the fact this is a sole source market for decades that it's right for a new entrant and when you look at fortresses the efficacy of their retarded material using our mag chloride as the base retarded coupled with its um you know enhanced environmental sensitivity We think it'll be a very inviting product to be on the marketplace. Obviously, the sole source current provider has 100% market share. We'd like to start to nip away at that over time. The last thing I would mention is the current sole source providers in the process of going public, and there are documents out there that you could examine just to give you a sense of the Not to imply that's a proxy for us, but just to give you a sense of how that market works. So I would guide you in that direction. And then in terms of what they're using the capital for, it's just to stand up the business. You know, you got to set up infrastructure at these forward operating air bases, et cetera. So it's just it's various and sundry equipment, trucks, mixing equipment, et cetera. So that's what the funding that we provided did was to accelerate the stand up of the business.

Okay, and for my follow-up, do you expect to partner with anyone in your lithium venture? Or if you are going to partner, what would be the extent of your partnership?

I don't know that I would say we expect. We're structure agnostic and focused on value. And if a partnership from, say, a technological standpoint makes sense, we will absolutely entertain that. in an effort to try to de-risk the long-term project. So what we're trying to focus on right now is making the appropriate selection around DLE. We've obviously brought some lithium talent in to help advise and make good decisions. So yeah, we haven't foreclosed on any decisions, and we're continuing to move ahead on that basis.

OK, great. Thank you so much.

Again, if you'd like to ask a question, please press star 1 on your telephone keypad. Joel Jackson with BMO Capital Markets. Your line is open.

Hi, good morning, gentlemen. Hi, Joel. Hi, Jamie, Kevin. With near break-even free cash flow this year, you have a lot of growth opportunities you want to pursue. You have a four-times levered balance sheet. How much capital do you think you're going to have to put into these projects in the next little while? And are you prepared to issue equity to get the targets you want?

Yeah, I think, you know, look, in terms of lithium, we're in the process of doing, you know, the next round of engineering and would expect to be able to speak more precisely sometime by, you know, early next summer, just in terms of what we're thinking in terms of total capex, irrespective of whether we have a partner or not, where we'd fall on the cost curve, expected production. etc and then in addition to that we have um you know the rights under the fortress agreement to own 100 of that business subject to certain performance criteria over the next couple of years and we want to see how that goes and then as jamie mentioned we have some internal efficiency types of projects that we think are worthy of some of some funding so you know the dividend reduction will go a long ways towards paying for some of that in total and making good down payments on other parts of it. And look, I think to the extent that we don't have sufficient cash flow to fund what we want to fund, we would examine whether it makes sense to do it in the debt markets or raise equity or maybe, as Jeff mentioned in his question from JP Morgan, take on a partner that can also bring some financial wherewithal.

don't have a specific answer for that i think it'll be conditions based in the future i i just add to that kevin if i may the you know we have we expect significantly improved profitability in both salt and plant nutrition as we go into 2023 and 2024 so you know that'll go a long way toward keeping leverage in check of course lining up all of these particular investments against that improved cash flow over the next couple of years are also going to make a difference. So the timing does matter. And our focus would be to stay below that four times leverage. And my view is that partner or without a partner on the lithium side, we should be able to do that with the improvement in the business going forward, stay at that level and raise debt as necessary.

And as the business improves too, Joel, I mean, I think, you know, Jamie and I are steadfast in our commitment that we think sort of that two and a half turn leverage ratio sort of mid-cycle continues to be the optimal target for us. And that's what we're trying to manage towards over the long term.

Okay. And looking at Goderich and your SALT strategy, you tapered some production in the third quarter. You know, looking at how much volume awards increases you got this year, I mean, it looks like you decided not to taper Goderich as much as you could have and run Goderich at strong rates, which has been, I believe, your goal since you came on. So the question I want to ask is, it looks like in order to keep Goderich running harder, you extended some of your region and where you sold self this bid season increased volume a lot. Is your goal here to keep Goderich running at the high operating rates to hit the operators' targets you want to hit and you'll let the market deal with that volume and see how it goes? Will you be adjusting this every year? Is Goderich operating rates the target or are other things the target?

A lot packed in there, Joel. Good question. In the ideal world, you'd like to run Goderich full out all the time, but we obviously made the choice this year to taper production in an attempt to better balance out the marketplace. I think long-term, what we'll do is Given that we've kind of regained what we view to be sort of our rightful total share across our served market, it may not occur on a state-by-state basis the way we want to, and we'll balance that out in the future. But now that we have sort of our traditional market share, the name of the game will be to execute certainly on the cost side, but also on the revenue side to recover those inflated logistics costs that caught us this year, but also continue to raise price going forward so that you know, we can remain steadfast in our pursuit of those EBITDA margins that have a three handle on them. So, you know, again, this is long-term game, but I have every confidence that the, you know, the production engine is sitting here ready to perform. But we'll calibrate it based on, you know, what the market needs and wants. We're not going to try to jam tons in places where they don't belong. So, It's trying to strike that balance. The near-term goal is to move price up in the coming bid season starting in April.

Thank you very much.

Chris Shaw with Monash Crespi. Your line is open. Good morning, everyone. How are you doing?

Good morning. Can I ask the Fortress opportunity for your magnesium chloride? It seems pretty big. Currently, I mean, does that require you to process it more? I mean, do you have extra magnesium chloride lying around, kind of like lithium was, or would you be diverting it from other customers? I mean, can you give me a little color there?

Yeah, so, you know, we've, you know, assessed what sort of mag chloride

needs we would have for to fund or to supply the fortress business at a hypothetical 50 percent market share. And it's sub 10 percent of what we actually produce there already. So and we have actually extra production capacity there now. So it doesn't constrain us in any way and it doesn't take volume away from our existing customer base. So that's it. That's easy for us to accomplish. I'm sorry, what was the first part of the question?

I was curious, does it require any additional processing by you, or do you just go directly to them as mag chlorides?

Yeah, so it's just an ingredient. It kind of represents 10% or so of the final product that Fortress would use. So it gets mixed and blended, and there's proprietary IP and and ingredients that are blended and shipped out to bases.

And when you look at this combination, again, we view this as an organic based opportunity because we make the mag chloride and their needs are easily supplied. We're pretty good at logistics, so we think we can be helpful to them in terms of moving this material around and obviously dealing with governmental agencies is something we've been doing for a long time. And you couple that with the expertise that they bring to the table, which is considerable. These are all ex-U.S. Forest Service firefighters, so they know this business cold and they have the patents on the IP for these new blends and in the process of Some of them are already approved to supply to the government. They have a handful more that are various stages of the process to get approved as well. So we think it's a very synergistic relationship that at its core is an organic type of growth opportunity. And it'll start putting runs on the board in terms of EBITDA well before lithium. So we like the way these things phase in over the next handful of years as well.

I can ask a plant nutrition question. What do you guys consider these days maybe normal or normalized volumes in that business? I know in the past I used to just think of it as 100,000 tons a quarter potential, but I don't think we've been there in a while.

What do you guys consider?

The market continues to fluctuate. It can be 450,000 to 500,000 tons and And our share is typically 70% to 80% of that. So that's been pretty consistent historically.

So nothing's really changed in the market. It's still just sort of volatile, I guess, year to year still, just because of droughts or what have you, right?

It can be. There can be drought conditions. It depends on end product prices for an almond grower, for example. Things vary. They can make, you know, discreet decisions to mine the soil a little bit. So it always, it's going to ebb and flow, but over long periods of time, you know, our share tends to be that 70 to 80% of that 500,000 ton market in North America.

Great. Thanks a lot. Thank you.

If there are no further questions, it's time. I would now like to turn the call back over to Kevin Crutchfield for closing comments.

Thanks again to everybody for participating today. And I wanted to close the call today by thanking Jamie for his strong financial stewardship over the past number of years. As I said in a recent announcement of upcoming senior management team changes, I would put Jamie's knowledge of our core business and markets up against anyone's. He's been a key contributor at our company for more than 15 years and a leader I'm proud to have on my team. I'm looking forward to seeing him leverage his intellect and talent as he transitions into the Chief Commercial Officer role starting next month when we welcome Lauren Crenshaw to Compass Minerals in the role of Chief Financial Officer. We continue to be very excited about our future here at Compass Minerals and look forward to continuing to engage with each of you along the way. Thanks for listening in today.

This concludes the Compass Minerals third quarter and fiscal 2021 earnings call. We thank you for your participation. You may now disconnect.