Compass Minerals Intl Inc

Good morning, ladies and gentlemen. My name is Julie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Compass Minerals. 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 Fiscal 2022 First Quarter Earnings Conference Call.

Today, we will discuss our recent results and our outlook for fiscal 2022. We will begin with prepared remarks from our president and CEO, Evan Crutchfield, and our CFO, Lauren Crenshaw. Joining in for the question and answer portion of the call will be George Shuler, our chief operations officer, Jamie Standen, our chief commercial officer, and Chris Yandel, our head of lifting.

Before we get started, I will remind everyone

that the remarks we make today represent our view of our financial and operational outlook as of today's date, February 9, 2022. 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 filing located online at investors.compassminerals.com. Our remarks today also include certain non-GAAP financial measures. You can find reconciliations of these items in our earnings release or in our presentation, both of which are also available online. The results in our earnings release issued last night and presented during this call reflect only the continuing operations of the business, other than amounts pertaining to the condensed consolidated statements of cash flows or unless otherwise noted. during this earnings call reflect the previously announced changes in fiscal year end from December 31st to September 30th. All year-over-year comparisons to fiscal 2022 first quarter results refer to the corresponding period ending December 31st, 2020.

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'm excited to welcome our recently appointed CFO, Loren Crenshaw, to his first Compass Minerals quarterly earnings call. Loren brings a new perspective to our business, and I'm appreciative of the contributions he's already making in his short time here. Throughout the first quarter, our team continued to demonstrate its resiliency and the ability to adapt to the many challenges of operating a weather-dependent business in a high inflation environment. The culture we've established has allowed us to focus our efforts on the common goal of creating value while continuing to maintain a safe and responsible operating environment. After providing a brief review of our fiscal 2022 first quarter performance, I'll spend a few minutes discussing our long-term vision for Compass Minerals and specifically why we believe our strategic shift toward the adjacent markets of lithium and next-generation fire retardants makes sense for our business. how we're advancing these opportunities, and what to expect as we work to unlock value for our shareholders. As reported in our earnings release yesterday, first quarter revenue growth was 7% year-over-year, primarily driven by volume gains in our salt business and higher pricing in our potassium plus SOP product, as well as throughout most of our consumer and industrial product lines. While our top-line results showed year-over-year improvements, profitability was suppressed primarily by previously cited headwinds that are likely to persist throughout this year, including inflationary pressures on distribution and input costs, particularly within our salt segment, and low inventory levels constraining our ability to grow plant nutrition volumes. The net result of these factors, combined with a weak start to winter in our served markets, caused consolidated adjusted EBITDA for the first quarter to decline by approximately 6% year-over-year to $58 million, a result that we believe is well below the normalized earnings potential of our business. In our salt segment, revenue grew approximately 20% year-over-year on higher volumes, partially offset by lower prices. This revenue increase, despite the relatively weak winter weather during the quarter, reflected a combination of growth in our bid season commitments and volumes in a comparable year period being below historical average. Due to higher costs and lower pricing in the segment, however, this top line growth did not translate to increased profitability, resulting in SALT segment EBITDA for the first quarter declining by approximately 10% year over year to $56 million. Our SALT business has not been immune to the rapidly growing inflationary pressures impacting the broader economy. We've experienced this phenomenon across our business in everything from higher fuel costs and transportation rates for trucking, vessels, and rail, to higher prices on input items such as pallets and bags. And while the contract structure within our consumer and industrial business has generally allowed us to pass along certain of these costs year-to-date, the nature of the highway de-icing business is such that we must recapture costs as part of the upcoming bid season, recognizing this timing challenge were determined to pass inflationary costs along in both the short and intermediate term in an effort to protect the profitability of our business. In addition to inflationary costs, we also experienced higher costs during the first quarter to position our products in certain of our southern U.S. markets due to a maintenance outage at our Cote Blanche mine that we initiated several months earlier than originally planned. Although conducting this outage during the winter quarter was inopportune from a logistics and financial perspective, as it occurred at a critical time for us in terms of filling our salt depots for the winter season. It was definitely the right thing to do from a safety and business continuity perspective, which took precedence over the short-term impact of financial performance. Certain costs related to this outage impacted the first quarter, while others will flow through as products are sold throughout the year. Now, turning to plant nutrition. This segment delivered a sharp year-over-year improvement in EBITDA for the quarter of 49% to $18 million and an increase in EBITDA margins year-over-year to roughly 34% of approximately 18 percentage points, driven largely by higher pricing as we continue to keep pace with a constructive macro backdrop in the fertilizer market. It's worth noting that these strong profit results were achieved despite volumes being down 42% year-over-year. As we shared when we issued guidance last quarter, throughout the fiscal year, we expect plant nutrition volume levels to track below the inherent potential for this business, reflecting the fact that we entered 2022 with a depressed inventory level, primarily due to yield challenges at our Ogden facility and sustained demand levels across our market. For over a year, our team has worked diligently to holistically reexamine our SOP end-to-end process. As a result, we've put in place a number of process improvements at our augen facility designed to help optimize our performance, increase our efficiency, reduce downtime, and ultimately drive higher yields and production volume. In addition, our R&D team has done significant work to try to better predict the consistency of our feedstock year to year, including building a lab scale model to conduct in-depth studies on the effects of naturally occurring factors such as temperature, humidity, and precipitation levels on our stockpiles and pond deposit concentration levels. As we continue to manage through a multi-year drought with low Great Salt Lake levels, we remain focused on restoring yields, production costs closer to historical performance. At this time, I'd like to switch gears and spend a few minutes highlighting the strategic growth opportunities that lie before us. What we've already accomplished and anticipated milestones in the year ahead. I'll also review why we believe the right path for our company to drive long-term shareholder values to expand upon our position as a premier essential minerals company and into select high-return adjacent markets. As we think about how to execute on our vision for the future of Compass Minerals, we've carefully considered how we can best leverage our core competencies of mineral extraction experience in optimizing mining and manufacturing assets and logistics and supply chain expertise while continuing to honor and build upon our strong safety culture and core purpose having already leveraged these core competencies into leading positions within our existing product categories we view our strategic decision to expand thoughtfully into two high return natural adjacencies lithium and next generation aerial fire retardants as both a potential value creator, and an opportunity to rebalance a portion of our revenue away from weather-dependent products. Since announcing the identification of our lithium resource seven months ago, our focus has been on advancing five key dimensions of the project. People, testing, capital and operating cost intensity, identifying a direct lithium extraction or DLE technology provider, and ensuring sustainable operations through a third-party conducted lifecycle assessment of our development options. Among the most notable recent accomplishments have been the areas of people and testing. In terms of people, we successfully bolstered our senior management and board of directors through the addition of key executives with deep industry experience, including our new CFO, Lauren Crenshaw, head of our lithium operations, Chris Yandel, and independent director, Gareth Joyce. Each has already contributed significantly to our go-forward strategy and decision-making process, and I look forward to working closely with them and the additional technical professionals we've added to help navigate our lithium development. From a testing perspective, we achieved a critical proof point this past October with the successful third-party conversion, Baviolia, of our brine-to-battery-grade lithium hydroxide, which can be used in electric vehicle and energy storage markets. We believe that this is the first known conversion to be proven from brine originating in the Great Salt Lake, and we're very encouraged by the results. As we look forward, an additional critical milestone that we expect to reach in 2022 is the completion of an economic assessment with FEL1 level of accuracy. of the capital and operating costs required to develop the resource. This project phase will allow us to narrow our options and is expected to be defined at an FEL 2 level shortly thereafter. As some investors may be already aware, the engineering cost estimating process is a multi-stage progression from FEL 0 through FEL 3 in detailed engineering. We're approaching the end of the first phase. As the FEL process progresses, The accuracy of the cost estimate continues to be improved until the project becomes fully defined, ready for construction, and eventually commissioning and operation. I share this synopsis to say that while our FEL-1 level cost estimates should provide a solid foundation and insight into the economics of the project, by their nature, they're subject to a relatively wide confidence interval which narrows upon advancing the project through the varying FEL stages and cost estimates. Another milestone expected this year relates to our formal selection of a DLE technology provider. As we've discussed on past calls, we've been rigorously evaluating a range of DLE technologies and are increasingly confident we'll be able to announce our selected technology provider by the summer. Our pilot projects in connection with this evaluation are structured to help prove out the technologies and provide input as we progress in our engineering and our design. Finally, we also expect the completion of the life cycle assessment of our lithium project by this summer. As previously announced, we've engaged with Enviro, a global industry leader in this field, to conduct the life cycle assessment and our ongoing discussions with numerous potential partners and based on various structures we're considering for the business. We believe the sustainable aspects of our current Great Salt Lake operation provide a differentiator to other projects in development. Ensuring we're minimizing the environmental impacts as we work towards supplying a domestic battery-grade lithium resource is of paramount importance. Being responsible stewards of our assets and engaging proactively with stakeholders, from friends of the Great Salt Lake to the Audubon Society to the state of Utah, core to our DNA, When thinking about the best path to maximize value for our shareholders related to our lithium development opportunity, at a high level, there are three options. Go to loan, advance with one or more partners, or monetize the asset via an outright sale. Our assessment of each of these options remains ongoing with a view toward deciding which path to take sometime later this year. Overall, I believe Compass Minerals is in an excellent position to deliver a battery-grade lithium product by 2025, and there's arguably no better backdrop against which to be engaged in discussions with interested parties and potential partners than now, given the global supply and demand outlook for providers of sustainable, domestically sourced lithium. I'm pleased with the project milestones we've already accomplished in a brief timeframe. we remain confident that there is a prudent path to advance this potentially high returning initiative as we look forward to being in a position to share additional information in the coming quarters. We're also excited about our investment in Fortress North America, which we announced a few months ago. Wildfire frequency and intensity have been steadily increasing for decades, and wildfire solutions have become a fast-growing specialty business with larger government budgets, being appropriated for the abatement and fighting of wildfires. Fortress at its core is a disruptive, next-generation fire retardant technology company. By leveraging the magnesium chloride currently produced at our Ogden facility, Fortress has developed and is in the early stages of manufacturing their proprietary portfolio of highly specialized aerial and ground retardant formulations with unique properties for fighting wildfires abating fire risk importantly the u.s forest service testing has shown that fortress retarded products result in more effective and more eco-friendly fire retardants one of the additional features of the fortress business is that it is primarily a spring summer and fall business which we expect to provide a natural complement to our winter season focus the icing salt business For many years, there has been only one supplier of aerial fire retardants, a supplier who utilizes a dimonium phosphate-based retardant formula. Together, through Compass Minerals' essential materials and extensive supply chain capabilities and Fortress' anticipated position and unique chemistry, we're confident in our ability to be successful in this growth industry, which we estimate represents a total addressable market of approximately $300 million. As evidence of FORTRESS progress today, I'd like to touch briefly on some of the accomplishments of the FORTRESS team and anticipated developed milestones over the 2022-2023 timeframe. Notably, FORTRESS has successfully obtained conditional qualification of certain of its products on the U.S. Forest Service Qualified Product List. Specifically, two of its aerial retardants are conditionally qualified, while a third ground-applied retardant is fully qualified. With the capital infusion we recently provided, Fortress is in a position to accelerate the build-out of infrastructure, production facilities, and its team. Fortress also has recently hired Tom Davis as its chief manufacturing and supply chain officer. With 30 years of direct experience in the chemical industry, Tom was formerly responsible for building the global operations and supply chain organization for Perimeter Solutions, the primary current global supplier of fire retardant products. In terms of future expected milestones, by 2023, Fortress expects to receive further approvals from the U.S. Forest Service for select products currently in testing and to make additional submissions for products in development, including mobile and helicopter distributed retardants. Lastly, Fortress has built an intellectual property moat around mag chloride-based fire retardants supported by a portfolio of issued and pending patents. In closing, we continue to work to optimize our core business as we look to mitigate inflationary elements impacting our cost structure to help restore the earnings power of our legacy salt and plant nutrition businesses. The team continues to see improved production performance at our flagship Goderich mine as we progress our long-term mine plan. On a parallel track, we expect our organic high-return opportunities to allow our company to unlock additional value from our advantage asset base, raise the economic profit potential of our business, accelerate growth, and drive long-term shareholder returns. Our capital allocation approach, with a dividend payout more closely aligned with peers and company with captive growth opportunities, is an output and an enabler of our corporate strategies. I'm thankful for the efforts of our dedicated workforce whose unwavering focus on safety and sustainable growth is reinforced by their commitment to achieving the goals we set forth for fiscal 2022. Their efforts are instrumental in creating value for the benefit of all Compass Mineral stakeholders. Now I'm going to turn it over to Lauren, who will discuss in more detail our financial performance and our updated outlook for fiscal 2022. Lauren? Thanks, Kevin.

Consolidated revenue was $331.5 million for the first quarter of fiscal 2022, up 7% year-over-year, primarily driven by higher volumes in our North America highway business and favorable pricing in our plant nutrition segment and CNI business. Despite the revenue increase, our consolidated operating earnings declined to $20.4 million and adjusted EBITDA declined by $3.6 million to $58.4 million, or 6% year-over-year, as upward pressure on distribution and product costs within the salt segment in particular, more than offset exceptional plant nutrition price performance and epithet growth. On a segment basis, salt revenue for the quarter totaled $273.9 million, up 20% year-over-year, driven by 24% higher sales volume. Specifically, highway de-icing volume rose 27% year-over-year, despite a weak start to winter. reflecting higher commitment levels achieved during last year's bid season. D&I volumes also rose, up 9% year-over-year, reflecting strength in both de-icing and non-de-icing products, with de-icing reflecting a stronger pre-fill demand and non-de-icing reflecting higher water conditioning and ag volume. Soft segment volume growth also benefited from volumes in the comparable year-ago period being below average. Thought volume gains were partially offset by lower prices, with a 1% decline in the highway de-icing average sales price offsetting a 3% increase in the CNI average sales price. In our CNI business, broad-based price increases were implemented across most product categories, primarily in response to the high inflation environment, reflecting an area of our business where the potential exists to pass through costs on a more real-time basis. enabling us to claw back some portion of the overall inflation-related drag on our profitability. Overall, despite higher revenue, salt operating earnings fell 11% year-over-year, while EBITDA fell approximately 10% to $55.6 million for the quarter, primarily reflecting the inflationary effects on distribution costs not fully captured during the most recent salt bid season and higher product costs. While it is too early to predict how the rest of the winter season will play out, we believe we should be in a position to recoup a meaningful portion of these higher costs during the upcoming bid season. Turning to our plant nutrition segment, revenue for the first quarter fell 30% to $54.6 million year over year on lower volumes. Lower volumes primarily reflect a combination of low inventory levels related to the yield issues Kevin detailed earlier, sustained demand levels across our SOP product range, and the impact from extreme wildfires in the western U.S. last year, delaying plantings and pushing orders into the comparable year-ago period. Overall, despite the decline in revenue, plant nutrition operating earnings were $9.5 million, and EBITDA was up 49% in the quarter to $18.3 million, primarily driven by higher prices and also by lower per-unit cash costs. Specifically, the average sales price for our potassium plus SOP product rose 5% sequentially to $660 per ton and was up 20% year over year, reflecting the continued positive macro backdrop in the fertilizer sector. From a balance sheet perspective, largely due to the seasonality of our de-icing salt business, historically, our working capital tends to be highest in the quarter ended December 31st. That dynamic played out this quarter. with net debt rising by $69 million versus fiscal year-end levels, reflecting higher working capital requirements and cash required to fund our incremental investment in portraits. Now turning to our outlook for the balance of the year. Three factors year-to-date represent meaningful headwinds to our original full-year earnings guidance. Inflationary pressures across our SALT business have resulted in distribution and product costs tracking higher than expected. lower volumes due to the relatively weak start to winter in the markets we served for the quarter ended in December, and higher than expected product costs primarily due to the need to use suboptimal routing methods to position product at our salt depots in certain of our southern markets caused by the accelerated outage at our cobalt mine. Taking these factors into account, we have lowered our expectations for the 22 fiscal year and currently expect our adjusted EBITDA to be in the range of $200 to $235 million, driven by erosion in the outlook for our salt segment. Accordingly, we have lowered first half EBITDA guidance for that business to a range of $120 to $160 million. The midpoint of our guidance assumes that winter weather transpires in line with historical averages for the balance of the season in the markets that we serve. The upper and lower bounds of our updated salt segment guidance broadly reflect our estimate of the profitability levels we would expect if snow events are meaningfully higher or meaningfully lower than the historical average. As plant nutrition has started the year strong, first half fiscal 22 EBITDA guidance for this segment is unchanged at between 25 and 35 million. We continue to expect SOP pricing strength in the first half of fiscal 22 to more than offset lower sales volume, resulting in improved margins and profitability year over year, with improvement in plant nutrition productivity anticipated during the second half of fiscal 22. From a CapEx perspective, given the weather-dependent nature of our business, it's essential that our approach to CapEx be agile, particularly during the first two quarters of our fiscal year, which represent the bulk of the winter season. Given that we not only face the typical weather-related uncertainty, but also a wide range of cost pressures that are quite evident at this time. We've reduced our CapEx guidance by $25 million at the midpoint to a range of $100 to $110 million. We believe taking a disciplined approach to capital management is an effective lever to offset our lower profitability outlook and to help ensure we also ultimately deliver cash flow results in line with our original expectations heading into this fiscal year. Finally, our effective tax rate guidance has been reduced to a range of 14% to 17%. The decrease stems from the overall refinement of projected income levels, including lower income overall, a mix of income between the US and Canada, and certain tax benefits. In closing, I'd just like to add that two months in, I'm thrilled to be a part of the Compass Minerals team. join the leadership team kevin has assembled and joined the over 2 000 compass minerals employees across our location as we build on the strengths of what is already a leading essential minerals company as we leverage our core competencies into new areas i'm confident that there is a prudent path forward to achieving our goals bringing our vision into reality and ultimately creating shareholder value with that I will turn it back to the operator to open the lines for the Q&A session. Operator?

Thank you. At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from David Begleder from Dirt Shebek. Please go ahead.

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

How you doing, David, Lauren?

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

Very good. And just on CapEx, what was the $25 million reduction? What was that tied to that you've pushed out now?

I'm sorry, David, would you repeat?

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

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

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

Thank you very much.

Thank you.

Your next question comes from Bob Cart from Goldman Sachs. Please go ahead. Hi, this is Emily Keck on for Bob. In the CNI business, how sticky do you guys expect the broad price increases mentioned to be?

Yeah, sure. I'll take that. Pretty sticky.

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

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

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

We didn't do anything unusual. Nothing unusual. Typical seasonality. Yeah. Thank you.

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

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

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

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

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

Yeah, sure. This is George Shuler.

Look, we, you know, we, as Kevin pointed out in his comments, you know, it's kind of been an ongoing process. Lots of times, you know, again, with the drought, drought doesn't necessarily affect our production, but it does affect what we have coming in from a brine point of view in our West Pond. So we've done a lot in regards to making sure we improve our processes, are literally making sure that what we have in place as far as improvements, efficiency, we're doing that. It's hard for me to kind of go out there right now and give you an absolute date for us to say we'll be back to normalized production. But I can tell you that I feel pretty confident that we're well on the track to get us back to reestablishing ourselves in the future. You know, again, seeing that, I guess I'd say long term, you know, where we've seen the drought over the last couple of years, we have to do some things at the site to make sure we embed that going forward.

Okay, great. Thanks for taking my questions. Thank you, Seth.

Your next question comes from Chris Shaw from Monis Crispy. Please go ahead.

Hey, good morning, everyone. How are you doing? Hey, Chris. I was just laying out the sort of timeline on the lithium asset. You know, it seems like it's been the – date, you're suggesting summer of 2002 for the decision on maybe the DLE partner or provider, and also just, it sounds like the decision on, you know, which of the three paths you laid out, you know, you might take has been pushed back a bit. Am I right in reading that? And if so, you know, why was, why has that sort of been pushed back time-wise?

No, I don't, I don't think we pushed back the timeline at all. I think on the last call, actually, we referred to, uh, summer as a as a point when we would do a reveal around uh estimated capex at the fel1 maybe fel1 plus level um the the dle provider selection testing testing results where we're going to show up where we think we're going to show up on the on the cost curve so i think you know from our standpoint we're tracking right consistent with everything we said the last quarter

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

Right. Do you remember, was the last call, did you push back the timeline? Maybe I just forgot that you had done that or was I just misremembering all of it?

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

Right, right. Okay, that's all I had. Thanks so much. Yep, thank you.

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

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

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

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

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

Perfect. Thank you.

Your next question comes from David Silver from CL King.

Please go ahead.

Yeah. Hi. Thank you. So a couple of questions. I think the first question I'd like to maybe ask you a little bit more about the selection of the DLE process. So firstly, the timing. So you mentioned earlier in your comments that a decision might be forthcoming this summer. And I'm just wondering, has that timeline changed, let's say, over the last three to six months? In other words, is the decision point sooner than maybe was anticipated at the beginning of your strategic evaluation? And then secondly, regarding the process itself, are there any kind of peculiarities or project-specific aspects that you think are noteworthy? In other words, maybe the other elements that the lithium must be extracted from the composition of the brine, let's say, or the level of automation or purity that you're trying to get for. In other words, is this a relatively standard process or are you tweaking the process in significant ways based on, you know, the specific resource? Thank you.

Thanks for those questions. I'll take the first one and I'll let Chris discuss the second one. Look, I think with respect to the DLE, the selection of the DLE provider, that's a huge decision and you've got to get that right. and we'll take whatever time is necessary but we continue to believe that we'll be in a position by mid-summer to have to be able to you know make that selection and announce it externally but what we want to do is just go through and continue to test because it you know you get this wrong you're going to have a problem so it'll take as long as it takes but we feel based on the progress to date the technologies that we're testing that i know sometime in the in the summer we'll be in a position to make that announcement and then on your on your second question i think that's a pretty technical one i'll i'll let chris tackle that one hey thanks kevin so david with regards to looking at the process itself i would say that the crux of it is pressing on the dle after the dle going into the conversion portion of the process it would be very standard

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

Yeah, no, thank you. That was great. I honestly was wondering about magnesium concentrations and things. I'll do a little more research on that, but thank you for pointing that out. Second question I have relates to financial flexibility and kind of covenant situations. So You know, a lot of covenants are related to, you know, trailing 12-month EBITDA levels and, you know, kind of been tracking it here. And my TTM went down this quarter, you know, with the under-earning, as you mentioned. And just guessing, but there may be another step down next quarter. If that was the case, from your perspective, will there be a need for any adjustments to your current financing or any kind of steps that are needed just to clear out a little more flexibility in terms of meeting the key covenants on your main credit agreements? Thank you.

Yeah, David, thanks for the question. What I would say is, first of all, we're thrilled to have and blessed to have a strong bank group that over many, many years has been very understanding and supportive of our business. I think the right way to think about it is to say, at the midpoint of your guidance, do you think that you would need any sort of headroom? And what I would say is that at the midpoint of our guidance, we start to approach those covenants. However, there's a couple of things I remind you of. One, this is a business that, again, has historically been able to sustain itself off of CapEx levels that are considerably below where we are today. And so that's something well within our control that to extent the circumstances suggested, we could tap the brakes further on CapEx. The second thing I'd say is that the ICL sale that we executed last year had an earn-out associated with it that was in Brazilian reais that at today's exchange rates are in the mid-teens in terms of what it could be. That business will close its books. And in the coming months, we will know to what extent we receive proceeds from that earn-out. I would also say that in the more recent quarter, we had a pretty heavy working capital. By the end of this year, our 930 quarter, We expect that working capital drag to not be quite as much as it was this quarter. But broadly speaking, we think we've got the ability to stay within our covenants. But we also are blessed to have a very strong and supportive bank group during a time when this business is earning below its potential. And I think that's the focus of this leadership team is on restoring the earnings potential for SALT and for plant nutrition, and I think we'll manage through it.

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

Yeah. I just said $88 million Brazilian REI, about $88 million.

Oh, right, right. REI. Yeah.

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

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

sales volume structurally going forward and kind of clearing the way for that anticipated increase in gotterich production yeah the few aspects there in your question that i want to address and i'll pass it to jamie for some additional color but you know number number one what we want to do you know in this upcoming bid season is recover some of those inflationary pressures that we got we got caught with we built some of them into the our plan but they even exceeded that so we want to we want to recapture that the transportation is a real limiting factor in in this business and when transportation rates are high it limits your ability to stretch the footprint that you have so we may have to take you know adjustments we look at our salt operations as a portfolio so what we want to do is balance that production with what we anticipate the demand to be so that we can get fair value for our products. And then I think with respect to basically you're asking about imports, we try to monitor that market the best we can. And to the extent that you could secure imports in a fashion cheaper than you could make it yourself could be obviously something that we would be very in tune to. But heretofore, or at least to date, that hasn't been the case given the volatile seaborne transportation rates. The cost of product at various places in the world tends to be pretty stable. It's the transportation rates that are highly volatile, and they're pretty inflated at the moment, which we think is impairing their ability to penetrate in the U.S. like they have historically. So it is something that we watch, but nothing there to act on so far. Do you want to add any color, Jamie?

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

That's great. Thank you very much.

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

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

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

Got it. And I see that in fiscal Q1-22, salt shipping and handling and the press release spending was $39 million or 25% of salt sales. What is that? As a percent of SALT COGS, your shipping and handling.

Do you have that? Shipping and handling as a percent of SALT costs. Yeah. I don't have that number.

So of the total cost, yeah. I mean, we kind of, you can see our unit shipping cost as a line item is separate from COGS. We have shipping and handling separately. Salt shipping and handling on a unit cost basis was about $26 per ton. And gross price was 80. And you can see our all-in cost for the fourth quarter was about 42. So in our first quarter, December quarter, it was about

a third of the total cost if you combine our COGS and our shipping and handling.

Got it. And then for North American freight, which I guess you do probably by various methods, vessel, what have you, can you talk about the contracts you have? How long are those contracts? How often do prices set or reset, I should say,

for different modes of transportation for shipping your uh highway de-icer salt yeah so it varies across the different modes uh we we typically enter into multi-year agreements on on barge um you know sometimes vessel agreements are are are uh can be five seven years it depends uh oftentimes they have built-in inflationary inflators as you get to truck It's not as set. We tend to do some spot shipping in season. We do have relationships with pricing, but it's a mixed bag across the broad geography that we serve.

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

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

yeah so so we uh as we ship through the summer as we produce and ship to our depots we we have good line of sight on that while we're while we're doing it and that's mostly vessel and barge uh we're exposed uh on the last mile we'll call it when you're delivering salt from a depot to a customer during the winter so and i'll tell you that that the truck is significantly more expensive on a mile or unit delivered basis than barge and vessel. So that's what drives some of that expense that was somewhat unanticipated as we've talked about for this winter season.

It's the truck side.

And your last question comes from Brian De Rubio from Baird.

Please go ahead.

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

Yeah, truck has been most impactful in that truck and fuel related to truck. You know, like I said, on barge and vessel, there is a fuel surcharge component there. But those are multi-year agreements with known escalators, if you will. So absolutely truck. And it's as much availability. So we end up paying higher rates to find the trucks. So because of this, there's a 10 to 1 load to truck availability ratio nationally in the US. So everybody's experiencing this, obviously. And that was quite impactful. will be impactful to our results this winter season. Jamie, just one question.

I guess it's the inflationary pressure too, though. Some of that's related to our input costs around bags, pallets, literally everything that we have in input costs, we've seen that inflationary pressure as well.

Absolutely.

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

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

Understood. And just final question for me, given sort of the headwinds you're facing, how are you thinking about approaching the next, or I should say the upcoming bid season?

Yeah, I think we'll, again, see how we finish up. And as Jamie mentioned, we want to take a look at our portfolio to make sure that we're serving markets that are natural to us and not serving markets, or at least to the degree that aren't so natural to us. And then we'll think about supply demand, ensure that from our perspective, we have that balanced appropriately so that we can achieve fair value and draw margins on the salt side. So for sure, the goal would be to recover these inflationary costs that we've incurred and pass those on and then raise price beyond that to the extent the market market permits. And it's just too early to predict what that looks like. And we'll update you in the next couple of months on that one.

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

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

And there are no further questions at this time.

I will turn the call back over to the presenters for closing remarks.

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

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