Compass Minerals Intl Inc

Good morning, my name is Abby and I will be your conference operator today. At this time, I would like to welcome everyone to the Compass Minerals Fiscal 2022 Second Quarter Earnings Conference Call. Today's conference is being recorded and 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 would like to ask a question during this time, simply press the star key followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one once again. Thank you. And I would now like to turn the conference over to Douglas Criss, Head of Investor Relations for Compass Minerals. Mr. Criss, you may begin your conference.

Thank you. Good morning and welcome to the Compass Minerals Fiscal 2022 Second Quarter Earnings Conference. 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, Lauren Crenshaw. Joining in for the question and answer portion of the call will be George Shuler, our Chief Operations Officer, Jamie Spandon, our Chief Commercial Officer, and Christiane Depp, our Head of Olympians. Before we get started, I will remind everyone that the remarks we make today reflect the financial and operational outlooks as of today's date, May 6, 2022. These outlooks entail assumptions and expectations that 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 also are available online. The results in our earnings release issued last night and presented during this fall reflect only the continuing operations of the business, other than the amounts pertaining to condensed, consolidated, cash flow risk or unless otherwise noted. The company's fiscal 2022 second quarter results and fiscal 2022 outlook from the earnings release and discussed during this earnings call reflect the previously announced change in fiscal year end from December 31st to September 30th. All year-over-year comparisons to fiscal 2022 second quarter results refer to the corresponding I will now turn the call over to Kevin. Thanks, Doug, and good morning, everyone. Thanks for taking time to join today. Since our last call, we've taken a number of actions as we continue to make progress against our strategic plan and prioritize our core assets. First, we completed the final step in our previously announced strategic exit from the South American market through the successful sale of our chemical business in Brazil. We also continue to advance engineering work on our lithium development project, increasing its expected ultimate annual production capacity as a result. In addition, we welcome the new board member, Ed Dowling, who brings more than three decades of executive and board-level minerals extraction experience to Compass Minerals. And lastly, I'm very proud to share that our safety performance this past quarter was among our best since we began tracking our total case incident rate or TCIR, which represents the total number of injuries per 200,000 exposure hours. As many of you have heard me emphasize before, our leadership team places no priority higher than the safety and wellbeing of our employees. And we continue to see exceptional safety improvements throughout the company. We finished the second quarter with a TCIR of just over one, reflecting a more than 50% improvement from the prior year quarter. We're maintaining focus on both engineering solutions and behavior safety training in order to minimize risk and to help ensure that every employee is provided a safe and healthy work environment and an optimal quality of life. Moving to our fiscal 2022 second quarter results we announced late yesterday, the quarter was certainly not without its challenges. Like numerous other companies across industries and supply chains, we continue to grapple mightily with severe unpredictable inflationary pressures across our business. We're also still managing through ongoing production headwinds at our Ogden Solar Evaporation Facility, which produces our premium sulfate potash, or SOP product. We've shared details related to both of these issues in recent quarters, and they each continue to manifest themselves during the second quarter, with fuel surcharges soaring due to the ongoing crisis in the Ukraine while production levels have not met expectations. We believe these challenges will remain through the balance of the fiscal year. While not every facet is within our control, we are focused on executing strategies to reduce the impact of these impediments to our businesses, realizing their full potential. Against the difficult operating landscape, our management team and nearly 2,000 employees remain focused on operating safely, maximizing the profitability of our businesses, serving our customers, and supporting the communities where we're privileged to operate. Going forward, we'll continue to actively seek opportunities to manage each value driver of our business to successfully navigate through these challenging times and toward more normalized solid-segment profitability levels and plant nutrition production levels. With that high-level framing, I'll now spend a few minutes briefly summarizing our Then I'll discuss the short and intermediate term steps we're taking in an effort to restore profitability of our business. Finally, I'll provide a brief update on our efforts to progress our lifting growth opportunity. As reported in our earnings release yesterday, second quarter revenue was approximately $449 million, up 5% year-over-year, primarily driven by volume gains in our salt business. While our top line results show year-over-year improvement, profitability was negatively impacted primarily by the continued inflationary pressures on distribution and production costs in our salt segment and continued production challenges in plant nutrition that I referenced previously. As a result, despite a relatively average winter season, our consolidated adjusted EBITDA for the second quarter declined by approximately 42% year-over-year to $65 million. reflecting an adjusted EBITDA margin of 14%, which is entirely unacceptable, as it's considerably below what I believe is the normalized earnings potential of this business. In our SALT segment, revenue grew by approximately 6% year-over-year on higher sales volume, reflecting substantial growth in our North American bid season commitments and improved pricing in our consumer and industrial businesses. However, this top line significant cost pressures we've encountered resulting in salt segment EBITDA from the second quarter declining by approximately 40% year-over-year to $66 million. A key area where we've seen greater cost pressure than anticipated during our last earnings call has been distribution costs in our salt business, specifically escalating fuel surcharges in connection with the recent sharp increase in oil prices. Transportation and handling costs makes up a significant component approximately 40% on a per-term basis of the total delivered product costs for our SALT product. For example, we contract bulk shipping vessels, barges, trucking, and rail services to move our products from our production facilities to distribution outlets and customers. The most mixed for the SALT segment of calendar 2021, inclusive of transfers required to reach the final destination, was approximately 45% truck 37% vessel, 15% barge, and 3% rail farm. The cost of each of these modes is impacted when oil prices rise, as the underlying contract architecture allows our service providers to pass through fuel surcharges. In contrast, this is not a cost that we're able to pass on within our North America Highway De-icing business, given the structure of those contracts until the next bidding season. In just one category of these increased costs, the recent oil price surge has caused fuel surcharges to rise meaningfully during the quarter across all modes and represents intensifying inflationary pressures we've been contending with since last quarter. To combat these pressures, in the CNI segment, we're working to recapture these costs during negotiations with our customers and are endeavoring to do the same thing during our North America highway bid season. While we do not expect to see meaningful recoupment of fuel costs in our North America highway business until our next fiscal year, we're committed to broad steps to return historic profitability levels within our salt business. Our approach for the bid season is to work to secure geographies where we believe we can harness our logistics efficiencies and capture margins. Through our improved production profile at Goderich, we also now have a better agility to ratchet that production then requires, and we plan to do so. We expect these steps will help ensure a fair value for our central products, thereby ultimately improving profitability. Our plant nutrition segment EBITDA of $13 million, down 6% year-over-year, and its available price impact of high global fertilizer market conditions was offset by our higher unit costs and lower sales volume. constrained by our reduced inventory levels. Our current expectations at these trends, tight fertilizer supply demand dynamics, and our limited inventory available for sale are likely to persist for the balance of the year. As we've highlighted in the past several quarters, our SOP production from Ogden's farm-based solar evaporation process have been under pressure from the persistent weather events over the last several years. mainly drought and limited snowpack. The impact of these weather events has an adverse impact on the SOP process due to the fine balance of the pond chemistry required for this specialized product that does not meaningfully imply our salt or magnesium chloride production. It's also not expected to impact our future lifting production at the site. We've been acutely focused on implementing both short and long-term solutions to this challenge to our SOP production. In the near term, we're in the process of further refining engineering controls in time, such as raising our dikes for optimal deposition of potassium levels in our ponds and upgrading pumping systems, while our oxygen plant continues to aggressively manage against the lower potassium content of animals in our harvest here today. For the longer term, We've undertaken a detailed holistic review of our end-to-end process to minimize the impact to our pond chemistry and ultimately ensure stable SOP production levels. It's also important to note that historically, we've regularly managed through periods of low potassium concentration in our solar evaporation season and offset the variability of nature by augmenting that lower quality feedstock with MOP when it's been cost-effective to do so. Switching gears to portfolio management, the recent closing of the sale of our South American chemicals business represents another significant step in the prioritization of our core assets. With the sale, we've now completed the divestment of all of our businesses in that region and successfully completed this phase of the reshaping of our portfolio. We also recently received the maximum possible plant nutrition business to ICL last year. Proceeds from these two events have enabled us to continue our debt reduction efforts. Specifically, upon applying the combined net proceeds toward reducing our debt outstanding, we will have reduced our total debt outstanding by approximately $476 million, or approximately 35% from December 31, 2020 levels. We remain mindful of our leverage and expect starting the next fiscal year, a substantial leg of leverage reduction to come from restoring the profitability of our solids, which we believe is currently earning well beneath its potential due to the factors I've already discussed. I would now like to turn our strategic growth initiative toward lithium. In early March, we announced an increased projected annual production capacity of our lithium development opportunity by roughly 60 percent at the midpoint from 20 to 25,000 metric tons of lithium carbonate swivel for LCE to a new projection of 30 to 40,000 metric tons LCE. Additionally, we shared our plans to achieve this annual capacity target in a phased approach with initial commercial production capacity of up to 10,000 metric tons LCE projected to come online by 2025. These updates to the project were informed by our engineering assessment, or FEO1, which has entailed multiple evaluation scenarios from the project. It's important to recognize that the scope of our operations in Ogden, Utah, along with leaseholding, water rights, and infrastructure we already have in place, provide us with a wide range of production options. Specifically, our solar evaporation farms are located on both the east and west side of the Grace Hall Blank, with the west side of the complex connected to our east ponds by a 21-mile underwater hydraulic channel. Our current thinking is the advancement of our lithium project would occur over the course of two distinct development phases. Production of the initial 10,000 tons LTE would commence on the east side, which is where much of our existing infrastructure is currently located. This would be considered phase 1. This phase of the project would include a DLE processing facility and a conversion plant designed for either lithium hydroxide or lithium carbonate production. Phase 2 of our development provides the potential to build an additional DLE processing facility and conversion plant to produce an incremental 20,000 to 30,000 tons of LCE, likely on the west side of our augen facility. Two-phase approach is a function of the inherent nature of the significant asset we have the privilege of owning and operating. It also has the potential benefit of de-risking the project from an engineering perspective by allowing us to scale into our production profile. It additionally de-risks the project from a financial perspective by reducing our initial capital outlay and creating the prospect of cash flows associated with Phase 1 helping to fund the capital requirements of Phase 2. Overall, we continue to believe we are well positioned to serve the widely forecasted increase in market demand for battery-grade lifting and remain on track to reach previously announced critical project milestones during the summer of 2022. These include a selection and announcement of a DLE technology provider, disclosure of a completed FEL1 level estimate of operating costs and capital, and completion of the initial life cycle analysis. We remain confident we're on a prudent path to advance this officially high-returning initiative via a range of funding options, including but not limited to project-level finance partners and offtake agreements. We look forward to sharing additional information later this summer and in the coming quarter. In closing, our organic growth strategy is focused on leveraging our core advantage assets, extraction capabilities, and logistics expertise at the adjacencies where we expect increased earnings power, thereby recalibrating our weather dependency over time. Ultimately, these identified opportunities are designed to expand our essential minerals portfolio to comprise four pillars, salt, plant nutrition, lithium, and fire retardant. As we progress toward our stated objectives, we plan to manage each of the key value drivers in our business with a keen focus on mitigating defects of the current highly inflationary environment. 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 $448.5 million for the second quarter primarily driven by higher sales volumes in our North America highway business and favorable pricing in our plant nutrition segment, where pricing rose 28% year-over-year, and within our consumer and industrial business, where pricing was up 9% year-over-year. Despite the revenue increase, our consolidated operating earnings declined to $20 million, and adjusted EBITDA declined to $64.8 million, or by 42% year-over-year. in the salt segment and higher SOP production costs more than offset favorable plant nutrition pricing. From a profitability perspective, consolidated operating margins for the quarter were 4.5% and adjusted EBITDA margins were 14.5%. On a segment basis, salt revenue totaled $391.3 million, up 6% year-over-year, driven by 6% higher sales life, specifically Highway deicing volumes rose 6% year-over-year, primarily reflecting higher commitment levels achieved during last year's bid season. Consumer and industrial sales volumes increased 8% year-over-year based on strength in both deicing and non-deicing products. Thought segment average selling prices were relatively flat year over year, reflecting a 3% decline in highway de-icing sales price, offset by a 9% increase in consumer and industrial average sales price. In our consumer and industrial business, broad-based price increases continue to be implemented across most product categories, primarily in response to the high inflation environment, enabling us to recoup a portion of the overall inflation-related drag on our profitability. Despite higher revenue, SALT operating earnings declined 46% year-over-year to $49.3 million, while EBITDA declined 40% to $65.5 million. Both results primarily reflect the effects of inflation on distribution and production costs and the impact of lower pricing. From a cost perspective, Of the approximately $9 drop in EVA dot and operating profit per ton year-over-year, roughly $6 or two-thirds was driven by higher shipping and handling costs, which rose 25% to roughly $29 per ton, and roughly $3 or one-third was driven by higher cash costs, up 13% to roughly $32 per ton. The increase in per-unit shipping and handling costs primarily reflected inflationary impacts such as fuel surcharges and higher costs to serve our markets due to geographic mix and impact of the Coke launch outage last quarter continuing to flow through our P&L. The increase in per-unit cash costs was primarily driven by inflationary impacts and unfavorable mix. We don't expect these inflationary pressures to subside through the balance of the current fiscal year, as the nature of our North America Highway de-icing contract structure with various states and municipalities does not permit the pass-through of inflationary costs, such as field surcharges, on a mid-year basis. Overall, the challenges impacting our salt segment profitability during the period were primarily related to cost pressures and not weather. as we experienced above average second quarter winter weather activity in our North America served market compared to the 10-year historical average. Despite snow events during the quarter tracking above average, our estimate of the net impact of weather on our operating profits was slightly negative, reflecting below average sales to commitment ratios within our market. Historically, our experience has been that several factors can drive relatively low sales to commitment ratios despite relatively normal snow events, including the timing, severity, and exact location of snow events and customer inventory levels. Turning to our plant nutrition segment, revenue for the second quarter rose 1% to $54.3 million year over year, despite 21% lower volume on higher pricing. Specifically, the average sales price for our SOP product rose 12% sequentially to $736 per ton and was up 28% year-over-year, reflecting the supply-demand dynamics impacting the global fertilizer sector at this time. Operating earnings were $4.4 million, and EBITDA was $13.2 million, down 6% year-over-year. and the unfavorable impact of lower production volume on sales and per unit cash costs more than offset higher average selling prices. From a balance sheet perspective, we ended the quarter with net debt of $867 million, down $47 million from our 2021 fiscal year end, and with net leverage of approximately four times as defined under our credit agreement, which includes EBITDA from discontinued operations. As Kevin referenced, The combined net proceeds related to the recent sale of our South American chemical business and the earn out related to the prior sale of the South American plant nutrition business, both of which occurred in April, were immediately applied to debt reduction, further improving our debt profile. Nevertheless, in the coming months, we will proactively engage in discussions with our bank group with the aim of amending our net leverage covenant to provide sufficient flexibility as we continue to manage through this period during which our businesses are performing below what we believe to be their potential. Finally, an attractive feature of the debt portion of our capital structure that we often underscore is that beyond our AR securitization facility, which matures next summer, We have no debt maturities prior to 2024, as detailed on slide eight of the accompanying earnings presentation. Overall, our financial flexibility with over $300 million of liquidity as of quarter end and balanced manageable debt maturity profile give us confidence in our ability to manage through the current period with the ultimate restoration of the profitability of our soft business expected to drive the next leg of the leveraging. Now turning to our outlook for the balance of the year. Largely due to the order of magnitude of the escalation in fuel surcharges across all transportation modes in our salt segment in particular, and the continuation of SOP production yield challenges resulting in higher than expected fixed costs and lower than expected sales lines, we have lowered our projected fiscal 22 consolidated adjusted EBITDA to a range of $170 million to $200 million from our previously announced range of $200 million to $235 million. These impacts are expected to only be partially offset by higher pricing and nutrition and targeted productivity initiatives. Specifically, we are introducing second half fiscal 22 SALT segment adjusted EBITDA guidance in the range of $60 million to $75 million. down from our expectation at the time of our February earnings fall, and second-half plant nutrition segment adjusted EBITDA guidance in the range of $25 million to $35 million, roughly in line with our February outlook, reflecting our expectation that the substantially higher-than-expected SOP pricing will be largely offset by lower-than-expected sales and higher-than-expected unit costs due to the lower production levels at our August facility. As we consider the range of our revised adjusted EBITDA guidance, among the key drivers of potential upside or downside to the midpoint of that range for the balance of the year are the same themes that have weighed so heavily on our first half results, including production yield rates at our Ogden facility, the impact of global fertilizer market dynamics on ultimate SLP average selling price levels and sales volumes, and the direction of the trend and inflationary pressures on key inputs, including whether oil prices average around current levels, rise or fall through the balance of the fiscal year. In the face of the challenging operating environment we are experiencing, in the short run, we are executing targeted productivity initiatives to partially offset the cost pressures we have encountered year to date. Specifically, in addition to raising prices in markets where that's possible and where contracts allow, We are also tightening our belt from a fixed cost perspective by taking actions expected to result in lower plant operating costs and S&A expenses. Looking further out and into the next fiscal year, within our consumer and industrial business, we expect to continue to leverage the flexibility we have to pass through inflationary costs on a more expedited basis. With regard to our North America Highway de-icing business, as we have previously stated, The bid season process is our only meaningful opportunity to pass along the higher costs we are experiencing. With that in mind, in our approach to this year's bidding season, in addition to restoring profitability by recapturing the significant inflationary pressures we have faced this year, our focus is on capturing margin by recalibrating our business mix even further toward geographies where we have natural competitive advantages even if that entails curtailing production volumes by whatever degree is necessary. In executing our bidding and production strategy, our focus will be to carefully balance our commitment to serving our customers when and where it matters with the need to maximize profitability and minimize suboptimal logistics moves and the associated costs. From a capital spending perspective, Though we continue to reexamine certain areas that may provide for potential further reductions, our fiscal 22 full-year guidance remains $100 to $110 million, which was lowered by $25 million last quarter. Finally, with a reduced EBITDA expectation for the year driven by lower U.S. income, we have recorded additional non-cash tax expenses in the form of valuation allowances against certain U.S. deferred tax assets. Our effective tax rate for the year is approximately 30%, excluding the additional expense from the valuation allowances, and a negative 227%, including those expenses. We are likely to take additional, though smaller, allowances in each of the next two quarters, assuming our earnings outlook tracks in line with our current expectations. With that, I will turn it back to the operator to open the lines for the Q&A session. Operator?

Thank you. As a reminder, if you would like to ask a question, press star then the number one on your telephone keypad. And we will pause for just a moment to compile the Q&A roster. And we will take our first question from David Begleiter with Deutsche Bank. Your line is open.

Hi, good morning. This is David Wong here for Dave. I guess first, can you talk about your early thoughts on HDI salt pricing for next winter? And specifically, do you expect to fully offset the inflationary pressure when the contracts reset?

Yeah, good morning. I'll take a quick stab at that. Jamie may want to add some color. But, you know, we're only about, I don't know, roughly 10% or so into the bid season. And I think we weren't the only ones that were impacted by these inflationary costs that we absorbed. And the early sense is that there's enough value in the market to make an earnest attempt at recapturing those costs. And additionally, as we talked about before, part of our strategy is also to reposition our portfolio to serve markets that are more natural to us where we have a competitive advantage. So we feel pretty optimistic about how things are setting up so far. Any further comment, Jay?

No, that covers it. Thanks. And thank you. And then second, can you also discuss how the salt unit production costs will trend in the second half and maybe into next year?

Well, what you saw during this particular quarter was about a $9 delta in terms of the operating profits per ton. about two-thirds of that related to distribution costs and one-third related to cash costs. We'd expect those trends to continue for the balance of the year. I would say comparable increment in the back half of the year. As Kevin just indicated, we would expect to restore the profitability through this upcoming bidding season, but that will not be reflected in the second half of the year. Thank you.

And we will take our next question from Seth Goldstein with Morningstar. Your line is open.

Thanks for taking my question. Good morning, everyone. Just wanted to ask, if we see oil prices have a similar fall to how quickly they rose in the next fiscal year, would your contracts basically stay flat from a price standpoint, meaning that would all fall to the bottom line, or Are there, I guess, de-inflation, de-escalators in those deals? Yep. This is Seth. This is Jamie. I would say that as it relates to highway de-icing, we will set fixed contract prices through the summer through our bid season. So to the extent next winter fuel prices fall and fuel surcharges fall, we would capture that benefit for sure. When you talk about our CNI business or plant nutrition, there's a bit more variability, meaning we can capture some of that through price. But over the history of the business, as we've implemented the recapturing of fuel surcharges in both CNI and plant nutrition, when fuel prices fall, we tend to hold on to that and capture some value there as well. Okay, I appreciate the details. And looking at SOP, does the pond system work such that you really can't do much within a year to increase production, but next year's harvest could potentially be better if the weather turns out to be better than expected? Or I guess any details you can give us with to help us think about you know, how weather can impact future production will be appreciated.

Yeah, good question. And it does vary sort of season by season, and we tend to think of it in those terms. But, you know, our issue has been the ability to maintain continuous flow of brine into our western set of ponds, just given the drought and the lake levels. Exacerbated also by lack of access to Freshwater also given given the drought, we put plans in place to begin resolving those those issues. In addition to a couple of things I mentioned in the script. Raising the dice, et cetera so we believe the efforts that we're taking will lead to a longer term, more sustainable, predictable, reliable. set of production values coming out of Ogden. But this is, you know, it's going to take a while. I think we're confident we've got our hands around the issues and we know what to do. But it's going to take a while to kind of work through. Any color you'd like to add to that, George?

No, look, Kevin, I think you highlighted the majority of it. Again, it's really been around a persistent drought and limited snowpack that we've seen over the last few years. And those factors that you referenced in the summertime are whether it's wind, whether it's temperature, those types of things can drop out other minerals throughout the pond system at a different time, mostly magnesium, which then makes it a challenge. So, again, it's just making sure that we drop it out at the right place, but I think you covered the majority of it, Kevin. Thank you.

All right. Thanks for taking my question. Thank you.

As a reminder, it is star one if you would like to ask a question. And we will take our next question from Joel Jackson with BMO Capital Markets. Your line is open.

Hi, good morning, everyone. Just following up on that topic, obviously since Compass put in, I don't know, a decade ago, the expansion, hoping to get 350s upon base SOP every year, the thing just never worked, right? You had lots of problems with the plants, the crystallizer, the evaporator. I don't really remember. The impurities weren't proper. And I think, I don't remember, Kevin, if it was under you or the prior CEO, I think you went in and just fixed on these plants, but you're still not getting these yields 10 years later. So what's been done? And are we just going to have to face sub-300,000 ton production forever and that's just the way it is?

Yeah, sure. Joel, this is George Shore. I'll take a shot at that in depth. And look, there's no question it's all in this fine balance upon chemistry required out of that operation. But really, our first mode of attack under Kevin's leadership was we went to our immediate controllable factors, which was really around the operational efficiency and reliability of the plant. So again, we spent quite a bit of time really trying to focus on that and really what that might look like. But what we've switched to over the last, I'd say, six to eight months is more around both short and long-term solutions. And those solutions are really more around the short term being around some engineering controls and designs such as raising our dikes to help optimize our pond chemistry and our pumping systems. But the longer term, what we've done is taken a holistic end-to-end process designed to optimize this pond. Again, when I go back and I reference the snowpack and effects of the drought, those things have a profound effect actually on the pond chemistry and how you actually drop out those minerals as you go through. So as Kevin highlighted, I do think we've got our hands around that. I know you probably say, well, you know, it's been several years, but it is, again, this is 55,000 acres of ponds out there. It's literally miles. So again, it's pretty critical on where we are. And also keep in mind when you talk about some of those high numbers that are out there historically, we've actually added MOP, which is KCL, into that process to augment that and make sure those tons stay up. We've been trying to do this from a pond-based system only because of the current price of the MOP. But again, from what I do say, I do think we have our hands around on it and heading in the right direction. Thank you.

Hey, Joe, let me just add that the plant will do what it's designed to do. You just have to feed it what it's designed for. And that's been the issue, I would call it kind of on the out-by side or the upstream side. is you've got to control that pond chemistry to feed that plant what it wants. It'll do whatever number we need it to. But what we've got to do is fix the chemistry on the inbale side.

And that's what we're working on. And, Joel, one more thing I'll add to that, too, is everything we do and adjust, keep in mind, Joel, that it's a two- to three-year process. So every adjustment we make, you don't see it like in one month or three months. It actually takes that time to run that brine through the entire pond process to get it from salt to mag chloride with SOP being in the middle. Thank you.

Okay, following up that and also bridging into lithium here. So if I understand with the now the East and the West split plan, the first part of my question is, so we're talking about, I guess, two different DLE technologies that would be needed for the 10,000 ton East plant and the follow on later on West plant. And I guess that's because the assets, the lithium resources you're tapping into are a little bit different. And then just then trying to layer what we just talked about on SOP, because of the issue with pond chemistry and the variability year to year, not necessarily getting the right feed into the plant, how is that going to play into your lithium? You're not going to have a consistent feed into lithium plant. And will the DLD technologies be, you know, which have a lot of questions around them, be sufficient enough to handle said variability?

Let me tackle. The second one first, Joel, we don't think of anything we've seen thus far, we don't believe this is going to affect our ability to extract the lithium ions through the DLE technology. So I don't know what to say beyond that. That's what we believe. And then with respect to the east versus west side, you know, it's possible you use two different sets of DLE, but it's not likely. I think the more likely case is we use one DLE technology because chemistry is not that different from side to side. But Chris, would you want to add anything to that?

Sure. Thanks, Kevin. I think, Joel, as we look at it, you know, Kevin alluded to the two different DLE technologies. And really, there's an aspect of DLE technology and then what you do from a conversion side. DLE to carbonate to hydroxide or to hydroxide into carbonate. So really just hands on that, what you decide to do from a conversion aspect. You know, currently we look at running our two DLE pilots and they continue to prove out. They meet target requirements for lithium recovery and magnesium rejection. And that really speaks to some of the impurities that you live to as well, right? So the design is really to get the lithium, and reject the impurities. So as we see additional impurities around initially magnesium, the DLE system should be designed to reject that. You know, we think that the path that we're on with regards to the pilots are both solid choices for DLE technology. I think what you also look at is our continued evaluation of those technologies, really speak to the rigor that we're assigning to the process that informs our decisions. So, our final technology of options are both proven effective, and the goal over the next few months is to really pressure test these technologies in the areas of scalability and reliability.

Thank you. Thanks, Bill.

As a reminder, it is Star 1 if you would like to ask a question, and we will take our next question from Chris Shaw with Monash Crespi. Your line is open.

Yeah, good morning, everyone. How are you doing? On the salt, looking ahead at the bid season, maybe order of magnitude, on your average ton, what sort of price increase would you need to get to offset current either fuel surcharges or inflation in transportation at this point, on average across the whole book of business?

I would start by just saying that when we think about sort of our go-get and what we feel entitled to, If you look back at the operating profit per ton on this business, we're about $5 away at least from where we ought to be. And that will translate into $50 to $60 million of value at least. I don't think it'd be prudent to back into what the respective price would be because there's several ways that I'd like Jamie to elaborate on for us to get that and more It's not just price. It's about optimizing the mix as well. But, Jamie, maybe you can elaborate on what our goals are when we approach this bidding season.

Thanks, Lauren. And Lauren did a good job of summing it up in his prepared remarks in terms of our strategy this season. But it's winning the right tons that make the most logical sense for us, the ones that are easiest to serve. And so it's not just about ASPs. it's about net back. So our focus this season is on optimizing the net back for every ton that we produce. And that could mean a significant shift in our portfolio from last year in terms of states and municipalities that we're going to serve as we go through this bid season. We're definitely optimistic about the value per ton or margin per ton that we're seeing thus far. And I think it bodes well for for the bid season as a whole and how the 2023 SALT segment will look. The other thing is we've mentioned it a couple of times today and particularly in prepared remarks that if we need to dial back Goderich a little bit, we're willing to do that. The mine is running great. We've got some opportunities to do that efficiently, to toggle it up and toggle it down. So again, we're very focused on value per ton. and are optimistic and feeling pretty confident about how the bid season is going to unfold.

You know, in the past, I'm sure your company has many times talked about optimizing netbacks. Is the reason that, did the company go away from that or is it just, is that not a static thing? Is that because, you know, the cost of the different transportation systems shift every year, geographies and things like that? Or is it just something that, you know, hadn't focused on as much more recently. Do you need to get back to it? Can you provide me a color there?

Yeah, I would just make just a small comment. You know, as we got Goderich back up running as it should, as it's capable, while we were doing that, we were recapturing some share that we had previously lost. So we feel like that's completely behind us We feel like we have the right balance now, and that means you can really zero in on optimizing the portfolio and winning the tons that make the most sense for us.

Yeah, I would expect to see a pretty significant portfolio restructuring after this bid season concludes, to Jamie's point, to optimize and maximize around natural competitive advantage markets. and less worried about placing, you know, that incremental volume of tons now that George and his team have got a rich operating so well.

And looking at the past, I know a lot of you guys weren't probably around, I think, in 18, but, you know, there was this... I remember getting all excited on your earnings upside potential on the drop. I think oil probably went from, like, 80 to 50. And then I think the next, whatever, 12 months were... But a lot of that also seemed like you did well in pricing on the salt side. So you didn't really see that. I thought there was going to be a bigger lift from reduction in oil. Is there anything in how either contracts are structured or this time because the magnitude is so different that you don't realize the benefit on the way down as much? I mean, you talked about it earlier, I know, but is it something about surcharges? you know, the surcharges, were there ever surcharges in the past where they never had to roll off and this would be different because they would just roll off? Why did that seem different to me? Maybe my memory's a little foggy.

So I had trouble getting a little bit of what you were asking, Chris, but as it relates to our highway de-icing contract, it's in general a fixed price, a fixed delivered price. So when we're bidding through the summer, like last summer, WE HAD AN EXPECTATION OF WHAT FUEL WOULD LOOK LIKE DURING THE SEASON, AND OBVIOUSLY IT WAS WRONG. FUEL HAS BEEN MUCH, MUCH HIGHER THAN WE ANTICIPATED. EVEN WHEN WE WERE SITTING IN THE FALL IN SEPTEMBER, WE WERE THINKING ABOUT BRENT CRUDE AT $75, $76 A TON. WE'RE THINKING ABOUT BRENT CRUDE RIGHT NOW AT $115 A TON KIND OF AS WE GET THROUGH you know, this summer, and we're making, taking a view on it next winter as well. So we don't have the ability to pass through fuel surcharges here in North America. The governments and municipalities run the process and have terms that we bid on, and they don't incorporate fuel. If a fixed price delivered, a fixed delivered price And we have, that's why it's very important this bid season to understand, take the appropriate view on fuel next year, the appropriate view on truck transportation, barge and vessel as well, and base our bids on that and recapture that value and, you know, really focus on improving our margins as we go into 2023.

And I would just add, there are any number of factors that could have offset those savings the last time oil prices came off. But the contract architecture hasn't changed.

It is what Jamie just expressed.

And this concludes our question and answer session today. I will now turn the call back to Mr. Kevin Crutchfield for closing remarks.

Thanks, everybody, again, for participating today. We really do value your time and feedback and appreciate the opportunity to engage with each of you as we continue navigating our strategic path forward, and we'll keep you updated. Thank you.

And this concludes today's conference call. We thank you for your participation, and you may now disconnect.