Compass Minerals Intl Inc

Ladies and gentlemen, thank you for standing by. My name is Brent and I will be your conference operator today. At this time, I would like to welcome everyone to the Compass Minerals third quarter fiscal year 2022 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session If you would like to ask a question at that time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press star one. Thank you. It is now my pleasure to turn today's call over to Valerie Tomasco. Please go ahead.

Thank you, Operator. Good morning and welcome to the Compass Minerals Fiscal 2022 Third Quarter Earnings Conference Call. Today, we will discuss our recent results and our outlook for the remainder of 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 Standen, our Chief Commercial Officer, and Chris Yandel, our Head of Lithium. Before we get started, I will remind everyone that the remarks we make today reflect financial and operational outlooks as of today's date, August 5th, 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 filings located online at investors.compassminerals.com. Our remarks today also include certain non-GAAP financial measures. You can find reconciliations of these items in our earnings release or in our presentation, both of which are also available online. The results in our earnings release issued last night and presented during this call reflect only the continuing operations of the business other than amounts pertaining to the condensed consolidated statements of cash flows or unless noted otherwise. The company's fiscal 2022 third quarter results and fiscal 2022 outlook in the earnings release and discussed during this earnings call reflects the previously announced change in fiscal year end from December 31st to September 30th. All year-over-year comparisons to fiscal 2022 third quarter results refer to the corresponding period ending June 30th, 2021. I will now turn the call over to Kevin.

Thanks, Valerie, and good morning, everyone. Thanks for joining the call today and for your continued interest in the Compass Minerals transformation. Over the last couple of years, we've embarked on a journey to expand our position as a premier essentials minerals company by moving into select, high-return, adjacent markets, leveraging our core competencies, which includes safe and productive mineral extraction, experience in optimizing mining and manufacturing assets, and logistics and supply chain expertise. At the same time, we've continued to focus on safety and transforming our internal culture, building execution muscle, increasing our focus on diversity and inclusion, and staying true to our core purpose of helping to keep people safe, feeding the world, and enriching lives. We made progress in several of these areas this year to date and this past quarter. First, we finished year to date with a total case incident rate, or TCIR, of just under one. reflecting a roughly 58% improvement year over year. I want to express my gratitude and congratulations to each of our employees around the world for this outstanding safety performance, with a particular call out to those who lend their experience, talent, and hard work at one of our underground mining operations where, on a daily basis, they can face complex and challenging circumstances. I appreciate the level of care, focus, discipline, and collaboration essential to operating safely and ensuring that each employee returns home to their family in the same condition as they left. Even with this world-class safety performance our team has delivered year to date, we're maintaining a vigilant focus on both engineering solutions and behavior-based safety training to continue minimizing risks and to ensure a safe and healthy work environment. From a portfolio management perspective, very early this quarter in April, we closed on the sale of our South American chemicals business, which represented 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 reshaping our portfolio. That same month, we also received the maximum possible $18.5 million earn out related to the sale of our South American plant nutrition business to ICL last year. The proceeds from these two events enabled us to continue our debt reduction efforts. Notably, the impact of our efforts recently had the effect of Moody's upgrading the ratings of our senior secured revolving credit facility and senior secured term debt to BA I from BA II. This upgrade reflects the substantial reduction in the proportion of secured debt in our capital structure resulting from our disciplined application of divestiture proceeds toward debt reduction over the past several quarters. We also successfully secured an amendment to our credit facility this quarter, adjusting our net leverage covenant over the next eight quarters to levels that provide considerable financial flexibility. We view this amendment as effectively serving as a bridge between the fiscal 2022 inflationary dynamic that has compressed our SALT segment margins and the expected amount of profit recovery in fiscal 23 resulting from efforts underway right now to pass through costs as part of the North America Highway salt bidding season. From a leadership and governance perspective, the recent addition of two new board members, Richard Daley in May and Melissa Miller in July, bolstered our board of directors with leaders who add considerable operational, financial, and human capital management expertise, depth, and knowledge. We're thrilled to have both of them on board and look forward to their contributions as thought partners along with our transformational journey. Moving to our financial performance in the third fiscal quarter, we delivered results in line with our expectations heading into the quarter, with revenue rising 8% to $215 million and adjusted EBITDA coming in at $29 million. With three-quarters of our fiscal year now behind us and roughly 80% of the adjusted EBITDA we expect to achieve this fiscal year having now been delivered, we're focused on finishing the year strong and positioning the company to deliver improved financial results in fiscal 23, more in line with underlying earnings power of our business. At this time, I'd like to provide some early color on how the 2023 North America de-icing bid season which commenced in April, is unfolding today. As a reminder, the contract architecture commonly employed across our North American de-icing business does not allow us to pass through in real time the substantial inflationary costs that we've withstood in fiscal 22. As a result, whereas over the past 10 years, our salt franchise has, on average, delivered profitability levels of around $20 per ton, as measured by adjusted EBITDA per ton, This year, the business is tracking to deliver adjusted EBITDA more in line with $15 per ton. That $5 per ton difference represents roughly a $60 million difference at the midpoint of our projected fiscal 2022 salt sales volumes. An essential key to restoring the profitability of our salt business is therefore successfully passing through the costs we've incurred in 2022 as a part of the 2023 salt bidding season. which is approximately 75% complete at this time. A lot can happen in the final stages of the bid season. However, two main themes have emerged thus far. First, customer inventory levels were not elevated exiting last winter and seem to have ended this winter essentially unchanged year over year. As preliminary evidence of this, in the states we've bid on in season to date, The aggregate amount of salt requested is roughly in line with the volumes those same states requested a year ago. So on the heels of what was ultimately a relatively average winter across the entire market, customer inventories also ended the season at average levels. This KPI is constructive as we estimate sales volumes in 2023, assuming average winter weather. The second theme that has emerged is signs that all suppliers are striving to restore profitability to pre-inflationary levels akin to 2021 levels. This is evidenced by the fact that, in the aggregate, for the states where we bid on season-to-date and won, or where our supply contracts rolled over, the weighted average selling price increase year-over-year is up roughly 14%. At such pricing levels, the implied gross profit per ton in those states would indeed be approximately restored to more historical levels, which, as we've previously communicated, is our primary objective this bid season. So overall, pricing indications to date are favorable. Of course, price is only one aspect of value capture. Volume and mix are other key components. As I indicated on last quarter's earnings call, and 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 the associated costs of suboptimal logistics moves. This bid season, we have and will continue to prioritize value over volume, working to strategically place our tons where margin capture can be improved over this past winter season. Therefore, we expect our bid commitments to be down approximately 13% versus the prior bids. With that in mind, in addition to restoring profitability through pricing actions, we're also very focused on recalibrating our mix even further toward geographies where we have natural competitive advantages that enhance our profitability, even if that entails curtailing production volumes to some extent. Overall, a considerable amount of work lies before us. However, we're encouraged by the tenor and indications of the North American salt bidding season to date. Now, I'd like to provide an update on our continued efforts to sustainably develop our approximately 2.4 million metric ton LCE resource on the Great Salt Lake. First, we recently announced a non-binding MOU with both LG Energy Solutions and Ford Motor Company, envisioning a commitment of the majority of our planned annual phase one production starting in 2025. Each MOU also allows for a commitment of phase two production once our project is at full scale. In the coming months, we'll work to evolve these MOUs into binding supply agreements as a part of our broader lithium projects commercial offtake strategy. Our lithium vision is to support the North American battery market by accelerating the development sustainable and secure domestic lithium supply chain finalizing commercial relationships with proven manufacturers like LGS and Ford will help enable that vision and assist in solidifying the US supply chain that's essential to facilitate the electrification of the transportation sector and broader energy transition we've also continued to build out our lithium leadership team both through leveraging internal talent and bringing in outside expertise with proven experience in lithium-specific processes, technology, and product development. As previously announced, on September 15th, we'll host a lithium strategy update call. We look forward to sharing, at that time, more specific details on our path to maximize the value of our lithium resource, particularly in the areas of technology, operating and capital cost intensity, initial results of our third-party lifecycle assessment, and funding strategies, among other critical facets. On the topic of possible lithium funding strategies, a recent Bloomberg article speculated that Compass Minerals was exploring the sale of our UK salt operations. To be clear, a sale of our UK operations has not been authorized by our board of directors. However, we do consistently review our asset portfolio with an eye towards maximizing value for our shareholders. As we consider sources of capital to fund our lithium development project, one potential option among other alternatives is to monetize an existing asset at a fair valuation, then redeploy the resulting proceeds into a faster-growing, higher-returning asset, enhancing value and representing an attractive cost to capital. I'd like to now provide a brief update on Fortress North America, the next generation fire retardant technology company we've invested in that is leveraging the magnesium chloride from our Ogden facility to produce a proprietary portfolio of innovative, environmentally friendly, aerial and ground retardant formulations to fight wildfires and abate fire risk. After several years in startup mode, Fortress is gradually transitioning from the development stage toward the commercialization of its portfolio. The qualifying process with U.S. Forest Service is a long and arduous one. However, Fortress is the first new company in over 20 years to successfully get to the final approval stage with the U.S. Forest Service. We expect that heading into the 2023 fire season, two aerial retardants will be listed on the U.S. Forest Service's qualified product list as fully qualified products, positioning Fortress to competitively bid on multiple air bases with the U.S. Forest Service, USDA, and CAL FIRE in the 2023 season and beyond. In the meantime, partnering with Compass Minerals year-to-date, Fortress has been building out its supply chain and logistics functions, positioning itself to be ready to scale its manufacturing capacity to meet expected demand. We believe the company has adequate capital to ramp up full commercialization and build out manufacturing infrastructure, production facilities, and staffing to capture a substantial share of a market that we estimate to represent a total addressable North American market on the order of 80 million gallons or over $300 million from a revenue perspective. We're excited about the prospects for this business and will share updates as Fortress gains traction over the coming quarters. Finally, the last topic I would like to touch on briefly relates to the decline in our company's valuation since our last earnings call. My view is that the first half of the quarter saw our shares underperform largely against the backdrop of the May reduction in our full-year earnings guidance. The second half of the quarter witnessed a broader market decline due to a variety of reasons, including higher interest rates, widening credit spreads, particularly for industrial companies with credit ratings similar to ours, the sell-off and the shares of companies within the fertilizer sector, and significant valuation compression across the lithium sector. We're confident we will, in time, be able to rebound from this decline as we successfully restore the profitability of our salt segment, which would have the added benefit of allowing us to deleverage. Against this backdrop, I would like to emphasize several points about the long-term prospects of our company. First, while interest rates and discount rates may rise and fall over time, fundamentally, we don't believe anything has changed in the last 90 days regarding the long-run earnings power of either our salt or plant nutrition businesses. In fact, we're increasingly confident in the prospect of restoring the profitability of our salt business given the tone of the bid season today. Second, our salt business, which comprises the bulk of our adjusted EBITDA, has historically proven itself to be highly recession-resistant. Its sales volumes are mainly driven by the weather, which has no correlation with global economic growth, rising interest rates, or any other notable macroeconomic factors. Third, we believe that the growing market need for domestically sourced lithium continues to represent an attractive, durable secular trend and that the long-term prospects for our lithium resource are, in our view, largely not reflected in our current share price. And finally, our financial flexibility has only been enhanced in recent months, and I believe we're well positioned to successfully manage through a wide range of scenarios over the coming quarters. All taken together, I firmly believe the long-term prospects for Compass Minerals remain very attractive as we successfully execute on our strategy to reduce weather-dependent portion of our earnings mix while accelerating our growth. With that, I'll turn the call over to Lauren, who will discuss our financial performance in greater detail and our updated outlook for the balance of the 2022 fiscal year. Lauren?