Compass Minerals Intl Inc

Good morning. My name is Chris, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Compass Minerals Q4 and fiscal 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'd like to ask a question during this time, simply press star, then the number one on your telephone keypad. To withdraw your question, please press star one again. Thank you. Brent Collins, VP, Investor Relations. You may begin.

Thank you, operator. Good morning and welcome to the Compass Minerals fiscal 2022 fourth quarter earnings conference call. Today we will discuss our recent results and our outlook for fiscal 2023. 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, Chris Yandel, our Head of Lithium, and Ryan Bartlett, Senior Vice President, Lithium Commercial and Technology. Before we get started, I will remind everyone that the remarks we make today reflect financial and operational outlooks as of today's date, November 30, 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 available online. The results in our earnings release issued last night and presented during this call reflect only the continued 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 fourth quarter results and fiscal 2023 outlook in the earnings release and discussed during this call reflect the previously announced change in fiscal year end from December 31st to September 30th. All year-over-year comparisons to fiscal 2022 fourth quarter and fiscal 2022 results refer to the corresponding period ending September 30, 2021. And now I will turn the call over to Kevin.

Thanks, Brent. Good morning, everyone. Thanks for joining the call today. We appreciate your continued interest in Compass Minerals as we work to reposition our company for accelerated growth reduced weather dependency and sustainable value creation by expanding our central minerals portfolio into the adjacent markets of lithium and next-generation fire retardants. Fiscal 22 was challenging from a short-term financial standpoint, but I believe will prove to be transformative in the long term. We continue to make meaningful strides in all three of our strategic focus areas, building a sustainable culture, delivering on our commitment, and leveraging our advantage assets to create long-term shareholder value. I'll take a few minutes to highlight specific accomplishments in each of these three areas before turning the call over to Lauren to provide more details on our financials for the fourth quarter and full fiscal year, and then provide some perspective on our outlook for 2023. Starting with employee culture, we took a number of actions over the course of the fiscal 2022 to provide the tools and training necessary to ensure safe and responsible operations. I would like to salute each of our employees throughout North America and the UK for their contributions to the outstanding safety performance the company delivered this year. Through their efforts and supported by an increased focus on behavior-based safety training and engineering solutions, we maintained a consistent safety performance throughout the year. The result was a total case incident rate, or TCIR, of 1.27, reflecting a roughly 56% improvement year over year. To be clear, our ultimate goal when it comes to safety is zero harm, meaning no reportable injuries across our platform. In a mining and industrial manufacturing environment, that's obviously a very difficult target to achieve, but we owe it to our employees and their families to strive for absolute perfection when it comes to safety. We also continue to believe this goal is possible, as evidenced by the fact that several of our operating sites went the entire fiscal year with zero injuries. As I've stated previously, I deeply appreciate the level of care, focus, discipline, and collaboration essential to operating safely and responsibly, ensuring that each employee returns home to their family in the same condition as they left. this is and always will remain a top priority for compass minerals when your culture is strong it provides the foundation for execution which was our second area strategic focus delivering on our commitment or put another way doing what we said we were going to do a year ago on this call i talked about our commitment to protecting our balance sheet strengthening our core assets and increasing our focus on the high growth opportunities in the lithium and next generation fire retardant market. From a portfolio perspective, we completed the sale of our South America chemicals business and received the maximum earn out payment associated with the sale of our South America specialty plant nutrition business, using proceeds from both transactions to reduce our debt. To ensure we have the leadership in place to take advantage of our emerging growth opportunities, We bolstered our senior management team with the addition of key executives, including Lauren Crenshaw, Chief Financial Officer, and Chris Yandel, Head of Lithium, deepening our team's financial expertise, industry perspective, and advanced battery supply chain experience. I can't overstate their influence on our achievements this year. I'm thrilled to have them on board and look forward to their continued partnership along this journey. We also brought in the governance document of our board to the appointment of Garrett Joyce, Rich Daley, Ed Dowling, Melissa Miller, John Chisholm, and Shane Wagner, who collectively enhanced the board's operational, financial, advanced battery supply chain, and human capital management expertise. And with an eye toward the future, we continue to invest in the safe and efficient operation of our core assets. Through continuing to progress on our Goddard's Mine Plan, and a much-needed upgrade to our barge stock at our Coke launch month. Turning to our financial performance for the full year, as I indicated earlier, fiscal 2022 was challenging from a financial and operating perspective for a variety of reasons. As we've discussed on past calls, the inflationary pressures that all industries have had to deal with in 2022 had a particularly acute impact on our salt segment. as the contract architecture of our North American highway business does not allow for the pass-through of inflationary costs in real time. As a result, our profitability was severely tempered by historic levels of inflation, resulting in higher distribution and production costs. We took actions throughout the year to partially offset some of those effects, primarily through raising price within our consumer and industrial business. However, ultimately, the impact of these efforts fell far short in comparison to the inflationary effects, causing the profitability of our salt segment to come in well below the inherent earnings potential for this business. The most impactful action we could take during the year to restore the profitability of this business was to approach the recent North American Highway de-icing salt bidding season with a very disciplined strategy, emphasizing value over volume. And that's precisely what we did. As a result, we expect pricing in 2023 to rise on the order of 15% and volumes to decline on the order of 9%. I'm pleased with the team's efforts and expect to see substantial progress in fiscal 23 as measured by EBITDA per ton rising to match or exceed the $20 per ton in EBITDA the salt segment has delivered on average over time up from approximately $15 EBITDA per ton is delivered in fiscal 22. Our plant nutrition business had a strong year from a profitability perspective, with EBITDA per ton of approximately $245, above the long-run average for this business. However, we continue to be challenged throughout the year to deliver production volumes in line with historical levels. On that measure, we fell short of what we believe is the inherent potential for this business. Again, Lauren will provide more color on the financial shortage. While navigating these short-term challenges to our core businesses, we stayed laser focused on advancing our third strategic focus area, leveraging our advantaged assets to reposition our company for future growth. One dimension of that repositioning relates to our strategic investment in Fortress North America, a next-generation fire retardant company focused on reinventing wildfire application technology to make them safer for the environment and also more effective. The fortress team had three primary strategic objectives for calendar year 22. Secure adequate capital for full commercialization, bolster the leadership team, and advance each main product, FR 600, FR 200, FR 100, and FR 105, closer to qualification and commercialization. From a funding perspective, our $45 million equity investment this fiscal year increased our stake to roughly 45% and helped position Fortress to build out its manufacturing infrastructure, stockpile inventories of raw goods, and begin hiring key staff. From a people standpoint, Fortress made great strides in 2022, naming a Chief Manufacturing and Supply Chain Officer and a Chief of Air Base Operations who formerly served as the U.S. Forest Service Director of Fire and Aviation Management for California Region 5, the U.S. Forest Service's largest region in the entire country. They've recently recruited several highly skilled air base infrastructure and operations managers with decades of experience building and operating air tanker bases. Product-wise, FR600, a ground retardant, was fully qualified in early 2022 and placed on the U.S. Forest Service's qualified product list. Fortress launched production and successfully provided revenue-producing test volumes for select clients with use cases focused on utilities, residential, and commercial properties. FR200, a liquid concentrate aerial retardant, successfully passed all required tests and completed all operational field evaluation requirements which included successfully air dropping the required 200,000 gallons under live wildfire conditions, which Fortress performed at an air base located in Montana. FR 105, a second generation dry concentrate aerial retardant, has successfully passed all required tests and commenced its operational field evaluation, which we expect to be completed during 2023 fire season. And lastly, FR-100, Fortress' first-generation dry concentrate, has passed all required tests and successfully completed its operational field evaluation requirements. We're pleased with the progress that Fortress has made. A couple of important milestones that are not entirely within the team's control but essential to breaking through are the completion of the Environmental Impact Statement, or EIS, by the U.S. Forest Service, and substantially being awarded air base allocations and attendant contracts. This EIS is scheduled to be updated every 10 years and expired in December of 2021. Our working assumption was that it would be finalized by the end of calendar year 2021. That didn't occur, and the EIS is now roughly 11 months behind its regulatory expiration date. We expect the magnesium chloride formulation at the heart of fortress retardants to be confirmed as acceptable for use as part of the EIS. As a result, we expect the eventual completion of this study to provide the necessary environmental clearance for fortress aerial fire retardants and to set the stage for bringing their highly effective, more environmentally friendly flame retardants to market. On the lithium project front, Most of you are well aware of the significant progress we've made this fiscal year. In September, we provided a comprehensive overview of our strategic path forward to maximize the value of our North America lithium brine resource. As a part of that strategic update, we announced the achievement of five key milestones. First, we announced a $252 million strategic equity investment from Coat Middleton Trading LLC to advance phase one of the development of our lithium brine resource, explore opportunities for execution synergies across the company, and further align our capital structure with our strategy through additional debt reduction. Second, we shared the selection of energy source minerals with our phase one DLE technology provider after three years of extensive testing of multiple DLE technologies and providers. We also shared the results, including a technical report summary of our FAL1 engineering estimate, confirming that our project is projected to be highly cost competitive, the lowest by our estimation on the entire domestic lithium cost curve, leveraging our robust existing infrastructure. Fourth, we announced our intention to construct by 2025 a conversion facility at our Ogden Utah solar evaporation site with a target annual production of 11,000 metric tons of lithium carbonate with an expected NPV of between $626 million to $985 million and an after-tax IRR of between 28 and 36% on estimated development capital of approximately $262 million at an FEL1 level of accuracy. And finally, we announced the completion of a life cycle assessment, confirming a strong sustainability profile for phase one of our lithium development. From a valuation perspective, the projected after-tax MTV of phase one of our lithium project is approximately $626 million, assuming an average lithium carbonate selling price of approximately $16,000 per MT. which equates to nearly 40% of our 30-day average market cap for approximately $15.25 per share. Similarly, the NPV of Phase II of our lithium development is projected to be approximately $1.4 billion, assuming an average lithium hydroxide filling price of approximately $17,000 per MT. equating to roughly 85% of our 30-day average market cap and approximately $34 per share. It's worth noting that the average sales price for lithium products used to calculate these NPVs is but a mere fraction of today's indicative prices, highlighting the upside leverage our project possesses. Together, the growth opportunities we're undertaking clearly represent sizable potential upside for our business. and one that we would expect to benefit our employees, community, and our shareholders alike. Overall, we believe the actions we've taken in fiscal 22 laid the foundation for an increase in the absolute earnings power of Compass Minerals and our long-term earnings growth rate and ultimately in the valuation of our company. With that said, the fact that our stock price is trading at a considerable discount to the value of successfully executing our lithium development suggest a considerable upside potential it also likely reflects a measure of skepticism among investors in our view our leadership team and employees embrace the execution challenge before us and expect to resolve the current valuation disconnect over time through successful execution looking ahead our focus in 23 will be to deliver improved overall financial performance and continue advancing our transformation strategy with an emphasis on the following six strategic objectives. Number one, building on the outstanding safety performance of the past 12 months to continue our drive towards zero harm across each of our facilities. Number two, restoring the profitability of our salt business to levels we've demonstrated in the past. Number three, developing and executing strategies to improve the reliability and sustainability of our SOP production, which should allow for increased production levels over time. Number four, achieving the commercial and project related milestones on our roadmap to advance phase one of our lithium development. Number five, supporting Fortress North America's efforts to become the first new entrance in the market for fire retardant chemicals in two decades during the upcoming 23 wildfire season, subject to completion of the EIS. And last, number six, continuing to enhance our financial standing and maintain our overall credit profile. In closing, I'm excited about the path we're on and the sizable opportunity before us as we execute our strategy to accelerate our growth, raise our earnings power, and reduce our weather dependency. I believe that we have the right team and the right strategy in place to realize this opportunity and create real value over time. With that, I'll now turn the call over to Lauren, who will discuss our financial performance in greater detail and our outlook for the fiscal 23 year. Lauren? Thank you, Kevin.