Compass Minerals Intl Inc

Please stand by. We're about to begin. Good morning, ladies and gentlemen. Welcome to the Compass Minerals Fiscal Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode, and please be advised that this call is being recorded. After the speaker's prepared remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star 1 on your telephone keypad. If you would like to withdraw your question, simply press star 1 again. Now, at this time, I would like to turn the call over to Mr. Brent Collins, Vice President, Investor Relations. Please go ahead, Mr. Collins. Thank you, operator. Good morning, and welcome to the Compass Minerals Fiscal 2023 Second Quarter Earnings Conference Call. Today, we will discuss our recent results and update our outlook for the remainder of 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, 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, May 10, 2023. These outlooks entail assumptions and expectations that involve risks and uncertainties that could cause the company's actual results to differ materially. The 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 continuing operations of the business other than amounts pertaining to the condensed consolidated statements of cash flows, or unless noted otherwise. I'll now turn the call over to Kevin.

Thanks, Brent. Good morning, everyone, and thank you for joining us on our call today. Before beginning the call, I wanted to welcome Jill Gardner to our board of directors. Jill joined the board last week and brings a wealth of financial and extractive industry experience to our board. We're looking forward to her contributions and insights. Now, halfway through our fiscal year, we continue to push forward in our pursuit to create value for you, our shareholders, seizing opportunities and mitigating challenges when either arise. To guide us in this pursuit, we focus our efforts around six strategic objectives that we set for the organization in fiscal 23. You've heard me outline these objectives on past calls, And I'll take a few minutes to provide an update on each of those areas. I'll then comment briefly on the quarter before turning the call over to Lauren to discuss our financial performance in more detail. Safety and specifically our drive towards zero harm will always be a key area of focus for our company. We owe it to our employees and their families to foster an environment where employees know they will go home to their families at the end of the shift in the same condition as when they left. Safety performance is also often a leading indicator of operational performance. The safest minds in the world are also the most productive. We make safety a priority because it's the right thing to do for our people and it's the right thing to do for our business. Last year was an outstanding year for safety performance, and I'm proud to say that year to date we're performing even better with our track safety metrics than we did in fiscal 2022. Achieving zero harm is a high bar, particularly in the complex operating environment that we operate in. However, several of our sites have proven it's possible and will continue to pursue that goal each and every day. With respect to our salt business, our objective for 2023 was to improve the profitability of that segment to levels that we've historically delivered, specifically we've talked about restoring profitability to around $20 of EBITDA per ton for the segment for fiscal 23. As I've outlined previously, we approached the 23 bidding season with a disciplined pricing strategy and focused on securing sales commitments in markets that are geographically advantageous and relatively efficient to serve. For the second quarter, we saw the average gross sales price for the SALS segment increase 12% to approximately $82 per ton, driven by improved pricing in highway deicing salt from the comparable period last year. Favorable pricing dynamics combined with essentially flat distribution and cash operating costs resulted in EBITDA per ton increasing 64% to just over $20 per ton, up nearly $8 from roughly $12 per ton last year. Although the year's not over, I'm pleased with the progress the team has made to restore profitability following the extremely challenging inflationary environment we experienced in 2022. Charting a path to improve the reliability and sustainability of our SOP production was another strategic objective for this year. Though we continue to face significant headwinds on this front, one thing I do want to make clear is the reduced sales volumes year over year that we've experienced during our second quarter are not a function of production issues. Operationally, we've been ready to service customer demand. However, ongoing precipitation challenges in our key California market have continued to delay the application season for growers. Again, when those challenges abate for our customers, we stand ready to respond. From a longer-term perspective, however, our focus with respect to this part of our business remains optimizing sustainable production levels of our Ogden Pond Complex across a variety of weather scenarios. Progress continues to be made in that regard and we'll provide a more detailed update on this initiative when appropriate. The next objective I want to touch upon involves the advancement of our battery grade lithium development at Ogden. As indicated in our release yesterday, we were engaged in what turned out to be a particularly busy legislative session in Utah this past quarter for those of us who share in the overall goal of maintaining a healthy Great Salt Lake while at the same time balancing the needs of its many diverse stakeholders, including the mineral extraction industry. Specifically, legislation promulgated as a part of this recent Utah state legislative session introduced new regulatory and cost elements into the framework that will govern the development of lithium on the Great Salt Lake And certain of these provisions relating to severance taxes, royalty agreements, leasing rights, and burn management have created some near-term uncertainty until regulatory rulemaking can be completed in the coming months. Our operations at Ogden were founded over 50 years ago with the original intent to extract lithium. Unfortunately, at that time, a commercially viable technology wasn't available. Today, with our technology provider, energy source minerals. We have a commercially viable technology that allows us to extract a fourth mineral from our existing operating stream and recycle the brine back into our pond system. Lithium development is new for the state, and we fully appreciate its desire to receive fair value from the development of that resource. However, we'll continue to pursue this opportunity only if two critical criteria are met. Number one, that it makes economic sense for our shareholders from a risk adjusted financial return perspective. And two, predictability of the regulatory regime in Utah. These criteria are true in any mining jurisdiction or project, and Utah can be no exception. Historically, Utah has long been considered an attractive operating environment due to their historic understanding of the economic and social value our industry creates. And based on preliminary discussion, we expect this mindset to continue. As we've previously announced, the full development of phases one and two of our lithium project would represent an approximate $1 billion investment on the Great Salt Lake. Clearly, to justify that investment, we must have clarity and certainty on the evolving regulatory framework we will be working under to assess the potential impacts on our project. Therefore, as we continue advancing the demonstration unit presently under construction and proceeding with developing an FEL2 engineering estimate with all deliberate speed and an abundance of caution, we'll defer publicly sharing the updated disclosure of any project-related economic and engineering estimates until we have such clarity. Again, we've been a responsible and productive operator on the Great Salt Lake for over 50 years. We've been an important contributor to the Utah economy for decades, and this project has the potential to bring Utah to the forefront as part of the domestic supply chain for critical minerals. I'm cautiously optimistic that as we've done time and again with regard to our other mineral resources on the Great Salt Lake, we will reach a favorable accord with the state of Utah on a path forward for our planned lithium development that serves the best interests of all stakeholders. Moving on to our other commercial growth pillar, yesterday we announced that we had acquired the outstanding 55% interest in Fortress North America, bringing our ownership stake to 100% for upfront consideration of approximately $26 million in cash, contingent milestone consideration in cash or stock valued at approximately 28 million, and an earn out of 30 cents per gallon of product sold over the next decade. For those of you who are not familiar with Fortress, it's a next gen fire retardant company that utilizes our magnesium chloride and other salt production as the key ingredients in its formulations of aerial and ground fire retardants. The aerial fire retardant industry has essentially been a monopoly for over two decades. Bob Burnham and his team are entrepreneurs, as well as fire, aviation, chemistry, and government contract experts, who saw an opportunity to develop a suite of products that were more effective and better for the environment than the incumbent products being used. Our relationship with Fortress began in early 2020, initially as a supplier of magnesium chloride, which we produce out of our Ogden facility. Through the years, we had the opportunity to work closely with Bob and his team, and as we learned more about their business, we ultimately made a strategic investment in their company. In December 2022, Fortress became the first new company in over two decades to have long-term aerial fire retardants added to the US Forest Service Qualified Product List, or QPL, after meeting or exceeding rigorous testing across a number of categories and evaluations. Being added to the QPL was a significant step toward full commercialization of Fortress products as it provides the pre-approval to government agencies around the world who use the U.S. Forest Service QPL as the chief qualifier for purchasing and which allows them to procure and use the company's products. Then early this month, Fortress reached an agreement with the U.S. Forest Service that will result in Fortress supporting up to five mobile deployed air bases with product and associated services in the upcoming 2023 fire season, utilizing Fortress' new state-of-the-art mobile and fixed retardant mixing units. The U.S. government recognizes that competition in the market is preferable to sole sourcing for essential products and services, and accordingly, there are programs that provide on-ramps into the retardant market where it would like to see competition occur. Under a framework used by U.S. government agencies, including the U.S. Forest Service, to boost competition in critical sectors where government is the primary buyer, a substantial portion of fortress activity will be contracted by the U.S.

Forest Service.