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 fiscal third quarter 2023 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. Brandon Collins, VP of Investor Relations. You may begin.

Thank you, operator. Good morning and welcome to the Compass Minerals fiscal 2023 third quarter earnings conference call. Today, we will discuss our recent results and update our outlook for the remainder of 2023. We'll 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 Schuller, 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 that we make today reflect financial and operational outlooks as of today's date, August 9, 2023. 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 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 yesterday 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. I'll now turn the call over to Kevin.

Thanks, Brent. Good morning, everyone.

Thank you for joining on our call today. Before jumping on to the call, for our employees that are listening in today, I want to recognize the outstanding safety performance that you continue to achieve. We make safety a top priority because it's the right thing to do for our people. And it's also the right thing to do for our business. George and his team have brought significant and focused leadership to strengthen our safety culture here at Compass Minerals, but keeping ourselves and our colleagues safe is a responsibility we all share. In the complex operating environment that we work in, achieving zero harm is a difficult standard to meet, but you continue to prove it's attainable. So thank you for your efforts on this front, and please keep up the excellent work. I'll now make a few comments on our progress on a number of strategic objectives before commenting on the quarter. Lauren will then review our financial performance in more detail. Restoration of the profitability of the salt business to historic levels was an important goal for the company this year. Year over year, adjusted EBITDA per ton for salt increased by approximately 50% to slightly over $24.41. And we also meaningfully improved our EBITDA margin percentage. This improvement was driven by better pricing. We saw increases of 16% and 5% in average selling price for highway de-icing and CNI, respectively, year over year. We've talked in previous calls about the importance of reclaiming $20 a ton of EBITDA within our SALT franchise. The teams have done a great job of answering that challenge by getting us back on track that we remain focused on continuing to further enhance our profitability in that segment. Moving to our focus growth initiatives, we continue to advance our lithium project on the Great Salt Lake during the quarter. In May, we announced that we had signed a binding multi-year agreement with Ford Motor Company to provide them with up to 40% of our planned phase one battery grade lithium carbonate once production begins. Ford is a trusted leader in the automotive industry, and we appreciate their confidence in our project at Ogden, serving a role within their electric vehicle strategy. With Ford in our agreement with LG Energy Solution in place, we now have 80% of our planned production from phase one committed. Initial steps to advance construction on the commercial scale DLE demonstration unit proceeded on schedule during the quarter as well. This unit, which is sometimes also referred to as the desk guard unit or the DG unit, will be the first of four DLE units contemplated for phase one. We continue to expect to be mechanically complete with that unit by calendar year end and that it will begin commissioning in the first calendar quarter of next year. We also pushed ahead on a number of broader phase one activities during the quarter, such as additional earthwork and construction permitting. As we explained last quarter, we won't be sharing any new cost or economic projections with regards to the lithium project until we have clarity and certainty on several items that came out of the Utah legislative session earlier this year. You'll recall that on our May earnings call, we discussed how Utah House Bill 513 introduced a number of changes to the regulatory regime that will govern lithium development on the Great Salt Lake. Since that bill's passage, we've been actively engaged with political and regulatory leaders in Utah as rulemaking is undertaken by the relevant state agencies. While we therefore won't be making any updated economic cost disclosures today with regard to our lithium project, I did want to provide a bit of color directionally as we understand some time has passed since we disclosed our preliminary FDL-1 estimates about a year ago. We continue to refine the engineering and the associated estimates that will allow us to eventually update our project economics from what we published last September. And I'll share a couple of observations as the plan for phase one has continued to develop. First, we're still tracking very closely with our original timeline, which we expect will enable us to begin operations in 2025. Second, and this won't be a surprise to any of you that we've been following on other project developments in the lithium space, cost inflation over the past two years for these types of projects has been meaningful. We continue to work with our engineering partners on developing the plans that will ultimately underpin our next round of disclosures, but investors should expect that construction costs will exceed the upper end of the range that we provided in our FEL-1 estimate. We look forward to sharing more on this topic after we've reached resolution on all critical development elements directly with the state of Utah. Changing gears to our other primary growth opportunity, I'm pleased to be able to share some exciting updates with regard to Fortress. As we announced last quarter, we acquired the outstanding 55% in Fortress in May of this year, bringing our ownership stake to 100%. This occurred shortly after they signed a supply agreement with the U.S. Forest Service. Using their advanced mobile units, Fortress is supporting up to five air tanker bases with product and associated services this 23 fire season. In June, Fortress began dropping product at an Arizona air base, marking Fortress' first commercial sales since being added to the Forest Service qualified product list in late 22. As expected, the feedback we've received regarding both the performance of the products and the execution by the fortress team has been extremely positive. Subject to quarter end, we were working on three additional assigned bases, one in Montana, one in Washington State, and a US Forest Service base in California. In fact, the US Forest Service recently deployed an aircraft out of a base in San Bernardino, California, to drop Fortress products on the Rabbit Fire in Riverside County, marking our first drops in California. Most recently, Fortress has been active in combating fires in the Mojave Desert. The team at Fortress continues to work on its next generation of products. FR-105 will eventually replace FR-100 as the company's primary powder retardant offering. We expect that it will deliver improvements with regard to visibility and environmental impact. FR 105 is undergoing the continuation of operational field evaluation that began in 22 and to date has dropped approximately 65% of the required 200,000 gallons.

We're well on our way to completing the required OFE volume this summer.

Looking ahead, we're currently in discussions with U.S. Forest Service regarding the contract for 2024 and beyond. We also meet regularly with CAL FIRE and Canadian firefighting entities, and we expect to be bidding for contracts for the 2024 season. One note on Canada. Given the recent wildfire activity there in recent months, we've received a number of questions from investors regarding our ability to compete in that geography. The US Forest Service QPL is used by their entities as well. So our products are qualified for use in Canada, And we expect to be able to sell into that market starting in 2024. We're off to a good start with Fortress, and we're excited about the counter seasonal growth potential that the business can provide for the company. On the last quarterly earnings call, I spoke a little bit about the refinancing we completed in May. I won't rehash those details today, but that was technically a third quarter event. So I want to acknowledge that important effort, enhancing our financial position was the final strategic objective that we set for fiscal 23, and I'm pleased that we were able to achieve that despite the challenging environment. Before turning the call over to Lauren, I'll make a couple of comments about the quarter. I discussed SALT earlier in my strategic commentary, and those results helped drive strong performance during the quarter. We deliberately chose not to pursue certain business in last year's bid season so that we can improve our profitability. And that value over volume strategy has worked very well. In the C&I business, we've done a great job of leading on price. It was a very solid quarter from the salt business. In contrast, the plant nutrition business has seen a number of external headwinds this year. From a macro point of view, buyers are simply being very cautious. Buyer sentiment has clearly shifted toward a fear of getting stuck with higher cost inventory and we're seeing lots of just-in-time purchasing behavior. Whereas a year ago, growers were concerned about being able to secure supply, today there is no concern on that front. You can see the impact this has had on MOP prices throughout the year, which in turn has put pressure on SOP prices. While SOP is a premium product and is preferable by growers in many applications, Its pricing is not immune to the dynamics of the MOP market given that there is some substitution that can occur. These dynamics have been further exacerbated by the lack of demand caused by the abnormal weather in California that you've heard us talk about in previous quarters. This is frankly a rough part of the cycle and we simply have to manage our way through it. On a positive note, we've done a good job maintaining price given what is happening with MOP prices. frankly exceeding our internal sales price forecast despite the market pressure we're experiencing. Based on some things that we're seeing in the market, it does feel like we're close to finding a floor on MOP pricing, which would obviously be a welcome development for holding SOP price as well. While these weather-related factors have challenged our sales efforts this year, it's worth pointing out that operationally, things are going well at Ogden. Year to date, we've not had any significant production issues and we're tracking in line with our internal production targets, which has allowed us to replenish our inventory. All in all, we don't see any structural changes with respect to SOP use and demand in California or elsewhere for that matter. Based on what we're hearing, our expectation is that demand will revert to more normal levels next year. and that would be constructed to sales volumes in 2024. All in all, we had a solid execution in the third quarter across a number of our businesses while we continue to make progress on positioning the company for accelerated growth in the coming years. Our management team is committed to growing and enhancing the value of the company, and the third quarter was a successful quarter in our pursuit of that objective.

I'll now turn the call over to Lauren, who will provide more detail on the quarter. Lauren? Thank you, Kevin.

As a reminder, the seasonal nature of our business becomes more obvious in the third quarter as winter subsides and we see the impact of the decline in highway deicing sales. On a consolidated basis, revenue was $208 million for the third quarter, down 3% year over year. Third quarter consolidated operating loss improved to $0.6 million from a loss of $3.5 million last year, while adjusted EBITDA from continuing operations was $28.6 million, essentially flat year over year. We reported net income of $40 million for the quarter, driven by a $43 million tax benefit that reflects our recent acquisition of Fortress and recent changes in Canadian tax law. Specifically, the Fortress acquisition impacts our US tax profile quite favorably, as we are now able to utilize net operating losses and interest deductions that our prior U.S. income outlook did not call for us to be able to utilize, while also enabling us to reverse a portion of the deferred tax allowances we had taken in prior quarters. Starting with the SALT segment, SALT revenue totaled $156 million for the quarter, which was essentially flat year over year, despite volumes being 11% lower, reflecting strong SALT segment pricing, which rose 12%. The highway de-icing business saw sales volume decline 13% year over year. You've heard us talk about focusing our efforts on more valuable business over the last year, even if that means giving up some volume. That strategic pursuit, combined with the impact of a below average winter within the markets that we serve, explains the decline in volumes year over year. Pricing for highway de-icing rose 16% year over year to approximately $74 per tonne. and was an important contributor to the improvement in profitability that I will speak about in a moment. Within our CNI business, volumes declined 7% year over year, driven primarily by the timing of non-deicing demand. This was partially offset by higher CNI pricing, which rose by 5% to approximately $182 per ton. The CNI business has done a great job this year at maintaining positive momentum on pricing in its markets. Distribution costs and all-in product costs on a per-ton basis increased 4% and 5%, respectively, year over year. The salt that was sold in the third quarter was produced and moved to depots in 2022, a period of time when we saw strong inflationary pressure on costs. So there's a delayed impact that you see flowing through. Operating earnings for the segment were $21.7 million in the quarter, an increase of almost 75% year over year. Adjusted EBITDA came in at $36.4 million, an increase of 31% year over year. Adjusted EBITDA per ton was $24.41, which is in line with historical levels of profitability. As Kevin discussed earlier, restoring the profitability of the salt business was a strategic objective for this year that we are pleased to have successfully accomplished. Turning to our plant nutrition segment, the lingering impacts of extraordinary weather that we experienced this year continue to impact our sales. Though sales for the quarter were roughly in line with our expectations, we had hoped that applications of SOP that under normal conditions would have been applied in the first and second fiscal quarters might shift to later in the year. Unfortunately, that didn't materialize, with sales volumes down 6% year over year. As Kevin mentioned, there has been a change in sentiment over the last several quarters that has impacted pricing. In the third quarter, the average selling price was $750 per ton, down 9% year over year and 6% sequentially. The combined impact of lower volumes and lower prices was that revenue in the quarter was down 15% year over year to around $48 million. While that is obviously not great for the current year, Our view is that it sets us up for a positive 2024 from a volume perspective. Generally, we believe that applications have not kept pace with the mining of the soil that occurs through normal growing conditions and that the extraordinary weather conditions that occurred this year seem unlikely to repeat themselves in fiscal 24. As a point of reference, California just experienced the seventh wettest year in the past 129 years. which clearly qualifies as extraordinary. One benefit of the slowdown in SOP sales is that we've been able to build and forward deploy some inventory across our warehouse network. Speaking of distribution during the quarter, we saw those costs decrease on a per-time basis by 8% year-over-year, as we saw a higher proportion of sales being picked up at our warehouses as opposed to being delivered by the company. I'd note that this dynamic can also influence price and that we will often take a lower sales price if we don't have to assume responsibility for delivering the product. The distribution of KCL per ton basis were up 6% year-over-year, driven by operational steps that we took following the subpar 2022 evaporation season, including the use of KCL to bolster production yields. and the impact of the natural gas spike from earlier in the year on our inventory costs. The net impact of these drivers is that third quarter adjusted EBITDA declined from $19 million to approximately $12 million year over year. As Kevin highlighted, Orchards had its first sales in third quarter, so we enjoyed a small positive contribution from the business to revenue, operating earnings, and adjusted EBITDA this period. We are excited with the quick traction that the Fortress team has gained in the marketplace. At quarter end, we had liquidity of $418 million, comprised of roughly $58 million of cash and revolver capacity of $160 million. Net debt to adjusted EBITDA stood at 3.1 times at the end of the quarter. As noted previously, we were pleased to successfully execute a refinancing in May of our $250 million of notes due in July 2024. Our focus as we work through that refinancing centered on four objectives. Refinancing on reasonable pricing terms, pushing out our debt maturity profile, bolstering our liquidity, and creating flexibility within the credit agreement to accommodate a wide range of potential non-debt financing sources to fund our lithium efforts in the coming years. I believe that we achieved each of these objectives as part of the refinancing. Moving on to our outlook for the remaining of the year. In our press release yesterday, we announced the narrowing of our guidance range to reflect the fact that we are now three quarters of the way through the year. In SALT, we now expect EBITDA in the range of $220 to $235 million. As you know, we did not adjust our SALT segment guidance throughout the year until now. as we approach the final few months of the fiscal year. Our original guidance, given at the beginning of the year, implied a midpoint for EBITDA of $235 million and assumed average winter weather. The fact is, we had a below-average winter de-icing season, resulting in the midpoint of volumes, revenue, and EBITDA all moving down to reflect that fact. That the midpoint of our original guidance is still within striking distance despite a winter that was 80% of average, reflects very favorable sales mix within the highway deicing business and strong CNI pricing. For reasons that we've discussed today and on previous calls, this has been an exceptionally challenging year to forecast our plant nutrition business. Despite these challenges, we have managed the business throughout the year in such a way that even though we expect to see fewer volumes for the year compared to our original expectations, the midpoint of our EBITDA guidance for this business remains unchanged at $45 million. The commercial teams in our salt and plant nutrition businesses have done a great job managing price this year and have played a big role in helping the company successfully navigate a year of profit restoration on the salt side of the business and of challenging weather conditions and demand dynamics on the plant nutrition side. At Fortress, we still expect that business to contribute EBITDA in the low double-digit millions of dollars, with nearly all of that expected to be recognized in the fiscal fourth quarter. That business rolls up into the corporate and other expense net line item, which we are forecasting will come in at $65 to $70 million for the guidance at the midpoint. CapEx is moving down slightly. to a range of $130 to $150 million. This is the result of moving lithium development capex down to a range of $40 to $50 million from our prior range of $60 to $75 million, reflecting a shift in timing that will result in capital being spent early next quarter, pushing into the fiscal 2024 year, rather than late during the current quarter. Our sustaining CapEx guidance of $90 to $100 million remains unchanged from our prior guidance. At this time, I'll share a few thoughts about the 23-24 bid season. As we noted in yesterday's press release, we're about 65% of the way through the current North America de-icing bid season. Based on the results that we've seen to date, we are expecting an approximate 3% increase in price for highway de-icing salt next year. committed bid volumes are coming in roughly 5% lower than what we saw last year, which is not entirely surprising given the below average deicing season we just had. Throughout the 23 bidding season, we have continued disciplined adherence to our value over volume commercial strategy with an emphasis on building a book of commitments biased towards markets that are most natural geographically for us to serve and therefore most profitable. As usual, we will true up our projected salt price and volume on our November earnings call when the bidding season is behind us. However, 65% of the way through the season, we view the results to date as highly constructive, particularly against the backdrop of a relatively sluggish winter this year. Briefly turning to the cost rationalization efforts we have undertaken, on our last earnings call, we discussed the first phase of our cost savings program, was expected to ultimately result in an annual cost reduction of corporate-related expenses of $17 to $18 million by fiscal 25 compared to fiscal 22. These cost savings are split roughly equally between product costs and SG&A. The second phase of this initiative relates primarily to production and packaging operations. And last week, we notified the impacted personnel, cost-related, to the impacted operations are generally inventoryable. And as a result, the expected benefit of the phase two cost rationalization efforts will be recognized through the income statements when those products are sold out of inventory, which is expected to begin in the middle of fiscal 24 for the plant nutrition business and late in 24 for the salt business, subject to the impact of winter weather in the upcoming year. The key takeaway is that the combined impact of phases one and two is expected to result in meaningful savings that all else equal should lower our cost structure and improve our profitability in the coming years. Finally, I wanted to share a couple of thoughts on valuation. Notwithstanding the recent rally at our share price, a classic sum of the parts valuation build up of our company's valuation, where you assign reasonable multiples to the long-run earnings power of our core salt and plant nutrition businesses, we believe continues to support a stock price higher than where we are trading today. If one then contemplates the earnings potential of the growth opportunities that we have at Fortress and with our planned lithium development, it's clear why we're excited about the opportunity to create shareholder value by accelerating our earnings growth and reducing our weather sensitivity by advancing into near adjacencies that align with our core competencies as a company. With that, I will turn it back to the operator to open the lines for Q&A. Operator?

Thank you. And as a reminder, if you would like to ask a question, please press star then 1 on your telephone keypad. The first question is from David Begleiter with Deutsche Bank. Your line is open.

Thank you. Good morning. Kevin, on the highway de-icing bid season, VOM is being down 5%. Are you seeing a greater competitive intensity in this season this year? And with volumes down the last two years, do you risk running your operations at below optimal levels of production?

Hey, David. Good morning. Good question. You know, there were air pockets, I would say, kind of in this bid season. We had a few areas that experienced an outsized winter where bid volumes were up and prices were up considerably than other areas that kind of the inverse of that happened. But on balance, we're kind of characterizing the winner as 80%. And, you know, I would say for the most part, Jamie's here and he can add some color, but for the most part, our competitors in the marketplace behaved in a relatively disciplined fashion and everybody's kind of settling into their natural geographies. And there was definitely a view to promote value in the marketplace this year. We'd like to see more, obviously, but given the fact it was an 80% winner, the fact that we're up 3% on price is actually a pretty big win at the end of the day. And then with respect to volumes, look, as I've said before, we'll do whatever it takes to keep the market balanced. If we need to tweak our production volumes, we'll do it to manage inventories and manage working capital. But we need to let kind of the next season begin to unfold before we'd be able to make that call.

Very good. And just on lithium in the state of Utah, it's been about four months, I think, since the law was signed into law. What's the timeframe, do you think, to get this regulatory clarity you referenced in your remarks?

I wish I could stick a pin in that. I think it'll be done when it gets done. I don't mean to be cute, David, but it's a process. The rulemaking process is ongoing. We remain very active in that rulemaking process, and that plane will get landed when it gets landed. Hopefully sooner than later, obviously, because we need that certainty to be able to advance our FEL3 estimate. make a final investment decision, that sort of thing. So hopefully the state of Utah will get that plane landed sooner rather than later.

Agreed. Thank you very much.

Thank you, David. The next question is from David Silver with CL King. Your line is open.

Yeah. Hi. Good morning. Thank you. I would like to maybe start off with a question on lithium, or actually two questions. But firstly, regarding the reduction in the fiscal 23 capex to $40 to $50 million, I did hear your comments about that. I would just kind of come back and say that I think this is the second reduction in that projected spend through fiscal year 23 now. And I was just hoping you could talk about maybe what the reduction in spending this year might be for the ultimate timeline to completion. And then secondly, this is very speculative, very early, but with the binding multi-year agreements for phase one volumes, what happens if you're a little bit behind schedule three to six months or whatever? of your planned startup or alternatively ahead? I mean, under the agreement, are you committed to supplying a certain amount of volume by a certain start date? You know, you may have to go out in the open market or something, but how does the multiyear binding agreement handle deviations, I guess, from the planned startup schedule? Thank you.

Let's start with question two first. I mean, our agreements with LG and Ford provision for a lot of flexibility in terms of startup timing. So there's no scenario, David, that we can contemplate where we'd ever have to go to the market to fulfill our obligations under those agreements. They give us plenty of flexibility to get these operations mechanically complete and get them optimized and performing as advertised. So I think we're good there. And then in terms of the capital we're just pushing out the longer lead items into the probably the next couple of quarters which has taken some pressure off of the capital expense during fiscal year 23 but chris any color you'd like to add to that yeah kevin just just real quick so with regards to the longer lead items that kevin spoke about that's really related to the broader uh project on the entirety east side

So what we've been doing is we continue to optimize that schedule and look at what that drop dead date is for having to spend on those long lead items. So fortunate for us, those have been able to be pushed out a little bit. You know, additionally, what I would say is, you know, coming into the beginning of the year, we had a certain estimate associated with what it would cost to build the dust guard commercial demonstration unit. as we've continued to refine that we've been able to reduce that call so that's been a benefit that you heard in the last quarter in reduction of capex and as lauren also mentioned what we've also seen now is we've also been able to get really good terms with our vendors and that's allowed us to have an ability to push out those payments into the next fiscal year so all in all it's a good story from a capex perspective And as we heard in the opening comments, we're still on schedule for mechanical completion by the end of this year. So, Dusk Guard is well on its way to being proven.

Thank you for that. Very appreciate the detail. I'd like to shift over to SALT, and I'd like to pick up on, you know, Lauren's comments about, I guess, accounting costs this quarter. The past year, 18 months, had been one of significant cost inflation. As you look ahead to the next winter, is it possible for you to give a quick rundown of how you see, let's say, barge rates or plastic prices or pallet prices, whatever key elements that you can maybe lease or lock in prices for? ahead of time. But any thoughts about where the pluses, the puts and the takes, the pluses and the minuses on your overall salt, de-icing salt cost elements shake out here now? Thank you.

Yeah, let me just touch on inventory days and just the way that they transition through our P&L. And then I'll ask Jamie to talk about kind of supply chain effects, et cetera. But when you look at our inventory days, on average, you look over the past several years, they're sort of in that 125, 130-day mark. And so that tells you you have a four-month turn. However, you could produce salt that in a relatively weaker winter, you don't sell for quite some time. You take a March salt production, and then you take a 80% winter. You could be selling salt from... 2022 inflationary environment for some period of time. And so looking at our inventory days and seeing how they flow through our P&L kind of is a function of the winter that you experience. But Jamie, any thoughts on just supply chain effects you want to share?

Yeah, David, you mentioned a couple of items. Pallets continue to be fairly expensive and inflated. We don't see that coming down. Polypropylene has come down. It's obviously related to oil prices. So if Brent stays in this area, we'd look to see some benefit there in the CNI business. On the freight side, we've actually seen lower truck and fuel rates through 2023. Those probably creep up. Those are going to mostly be related to the CNI business on the dry vans that those prices tend to go up. But we've done a lot of great work the team has on the pricing front to really get ahead of that, to recapture some of the inflation we saw last year and continue to push price through 23 and even into 24. So we are cognizant of those truck freight rates rising in 24, but we think we can stay ahead of it with pricing and really see some margin improvement in 2024. On the highway side, most of our material is shipped via vessel and barge. Our vessel rates are locked in through 2028. Our barge rates are locked in through next summer, summer of 2024. So we'll be renegotiating those rates later this year or early in 2024. On the vessel side, we've got inflation in a CPI type situation. inflationary adjustments on the vessel side so we feel good about the long-term aspect there. Those are the primary kind of supply chain inputs that I'd be able to talk about right now ahead of, you know, our full-year discussion later this year for 2024.

Yeah, I appreciate it's early days, but thank you for that.

Very, very helpful. The next question is from Chris Kapsch with Loop Capital Markets. Your line is open.

Yeah, follow up on the salt business piggybacking on some of the discussion already. Just curious, the notion that roughly 65% of the negotiations are complete. Just wondering if that, against this backdrop of a 80% winter, are those discussions, do they align with in any way with the geographies that sort of had a, you know, a stronger winter, whereas the unsettled negotiations might have been geographies where, you know, where there's a lighter winter. I'm just curious if, in other words, if, you know, on average 80% winter, but clearly it was mixed across North America. Just curious if that has any influence on the discussions with the municipalities. and your ability to contract?

Not really, I think. So like Kevin mentioned a little bit earlier, there were pockets of success. We had stronger winter weather activity and higher sales of the upper Mississippi. It was weaker along the Ohio River Valley. We would typically be 65% to 75% complete with our bid season. sitting here in early August. A lot of the states and municipal bids are finished and the latter half of the season is commercial business. So it would be rare that the full year bid season pricing ends up different than the 65% mark. So I hope that answers most of your question. I would also note that That 65% really applies to about 75% of the overall highway de-icing business. So outside of this North American bid season, we've got our UK highway de-icing business. We've got our mag chloride business. And we've got our chemical business as well. And we are pushing significant price increases on those fronts as well.

uh because the market allows it and and we're pricing to value so uh that bid season data is just part of the picture as it relates to the highway business in general i just wanted to make that point okay and then the follow-up on on again on salt if you know the if you're at this point you know the commitment that you have for down five percent volumes up three percent pricing um By no means are you suggesting that the guidance for 24 would be down 5% volume. We just don't know. I'm only saying that because of the reaction of the stock price this morning. I'm curious, though, if in a scenario where you were down 5% volumes and up 3% pricing, it seems and given, you know, notwithstanding some of the inventory costs are still flowing through your, you know, flowing through your P&L.

in that scenario would would salt ibidab be up in 2024 it seems like it would be yeah you know that's a great point so remember the winter was mild and we're experiencing that in our current period results so we sold less material than we would have expected when we roll out our view on 2024 it will assume average winter weather so while the commitments are a little bit lower the recovery of normalization or average winter weather kind of offsets that actually more than would offset that decline in commitments. And then you take into account the price, the portfolio improvements that we're making in the business. Remember, GSP is only part of the picture. We're focused on net back. We might be uh shipping something with a lower gsp gross sales price but we make more money on it because it has a lower transportation cost or it's closer to the mine so uh we're only giving you part of the picture uh for competitive purposes but uh certainly feel like we can see improvement in the salt business highway and cni in 2024. bingo

The next question is from Greg Lewis with BTIG. Your line is open.

Yeah, thank you, and good morning, and thank you for taking my question. You know, I appreciate the comments around the 65% and the municipalities and now the shift to more industrial. You know, realizing we can't comment on pricing, but, you know, it's a fair way to think about as we look at the back or the remaining kind of the stated number that's out there kind of serves as an anchor and a buoy. the pricing like just as we think about previous years is the upside downside I don't know is it like I mean how tight is that range is are we is it basically this is the price or is there is there upside or downside it you know it is there isn't there is typically not a lot of movement between what we say now around price and commitments and how we finish the the bid season uh

Again, we are now in really commercial negotiations with independent contractors and landscapers and de-icing guys who resell this material for parking lot clearing and whatnot. So we are pushing price across the board. I think you're right. There's not a huge amount of upside, but there's very limited downside as well as we go through the remainder of this season.

Okay, that's great to hear. And then just, you know, as I think about Fortress, I mean, it seems like this is just getting, just continuing to be a nice driver for the company, you know, and realizing there's a major, you know, existing competitor. You know, I guess the question is, you know, what needs to happen for the company to really scale up this business? And, you know, I know as we were talking the last couple months, you know, Is there a way to accelerate that scaling off to kind of, you know, to take advantage of just really the demand for that?

Yeah, we're well on our way in doing that. We are engaging with the U.S. Forest Service for a multi-year agreement, 2024 and beyond. Those discussions will really get into into details in this month and in September. So I think we're going to have a lot more visibility on what the next few years look like within the next 60 to 90 days. So there's nothing that we can do beyond kind of nailing that arrangement as we go into 24 and 25. But also, we're talking about entering the California market with CAL FIRE. That is dependent on the completion of our IFOE that we talked about in the prepared remarks around our FR 105. And then when we think about Canada, British Columbia, and Saskatchewan, and Alberta, those are opportunities in Western Canada as we go into 2024 as well.

Okay. Thank you very much.

Again, that's star one if you'd like to ask a question. The next question is from Joel Jackson with BMO Capital Markets. Your line is open.

Hi, good morning. A few questions. Just on 2024, is a 3% gross price increase in highway taxing south, is that enough to have margins in 2024 in south be higher? Or what would you need to have margins be higher in 2024? And then the second part of that question is I understand that for some of your competitors, maybe yourselves, barge rates are going to go up on some of the contracts, maybe as of January 1st in Mississippi. Can you talk about that, how barge rates might go up and how that might affect costs and margins in 24? Thanks.

Well, I won't address it specifically. We've not started our discussions on beyond July 2024 with our barge carriers. Yes, there is talk. They need us. uh we'll go through that process and uh the good news about the the barge rates and the timing is that uh we'll be well into our discussions let's call it in february or march before we even start our bid season so we'll have good line of sight during our bid season on what those barge costs will be in 24 and in a multi-year agreement through uh perhaps 26 or something like that so i don't have specific comments on what that'll how that would impact It would have very little impact on 24 because of the timing.

And, Joel, in terms of profitability, from an EBITDA per ton perspective, we're tracking towards an excess of $20 of EBITDA per ton, and we see no reason why we should not be able to hold that. You know, I like to talk in terms of the middle of the bell curve to the point we made earlier. There's no reason that we can't see improvement in salt next year at a comparable EBITDA per ton with the prices.

That's helpful, Lauren. Thanks. Okay.

And then finally for me, you may have said on the call earlier, I know this is pushing back timing, but your CapEx reduction of $20 million or something like that, is that just pushing back the long lead time items on some of your lithium opportunities? Is that what you said?

Yeah. For the most part, Joel, it's that coupled with Chris and the team have been able to skinny down the expectation around the dust guard unit as well. So it's a combination, but it's largely made up of longer lead time items that we've been able to push into the next quarter and the quarter after that.

Maybe I'll come back to the barge rate question. Do you have some history when barge rates have gone up, how that it's worked out through the following bid season? Has the price been passed through to the different tenders? I understand it's a bidding process, but generally, or down in the year afterwards, a bit of an adjustment period? What typically has happened when barges have gone up between you and competitors?

I don't have that history off the top of my head. But remember, we would be equally impacted. Cargill and the Stone Canyon asset would be equally impacted by any change in barge rates. Again, the good thing is so you would assume that disciplined market competitors would recapture that value through pricing as they go through those bid seasons. Again, the good thing for us is that the timing is that it is a July renewal of 2024, and we'll have really good line of sight on what that looks like for the 2024-25 winter.

we'll embed that in our in our bidding analysis as as we uh next summer just maybe they give it one more for me um typically you have some working capital needs in september and december quarters um looking at your balance sheet right now are you comfortable are there any actions you want to take to give you more flexibility with the balance sheet uh well our leverage just hit um uh 3.1 times and so we are happy with

progress that we've made to deliver. Now, granted, some portion of that relates to the code proceeds, but a lot of it relates to the restoration of the EBITDA of this business. And so three times is a very comfortable level for a company with our credit profile. And we will see what we always see in terms of seasonal dynamics around the final quarter of the year. But we feel very good about

our leveraged position as we continue to drive it down. Thank you.

The next question is from Chris Kapsch with Loop Capital Markets. Your line is open.

Yeah. So it's a little detailed question on the lithium business, but it's really against the context of – Lauren mentioned valuation, and investors can probably debate whether or not there's much of any value being ascribed to your franchise. right now for the prospective value from the lithium resource at the Great Salt Lake. But my question addresses the visibility and or perceived risk associated with standing up that project right now. So directionally, you suggested, I know we're going to wait until the conversations with Utah are complete, understand that. But directionally, you suggested that CapEx might be higher than what the original FDL-1 engineering plan had been scoped out at. And as you're looking forward, though, I'm just curious as a way to maybe contain costs. In phase two, the plan is to stand up a lithium hydroxide conversion facility, whereas phase one is carbonate. And that adds presumably more costs per capita, per se, more complexity, therefore maybe more risk. So I'm wondering if you could just remind us why the strategic rationale is there for do carbonate and then hydroxide it it might be um you know it seems like there might be a a pathway for less perceived risk less capex if the whole if both phases were carbonate um is there any thinking along these lines thank you yeah hey chris uh this is chris as well uh with regards to looking at phase one and phase two phase one is that that lithium carbonate that we're talking about phase two

On the west side would be that hydroxide component. As we've talked about progressing our CAPEX and our FDL1, our FDL2, FDL3 detailed engineering, what we're referring to is really our phase one. So it's the carbonate side. And that's when we talk about the CAPEX is higher than what we saw in the FDL1. We're specifically speaking to the carbonate perspective. If you look at the market dynamics and what customers are looking for, You see a split really between the LFP and NMC type batteries. And so from an LFP standpoint, we're producing that carbon or intend to produce carbonate. The customers are also looking for the hydroxide piece as well. So hopefully that then provides some detail to your question.

Right. But one of the offtake agreements with Ford, they have, you know, obviously this early stage, but commitment with partnership with CATL, which presumably is focused on LFP, which will require carbonate. So I'm just wondering if, you know, as this evolves, if there's any consideration for carbonate, which might de-risk the overall project and maybe even rein in a little bit of the CapEx. That's what I'm asking. Thank you.

Chris Bremer, M.D.: : Sure Chris that's that's a great point and we'll continue to look at that right now we're hyper focused on getting phase one up and running and executing there, and as we progress through that will certainly take a look at at phase two and whether that's carbon or hydroxide so great point. Chris Bremer, M.D.: : Thank you.

Chris Bremer, M.D.: : Again that's star one if you'd like to ask a question.

And it appears that we have no further questions at this time. We'll turn it back to the presenters for any closing remarks.

Thank you for joining the call today, and thank you for your continued interest in Compass Minerals. And we'll continue to keep you posted in subsequent quarters. Thanks, everybody.

Have a great day.

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