Compass Minerals International Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 17, 2023

There are 14 speakers on the call.

Operator

Ladies and gentlemen, good morning. My name is Abby, and I will be your conference operator today. At this time, I would like to welcome everyone to the Compass Minerals 4th Quarter 2023 Earnings Conference Call. Today's conference is being recorded and all lines have been placed on mute to prevent any background noise. Fiscal.

Operator

After the speakers' remarks, there will be a question and answer session. Star key followed by the number 1 on your telephone keypad. Quarter. Thank you. And I will now turn the conference over to Brent Collins, Vice President of Investor Relations.

Operator

Mr. Collins, you may begin.

Speaker 1

Fiscal 2020. Thank you, operator. Good morning, and welcome to the Compass Minerals 4th quarter and fiscal 2023 earnings conference call. Today, we will discuss our recent results as well as our outlook for 2024. We'll begin with prepared remarks from our President and CEO, Kevin Crutchfield and our CFO, Lauren Crenshaw.

Speaker 1

Joining in for the question and answer portion of the call will be Jamie Standen, our Chief Commercial Officer and Chris Shandell, our Head of Lithium. George Schuler, our Chief Operating Officer is away today. Fiscal quarter. 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 17, 2023. These outlooks entail assumptions and expectations that involve risks year 2019 and uncertainties that could cause the company's actual results to differ materially.

Speaker 1

A discussion of these risks can be found in our SEC filings quarter located online at investors.compassminerals.com. Our remarks today also includes certain non GAAP financial measures. Quarter. 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 continued operations of the business.

Speaker 1

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.

Speaker 2

Fiscal 2020. Thank you, Brent. Good morning, everyone, and thank you for joining us on our call today. Over the course of fiscal 2023, We advanced the ball on a number of important strategic fronts. Unfortunately, the positive strides we've made across several areas this year have been fully overshadowed by sustained uncertainty surrounding our lithium project in Utah, which has weighed heavily on our share price.

Speaker 2

Quarter. I'll come back to our strategic achievements in just a moment, but I first want to provide some commentary on our operations in Utah quarter and on our lithium project specifically. As a reminder, we've been operating in the state of Utah for more than half a century, fiscal 2020. We've been an engaged corporate citizen in the community for decades. Quarter.

Speaker 2

Our planned lithium project would build upon the successful sulfate of potash, sodium chloride and magnesium chloride businesses quarter that currently operate on the lake and would not require any additional brine draw from the Graysalt Lake. The current process draws mineral rich lake water quarter brine from the Graysalt Lake into a series of solar evaporation ponds, which the brine moves through over a 2 to 3 year evaporation cycle. Fiscal 2020. As the water content of the brine evaporates and the mineral concentration increases, some of those minerals naturally precipitate out of the brine and are deposited on the pond floors. These deposits provide the minerals necessary for processing into SOP, 5th quarter.

Speaker 2

Those three products make up our core Ogden business today. Fiscal year 2020. Our lithium development would simply entail extracting a 4th mineral salt out of the brine that we're already processing. Quarter. Our project would add over 100 incremental local high paying jobs and drive substantial additional royalty and tax receipts fiscal year 2020.

Speaker 2

In our view, that's a win win situation and we continue to patiently educate quarter. All relevant parties and decision makers on the positive attributes of this project. Utah House Bill 513 was enacted to establish a regulatory framework for how lithium would be developed as well as introduce some updated rules on management of the Grey Salt Lake. Fiscal year 2020. We're acutely aware of the recent concerns and sensitivities related to the Great Salt Lake.

Speaker 2

Maintaining the health and sustainability of the lake is a shared goal for all stakeholders in the community. We are no different and in fact we've worked hard to be part of the solutions to maintaining quarter and improving the health of the lake for the long term. Several weeks ago, we announced our intention to suspend indefinitely any further investment in our lithium project in Utah until we achieve regulatory clarity with the state. We did not make this decision lightly. Quarter.

Speaker 2

A critical linchpin to making investments on the order of magnitude we're considering here and have now paused is regulatory certainty. Quarter. Without such certainty, it's essentially impossible to have confidence in the projected returns on invested capital over the next 30 years. Quarter. Therefore, to move forward prudently, we must have confidence that the regulatory environment will include a set of rules that are reasonable now and will be stable and predictable over the coming decades.

Speaker 2

The March passage of House Bill 513 quarter and particularly the subsequent rule making process have introduced uncertainty around the regulatory environment we'll be operating in quarter as well as the timing of how our development could proceed. Since the inception of House Bill 513, Compass Minerals has actively engaged with the state of Utah in a collaborative attempt to ensure the provisions of the legislation quarter are implemented in a way that will not slow or halt the progress the company has made to date regarding its pursuit of developing a sustainable lithium salt resource to service the burgeoning North American advanced battery market. Quarter. Despite the active and ongoing best efforts by all parties, we concluded that it's in the best interest of our shareholders quarter to suspend further investment in our lithium project beyond certain already committed items associated with the early stages fiscal year 2019. I want to share some additional thoughts about how we're thinking about the quarter.

Speaker 2

First, to be perfectly clear, we'll not move forward with the project at any cost. Quarter. We'll continue to refine our engineering estimates on Phase 1 and we'll incorporate the proposed financial terms from the state when we receive them. Quarter, then we'll have a better view of the economics of the project. We'll only proceed if we're convinced that the long term returns fiscal year 2019.

Speaker 2

2nd, if we do advance lithium, we'll do so in a manner that is financially prudent. Fiscal year 2020. As projected capital for the lithium program has increased, questions about how we'll fund the program have taken on greater importance. Fiscal 2020. Clearly, bringing a partner in at the asset level will help answer at least part of that question by reducing our share of the capital cost.

Speaker 2

Quarter. We still have some work to do on this, but the one thing I want to stress today is that we're firmly committed to not using common equity to fund our share quarter of any future lithium development. We believe there are numerous other viable sources of funds at considerably lower cost of capital and do not dilute the ownership fiscal 2020 of existing shareholders. 3rd, whereas previously we were on a path toward commencing operations in the fiscal 2025 timeframe, quarter. We have to acknowledge that our timeline today is different than when we started this project.

Speaker 2

I'm hopeful that we will be able to chart a path forward with state of Utah that will allow this resource to be responsibly developed for the great benefit of all stakeholders, quarter, including the state in a timely manner. But we have to believe that we know the rules of the game and are standing on solid ground fiscal quarter, we can credibly talk about timing again and we aren't there yet. I'll comment now on the progress we made on our 2023 strategic objectives. Quarter. Lauren will then review our financial performance for the year and we'll discuss our outlook for 2024.

Speaker 2

2020. We talked about it a lot this year, but restoration of the profitability of the salt business to historic levels was an important goal for the company in fiscal 2023. Fiscal year over year full year adjusted EBITDA per tonne for salt increased by approximately 40% fiscal year 2018 compared to $14.59 last fiscal year. Salt's adjusted EBITDA margin percentage also increased Over the same period, up to nearly 23% from 18% a year ago. This improvement was driven by better pricing, quarter as we saw increases of 12% 6% in price for highway de icing and C and I respectively year over year.

Speaker 2

Quarter. We did a great job getting back to the basics and focusing on winning markets that we can effectively and profitably service. Quarter. I'm also happy to note that despite the recent bidding season occurring on the heels of a winter that within the North American markets That we served had only 80% of the average number of snow days. Our base plan for 2024 shows us continuing to improve salt profitability fiscal 2020 fiscal year.

Speaker 2

After a rigorous multi year process, 2 core Fortress products were added to the U. S. Forest Service qualified product list and December of 2022. This opened the door to allow governmental agencies to purchase Fortress fire retardant products, which were the first new products to enter the market in nearly 2 decades. Fortress was awarded its first contract in May quarter and we consolidated our ownership of the company shortly thereafter.

Speaker 2

In June 23, we achieved another milestone fiscal quarter. When we dropped our first commercial product, the feedback that we've received on the efficacy of the products and the operational performance of the team has been excellent. Quarter. We're currently in the process of finalizing our contract with the U. S.

Speaker 2

Forest Service for 2024. We're off to a good start with Fortress quarter and we're excited about the high margin counter seasonal growth potential that this business can provide for the company. Quarter. We also improved the balance sheet and financial standing of the company during the fiscal year, which was another of our strategic goals. Fiscal year.

Speaker 2

Early in the fiscal year in October, we successfully closed on a strategic equity partnership with Coke Minerals and Trading to help fund Phase 1 of our lithium project and to pay down debt. We also improved our debt maturity profile in May with a successful refinancing that pushed our nearest maturity out to 2027. As a result of our focused execution on this goal, year over year, we saw an improvement in our available liquidity, quarter. A decline in our net debt outstanding and a lengthening of our debt maturities. Quarter.

Speaker 2

The last strategic goal that I'll touch on today relates to safety and our efforts to build a culture of 0 harm. I say this year. Almost every earnings call due to its importance. We make safety a top priority because it's the right thing to do for our people quarter and it's the right thing to do for our business. Safety is often a leading indicator of operational performance.

Speaker 2

And if you can't do the basics of keeping yourself and your colleagues fiscal year. How can you possibly operate reliably and efficiently? Our employees have clearly embraced the culture we're building here around 0 Harm fiscal year 2019. And it shows in our results. Specifically, our total recordable injury rate dropped approximately 8% to 1.17 fiscal year 2019.

Speaker 2

And our lost time injury rate declined from 0.93% from a 1.02% or 9% in the comparable year ago period. Quarter. Those are outstanding numbers, particularly in the complex operating environments that we have here at Compass Minerals. Quarter. I want to extend my thanks to all the employees across the company for their commitment to safety and contribution to these outstanding results.

Speaker 2

Quarter. As I reflect on the year, it's disappointing to know that the solid steps forward we made across our business We're drowned out by noise and uncertainty that arose in Utah around our planned lithium project. We're determined to resolve those questions as soon as possible quarter. We remain engaged with Utah leaders on that front. Compass Minerals has unique high quality assets that have tremendous value.

Speaker 2

I'm confident that the intrinsic value of the company will be recognized with continued strong execution. So with that, I'll now turn the call over to Loren.

Speaker 3

Fiscal 2020. Thanks, Kevin. I'll begin my remarks by discussing our fiscal 2023 performance before providing perspective around our outlook for fiscal 2024. Fiscal quarter. Starting at the consolidated level, 4th quarter results primarily reflect weaker plant nutrition sales offset by improved profitability in the salt business year over year.

Speaker 3

Consolidated revenue declined 6% year over year quarter to $233,600,000 Consolidated operating earnings declined to $3,900,000 while adjusted EBITDA was slightly quarter year over year at $33,000,000 Net loss for the quarter narrowed to $2,500,000 from a net loss of $5,500,000 year over year. Quarter. For the full year, a below average highway de icing season and the impact of adverse weather conditions in California on the Plant Nutrition business negatively impacted the company's revenue. However, the Salt business demonstrated improved profitability that allowed for gains in consolidated operating earnings adjusted EBITDA year over year. Consolidated revenue was 3% lower at just over 1,200,000,000 fiscal year.

Speaker 3

Consolidated operating earnings was $79,100,000 up $36,200,000 year over year and adjusted EBITDA of $200,800,000 rose $12,300,000 year over year. Net income from continuing operations was $15,500,000 versus a net loss of $37,300,000 in the prior year. Our full year effective income tax rate came in at 53%, quarter, which is influenced by the fact that throughout the year we booked valuation allowances on U. S. Deferred tax assets.

Speaker 3

Quarter. Excluding the impact of valuation allowances, our full year effective income tax rate was roughly 22%, quarter, which is below the range we guided to last quarter. The rate came in below our expectation, primarily due to lower estimated income associated with Fortress earnings slipping into the Q1 and the refinement of certain foreign tax estimates. Moving to the Salt business. Quarter.

Speaker 3

On a quarterly basis, segment revenue was essentially flat year over year at $186,700,000 quarter, resulting from a 9% increase in price, offset by a 9% decrease in total sales volumes, which declined for both the highway deicing and C and I Salt Businesses. Highway de icing price rose 11% year over year, while C and I price fiscal year 2020. The increase of 8%, reflecting continued pricing power across both product lines. Quarterly distribution cost per ton decreased 8% year over year due to favorable freight rates within the C and I business, while all in product cost per ton increased 4% year over year, quarter driven by the impact of unplanned downtime. Operating earnings increased 91% to $28,800,000 quarter, while adjusted EBITDA improved 29 percent to $44,400,000 year over year.

Speaker 3

For the full year, fiscal year. Salt segment revenue was flat year over year at approximately $1,000,000,000 A below average highway de icing season in our fiscal Q1. In North America, it was a leading cause of a 10% decrease in total sales volumes with highway de icing volumes down 11% C and I volumes down 6%. Higher highway de icing and C and I salt pricing led to an increase in overall segment pricing of 11% year over year. The decline in volumes and increase in price were consistent with the value over volume strategy that we pursued in 2023 and was the driver of this business' improved profitability.

Speaker 3

Quarter. On a per turn basis, both distribution and all in product costs saw modest increases year over year quarter of 2% and 6%, respectively. The Salt segment generated $170,700,000 in operating earnings and adjusted EBITDA of $230,700,000 up 47% and 26% respectively year over year. Importantly, the segment saw adjusted EBITDA margins improved by over 400 basis points year over year and adjusted EBITDA per ton recovered to over $20 per ton, which as Kevin mentioned was an important strategic objective for us this year. Turning to our Plant Nutrition segment.

Speaker 3

4th quarter revenue totaled $35,300,000 down 39% year over year, driven by a combination of a 26% decrease in price an 18% decline in sales volume. The decrease in price reflected the deterioration of global potassium fertilizer prices throughout the year. Quarter. This influenced purchaser behavior as throughout the year buyers didn't want to hold inventory quarter and generally waited to buy product until needed. Distribution cost per ton increased by 6% year over year due to the timing of market demand and associated railcar storage fees, while all in product cost per ton declined 2%.

Speaker 3

The segment had an operating loss of $1,600,000 for the quarter, down $14,200,000 year over year. Adjusted EBITDA declined $15,100,000 to $6,700,000 As we've discussed throughout the year, highly unusual weather in California was the primary driver quarter of the decrease in full year sales volumes year over year. For the full year, the segment generated $172,100,000 in revenue, quarter down 23% year over year, primarily due to a 23% decrease in sales volumes. Quarter. Distribution cost per tonne rose 6% year over year due to the impact of lower sales volumes on our fixed distribution costs, while all in product cost per ton were up 15%.

Speaker 3

Operating earnings for the full year totaled $11,200,000 quarter and adjusted EBITDA totaled $45,500,000 I would now like to provide a bit of color on Fortress' results for the year. Fortress had its 1st sales in 2023, but we recognized modest positive contributions from the business to revenue, operating earnings and adjusted EBITDA this period of $10,400,000 $3,200,000 $4,600,000 respectively. Quarter. Our initial contract with the U. S.

Speaker 3

Forest Service was largely structured as take or pay and covered the calendar year ending and December 23. We expected to recognize the vast majority of the value of the contract during our fiscal year ended in September based on historic patterns of wildfire activity. However, wildfire activity in the final quarter of our fiscal year, quarter, which included heavy rain in the Western U. S. From tropical storm Hillary was unusually mild.

Speaker 3

Specifically, calendar year to date through September, fiscal year 2020. Acres burn from wildfires in the U. S. Were approximately 36% of the 10 year average, according to the National Interagency Fire Center. As a result, while the ultimate value of the initial calendar 2023 contract is unchanged, quarter.

Speaker 3

The bulk of the revenue recognition related to the take or pay portion of the contract will occur in the current quarter, 3 months later than our original expectation. Quarter. Accordingly, approximately $12,000,000 in adjusted EBITDA that we had expected to impact the Q4 of 'twenty three will slide into the current quarter. Quarter. Overall, we were encouraged by the operating performance we saw at Fortress in its initial year of commercial operations.

Speaker 3

Quarter. Turning to our balance sheet. At quarter end,

Speaker 4

we had

Speaker 3

liquidity of $317,000,000 comprised of roughly $39,000,000 of cash revolver capacity of around $278,000,000 Net debt to adjusted EBITDA stood at 3.7 times at the end of the quarter. Fiscal 2020. Moving on to our outlook for fiscal 2024. The latest North America highway de icing bidding season has concluded quarter and we expect the average contract price for the upcoming North America winter season to be up by roughly 3% versus the prior year's bid season results and total committed bid volumes to decline by approximately 5% year over year. Quarter.

Speaker 3

Despite the 5% decrease in commitments, we are expecting an increase in sales volumes year over year quarter. Based on historical sales to commitment ratios and assuming we experience average winter weather activity, quarter. Snow days during last year's winter within our North America served markets were only approximately 80% of the long run average. Quarter. As a result, simply having an average winter should drive more than enough volume year over year to offset lower commitment levels.

Speaker 3

Fiscal year 2020. For Sol, we expect adjusted EBITDA in the range of $230,000,000 to $270,000,000 This is again based on the assumption that we have an average winter. Quarter. During our Q1 earnings call in February of 2024, we expect to update investors on where the salt segment is tracking quarter against the range of outcomes shown on Slide 14 of our earnings presentation. Then during our Q2 earnings call in May, quarter.

Speaker 3

We will revisit our salt guidance following the completion of the winter season. The outlook for Plant Nutrition EBITDA quarter is in the range of $20,000,000 to $40,000,000 despite meaningfully higher sales volumes. This level of performance margin wise quarter is well below our targeted potential for this business at this stage in the industry pricing cycle. And I'll now take a moment to discuss why that's the case. From a top line perspective, sales are projected to be higher year over year at roughly 300,000 tons, quarter primarily driven by a restoration of more normal West Coast demand conditions, assuming the extraordinary weather conditions that occurred last year don't repeat themselves quarter and higher production out of Ogden.

Speaker 3

Two factors, the continuation of elevated cash costs quarter and lower pricing year over year are offsetting the sharp sales increase. From a pricing perspective, We are assuming an average SOP price next year of around $6.60 per ton, which is roughly 4% year 2019, we expect to be approximately $30 below levels we experienced in the Q4 of 2023. From a cost perspective, fiscal year. Although cash unit costs are projected to decline year over year, they are still roughly $100 per ton higher than our targeted performance levels. Quarter.

Speaker 3

The reason for this is that while we have a production strategy supportive of restoring sales volumes back toward historical levels quarter. And you see that in our sales guidance. The naturally occurring pond tons, which have the lowest unit costs remain below historical levels. Quarter. Therefore, just as we did in 2023, this year, we intend to continue supplementing our production process with potassium chloride, a higher cost input to close the gap and cheaper pond tons available.

Speaker 3

Quarter. We expect this to enable us to achieve the yields and volumes required to deliver higher sales tons, but at a higher unit cost fiscal quarter. Over time, assuming current demand levels persist, using potassium chloride is expected

Speaker 5

quarter to allow us to maximize

Speaker 3

evaporation seasons and enable the replenishment of our stockpile, resulting in lower cost fiscal year 2020. We are pleased with the progress we made in the quarter. We are pleased with the progress we made in the quarter. We are pleased with the progress we made in the quarter. We are pleased with

Speaker 6

the progress we made in

Speaker 5

the quarter. We are pleased with the progress we made in the quarter.

Speaker 3

We are pleased with the progress we made in the quarter. We are pleased with the progress we made in the quarter. We are pleased

Speaker 5

with the progress we made in the quarter. We are pleased with

Speaker 6

the progress we made in the quarter.

Speaker 3

We are pleased with the progress we made in the quarter resulting in lower unit costs as that happens. Now that we have a production strategy that we expect to allow us to deliver sales tons quarter. In line with historical levels, a key operational initiative in 2024 will be to identify additional cost reduction strategies quarter to lower our unit costs. Such actions are not reflected in our guidance. However, we are committed to identifying a path to restoring the unit cost of this business closer to historical levels by lowering the cost in the short run and producing more pond based tons longer term.

Speaker 3

Turning to our corporate guidance. We expect this segment to come in

Speaker 2

quarter at a range

Speaker 3

of between minus $55,000,000 minus $65,000,000 As a reminder, corporate is comprised of 3 components: fortress, lithium and other. Other includes costs unrelated to the Salt and Plant Nutrition segments and the impact of our deep store document and records management business. As it relates to Fortress, we are currently working closely with the U. S. Forest Service to establish a contract for calendar year 2024.

Speaker 3

However, an agreement is not expected to be finalized until late December 2023 or early January 2024. As a result, quarter. Our initial guidance only includes the approximately $12,000,000 in adjusted EBITDA related to the 2023 contract quarter that we will recognize in the current quarter. However, our current expectation is that we will achieve at least a similar level of profit for our 2024 contract. When our negotiations have concluded and we have a finalized contract, we'll update our guidance accordingly.

Speaker 3

Fiscal 2019. Lithium related expenses are projected to be in the range of $5,000,000 $10,000,000 for fiscal 2024. Quarter. These costs will be heavily influenced by whether adequate regulatory clarity in USAA is achieved to resume lithium development. Fiscal quarter.

Speaker 3

Total CapEx is expected to be in a range of $125,000,000 to $140,000,000 and is comprised of 3 parts: sustaining CapEx related to salt and plant nutrition of approximately $90,000,000 to $100,000,000 CapEx of between $25,000,000 $30,000,000 related to the orderly suspension of the lithium project and Fortress related growth CapEx of approximately 10,000,000 quarter. In closing, our company remains well positioned financially and operationally with strong competitive positions in the production of essential minerals with few viable economic substitutes. As Kevin alluded to in his remarks, we made several positive steps fiscal 2020 3 that set us up well for success in 2024 as we continue focusing on maximizing the performance of our high quality salt plant nutrition and emerging fire retardant businesses. With that said, I will turn it back to the operator fiscal

Operator

quarter. Thank you. Star and then the number 1 on your telephone keypad. Fiscal year 2019. Fiscal.

Operator

We will take our first question from Joel Jackson with BMO Capital Markets. Your line is open.

Speaker 7

Good morning, everyone. I have a few questions. I'll go 1 by 1. On the 2024 guidance quarter and Fortress. So thank you for the color that you'd expect this year's contribution from Fortress to be at least similar to $12,000,000 fiscal

Speaker 3

quarter. So I assume what's

Speaker 7

going to happen in 2024 is there will be a bit of double counting, right? You have the 23 earnings that comes at 2024 fiscal. Just trying to think about a normalized 2024 earnings would be like. It sounds like it'd be a little bit higher than $12,000,000 contribution. And how would you expect that business to ramp into 2025 fiscal 2025?

Speaker 7

Just how the business is going to ramp? Thanks.

Speaker 3

So I'll start and then ask Jamie. So we did book about $4,000,000 or $5,000,000 of Fortress profit in 2023 and $12,000,000 will roll into next year. And so you add those together, you get kind of 15% and change. And it all depends on the level of profitability year 2019. That we see in this upcoming contract.

Speaker 3

Jamie, you want to elaborate?

Speaker 8

Yes. I think yes. So you think about normalized 23 was about 15 $1,000,000 or so, dollars 15,000,000 $16,000,000 Lauren's prepared remarks said we expect in 2024 to achieve something at least at that level. So the negotiations are ongoing. We're figuring out quarter, which bases what it looks like.

Speaker 8

It's likely that it won't be a take or pay scenario next year. So that's about all the incremental color we can give you right now.

Speaker 3

And Joel, rather than speculate, we just felt it would be better to let the dust settle And then update you in February.

Speaker 7

Right. Okay. So really this guidance number is It's a bare case guidance for Fortress. It's going to be better because

Speaker 4

from a normalized perspective. Exactly.

Speaker 7

Fair, right? Okay. Okay. On the salt business, looking at costs, I could be wrong, just first blush. It looks like maybe you're In your guidance projecting maybe about $1 per ton increase in salt cost.

Speaker 7

Is that right? If I'm not, let me know and tell me what's driving salt cost this year?

Speaker 3

Yes. From a cash cost perspective, salt costs are about flattish around roughly sort of $40 a ton and fiscal year. EBITDA per ton is actually up about $1 And so I'm not sure what you're seeing, but salt is up from an EBITDA per ton perspective and roughly flat from a cash ton perspective year over year.

Speaker 7

Maybe then in that flat environment before I pass the baton on, maybe talk about what on costs are up and what the costs are down? Thanks. Let's make it flat.

Speaker 3

So from a fuel perspective, which is important for that business quarter. And the first half of this year is where we'll consume most of the fuel. We're assuming Brent kind of in the mid-80s. And if you look year over year, that's kind of roughly flattish from that point of view. And then this relates to C and I.

Speaker 3

From a natural gas perspective, we are going to benefit from what we hope will be the absence of natural gas spike that we saw last year quarter. At a high level, Jamie, anything else you want

Speaker 8

to share? I would say on the operating side on the cash cost itself, quarter. We saw some unplanned downtime in 2023, items like that not expected to repeat. So, we've got some inflationary pressure on the input side fiscal, but that's being offset by improved production levels as we go into 2024 on Sol.

Speaker 7

Thank you.

Speaker 5

And we will take

Operator

our next question from David Begleiter with Deutsche Bank. Your line is open.

Speaker 9

Thank you. Good morning. Kevin, on lithium, are you is there a timeframe where you would say these negotiations is just fiscal year. Taking too long and we're going to move on and just not pursue lithium? Is there is it 6 months?

Speaker 9

Is it a year? Is it longer? That would be helpful. Thank you.

Speaker 3

Yes. I mean, look, that's a

Speaker 2

good question, David. It's kind of hard to pin it down. But what I'll tell you, I mean, there's kind of 2 work streams In terms of kind of how we're thinking about this, I think as everybody knows they released the draft rules quarter that were promulgated as part of House Bill 513. Those need to get sorted, so they're out for fiscal year 2020. I think we've made our comments on those and we'll work with the state to come up with a set of draft rules that govern how lithium could be extracted on the lake.

Speaker 2

And we have some concerns about the way they were released and we'll be at the table trying to bend that outcome in a way that works for us as well as folks in Utah. And then secondarily, there's the legislative session coming up After the 1st of the year that we'll obviously be involved in. So I think all that will kind of settle in Maybe the April timeframe. And I think that will give us the kind of clarity we need to make a decision on whether this thing still got legs or put it on the shelf for another time. So I would kind of direct you to that April, May timeframe next year.

Speaker 9

Very helpful. And just on Plant Nutrition, What do you think is normalized earnings in this segment? I think the last 4 years averaged maybe $55,000,000 to $60,000,000 EBITDA. Is that a good number or could it even be higher in terms of normalized?

Speaker 3

Yes, we're $100 below where we fiscal year. We expect this business to be on a cash cost basis. If you look back over the past 5 years, you multiply that times our tons and you get $30,000,000 fiscal year. This business is ought to be in that in the range you just referred to. And that's going to be a focus of our efforts in the coming years.

Speaker 3

From a long term perspective, as we harvest less and let the ponds just deposit and concentrate. We expect that we'll get better yields over that 2 or 3 year deposition process, but we're not going to just wait for that. Quarter. We're also looking at the cost base at Ogden in terms of things we can do in the near term to improve the cost base as we wait for the

Speaker 9

year. Very good. Thank you.

Operator

We will take our next question from Greg Lewis with BTIG. 50. Your line is open.

Speaker 4

Yes. Thank you and good morning and thanks for taking my questions. My first one was, I did want to go back on fiscal 2019. So as we think about free, it seems like that could be pulling back a little bit. Any way to kind of gauge how much of your freight costs are fixed or if they are like when we could see like Those agreements, I guess, recontracted or reset.

Speaker 10

Hey, Greg. We You're garbled up there. Could you please repeat your question for us?

Speaker 4

It was around cost fiscal year. What I'm trying to gauge is if we were to see freight costs generally across North America move lower, quarter. Like how should we think about the company benefiting from that impact, I. E, as you look at your freight exposure, how much of it's Kind of spot contracted, kind of that is my question. The first one?

Speaker 2

Quarter. Sure.

Speaker 8

Greg, this is Jamie. So we've assumed we talk about it in different buckets. Fiscal year. On the vessel and barge side for 2024, we're going to see typical inflationary pressure. A lot of those are fixed.

Speaker 8

Quarter. When we look at truck for 2024, we think the truck market is actually bottoming out now maybe Q1 and would be expected to rise Given the some of the freight supply rationalization, Conway, Yellow, bankruptcies, So we think the supply picture of freight is shrinking actually. And with the post pandemic destocking behind us, we think there's fiscal year 2020. Demand increase in retail over the next year. So we've baked into our plan and for 2024 increased truck rates really in the back half of the year.

Speaker 8

Now quarter. That is significant. It is a significant increase. Think of it as 15% or so. But if that does not occur and the quarter.

Speaker 8

Bottom stays in longer and freight rates don't rise, we would stand to benefit from that Versus our current operating plan.

Speaker 4

Okay, perfect. Super helpful. And then I did want to realizing that it's We need to kind of move forward in the project. But when we think about a strategic partner that you mentioned on the lithium side, fiscal. I mean, really with the project largely funded, at least Phase 1, like when we think about a strategic partner, Is that just really an offtake partner?

Speaker 4

Is that kind of a fair way to think about it? Or any kind of rough how you're thinking about like what you're looking for in terms of that quarter. And really just given what's the ongoing, I don't know, landscape in Utah, is that something where we probably won't see that partner until we kind of get more clarity and can move forward. And no, we've a better line of sight on when we could see I guess the lithium project move forward.

Speaker 2

Yes. So I think in terms of conditions precedent to having a partner, it would have to be regulatory legislative clarity in Utah where you've got a horizon that is suitable for long making long term investments. So clearly, as I mentioned earlier when David asked his question, there's work there to be done. And then secondarily, we still have we still want to prove out the Dust Guard unit to demonstrate to the world that, That is a scalable technology at commercial level. So anything that we would do with a partner would The conditioned upon those two criteria having been met.

Speaker 2

And then in terms of the type of the partner, we'd be looking for, I mean, Clearly a balance sheet to reduce our capital exposure at the project level. And then ideally, it'd be nice to have a partner that's got some sort of prowess in that domain space, Lithium or the EV World itself. So that gives you kind of some sense of how we're thinking about it.

Speaker 4

Okay. Super helpful. Thank you very much.

Speaker 7

Yes. Thank you.

Speaker 5

Fiscal year.

Operator

And we will take our next question from Vincent Anderson with Stifel. Your line is open.

Speaker 10

Yes, thanks. Good morning. Going back to the drivers of salt margin expectations, I mean, you hit on the variable components, quarter. Super helpful. But I was hoping you can maybe frame the season on season changes in fixed cost leverage.

Speaker 10

And then any incremental netback Positives or negatives based on the geographical mix of your commitments this year versus last year?

Speaker 3

Well, to the extent that our volumes increase as a result of a normalized winter, just This year leverage from a 3%, 4% increase in the tonnage on the same cost base will And that's what you're seeing. As it relates to fuel, as I said, to the extent that, that in fact is sort of flattish year over year. And we have taken some efforts that we referred to in the last call in terms of cost reductions. We refer to efforts at the sites to reduce cost, following our efforts at the corporate center to reduce cost. Those are the kind of things that if we can if they hang in there should allow us to see $1 or 2 increase in profit per ton.

Speaker 3

And that's what's in the midpoint of our guidance.

Speaker 10

Okay. Okay. That's helpful. And then just turning over to Fortress, just a 2 parter here. So first, does the CapEx budget reflect any on base investments?

Speaker 10

And then kind of related to that, you said you expect this year likely won't have take or pay contracts. But as I understand it, those are in place to help support initial commercialization of a new product. So should I interpret that as you expecting a high enough level of organic base wins that you'll no longer qualify for that?

Speaker 8

Yes, it's not a matter of qualification. Vincent, this is Jamie. It's a matter of how the agreement unfolds. The take or pay element of last year's contract was related to gallons. There are a number of elements in a contract that give us security around daily rates.

Speaker 11

So there are a

Speaker 8

lot of moving parts and that's why we've kind of said, hey, we're going to wait fiscal year 2020. And let this kind of give you some transparency after we finalize the contract. So there are quite a few things moving. As it relates to investment, one of the neat things about fiscal quarter. Our delivery mechanisms is that they're fundamentally mobile.

Speaker 8

So even though we get assigned a base on a permanent basis, so to speak, quarter. We have mobility. So we're investing for the future. That's the $10,000,000 in capital. Quarter.

Speaker 8

And we have flexibility to put that to manufacture that, get it ready and then deploy it to the bases that were awarded. So It's less capital intensive than a typical situation. We're not burying pipes and Pouring concrete and investing in infrastructure at basis, we have more of a mobile structure.

Speaker 3

And I would just add, when we do provide guidance on this business, we'll approach it similar fiscal Q4. So what you see in our earnings deck today with regard to salt. To the extent it's not take or pay, this will be a business that is subject to the wildfire season. And so you should expect us to come out with a range that tells you what we think a normal wildfire season would look like and the bell curve for that on both sides. And so I just want to underscore that you will have that dimension.

Speaker 3

No,

Speaker 10

that's helpful. I appreciate that. If I could sneak one more in for Kevin, actually, If I'm not mistaken, 2024 will put you on the back 9 of your Goderich overhaul. I was just hoping to get an update on priorities for this year and that maybe any larger projects plan for that March turnaround.

Speaker 2

Yes. So like the maybe the 11th poll of the back line just to be Just to be specific, Vincent. But yes, fair. We continue to drive our main entryways. George is not here.

Speaker 2

I don't have an exact percentage, but we're probably 65%, 67% of the way driven there. So as we've shared before, connecting up quarter. Those new entries with the shaft bottom and the new sections in the west of the mine will then promote Our ability then to kind of close the old section of the mine and stop Spending money, holding roof up and ventilating and lighting and all that sort of thing. So that's kind of first phase. And then we continue to develop the panels out in the West and some new panel infrastructure up into the kind of the North part of the mine.

Speaker 2

So you'll see The results can gradually start to filter through on a cost side over the next 2, 3 years as we've talked about before. There's not fiscal. Magic moment where all of a sudden costs precipitously fall. It will be gradual, But you'll start to see that as soon as we connect those roadways up. So I think we still got probably close to a year or so before we do get those connected up, but that's when you'll start to see things begin to change at Goderich.

Speaker 2

Vincent?

Speaker 10

Sure. No, very helpful. Thanks again everyone. Fiscal year.

Operator

We will take our next question from David Silver with C. L. King. Your line is open.

Speaker 11

Yes. Hi, good morning. Thank you. Couple of questions, I think. First, I'd like to ask quarter.

Speaker 11

About the inventory levels at September 30, I think it's one of the higher totals fiscal year. In recent years and it is up pretty substantially year over year. So just wondering if you could kind of talk about maybe the cost versus volume elements in there. Is this kind of a Carryover from a subpar or below average winter season last year. Just how to think about fiscal year.

Speaker 11

That inventory level at September 30 or maybe if you could update it for November 15 or something. I'll stop there. Thank you.

Speaker 3

Hi, David. It's Lauren. And when you look at 9.30 on a year over year basis, you're right, it is higher quarter and it's roughly half related to salt and half plant nutrition. In terms of plant nutrition, Ogden performed very well production wise throughout last year in the face of a sales environment that was severely diminished. And so quarter.

Speaker 3

We restored our inventory levels at Plant Nutrition to levels that are frankly more normal. And if there is any silver lining, That was it. From a salt perspective, we ran Goderich for a normal winter quarter. And only an 80% winter actually happened. And so those are two reasons for the inventory to be higher.

Speaker 3

Quarter. With that said, if you look back over the last 4 to 5 years from a volume from a units perspective, quarter. Our units of inventory are only up about 5% versus that average, 5% to 10%. It's inflation for that same unit that has risen. And one of the things that Kevin has fiscal year.

Speaker 3

I talked about is this notion that our customers understand that the cost of holding this inventory has gotten more expensive. And I don't know Kevin, if you want to elaborate, but we've restored the profitability of the business EBITDA per ton, but working capital is more expensive

Speaker 11

I'd also just ask you for an update, I guess, on your business realignment or your cost reduction program. You had some targets in terms of lowering the fixed cost base as of the kickoff, I guess, of fiscal year 2024. So if you could just update us on that, that would be great.

Speaker 4

Thank you. Yes. When we

Speaker 3

did an 8 ks where we laid out about $15,000,000 to $20,000,000 of costs that we were going after last year. And those were split roughly 50% SG and A, 50% cost of goods sold, maybe half salt, quarter Plant Nutrition, etcetera. And so we've captured those costs and they are reflected in this guidance that you see. Of course, there are offsets like merit that would eat into some of that along with other factors. But We feel good about what we've accomplished and it's reflected in our guidance.

Speaker 11

Okay, great. And then maybe just a last one. I would like to go back to Fortress. And I understand there's quite a few moving parts on how your first fire season went And timing issues and whatnot. But I believe you had some longer term, I guess, market share targets for how your product might be positioned once it's fully accepted in the market.

Speaker 11

And any thoughts about where your market share shook out this 1st year quarter. And whether the expectation is that that share would be maintained or increased over the next year? Thank you.

Speaker 8

Yes, sure, David. This is Jamie. We were right around the 3% to 5% share

Speaker 5

fiscal 2020.

Speaker 4

As it relates to the U. S. Forest Service

Speaker 8

total contract in 2023, we expect that to grow that year on year. We absolutely fiscal year. We expect to increase our base count and expected volumes as we negotiate this contract here this month, quarter, hopefully to be resolved later this month or early January. And then we'll build from there. Our expectation is to continue to Reinvest in the business, add basis, add share and grow over the next several years.

Speaker 8

So quarter. Nothing on that front has changed. That was part of the investment thesis when we made the acquisition. And we feel good about where we how we're positioned and we can deliver on that plan.

Speaker 11

That's great. Thank you very much.

Speaker 5

Fiscal year. And we will take

Operator

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

Speaker 12

Yes, good morning. I had one on the salt business and specifically around the 3% pricing outcome from the fiscal 2024 contract bidding season quarter. And maybe Chuck, I propose you can still look back at 2023. So you specifically used the words like referring to your value over volume strategy in 20 20 3, but I didn't I don't think I have heard those words reflecting 24. So I'm curious about the outcome this year.

Speaker 12

Is it partly a function of that strategy still or is it more simply a function of other considerations like quarter. Whether it's the inflation, for example, you flagged the interest rates and higher carrying cost of inventories or other residual inflationary costs quarter or some other dynamic like the Windsor mine strike. Just wondering if you could provide additional color on that. On the value over volume strategy, if that's persisting. Thanks.

Speaker 3

Let me hit that At a

Speaker 2

high level, Chris and then Jamie probably want to add some color. But we approach the bid season again with the same mindset, which is value Over volume, let's focus on areas that we're geographically advantaged from a delivery and transport cost that last year. Tough in this business like any business and we stayed very disciplined through the whole marketing season. Competitors do what competitors do and they're driven by different things. But our goal was to promote value in the marketplace, which is what we did.

Speaker 2

And I'd like to just hand kudos to the team for delivering 3% price up in the face of or on the heels of an 80% winner, Which is kind of unprecedented when you think about it. So our team did good, I think, in terms of kind of promoting that value in the marketplace. And quarter. I would tell you that you can expect that strategy to continue going forward as we try to march above $20 a ton quarter and continue to move that number up

Speaker 5

over time.

Speaker 12

Okay. That's helpful. Thanks. And then just one quick follow-up on fortress. And I believe there was some incentive or premium pricing that was applicable, maybe even a government statute to incentivize alternative 5th quarter when there's like a sole source situation.

Speaker 12

So curious if that will apply to the fiscal 2024 supply agreements when they're more definitive.

Speaker 8

Yes. So our the open solicitation currently is a sole source. So fiscal year 2020. Our competitor has a sole source contract as do we for 2024. So yes, that continues into 2024.

Speaker 8

The terms could be a little bit different than they were in 2023, but fundamentally it's the same structure. Fiscal year 2020. And then ultimately over time, we expect this to move away from that mechanism and move more into a competitive environment with bidding regional bidding occurring from year to year.

Speaker 12

Okay. And then, sorry, could you just then the follow-up is just on the situation in Canada. I think they were effectively piggybacking off the U. S. Approval for this product.

Speaker 12

Is there You just provide any color on how that's progressing as well? Thank you.

Speaker 8

Yes. The Canadians use the U. S. Forest Service QPL. Our focus in North America for the early days of this business are the U.

Speaker 8

S. Forest Service contract, Cal Fire and then Canada. So yes, we are able to compete up there, but our focus right now is in the U. S.

Speaker 9

Thank you.

Operator

Quarter. And we will take our next question from Jeff Zekauskas with JPMorgan. Your line is open.

Speaker 13

Quarter. Thanks very much. Can you briefly discuss how management comp changed fiscal year 2020. And our incentive comp changed in 2023 versus 2022 and how it might change in 2024.

Speaker 2

So there are a couple of components of incentive compensation, Jeff. 1 is kind of a cash bonus annual incentive plan. And I'm sitting here thinking, but I don't think that changed from 1 year to the next. It's driven off of cash flow, EBITDA, safety and some shared goals and ESG activities that kind of thing. The long term incentive plan which is stock based plan did change.

Speaker 2

Have we disclosed that yet? Quarter. No. So you'll read about that coming up here shortly. So the short term incentive plan didn't change.

Speaker 2

The Long term incentive plan and plan, the stock based plan is going to change modestly from 1 year to the next. You'll read about that in the upcoming proxy.

Speaker 11

Okay.

Speaker 13

You talked about looking for a partner in your lithium project. So if it turned out that fiscal year 2019. Regulatory developments were favorable. Would you then begin spending as you did before partner. Would you continue to spend?

Speaker 13

Can you just clarify the importance and the timing of the selection of a partner if things resume.

Speaker 2

Well, that's a lot to unpack in there, Jeff. I mean, I think the ideal outcome for us is to have a partner at the project level Yes, for Liz, again to allay some of that capital risk. And as I mentioned earlier to the

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Earnings Conference Call
Compass Minerals International Q4 2023
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