Compass Minerals International Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 10, 2023

There are 8 speakers on the call.

Operator

Good morning, ladies and gentlemen. Welcome to the Compass Minerals Fiscal Second Quarter 2023 Earnings Conference Call. There will be a question and answer session. Now at this time, I would like to turn the call over to Mr. Brent Collins, Vice President, Investor Relations.

Operator

Please go ahead, Mr. Collins. Thank you, operator. Good morning, and welcome to the Compass Minerals fiscal 2023 2nd quarter earnings conference call. Today will discuss our recent results and update our outlook for the remainder of 2023.

Operator

We will begin with prepared remarks from our President and CEO, Kevin Crutchfield and our CFO, Lauren Crenshaw. Joining in for the question and answer portion of the call will be George Schuler, are our Chief Operations Officer Jamie Standen, our Chief Commercial Officer and Chris Shandell, our Head of Lithium. Before we get started, I will remind everyone that the remarks we make today reflect financial and operational outlooks as of today's date, to May 10, 2023. These outlooks entail assumptions and expectations that involve risks and uncertainties that could cause the company's actual results may differ materially. A discussion of these risks can be found in our SEC filings located online at investors.

Operator

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, are available online. The results in our earnings release issued last night and presented during this call reflect only continue operations of the business other than amounts pertaining to the condensed consolidated statements of cash flows or unless noted otherwise. Will now turn the call over to Kevin.

Speaker 1

Thanks, Brent. Good morning, everyone, and thank you for joining us on our call today. Before beginning the call, I wanted to welcome Jill Gardner to our Board of Directors. Jill joined the Board last week and brings a wealth of financial are in a position to create value for you, our shareholders, seizing opportunities and mitigating challenges when either arise. Will be able to provide a brief update on our strategic objectives that we set for the organization in fiscal 2023.

Speaker 1

Have heard me outline these objectives on past calls, and I'll take a few minutes to provide an update on each of those areas. I'll then comment briefly on the quarter before turning the call over to Lauren to discuss our financial performance in more detail, and safety and specifically our drive towards 0 harm will always be a key area of focus for our company. We owe it to our employees and their families to foster an environment where employees know they will go home to their families at the end of the shift in the same condition as when they left. Safety performance is also often a leading indicator of operational performance. The safest mines in the world are also the most productive.

Speaker 1

Will be in the range of $1,000,000,000 to $1,000,000,000 We make safety a priority because it's the right thing to do for our people and it's the right thing to do for our business. Last year was an outstanding year for safety performance. And I'm proud to say that year to date, we're performing even better are in line with our track safety metrics than we did in fiscal 2022. Achieving 0 harm is a high bar, are in the complex operating environment that we operate in. However, several of our sites have proven it's possible continue to pursue that goal each and every day.

Speaker 1

With respect to our salt business, our objective for 2023 was to improve the profitability of that segment to levels that we've historically delivered. Specifically, we've talked about restoring profitability to around $20 of EBITDA per tonne for the segment for fiscal 2023. As I've outlined previously, will be able to see the 2020 3 bidding season with a disciplined pricing strategy and focus on securing sales commitments in markets that are geographically are very competitive and relatively efficient to serve. For the Q2, we saw the average gross sales price for the salt segment increased 12% return to approximately $82 per tonne, driven by improved pricing in highway de icing salt from the comparable period last year. Favorable pricing dynamics combined with essentially flat distribution and cash operating costs resulted in EBITDA per tonne increasing 64% purchase to just over $20 per tonne, up nearly $8 from roughly $12 per tonne last year.

Speaker 1

Although the year is not over, I'm pleased with the progress the team has made to restore profitability following the extremely challenging inflationary environment we experienced in 2022, charting a path to improve the reliability and sustainability of our SOP production was another strategic objective for this year. Know we continue to face significant headwinds on this front. One thing I do want to make clear is the reduced sales volumes year over year that we've experienced during our Q2 are not a function of production issues. Operationally, we've been ready to service customer demand. Have continued to delay the application season for growers.

Speaker 1

Again, when those challenges abate for our customers, we stand ready to respond. From a longer term perspective, however, our focus with respect to this part of our business remains optimizing sustainable production levels of our Ogden Pond complex across a variety of weather scenarios. Progress continues to be made in that regard and we'll provide a more detailed update on this initiative when appropriate. The next objective I want to touch upon involves the advancement of our battery grade lithium development at Ogden. As indicated in our release yesterday, we were engaged in what turned out to be a particularly busy legislative session in Utah have been participating in the past quarter for those of us who share in the overall goal of maintaining a healthy Great Salt Lake, while at the same time balancing the needs its many diverse stakeholders, including the mineral extraction industry.

Speaker 1

Specifically, legislation promulgated as a part of this recent Utah state legislative session introduced new regulatory and cost elements into the framework that will govern the development of lithium on the Great Salt Lake and certain of these provisions relating to severance taxes, royalty agreements, leasing rights and burn management have created some near term uncertainty until regulatory rulemaking can be completed in the coming months.

Speaker 2

Are in

Speaker 1

the range of $1,000,000,000 Our operations at Ogden were founded over 50 years ago with the original intent to extract lithium. Are available. Today, with our technology provider, EnergySource Minerals, we have a commercially viable technology that allows us to extract a 4th mineral from our existing operating stream and recycle the brine back into our pond system. Lithium development is new for the state and we fully appreciate its desire are expected to receive fair value from the development of that resource. However, we'll continue to pursue this opportunity only if 2 critical criteria are met.

Speaker 1

Are: number 1, that it makes economic sense for our shareholders from a risk adjusted financial return perspective and 2, predictability of the regulatory regime in Utah. These criteria are true in any mining jurisdiction or project and Utah can be no exception. Historically, Utah has long been considered an attractive operating environment are expected to be in the range of $1,000,000 due to their historic understanding of the economic and social value our industry creates. And based on preliminary discussion, we expect this are set to continue. As we've previously announced, the full development of Phases 12 of our lithium project would represent an approximate $1,000,000,000 investment on the Great Salt Lake.

Speaker 1

Clearly, to justify that investment, we must have clarity and certainty on the evolving regulatory framework we will be working under to assess the potential impacts on our project. Therefore, as we continue advancing the demonstration unit presently under construction and proceeding with developing an FEL2 engineering estimate with all deliberate speed and an abundance of caution, we'll defer publicly sharing again, we've been a responsible and productive operator on the Great Salt Lake for over 50 years. We've been an important contributor to the Utah economy for decades, and this project has the potential to bring Utah to the forefront participate in the Q2 of 2019. As part of the domestic supply chain for Critical Minerals, I'm cautiously optimistic that as we've done time and again with regard to our other mineral resources on the Great Salt Lake, we will reach a favorable accord with the State of Utah on a path forward for our planned lithium development have served the best interest of all stakeholders. Moving on to our other commercial growth pillar.

Speaker 1

Yesterday, we announced that we had acquired the outstanding 55% interest in Fortress North America, bringing our ownership stake to 100% for upfront consideration of approximately $26,000,000 in cash, contingent milestone consideration in cash or stock are valued at approximately $28,000,000 and an earn out of $0.30 per gallon of product sold over the next decade. For those of you who are not familiar with Fortress, it's a next gen fire retardant company that utilizes our magnesium chloride and other salt production as the key ingredients in its formulations of aerial and ground fire retardants. The aerial fire retardant industry has essentially been a monopoly for over 2 decades. Bob Burnham and his team are entrepreneurs as well as fire, aviation, chemistry and government contract experts who saw an opportunity to develop a suite of products that were more effective are being used and better for the environment than the incumbent products being used. Our relationship with Fortress began in early 2020, first start with the call.

Speaker 1

Initially as a supplier of magnesium chloride, which we produce out of our Ogden facility. Through the years, we had the opportunity to work closely with Bob and his team. And as we learned more about their business, we ultimately made a strategic investment in their company. In December 2022, Fortress became the first new company in over 2 decades to have long term aerial fire retardants added to the U. S.

Speaker 1

Forest Service qualified product list or QPL after meeting or exceeding rigorous testing across a number of categories and evaluations. Being added to the QPL was a significant step toward full commercialization of Fortress products As it provides the pre approval to government agencies around the world who use the U. S. Forest Service QPL as the chief qualifier for purchasing and which allows them to procure and use the company's products. Then early this month Fortress reached an agreement with the U.

Speaker 1

S. Forest Service that will result in Fortress supporting up to 5 are in the range of mobile deployed air bases with product and associated services in the upcoming 2023 fire season, start utilizing Fortress new state of the art mobile and fixed retardant mixing units. The U. S. Government recognizes that competition in the market are expected to be eligible to sole sourcing for essential products and services.

Speaker 1

And accordingly, there are programs that provide on ramps turn the call over to the retirement market where it would like to see competition occur. Under a framework used by U. S. Government agencies, including the U. S.

Speaker 1

Forest Service, will be able to boost competition in critical sectors where government is the primary buyer, a substantial portion of Fortress activity will be contracted by the U. S. Forest Service in fiscal 2023. We anticipate operating under a similar framework in 2024 as well And then moving into more open competition in 2025. In the simplest terms, this program establishes a glide path and encourages Fortress to build additional scale.

Speaker 1

The combination of Fortress products being added to the QPL and the recent agreement with the U. S. Forest Service granting the company its first tranche of basis provides sufficient visibility Fortress business model has always aimed at achieving at least a 50% share of the market, and we believe progress toward that goal can be accelerated as a result of this transaction. There's a meaningful value creation opportunity to realize by fully integrating Fortress into our company, thereby taking full advantage of our deep logistical and production capabilities. I'm thrilled that Bob and his highly experienced leadership team will be staying on to run the Fortress business and joining the Compass Minerals family.

Speaker 1

Enhancing our financial position was the final strategic objective that we set for fiscal 2023. The strategic equity investment by Coke in October of 2022 was a critical step in achieving that goal as it provides a substantial amount of non debt related funding pursue Phase 1 of our lithium development. Another important element to achieving this objective was addressing the near term maturity of the $250,000,000 in notes that were set to mature in July of 24. In recent days, we've issued $200,000,000 in term loan A notes and expanded our credit facility to allow us to fund the redemption of the July 2024 notes. In doing so, the maturity of our revolving credit facility has been pushed out 3 years to 2028 and our closest significant maturity is now 4 years away with our $500,000,000 senior notes due in 20 27.

Speaker 1

Obviously, the credit markets have been somewhat fragile in recent months given the recent banking sector turmoil. So I want to acknowledge Loren and his team for successfully navigating that process against a very challenging macro backdrop. We expect to see a strengthening of our credit provide an overview of our outlook for the Q2 of 2019. And over time, with improved Salt segment profitability and the incremental financial contribution from Fortress, Driving deleveraging in the shorter term and eventually contributions from lithium longer term. Both of these new business ventures are expected to enhance our long range credit profile from a growth business diversification and scale perspective.

Speaker 1

In early April, we announced via an 8 ks that we had taken the initial steps to rationalize the cost structure of our company, with the express goal of improving and maximizing the profitability of our Salt and Plant Nutrition businesses. Will be able to execute on the Q2 2023 earnings conference call.

Speaker 2

At the time, all participants will be

Speaker 1

able to execute on the first phase of that effort began with headcount reductions equivalent to approximately 16% of our corporate workforce, which combined with elimination of certain consulting services and other overhead costs is expected to benefit our operating earnings and adjusted EBITDA are expected to be in the range of $17,000,000 to $18,000,000 per year beginning in fiscal 2024 year over year, all else being equal. Will be completed in the second half of the year and will be focused on reducing costs at our production and packaging sites. Are ready to take questions. These types of actions are never easy, but we're committed to improving the profitability of those core businesses, This initiative is a proactive important step toward achieving that goal. Now before I turn the call over to Lauren, I I want to make a couple of comments about the quarter.

Speaker 1

Regarding Salt, I'm pleased that we were able to improve operating earnings and EBITDA for Salt on both an absolute and per unit basis. Volumes in the highway de icing business were down 19% year over year with a portion of this decrease due to the moderate weather that we experienced during the Q2 and a portion of it are in the range of $1,000,000 relating to our decision last bid season to focus on value over volume. We deliberately chose not to pursue certain business last fiscal year, so that we can improve our profitability. It goes without saying that it's hard to grow volumes when you're reducing and I'm pleased that we were able to make a substantial improvement in that regard in the Q2. Our focus for the Salt segment are centered on managing costs and maximizing profitability through optimizing our customer and geographic sales mix.

Speaker 1

As we approach the upcoming bidding season, we intend to pursue full value for the soft products we provide in our served markets. As I noted in my earlier comments, Plant Nutrition unfortunately continues to be impacted by exceptionally difficult weather in California are entering our sales efforts in that important market. The amount of precipitation that California has received this year is frankly amazing, start ranking as the 7th wettest year over the last 129 years as an immediate consequence of all this rain and snow that is that growers simply cannot access their fields and orchards. And as a result, they're not able to make applications that we would normally expect to see And our 2nd fiscal quarter. The good news is we don't see any structural changes with respect to use and demand of SOP in California.

Speaker 1

Are in the range of $1,000,000. Fortunately, pricing for SOP continues to be strong, with the average selling price increasing approximately 8% year over year. Per unit distribution costs increased primarily due to changes in regional sales mix. The increase we saw all in product cost per ton reflects operational measures taken to mitigate the impact of the below average 2022 evaporation season and the impact of the temporary natural gas spike that we had in the Q1. We also had a small belt fire at our Ogden facility during the quarter and the related repairs added some incremental operating costs in the quarter.

Speaker 1

We were able to quickly implement a temporary system have allowed us to have minimal downtime. Kudos to George and his team for how they responded to that incident. As a result of these puts and takes, we saw adjusted EBITDA for Plant Nutrition decrease to $8,000,000 in the 2nd quarter. Reflecting on where we stand at midyear, I think we've done a good job addressing the things that are within our control. Are performing well and the Fortress acquisition is an exciting new avenue for growth.

Speaker 1

We'll continue to work on optimizing the Plant Nutrition business said that we're primed to take advantage of opportunities as weather conditions normalize. Regarding lithium, are in the position of the company. I'm guardedly optimistic that we'll come to an agreement with the state regarding essential agreements, particularly the royalty structure and operating parameters that are prudent economically enable us to confidently advance both phases of our project. Our lithium vision remains serving as the critical input enabler toward the creation of a robust North American advanced battery supply chain.

Speaker 2

Ready to

Speaker 1

take questions. With that, I'll now turn the call over to Loren to provide more detail on the quarter.

Speaker 2

Thank you, Kevin. On a consolidated basis, revenue was $411,000,000 for the Q1, down 8% year over year. 2nd quarter consolidated operating earnings improved to $47,900,000 up 140% year over year, while adjusted EBITDA from continuing operations was $77,400,000 up 19% year over year. Take a look at the Q2 2020 3 earnings conference call. At this time, I'll first take a look at the Q2 of 2019.

Speaker 2

The key takeaway is that despite revenue declining due to lower volumes, we substantially improved our profitability year over year. Begin with our Salt segment. Salt revenue totaled $361,000,000 for the quarter, down 8% year over year, were driven by 17% lower sales volumes, offset by a 12% increase in average gross selling price. Are in the range of $1,000,000,000. The highway de icing business experienced 12% higher pricing year over year to just shy of $70 per tonne, while sales volumes were down 19% year over year, reflecting a combination of our value over volume commercial strategy in the 2nd quarter that was below average from a weather perspective within the markets that we serve.

Speaker 2

Looking at the 11 representative cities we've discussed in the past, there were 83 snow events reported during the Q2, down 27% year over year are down 23% from the 10 year average of approximately 108 snow events. With this year's de icing season behind us, The winter, as measured by snow days in our core markets, was roughly 80% of the historical 10 year average for snow days. Are not a normal winter, but not an exceptionally poor one either. Specifically, for the winter to date period through April, we had 127 snow events, which is lower than last year's 152 and below the 10 year average of 159. Within our C and I business, volumes declined 5% year over year, driven by below average winter activity, are offset by increased sales in non deicing product lines.

Speaker 2

Average pricing within C and I rose 1% to approximately $178 per tonne. By holding total cost essentially flat year over year and driving through the price increases last bidding season, we were able to drive Salt segment operating earnings and adjusted EBITDA higher despite lower sales volumes on both an absolute and per ton basis. Operating earnings for the segment were $73,000,000 in the quarter, an increase of almost 50% year over year. EBITDA came in at $88,900,000 an increase of 36% year over year. Importantly, EBITDA per tonne was $20.19 which is in line with historic levels of profitability.

Speaker 2

As Kevin discussed earlier, restoring the profitability of the Salt business was a strategic objective for this year. Turn to our Plant Nutrition segment. Unusual weather developments in some of our most important markets continue to weigh on our sales efforts in the 2nd quarter. Sales volumes were down 19% year over year. As I'm sure most of you are aware, California have seen an incredible amount of precipitation over the last several months and it has wreaked havoc on the agricultural community out there.

Speaker 2

The rain and snow they have received has made even the most basic tasks like growers accessing their fields and orchards difficult to do due to mud. This in turn impacted their ability to apply fertilizer resulting in lower volumes year over year. On a positive note, prices were up 8% year over year to $7.96 per tonne.

Speaker 3

Reported to the Q2 of

Speaker 2

fiscal 2020. The net impact to revenue during the quarter was a decrease of around $7,000,000 or 12% year over year. Distribution costs on a per tonne basis were up 12% year over year due primarily to changes in regional sales mix. All in product cost per tonne were up 19% year over year. 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 last quarter on our standard cost pushed all in product costs higher.

Speaker 2

While these items were known and included in our last outlook, the fire Kevin mentioned obviously was not. Comprised of roughly $250,000,000 of cash and revolver capacity of around $286,000,000 while net leverage stood at 3.5 times. Also, as Kevin indicated earlier, we were pleased to successfully execute a refinancing of our notes due in July 24 despite the current banking sector backdrop. We approached the refinancing with 4 objectives in mind: 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. Achieved each of these objectives as part of the refinancing with pricing up only 25 basis points at the current portion of the pricing grid, provide a solid financial update on our financial results and reduction in term debt outstanding by $50,000,000 and a credit agreement that now contemplates the prospect of a wide range a potential non debt lithium funding sources ranging from government grants to streaming to equity at the Ogden asset level.

Speaker 2

Our supportive bank group is essential on our journey to accelerate growth and reduce weather sensitivity by expanding into the adjacent markets of lithium pursue our next generation fire retardants. We're thankful to have a long term oriented supportive bank group on our transformation journey. Turn into our outlook for the rest of the year. I'll begin with Salt. The performance guidance for the Salt segment across various weather scenarios remains unchanged from the guidance we provided last quarter.

Speaker 2

We expect that results are likely to come in present the range of $215,000,000 to $255,000,000 of EBITDA. Our full year outlook for Plant Nutrition remains unchanged from our prior guidance, start with profitability outcomes ranging from $30,000,000 to $60,000,000 of EBITDA, which reflects the heightened uncertainty regarding SOP fertilizer pricing and sales, provide higher production costs and extraordinary weather in several core markets, including California. During our last earnings call, we laid out 3 scenarios that frame the range of guidance that we have provided. Currently, we are tracking most closely to the midpoint of the range. Turning to Fortress.

Speaker 2

This acquisition changes our financial disclosures some going forward. We will now fully consolidate its results rather than just picking up our proportionate share of its net income. As a result of this transaction, whereas our prior guidance assumed Fortress would incur operating losses throughout fiscal 2023, to a range of $65,000,000 to $70,000,000 down from our prior range of $75,000,000 to $80,000,000 reflecting our now positive expectation of the profit contribution from Fortress this fiscal year. As we noted in our press release yesterday, we expect Fortress to generate revenue of $20,000,000 to $25,000,000 in fiscal 2023 With operating earnings and EBITDA expected to be in the low double digit 1,000,000 of dollars. Fortress aspires to win 50% market share over time and has a business strategy to achieve that goal.

Speaker 2

While we are pleased with a contribution this fiscal year to EBITDA in the low double digit 1,000,000 of dollars, we certainly didn't buy Fortress for its year 1 financial contribution. Its earnings power is much higher than that and quite substantial in our view. We see a path for the company to grow earnings meaningfully pursue sizable market share gains and at scale expected to enjoy profitability levels as good as and we think likely better than what the market incumbent currently generates. We estimate the addressable North America market for aerial fire retardants to be roughly 70,000,000 gallons or between $200,000,000 $250,000,000 in revenue. If we are successful at gaining market share at attractive margins as we expect the implied multiple that we are paying for Fortress will prove to have been quite reasonable.

Speaker 2

Turn to our CapEx guidance. We have lowered our projected total CapEx for fiscal 2023 by $30,000,000 at the midpoint earnings call to a range of $150,000,000 to $175,000,000 This is comprised of lithium development CapEx in the range of $60,000,000 to $75,000,000 funded by proceeds from the Coke transaction and sustaining CapEx in the range of $90,000,000 to $100,000,000 in the range of $1,000,000 which is unchanged from our prior estimate. The $30,000,000 reduction in projected lithium related spending reflects 2 drivers: further refinement in the project's engineering, which has resulted in a lower estimate of project costs for the demonstration unit provide an adjustment in the timing of select long lead time items. We continue to advance the construction of the commercial scale DOE unit, Finally, from an interest expense perspective, we have raised our projection for fiscal 2023 slightly to a range of $55,000,000 to $60,000,000 put approximately $5,000,000 at the midpoint from our prior range, reflecting the increase in our pricing grid by 25 basis points as part of the recent refinancing. With that, I will turn it back to the operator to open the lines for Q and A.

Speaker 2

Operator? Are welcome

Operator

to take questions. We'll take our first question this morning from Joel Jackson of BMO Capital Markets.

Speaker 4

Good morning, everyone. So maybe a few questions for me. I think it's are confusing, to be honest, some of your guidance around salt. So you say the company indicates that it's the same guidance as last February for salt when you said that you'd be below the midpoint of guidance, so below 235, and now you're saying you're going to be within the range. So are you saying that you're going to be below the midpoint of guidance still for this year?

Speaker 4

Thanks. And answer that also for volume too, please, for the excuse me, interrupt the high with the icing button. Thank you.

Speaker 2

I appreciate the question. Our financial guidance of $2.15 to $2.55 for SALT is unchanged. Directionally, we now do believe that we've got a path towards the midpoint of that range, but the $215,000,000 to $255,000,000 is unchanged. But directionally, we do feel more comfortable with the middle part of that range, which reflects some positive dynamics That Jamie can elaborate on, whereby despite an 80% winter, several of our markets have tracked much higher than that in terms of our budget. But Jamie,

Speaker 5

maybe you can elaborate. Yes. I think that while on balance, the winter was pretty mild. There were areas of strength and in those areas such as Wisconsin, Minnesota, we have higher than average margins there. So while the volumes are down, we were able to sell higher margin tons, which helps

Speaker 3

us get into the put a little bit

Speaker 5

of that guidance range, even though volumes are lower than normal than average.

Speaker 4

Okay, that's helpful. Then a couple of questions more on Fortress. So can you talk about if you think about fiscal 2024, what are some realistic bold, bare and base cases for the types of volume type of gallons you might be able to do, type of earnings you might be able to do, everyone talk about like a reasonable fair case, did I say fair case based case for you? Thanks.

Speaker 2

Yes, I would start and then let Jamie elaborate. This is Lauren by saying, as we think about this business, we think about the long term and think What I should share with you is what we think the earnings power of this business is. These founders who we salute today have a case to established 50% market share. And if we're successful, we think this business has earnings power in the $40,000,000 to 50,000,000 dollars of EBITDA range $40,000,000 to $50,000,000 We're just getting started and are thrilled to have this first tranche of basis, are not in a position or comfortable talking about 2024, but thrilled to reach this milestone and we'll share more in the coming quarters. Jaime, anything you want to share?

Speaker 5

No. I just think that under this construct, we're currently working with the U. S. Forest Service on what 2024 looks like. So we don't want to talk about that yet.

Speaker 5

And like Lauren said, we'll give more information in due time.

Speaker 3

Okay.

Speaker 4

And then just finally, it's early, but what are your kind of views right now on bid season. So what are channel inventories like in different regions? You've got a lot of are kind of volatile up and down, but what's kind of your view on how big season they should go? Should we use the average winter 2%, 3% growth or do we have to use some other base case there?

Speaker 2

I would say that obviously

Speaker 5

supplier inventories are a bit elevated because the winter was not was below average. It varies in pockets. I already mentioned the strength we saw in the upper miss. The Ohio River was pretty weak, but supply is pretty tight in the South, which is in our South region that Ohio River Valley. You also have to consider inflation is still a factor to the market and competitor supply.

Speaker 5

There is some activity there. So some mines being down, absorb some of that winter weather weakness. And we feel good about extracting value, optimal value through this bid season that's well underway now.

Speaker 3

And Joel, this is Kevin. And to be perfectly clear, we plan to continue this value over volume approach. And to Jamie's point, there are there's a mine that fell out of the mix. There's one that's producing way less than it used to because it's on strike. So Nothing is unfolding thus far that we would consider surprising.

Speaker 3

And we continue to approach the season from a value over volume standpoint to extract fair value for our products.

Speaker 2

Thank you.

Operator

Thank you. We go next now to Vincent Anderson of Stifel.

Speaker 6

Yes, good morning. So to follow on that Fortress line of questioning, I guess just when we think about 2023 guidance then, is that an appropriate kind of per base run rate of revenue? Or does that include some amount

Speaker 5

it's going to ramp up through the season. We don't know what revenue exactly is going to look like in 2024. So it wouldn't be appropriate to just use average run rates and some growth mechanism. We're just not ready to talk about 2024 yet. We believe we'll sell more gallons to the U.

Speaker 5

S. Forest Service in 2024 as this ramps up, but we're just not ready to talk about that on a per unit basis.

Speaker 2

And I would say, I know that folks would want us to share sort of a 5 year view of market share. I would just reiterate, we think the earnings power of this business is kind of $40,000,000 to $50,000,000 You would discount that back to determine how long it takes us to achieve that at some reasonable discount rate and we'll provide more perspective, but that's the earnings power and we think it's quite an attractive transaction.

Speaker 6

All right. Fair enough. Maybe I'll shift gears then a little bit. So will the acres that deploy your product this year, assuming it's required, Will those receive some kind of active monitoring to continue to compare and contrast with the competitive product?

Speaker 5

Are you talking are you still talking about fire retardants?

Speaker 6

Yes, still Fortress. Participants Yes.

Speaker 5

I'm not quite, yes, I'm not sure I understand.

Speaker 6

Yes. Can

Speaker 5

you ask that again?

Speaker 6

You're going to be deployed this year in the field officially. And will there be Active monitoring of how your product performs.

Speaker 5

Yes. No, so the product efficacy is defined, established and that's actually what gets us on the QPL as well as the environmental benefits, etcetera. So there is not this is a process where we are ramping up scale kind of 5 mobile retardant bases through the summer to various locations. We're currently working on that operational plan now with the expectation that the 1st base deploys in June and then ramps up through the season. And it'll be working the bases will be in similar locations to the incumbent and able to operate at the same time at the same places throughout the season.

Speaker 6

Okay, Got it. I'll switch to something simpler really quick here, mineral rights. So on the Utah legislation, I believe your current royalty rate at Ogden is around 5%. There's a new severance tax that needs to be better defined, but Yes, like 2.6% on something. But on that base 5% royalty rate, does the new legislation personally change that or encourage regulators to capture a greater change or is the number not really the big question mark And it's more around omitting the berm consideration.

Speaker 6

But from an economic perspective, is that number really subject to much change?

Speaker 3

Hey, Vincent, this is Kevin. Number of considerations there. First thing I would want to say is, We've been on the Great Salt Lake for a long time and have a good reputation out there and we're working very what I would consider to be very collaboratively with the state legislature out there across a variety of fronts as it relates to rulemaking tied to House Bill 513. Yes. One of the issues is clarification around royalty because we've been very clear with the state to the extent you want to have discussions about that.

Speaker 3

We need to know ahead of time because we're deploying a lot of capital here and we can't deploy capital if the royalty rate is going to be Some sort of variable structure. So we're it's very clear we're going to have a severance tax and are having discussions with royalties as we speak along with leasing rights and firm management issues as it relates to Lake Health, etcetera. But we're confident that we're going to be able to work closely with the state are going to be able to capitalize this project over the long term. Anything you would want to add to that, Chris?

Speaker 7

Thanks, Kevin. So this is Chris. The project remains an incredible and an exciting opportunity for growth for Compass. The thing that we talked about earlier as well is the synergy aspect that you see With the 4th Mineral. And as you talked about mineral rights, just a reminder of what makes up a mineral rights.

Speaker 7

There are 6 pieces to that. One is the lakebed leases, The upland leases, water rights, mineral extraction rights, lakebed construction and maintenance and finally, the mineral royalties. And so with regards to lithium, what we're doing now and what we've been working on for the past month is really coming to a conclusion on lithium royalties. And as Kevin talked about, there is some uncertainty as to what that will be. And so that's currently being negotiated start with the state right now, but we feel comfortable that we'll land in the right place.

Speaker 6

Perfect. Thank you so much.

Operator

Will be ready for questions. We'll go next now to Seth Goldstein of Morningstar.

Speaker 5

Hi, good morning everyone. Thanks for taking my questions. If we assume normal weather in Plant Nutrition end markets next year, operationally, what would be your path to volumes and is there a plan to get operating costs down to restore profits?

Speaker 3

Couple of things I'll add and then I'll let George add some color. Good question. We do believe Restoration of normal back to more normal weather patterns given the precipitation that's occurred out there along with participants are going to alleviate some of the production issues that we've been having there As it relates to the bond system and we have every belief that we can restore volumes consistent with what we've experienced in the past. And then as we said in our prepared remarks, we have Phase 2 program we're running internally to look at costs across the entire platform of Compass And that does not exclude Ogden. So ensuring that we keep maintain our costs under control and I'll Given the high fixed cost nature of some of our assets, Ogden being 1, the volume effect is a big deal as it relates to cost.

Speaker 3

Anything you want

Speaker 5

to add to that, George? Yes. Look, maybe George Schuler, just a couple of comments there, Kevin. In regards to this debt, we have pursue those goals, one of those being to increase our pond based SOP production, 1st and foremost. The second piece of that is really post during our pond complex resiliency for the long term.

Speaker 5

When you look at some of the costs that we had that hit us here in 2023, I will call that somewhat one off. We got our spike in natural gas price for this year around 3,000,000 And then also in regards to that, we had a small fire out at Ogden in our belt tube that goes up to the load out, really minimal impact there. But again it did impact cost about $2,000,000 so we had some KCL usage. But going forward, to address the questions around future production, we can control the KCL as we do that as we go forward. So we'll add that when it's strategic to do so.

Speaker 5

But in addition, as Kevin highlighted, we will control our costs. One of the things that we're absolutely doing is addressing our total manufacturing costs, not only at Ogden, but all our sites across the platform, as we've talked about in our next step. And probably the third thing I'd mention there is really when you look at where we are and we've talked about a lot about drought in the past and the impacts of drought and the weather conditions, we've had incredible year in snowpack. That bodes well for us in our pond production, in our ability to add mineral returns that set us up for really several years going forward. So we do have a lot of confidence in what we've been working on for the last year to 1.5 years, and I think we're starting to see some real progress in regards to that.

Speaker 5

Thanks, Kevin. Okay. That's great. Thank you for all the details there. And to follow-up on sort of the long term company wide cost optimization, can you share an update on the Goderich long term improvement plan?

Speaker 3

Yes, probably not a whole lot to update on relative to last quarter, but we continue to drive those new gate roads To the Northeast and that's progressing nicely. George can comment on how much that is probably We're at least halfway done. But that's the linchpin to implementing the new mine plan that's getting those new have a strong track record of long term roadways connected up between the active area of the mine at the shaft bottom. And that progress continues nicely, which as we've discussed, that will allow us to abandon that old section of the mine and stop spending money on it with regard to ventilation, roof control, etcetera. And that will begin to demonstrate levels of productivity improvement over the course of time.

Speaker 3

So, all of this is occurring kind of invisible from an external perspective because it's all captured in cost of goods sold that there's a big development project underway and we're still remain very excited, very confident about what Goderich and the future is going to look like. Anything you want to add to that, George? Yes. Seth, again, this

Speaker 5

is George. Just it probably gives me an opportunity to just recognize Godwitt's across the new main development is going extremely well. I do think that bodes well as we go forward from our from a Goderich mine perspective, looking at where we'll continue to improve our cost and improve our productivity at Godrej. So that's all I'll add. Thanks, Kevin.

Operator

Have a good day. And gentlemen, it appears we have no further questions this morning. Mr. Crutchfield, I'd like to turn the conference back to you for any closing comments.

Speaker 3

We thank you for taking time to participate in our call this morning. Look forward to keeping you updated in the interim and to the extent you have any questions or whatever, please feel free to call Brent. We look forward to updating you again next quarter.

Operator

Will be joined by the end of the call. Thank you, Mr. Crutchfield. Ladies and gentlemen, that will conclude the Compass Minerals' fiscal Q2 2023 earnings conference call. Would like to thank you all so much for joining us and wish you all a great day.

Operator

Goodbye.

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Earnings Conference Call
Compass Minerals International Q2 2023
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