Compass Minerals International Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
February 8, 2024

There are 11 speakers on the call.

Operator

Ladies and gentlemen, good morning. My name is Abby, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Compass Minerals 1st Quarter Fiscal 20 24 Earnings Call. Today's call is being recorded and all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Operator

If you would like to ask a question during that time, simply press Thank you. And I will now turn the conference over to Brent Collins, Vice President of Investor Relations. You may begin.

Speaker 1

Thank you, operator. Good morning, and welcome to the Compass Minerals Fiscal 20 24 First Quarter Earnings Conference Call. Today, we will discuss our recent results and update our outlook for fiscal 2024. We'll begin with prepared remarks from our President and CEO, Edward Dowling and our CFO, Lauren Crenshaw. Joining in for the question and answer portion of the call will be George Schuler, our Chief Operations Officer Ben Nichols, our Chief Sales Officer and Jenny Hood, our Chief Supply Chain Officer.

Speaker 1

Before we get started, I will remind everyone that the remarks we make today reflect financial and operational outlooks as of today's date, February 8, 2024. These outlooks entail assumptions and expectations that involve risks and uncertainties that could cause the company's actual results to differ materially. A discussion of these risks can be found in our SEC filings located online at investors. Compassminerals.com. Our remarks today also include certain non GAAP financial measures.

Speaker 1

You can find reconciliations of these items in our earnings release or in our presentation, both of which are available online. I will now turn the call over to Ed.

Speaker 2

Thank you, Brent. Good morning, everyone, and thank you for joining us on our call today. I look forward to engaging with you as Compass Minerals' new President and CEO. I'll begin my remarks today by discussing some of the announcements we've made over the past several weeks. Yesterday, we shared within our quarterly earnings that we decided to terminate our lithium project in Utah.

Speaker 2

As I expect most of you know, this was a brownfields project that would have enabled the extraction of 1 additional mineral salt, in this case, lithium fluoride to carbonate as a co product within our existing SOP salt, magnesium chloride production streams at the Ogden operations. Unfortunately, the environment surrounding this project has evolved drastically from when we began inventing this project several years ago. The proposed regulatory changes have led to significantly increased uncertainty. When you combine an uncertainty regulatory environment with other changes that have occurred within the commercial For lithium, Resolve project has a higher than acceptable degree of risk and uncertainty. This requires a higher return in order to justify such investment.

Speaker 2

It's understood that projects like this carry risk and willing to take and manage measured risk. However, we will not invest into uncertainty. We ultimately included there's just too much uncertainty in this project. I will note that the lithium content in the Great Salt Lake is a significant resource that's not going anywhere. We have the ability to revisit to develop the resource in the future, clearly that's not today.

Speaker 2

We'll continue to monitor and engage appropriate legislative and regulatory processes in Utah as well as watch emerging commercial developments to preserve the long term optionality of that resource. As a result of the decision not to move forward with the lithium project, we have disbanded the lithium development team. Chris Shandell, Heather Lithium has left the company as have another of talented individuals who worked to advance the program. I want to thank Chris And the lithium team for their efforts over the last couple of years were some of the best in their future endeavors. In concert with these actions, we're taking charge in this quarter that reflects our decision to exit the lithium program, which includes severance costs for the employees that are leaving the company as well as impairment of certain lithium related assets and future commitments, which Lauren will discuss in more detail.

Speaker 2

Next, I'll discuss our recent CEO transition. When Kevin Trucksfield joined Compass Minerals in 2019, His mandate from the Board was to address the following: 1, fix what has been a challenging production period at the Guybridge mine and repair significantly strained relationships, labor relationships at the mine 2, exit South America and 3, determine if there is any areas of growth adjacency to the company's core business of the health, Salt and Plant Nutrition. I've known Kevin for 3 decades. He's a talented executive of the highest integrity and personal character. Over his time here, he successfully address all three of these challenges.

Speaker 2

As we know, the last year has been a challenging one for Compas Mills. Ultimately, the Board and Kevin agreed that a change in leadership was in the best interest of the company. This change allows employees and the investment committed to refocus on our advantage assets that underpin our core salt and plant nutrition businesses as well as the emerging and exciting fire retardant business. Behalf of the Board and personally, I want to thank Kevin for his leadership over the past several years and his continued support during this transition. Looking forward, I'm excited about the opportunities ahead of us at Compass Minerals.

Speaker 2

I've been on the board here for just under 2 years. More broadly, I spent the totality of my career in mining industry, both on executive and operating roles around the world. I've been fortunate to work in almost every mining environment you can imagine. And I think I bring an acute understanding of what it takes to achieve operational excellence and drive improved profitability in mining. I successfully led numerous cost reduction and capital efficient efforts for several companies in the past.

Speaker 2

Given these experiences and my familiarity with the company's advantage assets, The Board determined that I was the right person to lead the Compass Minerals at this point in his journey. In addition to maintaining a safe and responsible operations that Compass Minerals is known for, the mandate I have is pretty simple, is to improve free cash flow generation and returns on capital we provide to our shareholders. I'm confident that we can get there by improving production effectiveness and asset efficiencies in our Salt and Plant Nutrition businesses. We'll adopt a more stringent approach to evaluating capital requirements. We'll execute strategies aimed at reducing working capital.

Speaker 2

We'll also thoughtfully build out our emergency fire retardant business. Our company has a tremendous set of unique and proven assets It would be almost impossible to replicate today, but we must and we will take actions to maximize the performance of these assets. During our most recent earnings call, we laid out 6 strategic focus areas for fiscal 2024. Those were: build on our strong safety performance and our continuous drive for 0 harm across each of our facilities 2, maintain a disciplined pricing strategy in our North American highway de icing business and focus on geographically advantageous markets 3, execute on strategies to deliver more reliable, sustainable Ogden production 4, achieve clarity regarding Utah's regulatory regime as it relates to lithium production. Again, as we've gained increased clarity on this matter, We're now the pens down on lithium.

Speaker 2

5, continue to scale the manufacturing and supply chain capabilities of our fire retardants business on its path to full commercialization increased market share and 6th, maintain a strong balance sheet and prudent fiscal policy. Those areas remain the same today and we'll approach them using improvement, cost improvement and capital discipline and tool sets and a renewed emphasis on improving the management of our operating expenditures, capital expenditures and working capital. In the coming quarters, she expect to hear more from us about the progress we're making in these areas. Again, I'm extremely excited about the opportunity to lead conference minerals through this next In addition to a great set of assets, the company is blessed with a talented and committed group of employees. My wife and I are looking forward to relocating to the Kansas City metro area and I'll be coming more involved in the local community here.

Speaker 2

With that, I'll turn the call over to Lauren to review the quarter.

Speaker 3

Thank you, Ed. On a consolidated basis, Revenue was $342,000,000 for the Q1, down 3% year over year. Our profitability this quarter was impacted by the $75,000,000 impairment we took related to our decision to terminate our lithium project in Utah, which Ed referenced earlier. The consolidated operating loss was $55,000,000 versus operating income of $28,000,000 last year. We reported a net loss of $75,000,000 for the quarter, which compares to a net loss of $300,000 last year.

Speaker 3

Adjusted EBITDA was approximately $59,000,000 slightly lower than the $62,000,000 in the prior year period. I'll begin with the Salt segment, where revenue totaled $274,000,000 for the quarter, down 11% year over year. The main theme here is that we experienced extremely light volume on account of exceptionally mild weather we saw across our core markets during the Q1. Specifically, highway de icing volumes were down 22% year over year to 2,300,000 tons and C and I volumes, which include retail de icing products were down 5% over the same period to 589,000 tons. Total Salt segment volumes were down 19% year over year and reflect the fact that the Q1 was the 4th worst quarter with regard to snow event activity within our served markets that we've seen over the better part of 3 decades.

Speaker 3

In fact, December 23 was the worst December over that span. So despite the fact that our commercial group did a fantastic job on pricing. Highway deicing price increased 7% and C and I price increased 3%. The weather didn't cooperate the way we'd like to begin the year. While the snow data is disappointing, It is important to remember a couple of things about the weather.

Speaker 3

First, over the long term, about 70% of the snow days in our served markets occur in the 2nd fiscal quarter. So there is a lot of winter left in this season. 2nd, statistically, looking at historical data, A weak Q1, one that is below the historical average, has not historically foreshadowed a below average second quarter. Specifically, when we look back over the past couple of decades, we see that in the 10 first quarters With recorded snow days below 90% of the long term average, 70% of the time, the Q2 of that year was at 90% or greater of the long term second quarter average. So again, It is simply too early to state with any confidence how the rest of the winter season will play out.

Speaker 3

Distribution costs on a per ton basis were basically flat year over year. All in product costs on a per ton basis rose 9% year over year and reflect C and I Salt sales representing a higher percentage of the sales mix this quarter and fewer sales tons to absorb cost in the period. Despite these challenges, we earned more this quarter year over year as measured by operating earnings for the segment, which were $51,000,000 up nearly 7% year over year and as measured by adjusted EBITDA, which came in at $66,000,000 up 8% year over year. Our adjusted EBITDA margin improved by over 400 basis points And adjusted EBITDA per ton was $23 We worked diligently over the past couple of years to control the things we can control and improve and maintain the profitability of the Salt business. These effects were reflected in this quarter's results and reflect a positive takeaway during the quarter in which we didn't get any help from the weather.

Speaker 3

Moving on to our Plant Nutrition segment, you'll recall that calendar 2023 saw incredibly dry conditions Early in the year in California quickly shift to historically unprecedented flooding conditions, the combination of which severely impacted sales throughout last year. From a commercial standpoint, the good news is that demand has returned as we expected in our core West Coast markets And we had sales of 75,000 tons this quarter, which is an increase of 67% from the prior year quarter. The pricing dynamic for SOP continues to reflect the excess supply of potassium based fertilizer in the market, which led to a 29% decrease in price per ton year over year to $6.60 per ton. The net effect of higher volumes and lower pricing was an increase in Plant Nutrition revenue of 19% year over year. A significant portion of the Plant Nutrition businesses distribution costs are fixed.

Speaker 3

So the increase in sales volumes benefited distribution cost per ton in the quarter by 11%. All in product cost on a per ton basis were up 4% year over year. The net impact of these drivers is that 1st quarter adjusted EBITDA declined from $19,000,000 to approximately $6,000,000 year over year as the favorable impact of higher volumes was more than offset by significantly lower pricing and higher cash costs. At Fortress, our results related to the calendar 2023 contract were a little better than we expected. We recognized approximately $13,000,000 in adjusted EBITDA during the quarter associated with the take or pay provisions of that contract.

Speaker 3

Also regarding Fortress, we recognized a roughly $3,000,000 non cash charge related to an increase in the valuation of the liability associated with the Fortress acquisition and the contingent consideration related to that transaction. As a reminder, when we purchased Fortress, approximately 50% of the purchase price was contingent, with roughly half of that linked to the achievement of certain business development milestones and the other half based on volume sold and paid over a 10 year period. As of December 31, the net present value of this liability approximately $47,000,000 Each quarter, there will be gains and losses as the liability is mark to market to reflect changes in the discount rate used in the valuation and changes in our outlook for the business. Because this liability was established as part of an acquisition, The accounting guidance does not allow for the non cash mark to market to be added back to reported adjusted EBITDA. However, our adjusted EBITDA would have been $3,000,000 higher if we added back that non cash charge.

Speaker 3

That $3,000,000 expense is captured in other operating expenses on the income statement. Lastly, with respect to our lithium program, As Ed mentioned, we have made the decision to not move forward with that project. As a result of that decision, in our view that the risk adjusted returns on capital of moving forward with the project are inadequate. We have disbanded the lithium function and are recognizing a charge of approximately $77,000,000 related to the impairment of associated assets and future commitments, as well as the severance costs of those team members that will be leaving the company. Before leaving the income statement, I'll make a couple of quick comments on income taxes.

Speaker 3

First, the effective tax rate for the quarter is not meaningful due to the impact of the impairment that we took in the quarter. 2nd, in periods like this year, when our U. S. Businesses are under earning, It creates income mix issues where our worldwide income consists of foreign income driven by our salt business That is significantly offset by U. S.

Speaker 3

Losses driven by our plant nutrition business. These dynamics are driving the estimated tax guidance for the year, which excludes the impact of valuation allowances and the lithium impairment. Moving on to the balance sheet. At quarter end, had liquidity of $246,000,000 comprised of roughly $38,000,000 of cash and revolver capacity of around $208,000,000 Net leverage stood at 4.3 times at the end of the quarter. Moving on to our outlook for the rest of the year.

Speaker 3

The 2024 adjusted EBITDA guidance for the Salt business that we rolled out on our last call depicts a bell curve showing earnings outcomes ranging from a mild winter on the low end, a normal winter in the middle and a strong winter on the high end. Our goal in taking this approach was to provide a reasonable distribution of results that could be anticipated across different weather outcomes. With 70% of the winter still ahead of us, we continue to feel comfortable that we will fall within our guidance range and that it would be premature to make any adjustments at this point in time other than to acknowledge that the odds of a strong winter are now remote. As a quarter to date update, January snow events in our service markets came in around 94% of the long term average. And there was quite a bit of cold weather in January that generated good demand across our platform.

Speaker 3

Overall, at this point, We think the range we provided is still a fair estimation of the potential outcomes as we continue to closely monitoring How weather during the Q2 plays out. Shifting to plant nutrition. Unfortunately, the macro environment for fertilizers remains Challenging from a price perspective, recent data points within the broader MOP market indicate what is at least short term Downward pressure on potassium based fertilizers. Our team has done a great job maintaining what we see as a fair premium value for SOP relative to MLP. However, we see more downside than upside risk over the balance of the year.

Speaker 3

Against that backdrop, we are adjusting our plant nutrition guidance down to reflect several risk factors over the balance of the year. First, MOP prices continue to face pressure as I indicated, and we must manage an attempt to balance available market value versus targeted demand. 2nd, the continuing weakness in fertilizer pricing is resulting in a large number of buyers remaining inventory conscious. In deflationary environments, buyers moved to just in time purchasing behavior, further adding to the competitiveness of every time we compete to in the market. And 3rd, 1st quarter pond based production at Ogden fracked at the lower end of our initial projections.

Speaker 3

As a result of those factors, we now expect the adjusted EBITDA for the year to be in the range of $15,000,000 to $35,000,000 Moving on to corporate. Our corporate expense includes everything not related to salt and plant nutrition. So it includes our corporate overhead, the cost of our now terminated lithium program and the positive contribution of Fortress. Overall, our total corporate guidance is not changing at this time. Lithium related expenses for the year will be at the lower end of the guidance we provided given the elimination of the lithium function.

Speaker 3

However, this reduction is being largely offset at this time by the non cash expense related to marking to market Fortress contingent liability that I discussed earlier. These two items offset one another and therefore our guidance for corporate is unchanged. Digging in a bit more on each of these, regarding lithium, as a result of our lithium program termination, we will see the amount of lithium expense decline approximately $5,000,000 This reflects costs up through late January when we move forward with our headcount reductions. The one time costs associated with exiting that program like severances won't be captured in this guidance since they are an add back for adjusted EBITDA purposes. Regarding Fortress, subsequent to our last earnings call, which occurred in November, the U.

Speaker 3

S. Forest Service changed the solicitation contract requirements for the calendar 2024 contract and this has resulted in delays in the negotiation and finalization of a contract for the 2024 fire season, which starts in the April May timeframe. We continue to expect to have a finalized contract prior to deployment for the upcoming fire season. As a reminder, we do not have anything currently baked in to our 2024 guidance for the calendar 2024 U. S.

Speaker 3

Forest Service contract. Accordingly, we are leaving guidance unchanged with respect to what we've included in for Fortress at this time. Once our contract is finalized, We will adjust our guidance appropriately. Finally, our corporate adjusted EBITDA guidance does not include the costs associated with certain senior executive management changes we have announced in recent weeks. Such costs are expected to be in the range of $6,000,000 to $9,000,000 and these costs will be recognized in the 2nd quarter and treated as an add back to adjusted EBITDA at that time.

Speaker 3

Finally, moving on to CapEx. We have lowered CapEx slightly by $7,000,000 at the midpoint to a range of $120,000,000 to $130,000,000 consistent with Ed's prior remarks regarding our focus on reducing the capital intensity of the business. Specifically, we are reducing our estimate of sustaining CapEx by $10,000,000 at the midpoint to a range of $80,000,000 to $90,000,000 Lithium expenditures for the year are expected to be around $30,000,000 reflecting in flight spending prior to suspending the projects. I would note that not all of that $30,000,000 will ultimately be reported in the cash flow statement as capital expenditures due to the timing of the impairment and when we ultimately pay for some of those in flight items. Finally, we continue to expect to invest approximately $10,000,000 to support the continued growth of Fortress and that guidance is unchanged.

Speaker 3

That summarizes our Q1 results and our outlook for the remainder of the year. With that, I'll turn the call over for questions. Operator?

Operator

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

Speaker 4

Hi. Thanks for taking my questions. I have a couple. I'm going

Speaker 2

So can you talk a

Speaker 4

little bit about the balance sheet and liquidity and free cash flow? The Q the fiscal Q1 cash flow burn was quite a lot. Should we expect a really good return to good inflow of cash in Q2? You can talk about it's going to look it looked like prior years. And then it looks like you're really pushing up against the covenants here.

Speaker 4

Do you need to issue equity right now and to stabilize the company?

Speaker 3

Hey, Joel. Thanks for that question. It's Lauren. This quarter we did see a meaningful cash burn and there are several factors related to it that are unique and will not repeat. 1, from a lithium CapEx perspective, cash out the door and actual accrued was $20,000,000 We will not spend $20,000,000 on lithium going forward.

Speaker 3

And so that was a one time factor. Inventory was roughly flat sequentially. AR was up as you would expect. The big factor was accounts payables, where DPOs as we ended the year were abnormally high. You saw them normalize this quarter.

Speaker 3

The bottom line is this coming quarter, the threethirty one quarter, you should expect a significant positive from change in working capital. And I expect that this will be the largest this will be the only quarter where we have this sort of a cash burn. So you should see a major positive in terms of cash flow in this quarter And there were some unique factors that drove the burn in the Q1. I'd also add the SEC settlement payment was made and so several unique factors in that regard.

Speaker 2

Joel, this is Ed. I'd just like to Complement what Lauren just said is that our focus, which has historically been around earnings, has changed in the company and primary focus is cash production and it's our intention going forward to reduce our debt and improve the ratios that Lauren previously mentioned at the 4.3 net debt to EBITDA. We want to get this back into historical and where our peer groups are.

Speaker 3

And Joel, the 4.3 was well within the 5 times covenant for this quarter. And so, no, we were well within that covenant. We'll see substantial cash flow going forward. And equity, I think, is not anything at all to even contemplate as it relates to our covenants. We are comfortably within those covenants.

Speaker 3

And I would say The nature of our business is that we do scenario planning every year. We look at mild, we look at normal, we look at strong winters and we are blessed to have an exceptional bank group, Many of which have been with us for over 20 years and we'll be prepared for any scenario. But no, equity, I think that's Not anything that anyone should imagine. No.

Speaker 4

Okay. My follow-up question on Salt is Most of your official commentary, although Lauren or Ed or I think it was Lauren did comment about what it was Lauren what January looked like, but The artificial commentary is acting like it's January 1st when it's actually February 8. So I did appreciate Lauren updating on this call what's happened in snow The last 5, 6 weeks. But the question I have for you is, such a mild winter, anything can happen. We're getting to we're deep into the key winter months now and it's getting into March.

Speaker 4

You have to start making decisions like customers are probably now quite below trending quite below their 80% minimum or the minimum spent, minimum volume equipment, you have to make mine plans at Goderich and elsewhere to make sure you don't over produce. So can you talk about what discussions are happening internally or externally, start making mine plan decisions, customer minimum decisions, whether you're going to spend them into rollovers next Those must be discussions you have to start planning for in such a mild winter.

Speaker 2

Yes. Joel, we're historically, We plan for certain winners and produce to that. And when you end up with a weak winner, we end up with too much inventory stored, which versus a cost to the balance sheet. We're running the business differently. At this point, we're building flexibility into the operations.

Speaker 2

We'll be reviewing where we stand going forward and adjust production side accordingly to better manage capital in the company going forward. So there's a lot of detail behind that. Happy to chat to you about that separately. But Philosophically, that's where we are and we're going and things are already being done.

Speaker 3

I think it is worth adding, Joel, that it's funny, A lot of questions several years ago around were around Goderich and its production levels. And now in times like this, These are times where you actually would consider tapping the brakes. And as we look to protect our balance sheet and George can elaborate, we are thrilled on the one hand that We have restored Goderich to the levels that we have, but at the same time, we're also pleased that we're in a position where we can take actions To tap the brakes as necessary. George, maybe you

Speaker 5

can talk about Yes, sure. Thanks, Joel. This is George Shuler. I just want to add on to a little bit what Ed said and also Lauren. We've already taken action over the last several weeks to better align our mine production to match its inventory levels.

Speaker 5

So Just a little bit more than what Ed said. We've already taken action to adjust that and I feel confident that that will It will improve both our inventory levels where they need to be, but also make sure that we're maintaining our mine cost at the right level. Thank you. Thank you, Alex.

Operator

We will take our next question from David Begleiter with Deutsche Bank.

Speaker 5

Ed,

Speaker 3

besides lithium, are there other assets in

Speaker 5

the portfolio that you and

Speaker 6

the board are looking at or Are there options for?

Speaker 2

Look, the lithium, of course, was predominant in our mind. We want all of our assets to perform in terms of returning ROIC, return on invested capital in excess of our weighted average cost of capital. I'm putting here 3 weeks now. I haven't been able to review all my thoughts with the Board yet, But that will become clear in time. We're working really hard to see what this business can be and we'll make the decisions accordingly, okay?

Speaker 6

Got it. And just on penetration given the earnings pressures this year, are you considering taking additional cost actions here for the either temporary or permanent On the cost side?

Speaker 2

I'm sorry, I missed the word. Yes.

Speaker 3

It's regarding plant nutrition. And David, this business is $100 a ton above where it should be from a cash cost perspective. Half of that relates to our use of KCL, we are absolutely focused on getting those costs back in line with historical averages through a combination of fixed cost reductions as well as restoration of the ponds so that we don't have to use as much KCL, which is burdening our results.

Speaker 6

Perfect. Thank you.

Speaker 7

And we will take

Operator

our next question from Jeff Zekauskas with JPMorgan. Your line is open.

Speaker 6

Thanks very much. In your agricultural business, your volumes were up, I don't know, 50% more than the 4th quarter, but the EBITDA wasn't really very different. And I get it that prices were down a little bit, but what was the magnitude of the Cost overruns or the problems with pond production, how much did that burden you in the quarter? And what exactly happened?

Speaker 3

I'll approach that 2 ways and then ask Ben to comment. As I look at the Year over year impact to profitability, it is predominantly for the Q1 related to price. There's a $2.60 difference between the price a year ago and the price today, which is quite substantial. I would say about 2 thirds of the decline is attributable to price and about a third is attributable to cash costs. I mentioned earlier the KCL dynamic And I would characterize it that way, but it's predominantly related to price.

Speaker 6

But sequentially, your prices Are down just

Speaker 3

a little bit though, right?

Speaker 1

Can you analyze how that's sequentially?

Speaker 3

So my answer was in regard to the year over year impact. From a sequential point of view, you're right. We only saw about a sequential decline of about 5% or so in the average selling price. And so The impact sequentially would have been principally related to cost. And I've said before That is principally related to the KCL.

Speaker 6

All right. And then in your inventories, your inventories are close to 400,000,000 And historically, maybe a peak inventory level for Compass is 300,000,000 Do you have to really cut production rates in your salt business for the remainder of the year in order to get your inventories down?

Speaker 3

I would focus on days for two reasons. Due to inflationary dynamics, We have higher valued inventories. If you just look back over the past 3 or 4 years and the team has successfully passed through a lot of those costs. But with that said, inventory days coming into this year, we're at about 200 And our focus is on reducing those days. Every 10 days is approximately $25,000,000 And you should expect starting this quarter and as we focus on the balance of the year that we're going to drive those days down.

Speaker 3

They are not at acceptable levels, but they are inflation adjusted at higher levels. So we're going to focus on getting those days down and they are at historical highs and that's something that we're going to get our arms around. It goes to George's point earlier about running these assets flexibly to reduce production to meet where demand is.

Speaker 6

And then lastly, you talked about some changes in requirements from the U. S. Forest Service affecting your fortress business. But I couldn't tell whether you thought That it actually delayed anything. What you said is you expected to have your paperwork in order before the 2024 fire season.

Speaker 6

So if that's true, does the delay really make no difference?

Speaker 7

Yes. So, hey, Jeff, it's Jenny Hood. Happy to take that question.

Speaker 5

Thank you.

Speaker 7

So the delay, just to give a little bit more color on that, The original solicitation from the U. S. Forest Service was issued in late September. It took them until mid December to issue a final revised solicitation and the solicitation deadline was then January 10. So it absolutely pushed back the contracting process in total.

Speaker 7

However, we are pleased since January 10, when we were able to start the negotiations, we're pleased with the progress and the engagement that we're seeing from U. S. Forest Service. Keep in mind that previously the Forest Service was dealing with 1 sole source supplier for over 2 decades. So thinking about how to integrate another supplier, both from a contractual standpoint, as well as in the field has been quite challenging for them.

Speaker 7

But however, we are supporting them in those efforts. And again, we're pleased with the engagement that we've received since the submission deadline.

Speaker 3

And Jeff, from an earnings perspective, you're exactly right. There's no change. We entered into this year Not assuming EBITDA for 2024 for Fortress until we get the contract. When we get that contract, which we fully expect, You should expect us to raise our guidance to reflect the profitability. And so we have been conservative and not speculating, But you should expect that we will raise our guidance and there's no change there.

Speaker 3

It's just a little bit delayed.

Speaker 6

Okay. And then lastly for Ed, What's your number one priority that you want to get done over the next 6 months?

Speaker 2

Well, after ensuring that we're operating in a responsible manner as a company, it's focused on cash, working on the balance sheet, managing the inventories to an appropriate level, which is just all cash management and getting the mindset And right, establishing the accountabilities and the changes of plans that accompany that, There's some subtleties that you run your business differently and making sure that we're moving ahead with that in a very quick way.

Speaker 6

Okay, great. Thank you so much.

Operator

We will take our next question from David Silver with CLK. Your line is open.

Speaker 8

Yes. Hi, good morning. Thank you. I have a question, I guess, about any lingering liabilities related to the decision to terminate the lithium project. So I'm sure you have a number of agreements, but the ones with Ford and LG on the supply agreements, you have an agreement with the technology provider, etcetera.

Speaker 8

Should we expect any lingering costs So are cash requirements to any of the counterparties related to the lithium project going forward? Thank you.

Speaker 3

As it relates to the technology provider, any expenses associated or Potential liabilities associated with the technology provider have been included in our write down. And so any expenses there have been included in that write down. As it relates to the OEMs, there were no financial obligations that were not contingent on us advancing this project. And so we have notified them appropriately, There are no financial obligation?

Speaker 2

Yes. There's no take or pay or any requirement to deliver associated with those agreements. More relationship based that when and if it got going, we had a customer base established. That's it.

Speaker 8

Okay. So from an earnings per share perspective, the charges you took this quarter are sufficient. But Is there any estimate of the cash impact that will flow from the decisions that's maybe How much of that $77,000,000 let's say will be addressed via cash payment as opposed to just a write down of things you've already paid for? Thank you.

Speaker 3

Sure. This is Lauren. And so as you can see in our guidance For CapEx for lithium, it hasn't changed. We said that we would spend about $30,000,000 for lithium as it relates to in flight capital that we could not stop even after we suspended. And so as you do your model, you should assume that we will be around that level and only that level and not any more than that level.

Speaker 3

Now when we get to the end of the year, Not all of that $30,000,000 will show up as CapEx because we have written down the asset. Some of it will just be liabilities that we pay off. But That $30,000,000 is a good number and there's nothing more than that. And I would also say that the Preponderance of the cash has already been paid. And so it will be behind us after this threethirty one quarter.

Speaker 8

Okay, great. Thank you for that. I have a question about strategies for operational strategies on your salt business. So Ed, you were very clear Discussing your priority on cash generation. And there's a couple of things when I think about your salt business.

Speaker 8

But firstly, there is the underground mine plan that is underway. And to me, that's something where you would have to invest a little more to generate a certain amount of efficiency incremental efficiency from that. And then, so I'm wondering about should we expect the underground mine development program to take a little longer or to be conducted at a more measured pace going forward? And then secondly, on your marketing strategy, I did note that you talked about maintaining the product pricing as far as I guess bid season strategies are concerned. But I'm just wondering, I mean, Along with Kevin's departure, the Chief Commercial Officer did depart as well.

Speaker 8

And Some people might interpret cash flow generation and per ton margins as a bit of a trade off there. So could you just reiterate, I mean, what is the plan for spending to further progress the underground mine development? And then what, if anything, might change going forward with the value over volume approach to your upcoming bid season for deicing salt? Thank you.

Speaker 2

George and I'll address the First half of your question and then Ben will speak to the marketing commercial side of that. There are numerous improvement efforts underway, not just at Goderich, but at all of our operations. And that this is not just the mines, but at the plants and at our distribution centers, all focused on cash. When you go to a mine like Goderich, our priority will be to be driving through the east on the mains that are up on the north side of the mine really tied into the infrastructure better than what the existing infrastructure is. We have to haul through conveyor or other means, the product all the way around to the shaft basically going 3 quarters away around or many miles more than the direct shot through would be.

Speaker 2

So that's really the priority. So we will continue to prioritize that move forward. And as we ramp up and down, we'll flex our production from other parts of the mine, for example. And we're also looking at alternative mining methods, looking at some of the most expensive equipment we have, looking at different alternatives on that. We need to do better with our way that we manage those in terms of maintenance and Other things and improve or you might call our general systems in the company, what we're trying to say, there's a variety of levels and timing So these activities are going on at Goderich, which you referenced and really but everywhere.

Speaker 2

I think that As we get a little further down the road, we'll plan to do some Analyst Days, Investor Days up at the mines and we can show you what we're doing firsthand, and I hope you would participate in that. I'll let George make a few comments as well and then turn it over to Ben.

Speaker 5

Sure. Thanks, David. This is George Miller. Good to hear from you. Just to add a little bit what Ed said, our strategic focus hasn't changed one bit at Goderich in regards to the East development that we're doing there.

Speaker 5

Keep in mind that Ed has been around on our board year and a half to 2 years now and he was fully versed on that. If anything, I would say Ed, in the short time he's been here, he's probably asked the questions a little bit more around, can we do it quicker, faster, better, Those kind of things that are all necessary. So again, as he highlighted, we're looking at some potential ways we can attack it in different directions and how we can actually move that forward. So I would say anything other than the delay is how we can continue to move that effort forward. Thank you.

Speaker 9

Hi, good morning. This is Ben. I appreciate the question about our pricing strategy. And I wouldn't see any fundamental change in our approach. We're focused on seeking the appropriate value of our product in the market.

Speaker 9

I can appreciate the undertone of how price and volume play together to generate cash and frankly it would be a little premature to even to comment on where we're headed in the next season because we need to see how this winter plays out. So fundamentally no change.

Speaker 2

Let me just close that with the departure of Some of our senior executives, Kevin and Jamie, for example, please don't think there's something nefarious going on in the background there. These were all made for different decisions. They're not related to one another. And that, for example, we have 2 high potential executives now on the commercial side and we've de layered the organization. So that's the kind of the focus and kind of an example of kind of the things that are going on and that you'll continue to see.

Speaker 8

Okay. Thank you very much.

Operator

And we will take our next Question from Seth Goldstein with Morningstar. Your line is open.

Speaker 5

Good morning and thanks for taking my questions. Can you help us understand the $10,000,000 sustaining CapEx decrease? And are you risking long term underinvestment By cutting this similar to what happened that led to the need for gutters to be fixed several years ago?

Speaker 2

No, it was a quick answer. I mean, we give you the details associated with it. George, do you want to talk about that a little bit?

Speaker 5

Yes. Look, Seth, this is George Schiller. Just to kind of build on what Ed highlighted, I would also say no. One of the areas that we're doing is, As we talked about the East Main development, what we're doing around with that mill, we're looking at utilizing many of the components we have, which in hot, which when you go back and look at them are actually new or refurbished and what we're trying to do is optimize that whole process. That in itself has drove quite a bit of a change in the sustaining capital.

Speaker 5

So when you look at the rest of the platform, Whether it be our plants, our facilities, our bagging facilities, those types of things and our other operations, There's not a substantial change here at all. So vast majority is coming directly from that thinking of how we're going to redevelop the Goderich mine. But again, It's still a high priority for us.

Speaker 2

Yes. What George is saying is that when we initially looked at putting the mill to the north side of the mine or really to the west side on that corner. But from where it is A couple of miles to the south, who's looking initially to build a new mill.

Speaker 5

Correct.

Speaker 2

And what we're headed to now is to because we think we have the flexibility to establish that is to relocate what we have and that would cut the estimated capital by a very large percentage point, by about 2 thirds.

Speaker 5

Correct. And some of that's flowing through in fiscal year 2024 is what you're actually seeing in your second.

Speaker 2

So anyway, that's a big part of what you're seeing there.

Speaker 5

Okay. That's really helpful. Thank you. And what's the lead time From when you buy KCL to when it's sold as SOP and would we expect to see your input cost coming down from buying KCL for a longer lead time? So I'd say Seth, again this is George Schiller.

Speaker 5

I think Ben and I will tag that together. I think a couple of comments there. We can depend on what we do. We do have some longer term contracts on KCL, but we also buy some on a shorter term spot, which lets us optimize our fiscal 2024 fiscal year 2024 budget. So with that said, there is some opportunity from Because of the lower MOP price right now, I'd say some potential upside.

Speaker 5

But again, as we start to look at this longer term is that we are looking to gain a longer term contract with an MOP provider as we start to go forward. I do think it bodes well for us in The future, again, I know it's always tough to sit here and tell you exactly where that is. But you've heard Lauren say this multiple times I'm confident that we're going to continue to see our SOP price, our cost to site continue to go down with our efforts

Speaker 9

that we have around the PON process and the KCL combined. Ben? Yes. I might just add, It's probably fair to say that any KCL we purchase as an input is monetized within that given fiscal year. It's just kind of a broad statement, we're turning inventories consistently.

Speaker 5

Okay, great. Thanks for taking my questions.

Operator

And we'll take our final question from Vincent Anderson with Stifel. Your line is open.

Speaker 10

Yes, thanks for squeezing me in here. I just had 2 Hopefully, quick ones. So I understand everything that's been said about refocusing on cash generation. And as it's been mentioned, parting ways with Kevin and Jamie is quite a bit of experience out the door unless you have a very high conviction level that the business is already moving in the right direction and fairly quickly to basically change jockeys mid race here. So I'm wondering if that's a fair assessment that these comments on further Goderich optimization, Pushing the Goderich market east, those were really mostly established plans and most of the pieces for achieving your cash generation goals are really already well in place.

Speaker 2

Yes, I would say that the large percentage of the things that You're aware of we're preexisting. Of course, from a Board perspective, we were involved in that as well. And as George said, I've been out for the operations and consulting essentially with our operating team to make different suggestions on things that we need to do. I'd say there's a number of other things that are underway now. For example, some of the changes that we've made already and others that we're looking at with an overall outlook really managing cash that there's going to be other future changes coming in the way we do business and to really generate improved cash flows per share.

Speaker 10

Understood. Thanks. And don't know how fair this question is, but Ed, you're coming down off of the Board, so I figured I'd lob it at you anyways. I'm just trying to understand Yes. Well, what's the conviction level right now that the public equity markets are ever going to properly value your assets, special either before or after you hit these cash flow targets because I don't know if there's an internal timeline, right, but is anything off the table for achieving that fair valuation?

Speaker 2

Yes. The only thing off the table is doing business in a responsible way. Other than that, we're looking at everything. And I'd just say that my crystal ball is no better in years and to how the market values things. But through efforts and communication and showing you what we're doing or going to be doing, I believe that the market could get confidence and how we're moving ahead.

Speaker 2

I think there's been uncertainty on how the business is looked at for growth versus yield. Want to make it clear that we're out to develop a yield type company. And lithium has also been a big question mark. And doing a project with a technology that hasn't been successfully deployed yet, that's Inherently in a regulatory environment, that's really uncertain. I would if I was in your shoes, I'd hire I'd add a higher discount rate to us just on that.

Speaker 2

So I think with clarity of what we're doing, the direction that we're headed, I think the market is efficient.

Speaker 10

All right. Well, I appreciate the candor. Thank you.

Operator

And with no further questions at this time, I will now turn the call back to President and CEO, Mr. Ed Dowling for closing remarks.

Speaker 2

Well, look, thank you all for joining us today. I will look forward to engaging with you going forward. And please feel free to reach out to contact us if you have additional questions or things that you'd like additional clarity on. Have a great day.

Operator

And ladies and gentlemen, this concludes today's call and we thank you for your participation. You may now disconnect.

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Earnings Conference Call
Compass Minerals International Q1 2024
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