Compass Minerals International - Q1 2024
February 8, 2024
Transcript
Operator (participant)
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 Q1 fiscal 2024 earnings call. Today's call is being recorded, and all lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during that time, simply press the star key followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one a second time. Thank you, and I will now turn the conference over to Brent Collins, Vice President of Investor Relations. You may begin.
Brent Collins (VP of Investor Relations)
Thank you, operator. Good morning, and welcome to the Compass Minerals Fiscal 2024 Q1 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, Lorin Crenshaw. Joining in for the question-and-answer portion of the call will be George Schuller, our Chief Operations Officer, Ben Nichols, our Chief Sales Officer, and Jenny Hood, our Chief Supply Chain Officer. 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. 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.
Edward Dowling (President and CEO)
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. As I expect most of you know, this was a brownfields project that would have enabled the extraction of one 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 investing in this project several years ago.
The proposed regulatory changes have led to significantly increased uncertainty.
When you combine an uncertain regulatory environment with other changes that have occurred within the commercial landscape for lithium, as well, the project has a higher than acceptable degree of risk and uncertainty, which requires a higher return in order to justify such investment. 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 concluded 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 the potential to develop the resource in the future. Clearly, that's not today. We'll continue to monitor and engage in 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 Yandell, as our lithium, has left the company, as have another of our 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. I wish them the best in their future endeavors. In concert with these actions, we're taking a 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 Lorin will discuss in more detail. Next, I'll discuss our recent CEO transition.
When Kevin Crutchfield joined Compass Minerals in 2019, his mandate from the board was to address the following: One, fix what has been a challenging production period at the Goderich mine and repair significantly strained relationships, labor relationships at the mine. Two, exit South America. And three, determine if there was any areas of growth adjacency to the company's core business of salt and plant nutrition. I've known Kevin for three decades. He's a talented executive of the highest integrity and personal character. Over his time here, he successfully addressed all three of these challenges. As we know, the last year has been a challenging one for Compass Minerals. 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 community to refocus on our advantaged assets that underpin our core salt and plant nutrition businesses, as well as the emerging and exciting fire retardant business. On 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. I've been on the board here for just under two years. More broadly, I spent the totality of my career in mining industry... both in 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've successfully led numerous cost reduction and capital efficiency efforts for several companies in the past. Given these experiences and my familiarity with the company's advantaged assets, the board determined that I was the right person to lead Compass Minerals at this point in its journey. In addition to maintaining a safe and responsible operations that Compass Minerals is known for, the mandate I have is pretty simple: 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. We'll also thoughtfully build out our emergency fire retardant business.
Our company has a tremendous set of unique and proven assets that 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 six strategic focus areas for fiscal 2024. Those were: build on our strong safety performance and our continuous drive for zero harm across each of our facilities. 2, maintain a disciplined pricing strategy in our North American highway de-icing business and focus on geographically advantaged 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 pens down on lithium.
Five, continue to scale the manufacturing supply chain capabilities of our fire retardants business on its path to full commercialization, increased market share. And six, maintain a strong balance sheet and prudent fiscal policy. Those areas remain the same today, and we'll approach them using proven cost improvement and capital discipline tool sets, and a renewed emphasis on improving the management of our operating expenditures, capital expenditures, and working capital. In the coming quarters, you should 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 Compass Minerals through this next chapter in its history. 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 becoming more involved in the local community here. With that, I'll turn the call over to Lorin to review the quarter.
Lorin Crenshaw (CFO)
Thank you, Ed. On a consolidated basis, revenue was $342 million for the Q1, down 3% year-over-year. Our profitability this quarter was impacted by the $75 million impairment we took related to our decision to terminate our lithium project in Utah, which Ed referenced earlier. The consolidated operating loss was $55 million versus operating income of $28 million last year. We reported a net loss of $75 million for the quarter, which compares to a net loss of $300,000 last year. Adjusted EBITDA was approximately $59 million, slightly lower than the $62 million in the prior year period. I'll begin with the salt segment, where revenue totaled $274 million 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 2.3 million tons, and C&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 worst Q4 with regard to snow event activity within our served markets that we've seen over the better part of three decades. In fact, December 2023 was the worst December over that span. So despite the fact that our commercial group did a fantastic job on pricing, highway de-icing price increased 7% and C&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. First, over the long term, about 70% of the snow days in our served markets occur in the second fiscal quarter, so there is a lot of winter left in this season. Second, statistically, looking at historical data, Q1, one that is below the historical average, has not historically foreshadowed a below-average Q2. Specifically, when we look back over the past couple of decades, we see that in the first Q10 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 Q2 average.
So again, it is simply too early to state with any confidence how the rest of the winter season will play out. 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&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 million, up nearly 7% year-over-year, and as measured by adjusted EBITDA, which came in at $66 million, 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 a quarter in which we didn't get any help from the weather. 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 $660 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 business's distribution costs are fixed, so the increase in sales volumes benefited distribution costs per ton in the quarter by 11%. All-in product costs on a per ton basis were up 4% year-over-year. The net impact of these drivers is that Q1 Adjusted EBITDA declined from $19 million to approximately $6 million 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 2023 contract were a little better than we expected. We recognized approximately $13 million in Adjusted EBITDA during the quarter associated with the take-or-pay provisions of that contract. Also regarding Fortress, we recognized a roughly $3 million 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 31st, the net present value of this liability was approximately $47 million.
Each quarter, there will be gains and losses as the liability is marked 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 million higher if we added back that non-cash charge. That $3 million 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 million 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. First, the effective tax rate for the quarter is not meaningful due to the impact of the impairment that we took in the quarter. Second, 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. 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, we had liquidity of $246 million, comprised of roughly $38 million of cash and revolver capacity of around $208 million. Net leverage stood at 4.3x at the end of the quarter. Moving on to our outlook for the rest of the year. 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. Overall, at this point, we think the range we provided is still a fair estimation of the potential outcomes as we continue 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 MOP. However, we see more downside than upside risk over the balance of the year. 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 and attempt to balance available market value versus targeted demand. Second, the continuing weakness in fertilizer pricing is resulting in a large number of buyers remaining inventory conscious.
In deflationary environments, buyers move to just-in-time purchasing behavior, further adding to the competitiveness of every ton we compete to sell in the market.
And third, Q1 pond-based production at Ogden tracked at the lower end of our initial projections. As a result of those factors, we now expect the Adjusted EBITDA for the year to be in the range of $15 million-$35 million. 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. However, this reduction is being largely offset at this time by the non-cash expense related to marking to market of the 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 to approximately $5 million. This reflects costs up through late January, when we moved 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.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. 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 that we have announced in recent weeks. Such costs are expected to be in the range of $6 million-$9 million, and these costs will be recognized in the Q2 and treated as an add back to Adjusted EBITDA at that time. Finally, moving on to CapEx.
We have lowered CapEx slightly by $7 million at the midpoint to a range of $120 million-$130 million, 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 million at the midpoint to a range of $80 million-$90 million. Lithium expenditures for the year are expected to be around $30 million, reflecting in-flight spending prior to suspending the projects. I would note that not all of that $30 million 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 million to support the continued growth of Fortress, and that guidance is unchanged. 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 (participant)
Thank you. At this time, I would like to remind everyone in order to ask a question, press Star and then the number 1 on your telephone keypad.... To be able to answer as many of your questions as possible, we ask that you please limit yourself to one question and one follow-up. And we will pause for just a moment to compile the Q&A roster. And we will take our first question from Joel Jackson with BMO Capital Markets. Your line is open.
Joel Jackson (Managing Director and Senior Equity Research Analyst)
Oh, hi. Thanks for taking my questions. I have a couple. I'm gonna ask them one by one. So can you talk a little bit about the balance sheet and liquidity and free cash flow? The fiscal Q1 cash flow burn was quite a lot. Should we expect a really good return to a good inflow of cash in Q2? If you can talk about it's gonna look, it looked like prior years. And then, you know, it looks like you're really pushing up against the covenants here. Do you need to issue equity right now, Ed, to stabilize the company?
Lorin Crenshaw (CFO)
Hey, Joel, thanks for that question. It's Lorin. This quarter, we did see a meaningful cash burn. And there are several factors related to it that are unique and will not repeat. One, from a lithium CapEx perspective, cash out the door and actual accrues was $20 million. We will not spend $20 million on lithium going forward, 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. The bottom line is, this coming quarter, the three Q31, you should expect a significant positive from change in working capital.
I expect that 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.
Edward Dowling (President and CEO)
Joel, this is Ed. I'd just like to complement what Lorin just said, is that our focus, which has historically been around earnings, has changed in the company, and primary focus is cash production. It's our intention going forward to reduce our debt and improve the ratios that Lorin previously mentioned at the 4.3 net debt to EBITDA. We want to get this back into historical and where our peer groups are.
Lorin Crenshaw (CFO)
And Joel, the 4.3 was well within the 5x 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. 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.
Edward Dowling (President and CEO)
No.
Joel Jackson (Managing Director and Senior Equity Research Analyst)
Okay, my follow-up question on salt is, most of your official commentary, although Lorin or Ed, or I think it was Lorin, did comment about what, it was Lorin, what January looked like. But, you know, a lot of official commentary is acting like it's January first, when it's actually February eighth. So I did appreciate Lorin updating on this call, what's happened in snow the last five, six weeks. But the question I have for you is, such a mild winter, anything can happen. We're getting to, you know, we're deep into the key winter months now, and it's getting into March. You have to start making decisions, like customers are probably now quite below, trending quite below their 80% minimum, or their minimum spend, minimum volume commitment.
You have to make mine plans at Goderich and elsewhere to make sure you don't overproduce. So can you talk about what discussions are happening internally or externally to start making mine plan decisions, customer minimum decisions, whether you're gonna spend them into rollovers next year? Like, those must be discussions you have to start planning for in such a mild winter.
Edward Dowling (President and CEO)
Yeah, Joel, historically, we plan for certain winters and produce to that. When you end up with a weak winter, we end up with too much inventory stored, which of course is a cost to the balance sheet. You know, we're running the business differently. At this point, we're building flexibility into the operations. 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 you know, philosophically, that's where we are, and things are already being done. You wanna add anything more?
Joel Jackson (Managing Director and Senior Equity Research Analyst)
Thank you. Sorry.
Lorin Crenshaw (CFO)
I think it is worth adding, Joel, that it's funny, a lot of questions several years ago 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're 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 can talk about-
George Schuller (Chief Operations Officer)
Yeah, sure. Thanks, Joel. This is George Schuller. I just wanted to add on to a little bit what Ed said and also Lorin.
... We've already taken an action over the last several weeks to better align our mine production to match its inventory levels. 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'll improve both our inventory levels to where they need to be, but also make sure that we're maintaining our mine costs at the right level. Thank you.
Joel Jackson (Managing Director and Senior Equity Research Analyst)
Thank you, all, for that.
Operator (participant)
We will take our next question from David Begleiter with Deutsche Bank. Your line is open.
David Begleiter (Managing Director)
Thank you. Good morning. Ed, besides lithium, are there other assets in the portfolio that you and the board are looking at or considering other options for?
Edward Dowling (President and CEO)
Look, you know, the lithium, of course, was predominant in our mind. You know, we want all of our assets to perform in terms of returning our ROIC, return on invested capital, in excess of our weighted average cost of capital. It's... You know, I've been here three weeks now. I haven't been able to review all my thoughts with the board yet, but that will become clearer in time. We're working really hard to see what this business can be, and we'll make the decisions accordingly, okay?
David Begleiter (Managing Director)
Got it. And just on Plant Nutrition, given the earnings pressures this year, are you considering taking additional cost actions here for the either temporary or permanent on the cost side?
Edward Dowling (President and CEO)
I'm sorry, I missed the first-
Lorin Crenshaw (CFO)
Yeah, it's regarding Plant Nutrition.
Edward Dowling (President and CEO)
Oh, yeah.
Lorin Crenshaw (CFO)
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.
David Begleiter (Managing Director)
Perfect. Thank you.
Operator (participant)
We will take our next question is from Jeff Zekauskas at JP Morgan. Your line is open.
Jeffrey Zekauskas (Managing Director, Senior Equity Research Analyst)
Thanks very much. In your agricultural business, your volumes were up, I don't know, 50% more than the Q4, but the EBITDA wasn't really very different. 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?
Lorin Crenshaw (CFO)
I'll approach that two 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 $260 difference between the price a year ago and the price today, which is quite substantial. I would say about two-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.
Jeffrey Zekauskas (Managing Director, Senior Equity Research Analyst)
But sequentially, your prices are down just a little bit though, right? Can you analyze how-
Lorin Crenshaw (CFO)
That's right
Jeffrey Zekauskas (Managing Director, Senior Equity Research Analyst)
... sequentially?
Lorin Crenshaw (CFO)
My answer was in regard to the year-over-year impact.
Jeffrey Zekauskas (Managing Director, Senior Equity Research Analyst)
Right.
Lorin Crenshaw (CFO)
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 that is principally related to the KCl.
Jeffrey Zekauskas (Managing Director, Senior Equity Research Analyst)
All right. And then, in your inventories, your inventories are close to $400 million. And historically, you know, maybe a peak inventory level for Compass is $300 million. 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?
Lorin Crenshaw (CFO)
You know, I would focus on days for two reasons. Due to inflationary dynamics, we have higher valued inventories, just if you just look back over the past three or four years, and the team has successfully passed through a lot of those costs. But with that said, inventory days coming into this year were at about 200, and our focus is on reducing those days. Every 10 days is approximately $25 million, 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. They are not at acceptable levels, but they are inflation-adjusted at higher levels. And so we're gonna focus on getting those days down, and they are at historical highs, and that's something that we're gonna get our arms around.
It goes to George's point earlier about running these assets flexibly, to reduce production to meet where demand is.
Jeffrey Zekauskas (Managing Director, Senior Equity Research Analyst)
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. So if that's true, does the delay really make no difference?
Jenny Hood (VP, Supply Chain)
Yes. Hey, Jeff, it's Jenny Hood. Happy to take that question.
Jeffrey Zekauskas (Managing Director, Senior Equity Research Analyst)
Thank you.
Jenny Hood (VP, Supply Chain)
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 tenth. So it absolutely pushed back the contracting process in total. However, we are pleased, since January tenth, when we were able to start the negotiations, we're pleased with the progress and the engagement that we're seeing from the U.S. Forest Service. Keep in mind that previously, the Forest Service was dealing with one sole source supplier for over two 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.
However, we are supporting them in those efforts, and again, we're pleased with the engagement that we've received since the submission deadline.
Lorin Crenshaw (CFO)
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-
Jeffrey Zekauskas (Managing Director, Senior Equity Research Analyst)
Yeah.
Lorin Crenshaw (CFO)
But you should expect that we will raise our guidance, and there's no change there. It's just a little bit delayed.
Jeffrey Zekauskas (Managing Director, Senior Equity Research Analyst)
Okay, and then lastly, for Ed, what's your number one priority that you want to get done over the next six months?
Edward Dowling (President and CEO)
Well, you know, after ensuring that we're operating in a responsible manner as a company, it's focus on cash, working on the balance sheet, managing the inventory to an appropriate level, which is just all cash management.
Jeffrey Zekauskas (Managing Director, Senior Equity Research Analyst)
Yeah.
Edward Dowling (President and CEO)
Getting the mindset, you know, 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.
Jeffrey Zekauskas (Managing Director, Senior Equity Research Analyst)
Okay, great. Thank you so much.
Operator (participant)
We will take our next question from David Silver with CLK. Your line is open.
David Silver (Senior Managing Director, Director of Equity Research)
Yeah, 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, you know, I'm sure you have a number of agreements, but the ones with Ford and LG on the supply agreements, the... You have an agreement with the technology provider, et cetera. Should we expect any lingering, you know, costs or cash requirements to any of the counterparties, you know, related to the lithium project going forward? Thank you.
Lorin Crenshaw (CFO)
Sure. 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, but there are no financial obligations.
Edward Dowling (President and CEO)
Yeah, 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.
David Silver (Senior Managing Director, Director of Equity Research)
Okay, so from an earnings per share perspective, you know, the charges you took this quarter, you know, are, are sufficient. But is there any estimate of the cash impact that will, you know, flow from the decisions? You know, that's maybe how much of that $77 million, let's say, will be, you know, will be addressed via a cash payment as opposed to just a write-down of things you've already paid for? Thank you.
Lorin Crenshaw (CFO)
Sure. This is Lorin. 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 million for lithium, as it relates to in-flight capital that we could not stop even after we suspended it. And so as you do your model, you should assume that we will be around that level and only that level, not any more than that level. Now, when we get to the end of the year, not all of that $30 million 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 million is a good number. There's nothing more than that.
I would also say that the preponderance of the cash has already been paid, and so it'll be behind us after this 3/31 quarter.
David Silver (Senior Managing Director, Director of Equity Research)
Okay, great. Thank you for that. I have a question about operational strategies on your salt business. So Ed, you know, you were very clear, you know, discussing your priority on cash generation. And there's a couple of things when I think about, you know, your salt business. But, you know, firstly, there is the underground mine plan that is underway. And, you know, to me, that's something where, you know, you would have to invest a little more to generate a certain amount of efficiency, incremental efficiency from that. And then, you know, so I'm wondering about, you know, 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, you know, 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, you know, the Chief Commercial Officer did depart as well, and some people, you know, might interpret cash flow generation and per ton margins, you know, 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, you know, might change going forward with the value over volume approach to your upcoming bid season for de-icing salt? Thank you.
Edward Dowling (President and CEO)
George, George, and I'll address the first half of your question, and then Ben will speak to the marketing commercial side of that. You know, there are a variety or numerous improvement efforts underway, not just at Goderich, but at all of our operations, and 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, you know, our priority will be to be driving through the east on the mains that are up on the north side of the mine to really tie it 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 Q3 of the way around or many miles more than, the direct shot through would be. So that's really the priority. So we, you know, we will continue to prioritize that moving 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. We're looking at different alternatives on that. We need to do better with our, our way that we manage those in terms of maintenance and other things and, you know, improve our, you might call our general systems in the company. There...
What I'm trying to say, there's a variety of levels and timing to these activities that are going on at Goderich, which you referenced, but and really, but everywhere. 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, then turn it over to Ben.
George Schuller (Chief Operations Officer)
Sure. Thanks, David. This is George Schuller. 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. Keep in mind that Ed's been around on our board a year and a half to two years now, and he was fully versed on that. If anything, I would say Ed, Ed, in the short time he's been here, has 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.
I would say anything other than the delay, it's how we can continue to move that effort forward. Thank you.
Ben Nelson (Chief Strategy Officer)
Yeah, 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. 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 comment on where we're headed in the next season because we need to see how this winter plays out. So, fundamentally, no change.
Edward Dowling (President and CEO)
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 in... You know, they're not related to one another, and that, you know, for example, we have two high-potential executives now on the commercial side, and we've delayered the organization. So that's the kind of the focus and the kind of an example of kind of the things that are going on and that you'll continue to see.
David Silver (Senior Managing Director, Director of Equity Research)
Okay. Thank you very much.
Operator (participant)
As a reminder, if you would like to ask a question, press Star One on your telephone keypad. We will take our next question from Seth Goldstein with Morningstar. Your line is open.
Seth Goldstein (Equity Research Analyst)
Good morning, and thanks for taking my question. Can you help us understand the $10 million sustaining CapEx decrease, and are you risking long-term underinvestment by cutting this similar to what happened that led to the need for Goderich to be fixed several years ago?
Edward Dowling (President and CEO)
... No, it was a quick answer. I mean, we give you the details associated with it. George, you wanna talk about that a little bit?
George Schuller (Chief Operations Officer)
Yeah, yeah. Look, Seth, this is George Schuller. Just to kind of build on what Ed highlighted, I would also say no. One of the areas that we're doing is we talked about the East Main development and what we're doing around with that mill. We're looking at utilizing many of the components we have, 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 the change in the sustaining capital.
So when you look at the rest of the platform, whether it be, you know, our plants, our facilities, our bagging facilities, those types of things, and our other operations, there's not a substantial change there at all. So a vast majority of that's coming directly from that thinking of how we're gonna redevelop the Goderich mine. But again, it's still a high priority for us.
Edward Dowling (President and CEO)
Yeah, what, 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-
George Schuller (Chief Operations Officer)
Yeah
Edward Dowling (President and CEO)
... But, from where it is, a couple of miles to the south, was looking initially to build a new mill.
George Schuller (Chief Operations Officer)
Correct.
Edward Dowling (President and CEO)
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 two-thirds.
George Schuller (Chief Operations Officer)
Correct. And some of that's flowing through in fiscal year 2024, is what you're actually seeing intersect.
Edward Dowling (President and CEO)
So anyway, that's a big part of what you're seeing there.
Seth Goldstein (Equity Research Analyst)
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 costs coming down from buying KCl for a longer lead time?
George Schuller (Chief Operations Officer)
So, I'd say, Seth, again, this is George Schuller. I think Ben and I will attack that together. I think a couple of comments there. You know, we can, depending 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 prices right now, I'd say some potential upside. 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, it's always tough to sit here and tell you exactly where that is, but you've heard, you've heard Lorin say this multiple times, that I'm confident that we're gonna continue to see our SOP price, you know, our cost to site continue to go down with our efforts that we have around the pond process, and the KCl combined. Ben?
Ben Nelson (Chief Strategy Officer)
Yeah, Seth, I might just add, you know, it's probably fair to say that any KCl we purchase as an input is monetized within that given fiscal year. It's just a kind of a broad statement. We're turning inventories consistently.
Seth Goldstein (Equity Research Analyst)
Okay, great. Thanks for taking my question.
Operator (participant)
We'll take our final question from Vincent Anderson with Stifel. Your line is open.
Vincent Anderson (Senior Equity Analyst)
Yeah, thanks for squeezing me in here. I just had two, hopefully, quick ones. So I understand everything that's been said about refocusing on cash generation. And as it's been mentioned, you know, 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, you know, 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.
Edward Dowling (President and CEO)
Yeah, I would say that a large percentage of the things that you're aware of were preexisting. Of course, you know, from a board perspective, you know, we were involved in that as well. As George said, you know, I've been out to 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 gonna be other future changes coming in the way we do business and to really generate improved cash flows per share.
Vincent Anderson (Senior Equity Analyst)
Understood. Thanks. And, you know, I 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 what, you know, well, what's the conviction level right now that the public equity markets are ever going to properly value your assets, especially, you know, either before or after you hit these cash flow targets? Because, you know, I don't know if there's an internal timeline, right? But is anything off the table for achieving that fair valuation?
Edward Dowling (President and CEO)
Yeah, 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 than yours on 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 in in how we're moving ahead. I think there's been uncertainty on how the business is looked at versus growth versus yield. I 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, you know, doing a project with a technology that hasn't been successfully deployed yet, that's inherently in a regulatory environment that's really uncertain.
You know, I would, if I was in your shoes, I'd add a higher discount rate to us just on that. So, I think with clarity of what we're doing, the direction that we're headed, I think the market is efficient.
Vincent Anderson (Senior Equity Analyst)
All right. Well, I appreciate the candor. Thank you.
Operator (participant)
With no further questions at this time, I will now turn the call back to President and CEO, Mr. Ed Dowling, for closing remarks.
Edward Dowling (President and CEO)
Well, look, thank you all for joining us today. I will look forward to engaging with you going forward. And, you know, 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 (participant)
Ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect.