Compass Minerals International - Q3 2023

Transcript

Operator (participant)

Good morning. My name is Chris, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Compass Minerals Fiscal Third Quarter 2023 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star, then the number one on your telephone keypad. To withdraw your question, please press star one again. Thank you, Brent Collins, VP of Investor Relations. You may begin.

Brent Collins (VP of Investor Relations)

Thank you, operator. Good morning, welcome to the Compass Minerals Fiscal 2023 third quarter earnings conference call. Today, we will discuss our recent results and update our outlook for the remainder of 2023. We will begin with prepared remarks from our President and CEO, Kevin Crutchfield, and our CFO, Lorin Crenshaw. Joining in for the question and answer portion of the call will be George Schuller, our Chief Operations Officer, Jamie Standen, our Chief Commercial Officer, and Chris Yandell, our Head of Lithium. Before we get started, I will remind everyone that the remarks that we make today reflect financial and operational outlooks as of today's date, August 9, 2023. These outlooks entail assumptions and expectations that involve risks and uncertainties that could cause the company's actual results to differ materially.

A discussion of these risks can be found 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 also available online. The results in our earnings release issued yesterday and presented during this call reflect only the continuing operations of the business, other than amounts pertaining to the condensed consolidated statements of cash flows, or unless noted otherwise. I'll now turn the call over to Kevin.

Kevin Crutchfield (President and CEO)

Thanks, Brent. Good morning, everyone. Thank you for joining on our call today. Before jumping onto the call, for our employees that are listening in today, I want to recognize the outstanding safety performance that you continue to achieve. We make safety a top priority because it's the right thing to do for our people, and it's also the right thing to do for our business. George and his team have brought significant and focused leadership to strengthen our safety culture here at Compass Minerals, but keeping ourselves and our colleagues safe is a responsibility we all share. In the complex operating environments that we work in, achieving zero harm is a difficult standard to meet, but you continue to prove it's attainable. Thank you for your efforts on this front, and please keep up the excellent work.

I'll now make a few comments on our progress on a number of strategic objectives before commenting on the quarter. Lorin will review our financial performance in more detail. Restoration of the profitability of the salt business to historic levels was an important goal for the company this year. Year-over-year, Adjusted EBITDA per ton for salt increased by approximately 50% to slightly over $24.41, and we also meaningfully improved our EBITDA margin percentage. This improvement was driven by better pricing. We saw increases of 16% and 5% in average selling price for highway de-icing and C&I respectively, year-over-year. We've talked in previous calls about the importance of reclaiming $20 a ton of EBITDA within our salt franchise.

The teams have done a great job of answering that challenge by getting us back on track, that we remain focused on continuing to further enhance our profitability in that segment. Moving to our focused growth initiatives, we continue to advance our lithium project on the Great Salt Lake during the quarter. In May, we announced that we had signed a binding multi-year agreement with Ford Motor Company to provide them with up to 40% of our planned phase I battery-grade lithium carbonate once production begins. Ford is a trusted leader in the automotive industry, and we appreciate their confidence in our project at Ogden, serving a role within their electric vehicle strategy. With Ford and our agreement with LG Energy Solution in place, we now have 80% of our planned production from phase I committed.

Initial steps to advance construction on the commercial scale DLE demonstration unit proceeded on schedule during the quarter as well. This unit, which is sometimes also referred to as the DustGard unit or the DG unit, will be the first of four DLE units contemplated for phase I. We continue to expect to be mechanically complete with that unit by calendar year end, and that it will begin commissioning in the first calendar quarter of next year. We also pushed ahead on a number of broader phase I activities during the quarter, such as additional earthwork and construction permitting. As we explained last quarter, we won't be sharing any new cost or economic projections with regards to the lithium project until we have clarity and certainty on several items that came out of the Utah legislative session earlier this year.

You'll recall that on our May earnings call, we discussed how Utah House Bill 513 introduced a number of changes to the regulatory regime that will govern lithium development on the Great Salt Lake. Since that bill's passage, we've been actively engaged with political and regulatory leaders in Utah as rulemaking is undertaken by the relevant state agencies. While we therefore won't be making any updated economic cost disclosures today with regard to our lithium project, I did want to provide a bit of color directionally, as we understand some time has passed since we disclosed our preliminary FEL-1 estimates about a year ago. We continue to refine the engineering and the associated estimates that will allow us to eventually update our project economics from what we published last September, and I'll share a couple of observations as the plan for phase I has continued to develop.

First, we're still tracking very closely with our original timeline, which we expect will enable us to begin operations in 2025. Second, this won't be a surprise to any of you, that we've been following on other project developments in the lithium space. Cost inflation over the past two years for these types of projects has been meaningful. We continue to work with our engineering partners on developing the plans that will ultimately underpin our next round of disclosures, but investors should expect that construction costs will exceed the upper end of the range that we provided in our FEL-1 estimate. We look forward to sharing more on this topic after we've reached resolution on all critical development elements directly with the state of Utah.

Changing gears to our other primary growth opportunity, I'm pleased to be able to share some exciting updates with regard to Fortress. As we announced last quarter, we acquired the outstanding 55% in Fortress in May of this year, bringing our ownership stake to 100%. This occurred shortly after they signed a supply agreement with the U.S. Forest Service. Using their advanced mobile units, Fortress is supporting up to five air tanker bases with product and associated services this 2023 fire season. In June, Fortress began dropping product at an Arizona air base, marking Fortress' first commercial sales since being added to the Forest Service qualified product list in late 2022. As expected, the feedback we've received regarding both the performance of the products and the execution by the Fortress team has been extremely positive.

Subject to quarter end, we are working on three additional assigned bases, one in Montana, one in Washington State, and a U.S. Forest Service base in California. In fact, the U.S. Forest Service recently deployed an aircraft out of a base in San Bernardino, California, to drop Fortress products on the Rabbit Fire in Riverside County, marking our first drops in California. Most recently, Fortress has been active in combating fires in the Mojave Desert. The team at Fortress continues to work on its next generation of products. FR-105 will eventually replace FR-100 as the company's primary powder retardant offering. We expect that it will deliver improvements with regard to visibility, environmental impact. FR-105 is undergoing the continuation of operational field evaluation that began in 2022, and to date, has dropped approximately 65% of the required 200,000 gallons.

We're well on our way to completing the required OFE volume this summer. Looking ahead, we're currently in discussions with the U.S. Forest Service regarding the contract for 2024 and beyond. We also meet regularly with CAL FIRE and Canadian firefighting entities. We expect to be bidding for contracts for the 2024 season. One note on Canada: Given the recent wildfire activity there in recent months, we've received a number of questions from investors regarding our ability to compete in that geography. The U.S. Forest Service QPL is used by their entities as well. Our products are qualified for use in Canada. We expect to be able to sell into that market starting in 2024. We're off to a good start with Fortress. We're excited about the counter seasonal growth potential that the business can provide for the company.

On the last quarterly earnings call, I spoke a little bit about the refinancing we completed in May. I won't rehash those details today, that was technically a third quarter event, I want to acknowledge that important effort. Enhancing our financial position was the final strategic objective that we set for fiscal 2023, I'm pleased that we were able to achieve that despite the challenging environment. Before turning the call over to Lorin, I'll make a couple of comments about the quarter. I discussed salt earlier in my strategic commentary, those results helped drive strong performance during the quarter. We deliberately chose not to pursue certain business in last year's bid season so that we can improve our profitability, that value over volume strategy has worked very well. In the C&I business, we've done a great job of leading on price.

It was a very solid quarter from the salt business. In contrast, the plant nutrition business has seen a number of external headwinds this year. From a macro point of view, buyers are simply being very cautious. Buyer sentiment has clearly shifted toward a fear of getting stuck with higher cost inventory, and we're seeing lots of just-in-time purchasing behavior. Whereas a year ago, growers were concerned about being able to secure supply, today, there is no concern on that front. You can see the impact this has had on MOP prices throughout the year, which in turn has put pressure on SOP prices. While SOP is a premium product and is preferable by growers in many applications, its pricing is not immune to the dynamics of the MOP market, given that there is some substitution that can occur.

... These dynamics have been further exacerbated by the lack of demand caused by the abnormal weather in California that you've heard us talk about in previous quarters. This is frankly, a rough part of the cycle, and we simply have to manage our way through it. On a positive note, we've done a good job maintaining price given what is happening with MOP prices. Frankly, exceeding our internal sales price forecast despite the market pressure we're experiencing. Based on some things that we're seeing in the market, it does feel like we're close to finding a floor on MOP pricing, which would obviously be a welcome development for holding SOP price as well. While these weather-related factors have challenged our sales efforts this year, it's worth pointing out that operationally, things are going well at Ogden.

Year-to-date, we've not had any significant production issues, and we're tracking in line with our internal production targets, which has allowed us to replenish our inventory. All in all, we don't see any structural changes with respect to SOP use and demand in California or elsewhere, for that matter. Based on what we're hearing, our expectation is that demand will revert to more normal levels next year. That would be constructive to sales volumes in 2024. All in all, we had a solid execution in the third quarter across a number of our businesses, while we continue to make progress on positioning the company for accelerated growth in the coming years. Our management team is committed to growing and enhancing the value of the company. The third quarter was a successful quarter in our pursuit of that objective.

I'll now turn the call over to Lorin to provide more detail on the quarter. Lorin?

Lorin Crenshaw (CFO)

Thank you, Kevin. As a reminder, the seasonal nature of our business becomes more obvious in the third quarter as winter subsides and we see the impact of the decline in highway de-icing sales. On a consolidated basis, revenue was $208 million for the third quarter, down 3% year-over-year. Third quarter consolidated operating loss improved to $0.6 million from a loss of $3.5 million last year, while Adjusted EBITDA from continuing operations was $28.6 million, essentially flat year-over-year. We reported net income of $40 million for the quarter, driven by a $43 million tax benefit that reflects our recent acquisition of Fortress and recent changes in Canadian tax law.

Specifically, the Fortress acquisition impacts our U.S. tax profile quite favorably, as we are now able to utilize net operating losses and interest deductions that our prior U.S. income outlook did not call for us to be able to utilize, while also enabling us to reverse a portion of the deferred tax allowances we had taken in prior quarters. starting with the salt segment, salt revenue totaled $156 million for the quarter, which was essentially flat year-over-year, despite volumes being 11% lower, reflecting strong salt segment pricing, which rose 12%. The highway de-icing business saw sales volume decline 13% year-over-year. You've heard us talk about focusing our efforts on more valuable business over the last year, even if that means giving up some volume.

That strategic pursuit, combined with the impact of a below-average winter within the markets that we serve, explains the decline in volumes year over year. Pricing for highway de-icing rose 16% year over year to approximately $74 per ton, and was an important contributor to the improvement in profitability that I will speak about in a moment. Within our C&I business, volumes declined 7% year over year, driven primarily by the timing of non-de-icing demand. This was partially offset by higher C&I pricing, which rose by 5% to approximately $182 per ton. The C&I business has done a great job this year at maintaining positive momentum on pricing in its markets. Distribution costs and all-in product costs on a per ton basis increased 4% and 5%, respectively, year over year.

The salt that was sold in the third quarter was produced and moved to depots in 2022, a period of time when we saw strong inflationary pressure on costs, so there's a delayed impact that you see flowing through. Operating earnings for the segment were $21.7 million in the quarter, an increase of almost 75% year-over-year. Adjusted EBITDA came in at $36.4 million, an increase of 31% year-over-year. Adjusted EBITDA per ton was $24.41, which is in line with historical levels of profitability. As Kevin discussed earlier, restoring the profitability of the salt business was a strategic objective for this year that we are pleased to have successfully accomplished. Turning to our plant nutrition segment, the lingering impacts of extraordinary weather that we experienced this year continued to impact our sales.

Though sales for the quarter were roughly in line with our expectations, we had hoped that applications of SOP that under normal conditions would have been applied in the first and second fiscal quarters, might shift to later in the year. Unfortunately, that didn't materialize, with sales volumes down 6% year-over-year. As Kevin mentioned, there has been a change in sentiment over the last several quarters that has impacted pricing. In the third quarter, the average selling price was $750 per ton, down 9% year-over-year and 6% sequentially. The combined impact of lower volumes and lower prices was that revenue in the quarter was down 15% year-over-year to around $48 million. Well, that is obviously not great for the current year.

Our view is that it sets us up for a positive 2024 from a volume perspective. Generally, we believe that applications have not kept pace with the mining of the soil that occurs through normal growing conditions, and that the extraordinary weather conditions that occurred this year seem unlikely to repeat themselves in fiscal 2024. As a point of reference, California just experienced the seventh wettest year in the past 129 years, which clearly qualifies as extraordinary. One benefit of the slowdown in SOP sales is that we've been able to build and forward deploy some inventory across our warehouse network. Speaking of distribution during the quarter, we saw those costs decrease on a per ton basis by 8% year-over-year, as we saw a higher proportion of sales being picked up at our warehouses as opposed to being delivered by the company.

I'd note that this dynamic can also influence price, and that we will often take a lower sales price if we don't have to assume responsibility for delivering the product. Distribution costs per ton also benefited from a shift in the regional sales mix during the quarter. All-in product costs on a per ton basis were up 6% year-over-year, driven by operational steps that we took following the subpar 2022 evaporation season, including the use of KCl to bolster production yields and the impact of the natural gas spike from earlier in the year on our inventory costs. The net impact of these drivers is that third quarter Adjusted EBITDA declined from $19 million to approximately $12 million year-over-year.

As Kevin highlighted, Fortress had its first sales in the third quarter, so we enjoyed a small positive contribution from the business to revenue, operating earnings, and Adjusted EBITDA this period. We are excited with the quick traction that the Fortress team has gained in the marketplace. At quarter end, we had liquidity of $418 million, comprised of roughly $58 million of cash and revolver capacity of around $360 million. Net debt to Adjusted EBITDA stood at 3.1x at the end of the quarter. As noted previously, we were pleased to successfully execute a refinancing in May of our $250 million of notes due in July 2024.

Our focus as we worked through that refinancing, centered on four objectives: refinancing on reasonable pricing terms, pushing out our debt maturity profile, bolstering our liquidity, and creating flexibility within the credit agreement to accommodate a wide range of potential non-debt financing sources to fund our lithium efforts in the coming years. I believe that we achieved each of these objectives as part of the refinancing. Moving on to our outlook for the remaining of the year. In our press release yesterday, we announced a narrowing of our guidance range to reflect the fact that we are now three quarters of the way through the year. So we now expect EBITDA in the range of $220 million-$235 million.

As you know, we did not adjust our salt segment guidance throughout the year until now, as we approach the final few months of the fiscal year. Our original guidance, given at the beginning of the year, implied a midpoint for EBITDA of $235 million and assumed average winter weather. The fact is, we had a below average winter de-icing season, resulting in the midpoint of volumes, revenue, and EBITDA all moving down to reflect that fact. That the midpoint of our original guidance is still within striking distance, despite a winter that was 80% of average, reflects very favorable sales mix within the highway de-icing business and strong C&I pricing. For reasons that we've discussed today and on previous calls, this has been an exceptionally challenging year to forecast our plant nutrition business.

Despite these challenges, we have managed the business throughout the year in such a way that even though we expect to see fewer volumes for the year compared to our original expectations, the midpoint of our EBITDA guidance for this business remains unchanged at $45 million. The commercial teams in our salt and plant nutrition businesses have done a great job managing price this year, and have played a big role in helping the company successfully navigate a year of profit restoration on the salt side of the business and of challenging weather conditions and demand dynamics on the plant nutrition side. At Fortress, we still expect that business to contribute EBITDA in the low double-digit millions of dollars, with nearly all of that expected to be recognized in the fiscal fourth quarter.

That business rolls up into the corporate and other expense net line item, which we are forecasting will come in at $65 million-$70 million for the year, unchanged from our prior guidance at the midpoint. CapEx is moving down slightly to a range of $130 million-$150 million. This is the result of moving lithium development CapEx down to a range of $40 million-$50 million from our prior range of $60 million-$75 million, reflecting a shift in timing that will result in capital being spent early next quarter, pushing into the fiscal 2024 year rather than late during the current quarter. Our sustaining CapEx guidance of $90 million-$100 million remains unchanged from our prior guidance. At this time, I'll share a few thoughts about the 2023/2024 bid season.

As we noted in yesterday's press release, we're about 65% of the way through the current North America de-icing bid season. Based on the results that we've seen to date, we are expecting an approximate 3% increase in price for highway de-icing salt next year. Committed bid volumes are coming in roughly 5% lower than what we saw last year, which is not entirely surprising, given the below average de-icing season we just had. Throughout the 2023 bidding season, we have continued disciplined adherence to our value over volume commercial strategy, with an emphasis on building a book of commitments biased towards markets that are most natural geographically for us to serve, and therefore, most profitable. As usual, we will true up our projected salt price and volume on our November earnings call when the bidding season is behind us.

However, 65% of the way through the season, we view the results to date as highly constructive, particularly against the backdrop of a relatively sluggish winter this year. Briefly turning to the cost rationalization efforts we have undertaken. On our last earnings call, we discussed the first phase of our cost savings program, which is expected to ultimately result in an annual cost reduction of corporate related expenses of $17 million-$18 million by fiscal 2025, compared to fiscal 2022. These cost savings are split roughly equally between product costs and SG&A. The phase II of this initiative relates primarily to production and packaging operations, and last week we notified the impacted personnel.

Costs related to the impacted operations are generally inventoriable. As a result, the expected benefit of the phase II cost rationalization efforts will be recognized through the income statements when those products are sold out of inventory, which is expected to begin in the middle of fiscal 2024 for the plant nutrition business and late in 2024 for the salt business, subject to the impact of winter weather in the upcoming year. The key takeaway is that the combined impact of phases I and II is expected to result in meaningful savings that, all else equal, should lower our cost structure and improve our profitability in the coming years. Finally, I wanted to share a couple of thoughts on valuation.

Notwithstanding the recent rally in our share price, a classic sum of the parts valuation buildup of our company's valuation, where you assign reasonable multiples to the long-run earnings power of our core salt and plant nutrition businesses, we believe continues to support a stock price higher than where we are trading today. If one then contemplates the earnings potential of the growth opportunities that we have at Fortress and with our planned lithium development, it's clear why we're excited about the opportunity to create shareholder value by accelerating our earnings growth and reducing our weather sensitivity by advancing into near adjacencies that align with our core competencies as a company. With that, I will turn it back to the operator to open the lines for Q&A. Operator?

Operator (participant)

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

David Begleiter (Managing Director and Senior Research Analyst)

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

Kevin Crutchfield (President and CEO)

Hi, hi, David. Good morning. Good, good question. You know, there were air, air pockets, I would say, kind of in this bid season. We had a few areas that experienced an outsized winter, where bid volumes were up and prices were up considerably than other areas that, kind of the inverse of that happened. On, on balance, we're kind of characterizing the winter as 80%. You know, I would say for the most part, Jamie's here and he can add some color, but for the most part, our competitors in the marketplace behaved in a relatively disciplined fashion, and everybody's kind of settling into their natural geographies. There was definitely a view to promote value in the marketplace this year.

We'd like to see more, obviously, but given the fact that it was an 80% winter, the fact that we're up 3% on price is actually a pretty big win at the end of the day. Then with respect to volumes, look, as I've said before, we'll do whatever it takes to keep the market balanced. If we need to tweak our production volumes, we'll do it to manage inventories and manage working capital. We need to let kinda the next season begin to unfold before we'd be able to make that call.

David Begleiter (Managing Director and Senior Research Analyst)

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

Kevin Crutchfield (President and CEO)

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

David Begleiter (Managing Director and Senior Research Analyst)

Agreed. Thank, thank you very much.

Kevin Crutchfield (President and CEO)

Thank you, David.

Operator (participant)

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

David Silver (Managing Director, Director of Equity Research, and Senior Research Analyst)

Yeah. Hi, good morning. Thank you. I, I would like to maybe start off with a question on lithium, or actually two questions. Firstly, regarding the reduction in the fiscal 2023 CapEx to $40 million-$50 million, I, I, I did hear, you know, your comments about that. I would just kind of come back and say that I think this is the second reduction in that projected spend through fiscal year 2023 now. I was just hoping you could talk about maybe what the reduction in spending this year might be for, for the ultimate timeline to completion.

Then secondly, this is very speculative, very early, but with the binding multi-year agreements for, for phase I volumes, what happens if, you know, you're a little bit behind schedule, three to six months or whatever, of your planned startup, or alternatively ahead? I mean, under the, under the agreement, are you committed to supplying a certain amount of volume by a certain start date? You know, you may have to go out in the open market or something, but how does the multi-year binding agreement handle, you know, deviations, I guess, from the planned startup schedule? Thank you.

Kevin Crutchfield (President and CEO)

Well, let's start with question two first. I mean, our agreements with LG and Ford provision for a lot of flexibility in terms of startup timing. There's no scenario, David, that we can contemplate where we'd ever have to go to the market to fulfill our obligations under those agreements. They give us plenty of flexibility to get these operations mechanically complete, get them optimized and performing as advertised. I think we're good there. In terms of the capital, we're just pushing out the longer lead items into the, probably the next couple of quarters, which has taken some pressure off of the capital expense during fiscal year 2023. Chris, any color you'd like to add to that?

Chris Yandell (Head of Lithium)

Yeah, Kevin, just, just real quick.

With regards to the longer lead items that Kevin spoke about, that's really related to the broader project on the entirety east side. What we've been doing is we continue to optimize that schedule and look at what that drop-dead date is for having to spend on those long lead items. Fortunate for us, those have been able to be pushed out a little bit. You know, additionally, what I would say is, you know, coming into the beginning of the year, we had a certain estimate associated with what it would cost to build the DustGard commercial demonstration unit. As we've continued to refine that, we've been able to reduce that cost. That's been a benefit that you heard in the last quarter, in reduction of CapEx.

As Lorin also mentioned, what we've also seen now is we've also been able to get really good terms with our vendors, and that's allowed us to have an ability to push out those payments into the next fiscal year. All in all, it's a good story from a CapEx perspective, and as we heard in the opening comments, we're still on schedule for mechanical completion by the end of this year. DustGard is well on its way to being proven.

David Silver (Managing Director, Director of Equity Research, and Senior Research Analyst)

Thank, thank you for that. Very, appreciate the detail. I'd like to, shift over to salt, and I'd like to pick up on, you know, Lorin's comments about, I guess, accounting costs, this quarter, you know, relative to what we might see going forward. You know, the past year, 18 months, has been, you know, had been one of significant cost inflation. As you look ahead to the next winter, is it possible for you to kind of give a quick rundown of how you see, let's say, barge rates or plastic prices or pallet prices? You know, whatever key elements that you can maybe lease or lock in, prices for, ahead of time.

Any thoughts about where the pluses, the puts and the takes, the pluses and the minuses on your overall salt, de-icing salt, cost, elements, shake out here now? Thank you.

Kevin Crutchfield (President and CEO)

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

So, looking at our inventory days and seeing how they flow through our P&L, kind of is a function of the winter that you, you experience. Jamie, any thoughts on just supply chain effects you want to share?

Jamie Standen (Chief Commercial Officer)

Yeah. David, you mentioned a couple of items. Pallets continue to be, you know, fairly expensive and inflated. We don't see that coming down. Polypropylene has come down. It's obviously related to-

... to oil prices. If Brent stays in this area, we'd look to see some benefit there in the C&I business. On the freight side, we've actually seen lower truck and fuel rates through 2023. Those probably creep up. Those are gonna mostly be related to the C&I business, on the, on the dry vans, that those prices tend to go up. We've done a lot of great work, the team has, on the pricing front to really get ahead of that, to recapture some of the inflation we saw last year and continue to push price through 2023 and, and even into 2024. We are cognizant of those, those truck freight rates rising in 2024, but we think we can stay ahead of it with pricing and, and really see some, some margin improvement in 2024.

On the highway side, most of our material is shipped via vessel and barge. Our vessel rates are locked in through 2028. Our barge rates are locked in through next summer, summer of 2024. We'll be renegotiating those rates later this year or early in 2024. On the vessel side, we've got inflation in a CPI-type inflationary adjustments on the vessel side, we feel good about the long-term aspect there. Those are the primary kind of supply chain inputs that I'd be able to talk about right now, ahead of, you know, our full year discussion later this year for 2024.

David Silver (Managing Director, Director of Equity Research, and Senior Research Analyst)

Yeah, I, I appreciate it. It's early days, but thank you for that. Very, very helpful.

Operator (participant)

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

Chris Kapsch (Managing Director and Senior Equity Research Analyst)

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

Jamie Standen (Chief Commercial Officer)

Not, not really. I think, so, so like, like Kevin mentioned a little bit earlier, there were, there were pockets of success. We had stronger, stronger winter weather activity and, higher sales up on the Upper Mississippi. It was weaker along the Ohio River Valley. We would typically be 65%-75% complete with our bid season. Sitting here in early August, a lot of the states and municipal bids are, are, are finished, and the, the latter half of the season is, is commercial business. So it would be rare that, the, the, the full year bid season pricing ends up different than the 65% mark. So, so that I hope that answers most of your question.

I, I would also note that, that, that 65% really applies to about 75% of the overall highway de-icing business. Outside of this North American bid season, we've got our U.K. highway de-icing business, we've got our magnesium chloride business, and we've got our chemical business as well, and we are pushing significant price increases on those fronts as well, because the market allows it, and we're pricing to value. That, that bid season data is just part of the picture as it relates to the highway business in general. I just wanted to make that point.

Chris Kapsch (Managing Director and Senior Equity Research Analyst)

Okay, then the follow-up on, again, on salt. If, you know, the... If you're, at this point, you know, the commitments that you have for down 5% volumes, up 3% pricing, by no means are you suggesting that the guidance for 2024 would be down 5% volumes? We just don't know. I'm, I'm only saying that because

Jamie Standen (Chief Commercial Officer)

Right

Chris Kapsch (Managing Director and Senior Equity Research Analyst)

of the reaction of the stock price this morning. I'm curious, though, if in a scenario where you were down 5% volumes and up 3% pricing, it seems, and given, you know, notwithstanding some of the inventory costs are still flowing through your you know, flowing through your P&L, it, in that scenario, would salt EBITDA be up in 2024? It seems like it would be.

Jamie Standen (Chief Commercial Officer)

Yeah, you know, that, that's a great point. Remember, the, the winter was mild, and we're experiencing that in our current period results. We sold less material than we would have expected. When we roll out our view on 2024, it will assume average winter weather. While the commitments are a little bit lower, the recovery of normalization or average winter weather kind of offsets that actually, more than would offset that, that decline in commitments. Then, you know, you, you, you take into account the price, the portfolio, portfolio improvements that we're, we're making in the business. Remember, GSP is only part of the picture. We're focused on net back. We might be, shipping something with a lower GSP, gross sales price-...

We make more money on it because it has a lower transportation cost, or it's, it's closer to the mine. We're only giving you part of the picture, for competitive purposes, but, certainly feel like we can see improvement in the salt business, highway, and C&I in 2024.

Chris Yandell (Head of Lithium)

Exactly. Bingo.

Operator (participant)

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

Greg Lewis (Managing Director and BTIG Energy and Infrastructure Analyst)

Yeah, hi. Thank you, and good after-- good morning, and thank you for taking my question. You know, appreciate the comments around the, the 65% and, and the municipalities and, and now the shift to more industrial. You know, realizing we can't comment on pricing. You know, is a fair way to think about as, as we look at the back or the remaining, kind of the, the, the stated number that's out there kind of serves as an anchor and a buoy. The pricing, like, just as we think about previous years, is the upside, downside, I don't know. Is it like? I mean, how tight is that range? Is it basically this is the price, or is there, is there upside or downside?

Jamie Standen (Chief Commercial Officer)

It, you know, it is. There is typically not a lot of movement between what we say now around price and commitments and how we finish the bid season. Again, we are now in really commercial negotiations with, you know, independent contractors and landscapers and, you know, de-icing guys who resell this material for parking lot clearing and whatnot. We are pushing price across the board. I think you're right. There's not a huge amount of upside, but there's very limited downside as well as we go through the remainder of this season.

Greg Lewis (Managing Director and BTIG Energy and Infrastructure Analyst)

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

Jamie Standen (Chief Commercial Officer)

Yeah, we're well on our way in, in doing that. We are engaging with the U.S. Forest Service for a, for a, a multiyear agreement, 2024 and beyond. Those discussions will really get into details in this month and in September. I think we're gonna have a lot more visibility on what the next few years look like within the next 60-90 days. There's nothing that we can do beyond make, you know, kind of nailing that arrangement as we go into 2024 and 2025. Also we're talking about entering the California market with CAL FIRE. That is dependent on the completion of our I-OFE that we talked about in the prepared remarks around our FR-105.

When we think about Canada, British Columbia, and Saskatchewan, and Alberta, those are opportunities in western Canada as we go into 2024 as well.

Greg Lewis (Managing Director and BTIG Energy and Infrastructure Analyst)

Okay. Thank you very much.

Operator (participant)

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

Joel Jackson (Managing Director of Equity Research)

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

Jamie Standen (Chief Commercial Officer)

Well, I, I, I won't address it specifically. We, we've not, you know, started our discussions on, you know, beyond, you know, kind of July 2024, with our barge carriers. Yes, there is talk of those going, going up for sure. Remember, we, we are the backhaul. You know, they, they need us. We'll go through that process, and the, the good news about the, the barge rates and the timing is that we'll be well into our discussions, let's call it in February or March, before we even start our bid season. We'll have good line of sight during our bid season on what those barge costs will be in 2024 and, and in a multiyear agreement through, perhaps 2026 or something like that. I don't have specific comments on what that'll...

how that would impact any. It would have very little impact on 2024 because of the timing.

Lorin Crenshaw (CFO)

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

Joel Jackson (Managing Director of Equity Research)

That's helpful, Lorin. Thanks.

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

Kevin Crutchfield (President and CEO)

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

Joel Jackson (Managing Director of Equity Research)

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

Chris Yandell (Head of Lithium)

I, I, I don't, I don't have that, that history off the top of my head. Remember, we, we would be equally impacted. You know, Cargill and, and, and the, the Stone Canyon asset would be equally impacted by any change in barge rates. Again, the good thing is. You would assume that disciplined market competitors would, would recapture that value through pricing as they, as they go through those bid seasons. Again, the good thing for us is that the timing is that it is a, is a July renewal of 2024, and we'll, we'll have really good line of sight on what that looks like for the 2024-2025 winter, and we'll embed that in our, in our bidding analysis as, as we.

Kevin Crutchfield (President and CEO)

Next summer.

Chris Yandell (Head of Lithium)

Next summer. Yeah.

Joel Jackson (Managing Director of Equity Research)

Just maybe to give it one more for me. Typically, you have some working capital needs in September and December quarters. Looking at your balance sheet right now, are you comfortable? Are there any actions you might want to take to give you more flexibility with the balance sheet?

Kevin Crutchfield (President and CEO)

Well, our leverage just hit 3.1x, we are happy with the progress that we've made to delever. Granted, some portion of that relates to the Koch proceeds, a lot of it relates to the restoration of the EBITDA of this business. So 3x is a very comfortable level for a company with our credit profile. We will see what we always see in terms of seasonal dynamics around the final quarter of the year. We feel very good about our leverage position as we continue to drive it down.

Joel Jackson (Managing Director of Equity Research)

Thank you.

Operator (participant)

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

Chris Kapsch (Managing Director and Senior Equity Research Analyst)

Yeah, so it's a little detailed question on the lithium business, but it's really against the context of Lorin mentioned valuation, and investors can probably debate whether or not there's much of any value being ascribed to your franchise right now for the perspective value from the lithium resource at the Great Salt Lake. My, my question, my question addresses the visibility and/or perceived risks associated with standing up that project right now. Directionally, you suggested, I know we're going to wait until the conversations with Utah are complete, understand that. Directionally, you suggested the CapEx might be higher than what the original FEL-1 engineering plan had been scoped out at.

As you're looking forward, though, I'm just curious if, as a way to maybe contain costs, in phase II, the plan is to stand up a lithium hydroxide conversion facility, whereas phase I is carbonate. That adds, presumably more, more cost for, you know, per capita, per se, more complexity, therefore maybe more risk. I'm wondering if, could you just remind us why, the strategic rationale is there for to do carbonate and then hydroxide? It, it, it might be, you know... It seems like there might be a, a, a pathway for less perceived risk, less CapEx, if the whole- if both phases were, were carbonate. Is there any thinking along these lines? Thank you.

Chris Yandell (Head of Lithium)

Yeah. Hey, Chris, this is Chris as well. With regards to looking at phase I and phase II, phase I is that, that lithium carbonate that we're talking about phase II, on the west side, would be that, that hydroxide component. As we've talked about progressing our CapEx and our FEL-1, our FEL-2, FEL pre-detailed engineering, what we're referring to is really our phase I. It's the carbonate side, and that's when we talk about the CapEx is higher than what we saw in the FEL-1, we're specifically speaking to the carbonate perspective. If you look at, at the market dynamics and what customers are looking for, you see a split really between the LFP and NMC-type batteries. From an LFP standpoint, we're, we're producing that carbonate, or intend to produce carbonate.

The customers are also looking for the hydroxide piece as well. Hopefully that provides some detail to your question.

Chris Kapsch (Managing Director and Senior Equity Research Analyst)

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

Chris Yandell (Head of Lithium)

Yes. Sure, Chris. That's a great point, and we'll continue to look at that. Right now, we're hyper-focused on getting phase I up and running and executing there. As we progress through that, we'll certainly take a look at phase II and whether that's carbonate or hydroxide. Great point.

Chris Kapsch (Managing Director and Senior Equity Research Analyst)

Thank you.

Operator (participant)

Again, that's star one if you'd like to ask a question. It appears that we have no further questions at this time. I'll turn it back to the presenters for any closing remarks.

Kevin Crutchfield (President and CEO)

Thank you for joining the call today. Thank you for your continued interest in Compass Minerals. We'll continue to keep you posted in subsequent quarters. Thanks, everybody. Have a great day.

Operator (participant)

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