Good morning. My name is Abby, and I will be your conference operator today. At this time, I would like to welcome everyone to the Compass Minerals Fiscal 2022 Second Quarter Earnings Conference Call. Today's conference is being recorded, and all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you. And I would now like to turn the conference over to Douglas Kris, Head of Investor Relations for Compass Minerals. Mr. Kris, you may begin your conference.

Thank you. Good morning, and welcome to the Compass Minerals fiscal 2022 second quarter earnings conference. Today, we will discuss our recent results and our outlook for fiscal 2022. 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 want to remind everyone that the remarks we make today reflect the financial and operational outlook as of today's date, May 6, 2022. These outlooks entail inception 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 also are available online. The results in our earnings release issued last night and presented during this call reflect only the continuing operations of the business other than the amounts pertaining to condensed consolidated cash flows or unless otherwise noted. The company's fiscal 2022 second quarter results and fiscal 2022 outlook in the earnings release and discussed during this earnings call reflects the previously announced change in fiscal year-end from December 31, September 30. All year-over-year comparisons to fiscal 2022 second quarter results refer to the corresponding period ending March 31, 2021. I will now turn the call over to Kevin.

Thanks, Doug, and good morning, everyone. Thanks for taking time to join today. Since our last call, we've taken a number of actions as we continue to make progress against our strategic plan and prioritize our core assets. First, we completed the final step in our previously announced strategic exit from the South American market through the successful sale of our chemical business in Brazil. We also continue to advance engineering work on our lithium development project, increasing its expected ultimate annual production capacity as a result. In addition, we welcomed a new board member, Ed Dowling, who brings more than three decades of executive and board level minerals extraction experience to Compass Minerals. And lastly, I'm very proud to share that our safety performance this past quarter was among our best since we began tracking our total case incident rate, or TCIR, which represents the total number of injuries for 200,000 exposure hours. As many of you have heard me emphasize before, our leadership team places no priority higher than the safety and well-being of our employees, and we continue to see exceptional safety improvements throughout the company. We finished the second quarter with a TCIR of just over one, reflecting a more than 50% improvement from the prior year quarter. We're maintaining focus on both engineering solutions and behavior safety training in order to minimize risk and to help ensure that every employee is provided a safe and healthy work environment and an optimal quality of life. Moving to our fiscal 2022 second quarter results we announced late yesterday. The quarter was certainly not without its challenge. Of numerous other companies across industries and supply chains, we continue to grapple mindly with severe, persistent and sometimes unpredictable inflationary pressures across our business. We're also still managing through production…

Thanks, Kevin. Consolidated revenue was $448.5 million for the second quarter of fiscal '22, up 5% year-over-year, primarily driven by higher sales volumes in our North America highway business and favorable pricing in our Plant Nutrition segment, where pricing rose 28% year-over-year. And within our Consumer and Industrial business, where pricing was up 9% year-over-year. Despite the revenue increase, our consolidated operating earnings declined to $20 million and adjusted EBITDA declined to $64.8 million or by 42% year-over-year, as upward pressure on distribution and production costs within the Salt segment and higher SOP production costs more than offset favorable plant nutrition pricing. From a profitability perspective, consolidated operating margins for the quarter were 4.5% and adjusted EBITDA margins were 14.5%. On a segment basis, Salt revenue totaled $391.3 million, up 6% year-over-year, driven by 6% higher sales line. Specifically, highway deicing volumes rose 6% year-over-year, primarily reflecting higher commitment levels achieved during last year's bid season. Consumer and Industrial sales volumes increased 8% year-over-year based on strength in both the icing and non-deicing products. Soft segment average selling prices were relatively flat year-over-year, reflecting a 3% decline in highway deicing sales price, offset by a 9% increase in consumer and industrial average sales price. In our Consumer and Industrial business, broad-based price increases continue to be implemented across most product categories, primarily in response to the high inflation environment, enabling us to recoup a portion of the overall inflation related drag on our profitability. Despite higher revenue, Salt operating earnings declined 46% year-over-year to $49.3 million, while EBITDA declined 40% to $65.5 million. Both results primarily reflect the effects of inflation on distribution and production costs and the impact of lower pricing. From a cost perspective, of the approximately $9 drop in EBITDA and operating profit per ton year-over-year, roughly…

Thank you. And we will take our first question from David Begleiter with Deutsche Bank. Your line is open.

Hi, good morning. This is David Huang here for Dave. I guess, first, can you talk about your early thoughts on HDI salt pricing for next winter? And specifically, do you expect to fully offset the inflationary pressure when the contracts reset?

Yeah, good morning. I'll take a quick stab at that, and Jamie may want to add some color. But we're only about, I don't know, roughly 10% or so into the bid season. And I think we weren't the only ones that were impacted by these inflationary costs that we absorbed. And the early sense is that there's enough value in the market to make an earnest attempt at recapturing those costs. And additionally, as we've talked about before, part of our strategy is also to reposition our portfolio to serve markets that are more natural to us, where we have a competitive advantage. So we feel pretty optimistic about how things are setting up so far. Any further comment, Jamie?

No, that covers it. Thanks.

And thank you. And then second, can you also discuss how the salt unit production costs will trend in the second half and maybe into next year?

What you saw during this particular quarter was about a $9 delta in terms of the operating profits per ton. About two third of that related to distribution costs and one third related to cash cost. We expect those trends to continue for the balance of the year, I would say, comparable increment in the back half of the year. As Kevin just indicated, we would expect to restore the profitability through this upcoming bidding season, but that will not be reflected in the second half of the year.

Thank you.

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

Thanks for taking my questions. Good morning, everyone. Just wanted to ask, if we see oil prices have a similar fall to how quickly they rose in the next fiscal year, would your contracts basically stay flat from a price standpoint, meaning that would all fall to the bottom line? Or are there, I guess, de-inflation de-escalators in those deals?

Seth, this is Jamie. I would say that as it relates to highway deicing, we will set fixed contract prices through the summer through our bid season. So to the extent next winter, fuel prices fall and fuel surcharges fall, we would capture that benefit for sure. When you talk about our C&I business or Plant Nutrition, there's a bit more variability, meaning we can capture some of that through price, but over the history of the business, as we've implemented the recapturing of fuel surcharges in both C&I and Plant Nutrition, when fuel prices fall, we tend to hold on to that and capture some value there as well.

Okay. Okay. I appreciate the details. And looking at SOP, do the pond system works such that you really can't do much within a year to increase production, but next year's harvest could potentially be better if the weather turns out to be better than expected? Or I guess, any details you can give us with to help us think about how weather can impact future production will be appreciated.

Yeah, good question. And it does vary sort of season by season and need to tend to think of it in those terms. But our issue has been the ability to maintain continuous flow of brine into our Western center ponds just given the drought and the lake levels, exacerbated also by lack of access to fresh water also given the drought. We put plans in place to begin resolving those issues in addition to a couple of things I mentioned in the script raising the dikes, et cetera. So we believe the efforts that we're taking will lead to a longer-term, more sustainable, predictable, reliable set of production values coming out of Ogden, but this is - it's going to take a while. I think we're confident we've got our hands around the issues and we know what to do. But it's going to take a while to kind of work through. Any color you'd like to add to that, George?

No. Look, Kevin, I think you highlighted the majority of it. Again, it's really been around a persistent drought and limited snowpack that we've seen over the last few years. And those factors that you referenced in the summertime, whether it's wind, whether it's temperature, those types of things can drop out other minerals throughout the pond system at a different time, mostly magnesium, which then makes it a challenge. So again, it's just making sure that we drop it out at the right place, but I think you covered the majority of it Kevin. Thank you.

All right. Thanks for taking my questions.

Thank you.

And we will take our next question from Joel Jackson with BMO Capital Markets. Your line is open.

Hi. Good morning, everyone.

Hey, Joel.

Just following up on that topic. I mean, obviously, since Compass put in, on a decade ago, the expansion, hoping to get 350 upon based SOP every year. The thing just never worked, right? You had lots of problems with the plant, crystallize the evaporator. I don't really remember the impurities weren't proper. And I think I don't remember Kevin if was under you or the prior CEO. I think you went in into a fix on the plants, but you're still not getting these yields 10 years later. So what's been done? And we're just going to have to face sub-200,000 tonne production forever, and that's just the way it is.

Yes…

Joel, this is George Schuller. I'll take a shot at that. And look, it is - there's no question it's adenosine balance upon chemistry required out of that operation. But really, our first mode of attack under Kevin's leadership was - we went to our immediate controllable factors, which was really around the operational efficiency and reliability of the plant. So again, we spent quite a bit of time really trying to focus on that and really what that might look like. But what we've switched to over the last, I'd say, six to eight months is more around both short and long-term solutions. And those solutions are really more around the short term being around some engineering controls and designs such as raising or dikes, help optimize our pond chemistry and our pumping systems. But the longer term, what we've done is taken a holistic end-to-end process designed to optimize this on. Again, when I go back and I reference the snow pack and the effects of the drought, those things have a profound effect actually on the pond chemistry and how you actually drop out those minerals as you go through. So as Kevin highlighted, I do think we've got our hands around that. I know you probably say, well, it's been several years. But it is - again, this is 55,000 acres of ponds out there. It's literally mild. So again, it's pretty critical on where we are. And also keep in mind when you talk about some of those high numbers that are out there historically, we've actually got an MLP, which is KCL into that process to augment that and make sure those tons stay up. We've been trying to do this from a pond based system only because of the current price of the MOP. But again, I-- again, from what I do say, I do think we have our hands around on it and heading in the right direction.

Hi, Joel, let me just add that, the plant will do what is designed to do. You just have to feed it what it's designed for. And that's been the issue is, I will call it kind of on the out buy side or the upstream side is you've got to control that on chemistry to feed that plant what it wants. It will do to whatever number we needed to. But what we've got to do is fix the chemistry on the inbound side. And that's what we're working on.

And Joel, one more - Kevin, one more thing I'll add to that, too, is everything we do and adjust, keep in mind, Joel, that it's a two to three year process. So every adjustment we make is you don't see it like in one month or three months, it actually takes that time to run that brine to the entire pond process to get it from salt to mag chloride with SOP being in the middle. Thank you.

Okay. Following up that and also bridging into lithium here. So if I understand with now the East and the West split plan, the first part of my question would be, so we're talking about, I guess, two different DLE technology that would be needed for the 10,000 ton East plant and the follow-on later on West plant. And I guess that's because the assets, the lithium resources you're tapping into are a little bit different. And then just then trying to layer on what we just talked about on SOP because of the issue with pond chemistry and the variability year-to-year and not necessarily getting the right feed into the plant, how is that going to play into your lithium. You're not going to have a consistent speed in lithium plan? And will the DLE technologies be - which have a lot of questions around them, or sufficient enough to handle fed variability?

Let me tackle the second one first, Joel. We don't think of anything we've seen thus far, we don't believe this is going to affect our ability to extract the lithium ions through the DLE technology. So I don't know what to say beyond that. That's what we believe. And then with respect to the East versus West side, it's possible you use two different sets of DLE, but it's not likely. I think the more likely case is we use one DLE technology because chemistry is not that different from side to side. But Chris, would you want to add anything to that?

Sure. Thanks, Kevin. I think, Joel, as we look at it, caveat it to the two different BLE technologies. And really, there's an aspect of BLE technology and then what you do for conversion side. So you can convert from DLE to carbonate to hydroxide or to hydroxide into carbonate. So it really just stands on that, what you decide to do from a conversion aspect. Currently, we look at running our DLE pilots, and they continue to prove out. They meet target requirements for lithium recovery and magnesium rejection. And that really speaks to some of the impurities that you alluded to as well, right? So the design is really to get the lithium and reject the impurity. So as we see additional impurity around usually magnesium, the DLE system should be designed to reject that. We think that the path of our own with regards to the pilots are both solid choices for the DLE technology. I think what you also look at is our continued evaluation of those technologies, but they speak to the rigor that we're assigning to the process that informs our decision. So our final technology of options are both proven effective and the goal over the next few months is to be pressure test these technologies in the areas of scalability and reliability.

Thank you.

Thanks, Joel.

And we will take our next question from Chris Shaw with Monness Crespi. Your line is open.

Yes. Good morning, everyone. How are you doing? On the salt, looking ahead of the bid season, maybe order of magnitude, it's on your average ton, what sort of price increase would you need to get to offset current either fuel surcharges or inflation in transportation at this point, on average across the whole book of business?

Yes. I would start by just saying that when we think about sort of our go-get and what we feel we feel entitled to, if you look back at the operating profit per ton on this business, we're about $5 away at least from where we ought to be. And that would translate into $50 million to $60 million of value at least. I don't think it'd be prudent to back into what the respective price would be because there's several ways that I'd like Jamie to elaborate on for us to get that and more, it's not just price. It's about optimizing the mix as well. But Jamie, maybe you could elaborate on what our goals are. We approach this bidding season.

Thanks, Lorin. And Lorin did a good job of summing it up in his prepared remarks in terms of our strategy this season. But it's winning the right tone that make the most logical sense for us, the ones that are easiest to serve. And so it's not just about ASPs. It's about netbacks. So our focus this season is on optimizing the netback for every ton that we produce. And that could mean a significant shift in our portfolio from last year in terms of states and municipalities that we're going to serve as we go through this bid season. We're definitely optimistic about the value per ton or margin per ton that we're seeing thus far. And I think it bodes well for the bid season as a whole and how the 2023 Salt segment will look. The other thing is we've mentioned it a couple of times today and particularly in prepared remarks, that if we need to dial back Goderich a little bit, we're willing to do that. The mine is running great. We've got some opportunities to do that efficiently to toggle it up and toggle it down. So again, we're very focused on value per ton and are optimistic and feeling pretty confident about how the bid season is going to unfold.

In the past, I'm sure companies many times talked about optimizing that net back. Is the reason that - did the company go away from that? Or is it just - is that not a static thing? Is that because the cost of the different transportation systems shift every year in geographies and things like that? Or is it just something that you had to focus on this much more recently you need to get back to it. What - is there - can you provide any color there?

Yes, I would just make just a small comment. As we got Goderich back up running as it should, as it's capable. While we were doing that, we were recapturing some share that we had previously lost. So we feel like that's completely behind us. We feel like we have the right balance now and that means you can really zero in on optimizing the portfolio and winning the tons that make the most sense for us.

Got it…

Yeah, I would expect to see a pretty significant portfolio restructuring after this bid season concludes to Jamie's point to optimize and maximize around natural competitive advantaged markets and less worried about placing that incremental volume of tons now that George and his team have Goderich operating so well.

Looking in the past, I know a lot of you guys weren't probably around, I think, in '18, but there was this - I remember getting all excited on your earnings upside potential, the drop. I think oil probably went from like $80 to $50. And then I think the next whatever, 12 months were solid, but a lot of that also seems like I'm thinking it was - you did well on pricing on the salt side. So you didn't really see that. I thought there was going to be a bigger lift from reductions in oil. Is there anything in how either contracts are structured or this time because of the magnitude so if - as different that you don't realize the benefit on the way down as much? I mean you talked about it earlier, I know. But is this something about surcharges, the surcharge where they're never surcharges in the past or they that we're going to have to roll off and this would be different because they would just roll off. Why does that seem different to me? Maybe my memory is a little foggy.

So I had trouble getting a little bit of what you were asking, Chris. But as it relates to our highway deicing contracts, it's in general, fixed price, fixed delivered price. So when we're bidding through the summer like last summer, we had an expectation of what fuel would look like during the season. And obviously, it was wrong. Fuel has been much, much higher than we anticipated. Even when we were sitting in the fall in September, we were thinking about Brent crude at $75, $76 a ton. We're thinking about Brent crude right now at $115 a ton kind of as we get through this summer and we're taking a view on it next winter as well. So we don't have the ability to pass through fuel surcharges here in North America. The governments and municipalities run the process and have terms that we bid on, and they don't incorporate fuel. It's a fixed delivered price and we have - that's why it's very important, this bid season to understand, take the appropriate view on fuel next year, the appropriate view on truck transportation, barge and vessel as well and base our bids on that and recapture that value and really focus on improving our margins as we go into 2023.

And I would just add, there are any number of factors that could have offset those savings the last time oil prices came off, plus the contract architecture hasn't changed. It is what Jamie just expressed...

And this concludes our question-and-answer session today. I will now turn the call back to Mr. Kevin Crutchfield for closing remarks.

Thanks, everybody, again, for participating today. We really do value your time and feedback and appreciate the opportunity to engage with each of you as we continue navigating our strategic path forward, and we'll keep you updated. Thank you.

And this concludes today's conference call. We thank you for your participation, and you may now disconnect.