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 speakers' remarks, there will be a question-and-answer session. If [Operator Instructions] Thank you. Brent Collins, VP of Investor Relations. You may begin.

Thank you operator. Good morning and 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'll 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'll remind everyone that the remarks that we make today reflect financial and operational outlooks as of today's date, August 09, 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 will turn the call over to Kevin.

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 to keeping ourselves and our colleagues safe as a responsibility we all share and 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. So 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 then 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 deicing 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…

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 deicing 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 deicing 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 deicing 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…

Thank you. [Operator Instructions] The first question is from David Begleiter with Deutsche Bank. Your line is open.

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

Hi, David. Good morning. Good – good question. There were 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. But on balance, we're kind of characterizing the winter as 80%. And I would say for the most part, Jamie is 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 is kind of settling into their natural geographies. And there's definitely a view to promote value in the marketplace this year. We'd like to see more obviously, but given the fact it was an 80% winter, the fact they were up 3% on prices, actually a pretty big win at the end of the day. And then with respect to volumes, look we're – 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, but we need to let kind of the next season begin to unfold before we'd be able to make that call.

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

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 [indiscernible] David, but it's processed. The rule making process is ongoing. We remain very active in that rulemaking process. And that plane will get landed when it gets landed.

Understand…

Yes, hopefully sooner than later obviously, because we need that kind of – we need that certainty to be able to advance our FEL-3 estimate, make a final investment decision that that sort of thing. So hopefully the State of Utah will get that plane landed sooner rather than later.

Agreed, thank you very much.

Thank you, David.

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

Yes. Hi, good morning. Thank you. I would like to maybe start off with a question on lithium, or actually two questions, but firstly regarding the reduction in the fiscal 2023 CapEx to $40 million to $50 million. I did hear 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. And I was just hoping you could talk about maybe what the reduction in spending this year might be for the ultimate timeline to completion. And then secondly, this is very speculative and very early, but with the binding multi-year agreements for phase-one volumes, what happens if you're a little bit behind schedule three to six months or whatever of your planned startup or alternatively ahead? I mean, under the agreement are you committed to supplying a certain amount of volume by a certain start date? You may have to go out in the open market or something. But how does the multi-year binding agreement handle deviations, I guess, from the planned startup schedule? Thank you.

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. So, there is 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. So I think we're good there. And then in terms of the capital, if we're just pushing out the longer lead items into the next couple of quarters, which has taken some pressure off of the capital expense during fiscal year 2023. But Chris, any color you'd like to add to that?

Yes, Kevin, just real quick. So with regards to the longer lead items that Kevin spoke about, that's really related to the broader project on the entirety East side. So what we've been doing is we continue to optimize that schedule and look at what that dropped date is or having to spend on those long lead items. So fortunate for us, those have been able to be pushed out a little bit. Additionally, what I would say is, 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. And as we've continued to refine that, we've been able to reduce that cost. So that's been a benefit that you heard in the last quarter in the reduction of CapEx. And 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. So 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. So DustGard is well on this way to be improved.

Thank you for that. Very – appreciate the detail. I'd like to shift over to salt. And I'd like to pick up on Lorin's comments about I guess accounting costs this quarter relative to what we might see going forward. The past year, 18 months has been – 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, whatever key elements that you can maybe lease or lock in prices for ahead of time? But any thoughts about where the plus – the puts and the takes, the pluses and the minuses on your overall salt – deicing salt cost elements shake out here now. Thank you.

Yes, let me just touch on inventory days and just the way that they transition through our P&L and then I'll ask Jamie to talk about kind of supply chain effects, et cetera. But 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. And 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 and then you take a 80% winter. You could be selling salt from 2022 inflationary environment for some period of time. And so looking at our inventory days and seeing how they flow through our P&L kind of as a function of the winter that you experienced. But Jamie, any thoughts on just supply chain effects you want to share?

Yes. David you mentioned a couple of items, pallets continue to be fairly expensive and inflated. We don't see that coming down. Polypropylene has come down. It's obviously related to oil prices. So 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 going to mostly be related to the C&I business on the drive vans that those prices tend to go up, but we've done a lot of great work the team has on the price – 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 even into 2024. So we are cognizant of those truck freight rates rising in 2024, but we think we can stay ahead of it with pricing and really see some margin improvement in 2024. On the highway side, most of our material has shipped via a vessel and barge. Our vessel rates are locked in through 2028. Our barge rates are locked in through next summer, summer of 2024. So we'll be renegotiating those rates later this year or early in 2024. On the vessel side, we've got inflation and a CPI type inflationary adjustments in – on the vessel side. So 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 our full year discussion later this year for 2024.

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

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

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

Not really I think. So like Kevin mentioned a little bit earlier, there were pockets of success. We had stronger winter weather activity and higher sales on the upper Mississippi. It was weaker along the Ohio River Valley. We would typically be 65% to 75% complete with our bid season, sitting here in early August. A lot of the states and municipal bids are finished and the latter half of the season is commercial business. So it would be rare that the full year bid season pricing ends up different than the 65% mark. So that I hope that answers most of your question. I would also note that that 65% really applies to about 75% of the overall highway deicing business. So outside of this North American bid season, we've got our UK highway deicing business. We've got our mag 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. So 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.

Okay. And then the follow-up on again on salt. If the – if you’re at this point, 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 only saying that because 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, notwithstanding some of the inventory costs are still flowing through your – flowing through your P&L, in that scenario, would salt EBITDA be up in 2024? It seems like it would be.

That’s a great point. So remember the winter was mild and we’re experiencing that in our current period results. So we sold less material than we would have expected. When we roll out our view on 2024, it will assume average winter weather. So while the commitments are a little bit lower. So recovery of normalization or average winter weather kind of offsets that actually more than would offset that decline in commitments. And then, you take into account the price the portfolio improvements that 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, but we make more money on it because it has a lower transportation cost or it’s closer to the mind. So 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.

Exactly. Thank you.

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

Yes, thank you and good morning. And thank you for taking my question. Appreciate the comments around the 65% in the municipalities and the now the shift to more industrial, realizing we can’t comment on pricing. But is a fair way to think about as we look at the back or the remaining kind of the stated number that’s out there kind of serves as an anchor and a buoy to pricing. Like, just as we think about previous years is the upside, downside? I don’t – is it like, I mean, how tight is that range? Is it basically this is the price or is there upside or downside?

It is, there isn’t – 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 independent contractors and landscapers and deicing guys who resell this material for parking lot clearing and whatnot. So 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.

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

Yes, we’re well on our way in doing that. We are engaging with the U.S. Forest Service for a multi-year agreement 2024 and beyond. Those discussions will really get into details in this month and in September. So I think we’re going to have a lot more visibility on what the next few years look like within the next 60 days to 90 days. So there’s nothing that we can do beyond make kind of nailing that arrangement as we go into 2024 and 2025. But also we’re talking about entering the California market with CAL FIRE that is dependent on the completion of our IFOE [ph] that we talked about in the prepared remarks around our FR-105. And then when we think about Canada, British Columbia and Saskatchewan and Alberta, those are opportunities in Western Canada as we go into 2024 as well.

Okay. Thank you very much.

[Operator Instructions] The next question is from Joel Jackson with BMO Capital Markets. Your line is open.

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

Well, I won’t address it specifically. We’ve not started our discussions on beyond, kind of July 2024 with our barge carriers. Yes, there is talk of those going up for sure. Remember, we are the backhaul, they need us. We’ll go through that process and the good news about 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. So we’ll have good line of sight during our bid season on what those barge costs will be in 2024 and in a multi-year agreement through perhaps 2026 or something like that. So 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.

And Joel, in terms of profitability from an EBITDA per ton perspective, we’re tracking towards an excess of $20 of EBITDA per ton. And we see no reason why we should not be able to hold that. 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.

That’s helpful, Lorin. Thanks. Okay. And then finally for me, you may have said on the call earlier, I know this is pushing back [indiscernible] 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?

Yes, for the most part. Joel, it’s that coupled with Chris and the team have been able to skinny down the expectation around the DustGard unit as well. So 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.

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? Has the price been passed through to the different tenders? I understand 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 barge have gone up between you and competitors?

I don’t have that history off the top of my head. But remember, we would be equally impacted Cargill and the Stone Canyon asset would be equally impacted by any change in barge rates. Again, the good thing is, so you would assume that disciplined market competitors would recapture that value through pricing as they go through those bid seasons. Again, the good thing for us is that the timing is that it is a July renewal of 2024. And we’ll be – 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 bidding analysis as we…

Next summer.

Next summer.

Just maybe think of 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?

Well, our leverage just hit 3.1 times. And so we are happy with the progress that we’ve made to delever now granted some portion of that relates to the co-proceeds [ph], but a lot of it relates to the restoration of the EBITDA of this business. And so three times is a very comfortable level for a company with our credit profile. And we will see what we always see in terms of seasonal dynamics around the final quarter of the year. But we feel very good about our leverage position as we continue to drive it down.

Thank you.

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

Yes. 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 as described to your franchise right now for the perspective value from the lithium resource of the Great Salt Lake. But my question addresses the visibility and or perceived risk associated with standing up that project right now. So directionally you suggested, I know we’re going to wait until the conversations with Utah are complete understand that, but directionally you suggested that CapEx might be higher than what the original FEL-1 engineering plan had been scoped out at. And as you’re looking forward though I’m just curious if, as a way to maybe contain costs. In Phase 2, the plan is to stand up a lithium hydroxide conversion facility, whereas Phase 1 is carbonate and that adds a presumably more cost per capita per se, more complexity, therefore maybe more risk. So I’m wondering if, could you just remind us why the strategic rationale is there for do carbonate and then hydroxide, it might be, it seems like there might be a pathway for less perceived risk, less CapEx if the whole – if both phases were carbonate. Is there any thinking along these lines? Thank you.

Yes. Hey Chris. This is Chris as well. With regards to looking at Phase 1 and Phase 2. Phase 1 is that that lithium carbonate that we’re talking about. Phase 2 on the West side would be that that hydroxide component is we’ve talked about progressing our CapEx and our FEL-1, our FEL-2, FEL-3 detailed engineering, what we’re referring to is really our Phase 1. So 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 the market dynamics and what customers are looking for, you see a split really between the LFP and NMC type batteries. And so from an LFP standpoint where we’re producing that carbon or intended to produce carbonate. The customers are also looking for the hydroxide piece as well. So hopefully that provides some detail to your question.

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

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 1 up and running and executing there. And as we progress through that, we’ll certainly take a look at Phase 2 and whether that’s carbon or hydroxide. So great point.

Thank you.

[Operator Instructions] And it appears that we have no further questions at this time, I’ll turn it back to the presenters for any closing remarks.

Thank you for joining the call today and thank you for your continued interest in Compass Minerals. And we’ll continue to keep you posted in subsequent quarters. Thanks everybody. Have a great day.

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