Compass Minerals (CMP), a producer of minerals including salt, plant nutrients, and magnesium chloride, reported a net loss of $75 million for the first quarter of fiscal 2024. The company announced the termination of its lithium project in Utah, citing regulatory uncertainties and shifts in the commercial landscape of the lithium market. This decision led to the disbandment of the lithium development team and a substantial charge for impairment and severance costs. In addition to these developments, Compass Minerals discussed a CEO transition, with Edward Dowling taking the helm as the new President and CEO, succeeding Kevin Crutchfield.
Key Takeaways
- Compass Minerals reported a consolidated operating loss of $55 million and a net loss of $75 million for the quarter.
- The company's salt segment saw an 11% decrease in revenue due to mild weather affecting volumes.
- Plant and nutrition segment sales volumes increased, but prices for potassium-based fertilizers dropped by 29%.
- The discontinued lithium project resulted in a $77 million charge for asset impairment and severance costs.
- Improved EBITDA margin and adjusted EBITDA per ton were reported for the salt business.
- The company's liquidity is at $246 million, with net leverage at 4.3 times.
- Adjusted EBITDA guidance for the salt business was provided, and plant nutrition guidance was adjusted due to fertilizer price challenges.
- Compass Minerals is focused on cash production and debt reduction, with no plans to issue equity.
Company Outlook
- The company expects significant positive cash flow in the next quarter.
- Adjusted production levels and capital management are in place in response to the mild winter.
- Focus remains on cash generation, with the intention to reduce inventory levels and improve cash management.
Bearish Highlights
- The termination of the lithium project introduces a significant one-time cost.
- Mild weather led to reduced demand for deicing salt, affecting the salt segment's revenue.
- Decreased pricing in the plant and nutrition segment has led to a decline in adjusted EBITDA for that segment.
Bullish Highlights
- Increased demand in West Coast markets for the plant and nutrition segment.
- A 67% increase in sales volumes compared to the previous year for plant and nutrition products.
- The company is within its covenants and comfortably positioned for future cash flow.
Misses
- The company reported a net loss of $75 million for the quarter.
- Revenue in the salt segment decreased by 11% due to mild weather impacts.
- The lithium project discontinuation led to a $77 million charge.
Q&A Highlights
- The company confirmed no lingering costs or cash requirements for the lithium project's counterparties, including Ford (NYSE:F) and LG.
- Operational strategies for the salt business are focused on cash generation, with no changes indicated in the pace or timeline of the underground mine development program.
- CEO Edward Dowling emphasized the focus on developing a yield-type company and expressed confidence in gaining market confidence through effective communication and demonstration of their plans.
Compass Minerals' first quarter fiscal 2024 earnings call has highlighted the challenges and strategic shifts the company faces. As they navigate through market uncertainties and operational adjustments, their focus remains on strengthening their financial position and optimizing their core business segments.
InvestingPro Insights
Compass Minerals' recent fiscal quarterly report paints a picture of a company at a strategic crossroads. The termination of its lithium project and the subsequent leadership change signal a period of transition. To further understand Compass Minerals' financial health and future prospects, the following insights from InvestingPro may offer additional clarity:
InvestingPro Data:
- Market Cap (Adjusted): 877.86M USD
- P/E Ratio (Adjusted) last twelve months as of Q1 2024: 275.82
- Dividend Yield as of 2023: 2.82 %
InvestingPro Tips:
1. Compass Minerals has been trading at a high earnings multiple, which could suggest that the market has optimistic expectations about future earnings growth despite the current challenges.
2. The company has maintained dividend payments for 20 consecutive years, reflecting a commitment to returning value to shareholders even during periods of operational adjustments.
These insights, particularly the high P/E ratio in the context of expected net income growth and a stable dividend history, may indicate that investors are looking at the long-term potential of the company as it refocuses on its core segments. For readers interested in a deeper analysis, there are additional InvestingPro Tips available that could help in making a more informed investment decision. Use coupon code "SFY24" to get an additional 10% off a 2-year InvestingPro+ subscription, or "SFY241" to get an additional 10% off a 1-year InvestingPro+ subscription.
Full transcript - Compass Minerals Intl Inc (CMP) Q1 2024:
Operator: Ladies and gentlemen, good morning. My name is Abby and I'll be your conference operator today. At this time, I would like to welcome everyone to the Compass Minerals First Quarter Fiscal 2024 Earnings Call. Today's call is being recorded and all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session [Operator Instructions]. And I will now turn the conference over to Brent Collins, Vice President of Investor Relations. You may begin.
Brent Collins: Thank you, operator. Good morning. And welcome to the Compass Minerals fiscal 2024 first quarter earnings conference call. Today, we will discuss our recent results and update our outlook for 2024. We'll begin with prepared remarks from our President and CEO, Edward Dowling; and our CFO, Lorin Crenshaw. Joining in for the question-and-answer portion of the call will be George Schuller, our Chief Operating Officer; Ben Nichols, Chief Sales Officer; and Jenny Hood, our Chief Supply Chain Officer. Before we get started, I'll remind everyone that the remarks we make today reflect financial and operational outlooks as of today's date, February 8, 2024. These outlooks entail assumptions and expectations that involve risks and uncertainties that could cause the company's actual results to differ materially. A discussion of these risks can be found in our SEC filings located online at investors.compassminerals.com. Our remarks today also include certain non-GAAP financial measures. You can find reconciliations of these items in our earnings release or in our presentation, both of which are also available online. I'll now turn the call over to Ed.
Edward Dowling: Thank you, Brent. Good morning, everyone. And thank you for joining us on our call today. I look forward to engaging with you as Compass Minerals new President and CEO. I'll begin my remarks today by discussing some of the announcements we've made over the past several weeks. Yesterday, we shared within our quarterly earnings that we decided to terminate our lithium project in Utah. As I expect most of you know, this was a brownfields project that would have enabled the extraction of one additional mineral salt, in this case, lithium fluoride to carbonate as a co-product within our existing SOP salt, magnesium chloride production streams at the Ogden operations. Unfortunately, the environment surrounding this project has evolved drastically from when we began advancing this project several years ago. The proposed regulatory changes have led to significantly increased uncertainty. When you combine an uncertain regulatory environment with other changes that have occurred within the commercial landscape for lithium with all the project it has a higher than acceptable degree of risk and uncertainty. This requires a higher return in order to justify such investment. So I understood that projects like this carry risk and willing to take and manage measured risk. However, we will not invest into uncertainty. We ultimately concluded there’s just too much uncertainty in this project. I will note that the lithium content in the Great Salt Lake is a significant resource that's not going anywhere. We have the ability to revisit the potential to develop the resource in the future. Clearly, that's not today. We'll continue to monitor and engage the appropriate legislator and regulatory processes in Utah as well as watch emerging commercial developments to preserve the long term optionality of that resource. As a result of the decision not to move forward with the lithium project, we have disbanded the lithium development team. Chris Yandell, Head of our Lithium, has left the company, as have another of talented individuals who've worked to advance the program. I want to thank Chris and the Lithium team for their efforts over the last couple of years were some of the best in their future endeavors. In concert with these actions, we're taking charge in this quarter that reflects our decision to exit the lithium program, which includes severance costs for the employees that are leaving the company as well as impairment of certain lithium related assets and future commitments, which Lorin will discuss in more detail. Next, I'll discuss our recent CEO transition. When Kevin Crutchfield joined Compass Minerals in 2019, his mandate from the Board was to address the following; one, fix what has been a challenging production period at the Goderich Mine and repair significantly strained relationships -- labor relationships at the mine; two, [entering] South America; and three, determine if there was any areas of growth adjacency through the company's core business of salt and plant nutrition. I've known Kevin for three decades. He's a talented executive of the highest integrity and personal character. Over his time here, he successfully addressed all three of these challenges. As we know, the last year has been a challenging one for Compass Minerals. Ultimately, the Board and Kevin agreed that a change in leadership was in the best interest of the company. This change allows employees and the investment community to refocus on our advantage assets that underpin our core salt and plant nutrition businesses, as well as the emerging and exciting fire retardant business. On behalf of the Board and personally, I want to thank Kevin for his leadership over the past several years and his continued support during this transition. Looking forward, I'm excited about the opportunities ahead of us at Compass Minerals. I've been on the Board here for just under two years. More broadly, I spent the totality of my career in mining industry, both in executive and operating roles around the world. I've been fortunate to work in almost every mining environment you can imagine. And I think I bring an acute understanding of what it takes to achieve operational excellence and drive improved profitability in mining. I successfully led numerous cost reduction and capital efficient efforts for several companies in the past. Given these experiences and my familiarity with the company's advantaged assets, the Board determined that I was the right person to lead the Compass Minerals at this point in its journey. In addition to maintaining a safe and responsible operations that Compass Minerals is known for, the mandate I have is pretty simple, its to improve free cash flow generation and returns on capital we provide to our shareholders. I'm confident that we can get there by improving production effectiveness and asset efficiencies in our salt and plant nutrition businesses. We'll adopt a more stringent approach through evaluating capital requirements and we'll execute strategies aimed at reducing working capital. We'll also thoughtfully build out our emergency fire retardant business. Our company has a tremendous set of unique and proven assets that would be almost impossible to replicate today. But we must and we will take actions to maximize the performance of these assets. During our most recent earnings call, we laid out six strategic focus areas for fiscal 2024. Those were, build on our strong safety performance and our continuous drive for zero harm across each of our facilities. Two, maintain a disciplined pricing strategy in our North American highway deicing business and focus on geographically advantageous at markets. Three, execute on strategies to deliver more reliable sustainable Ogden production. Four, achieve clarity regarding Utah's regulatory regime as it relates to lithium production. Again, as we've gained increased clarity on this matter, we're now pens down on lithium. Five, continue to scale the manufacturing and supply chain capabilities of our fire retardants business on its path of full commercialization and increased market share. And sixth, maintain a strong balance sheet and prudent fiscal policy. Those areas remain the same today and we'll approach them using improvement, cost improvement and capital discipline and tool sets and a renewed emphasis on improving the management of our operating expenditures, capital expenditures and working capital. In the coming quarters you can expect to hear more from us about the progress we're making in these areas. Again, I'm extremely excited about the opportunity to lead Compass Minerals through this next chapter in its history. In addition to a great set of assets, the company is blessed with a talented and committed group of employees. My wife and I are looking forward to relocating to the Kansas City metro area and now becoming more involved in the local community here. With that, I'll turn the call over to Lorin to review the quarter.
Lorin Crenshaw: Thank you, Ed. On a consolidated basis, revenue was $342 million for the first quarter, down 3% year-over-year. Our profitability this quarter was impacted by the $75 million impairment we took related to our decision to terminate our lithium project in Utah, which Ed referenced earlier. The consolidated operating loss was $55 million versus operating income of $28 million last year. We reported a net loss of $75 million for the quarter, which compares to a net loss of $300,000 last year. Adjusted EBITDA was approximately $59 million, slightly lower than the $62 million in the prior year period. I'll begin with the salt segment, where revenue totaled $274 million for the quarter, down 11% year-over-year. The main theme here is that we experienced extremely light volume on account of exceptionally mild weather we saw across our core markets during the first quarter. Specifically, highway deicing volumes were down 22% year-over-year to 2.3 million tons and C&I volumes, which include retail deicing products, were down 5% over the same period to 589,000 tons. Total salt segment volumes were down 19% year-over-year and reflect the fact that the first quarter was the fourth worst quarter with regard to snow event activity within our served markets that we've seen over the better part of three decades. In fact, December '23 three was the worse December over that span. So despite the fact that our commercial group did a fantastic job on pricing, highway deicing price increased 7% and C&I price increased 3%. The weather didn't cooperate the way we'd like to begin the year. While the snow data is disappointing, it is important to remember a couple of things about the weather. First, over the long term, about 70% of the snow days in our served markets occur in the second fiscal quarter, so there is a lot of winter left in this season. Second, statistically, looking at historical data, a weak first quarter, one that is below the historical average, has not historically foreshadowed a below average second quarter. Specifically, when we look back over the past couple of decades, we see that in the 10 first quarters with recorded snow days below 90% of the long term average, 70% of the time, the second quarter of that year was at 90% or greater of the long term second quarter average. So again, it is simply too early to state with any confidence how the rest of the winter season will play out. Distribution costs on a per ton basis were basically flat year-over-year. All-in product costs on a per ton basis rose 9% year-over-year and reflect C&I salt sales, representing a higher percentage of the sales mix this quarter and fewer sales tons to absorb cost in the period. Despite these challenges, we earned more this quarter year-over-year as measured by operating earnings for the segment, which were $51 million, up nearly 7% year-over-year, and as measured by adjusted EBITDA, which came in at $66 million, up 8% year-over-year. Our adjusted EBITDA margin improved by over 400 basis points and adjusted EBITDA per ton was $23. We worked diligently over the past couple of years to control the things we can control and improve and maintain the profitability of the salt business. These effects were reflected in this quarter's results and reflect a positive takeaway during a quarter in which we didn't get any help from the weather. Moving on to our plant and nutrition segment. You'll recall that calendar '23 saw incredibly dry conditions early in the year in California quickly shift to historically unprecedented flooding conditions, the combination of which severely impacted sales throughout last year. From a commercial standpoint, the good news is that demand has returned as we expected in our core West Coast markets and we had sales of 75,000 tons this quarter, which is an increase of 67% from the prior year quarter. The pricing dynamic for SOP continues to reflect the excess supply of potassium based fertilizer in the market, which led to a 29% decrease in price per ton year-over-year to $660 per ton. The net effect of higher volumes and lower pricing was an increase in plant nutrition revenue of 19% year-over-year. A significant portion of the plant nutrition business’ distribution costs are fixed, so the increase in sales volumes benefited distribution cost per ton in the quarter by 11%. All-in product cost on a per ton basis were up 4% year-over-year. The net impact of these drivers is that first quarter adjusted EBITDA declined from $19 million to approximately $6 million year-over-year as the favorable impact of higher volumes was more than offset by significantly lower pricing and higher cash costs. At Fortress, our results related to the calendar 2023 contract were a little better than we expected. We recognized approximately $13 million in adjusted EBITDA during the quarter associated with the take or pay provisions of that contract. Also regarding Fortress, we recognized a roughly $3 million noncash charge related to an increase in the valuation of the liability associated with the Fortress acquisition and the contingent consideration related to that transaction. As a reminder, when we purchased Fortress, approximately 50% of the purchase price was contingent with roughly half of that linked to the achievement of certain business development milestones and the other half based on volumes sold and paid over a 10 year period. As of December 31st, the net present value of this liability was approximately $47 million. Each quarter, there will be gains and losses as the liability is mark-to-market to reflect changes in the discount rate used in the valuation and changes in our outlook for the business. Because this liability was established as part of an acquisition, the accounting guidance does now allow for the noncash mark-to-market to be added back to reported adjusted EBITDA. However, our adjusted EBITDA would have been $3 million higher if we added back that noncash charge. That $3 million expense is captured in other operating expenses on the income statement. Lastly, with respect to our lithium program. As Ed mentioned, we have made the decision to not move forward with that project. As a result of that decision, in our view, that the risk adjusted returns on capital of moving forward with the project are inadequate, we have disbanded the lithium function and our recognizing a charge of approximately $77 million related to the impairment of associated assets and future commitments, as well as the severance costs of those team members that will be leaving the company. Before leaving the income statement, I'll make a couple of quick comments on income taxes. First, the effective tax rate for the quarter is not meaningful due to the impact of the impairment that we took in the quarter. Second, in periods like this year when our US businesses are under earning, it creates income mix issues where our worldwide income consists of foreign income driven by our salt business that is significantly offset by US losses, driven by our plant nutrition business. These dynamics are driving the estimated tax guidance for the year, which excludes the impact of valuation allowances and the lithium impairment. Moving on to the balance sheet. At quarter end, we had liquidity of $246 million, comprised of roughly $38 million of cash and revolver capacity of around $208 million. Net leverage stood at 4.3 times at the end of the quarter. Moving on to our outlook for the rest of the year. The 2024 adjusted EBITDA guidance for the salt business that we rolled out on our last call depicts the bell curve showing earnings outcomes ranging from a mild winter on the low end, a normal winter in the middle and a strong winter on the high end. Our goal in taking this approach was to provide a reasonable distribution of results that could be anticipated across different weather outcomes. With 70% of the winter still ahead of us, we continue to feel comfortable that we will fall within our guidance range. And that it would be premature to make any adjustments at this point in time, other than to acknowledge that the odds of a strong winter are now remote. As a quarter-to-date update, January snow events in our service markets came in around 94% of the long term average and there was quite a bit of cold weather in January that generated good demand across our platform. Overall, at this point, we think the range we provided is still a fair estimation of the potential outcomes as we continue closely monitoring how weather during the second quarter plays out. Shifting to plant nutrition. Unfortunately, the macro environment for fertilizers remains challenging from a price perspective. Recent data points within the broader MOP market indicate what is at least short term downward pressure on potassium based fertilizers. Our team has done a great job maintaining what we see as a fair premium value for SOP relative to MOP. However, we see more downside than upside risk over the balance of the year. Against that backdrop, we are adjusting our plant nutrition guidance down to reflect several risk factors over the balance of the year. First, MOP prices continue to face pressure as I indicated and we must manage and attempt to balance available market value versus targeted demand. Second, the continuing weakness in fertilizer pricing is resulting in a large number of buyers remaining inventory conscious. In deflationary environments, buyers move to just in time purchasing behavior, further adding to the competitiveness of every time we compete to sell in the market. And third, first quarter pond based production at Ogden tracked at the lower end of our initial projections. As a result of those factors, we now expect the adjusted EBITDA for the year to be in the range of $15 million to $35 million. Moving on to corporate. Our corporate expense includes everything not related to salt and plant nutrition, so it includes our corporate overhead, the cost of our now terminated lithium program and the positive contribution of Fortress. Overall, our total corporate guidance is not changing at this time. Lithium related expenses for the year will be at the lower end of the guidance we provided given the elimination of the lithium function. However, this reduction is being largely offset, at this time, by the noncash expense related to marking to market of the Fortress contingent liability that I discussed earlier. These two items offset one another and therefore our guidance for corporate is unchanged. Digging in a bit more on each of these. Regarding lithium, as a result of our lithium program termination, we will see the amount of lithium expense decline to approximately $5 million. This reflects cost up through late January when we move forward with our headcount reductions. The 1 time costs associated with exiting that program like severances won't be captured in this guidance since they are an add back for adjusted EBITDA purposes. Regarding Fortress, subsequent to our last earnings call, which occurred in November, the U.S. Forest Service changed the solicitation contract requirements for the calendar '24 contract and this has resulted in delays in the negotiation and finalization of a contract for the '24 fire season, which starts in the April, May timeframe. We continue to expect to have a finalized contract prior to deployment for the upcoming fire season. As a reminder, we do not have anything currently baked into our '24 guidance for the calendar '24 U.S. Forest Service contract. Accordingly, we are leaving guidance unchanged with respect to what we've included in for Fortress at this time. Once our contract is finalized, we will adjust our guidance appropriately. Finally, our corporate adjusted EBITDA guidance does not include the costs associated with certain senior executive management changes that we have announced in recent weeks. Such costs are expected to be in the range of $6 million to $9 million and these costs will be recognized in the second quarter and treated as an add back to adjusted EBITDA at that time. Finally, moving on to CapEx. We have lowered CapEx slightly by $7 million at the midpoint to a range of $120 million to $130 million, consistent with Ed's prior remarks regarding our focus on reducing the capital intensity of the business. Specifically, we are reducing our estimate of sustaining CapEx by $10 million at the midpoint to a range of $80 million to $90 million. Lithium expenditures for the year are expected to be around $30 million, reflecting in flight spending prior to suspending the projects. I would note that not all of that $30 million will ultimately be reported in the cash flow statement as capital expenditures due to the timing of the impairment and when we ultimately pay for some of those in flight items. Finally, we continue to expect to invest approximately $10 million to support the continued growth of Fortress, and that guidance is unchanged. That summarizes our first quarter results and our outlook for the remainder of the year. With that, I'll turn the call over for questions. Operator?
Operator: [Operator Instructions] And we will take our first question from Joel Jackson with BMO Capital Markets.
Joel Jackson: I have a couple. I'm going to ask one by one. So can you talk a little bit about the balance sheet and liquidity and free cash flow? The fiscal Q1 cash flow burn was quite a lot. Should we expect a really good return to good inflow of cash in Q2, if you can talk about it's going to look -- it looked like prior years? And then it looks like you're really pushing up against the covenants here. Do you need to issue equity right now and to stabilize the company?
Lorin Crenshaw: This quarter we did see a meaningful cash burn, and there are several factors related to it that are unique and will not repeat. One, from a lithium CapEx perspective, cash out the door and actual accrued was $20 million. We will not spend $20 million on lithium going forward, and so that was a onetime factor. Inventory was roughly flat sequentially. AR was up as you would expect. The big factor was accounts payables where DPOs, as we ended the year, were abnormally high. You saw them normalize this quarter. The bottom line is this coming quarter, the 3/31 quarter, you should expect a significant positive from change in working capital and I expect that this will be the largest -- this will be the only quarter where we have this sort of a cash burn. So you should see a major positive in terms of cash flow in this quarter, and there were some unique factors that drove the burn in the first quarter. I’d also add the SEC settlement payment was made, and so several unique factors in that regard.
Edward Dowling: I'd just like to complement what Lorin just said is that our focus, which has historically been around earnings, has changed in the company and primary focus is cash production. And it's our intention going forward to reduce our debt and improve the ratios that Lorin previously mentioned at the 4.3 net debt to EBITDA. We want to get this back into historical and where our peer groups are.
Lorin Crenshaw: And Joel, the 4.3 was well within the 5 times covenant for this quarter. And so, no, we were well within that covenant. We'll see substantial cash flow going forward. And equity, I think, is not anything at all to even contemplate as it relates to our covenants. We are comfortably within those covenants. And I would say the nature of our business is that we do scenario planning every year. We look at mild, we look at normal, we look at strong winters. And we are blessed to have an exceptional bank group, many of which have been with us for over 20 years, and we'll be prepared for any scenario. But no, equity, I think that's not anything that anyone should imagine.
Joel Jackson: My follow-up question on salt is most of your official commentary, although, Lorin or Ed, I think Lorin did comment about what -- it was Lorin, what January looked like. But a lot of your official commentary is acting like it's January 1st when it's actually February 8th. So I did appreciate Lorin updating on this call what's happened in snow for the last five, six weeks. But the question I have for you is, such a mild winter anything can happen. We're getting to -- we're deep into the key winter months now and it's getting into March. You have to start making decisions, like customers are probably now quite below, trending quite below their 80% minimum or their minimum spend, minimum volume equipment, you have to make mine plans at Goderich and elsewhere to make sure you don't over produce. So can you talk about what discussions are happening internally or externally, start making mine plan decisions, customer, minimum decisions, whether you're going It's been into rollovers next year, those must be discussions you have to start planning for in such a mild winter?
Lorin Crenshaw: Joel, historically, we plan for certain winners and produce to that. And when you end up with a weak winner, we end up with too much inventory stored, which -- versus a cost to the balance sheet. We're running the different -- the business differently. At this point, we're building flexibility into the operations. We'll be reviewing where we stand going forward and adjust production side accordingly to better manage capital in the company going forward. So there's a lot of detail behind that. Happy to chat to you about that separately. But philosophically that's where we are and we're going -- things are already being done. Do you want to add anything more…
Edward Dowling: I think it is worth adding, Joel, that it's funny, a lot of questions several years ago were around Goderich and its production levels. And now in times like this, these are times where you actually would consider tapping the brakes. And as we look to protect our balance sheet and George can elaborate, we are thrilled on the one hand that we have restored Goderich to the levels that we have. But at the same time, we're also pleased that we're in a position where we can take actions to tap the brakes as necessary. George, maybe you can talk about…
George Schuller: I just wanted to add on a little bit what Ed said and also Lorin. We've already taken an action over the last several weeks to better align our mine production to match its inventory levels. So just a little bit more than what Ed said, we've already taken action to adjust that, and I feel confident that, that will improve both our inventory levels, where they need to be, but also make sure that we're maintaining our mine cost at the right level.
Operator: We will take our next question from David Begleiter with Deutsche Bank.
David Begleiter: Ed, besides lithium, are there other assets in the portfolio that you and the Board are looking at or considering other options for?
Edward Dowling: Look, the lithium, of course, was predominant in our mind. We want all of our assets to performed in terms of returning ROIC, return on invested capital, in excess of our weighted average cost of capital. I've been here three weeks now. I haven't been able to review all my thoughts with the Board yet, but that will become clear in time. We're working really hard to see what this business can be and we'll make the decisions accordingly.
David Begleiter: And just on plant and nutrition given the earnings pressures this year. Are you considering taking additional cost actions here for either temporary or permanent on the cost side?
Edward Dowling: I'm sorry, I missed the…
Lorin Crenshaw: It's regarding plant nutrition. And David, this business is $100 a ton above where it should be from a cash cost perspective, half of that relates to our use of KCL. We are absolutely focused on getting those costs back in line with historical averages through a combination of fixed cost reductions, as well as restoration of the ponds so that we don't have to use as much KCL, which is burdening our results.
Operator: And we will take our next question from Jeff Zekauskas with JPMorgan.
Jeff Zekauskas: In your agricultural business, your volumes were up, I don't know, 50% more than the fourth quarter, but the EBITDA wasn't really very different. And I get it that prices were down a little bit. But what was the magnitude of cost overruns or the problems with pond production, how much did that burden you in the quarter, and what exactly happened?
Lorin Crenshaw: I'll approach that two ways and then ask Ben to comment. As I look at the year-over-year impact to profitability, it is predominantly for the first quarter related to price. There's a $2.60 difference between the price a year ago and the price today, which is quite substantial. I would say about two thirds of the decline is attributable to price and about a third is attributable to cash costs. I mentioned earlier the KCL dynamic and I would characterize it that way, but it's predominantly related to price.
Jeff Zekauskas: But sequentially, your prices are down just a little bit though, right? Can you analyze how you're [Multiple Speakers] sequentially?
Lorin Crenshaw: So my answer was in regard to the year-over-year impact. From a sequential point of view, you're right, we only saw about a sequential decline of about 5% or so in the average selling price. And so the impact sequentially would have been principally related to cost. And I've said before that that is principally related to the KCL.
Jeff Zekauskas: And then in your inventories, your inventories are close to $400 million. And historically, maybe a peak inventory level for Compass is $300 million. Do you have to really cut production rates in your salt business for the remainder of the year in order to get your inventories down?
Lorin Crenshaw: I would focus on days for two reasons. Due to inflationary dynamics, we have higher valued inventories. If you just look back over the past three or four years and the team has successfully passed through a lot of those costs. But with that said, inventory days coming into this year were at about $200 million and our focus is on reducing those days. Every 10 days is approximately $25 million and you should expect starting this quarter and as we focus on the balance of the year that we're going to drive those days down. They are not at acceptable levels but they are inflation adjusted at higher levels. And so, we're going to focus on getting those days down and they are at historical highs and that's something that we're going to get our arms around. It goes to George's point earlier about running these assets flexibly to reduce production to meet where demand is.
Jeff Zekauskas: And then lastly, you talked about some changes in requirements from the US Forest Service affecting your Fortress business. But I couldn't tell whether you thought that it actually delayed anything. What you said is you expected to have your paperwork in order before the 2024 fire season. So if that's true, does the delay really make no difference?
Jenny Hood: So the delay, just to give a little bit more color on that. The original solicitation from the US Forest Service was issued in late September. It took them until mid December to issue a final revised solicitation, and the solicitation deadline was then January 10th. So it absolutely pushed back the contracting process, in total. However, we are pleased since January 10th when we were able to start the negotiations, we're pleased with the progress and the engagement that we're seeing from US Forest Service. Keep in mind that previously the Forest Service was dealing with one sole source supplier for over two decades. So thinking about how to integrate another supplier, both from a contractual standpoint as well as in the field has been quite challenging for them, but however, we are supporting them in those efforts. And again, we're pleased with the engagement that we've received since the submission deadline.
Lorin Crenshaw: And Jeff, from an earnings perspective, you're exactly right. There's no change. We entered into this year not assuming EBITDA for 2024 for Fortress until we get the contract. When we get that contract, which we fully expect, you should expect us to raise our guidance to reflect the profitability. And so we have been conservative in not speculating, but you should expect that we will raise our guidance. And there's no change there, it's just a little bit delayed.
Jeff Zekauskas: And then lastly for Ed, what's your number one priority that you want to get done over the next six months?
Edward Dowling: Well, after ensuring that we're operating in a responsible manner as a company, it's focused on cash, working on the balance sheet, managing the inventories to an appropriate level, which it's just all cash management and getting the mindset right, establishing the accountabilities and the changes of plans that accompany that, there's some subtleties that you run your business differently and making sure that we're moving ahead with that in a very quick way.
Operator: We will take our next question from David Silver with CL King.
David Silver: I have a question I guess about any lingering liabilities related to the decision to terminate the lithium project. So I'm sure you have a number of agreements, but the ones with Ford and LG on the supply agreements, you have an agreement with the technology provider et cetera. Should we expect any lingering costs or cash requirements to any of the counterparties related to the lithium project going forward?
Lorin Crenshaw: As it relates to the technology provider, any expenses associated or potential liabilities associated with the technology provider have been included in our write down. And so any expenses there have been included in that write down. As it relates to the OEMs, there were no financial obligations that were not contingent on us advancing this project. And so we have notified them appropriately, but there are no financial obligation.
Edward Dowling: There's no take or pay or any requirement to deliver associated with those agreements. The more relationship base that when and if it got going, we had a customer base established, that's it.
David Silver: So from an earnings per share perspective, the charges you took this quarter are sufficient. But is there any estimate of the cash impact that will flow from the decisions that's maybe how much of that $77 million, let's say, will be addressed via cash payment as opposed to just the write down of things you've already paid for?
Lorin Crenshaw: And so as you can see in our guidance for CapEx for lithium, it hasn't changed. We said that we would spend about $30 million for lithium as it relates to in flight capital that we could not stop even after we suspend it. And so as you do your model, you should assume that we will be around that level and only that level, not any more than that level. Now when we get to the end of the year, not all of that $30 million will show up as CapEx, because we have written down the asset, some of it will just be liabilities that we pay off. But that $30 million is a good number and there's nothing more than that. And I would also say that the preponderance of the cash has already been paid. And so it'll be behind us after this 3/31 quarter.
David Silver: I have a question about operational strategies on your salt business. So Ed, you were very clear discussing your priority on cash generation. And there's a couple of things when I think about your salt business. But firstly, there is the underground mine plan that is underway. And to me that's something where you would have to invest a little more to generate a certain amount of efficiency, incremental efficiency from that. And then, so I'm wondering about should we expect the underground mine development program to take a little longer or to be conducted at a more measured pace going forward? And then secondly, on your marketing strategy, I did note that you talked about maintaining the product pricing as far as I guess bid season strategies are concerned. But I'm just wondering, I mean, along with Kevin's departure, the Chief Commercial Officer did depart as well. And some people might interpret cash flow generation and per ton margins as a bit of a trade off there. So could you just reiterate, I mean, what is the plan for spending to further progress the underground mine development? And then what, if anything, might change going forward with the value over volume approach to your upcoming bid season for deicing salt?
Edward Dowling: George and I will address the first half of your question, and then Ben will speak to the market and commercial side of that. There are numerous improvement efforts underway, not just at Goderich, but at all of our operations. And that not just the mines but at the plants and at our distribution centers, all focused on cash. When you go to a mine like Goderich, our priority will be to be driving through the east on the mains that are up on the north side of the mine really tied into the infrastructure better than what the existing infrastructure is. We have to haul through conveyor or other means the product all the way around to the shaft basically going three quarters away around our many miles more than the direct shot through would be. So that's really the priority. So we will continue to prioritize that move forward. And as we ramp up and down, we'll flex our production from other parts of the mine, for example. And we're also looking at alternative mining methods, looking at some of the most expensive equipment we have. We're looking at different alternatives on that. We need to do better with our way that we manage those in terms of maintenance and other things and improve our, you might call, our general systems in the company. What we're trying to say, there's a variety of levels and timing that these activities are going on at Goderich, which you referenced, but then really but everywhere. I think that as we get a little further down the road, we'll plan to do some Analyst Days, Investor Days up at the mines, and we can show you what we're doing firsthand, and I hope you would participate in that. I'll let George make a few comments as well and then turn it over to Ben.
George Schuller: Just to add a little bit what Ed said. Our strategic focus hasn't changed one bit at Goderich in regards to the east development that we're doing there. Keep in mind that Ed has been around on our Board year and a half to two years now, and he was fully versed on that. If anything, I would say Ed, in his short time he's been here, has probably ask the questions a little bit more around can we do it quicker, faster, better, those kind of things that are all necessary. So again, as he highlighted, we're looking at some potential ways we can attack it in different directions and how we can actually move that forward. So I would say anything other than the delay is how we can continue to move that effort forward.
Ben Nichols: And I wouldn't see any fundamental change in our approach. We're focused on seeking the appropriate value of our product in the market. And I can appreciate the undertone of how price and volume play together to generate cash. And frankly, it would be a little premature even to comment on where we're headed in the next season because we need to see how this winter plays out. So fundamentally, no change.
Edward Dowling: Let me just close that with the departure of some of our senior executives, Kevin and Jamie, for example, please don't think there's something nefarious going on in the background there. These were all made for different decisions. They're not related to one another and that -- for example, we have two high potential executives now on the commercial side and we've delayered the organization. So that's the kind of the focus and kind of an example of kind of the things that are going on and that you'll continue to see.
Operator: [Operator Instructions] And we will take our next question from Seth Goldstein with Morningstar.
Seth Goldstein: Can you help us understand the $10 million sustaining CapEx decrease? And are you risking long term underinvestment by cutting this similar to what happened that led to the need for Goderich to be fixed several years ago?
Edward Dowling: No, as a quick answer -- I mean, we’d give you the details associated with it. George, you want to talk about that a little bit?
George Schuller: Just to kind of build on what Ed highlighted, I would also say no. One of the areas that we're doing is, as we talked about the East Bay development, what we're doing around with that mill. We're looking at utilizing many of the components we have, which in fact which when you go back and look at them are actually new or refurbished, and what we're trying to do is optimize that whole process. That in itself has drove quite a bit of a change in the sustaining capital. So when you look at the rest of the platform, whether it’d be our plants, our facilities, our bagging facilities, those types of things and our other operations, there's not a substantial change there at all. So a vast majority of that's coming directly from that thinking of how we're going to redevelop the Goderich mine. But again, it's still high priority for us.
Edward Dowling: What George is saying is that when we initially looked at putting the mill to the north side of the mine and really to the west side on that corner, but from where it is a couple of miles to the south who's looking initially to build a new mill. And what we're headed to now is to -- because we think we have the flexibility to establish that is to relocate what we have, and that would cut the estimated capital by a very large percentage point, by about two thirds.
George Schuller: Correct. And some of that's flowing through in fiscal year 2024 is what you're actually seeing in there, Seth.
Edward Dowling: So anyway, that's a big part of what you're seeing there.
Seth Goldstein: And what's the lead time from when you buy KCL to when it's sold as SOP? And would we expect to see your input cost coming down from buying KCL for a longer lead time?
George Schuller: So I'd say Seth, again -- I think Ben and I will tag that together. I think a couple of comments there. We can -- depending on what we do, we do have some longer term contracts on KCL, but we also buy some on a shorter term spot, which lets us optimize our fiscal year 2024 budget. So with that said, there is some opportunity because of the lower MOP price right now, I'd say, there's some potential upside. But again, as we start to look at this longer term is that we are looking to gain a longer term contract with an MOP provider as we start to go forward. I do think it bodes well for us in the future. Again, I know it's always tough to sit here and tell you exactly where that is. But you've heard Lorin say this multiple times that I'm confident that we're going to continue to see our SOP price, our cost, the sites, continue to go down with our efforts that we have around the pond process, and the KCL combined. Ben?
Ben Nichols: I might just add, it's probably fair to say that any KCL we purchase as an input is monetized within that given fiscal year. It's just kind of a broad statement and we're turning inventories consistently.
Operator: And we'll take our final question from Vincent Anderson with Stifel.
Vincent Anderson: I just had two, hopefully, quick ones. So I understand everything that's been said about refocusing on cash generation. And as it's been mentioned, parting ways with Kevin and Jamie is quite a bit of experience out the door unless you have a very high conviction level that the business is already moving in the right direction and fairly quickly to basically change jackies mid race here. So I'm wondering if that's a fair assessment that these comments on further Goderich optimization pushing the Goderich market east, those were really mostly established plants and most of the pieces for achieving your cash generation goals are really already well in place?
Edward Dowling: I would say that the a large percentage of the things that you're aware of were preexisting, of course, from a Board perspective, we were involved in that as well. And as George said, I've been out for the operations and consulting essentially with our operating team to make different suggestions on things that we need to do. I'd say there's a number of other things that are underway now. For example, some of the changes that we've made already and others that we're looking at with an overall outlook really managing cash that there's going to be other future changes coming in the way we do business, and to really generate improved cash flows per share.
Vincent Anderson: And I don't know how fair this question is. But Ed, you're coming down off of the Board, so I figured I'd lob it at you anyways. I'm just trying to understand -- well, what's the conviction level right now that the public equity markets are ever going to properly value your assets, either before or after you hit these cash flow targets? Because I don't know if there's an internal timeline, right? But is anything off the table for achieving that fair valuation?
Edward Dowling: The only thing off the table is doing business in a responsible way. Other than that, we're looking at everything, and I'd just say that. My crystal ball is no better in years on how the market values things. But through efforts and communication and showing you what we're doing or going to be doing, I believe that the market could get confidence in how we're moving ahead. I think there's been uncertainty on how the business is looked at for growth versus yield. I want to make it clear that we're out to develop a yield type company. And lithium has also been a big question mark. And doing a project with a technology that hasn't been successfully deployed yet, that's inherently -- in the regulatory environment, that's really uncertain. If I was in your shoes, I'd add a higher discount rig to us just on that. So I think with clarity of what we're doing, the direction that we're headed, I think the market is efficient.
Operator: And with no further questions at this time, I will now turn the call back to President and CEO, Mr. Ed Dowling, for closing remarks.
Edward Dowling: Well, look, thank you all for joining us today. I will look forward to engaging with you going forward. And please feel free to reach out to contact us if you have additional questions or things that you'd like additional clarity on. Have a great day.
Operator: And ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect.
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