Q2 2023 Compass Minerals International Inc Earnings Call
Please standby were about to begin.
Good morning, ladies and gentlemen, welcome to the Compass minerals fiscal second quarter 2023 earnings Conference call.
All participants are in a listen only mode and please be advised that this call is being recorded after the speakers' prepared remarks, there will be a question and answer session. If you would like to ask questions. During this time simply press star one on your telephone keypad.
To withdraw your question simply press Star one again.
This time I would like to turn the call over to Mr. Brent Collins, Vice President of Investor Relations. Please go ahead, yes. Thank you operator.
And welcome to the Compass minerals fiscal 2023.
<unk> quarter earnings conference call.
They will discuss our recent results and update our outlook for the remainder of 2023.
We will begin with prepared remarks from our president and CEO , Kevin Crutchfield, and our CFO Lorin Crenshaw joining in for the question and answer portion of the call will be George Schuller, Our Chief operations Officer, Jamie Standen, our Chief commercial officer, and Christian Bayle, our head of lithium.
Before we get started I will remind everyone that the remarks, we make today reflect financial and operational outlooks as of today's date May 10 2023.
These outlooks, Intel assumptions and expectations that involve risks and uncertainties that could cause the company's actual results to differ materially for discussion of these risks can be found in our SEC filings located online at investors Dot compass minerals Dot com.
Our remarks today also includes 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 are.
Earnings release issued last night and presented during this call reflect only continuing operations of the business other than amounts pertaining to the condensed consolidated statements of cash flows or unless noted otherwise I will now turn the call over to Kevin.
Thanks, Brad.
Morning, everyone and thank you for joining us on our call today.
Before beginning the call I wanted to welcome Jill Gardiner to our board of Directors Jill joined the board last week and brings a wealth of financial and extractive industry experience to our board.
Looking forward to her contributions and insights.
Now halfway through our fiscal year, we continue to push forward in our pursuit to create value for you our shareholders seizing opportunities and mitigating challenges when either arise.
The guide us in this pursuit, we focus our efforts around six strategic objectives that we set for the organization in fiscal 'twenty three.
You've heard me outline these objectives on past calls and I'll take a few minutes to provide an update on each of those areas.
I will then comment briefly on the quarter before turning the call over to Lauren to discuss our financial performance in more detail.
Safety and specifically our drive towards zero harm will always be a key area of focus for our company.
I went to our employees and their families to foster an environment, where employees know they will go home to their families at the end of the shift in the same condition as when they left.
Thank you performance is also often a leading indicator of operational performance the safest mines in the world are also the most productive.
We make safety a priority because it's the right thing to do for our people and it's the right thing to do for our business.
Last year was an outstanding year for safety performance.
And I am proud to say that year to date, we're performing even better with.
With our track safety metrics than we did in fiscal 2022.
Achieving zero harm is a high bar, particularly in the complex operating environment that we operate in.
However, several of our sites have proven it's possible and we'll continue to pursue that goal each and every day.
With respect to our salt business. Our objective for 2023 was to improve the profitability of that segment to levels that we've historically delivered.
Typically we've talked about restoring profitability to around $20 of EBITDA per ton for the segment for fiscal 'twenty three.
As I've outlined previously we approached the twenty-three bidding season with a disciplined pricing strategy and focus on securing sales commitments in markets that are geographically advantageous and relatively efficient to serve.
For the second quarter, we saw the average gross sales price for the Salt segment increased 12% to approximately $82 per ton.
Driven by improved pricing in highway Deicing salt from the comparable period last year favor.
Favorable pricing dynamics combined with essentially flat distribution and cash operating costs resulted in EBITDA per ton, increasing 64% to just over $20 per ton of nearly $8 from roughly $12 per ton last year.
Although the year's not over I'm pleased with the progress. The team has made to restore profitability. Following the extremely challenging inflationary environment, we experienced in 2022.
Charting a path to improve the reliability and sustainability of our Sop production was another strategic objective for this year.
We continue to face significant headwinds on this front.
One thing I do want to make clear is the reduced sales volumes year over year that we've experienced during our second quarter are not a function of production issues.
Operationally, we've been ready to service customer demand.
However, ongoing precipitation challenges in our key California markets have continued to delay the application season for growers.
When those challenges abate for our customers, we stand ready to respond.
From a longer term perspective, however, our focus with respect to this part of our business remains optimizing sustainable production levels of our Ogden pond complex across a variety of weather scenarios.
<unk> continues to be made in that regard and we will provide a more detailed update on this initiative when appropriate.
The next objective I want to touch upon involves the advancement of our battery grade lithium development at Ogden.
As indicated in our release yesterday.
We were engaged in what turned out to be a particularly busy legislative session in Utah. This past quarter for those of US who share and the overall goal of maintaining a healthy great Salt Lake while at the same time balancing the needs of its many diverse stakeholders, including the mineral extraction industry.
Specifically legislation promulgated as a part of this recent Utah state legislative session to introduce new regulatory and cost elements into the framework that will govern the development of lithium on the great Salt Lake and certain of these provisions relating to severance taxes royalty agreements leasing.
And burn management have created some near term uncertainty until regulatory rulemaking can be completed in the coming months.
Our operations at Ogden were founded over 50 years ago with the original intent to extract lithium.
Unfortunately at that time, a commercially viable technology wasn't available.
Today with our technology provider energy source minerals, we have a commercially viable technology that allows us to extract a fourth mineral from our existing operating stream and recycle the Brian back into our pawn system.
Lithium development is new for the state and we fully appreciate this desire to receive fair value from the development of that resource. However, we will continue to pursue this opportunity only a two critical criteria are met.
Number one that it makes economic sense for our shareholders from a risk adjusted financial return perspective.
And to <unk>.
Predictability of the regulatory regime in Utah.
These criteria are true in any mining jurisdiction or project in Utah can be no exception.
Historically, Utah has long been considered an attractive operating environment due to their historic understanding of the economic and social value our industry creates and.
And based on preliminary discussions we expect this mindset to continue.
As we've previously announced the full development of phases, one and two of our lithium project would represent an approximate $1 billion investment on the great Salt Lake.
Clearly to justify that investment we must have clarity and certainty on the evolving regulatory framework, we will be working under to assess the potential impacts on our project.
Therefore, as we continue advancing the demonstration unit presently under construction and proceeding with developing an <unk> engineering estimate.
With all deliberate speed and an abundance of caution we will defer publicly sharing the updated disclosure of any project related economic and engineering estimates until we have such clarity.
Again, we've been a responsible and productive operator on the great Salt Lake for over 50 years.
And an important contributor to the Utah economy for decades, and this project has the potential to bring Utah to the forefront as part of the domestic supply chain for critical minerals.
I am cautiously optimistic that as we've done time and again with regard to our other mineral resources on the great Salt Lake.
We will reach a favorable accord.
With the state of Utah on a path forward for our planned lithium development that serves the best interests of all stakeholders.
Moving on to our other commercial growth pillar yesterday, we announced that we had acquired the outstanding 55% interest in fortress North America, bringing our ownership stake to 100% for an upfront consideration of approximately $26 million in cash contingent milestone consideration.
In cash or stock valued at approximately 28 million and an earn out of <unk> 30 per gallon of product sold over the next decade.
For those of you who are not familiar with fortress, it's a nextgen fire retardant company that utilizes our magnesium chloride another salt production as the key ingredients and this formulations of aerial and ground fire Retardants.
The aerial fire retardant industry has essentially been a monopoly for over two decades.
Bob Barnum and his team are entrepreneurs as well as fire aviation chemistry, and government contract experts, who saw an opportunity to develop a suite of products that were more effective and better for the environment than the incumbent products being used.
Our relationship with fortress began in early 2020, initially as a supplier of magnesium chloride, which we produce out of our Ogden facility.
Through the years, we have the opportunity to work closely with Bob and his team and as we learned more about their business. We ultimately made a strategic investment in their company.
In December 2020 to fortress became the first new company in over two decades to have long term aerial fire retardants added to the U S Forest service qualified product list or QTL after meeting or exceeding rigorous testing across a number of categories and evaluation.
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Being added to the <unk> was a significant step toward full commercialization the fortress products as it provides the preapproval to government agencies around the world who use the U S. Forest service <unk> is the chief qualifier for purchasing and which allows them to procure and use the company's products.
Then early this month fortress reached an agreement with the U S. Forest service that will result in fortress supporting up to five mobile deployed are basis with product and associated services in the upcoming 2023 fire season, utilizing fortress, new state of the yard mobile and fixed retard it mixed.
<unk> units.
The U S government recognizes the competition in the market is preferable to sole sourcing for essential products and services and accordingly, there are programs that provide on ramps into the retardant market, where it would like to see competition occur.
Under our framework used by U S government agencies, including the U S Forest service.
To boost competition in critical sectors, where government is the primary buyer a substantial portion of fortress activity will be contracted by the U S Forest service in fiscal 'twenty three.
We anticipate operating under a similar framework in 2024 as well.
And then moving into more open competition in 2025.
In the simplest terms this program establishes a glide path for new competitors like fortress to attain critical mass for their products and services in the first couple of years of commercial operation and encourages fortress to build additional scale. The combination of fortress products being added to the <unk> and the recent.
Agreement with the U S Forest service branding the company its first tranche of basis provides sufficient visibility to.
So the growth potential of this business to give us confidence to exercise our right to acquire the outstanding stake in fortress.
<unk> business model has always aimed at achieving at least a 50% share of the market and we believe progress toward that goal can be accelerated as a result of this transaction.
There is a meaningful value creation opportunity to realize by fully integrating fortress into our company, thereby taking full advantage of our deep logistical and production capabilities.
I am thrilled that Bob and his highly experienced leadership team will be staying on to run the fortress business and joining the accomplishment rolls family enhancing our financial position was the final strategic objective that we set for fiscal 'twenty three.
Our strategic equity investment by Coke in October of 2022 was a critical step in achieving that goal as it provides a substantial amount of non debt related funding to pursue phase one of our lithium development.
Another important element to achieving this objective was addressing the near term maturity of the $250 million in notes that were set to mature on July 24.
In recent days, we've issued $200 million in term loan a nodes and expanded our credit facility to allow us to fund the redemption of the July 2024 notes.
In doing so the maturity of our revolving credit facility has been pushed out three years to 2028 and.
And our closest significant maturity is now four years away with our $500 million senior notes due in 2007.
Obviously, the credit markets have been somewhat fragile in recent months given the recent banking sector turmoil. So I want to acknowledge Lauren and his team for successfully navigating that process against a very challenging macro backdrop, we expect to see a strengthening of our credit profile in the near term and over time, what's improved.
Salt segment profitability and the incremental financial contribution from fortress driving deleveraging in the shorter term and eventually contributions from lithium longer term.
Both of these new business ventures are expected to enhance our long range credit profile from a growth business diversification and scale perspective.
In early April we announced via an 8-K that we had taken the initial steps to rationalize the cost structure of our company.
With the expressed goal of improving and maximizing the profitability of our salt and plant nutrition businesses.
The first phase of that effort began with head count reductions equivalent to approximately 16% of our corporate workforce, which combined with the elimination of certain consulting services and other overhead costs is expected to benefit our operating earnings and adjusted EBITDA by approximately $17 million to $18 million per year, beginning in fiscal 'twenty.
For year over year, all else being equal.
Phase two of our cost rationalization exercise will be completed in the second half of the year that will be focused on reducing costs at our production and packaging sites.
These types of actions are never easy, but we are committed to improving the profitability of those core businesses and this initiative is a proactive important step toward achieving that goal.
Now before I turn the call over to Loren I wanted to make a couple of comments about the quarter.
Regarding salt I am pleased that we were able to improve operating earnings and EBITDA for salt.
Both an absolute and per unit basis.
Williams in the highway Deicing business were down 19% year over year with a portion of this decrease due to the moderate weather that we experienced during the second quarter and a portion of it relating to our decision last bid season to focus on value over volume.
We deliberately chose not to pursue certain business last year, so that we can improve our profitability.
Goes without saying that it's hard to grow volumes when you're reducing the areas you plan to service.
As I mentioned earlier, we're storing salt profitability was an important goal for us this year and I am pleased that we were able to make a substantial improvement in that regard in the second quarter.
Our focus for the Salt segment.
Centered on managing costs.
And maximizing profitability through optimizing our customer and geographic sales mix as.
As we approach the upcoming bidding season, we intend to pursue full value for the salt products, we provide in our served markets.
As I noted in my earlier comments plant nutrition. Unfortunately continues to be impacted by exceptionally difficult weather in California that is hindering our sales efforts in that important market.
The amount of precipitation that California has received this year is frankly amazing.
<unk> is the seventh wettest year over the last 129 years.
As an immediate consequence of all this rain and snow that as they grow or simply cannot access their fields and orchards and as a result, they are not able to make applications that we would normally expect to see in our second fiscal quarter.
The good news is we don't see any structural changes with respect to Houston demand of Sop in California.
Fortunately pricing for Sop continues to be strong.
With the average selling price, increasing approximately 8% year over year.
Per unit distribution costs increased primarily due to changes in regional sales mix.
The increase we saw all in product cost per tonne reflects operational measures taken to mitigate the impact of the below average 2022 evaporation season, and the impact of the temporary natural gas fire that we had in the first quarter.
We also had a small bell fire at our Ogden facility during the quarter and the related repairs added some incremental operating costs in the quarter.
We were able to quickly implement a temporary system that allowed us to have minimal downtime.
George and his team for how they responded to that incident.
As a result of these puts and takes we saw adjusted EBITDA for plant nutrition decrease to $8 million in the second quarter.
Reflecting on where we stand at midyear I think we've done a good job addressing the things that are within our control.
<unk> is performing well and the <unk> acquisition is an exciting new Avenue for growth.
We'll continue to work on optimizing the plant nutrition business does that we're primed to take advantage of opportunities as weather conditions normalize.
Regarding lithium I'm guardedly optimistic that will come to an agreement with the state regarding essential agreements, particularly the royalty structure and operating parameters that are prudent economically enable us to confidently advance both phases of our projects.
Our lithium division remains serving as the critical inputs enabler towards the creation of a robust North American advanced battery supply chain.
So with that I'll now turn the call over to Laura to provide more detail on the quarter.
Thank you Kevin.
On a consolidated basis revenue was $411 million for the first quarter down 8% year over year second quarter consolidated operating earnings improved to $47 $9 million up 140% year over year, while adjusted EBITDA from continuing operations was $77 4 million up 90.
<unk> percent year over year, a key takeaway is that despite revenue declining due to lower volumes, we substantially improved our profitability year over year bigger.
Salt revenue totaled $361 million for the quarter down 8% year over year, driven by 17% lower sales volumes offset by a 12% increase in average gross selling price.
The highway Deicing business experienced 12% higher pricing year over year to just shy of $70 per tonne, while sales volumes were down 19% year over year, reflecting a combination of our value over volume commercial strategy and our second quarter that was below average from a weather perspective within the markets that we serve.
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Looking at the 11 representative cities, we've discussed in the past there were 83 snow events reported during the second quarter down 27% year over year and down 23% from the 10 year average of approximately 108 snow events.
With this year's de icing season behind us the winter as measured by snow days in our core markets was roughly 80% of the historical 10 year average for snow days, so not a normal winter, but not an exceptionally poor one either.
Specifically for the winter to date period through April we had 127 snow events, which is lower than last years 152 and below the 10 year average of 159.
Within our C&I business volumes declined 5% year over year, driven by below average winter activity offset by increased sales of non deicing product lines.
Average pricing within C&I rose, 1% to approximately $178 per ton.
By holding total cost essentially flat year over year and driving through the price increases last bidding season, we were able to drive salt segment operating earnings and adjusted EBITDA higher.
Lower sales volumes on both an absolute and per tonne basis.
Operating earnings for the segment were $73 million in the quarter, an increase of almost 50% year over year.
EBITDA came in at $88 9 million, an increase of 36% year over year.
Importantly, <unk>.
EBITDA per ton was $20 19.
Which is in line with historic levels of profitability.
As Kevin discussed earlier, restoring the profitability of the Salt business was a strategic objective for this year.
Turning to our plant nutrition segment unusual weather developments and some of our most important markets continue to weigh on our sales efforts in the second quarter.
Sales volumes were down 19% year over year.
As I'm sure. Most of you are aware, California has seen an incredible amount of precipitation over the last several months and.
And it has wreaked havoc on the agricultural community out there.
The rain and snow. They have received has made even the most basic SaaS like growers accessing their fields and orchards difficult to do due to mud.
This in turn impacted their ability to apply fertilizer, resulting in lower volumes year over year.
On a positive note prices were up 8% year over year to $796 per ton.
Impact to revenue during the quarter was a decrease of around $7 million or 12% year over year.
Distribution costs on a per ton basis, we're up 12% year over year due primarily to changes in regional sales mix.
I'll end product costs per ton were up 19% year over year.
Operational steps that we took following the subpar twenty-two evaporation season, including the use of kcl to bolster production yields and the impact of the natural gas side from last quarter on our standard costs pushed all in product costs higher.
While these items were known and included in our last outlook. The fire Kevin mentioned, obviously was not.
That added approximately $2 million in costs in the second quarter.
At quarter end, we had liquidity of $536 million comprised of roughly $250 million of cash and revolver capacity of around $286 million, while net leverage stood at three five times.
So as Kevin indicated earlier, we were pleased to successfully execute a refinancing of our notes due in July 24 <unk>.
Despite the current banking sector backdrop.
We approach the refinancing with four objectives in mind.
Refinancing unreasonable pricing terms.
<unk> out our debt maturity profile bolstering our liquidity.
And creating flexibility within the credit agreement to accommodate a wide range of potential non debt financing sources to fund our lithium efforts in the coming years.
We achieved each of these objectives as part of the refinancing with pricing up only 25 basis points at the current portion of the pricing grid. Our next closest meaningful maturity now not occurring until 2027 and.
An increase in our revolver by $75 million.
And reduction in term debt outstanding by $50 million and a credit agreement that now contemplates the prospect of a wide range of potential non debt lithium funding sources, ranging from government grants to streaming to equity at the Ogden asset level.
Supportive Bank group is essential on our journey to accelerate growth and reduce weather sensitivity by expanding into the adjacent markets of lithium and next generation fire Retardants. We're thankful to have a long term oriented supportive bank group on our transformation journey.
Turning to our outlook for the rest of the year I'll begin with salt.
The performance guidance for the Salt segment across various weather scenarios remains unchanged from the guidance, we provided last quarter.
We expect that results are likely to come in within the range of $215 million to $255 million of EBITDA.
Our full year outlook for plant nutrition remains unchanged from our prior guidance with profitability outcomes, ranging from $30 million to $60 million of EBITDA, which reflects the heightened uncertainty regarding SLP fertilizer pricing and sales higher production cost and extraordinary weather in several core markets, including California.
Yes.
During our last earnings call, we laid out three scenarios that frame the range of guidance that we have provided.
Currently we are tracking most closely to the midpoint of the range.
Turning to fortress this acquisition changes our financial disclosure some going forward, we will now fully consolidate its results rather than just picking up our proportionate share of its net income.
As a result of this transaction, whereas our prior guidance assumed fortress would incur operating losses throughout fiscal 'twenty three.
We are now reducing our guidance for corporate and other expenses by approximately $10 million at the midpoint to a range of $65 million to $70 million down from our prior range of $75 million to $80 million, reflecting our now positive expectation of the profit contribution from fortress. This.
Fiscal year.
As we noted in our press release yesterday, we expect fortress to generate revenue of $20 to $25 million in fiscal 'twenty, three with operating earnings and EBITDA expected to be in the low double digit millions of dollars.
Just aspires to win 50% market share over time and has a business strategy to achieve that goal.
While we are pleased with a contribution this fiscal year to EBITDA in the low double digit millions of dollars. We certainly didn't buy fortress for its year one financial contribution.
Its earnings power is much higher than that and quite substantial in our view.
See a path for the company to grow earnings meaningfully through sizable market share gains and at scale expected to enjoy profitability levels as good as and we think likely better than what the market and conduct currently generates.
We estimate the addressable north American market for aerial fire retardants to be roughly 70 million gallons or between 200 $250 million in revenue.
If we are successful at gaining market share at attractive margins as we expect the implied multiple that we're paying for <unk> will prove to have been quite reasonable.
Turning to our Capex guidance, we have lowered our projected total capex for fiscal 'twenty three by $30 million at the midpoint to a range of $150 million to $175 million. This is comprised of lithium development capex in the range of $60 million to $75 million funded by proceeds from the Coke transaction.
And sustaining capex in the range of $90 million to $100 million, which is unchanged from our prior estimate.
The $30 million reduction in projected lithium related spending reflects two drivers further refinement and the projects engineering, which has resulted in a lower estimate of project cost for the demonstration unit and.
And adjustments in the timing of select long lead time items.
We continue to advance the construction of the commercial scale deal unit.
Which remains on track for mechanical completion by the end of this calendar year.
And for commissioning and startup to occur around this time next year finally from an interest expense perspective, we have raised our projection for fiscal 'twenty three slightly to a range of $55 million to $60 million up approximately $5 million at the midpoint from our prior range, reflecting the increase in our pricing grid by 20.
Five basis points as part of the recent refinancing.
With that I will turn it back to the operator to open the lines for Q&A.
Operator.
Thank you Mr. Grimshaw, ladies and gentlemen at this time could you have any question simply press Star one and just a quick reminder, if you find your question has been addressed you can remove yourself from the key by pressing star. One again, we will take our first question. This morning from Joel Jackson of BMO capital markets.
Hi, good morning, everyone.
So maybe a few questions for me.
I think its confusing to be honest some of your guidance around solid so you say to connect indicates that.
It's the same guidance as last February for Salt, when you said that you'd be below the midpoint of guidance.
So below 235, and now Youre, saying youre going to get in the range. So what is that are you, saying that youre going to be below the midpoint of guidance to open this year. Thanks.
And also for volume for volume to please excuse me interrupt the highway Deicing, Brian . Thank you.
Now I appreciate the question our financial guidance of $2 15 to $2 55 per salt is unchanged Directionally. We now do believe that we've got a path towards the midpoint of that range, but the $2 15 to $2 55 is unchanged, but directionally, we do feel more comfortable with the middle point.
Part of that range, which reflect some positive dynamics.
Jamie can elaborate on whereby despite an 80% <unk>.
Winter several of our markets have tracked much higher than that.
In terms of our budget, but Jamie maybe you can elaborate yes, I think that.
While on balance the winter was pretty mild.
There were areas of strength in those areas.
As Wisconsin, Minnesota.
We have higher than average margins there so while the volumes are down and we were able to sell higher margin times, which.
Which helps us get into the middle of bad debt.
Middle of that guidance range, even though volumes are are are lower.
Than normal than average.
Okay. That's helpful. Then a couple of questions more on for Chad.
So can you talk about if you think about fiscal 'twenty four what are some realistic ball bearing base cases for the kind of volume type of gallons you might be able to do.
As of earnings you might be able to do you ever you want to talk a little bit of reasonable bear case, but I'd say very tasteful.
Yes, I will start and then let Jamie elaborate this is lauren by saying.
As we think about this business, we think about along the long term.
What I should share with you is what we think the earnings power of this business is these founders who we salute today have a case to establish a 50% market share and if we're successful we think this business as earnings power in the $40 million to $50 million of EBITDA range 40 to 50 million.
We're just getting started.
And are thrilled to have.
This first tranche of basis, but are not in a position are comfortable talking about 2024, but thrilled to.
Reached this milestone.
We will share more in the coming quarters, Jamie that you watch here.
Think that under this construct where we're currently working with the U S Forest service on what 2024, it looks like so we don't want to talk about that yet.
And like Laurent said, we'll give we will give more information in due time.
Okay.
And then just finally.
It's early.
But what are your kind of views right now on bid season, so what our channel inventory like in different regions.
Got it okay.
Hey, things kind of volatile up and down but.
What's kind of your view on how bid season Asia should we use the average winter.
Two 3% growth or do we have to do some other base case here.
I would say that obviously.
Supplier inventories are a bit elevated because the winter was not.
Was below average.
It varies in pockets I already mentioned the strength, we saw in the upper Miss.
Tayo River, which was pretty weak, but supply is pretty tight in the south at which is in our southeast region that Ohio River Valley.
You also have to consider inflation is still a factor to the market and competitor supply there is some activity there so.
Some mines being down.
Absorb some of that some of that winter weather weakness and we feel good about extracting value optimal value through this bid season.
That's well underway now and Joel this is Kevin to be perfectly clear we plan to continue this value over volume approach to Jamie's point. There are there's a mine that fell out of the mix. There is one that's.
Producing what way less than it used to because it's on strike so.
Nothing's unfolding, thus far that we would consider surprising.
And we continue to.
Approached the season from a value over volume standpoint to extract fair value for our products.
Thank you.
Thank you we'll go next now to Vincent Anderson of Stifel.
Yes, good morning.
So far.
A follow on that fortress line of questioning I guess, just when we think about 2023 guidance. Then is that an appropriate kind of per base run rate of revenue or does that include some amount of upfront equipment sales to the basis.
This is.
Okay.
It's going to ramp up through the season.
It's we don't know what the revenue exactly is going to look like in 2024, so it wouldn't be.
It wouldn't be appropriate to just use average run rates and some growth mechanism.
Just not ready to talk about 2024, yet we believe we will sell more gallons to the U S Forest service in 2024 as this ramps up but we're just not we're just not ready to talk about that for you on a per unit basis.
And I would say I know that folks would want us to share sort of a five year view of market share.
Just reiterate we think the earnings power of this business is on a $40 million to $50 million you would discount that back to determine how long it takes us to achieve that at some reasonable discount rate and we will provide more perspective, but that's the earnings power and we think it's quite an attractive transaction.
Alright fair enough, maybe I'll shift gears a little bit.
So.
Will the acres that deploy your your products this year.
It is required.
Will those.
Receive some kind of active monitoring to continued to compare and contrast with the competitive product.
Acres.
Are you talking are you still talking about fire retardants from fortress.
This was studied yes, im not quite as yes, im not sure I understand.
Alright.
Yes can you ask that again I'm, sorry to be deployed youre going to be deployed this year and the field officially and will there be.
Active monitoring of how your product performs.
Yes. So so the product efficacy is defined established and Thats actually what gets us on the QTL as well as the.
The environmental benefits et.
Et cetera, so there is not.
This is a process, where we are ramping up.
Five mobile retardant basis through this summer to various locations, where we're currently working on that operational plan now with the expectation that the first base deploys in June and then ramps up through the season.
It'll be it'll be working.
The basis will be in similar locations to the incumbent and.
And.
Able to operate at the same time at the same places throughout the season.
Okay got it I'll switch to something simpler really quick here.
Mineral rates so.
On the Utah legislation I believe your current royalty rate at Ogden is around 5%. There is a new severance tax that needs to be better defined but it's like two 6% on something.
But on that base, 5% royalty rate does the new legislation explicitly change that we're encouraged regulators to capture greater change or does the number not really.
The Big question, Mark and it's more around permitting the berm consideration, but from an economic perspective is that number really subject to much change.
Hey, guys. This is Kevin number of considerations. There first thing I would want to say is yes.
We've been on the great Salt Lake for a long time.
Have a good reputation out there and we're working very what I would consider to be very collaborative with the state legislature out there across a variety of fronts as it relates to rulemaking.
The House Bill 513, one of the issues is clarification around royalty because we've been very clear with the state.
To the extent you want to have discussions about that we need to know.
Because we are deploying a lot of capital here, if we can't employ capital.
LT rate's going to be some sort of variable structure.
Very clear, we're going to have a severance tax.
And having discussions with royalties.
As we speak along with leasing rights are management issues as it relates to late late Delta et cetera, but we're confident that we're going to be able to work.
Closely with the state.
Towards the Bible outcomes here jeopardize. This project overall the long term do you think you would want to add to that Chris.
Hey, Thanks, Kevin So this is Chris.
Yes.
Projects remains an incredible an exciting opportunity for growth or accomplish the thing that we talked about earlier as well as the synergy aspect that you see with with the fourth mineral and as you talked about mineral rights. Just a reminder of what makes up a mineral rights or six pieces to that one is the lake bed leases.
The up land leases water rights mineral extraction rights.
Bad construction and maintenance and finally mineral royalties.
So with regard to lithium what we're doing now and what we've been working on for the past months, it's really coming to a conclusion on the lithium royalties and as Kevin talked about there is some.
Uncertainty as to what that will be and so thats currently being negotiated.
With the state right now that we feel comfortable that we'll land in the right place.
Perfect. Thank you so much.
Thank you and just a quick reminder, ladies and gentlemen star one please for any questions. We'll go next now to Seth Goldstein of Morningstar.
Hi, good morning, everyone. Thanks for taking my questions.
If we assume normal weather.
Plant nutrition end markets next year operationally, what what would be your path to volume mix and is there a plan to get operating cost down to restore profit.
Couple of things and I'll, let George add some color.
Good question, we do believe a restoration of normal back to more.
More normal weather patterns given.
The precipitation thats occurred out there with.
Way above average so.
Going to alleviate some of the production issues that we've been there as it relates to the system.
And we have every belief that we can restore volumes.
Insistent with what we've experienced in the past.
As we said in our prepared remarks.
Phase two of <unk>.
Graeme we're running internally to look at.
Cost across the entire.
Platform.
And that does not exclude Ogden so.
Ensuring that we maintain our costs under control.
Given the high fixed cost nature of some of our assets.
Being one.
The volume effect is a big deal as it relates to cost.
Anything you want to add to that George Yes look maybe George Schuller, just a just a couple of comments or Kevin in regards to this that we have to think goals one of those being to increase our pond based Sop production first and foremost of the second piece of that is is really.
Bolstering our horn complex resiliency for the long term when you look at some of the cost that we had.
That hit US here in 2023, I will call that somewhat one off we got our spike in natural gas price for this year around $3 million and then also in regards to that we had a small fire out and all of that.
In our belt, if it goes up and load out really minimal impact there, but again it didn't get impacted cost by $2 million, we had some kcl usage by going forward to address the questions around the future production, we can control the kcl as we do that.
As we go forward. So we'll add that one of the strategic use of it but in addition, as Kevin highlighted we will control our cost one of the things that we're absolutely going is addressing our total manufacturing costs not only at all given at all our sites across the platform.
As we've talked about in our next step and probably the third thing I would mention areas.
Really when you look at where we are and we've talked about a lot of that drought in the catastrophe impacts of drought and the weather conditions, we've had an incredible year and snowpack that bodes well for us in our PON production.
Our ability to add mineral return side.
That's a SaaS for really several years going forward, but we do have a lot of confidence in what we've been working on for the last year to a year and a half and I think we're starting to see some real progress in regard to that Kevin.
Okay. That's great. Thank you for the for all the details there and to follow up on sort of the long term companywide cost optimization can you share an update on the garage long term improvement plan.
Yes, probably not a whole lot to update on relative to last quarter, but we continue to drive those new gaybros.
North northeast.
That's progressing nicely George can comment on how much that is probably.
We're at least halfway done.
Thats the last bid.
Implementing the.
The new mine plan is getting those new.
Long term roadways connected up between the active area.
Shaft bottoms.
And that progress continues.
Isolate which as we've discussed that it will allow us to add to that.
Oh hold section.
Of the mine.
<unk> spending money.
Ventilation roof control et cetera.
And that will that will begin to.
Demonstrate levels of productivity improvement.
So.
All of this is occurring kind of invisible from the external perspective, because it's it's all captured in cost of goods sold.
Theres, a big development projects underway.
So we remain very excited very positive about what.
Got her and futures, but will look like.
Anything you'd want to add to that George yes.
George It's Bob.
It gives me an opportunity to just recognize goderich is really performing extremely well from a production point of view as Kevin highlighted we're over halfway.
Across the new mains development went extremely well I do think that bodes well as we go forward from our from our Doddridge My perspective, looking at where we will continue to improve.
Improve our cost and improve our productivity and <unk>.
Thanks, Kevin.
Alright, great. Thanks for taking my questions.
Okay.
Thank you and just a final reminder, ladies and gentlemen, any further questions. This morning simply press star one.
And gentlemen, it appears we have no further questions. This morning, Mr. Crutchfield I'd like to turn the conference back to you for any closing comments.
We thank you for taking kind of participate in our call. This morning look forward to keeping you updated.
In the interim and to the extent you have any questions or whatever please feel free to call.
Look forward to updating you again next quarter.
Thank you Mr. Crutchfield, ladies and gentlemen that will conclude the compass minerals fiscal second quarter 2023 earnings conference call, we'd like to thank you also much for joining us and wish you all a great day Goodbye.
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