Compass Minerals International Inc

NYSE:CMP

Earnings Call Analysis

Guidance Adjusted Amidst Market Challenges

The company has lowered its adjusted EBITDA guidance to $15-35 million due to pressures on MOP prices, competitive market conditions, and lower-than-projected production at Ogden. Corporate expense guidance remains steady despite the termination of the lithium program, with a lithium expense reduction being offset by a noncash expense for the Fortress contingent liability. CapEx estimates have been slightly reduced by $7 million to $120-130 million, with a decrease in sustaining CapEx and $30 million expected in lithium expenditures reflecting costs incurred before suspending projects.

Financial Performance Mirrors Weather Patterns

The pivotal nature of weather on the company's fortunes was underscored when executives explained that 70% of snow days, a significant indicator for their winter-related sales, occur in the second fiscal quarter. In spite of a weak start to the winter season, historical trends don't necessarily predict a poor subsequent quarter. In fact, past data shows a weak first quarter is followed 70% of the time by a second quarter that reaches 90% or more of the long-term average. This resilience is reflective in the current quarter's earnings, with the company’s operating earnings rising 7% year-over-year, highlighting an impressive ability to generate profits even in less favorable conditions.

Strategic Cuts and Shifting Markets

With changing market dynamics, the company has strategically lowered its capital expenditures by $7 million to a range of $120 million to $130 million, focusing on reducing capital intensity. Adjusted EBITDA guidance for their salt business suggests that a 'strong winter' scenario is now unlikely, but they still expect to fit within their provided guidance range. On another front, the plant nutrition segment faces a reduction in guidance due to continuing pressure on fertilizer prices and the resultant conservative buying behavior from purchasers. Additionally, a charge of $77 million was recognized for shelving their lithium project due to inadequate risk-adjusted returns, demonstrating agility in responding to project viability.

Inventory Management and Production Adjustments

In light of a mild winter, the company is carefully managing production to avoid excess inventory costs on the balance sheet. With inventories valued at historical highs due to inflationary pressures, the focus is on reducing inventory days as every 10-day reduction represents a potential $25 million in cash flow improvement. This proactive inventory management underscores the firm's strategy to align production with market demand while maintaining flexibility to adjust as necessary.

Corporate Strategy Focused on Responsiveness and Cash Flow

The executive team emphasized a shift in focus from earnings to cash production, with the primary goal of reducing debt and improving liquidity ratios. The company plans to address this by managing inventory levels more efficiently and reducing capital expenditure commitments. The company’s net leverage stood at 4.3x at the end of the quarter, comfortably below covenant thresholds, indicating a secure standing in line with debt agreements.

User Experience and Quality Focus Unaffected by Spending Cuts

The reduction in sustaining capital expenditures by $10 million aims to optimize processes, specifically the redevelopment of the Goderich mine, without risking long-term underinvestment. The company asserts that the quality of operations and products will remain high, reflecting a balance between cost-cutting measures and long-term strategic investments. Additionally, the reassessment of relocating infrastructure rather than constructing new facilities demonstrates a focus on capital efficiency while preserving the growth potential of core assets.

Open to Strategic Alternatives but Committed to Responsible Growth

Addressing concerns about the public equity market's valuation of the company’s assets, the CEO affirmed an openness to explore various strategic options to enhance shareholder value. Clarifying their direction toward developing a yield-oriented company and removing uncertainties related to ambitious growth projects like the discontinued lithium project helps to potentially increase investor confidence. The company's leadership expresses optimism that these efforts, along with transparent communication, will lead to a more appropriate market valuation over time.

Earnings Call Transcript 2024-Q1

[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. [Operator Instructions] And I will now turn the conference over to Brent Collins, Vice President of Investor Relations. You may begin.

[Brent Collins, executive]

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 fiscal 2024. We will 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 Operations Officer; Ben Nichols, our 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 outlook 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 available online.I will now turn the call over to Ed.

[Edward Dowling, executive]

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 chloride 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 inventing this project several years ago. We proposed regulatory changes that have led to significantly increased uncertainty. And you combine an uncertainty regulatory environment with other changes that have occurred within the commercial landscape for Lithium, as all the project has a higher-than-acceptable degree of risk and uncertainty. This requires a higher return in order to justify such investments. So I understood that projects like this carry risks and willing to take and manage measured risks. However, we will not invest into uncertainty. We ultimately included there’s just too much uncertainty of 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 legislative 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 lithium, has left the company as have another of talented individuals who want to advance the program.I want to thank Chris and the lithium team for their efforts over the last couple of years, I wish them the best in their future endeavors. In constant 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 as a mandate from the board was to address the following: one, fix what has been a challenging production cut at the Goderich Mine and repair significantly strain relationships, labor relationships at the mine. Two, exit South America; and three, determine if there is any areas of growth adjacency to the company's core business of salt and plant nutrition. I've known Kevin for 3 decades. It's a talented executive, the highest integrity and personal character. Over his time here, he successfully addressed all 3 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 advantaged 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 2 years. More broadly, I spent the totality of my career in mining industry, both in executive and operating role around the world. I've been fortunate to work on 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 has 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 the point in this journey. In addition to maintaining a safe and responsible operations that Compass Minerals is known for, the mandate I have is pretty 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 will adopt a more stringent approach to evaluating capital requirements, 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 6 strategic focus areas for fiscal 2024. Those were built on our strong safety performance and our continuous stride 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 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 where now it depends down on lithium. Five, continue to scale of manufacturing and supply chain capabilities of our fire retardant business on its path to full commercialization increased market share; and six, maintain a strong balance sheet and prudent fiscal policy. Those areas remain the same today, and we'll approach them using proven cost improvement and capital discipline and tool sets and a remained emphasis on improving the management of our operating expenditures, capital expenditures and working capital. In the coming quarters, you expect to hear more [indiscernible] about the progress we're making in these areas. Again, I'm extremely excited about the opportunity in Compassion, we also except [indiscernible] in it’s 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 all becoming more involved in the local community here.With that, I'll turn the call over to Lorin to review the quarter.

[Lorin Crenshaw, executive]

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 activity within our served markets that we've seen over the better part of 3 decades.In fact, December 23 was the worst 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 cost 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 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 businesses 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 '23 contracts 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 recognize 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 31, 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 not 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 are 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 U.S. 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 U.S. 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 4.3x 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 depict 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 our 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 MLP 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 MLP. 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 an 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 ton 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 2 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 declined to approximately $5 million. This reflects cost up through late January when we move forward with our headcount reductions. The onetime 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 time frame. 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 in to 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]

Thank you. And we will take our first question from Joel Jackson with BMO Capital Markets.

[Joel Jackson, analyst]

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 a good inflow of cash in Q2? Maybe you can talk about, it's going to look like prior years. And then it looks like you're really pushing up against the covenants here. Do you need to issue at right now to stabilize the company?

[Lorin Crenshaw, executive]

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 and also at the SEC settlement payment was made. And so several unique factors in that regard.

[Edward Dowling, executive]

I'd just like to complement what Lorin just said, is that our focus, which has historically been around earnings as change in the company, the 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 group are.

[Lorin Crenshaw, executive]

And Joel, the $4.3 million was well within the 5x 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, analyst]

My follow-up question on Salt is most of your official commentary, although Lorin, or Ed or I think Lorin did comment about what it was lower and what January looked like. But artificial commentary is acting like it's January 1st when it's actually February 8. So I did appreciate Lorin updating on this call what happened in snow over the last 5 to 6 weeks. But the question I have for you is such a mild winter anything that happens, we're getting to -- we're deep into the key winter months and it’s getting into March. You have to start making decisions like customers are probably now quite below, in trending quite below the 80% minimum, the minimum spend, the minimum volume increment, you get to make mine plans at Goderich and elsewhere to make sure it will overproduce. So can you talk about what discussions are happening internally or externally start making mine plan decisions, customer minimum decisions or whether you're going to spend them into rollovers next year? Like those must be discussions you have to start planning for in such a mile winter?

[Edward Dowling, executive]

Yes, historically, we plan for certain winners and produce to that. And when you end up with a weak winter, we end up with too much inventory stored versus a cost to the balance sheet. We're running 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 and things are already being done.Do you want to add anything more to that?

[Lorin Crenshaw, executive]

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're 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 that.

[George Schuller, executive]

I just want to add on to a little bit what Ed said and also Lorin. We've already taken action over the last several weeks to better align our mine production to match is inventory levels. So just a little bit more than what they said, we've already taken action to adjust that, and I feel confident that it will improve both our inventory levels and where they need to be, but also make sure that we're maintaining our mine costs at the right level. Thank you.

[Operator]

We will take our next question from David Begleiter with Deutsche Bank.

[David Begleiter, analyst]

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, executive]

Look, the lithium, of course, was predominant in our mind. We want all of our assets to perform in terms of returning our ROIC, return on invested capital in excess of our weighted average cost of capital. I've been here for 3 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. Okay?

[David Begleiter, analyst]

And just on penetration, given the earnings pressures this year, are you considering taking additional cost actions here for the either temporary or permanent on the cost side?

[Edward Dowling, executive]

I'm sorry, I missed the upper...

[Lorin Crenshaw, executive]

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 pie so that we don't have to use as much KCL, which is burdening our results.

[Operator]

We will take our next question from Jeffrey Zekauskas with JPMorgan.

[Jeffrey Zekauskas, analyst]

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 the cost overruns or the problems with PON production. How much did that burden you in the quarter? And what exactly happened?

[Lorin Crenshaw, executive]

I'll approach that 2 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 $260 difference between the price a year ago and the price today, which is quite substantial. I would say about 2/3 of the decline is attributable to price and about 1/3 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.

[Jeffrey Zekauskas, analyst]

But sequentially, your prices are down just a little bit, though, right? Can you analyze sequentially.

[Lorin Crenshaw, executive]

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 is principally related to the KCL.

[Jeffrey Zekauskas, analyst]

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, executive]

I would focus on days for 2 reasons. Due to inflationary dynamics, we have higher valued inventories. Just if you just look back over the past 3 or 4 years, and the team has successfully passed through a lot of those costs. But with that said, inventory days coming into this year, we're at about 200. 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.

[Jeffrey Zekauskas, analyst]

And then lastly, you talked about some changes in requirements from the U.S. 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, executive]

So the delay, just to give a little bit more color on that, the original solicitation from the U.S. core 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 10. So it absolutely pushed back the contract and process in total. However, we are pleased since January 10, when we were able to start the negotiations, we're pleased with the progress and the engagement that we're seeing from U.S. foresee. Keep in mind that previously, the 4 source was dealing with one sole source supplier for over 2 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, executive]

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.

[Jeffrey Zekauskas, analyst]

And then lastly for Ed, what's your number 1 priority that you want to get done over the next 6 months?

[Edward Dowling, executive]

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 at an appropriate level, which is just all cash management, and getting the mindset right, establishing the accountabilities and changes of plans as a company 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, analyst]

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, executive]

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, executive]

Yes, 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, analyst]

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, executive]

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 worth of 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, and 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 that it will be behind us after this 3/31 quarter.

[David Silver, analyst]

I have a question about strategies for 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 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, executive]

George, and I will address the first half of your question, and then Ben will speak to the marketing and commercial side of that. There are variety -- numerous improvement efforts underway, not just at Goderich but in all of our operations. And that is not just the mines, but at the plants and 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 mines 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 3 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 and move forward. And as we ramp up it 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 a way that we manage those in terms of maintenance and other things and improve or you might call our general systems in the company. What we're trying to say there's a variety of levels and timing of these activities that are going on at Goderich, which you referenced 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, executive]

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 it's been around on our board 1.5 years to 2 years now, and he was fully versed on that. If anything, I would say, Ed, in the short time he's been here, probably asked 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 the highlight, 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. Thank you.

[Ben Nichols, executive]

I appreciate the question about our pricing strategy, 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. I can appreciate the undertone of how price and volume play together to generate cash. And frankly, it would be a little prematurity 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, executive]

Let me just close 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 are all made for different decisions, and they're not related to one another. And that, for example, we have 2 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, analyst]

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, executive]

No, it was a quick answer. I mean we give you the details associated with it. George, do you want to talk about that a little bit?

[George Schuller, executive]

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 mine development and what we're doing around with that mill, we're looking at utilizing many of the components we have, 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 drove quite a bit of a change in the sustaining capital. So when you look at the rest of the platform, whether it be our plants, our facilities, our bagging facilities, those types of things in our other operations, there's not a substantial change there at all. So the vast majority of that is coming directly from that thinking of how we're going to redevelop the Goderich mine. But again, it's still a high priority for us.

[Edward Dowling, executive]

What George is saying is that when we initially looked at putting the mill to the north side of the mine or really to the west side on that corner. But from where it is a couple of miles to the south, I was looking initially to build a new mill, and what we're headed to now is 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 2/3.

[Seth Goldstein, analyst]

And some of that's flowing through in fiscal year 2024 is what you're actually seeing in that sense.

[Edward Dowling, executive]

So anyway, that's a big part of what you're seeing there.

[Seth Goldstein, analyst]

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 costs coming down from buying KCL for a longer lead time?

[George Schuller, executive]

I think Ben and I will tack that together. I think a couple of comments there. 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 from -- because of the lower MOP price right now, I'd say, 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 PON process and the KCL combined. Ben?

[Ben Nichols, executive]

It's probably fair to say that any KCL we purchased as an input is monetized within that given fiscal year. It's just kind of a broad statement. We're turning inventories consistently.

[Operator]

And we will take our final question from Vincent Anderson with Stifel.

[Vincent Anderson, analyst]

So I understand everything that's been said about refocusing on cash generation. And as Ben mentioned, parting ways with Kevin and Jamie, there's 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 jockeys 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 plans and most of the pieces for achieving your cash generation goals are really already well in place.

[Edward Dowling, executive]

I would say that the large percentage of the things that you're aware of, were preexisting. Of course, from a Board perspective, we are involved in that as well. And as George said, I've been out to 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, analyst]

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 love 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, especially -- either before or after you hit these cash flow targets because I don't know if there's an internal time line, right? But is anything off the table for achieving that fair valuation?

[Edward Dowling, executive]

Yes. 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 we are going to be doing, I believe that the market could get confidence and how we're moving ahead. I think there's been uncertainty on how the businesses looked at 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 rate 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, executive]

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.