Compass Minerals International Inc (CMP) 2005 Q3 法說會逐字稿

Good morning. My name is Lee and I will be your conference facilitator today. At this time I would like to welcome everyone to the Compass Minerals third-quarter earnings conference call. All lines have placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (OPERATOR INSTRUCTIONS) I would now like to turn the conference over to Ms. Peggy Landon, Director of Investor Relations. Ms. Landon, you may begin.

Thank you, operator. Good morning, everyone. I'm joined today by Michael Ducey, our President and CEO, and Rod Underdown, our Vice President and Chief Financial Officer.

Before we begin, I will read the following Safe Harbor statement to you. Today's discussion may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on the Company's current expectations and involve risks and uncertainties that could cause the Company's actual results to differ materially. The differences could be caused by a number of factors including those factors identified in Compass Minerals International's annual report on Form 10-K filed with the Securities and Exchange Commission on March 16, 2005.

The Company will not update any forward-looking statements made in this call to reflect future events or developments. You can find reconciliations of non-GAAP financial information that we discuss today in our earnings release and in the Investor Relations section of our website at CompassMinerals.com.

Now it is my pleasure to introduce Mike Ducey.

Thank you, Peggy. Good morning, everyone. I am pleased to report that we once again posted year-over-year sales gains and EPS growth despite unprecedented pressures on our costs and logistics. What's more, our EBITDA remained steady. I believe this is a demonstration of some of the key characteristics of our business. We have the flexibility and agility to respond to changes in our environment and we keep a sharp eye on creating shareholder value.

First and foremost, our pricing strategy has helped us stay ahead of the game. Our prior price improvements particularly in our SOP, sulfate of potash, business helped us fully recover increases in transportation and production costs over this quarter. We're also benefiting from volume gains in our general trade salt and also are sulfate of potash. Importantly we're seeing the benefit of our operational excellence program. So far this year we have made considerable improvements in labor efficiencies, production improvements, and of particular importance is energy efficiency.

Now I am not going to try to tell you that we have an unlimited ability to compensate for changes in our operating environment. I am not expecting the cost pressures to ease any time soon, particularly in the areas of transportation and energy, and that is a primary concern to us. However I can assure you that we are employing strategies to help mitigate the impact and effects of these challenges and I think we are in a remarkably good shape heading into the winter season.

We've hedged approximately 80% of our fourth quarter natural gas requirements and we are about 80% hedged for the first quarter of 2006 and 45% hedged for the remainder of '06. So while we will have higher natural gas costs in the coming months, we won't be completely at the mercy of the energy markets. And since we know in advance what we will be paying, we can plan accordingly.

Of course the Hurricanes Katrina and Rita affected us this quarter as well. We were very fortunate because none of our employees or their families were injured in the hurricanes and our mine didn't sustain a direct hit. And since our primary mining assets are underground, we are typically sheltered from the winds and waters of hurricanes. However, we do expect to have a production decrease of up to 200,000 tons at our Cote Blanche, Louisiana mine because of barge shortages following Hurricane Katrina and because we shut down the mine for several days.

Prior to the hurricanes, we were on course to exceed last year's bid volumes. After the hurricanes, we made last-minute adjustments to our bidding strategy based upon anticipated volume constraints. So at the conclusion of the bidding season we had won bid volumes for '05/'06 highway deicing season that were very similar to last year's bid awards. Now when we say that our highway deicing bid awards are similar to the bid awards of the 2004/2005 season, keep in mind that our actual highway deicing sales volumes in 2004 and 2005 exceeded our awarded volumes because we had a heavier than average snowfalls in the regions we serve.

We also concluded our highway deicing bidding season with an 8% average price improvement over last season, which we expect will be offset and will offset higher transportation costs for our highway deicing salt.

Another important feature of this year's bidding season is that we intentionally shifted some of our bids from the early fill business, which sells at a discount, to more in-season business. What we mean by early fill business is that some customers take deliveries of salt in the third quarter and in October, well ahead of the winter season. As part of our arrangement, that sale is usually discounted. In-season business is all the other sales of the products we deliver.

As a result of our strategy to bid on more in-season business, our highway deicing volumes were predictably lower this quarter than the same quarter a year ago, though stronger sales in the UK helped offset some of the impact on North American sales shift. We made gains in our general trade business this quarter through growth in water conditioning and also organic growth in general. However the effects of the chemical plant closures in the UK slightly offset the gains we made in North America.

We announced a general trade price increase this month that will take effect later in the fourth quarter. It is the largest increase we have ever announced or we have announced in the last ten years. In fact we're about two times higher than the increase that we announced this past January. But it is necessary to help us offset increases in energy, raw materials, and transportation costs.

Once again we had a strong performance in our sulfate of potash, SOP, business this quarter. The $20 per ton price increase that we announced in June and our previous price increases have helped us maintain our margins despite increasing costs. We also had a 12% increase in SOP volume, which gave us a 28% overall increase in SOP sales.

The majority of our sulfate of potash sales volume increases were due to an intentional shift of some of our export business from the fourth quarter into the third quarter. The fourth quarter is one of our peak shipping seasons for SOP, so to ensure that we had the shipping capacity to deliver product to our domestic customers, we arranged for some international customers to take their shipments in the third quarter.

Also I'm pleased to report that we recovered in large part from Utah's heavy springtime rains I told you about last quarter. July, August, and early September were very dry in Utah. So we had a long stretch of good solar evaporation days. We do not currently foresee any substantial impact on sales from those early season rains. We have begun the expansion of our magnesium chloride plant at Ogden, which will nearly double our capacity. We don't report magnesium chloride as a separate segment because it is sold through our two salt marketing groups. So when we sell liquid magnesium chloride for highway deicing, the sales will appear in our highway deicing sales. And when we sell bag crystallized magnesium chloride as a premium consumer deicing product, the sales are reported in our general trade sales.

Revenues from mag chloride were $20 million in 2004 and though we don't disclose specific margin information on the product, I can tell you that the margins on mag chloride are similar to our overall salt segment margins.

Lastly a quick update on Minosis. We have begun depositing waste in the mine and we see no change from the outlook we gave you last quarter, which is that we expect to be operating at 50% of our 100,000 ton per year license limit for most of 2006. And our document storage side we recruited an experienced sales team to cover London and they are beginning to have some success. Year-to-date we have increased the number of boxes stored in our mine by 20%. With the waste and storage operations combined, the joint ventures should have 2005 revenues of about 2.5 million almost entirely from the document storage side of the 50-50 venture.

Now I am going to turn the call over to Rod, so that he can walk you through the financial details of the quarter.

Thank you, Mike. Our third quarter sales of $120.3 million represents an increase of 8% over the third quarter of 2004. Product sales, which are sales less the cost of shipping and handling, increased $2.9 million or 3% over the prior year. Shipping and handling costs were 28% of sales for the September quarter, up from 25% in the prior year. This increase is similar to that seen in prior 2005 quarters. Given the increase in shipping and handling costs, we are very pleased to have year-over-year product sales improvement.

In addition, additionally, our new highway deicing pricing will completely take effect in the fourth quarter, which should help with further cost recovery in the rest of 2005 and into 2006. And as Mike mentioned, we have announced a price increase in our general trade product line which is effective later in the fourth quarter.

Natural gas costs were approximately $1 million higher than in the third quarter of 2004 and we currently expect our fourth quarter natural gas costs to be approximately $1.5 million more than in the fourth quarter of 2004.

Our gross sales for the nine months ended September 30 are also up 8% to $498.1 million and year-to-date product sales are up 5% over last year to $350.5 million. Gross sales for our salt segment increased 4% to $98.2 million in the September quarter. The primary contributors to this increase were price improvements, increased summer restocking orders from UK highway deicing customers, growth in water conditioning sales, and organic growth in our North American general trade product lines. These increases were partially offset by the effects of bidding on more in-season highway deicing business this year, as Mike discussed, and the effects of reduced evaporated salt sales to chemical producers in the UK.

The quarter-over-quarter change in foreign exchange rate also had a $1.6 million positive effect on our third quarter salt sales.

Our SOP segment continued its pattern of significant growth with sales tons up 12% and a 14% average price improvement over the same quarter last year. This gave us gross sales of $22.1 million this quarter, which is a $4.8 million or 28% year-over-year increase. Our sales improvements were sufficient to offset rising costs; however, our third quarter gross margin percentage compressed about 1.5 points compared to the prior year quarter.

Our SG&A expense increased by $800,000 this quarter compared to last year, primarily due to increased healthcare costs, salaries, and professional services.

Our third quarter interest expense was $600,000 higher than in the prior year due to accretion on our discount notes partially offset by lower interest on reduced borrowings under our term loan. Our other expense of $3.4 million this quarter is chiefly due to foreign exchange losses on foreign currency denominated intercompany balances.

Our tax benefit for the quarter was $3.2 million. So our net loss for the quarter was $4.4 million or $0.14 per share, compared to a loss excluding special items of $5.1 million or $0.17 per share for the same quarter last year. As you recall, we had a onetime tax benefit in the third quarter of last year due to the partial release of the valuation allowance for deferred tax assets. So on a GAAP basis we earned $5.5 million or $0.17 per diluted share in the third quarter of 2004.

For the nine months ended September 30, our net income was $17.5 million or $0.55 per diluted share. Excluding special items, our net income was $18.1 million or $0.57 per diluted share, compared to earnings excluding special items of $19.6 million or $0.61 per diluted share for the nine months ended September 30, 2004.

Both our EBITDA and adjusted EBITDA remained steady this quarter. EBITDA was $19.1 million, a $300,000 improvement over the third quarter of last year. Adjusted EBITDA this quarter was $22.5 million, compared to $22.7 million last year, a decline of $200,000. For the nine-month period, our EBITDA and adjusted EBITDA increased $2.2 million and $1.6 million respectively.

Our cash flow from operations for the period ending September 30, 2005 was $70.1 million, compared to $86.8 million for the same period in 2004. The primary reason for the decline has been higher tax payments due to improved profitability in 2004 compared to 2003. We also made the decision earlier in 2005 to build inventories earlier than we had in the past. Although this is a use of operating cash flows, it has helped us in the last half of 2005 as transportation markets have become constrained.

Our capital expenditures at September 30, 2005 were $19.1 million, which is $2.7 million ahead of our capital spending at the same time last year. We expect our capital expenditures to total approximately $32 million this year, which includes the capital for the expansion of our magnesium chloride plant that Mike mentioned earlier and the installation of our new mill in the Goderich mine. Those projects will add $14 million to our 2006 capital budget. We are currently projecting our 2006 capital expenditures to be approximately $40 million.

We are expecting depreciation and amortization to total approximately $11 million for the fourth quarter of 2005 and approximately $42 million for the full year of 2006.

Our debt was $590 million as of September 30, 2005, compared to $583.1 million at December 31, 2005. The increase reflects both accreted interest on our discount notes and our seasonal quarter end working capital peak as the Company continues to build deicing salt inventories for the upcoming winter season.

At September 30, 2005, we had borrowed $29 million on our revolver. During the September quarter, we also repaid another $10 million on our term loan, bringing our current balance to just $7.5 million.

Debt net cash was $566.3 million, a reduction of $7.1 million from the beginning of the year. Cash on hand was $23.8 million at September 30. We are continuing to analyze the possibility of repatriating foreign funds under the taxpayer relief provision of the Homeland Investment Act. We expect to make a determination regarding this before the end of our tax year in February 2006. Should we decide to do that, there would likely be an incremental tax charge associated with the repatriation in the period that determination is made.

And now we would be happy to open the call up for questions.

(OPERATOR INSTRUCTIONS) David Begleiter, Deutsche Bank.

This is actually Jason Miner (ph), sitting in for David Begleiter. First question just a little clarification on some of the mix shift. I note that it says or that you were saying that your volume of bid awards is similar year-over-year; however, you have also mentioned in your press release that higher commitment volumes are expected in Q4. Can you just clarify for me, is that higher volume per bid and same number of bids?

Yes, the commitments are really spread over a period from really August and September through the end of the winter season and March. So with more in season awarded contracts and less early fill, there is more volumes that would be expected in the November through March time period and less in the early fill time period, which really covers August through October.

Okay. Next question just quick clarification maybe on the SOP shift in volume as well. Maybe you can characterize for us a little bit what impact there might be on Q4 of some of that export shift? I don't know if that is significant or not.

I would say most of the volume increase year-over-year in the third quarter related to moving that export business around. We have a peak shipping season out of that Ogden facility in the fourth quarter. There's really two peak times. One is kind of in the middle of the fourth quarter and the other is during the spring season. And we did move most of that increase that that you see third quarter year-over-year is moving some export volumes up.

In my opinion, it is not a real large, meaningful number. The only thing we are trying to do is to give you guidance on annualizing those numbers and extrapolating them forward, not necessarily that's going to have a dramatic impact quarter-to-quarter.

So it’s sort of a H2 flat impact. This is just a shift even though --?

Yes, that is what we're trying to communicate to you.

Very good. Thank you.

Bill Young, CSFB.

A follow-up to that. Are you talking about like $0.01 or $0.02 a share or less than that? As far as shifting of into the third quarter versus the fourth on the SOP?

Yes, in terms of an EPS impact, it is probably no more than $0.02 per share. I hadn't calculated it on that basis, but that seems to be a reasonable assumption.

Okay, great. Now could you give us a little more information on the reduced output from your Louisiana mine and presumably increased output from Ontario and what this is going to mean to your margins given the transportation cost differential? Or maybe I got the wrong assumptions there.

No, when you look at where we're shipping today, the 200,000 tons of course went into the Ohio River Valley, Mississippi River Valley, that area. It is hard to predict an answer to your question, Bill, because we don't know where the snow is going to fall from that standpoint. But the way we are looking at it right now is we feel we're going to be able to cover all the volume commitments we have made based upon the bids that we got without having to do a whole lot of shifting from the Goderich mine to the Cote Blanche mine. We have been pretty much able to rebalance our commitment levels to compensate at about the same type margin levels we would expect earlier. We were lucky -- I don't want to use the word lucky -- (multiple speakers). We will just say the hurricanes hit early enough in the season so to speak that we were able to adjust our production runs and our bids with 5% or so left that we were able to compensate for it without having to take any significant hit from a logistical standpoint in moving the dead salt around. That's the best way I can answer it.

You mean to say the markets you serve are going to shift a little bit to compensate, is that what you're saying?

Yes, we are able to compensate a lot from it through our -- the 5% bid commitments that we had left along with the non- tendered. Non-tendered are people who don't necessarily -- landscape people, people who put out bids or not bids but get requests for quotes. And we basically were able to adjust those and not have to cover it with more expensive transportation is what I am trying to say.

Right, right. I have a question on your water treatment, water softening. Where do you stand there on your retail outlets? For example I was in Home Depot and all I saw was Morton salt products in there, at least the one I went to. So where are your major outlets and what can we expect there in the future as far as perhaps incremental penetration?

First of all, Home Depot, Lowe's, the big boxes are great huge volume users of salt, particularly water conditioning salt. They also are very much national in scope. Our general trade business tends to be more regional in basis. So like a Morton would have an East Coast presence, as you saw, while we don't have an East Coast evaporation plant to serve that market. So consequently depending upon where you go to shop, you're going to see Morton as the primary national supplier to Home Depot and also to Wal-Mart.

We tend to focus on the True Values of the world, the Ace Hardwares, the co-op where we can have strong regional penetration in those markets while kind of shying away from the Wal-Marts and the Home Depot for various and sundry reasons. Our inability to serve them on a nationwide basis, salt utilization, evaporating utilizations, our high rates right now; therefore those tend to be the lower margin business out in the retail chain. So we try to balance out all those characteristics to get the best bottom line utilization for our plant.

So your plants are pretty well sold out no matter what?

Yes.

Last but not least, can you give us an idea about your cost of gas under your hedging programs just so we can kind of figure out gas is 12 or $13 today -- just how much you are going to be saving with the hedging?

Yes, we have been layering in the hedging for a number of quarters now and gas for the fourth quarter is averaging right around $14 for the October through December period. Our hedges however are closer to the $8.00 range, and so we as a result of layering in hedges over a number of periods have built up a favorable variance there on what we would otherwise pay if we were completely on a spot basis.

And first quarter roughly?

You know, unfortunately, Bill, I don't have those numbers right in front of me, but the same kind of differential would exist.

Okay. Thanks, Rod.

David Silver, JPMorgan.

Mike, I wanted to go back to something you commented on three months ago and that was the situation in the UK where you talked about some volatility or some changes on the industrial I guess the general and trade business due to the closure of some manufacturing facilities and maybe a highly volatile natural gas situation there. I'm just wondering if you could maybe just update us on what you're seeing there and what kind of implications that might have for that segment of your business?

We see no changes. In actuality natural gas prices over there have probably escalated more sharply than they have here. On top of that, there is the Kyoto agreement over there has put significant user penalties on hydrocarbon user penalties, so it is just exacerbating the natural gas situation in the UK.

From a volume standpoint, we have seen no particular encouragement from the standpoint that we are dealing with mature markets and they can't overcome the large reductions that we have seen. So three months ago we were saying that it was a challenged market strategically. It remains a challenged market for us. We continue to review our options around that business and we will continue to do so over the next two to three months till we come up with a resolution that we feel comfortable with.

Okay. Thanks a lot for the update there. If I could shift over to the SOP business for a second, your average price is up significantly year-over-year. Your margin, your cash margin per ton is up meaningfully less and of course there are some trip costs and other issues involved there. One question would be kind of on a timing issue. I know there's a $20 a ton price increase that was kind of working its way into the market. Is that most recent $20 a ton increase fully reflected in the 3Q results or could there be some lag that we will see as we move forward?

No, you will continue to see the net realizations -- not net realizations, but the gross price increases for that business push forward as more of our contracts -- I think historically I have told everybody that our contracts expire throughout the year and as those contracts expire, those new prices roll in. So again as you see our contracts come for negotiation, those will be the new pricing expectations that we have for the business.

David, if I could just add there when you look at the price differential for the June quarter over the prior year, it was about $32, about the same increase for the September quarter. The difference in the September quarter this year is we had a larger percentage. It is always a larger percentage of export business and we have talked about that being a little lower in the past from a pricing standpoint. But with having even a greater percentage of the third quarter business be export this year than it was last year that also had a muting effect on the average price. Nonetheless it was the same differential of about $32 over the prior year quarter.

And one comment around that pricing. We continue to feel optimistic about SOP pricing. Unlike MOP, as I have stated in the past, MOP is used on corn, soybeans, and that type of stuff that currently is being significantly impacted at the farmer level on a cost basis. A lot of their cost is being eaten up same as ours on logistics, large logistics, so on and so forth for export. Our growers are continuing to see very good profitability in nuts and fruits and vegetables, that type of end-use product. So I don't think we are going to see nearly the price pressure that is going to be experienced I think by MOP in the upcoming season. So we feel confident that we can continue to hold onto that last posted price increase as we move through the growing season. As our farmers are doing really well.

That literally was the question I was going to ask you because in the past, Mike, you have talked about kind of a ratio, right? The specialty potash, MOP, SOP -- or sorry, SOP/MOP ratio. I don't know but making some assumptions about delivery costs, that ratio really has to be about as low as it has been in quite a while and I guess it could equalize or normalize in one of two ways, right? SOP rising or MOP falling? And I just wondered if your salespeople or if you have any kind thoughts about that maybe over a six-month period or so?

I think the better way to look at it as our marketing and salespeople look at it is more downward protection than upward protection. There of course is always natural price resistance levels that you hit as you go through on price increases. Our strategy is to continue to build value in the business so as MOP turns the other way, our growers will see the value of it and hopefully will avoid the significant downward pressure that you will see as MOP starts to slide, which is kind of how we are viewing -- at least the intermediate term, not the long term. I think the long-term prognosis for MOP continues to be bullish. I think there could be some short-term pressures around the MOP prices particularly as they try or potentially try to raise them further.

Okay, I have a couple more questions but I'll get back in the queue. Thank you.

(OPERATOR INSTRUCTIONS) Amy Zeng (ph), Goldman Sachs.

I just had two quick questions regarding the natural gas hedging programs and also the gross margin. In the call you just mentioned this quarter, 3Q, one million year-over-year higher natural gas costs. I just wanted whether that cost is being fully hedged in this quarter? And also besides the hedging program you mentioned any other actions have been taken to constitute a higher a transportation cost in order to address actually the sustained gross margin pressure?

I will take the question on gas, Amy. Thanks for the question. We were hedged I believe -- it was around 75% in the September quarter. Our policy is to not go to 100% hedged because we do have some variability in the usage of gas, so we don't like to be -- maybe to use an oxymoron -- over hedged and so we will typically go to 80%, occasionally 90%. So I guess we consider ourselves pretty fully hedged for the third quarter, fully as we define where we'd like to be. Our $1 million increase in natural gas costs year-over-year if you look at it from a standpoint of if you didn't have that $1 million and you had gotten price increases consistent with what we got. So all other things being equal, in other words, that was about half of the margin percentage compression that we saw during the quarter.

From a pricing standpoint, being able to pass those on I think we have to look at it from the three distinct business units. Highway of course uses very little natural gas. Their pricing pressure is more around the logistics side of the business, barge rates, diesel fuel escalators, that type of stuff. With the 8% price increase that we have achieved in the bidding season, we feel comfortable that we will be able to deliver the product in season and fully recover those costs.

From a general trade standpoint, you have to look at it from two perspectives. One is natural gas and I think historically we said this is the largest user of natural gas that we have as we evaporate salt. We did put in the price increase last January, which has been absorbed and you see that in our numbers.

Second of all, I mentioned that we are raising the prices again in the fourth quarter. That price increase that we have out there will recover not only the lag that we see but also the forecast we see for the winter season on natural gas costs.

On the distribution logistics side, we are doing two things. We are changing as we go into some of our contract levels historically we have had some delivered pricing. We are going more FOB pricing and actually are encouraging our customers to arrange their own shipping as much as we can. Also we are passing through those logistics costs to our customers as we go through. The issue right now around logistics is actually finding the trucks with hurricanes and everything eating up and disrupting the supply chain so to speak. It really is a critical situation on making sure that we get the trucks to deliver on time for our customer demand.

So from a general trade standpoint, the pricing that we have announced to the industry, that price increase varies anywhere from $6 or $8 a ton for evaporated salt in Ogden to as much as 18 to $20 a ton for evaporated salt. We think that will fully recover and protect the margins that we have in our general trade business.

SOP, the $20 a ton price increase we put through was in anticipation of a gas price out there and we think that fully recovers and helps our margins in that market also.

And so in terms of outlook for the gross margin, a sequential basis we would expect some modest increase in 4Q from 3Q?

She said would we expect a basis point increase in our gross margin in the fourth over the third?

No, I think the right way to think about it is that our price increases have been covering the increase in the cost but margin expansion is not on our focus right now.

I think the other issue if I can, Amy, is that since you're looking at a gross price and the freight is going up at such a large escalating rate, trying to recover all that on a percentage basis even though we are announcing pretty aggressive price increases is going to be tough to do. So if we can hang on at this particular point, I would say we are implementing our strategy.

Okay, thank you.

Nancy Traub, CSFB.

Just a couple of quick questions. You mentioned that you are hedged for the fourth quarter at $8 for gas and I wonder what your average gas cost was in the third quarter?

Let's see. Let me get that number for you here. It was right around $7.

Versus a year ago? What would that have been?

Versus a year ago that was closer to $5 in the third quarter.

Okay. And also if you mentioned it, I missed it, but in the UK you've been having difficulties because of overcapacity. What kind of operating rates are you at now?

We are currently running at about 55 to 50% of capacity.

And the outlook?

50 to 55% of capacity.

Staying at that low rate?

Yes, with logistics costs and as hard as it is getting it off the island to the UK or to mainland Europe is not necessarily attractive to get rid of volume. So it is a chronic capacity utilization issue in the UK.

Nancy, I would say that is down from maybe 60 to 65% in the past. The UK market has been in an oversupply position for a number of years.

So it was 60 to 65 a year ago?

Yes.

And yet you still have the problems of gas over there too?

Yes, that correct.

All right. When should we hear a decision on what your strategy is?

Hopefully we'll have something to tell you by the next time we get together.

All right, thank you.

Chris Hudson (ph), DDJ Capital (ph).

Good morning. Congratulations again on the solid and steady quarter. I just had some questions about the magnesium chloride expansions that you have planned. I think did you say that the sales there had been 20 million in 2004?

Yes, that's correct.

Do have any sense of what they will be for 2005?

No, I think -- we don't give guidance generally around those kind of things. What we have said is that we are almost doubling our capacity of both our magnesium flake and our magnesium liquid facilities out there. The magnesium liquid goes on highways for deicing and the flake is bagged and put in -- sold in retail outlets and other consumer based applications.

We can say when you look at it, the market opportunity is very good right now. The competing product with mag chloride is calcium chloride and calcium chloride right now is pretty much in a sold out position. Actually for consumer deicing, you could almost say it is kind of in a restricted position because the oil and gas industry is running so strong right now and calcium chloride commands a higher value in the drilling area that it is soaking up the normal calcium chloride demand or supply for consumer deicing.

So that is why we are bullish about it. We believe for an extended period of time there is no new calcium chloride announcements being made either by Dow or by TETRA that would fill up that avoid. So we think we're going to be able to very quickly generate sales volumes commensurate with the expansion that we have out there, if that is any guidance.

That's helpful. That's great. Have you disclosed in the past the split between what is liquid and what is crystal magnesium chloride?

No, we haven't. But on a revenue basis it is roughly 50-50. But the ton, because of the value is so different is quite a bit different from that.

Okay, that's great. And also on the general trade salt price increases that you said would be going in in the fourth quarter I think you gave just sort of some samples of some different price increases for some different regions. Do you have a sense of what that will look like as a price increase across the board for general trade?

No, because there is a whole mix issue in there. The only thing I can do is kind of give you the low end and the high end and that is about that range I previously talked about, 6 to 8 or 18 to 20 depending upon the value of the product and what market it is going into.

Okay, that's helpful. Thank you. And then on the natural gas issue, obviously natural gas is going to affect transportation cost, but do you even use natural gas in your evaporation for general trade, is that right?

Yes, and we use it for also drying the SOP product that in the process we have out there, but by far the larger use is general trade evaporating plants.

And my understanding is that your competitors, who are also in the general trade business and using natural gas as well, you guys are all basically for the reasons you care about in the same area, so it looks like if the price of natural gas goes up they will be needing to raise price just as you are, which you have successfully done in the past. It seems like you guys are just going to continue to go ahead and pass on the price increase there to offset the natural gas price increase.

Well we know with price increases you never know. But I would say based upon the history when costs driven natural gas is the culprit, we as an industry have been able to make our case quite eloquently I hope to our customers and it is a very low value product. It is also not a product in most instances -- that is a large cost component of the finished good. It is not like steel going to the auto industry. So while no purchasing agent or no customer of ours likes to hear the story, I think it is getting enough publicity everywhere you go that they know that the industry needs it. Now at the end of the day the market will determine what that happens to be. We hope of course it is to the higher end of what we need as an industry to remain healthy, but it will all shake out in the long run.

Chris, your assumption is correct that we all generally have the same energy characteristics in that regard. There are a few outlier plants that might use electricity or coal, but the vast majority is natural gas.

That's great. Thank you very much and congratulations again on the quarter.

David Silver, JPMorgan.

I have a couple of questions maybe for Rod and then I will come back with a quick one for Mike. But Rod, on the other income line, you noted that a large portion of the negative -- the net expense there was related to FX translation. A couple of things -- and I apologize for not knowing this -- but is that offset effectively elsewhere in the income statement or is that really kind of a net reduction from your perspective for the period?

That's a net reduction. On a full year basis, the Company does not have much exposure to the Canadian dollar, a little bit of exposure to the British pound. Now that can vary quarter by quarter because of the seasonality of the business. But this is purely some intercompany financing and intercompany accounts that are translated and that are denominated in foreign currencies. And when the Canadian dollar strengthens against the U.S. dollar, we can end up with some losses. We also have some financing, intercompany financing on our UK operations that also can affect that number.

If I can kind of piggyback on that for a second, I think it is very important for everybody to understand our philosophy around this issue. First of all it is a non-cash type issue. It is just a balance sheet issue. We focus this business around cash and we could sit and try to hedge that and make it go away, but at the end of the day if you're not right, it is a negative cash item rather than that. And our philosophy has historically been we manage the business on cash and if at the end of the day we have some fluctuations in this, so be it. We would rather keep it that way than turn it into a cash exposure that we really don't want in the business. So that is kind of our philosophy around how we manage that line on the income statement.

Okay. I had a question about the cash flow statement, the revolver activity. So for nine months of '05 there is a net source of cash of 18 million. Nine months of '04, it is a net use of cash of 14 million. I can guess some of it is just related to the ending cash balance on the balance sheet. But can you remind me why there is that change from a use to a source even though like you say in the release this is a period where you are a net consumer of cash on your revolver?

Right. So without regard to the seasonality and the particular time period that we are in the year, the difference year-over-year is about $15 million more cash on the balance sheet than we had last year. And then we have been basically working capital requirements have been higher year-over-year and that has really been two primary factors. One, we have been talking about the higher cash taxes year-over-year and that contributed quite a bit to quite a bit of that difference. But the other difference is in a period of rising costs and in our case also rising prices, when you have a seasonal business and you are building inventory to service the upcoming winter season, the peak of your working capital becomes higher in that scenario. So the hill becomes higher to climb on the working capital but the downside of that hill should be a little steeper as well as you liquidate that inventory for higher and higher prices.

So we have seen a combination of working capital items on both cash tax payments as well as on the build of working capital that has been a little steeper this year than it has in the past.

I would like to think we are smart and lucky. We made a decision way back in March at the end of last season to continue to run the mines and build inventory because we were low. And generally speaking, we usually take a shutdown in our mines in the March/April timeframe. We just kept running this year and we started delivering early. We made the decision to build.

As it turned out, it was the right decision because of the disruption and also the cost escalation. A lot of that salt that we delivered all through the spring and summer of last year had a different logistics cost profile behind it, then we would be paying right now today to deliver that same product. So while we did not see it in a crystal ball, it certainly I think worked out from the investors' standpoint as a good use of cash.

That's the second time you have said you've been lucky, Mike. I don't know. Last question for Mike. You typically get a question about, gee are there any ways to refinance your debt ahead of time? I'm not going to ask that question. But you are getting fairly close now to where some of these call dates come up. And so this is over a couple year period, but your net cash flow or your net free cash flow before dividends is probably going to rise significantly over the next couple of years and, Mike, if you would take that incremental cash flow, whatever it is, I'm making my own assumption, there is a pie, it is 100%. You have internal investments. You have increased dividends. You have acquisitions etc. You have various uses.

Do you have kind of a targeted division of that pie? In other words, how much might go to the shareholders in the form of buybacks or increased dividends? How much might be for internal high return internal development projects or other things? Can you just talk to us how you might start to think about that or how we might think about how you're looking at it?

Yes. Of course every year we go through our strat plan with our Board, that is a primary focus on how we create the best value for our shareholders and we have said we are a dividend paying Company.

So when we go through the metrics of what is important to us, of course dividend expansion is something that we feel is a primary driver of interest in our stock. So we have put together and I don't think I'm going to sit and make any commitments, but we have put together as you just stated, some targeted areas that we'd like to see around leverage on the Company. Also around what kind of dividend we would like to see the stock be able to generate and grow for our investor base. And also what kind of capital, internal capital expenditures that we want to make to grow the business.

We are putting outside that box right now, David, things like acquisitions that would be opportunistic if the right one came down the road. And we continue to look at those, but that is outside the box at the moment.

If you look at that mix, I can tell you the Board and my commitment is to continue to pay and grow the dividend of the Company for our investor base. Also to take back -- we started out the Company investing 75% of depreciation back into the business, which was very good early on. I think we have now moved that target up a little bit, saying that you can't continue to grow the business at that kind of level.

We are looking at targeted range somewhere around maybe around 100% of depreciation now going forward. But I will tell you we will keep that as flexible as we possibly can from two ways. We wait and see what the winter season happens to bring and we will keep our maintenance capital, keep our plants and mines running very safely at assured levels. And then we will invest back prudently growth capital in the business.

But we also recognize that we have got to continue to pay down debt. The balance sheet happens to be in our opinion comfortably leveraged at the time at these kind of multiples for the cash flow that we generate from the business. We would like to see it go lower. But I am not saying that we would like to see it go zero either. So I think we balance out all three of those things, dividends being first; prudently reinvesting it back in the business; and taking the excess cash and paying down debt of the business. Did that help you any?

Well, I --.

You wanted something more specific.

You laid out some things but obviously increasing the dividend over time remains a priority.

Yes, it does.

You'll have that opportunity. The timing is up to you but just based on the way that your debt structure is set up, I'm assuming there will be some opportunities there in the next year or two.

As we said in the past, the time is fast approaching where we have opportunities to reduce our interest expense and once we reduce the interest expense, that is going to generate higher levels of free cash flow which we will use in the manner that I just told you and the first priority is dividend.

Very good. I appreciate it. Thank you.

Peter Park (ph), Park West Management (ph).

I wanted to make sure I understood the cost per ton for shipping that you talked about when answering a previous caller's question. You said that gross margins might be flat sequentially in the fourth quarter. I know historically gross margins have been up very significantly in the fourth quarter just because that is when the operating leverage kicks in. I just wanted to make sure you meant for '06 as opposed to the fourth quarter of '05.

Exactly, yes, Peter. You're right. Don't compare it third to fourth. Compare it to prior quarters.

Got it. And when you say constant, you mean on a gross dollar basis or on a percentage basis?

Well, yes. Not on a percentage basis. As we have been able to recover the cost, we have not been able to increase our top line at a rate that would allow us to maintain the margin percentage. But we have increased it enough to maintain the dollar amount and given normal winter, we would expect that we would not be able to increase the percentage but from a dollar perspective we feel confident that we put in place if the weather hits enough to maintain our margins.

Got it. And then second line of questions, if you look at shipping and handling per ton, this year just in my modeling or whatever, it might be about $16 a ton. To what extent is that fully factored into higher costs related to shipping, whether it be barges or rail or trucks? And when I think about 2006, should I be thinking along the lines of 17, 18 per ton? Just any sort of help would be appreciated.

Higher. I don't mean to be funny. What you're seeing is the historical $16. As we -- not so much in the first part of '06, because we have already delivered a lot of that tonnage already, but forecasting out for the second half of '06, you are going to see some pretty significant -- as we indicated we have got an 8% price increase this year and almost all of that is going to go to distribution; 8% of probably an average price of $30 a ton on average. So you can see that you're talking about some pretty significant increases on the (multiple speakers) cost.

So more than $2 a ton more next year?

Yes.

And that is just on the shipping and handling. And then on the cost of sales in terms of product, that goes up maybe $1 a ton or something?

No, we try to do better than that. It depends on where you're looking at. Our goal as an operating excellence program is excluding energy, which we can do something about. Our task as operators is to offset the impact of inflationary cost increases on everything but energy through operational excellence programs, which we have been able to do. So hopefully we will continue to be able to do that trend. So I don't see it to being $1 a ton of $2 a ton type operating cost increases for the Company.

Great. Thanks. Good luck.

Ladies and gentlemen, we have reached the end of allotted time for questions and answers. I would now like to turn the conference back over to Mr. Ducey for closing remarks.

Thank you, Lee. I would like to conclude by saying how pleased I am about our performance this quarter, given the environment in which we find ourselves operating in today. We had an unprecedented challenges with our barge transportation, which is beginning to return to normal. We had increases in virtually every component of our shipping and handling costs as well as increases in our other inputs. Nonetheless our gross margin and our EBITDA held steady through the period.

I believe that speaks to the dedication and hard work of our people and the agility of the organization to react to the environment they find themselves happen to be in at the time. I have to say how proud I am of the Compass team. Thanks for joining us again today and think snow.

This does conclude today's earnings conference call. Thank you for participating. You may now disconnect.