Compass Minerals International Inc (CMP) 2007 Q2 法說會逐字稿

Good afternoon. At this time I would like to welcome everyone to the Compass Minerals' second-quarter conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. If you would like to ask a question during this time (OPERATOR INSTRUCTIONS). Thank you.

Ms. Landon, you may begin your conference.

Thanks very much. Good afternoon, everyone. Thank you for joining us. Before I turn the call over to Angelo Brisimitzakis, our President and CEO, and Rod Underdown, our Chief Financial Officer, I'll read you the following Safe Harbor statements.

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 identified in Compass Minerals' most recent Form 10-K. The Company undertakes no obligation to update any forward-looking statements made today to reflect future events or developments. You can find reconciliations of any non-GAAP financial information that we discuss today in our earnings release, which is available in the Investor Relations section of our website at compassminerals.com.

Now I will turn the call over to Angelo Brisimitzakis.

Thank you, Peggy. Good afternoon, everyone. Thank you for participating in today's call. As you saw in our earnings release, both of our segments produced healthy growth this quarter, which gave us meaningful improvements in sales and operating earnings while late winter snows, even into early April, helped generate very strong second quarter operating cash flows.

We continue to have good underlying pricing gains in all of our product lines. We had solid volume gains in our highway de-icing and specialty fertilizer product lines and customer mix improvements in consumer and industrial. These results give you a good snapshot of our overarching strategy which is to focus on sustainable margin improvements everywhere via both pricing leverage and operational excellence; to profitably grow our non-seasonal and counterseasonal business; and to capitalize on our substantial strengths, whether from our assets, our skills or our sales channels.

For example, we're working to maximize productivity of our assets with the expansion of our Goderich mine and our DeepStore records management business. We're looking for opportunities to introduce product innovations as you saw with our value-added pool salt introduction. We're leveraging our strength in building maintenance sales channel with our recently expanded SafeStep brand of professional de-icing products.

The goal of these strategy is to increase long-term shareholder value by building cash flow and using that cash flow to pay a strong dividend, which has increased 71% per share from our first dividend in March of 2004; to make strategic bolt-on acquisitions, preferably ones that are immediately accretive such as the London-based record management business we acquired earlier this year to help feed our underground storage business in Winsford, England; to improve our cost of capital; and to reinvest in our core businesses.

Taking a minute to discuss these last two uses of cash, we were recently recognized for our dedication to improving our capital structure with a corporate rating upgrade by Moody's Investment Services to a BB rating. We were extremely pleased with this recognition, particularly with the call dates of our high interest rate debt approaching in December of this year and June of next year. This isn't to say we're adverse to debt, but rather that we want to reduce our interest expense, improve earnings and provide greater strategic flexibility. To expand further on using cash to reinvest in our core businesses, we maintain a strategic long-term focus on our capital expenditure requirements, which can be variable from year to year and can sometimes be substantial.

Since late 2004, we expanded our sulfate of potash evaporation pond capacity by 20,000 tons; doubled our magnesium chloride production capacity; undertook the installation of a new $10 million mill in our Goderich rock salt mine; began the 750,000 ton expansion of our Goderich rock salt mine -- which, by the way, is similar to the total capacity of some of our competitors' mines -- and we are increasing the capacity of our records management business in the UK by a further 10%. We not only undertook these growth initiatives without incurring additional debt, we made these investments while we also improved our capital structure.

We have a detailed analysis process to evaluate our investment opportunities and we prioritize our spending based on both financial and long-term strategic considerations. Our financial considerations focus on the expected cash on cash internal rate of return of the project over a time period commensurate with the asset life. The dynamics of each project vary in terms of risk, strategic implications and many other factors; but we believe this approach has been instrumental to us achieving returns on invested capital in excess of 15%. The recent investments we've made have materially aided our revenue and earnings growth which far exceeds the salt industry's historic revenue growth rate of approximately 4 to 5% per year. Since 2001, our revenue has grown at a compound annual rate of 8% and operating earnings have grown at a 16% CAGR.

Most importantly, we intend to continue to deliver solid performance by maintaining our focus on building profitable, sustainable growth over the long-term. This brings me back to where I started in my remarks, discussing the sustainable and profitable growth we achieved this quarter.

Our salt segment revenues grew by 11% and operating earnings nearly doubled year-over-year. We had strong sales volume improvements in our North American highway de-icing markets aided by April snows and a favorable year-over-year comparison. These North American gains were partially offset by declines in the UK caused by carry-on effects of the mild winter there. So the net year-over-year volume improvement was 19% for our entire highway de-icing product line. The effects of the mild UK winter may continue into the third quarter due to lower restocking volumes, but we wouldn't expect the impact to be significant.

Though the average selling price of our highway de-icing product line appears flat year-over-year, you may recall that last year we explained that the second quarter 2006 average sales prices were temporarily inflated by strike-related effects. The underlying average sales price increased 6% year-over-year, when you exclude changes in sales mix and unusual logistics costs that were incurred and re-billed as a surcharge to our customers last year. We also made sustainable progress on our consumer industrial product line. The pricing actions we took late last fall helped to improve the average price of the product line by 11% over the 2006 quarter. Volumes declined 3% but this was the result of our focus on margin expansion as we were willing to give up very low margin sales. In spite of this pruning, our volumes still grew 2% in the first half of 2007 compared to the six months ended June 30, 2006.

Our specialty fertilizer segment also grew substantially with a 28% increase in revenues and a 7% increase in operating earnings. Our sales volumes were up more than 20% which included recapturing sales that were missed in the 2006 period due to heavy rains in California as well as organic growth both domestically and abroad. Our prices improved 5% which reflect early success of the $10 per ton price increase we introduced on March 1st of this year, and the $20 per ton increase we introduced on June 1. These price increases are helping to restore the margin lost beginning in the third quarter of 2006 when the rising cost of our purchased potassium chloride started to impact our SOP earnings.

Quarter to quarter, our records management sales increased $600,000 from $2.2 million in the first quarter of 2007 to $2.8 million in the second quarter. To provide perspective, this quarter to quarter improvement is almost the equivalent of the business' total sales in the second quarter of last year.

Looking ahead to the second half of the year, we feel good about our North American highway de-icing bid awards for the 2007, 2008 winter. So far, with little more than half of the bidding season completed, we estimate that bid prices are about 3% over prior season award prices, which is in line with historical trends. I'd say we estimate because much of the bid season is still ahead of us and because year-over-year changes in customer mix affect the average selling price. We will be able to provide actual bid results on our third-quarter conference call.

There has been some modest bid volume contraction in the communities that had exceptionally mild winters last year. But these community by community differences haven't been a significant percent of our bid awards. The more material factor this bid season is that our Goderich mine is operating at normal levels and we currently expect our total award volumes to be similar to pre-strike levels.

Keep in mind, as we stress every year, that a lot of the bidding season is still ahead of us. In addition, our actual highway de-icing sales volume and actual selling prices through the 2007, 2008 winter will be determined by how severe the winter weather is and where the weather occurs, since every community has a unique price.

In conclusion, we see a generally stable environment in our North American highway de-icing territories with some upside potential on bid award volumes as we recover to pre-strike levels. We expect modestly lower highway de-icing summer restocking volumes in our UK market to continue. We have continuing price momentum in our consumer and industrial product line and specialty fertilizer business, though the higher potassium chloride input costs will continue to squeeze the specialty fertilizer margins from the 2005, 2006 level. And we continue to see strong demand for sulfate of potash and our records management services.

Now I'll ask Rod to continue our discussion of the second-quarter financial results. Rod?

Thank you, Angelo. As Angelo mentioned, our sales increased 18% to $127.5 million this quarter. This led to a gross profit improvement of 27% or $5.4 million. Our profit margin also improved modestly year-over-year. Shipping and handling costs as a percent of sales declined to 24% in 2007 compared to 27% of sales in the 2006 quarter. The declining percentage reflects the impact of higher sales prices, a leveling off of our freight rates when compared to the prior year, and the effects of higher strike-related pass-through logistics costs in the 2006 quarter.

Our product costs returned to more normal levels in North America in the 2007 quarter when compared to the 3 to $4 million of higher per unit production costs in 2006 due to the strike at the Goderich mine. The year-ago quarter also included a benefit in cost of sales of $1 million for the final recovery of an insurance settlement. However, product costs in the current year quarter included approximately $3 million of higher unit costs caused by a production curtailment at our rock salt mine in the UK. Now to refresh your memory, the 2006, 2007 winter was extremely mild in the UK and there we have fewer of our costs that are variable. We don't expect any significant impact on UK production costs during the remainder of this year.

The second quarter 2007 production costs also reflect the impact of additional costs of potassium chloride which we purchased to extend our sulfate of potash finished goods production. This increased input cost began affecting us in the middle of 2006. So, during the last 12 months, our SOP prices have improved and our volumes are stronger compared to 2006 when the volumes were reduced by the rainy planting season in our important California market. So this price improvement and the more normal weather over the last 12 months have kept our earnings stable in this segment despite more than $8 million of incremental KCL costs, though margins have compressed.

Our SG&A for the quarter grew by $3 million compared to the prior year. The primary drivers were improved financial results which impact some of our variable compensation accruals, and added SG&A from our newly consolidated records management business. Quarterly operating earnings grew 2.4 million or 33% compared to 2006 as a result of the higher sales volumes and prices in our core businesses.

Interest expense increased $400,000 due to higher accreted interest expense on the discount notes which was partially offset by lower average borrowings. Since last year's second quarter, we've reduced our term loan balance by more than $40 million, primarily through voluntary early principal repayments including an additional $10 million payment in this year's June quarter. Since December 31, our total debt has declined by $21 million or 4%, and our debt net of cash has declined by $45 million or 8%.

As Angelo mentioned earlier, Moody's Investors Services upgraded our corporate credit rating to Ba3 or what's normally referred to as double B. When Moody's issued the upgrade, they cited many factors including our consistent focus on debt reduction, even in mild winter periods like we've recently experienced; improved leverage; and higher profits.

We're anticipating the opportunity to accomplish another step change in lowering our cost of capital over the next few quarters. Our two tranches of high yield debt are cullable in December of this year and June next year. While the financing markets are turbulent right now, we're confident we'll have a good opportunity here to refinance over the time horizon at much lower rates. It's safe to say we monitor this market and opportunity very closely.

We had net other income of 1.6 million in the 2006 quarter from foreign exchange gains and interest income. However, in 2007, foreign exchange losses fully offset interest income. Our income tax benefit was $700,000 in the current year quarter compared to a benefit of $2.2 million in 2006. The prior year amount includes a $600,000 true-up of accruals for foreign taxes.

We continue to expect our effective tax rate to be in the mid 20% range for 2007. Now, that does not include a nonrecurring tax benefit of around $4 million that we anticipate recording in the third quarter when we complete resolution of a portion of the liability associated with our uncertain tax positions.

Our net earnings declined $1.1 million compared to the prior year quarter. The year-over-year decline was primarily due to unfavorable changes in the foreign exchange gains and losses and the change in tax expense. Depreciation and depletion and amortization was 9.3 million compared to 10.2 in the prior year quarter. We currently expect our full year depreciation and amortization to be a couple million dollars less than last year's $40 million total.

Capital expenditures totaled 13.9 million in the current year quarter compared to 6.6 million in the second quarter of 2006. We continue to expect the Company's full year CapEx to be close to $45 million. We've essentially completed our new underground milling operation of the Goderich mine this quarter. This new mill gives us the new capacity we'll need once our new mine expansion is complete. It also gives us future scalability at that mine. This asset will go into production during the third quarter.

The Goderich expansion which is projected to add 750,000 tons of annual capacity should begin operating in early 2008 with full production capability later that year. As we have discussed in the past, the volumes available for sale from this expansion will have very little impact on this coming winter season.

Capital spending in our records management business totaled approximately $1.5 million during Q2; essentially all growth capital as our box count has continued to grow in the second quarter. Our continued investments there should prepare us to take advantage of growth opportunities. We're pleased with the progress of our records management business, though it's still a modest impact on Compass Minerals as a whole.

Cash flows from operations were $110 million for the six months ended June 30, 2007 compared to the operating cash flows of $95 million in the comparable 2006 period. Cash flows from operations during the second quarter were especially strong, increasing $46 million over last year's depressed amount. The primary differences year-over-year were improvements in working capital resulting from the timing of winter weather and the respective years as well as improved operating results.

So, that's it for our prepared remarks. Now I'll turn the call over to our operator. Mark?

(OPERATOR INSTRUCTIONS). Mike Judd, Greenwich.

Good afternoon. Just a question about the third quarter. I realize that it's typically sort of a slow quarter but last year you had a 39% tax rate. I think you're saying that the tax rate in the September quarter could be more like 25%. And you know I guess typically if you go back a couple of years, you used to typically lose money in the September quarter; again, it's a seasonally slow quarter for you guys. Can you just talk a little bit about the capability or ability to be profitable in the September quarter this year? What are your thoughts about that?

Yes, this is Angelo. I think I'll start it off and maybe Rod, you could comment on the tax rate. But we're taking substantial steps to make our business less winter dependent and actually have more robust performance in the second and third quarters. I mean, last year we were able to deliver our first profitable third quarter. And clearly we'd love to get to a point where all our quarters are profitable. I think our activities in the specialty fertilizer area are growing activities there. Our growing activities in document retention or records management are these non-winter, nonseasonal businesses -- at least in the case of document retention -- that I think will help us level the scenario out. However, we are still in majority a de-icing business and I would expect big differences between our performance in the fourth and first quarters versus the second and third.

Okay, and then just on the SG&A, which you mentioned the factors that cause it to pick up on a year-over-year basis. But we've had a couple of quarters with it running at a rate of now slightly above 15 or so. Is that a good run rate for the rest of the year, do you think?

The run rate of our SG&A is a little higher than it was last year. And I would say the SG&A is probably running at about those levels. We can end up -- given sort of where our performance ends up -- we can end up with some changes in variable accruals and those kind of things. But yes, it's probably closer to those rates at this point.

I do want to get back to your tax rate question. Yes, mid-20s should be about where our tax rate is, so if you want to use 25% that would be a pretty good estimate. I did point out that we believe we'll be settling at least part of an uncertain tax position we have during the third quarter. And that could provide kind of a one-off benefit for us in the $4 million-ish kind of range.

Okay, just lastly, can you just remind me back in the September quarter last year, what was the impact of the -- was the strike going on at the Goderich mine at that point? And if so, what was the impact in that quarter?

The Goderich strike last year was entirely confined to the second quarter and the impact was -- we estimated last year 3 to $4 million of impact last year.

So there was no impact in the September quarter last year?

There was no appreciable impact in the second quarter. We did have --

September quarter.

-- I'm sorry, in the September quarter. We did say we would be running Goderich full out last year for the remainder of the year and that that would give us a lift compared to had we not had the strike over the last six months. This year we plan on running Goderich at a pretty full clip as well. But that shouldn't provide a year-over-year variance.

Okay, thanks for the help.

David Silver, JPMorgan.

Good afternoon. A couple of questions and I'll just mention in advance I may be making you repeat yourself because I got a little distracted during some of your comments. First thing would be about costs like let's say per unit costs in your salt division. And I know that most of your comments regarding your costs position currently were related to the year-ago quarter. But you know from the last conference call I guess we were talking about some elevated costs related to different production rates and whatnot due to the unusual winter weather. Can you talk about this transition from the first quarter to the second quarter and whether your salt production costs are pretty much where you want them now? Or is there still some lingering effects from the -- with the variable operating rates in the first quarter of '07?

You know, the thing that we talked quite a bit about in the first quarter was our curtailed production, primarily in our North American market as we had had a really mild December and early January. And we curtailed production to align our inventory at the end of the winter period with a level more commensurate with where we'd expect to be towards the end of the season. And that did impact us in the first quarter. What continued on and was more significant in the second quarter was our production curtailment at our UK facility. I think we mentioned that that's around $3 million in the second quarter that that impacted us. What we had coming back as a prior year -- when you look at the prior year numbers as a favorable compared to last year on the salt production side, was last year at the Goderich mine we had a strike. And that impacted us in the 3 to $4 million range in the second quarter last year. We did not have that effect this year. So we had an uplift of around $3.5 million in our North American business but unfortunately that was offset by some curtailments that we needed to take in the UK to get our inventories in line there as well. So, I guess the current year quarter was somewhat of a wash.

Okay, but for your North American de-icing business, the operating cost levels are pretty much where you want them right now?

Yes, that's correct.

A question on the SOP side. So Angelo, in your comments regarding consumer and industrial salt sales, you talked about foregoing some incremental low margin business as part of maybe your longer-term strategy there. I was wondering if you could maybe apply that thinking to your SOP business where you seem to be selling at a pretty high rate at or above nameplate capacity the last couple of quarters. And yet -- I don't know, in my opinion probably those incremental sales based on purchase KCL probably aren't -- I don't know, don't seem to me to be profitable at the margin. I was wondering if you could comment on that and whether that's accurate or whether -- or how you view kind of those incremental sales in this current pretty tight market?

Yes. Thank you. I mean we have two modes of production. Our solar evaporation is our low-cost mode, our sourced KCL extension is a higher cost, but both are profitable. So we don't have the compelling need to shed business as long as we can produce. We've been very aggressive on price increases. We've had two already announced and I think you've already seen some success from that, as our prices are up 5%. We see the KCL prices moderating. We believe we'll have continued momentum on our SOP prices as those contracts are negotiated. They're not the typical potash commodity type contracts that go up and down in a volatile way. They may take a -- our SOP prices take a little bit longer to negotiate, but they stick for a longer period also. And they don't go up and down as dramatically with commodity pricing.

So I think our trends are good although we did get squeezed as KCL increased. Clearly, we want to do everything we can to expand our ponds because that provides us the lowest cost capacity. So we announced over the last couple of years a pond expansion which has been successful. And we are pushing that in every opportunity we have to expand our ponds as much as possible. So, I think going forward you'll hear a lot more discussion from us about ponds and pond expansion and hopefully with our price actions we are overcoming the KCL inflation which has compressed our margins since the middle of last year.

Okay, and then maybe one general question for Angelo. Angelo, earlier in your prepared remarks you talked about I guess your priorities for your operating cash flow. And the dividend was number one but then you seemed to outline a number of bolt-on acquisitions and growth opportunities that you seemed to be giving a little bit greater emphasis to. So, in your opinion, I mean is the best use of your cash flow -- when you say the dividend, is your priority to maintain the current dividend? Or is your priority to continue to grow it over time and then work around those growth opportunities as kind of second or third priorities?

Yes, I didn't want to imply that one had a higher priority than the other. I mean all those elements are important to us and we recognize the dividend is very important to a large portion of our investor base. We don't have a stated dividend policy but we have increased our dividend regularly and I don't see that changing, although we don't have a stated policy as to how much it's going to increase and at what frequency.

Investing in our core business is just -- is obvious. We have a very good franchise of businesses. We've changed our business makeup over the years. The businesses we have today we're happy with. Our goal is to maximize our free cash. That gives us many, many options. And we'll continue to deploy those over that menu that I described, recognizing that on acquisitions we'll remain ready and opportunistic. But we're not going to overpay and we're not going to stray too far from our core businesses that have served us so well for so long.

David Begleiter, Deutsche Bank.

Angelo, Rohm & Haas has announced plans to sell, divest their salt business. How could that impact the entire market in North America? Not that you can buy them but how might that impact the dynamics of how you compete in North America?

Let me start by saying Rohm & Haas -- or Morton Salt is a very well-managed company. And I would expect if they get sold, the acquirer will want to continue to manage it in a very responsible way and would want to maintain margins and actually improve the profitability. So I don't get too hung up over changes in ownership. So, we're still trying to figure out what it means to pursue the strategic alternative that came out during the Rohm & Haas call. We clearly would want to find out more about that. We'd be interested to look at that. Clearly, it would be a complicated analysis for us, both on a financial and legal side. But as we find out more about what Rohm & Haas' intentions are, we intend to pursue it; pursue finding out exactly what it means and what opportunities might be available to us.

Very good. And on the pricing of plus 3% for this upcoming year, is that sufficient to offset your higher costs? And what are your expectations for costs on energy and transportation and distribution the upcoming ice-control season?

Yes, I think when we bid on the business for the upcoming winter season, once we put in these prices any changes we have in the cost to deliver, which can include changes in fuel surcharge either up or down, do accrue to our benefit or detriment. So we look at that real hard. Right now we haven't seen anything that gives us a lot of heartburn as it compares to last year's costs. And I guess I'd say why don't we wait and see where the final bid results come out before we get any more specific about the impact on margins.

It's Angelo again. It's a tricky season for us in bidding. Last year, our activities were curtailed a bit due to the strike so we're kind of re-establishing our pre-strike levels. We had strong inflation last year. It seems to be moderating a bit. And again, as Rod explained, who knows where the costs will be when we're shipping product in the upcoming season into the first quarter of next year.

So we're happy with the trends. I mean, they seem to be more typical both on volume and on price. But as Rod explained and I explained in my comments, there's still a lot of bidding ahead of us and a lot can change. The reality is even after we go through the bidding and we think we know exactly what we have and what we don't have, mother nature then decides where to snow and where not to snow, how much to snow and how much not to snow. And that determines actually what our margins are going to end up being. So there's still a lot a head of us but we're pleased with where we are to date.

And just lastly on consumer and industrial. Should we expect continued 3, 4 or 5% volume declines as you exit lower margin business going forward on a quarterly basis?

Again, we're up 2% for the first half and clearly we don't intend when we implement aggressive price increases to lose business. I just know unless you push it to the line and unless you're willing to give up an account, you never know if you pushed hard enough. So, I would expect more modest -- or to continue modest growth rate for C&I, but I would also expect continued price improvements. And again, what we're trying to do is maximize our margin dollars by balancing volume and price. It's a fine balance. I don't like shedding business but I'm willing to shed it if it means having a healthier mix of customers and products and plants.

Mark Gulley, Soleil Securities.

I had a question in a couple of areas. I'm going to start with price, if I can. Back to ice control pricing, 3% up seems a little bit modest. How does it compare to your expectation going into the season?

It's Angelo again. 3% is the kind of historical average. I think it's been a bit inflated the last year or two as we recovered some significant inflation in barge rates and diesel and things like that. So, 3%, it's kind of what we thought would be available. Clearly, as we were recovering our volumes we're pleased that we got 3% or we're getting 3%. It could have been different as we had re-established our pre-strike volume levels. So we're pleased with 3% but like I said before, it may end up higher or it may end up lower. There's still a lot of bidding left.

Angelo, is there a risk that maybe -- I know you price very carefully and strategically and analyze it carefully still. Is it possible that you've been a bit disruptive as you try to get back some of this lost volume?

I don't think so. Again, when I look at -- and Rod correct me -- we looked at what, the last 25 years of pricing?

Yes.

And that's been around 3%. So when I look at a 25 year average and I see us at the 25 year average, I can't get too upset about that.

Let me turn now to SOP where the pricing outlook looks better. On a go forward basis, maybe not the third quarter necessarily but let's say fairly soon, is it possible that you'll have two overlapping price increases, 10 plus 20 gives you 30? Which would be more than a 10% price increase as those two price increases are implemented?

I mean we're kind of in a unique position here. We see the inflation that comes from the KCL potash sourcing which affects our cost. So we quickly have a foundation of pass-through that to our customers but also we see the value creation that SOP provides in the marketplace on, particularly, chloride resistant applications. So I think in answer to your question, yes, I do think overlapping price increases will be necessary as we number one, try to get the value the product has in the marketplace but equally important, overcome the inflation that we've been absorbing. Rod, I think you quantified that in approximately $8 million.

Over the last 12 months.

Over the last 12 months. So far we haven't overcome all of it, but the combination of the price that we've been able to achieve coupled with a strong volume growth, we've shown 7% operating earnings improvement in the segment.

Then finally, I'm going to also ask a question about cost of capital. I'm sure you're delighted you'll be able to refinance hopefully at lower rates as these things come due, but another way to lower your cost to capital is to increase the debt component of your capital structure and lower the equity component. With debt having fallen as a ratio of EBITDA considerably since the IPO, would you also be thinking about buying back stock?

Well, Mark, I think what we've been very focused on is making sure we have as attractive a balance sheet as we can to get -- to maximize the value for our shareholders out of the refinancing. So that's what we're currently focused on. As it exists today, we do have some limitations in the existing indentures that would prohibit any significant kind of share repurchase. But we would hope that maybe we are able to gain a little bit more flexibility going forward as part of the refinancing.

Okay, I'll get back in queue. Thank you.

(OPERATOR INSTRUCTIONS) Bob Koort, Goldman Sachs.

Good afternoon. This is Amy sitting in for Bob. Most of our questions were answered. I do have one left. Can you give us an update on your inventory level for de-icing stock following your adjustment effort since early this year. Also what is the impact on your salt inventory level and on your ongoing bidding process and also this upcoming quarter -- upcoming winter season?

Yes, Amy, you might recall that last year with the strike we had, we were -- as part of planning for that, we produced a little bit more than we normally would have in the first quarter. And then the strike was more pronounced and longer than we had ever experienced and it ended up reducing our inventories. And as we stated last year, we ended up shedding some volume awards as part of the bidding process just due to the fact that we weren't comfortable serving our -- what we might consider a normal award volume, given the inventory levels that we had. We have -- in managing our inventories this year do have higher inventories as we currently set today than we had a year ago. And as we mentioned in our remarks, one of the things that that means is that we feel good about both where we're at in the bid season as well as our ability to serve, increasing our awards to the pre-strike levels. So, inventories are a little higher but the result of that should be an increased ability to serve higher awarded tons should we end up garnering a higher amount by the end of the bid season.

[Nils Wallin], Credit Suisse.

I just had one question on the bid season, not about the increase in prices. But I was wondering if there was -- people have been either on the customer side or some of your competitors lulled into sort of a false sense of what normalized is, since you have had a pretty mild winter the last year. And perhaps this caused some contraction in the bid volumes?

No. This is Angelo. This is a market that is well studied over a long period of time. It's a very unique market in that it resets itself every season. Bid volumes by our customers are influenced by budgets, how they end the prior period; if they end with inventory or if they got a late season snow. There are a lot of factors. We've looked at this probably with 30 and 40 year kind of horizons. And there's an underlying growth rate over the long-term of 1 to 2% volume growth that we've seen.

But year to year you can have adjustments, community by community. We've seen some of that this year but I don't think there's something structural that's changing. I don't think anyone's been lulled into a false set of reality. The reality is if it snows hard, they're going to buy more salt than the bid award. And our contracts allow for that up to a certain point. And if there's less snow, they're going to buy less than the bid awards and our contracts allow for that, although there is a minimum take-or-pay usually in our sales agreements.

So do you think that maybe they had some extra inventory left over from last season?

Yes. I think there was some carryover from last season but not a lot. So far I would put it more in the normal category. What we've seen this year or this season seems to be normal. And those that have been around a little longer than I kind of tell me that. So I feel comfortable on how this season is playing out. And again, when you compare it to last year both for us on the production side, on the bid side and on the pricing side, there were a lot of unique events whether it was strike related events or inflationary events that affected last season. This season appears to be the more normal season. We'll see how it plays out.

And just one last question. I know it's somewhat obviously a lot smaller but on your SOP side it looks like the shipping and handling costs have gone up year-over-year. I was wondering if there was something different about what's going on there? Or is it just sort of a regular normal increase that didn't flow through (inaudible) as in the salt segment?

This is Angelo again. Out of Ogden we're basically landlocked in the sense we ship everything by rail and rail rates have gone up. And also on our export products, ocean freight has gone up. So, again we continue to see inflation and logistics on SOP [and] as we see inflation on KCL. We've been aggressive on price increases but not aggressive enough to overcome that inflation. So expect us to redouble our efforts on price and to continue to push the average selling price of SOP up at least to the point where we've recovered these costs.

Mark Gulley, Soleil Securities.

Yes, I do want to come back of course on this ice control 3%. Would you acknowledge, Angelo, that the fact that you had these cost increases from all the sources you talked about, would you acknowledge that they gave you the opportunity to over-recover those cost increases in terms of pricing? So if there's less cost push inflation, there's less opportunity for over-recovery?

As an old sales guy, you know while you hate inflation, it gives you the opportunity to have a discussion on price which probably did give us the opportunity to shoot a little higher. The other thing you've got to remember is last year, as Rod said, we purposely shed some bids because we knew we didn't have the product because of the strike. We obviously tried to shed the ones that had lower margin, lower price, so maybe we had a different mix or a richer mix.

So, I think those factors, those strike related factors, those inflation affected factors, probably gave us the perfect storm last year to get maximum price realization. I think this year we're falling into a more normal trend with not the same kind of inflation, not the strike related activities. We're falling back into a more typical 3%. Am I happy with 3%? No. I'd love to get the 6 that we had underlying or 10 that we had season on season last year. But the market will give us what the market gives us. And for us we also felt it was important to make sure we re-established our volume to our pre-strike levels, particularly as we announced the phase expansion of Goderich.

And finally, the Goderich expansion, you've given it in tons. What is it in percent, please?

Mark, currently the Goderich mine is 6.5 million tons of production and it will go to [7.25 million]. So in that Great Lakes region that would increase our productive capacity, again, beginning in the 2008, 2009 winter, so a year from now by just over 10%.

Good. Okay, thanks for the clarification. I appreciate it.

Ladies and gentlemen, we have reached the end of the allotted time for questions and answers. Mr. Brisimitzakis, are there any closing remarks?

Yes, just real quickly, Mark. We feel pretty good about our second quarter progress in sales, operating earnings and cash flow. Even though our earnings per share reflect our customary second quarter loss, the seasonal loss, our strategy is clear. I believe it's consistent and our success will be measured by our results. We look forward to sharing those results with you in the upcoming quarters. Thank you for joining us and everybody have a good evening.

This concludes today's Compass Minerals second quarter conference call. You may now disconnect.