Compass Minerals International Inc (CMP) 2008 Q3 法說會逐字稿

Good morning. My name is Regina and I will be your conference operator today. At this time, I would like to welcome everyone to the Compass Minerals Third-Quarter Earnings Conference Call. (OPERATOR INSTRUCTIONS.) I would now like to turn the call over to Ms. Peggy Landon, Director of Investor Relations and Corporate Communications. Ms. Landon, you may begin your conference.

Thank you, Regina, and thank you all for joining us this morning. In a moment, I'll turn the call over to Angelo Brisimitzakis, Compass Minerals President and CEO, and Rod Underdown, our Chief Financial Officer, but first I'll read our Safe Harbor statement.

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 expectations as of today's date, October 29, 2008, and involve risks and uncertainties that could cause the Company's actual results to differ materially. 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'll hand the call over to Angelo.

Thanks, Peggy. Good morning, everyone. Thank you for joining our call today. I would be proud of our third-quarter performance in any economic environment, but I'm particularly proud in today's environment to be able to put forward our results as evidence of the strength, the increasing balance, and the recession-resistant nature of Compass Minerals. The increasing strength of both of our segments is evidenced in our third-quarter financial results with sales up 70% year-over-year, operating earnings up 244%, net earnings up over ten-fold, excluding special items from last year's results, and cash flow from operations up over 100% for the first nine months of 2008.

And we have a very positive outlook, because most of our products are essential to daily life, therefore, generally nondiscretionary and non-cyclical. Certainly, the least discretionary product we sell is highway deicing salt, because governments will rarely compromise on issues of public safety. Even during periods of lower tax revenues and tight budgets, most governments will find other less critical areas of their budgets to cut in order to preserve public safety funding. In fact, North American demand for rock salt and other deicing products has been particularly strong this year as governments rebound from a very severe season last winter.

Many Midwestern Departments of Transportation increased their overall bid sizes for the coming season after having run out of salt last season. The length and severity of last winter also affected the supply of rock salt available for the coming winter. We usually have salt inventory at our depots that carries over from one winter to the next. But last year, we sold out our stock piles down to the blacktop. And typically, we begin building inventory in March for the upcoming winter season. But due to the late end of winter weather this past March, we were still selling deicing salt to our customers as we were producing it out of the Goderich mine. So when you add together larger bid requests from our customers, no salt inventory carryover at most of our depots, a late start to this year's inventory rebuild, and the fact that there was already a tight capacity balance in the Great Lakes region, you end up with a very tight supply of highway deicing salt for this upcoming season throughout the North American market we serve.

Though it's more pronounced this year, the Great Lakes region-specific capacity issue isn't new and has been the catalyst for our previously announced rock salt expansion projects. As you know, we have two projects currently underway at our mine in Goderich, Ontario. Phase one will give us annually 750,000 additional tons of rock salt capacity, which we expect to be fully available for the 2009-2010 season. And our phase two expansion will add another 1 million tons of annual production for the 2011-2012 winter. These expansions should provide much needed relief to our Midwestern customers who are currently struggling with sale supply issues.

Fortunately, our Cote Blanche, Louisiana mine has produced more to this point in the year than in any other year in its almost 50-year history, and we expect it to exceed its name plate capacity in 2008. This extraordinary effort on the part of our employees comes despite two separate brief shutdowns during Hurricanes Gustav and Ike. All of our employees were unharmed and the mine sustained almost no damage. From this mine, we serve customers along the Mississippi and Ohio Rivers. Thanks to the extra production from our Cote Blanche mine and a modest amount of new production from Phase I of our Goderich mine expansion, we've rebuilt much of our inventory position, but our levels are still below normal and below the inventory we had before the start of last winter.

As a result, we bid on and were awarded modestly less volume than our 2007-2008 bid award volume. But this supply/demand imbalance also drove an unprecedented average 20% increase in our highway deicing bid award prices. The margin improvement from our significant pricing gains coupled with lower than expected fuel costs will far exceed the modest volume constraints. Assuming normal weather, the net result should be a material expansion of our winter season margin dollars.

It's been a while since we discussed our highway deicing sales process. So I'll take just a moment to remind you that we sell our highway deicing salt through an annual sealed-bid process. Governments award their business to the lowest bidder and the awards set the delivered price for the entire winter, so that there are no in-season price changes. The awards generally specify a volume range, so that both parties have some protection from winter weather variability. Many of our customers began taking their deliveries early this season, which is why our third quarter highway deicing sales volumes increased 48% over the 2007 quarter. Our third quarter average selling price was up 20%, which is consistent with our increase in bid award prices and an improved mix.

Our consumer and industrial business also posted a very strong quarter with 24% sales volume improvement and average selling prices up 7%. About half of our year-over-year sales volume growth came from retailers and professional service providers who began early the replenishment of their depleted consumer and professional deicing product inventories.

The other half of our year-over-year C and I sales volume growth came from new customers and organic growth in non-deicing applications. This growth in our core non-deicing applications helps illustrate that salt is a nondiscretionary purchase in most of its applications. And because salt and the other minerals we sell generally are relatively low-cost in their varied applications, they don't significantly impact many of our customers' purchases. For example, consumers who have installed a $700 water conditioning system in their home aren't likely to stop using the system in order to save the $15 per month that they spend on a bag of water conditioning minerals. Similarly, ranchers don't use fewer salt licks in a tough economy and families don't buy less table salt. Salt and our other minerals are often critical to our diverse customers in good times and bad, and we have been their steady, reliable supplier for many decades.

Of course, our most significant third-quarter growth was generated by our specialty fertilizer segment with a 152% year-over-year increase in sales, and a 448% increase in operating earnings. These gains were generated through 121% increase in average selling price and a 14% increase in sales volume, which were the result of continuing strong demand and the timing of international shipments. The price increase reflects the progressive integration of our list price into our customers' contracts and, at $752 per ton, represents a 55% increase over our second quarter average selling price.

We're still expecting the fourth-quarter average selling price of our sulfate of potash to approach $1,000 per ton and we expect our fourth quarter sales to help us deliver modest full-year volume growth over 2007. Year-to-date, our production was slightly less than expected, primarily because of late season rains, which reduced the SOP harvest from our solar pond at the Great Salt Lake in Ogden, Utah.

Looking ahead to 2009, we expect the fundamentals for our specialty fertilizer segment to remain steady, because of the strong dynamics of the global potash market. First, it's important to remember that there is a global shortage of potassium nutrients. The primary driver behind the shortage is insufficient supply of standard potash, or KCl, caused by growing demand and limited new supply, complicated by a strike at three key Canadian mines, a sinkhole near a railway that transports potash from a Russian mine, and large export duties imposed on Chinese production. In addition, the Fertilizer Institute reports that North American potash producers' inventories are currently about 30% lower today than in September of 2007. Our own SOP inventory is extremely low by historical standards at only 20 days of supply.

Secondly, keep in mind that demand simply can't go away. People have to eat and growers need our sulfate of potash to feed America and the world. Over the long-term, we expect demand to grow as populations increase and as diets improve around the world.

And lastly, our customers have ample access to credit. U.S. farmers are still able to obtain operating loans from smaller community banks, farm credit services, or directly from the USDA. It is important to remember that our potash is a specialty fertilizer product used on fruits, such as citrus and wine grapes, vegetables, like tomatoes and sweet potatoes, and tree nuts. Growers choose our specialty potash and are willing to pay more for it because it works better than standard potash and helps increase the value of their harvest. Sulfate of potash still provides a strong return on investment for these growers.

We are the only supplier to the markets that we serve who has announced a capacity expansion to address the supply/demand imbalance for sulfate of potash. As you know, we began Phase I, a 100,000-ton capacity expansion, last year, which includes maximizing the configuration of our solar evaporation ponds within our existing footprint at the Great Salt Lake, as well as expanding the capacity of our processing plant there through improved efficiencies.

We currently estimate the cost of Phase I to be approximately $40 million, most of which will be spent in the next 12 months. We continue to expect to have approximately 500,000 tons of SOP capacity available to sell in 2011, weather permitting - a 22% increase from our 2007 levels.

Phase II of our expansion is more ambitious, but it's still approximately five years out. It calls for new permitting and construction of solar evaporation ponds on the Great Salt Lake, followed by a three-year solar evaporation cycle. Our expansion activities are directed at the existing potassium nutrient supply/demand imbalance, increased value-added SOP marketing opportunities, as well as the historic 3.5% annual SOP growth rate.

So to summarize, this is a very exciting time for Compass Minerals. Our customers are demanding more of our products than ever before. Our higher prices are commensurate with that demand and our commercial leadership. Both of our segments' sales and profitability are growing. And we enjoy robust cash flow, a solid balance sheet that has allowed us to stay on strategy during this challenging economic environment.

Now, I'll turn the call over to Rod, who will discuss our results in greater detail. Rod?

Thank you very much, Angelo. As you read in our results and just heard Angelo discuss, our results were extremely positive this quarter and reflect the continuing strong fundamentals of both our salt and specialty fertilizer business that we've been talking about for quite some time. I want to leave plenty of time for questions today, so I'm going to focus my remarks on just a few key areas for consideration.

Looking first at sales, Angelo already indicated our best estimate is for the average selling price of our SOP to approach $1,000 per ton in the fourth- quarter. Now, as a reminder, every $100 of SOP average selling price increase equals approximately $40 million of additional full-year operating income.

Regarding highway deicing salt prices, as you heard Angelo discuss, we achieved a 20% year-over-year increase in North American Highway bid award prices, which should be reflected in our results in both of the next two quarters, as it was in this third-quarter. The percentage increase was our largest ever and reflects the tight conditions, which currently exist in our markets. Because the average 20% increase includes a wider than typical dispersion of percentage increases on a customer-by-customer basis, the actual percent increase realized will be different, either more or less, based on where it snows. Our capacity expansion programs are designed to fully alleviate the kinds of imbalances creating this price increase in the future.

Of course, our sales volumes vary depending on weather patterns, as we saw this past severe winter season, and, since we're the industry leader in consumer and professional deicing products, our consumer and industrial sales volumes will also vary the next couple of quarters depending on the severity of the winter. Now, while October is not one of our larger winter sales months for deicing products, I can report to you that early orders for salt have continued to be brisk in October, as they were in September, following a season where salt supplies were hard to come by and some governments and other salt users have been unable to secure supply for this coming winter.

Regarding shipping costs, we've had a bit of a wild ride. Our highway deicing salt bidding during the summer occurred when oil and diesel prices were at all-time-highs and with no relief in site. Following the completion of those bid awards, fuel costs have now moderated with falling oil prices. At current fuel prices, we expect the full impact of our salt sales price increases to drop to the bottom-line when compared to prior year. Through year-end, our salt production efficiency should be similar to prior year operating rates, leading to relatively stable unit costs. And our fourth-quarter potash costs are expected to be similar to the third-quarter costs on a per unit basis.

At a time when our business fundamentals give us continued optimism, we're well positioned to capitalize on the opportunities before us to use a portion of our increasing 2009 operating cash flows to fund our strategic capacity expansion plans. As we said last quarter, we expect 2008 capital expenditures to be approximately $60 million, and our 2009 capital investment to be approximately 50% higher than in 2008. These investments will help position Compass Minerals to continue its leadership in North American deicing, as well as to provide growers worldwide the full nutrients necessary to provide healthy, nutritious food.

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 return of the project over its 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 of approximately 20%. And likewise, we expect our newly planned discretionary capital investments to deliver cash-on-cash internal rates of return in excess of 20% consistent with our investing principles.

Our September 2008 net leverage ratio was 1.9 times trailing EBITDA, compared to 3.7 times at this time last year. Given the current financial markets, we don't expect to make many changes in our capital structure in the short term. Our next scheduled maturity date is in 2012, so we're well positioned from a debt maturity perspective and have ample liquidity with cash, our undrawn revolver, and operating cash flows. Our year-to-date tax rate is 31% and we think that's the full-year 2008 rate. We currently expect our 2009 effective tax rate to also be in the low 30% range.

In these uncertain times in the financial and capital markets, we've seen evidence of fear and, to some extent, panic overtake business fundamentals in investors' decision-making processes. While these events cause us to pause and reflect to ensure we're pointing in the right direction, companies such as Compass Minerals, with our strategically advantaged assets and recession-resistant attributes, should be attractive to investors in any economic environment, but especially now as the global economy enters more uncertain times.

As we make decisions on a daily basis, we will continue to focus on running the business with the long term goal of serving our customers and making prudent use of our cash flow to profitably grow our business and meet the needs of all of our stakeholders.

Now, with that, we'll take your questions. Regina?

(OPERATOR INSTRUCTIONS.) Your first question comes from the line of David Begleiter with Deutsche Bank.

Thank you. Good morning.

Good morning.

Angelo, have any of your highway deicing customers asked for any price rollbacks given the decline in energy prices? And if they did or will, would you lower prices?

Just to answer your questions, no, we've not had--I'm not aware, for any requests for rollback in prices, because this issue of pricing kind of cuts both ways. If fuel were to go up after the bids were awarded, we would take that hit. If fuel costs go down, I guess the customer takes that hit. We would like nothing more than the customer to accept maybe a fuel surcharge mechanism. But so, they've insisted on the supplier taking that cost risk, so we take it. And now, the price is fixed for the entire season.

And just on SOP on the August 15 price increase, what's been the--how much of that have you realized or are realizing?

Well, you saw our average for the third-quarter, which is kind of a blend of some of the laggards from the old price and the new $1,000 list price. We expect that for the fourth-quarter to approach the full $1,000 for all of our customers on average. So I think we've had very good success and are pointing to continued success as we finish out the year.

And just lastly, if MOP prices were to decline, how sticky would SOP prices be short and long term?

We saw a brief period in 2006 when there was a slight period of MOP pricing decline and our SOP pricing did not decline. So hypothetically, if MOP were to decline and, all that I hear from the MOP guys, they're not expecting that to happen. Remember, we're a big MOP consumer. We would test the premium that we normally get. I mean, normally we get about a $150 premium to MOP. We believe that premium should increase as the extra value of SOP is further realized by the growers. And if MOP were to decline slightly, we would test that premium and we would expect that premium to increase.

Thank you very much.

Your next question comes from the line of Mike Judd with Greenwich.

Yes, Mike?

Good morning and congratulations on a great quarter.

Thank you.

I just want to start off with some balance sheet related items. On the working capital side, maybe you already addressed this, what do you think the fourth-quarter is going to look like? Is there going to be a use of cash there as typically it would be?

Typically, we've had a cash flow from operations. The last three years have actually been a generation of cash flow from operations. Now, specifically, as it relates to working capital, that's significantly influenced by the timing and severity of the winter season. So last year, winter happened significantly in December, which of course, the receivables or the payable terms arrangements there are 30 days. So depending on the severity of December is really the determination of the growth in working capital or the decline. But the last three years, I think the fourth-quarter has had positive cash flow from operations each year.

Okay. And then, in terms of the freight costs, we've all seen the Baltic Index come down. If--are you anticipating lower freight rates in the December quarter and how does that impact things?

Yes. I mean--this is Angelo, I mean, we have significant freight elements in both of our segments - salt and our specialty fertilizer. On the salt side, as I explained before, the lower freight rate of course that's all domestic sales (or North American sales or within the U.K) those benefits will fall to us, assuming those low freight rates stay down through the course of the winter. On the SOP side, about a quarter of our sales are on the international market, so we would expect to enjoy those benefits also, although they're a much smaller percentage of the revenue versus salt, which freight is a much higher percentage of the revenue.

Okay. And just, lastly, with the excellent job you guys have done in terms of refinancing some of your debt, or maybe that's not the right terminology for it, but either way, the interest expense has come down fairly significantly on a year-over-year basis. I'm just wondering--I understand that you need to have capital available for some of the expansions that you're doing within your product groups. But with the interest rate--with the absolute interest amount down, but yet your dividend has basically remained flat for more than a year here, do you think that there could be some consideration for boosting the dividend?

Yes, that's a good question. Cash is kind of king right now, and we feel really good that our cash flow from operations is at a record level in our history. That gives us a lot of options and, particularly with the economic uncertainty, we look at those options very critically during this period. As Rod explained, our investment in our advantaged assets is a strategic priority for us. We have a very high hurdle in terms of the IRR with a 20% or more hurdle, so we feel really good about funding those, both from a financial perspective and a strategic perspective. The dividend remains very important to us. We did raise it this year 5%. We raised that back in February. And typically the company raises its dividend on an annual basis each February and, I believe, Rod, correct me if I'm wrong, we've raised it every year for the five years we've been a public company.

Yes, that's correct.

So the dividend remains very important to us. We raise it typically annually. So I would expect it to remain important to us. Buying down or retiring the debt has also been very important to us. We have halved our leverage ratio, as Rod pointed out. It's now at a much more comfortable level, below two. And we've taken advantage of our excess cash flow to retire some of our high yield 12% debt and we retired an additional $20 million just in the month of October. So we kind of see that multi-faceted path continuing and it's all going to be driven by how successful we are in generating that operating cash flow. I think we're set up very well to continue to grow that operating cash flow with a kind of unprecedented price increase in our highway deicing and unprecedented pricing in our SOP business. But again, we are sensitive to weather, so we'll just have to see how the weather effect plays out in our winter driven businesses. And there's also a weather effect in our specialty fertilizer business, both on the selling side where the application of fertilizer is dependent on the amount of rain and the timing of rain out in the fields, but also since we operate a solar evaporation manufacturing process, whether it rained and how often it rains during the solar evaporation period does affect the amount of SOP we produce.

So I'm sorry I didn't give you a very easy answer to follow, but I think it's kind of stay the course with us on those priorities. And any significant change in dividend at the expense of those other priorities for cash doesn't feel like it's the right balance for the long run.

Thanks for the help.

Your next question comes from the line of Mark Gulley with Soleil Securities.

Hey, Mark.

Good morning, guys.

Good morning.

A couple questions on supply. First of all, with respect to ice control salt, given this tight supply/demand in North America, can we assume that you'll be able to sell out the increased production coming out of Goderich as it comes on, since you're the only one expanding capacity in North America to my knowledge?

Again, we--selling out the mine isn't the priority, although we'd love to do it every year. I mean, weather is--the weather is going to determine whether the capacity increases actually get sold out or not. Typically, the market has grown between 1 and 2% per year on a normalized basis. So we are putting in the equivalent of approximately 10% of the North American market with our two-phased expansions. So if the market plays out normally with our 10% expansion and a growth rate of 1 to 2%, we have between five and 10 years of available product to serve the market.

However, as we saw last year, an abnormally strong market creates a demand of approximately 10% in a single year. And we were ill prepared, as the industry was, to respond to that surge in demand last year. So in the short term, what our expansions will give us is an ability to recover our inventory position, which was essentially wiped out last season, and is only going to be partially replaced this season. So it gives us the opportunity to get our inventories back to where they should be to service our customers effectively, and will also give us standby capacity ultimately for either that very strong winter or the normal 1 to 2% annual growth rate that we see in a normal winter. And again, if it's a weak winter, those tons don't get pushed into the market, because the big volumes are set during the bidding season, which occurs prior to the winter. So the volumes are set, the pricings are set, before winter even starts. So there's very little change that occurs from a selling perspective during the winter.

Thanks for that, Angelo. I have a short term question with respect to supply interruptions at competitors. Can you tell us whether or not either of the hurricanes, particularly Ike in the Bahamas, limited Rohm and Haas' production there and whether or not that was one of the reasons you were able to increase C and I prices by the 18%?

Yes, that's a lot of speculating. I could tell you that both of our major salt competitors have mines very close by our mine in Louisiana. And I told you about the great effort and results from our mine. I expect the teams of our competitors in Louisiana did similar efforts on Ike and Gustav, and I haven't seen any significant dislocation out of those primary Louisiana rock salt mines, all of which travel up the Mississippi and Ohio Rivers. It is kind of publicly known that the Bahamas were hit more severely and--but that is not a rock salt mine. That's solar evaporation and solar evaporation above ground facilities are a lot more vulnerable than underground mines to these kind of wind events. So I suspect there was more impact at the Bahamas mine. I have no ability to directly correlate it to pricing or demand whether it's in C and I or our highway deicing.

Okay. Another question and I'll get back in queue. If I'm doing the math correctly on the million ton ambition goal for Ogden, if I'm doing my math right it sounds like that capacity wouldn't be available until beyond 2015. Am I correct there, Angelo?

Yes. I mean, to be honest with you, the path to a million isn't even clear yet. What's clear right now is the first piece which is 100,000 tons and that's clear through 2011 - we'll get there. The next chunk, which is Phase II, which was the expansion of the ponds, is much more ambitious. That should give us another 200,000 tons approximately, but that's approximately five years out, because we have to get the permits and that's a very detailed process with the Army Corp of Engineers environmental impact study, then we have to construct these massive ponds, and then the solar evaporation process is a three-year cycle. So you just add up those pieces and you're five years out. So the other pieces that go from 750 to 1 million are still under development and have different time horizons, but it's a likely--it's unlikely we get even to the 750,000 tons before 2013 or 2014. And again, that market is growing approximately 3.5% a year. We need about 15,000 tons in our own capacity just to stay even with the market and the market currently is underserved. So there is SOP demand that's not being served that we believe if we had the capacity today we'd have that demand.

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

(OPERATOR INSTRUCTIONS.) Your next question comes from the line of David Silver with JP Morgan.

Good morning, David.

Yes, hi. Good morning, guys. A couple of questions and I guess I'll apologize in advance for the--kind of the hop scotch. But I wanted to ask you about your SOP shipment volumes first. So I guess with this three-year phased-in 100,000-ton expansion, I thought you were going to have maybe an additional 25,000 tons available in calendar '08 and I guess in the release you pointed more to maybe 425,000-430,000. In other words, very similar to the shipment levels from last year. So I'm just wondering, am I--is there an inventory shift or why might the shipment levels given the strong demand, low inventories--why might the shipment levels be relatively stable instead of up 25,000 tons?

Yes. In my prepared remarks I highlighted that our solar evaporation season was a little bit less than we predicted because of some rains that occurred at Ogden, Utah. So our production is kind of not like a chemical plant where you just dial in the knobs and the plant produces. We actually rely on Mother Nature and a certain amount of evaporation to occur over our 33,000 acres to give us a harvest. So it's strictly production constraint. Now, those production tons should occur next year, assuming the weather for evaporation is normal. But our inventory right now is at maybe an all-time level. We're down to 20 days of inventory. And so therefore, we're constrained by production and inventory to just have modest increase year-over-year. But I would say that in our financial model, the improvement in selling price far outweighs the impact of a few thousand tons of volume on SOP. So we're much more excited and much more focused on achieving that approaching $1,000 a ton goal for the fourth-quarter. And as Rod pointed out, for every $100 of SOP selling price, that translates to about $40 million of operating income at today's volumes. So really, our focus is there. Sure, we'd love to have that last incremental couple thousand tons of sales and production. It's just not going to happen in this season.

Okay. And then, also on the SOP side of things, I had a marketing question. So you're indicating for the fourth-quarter an average selling price of close to $1,000 a short ton. And again, you reiterated how low your current inventories are. Can you give us an idea of how far out you're selling now? So in other words, if an order comes in, I'm assuming you really don't have any product to sell on a spot basis, but are you telling people you can't get a shipment till February, till March? How filled up is your order book or what's your backlog look like there?

Yes. I mean, we've seen a little bit of compression in terms of how far out customers are placing orders. I mean, I think in this economy people have pulled back their horizon and it's kind of become more kind of hand-to-mouth. So our orders are really fourth-quarter in focus right now. Our pricing is typically 90-day validity, so we're kind of going quarter-to-quarter. And what we've seen in the month of October is good acceptance of our selling price, so we feel pretty good about the $1,000 guidance we gave for the fourth-quarter and our customers are really taking it quarter-by-quarter right now. And frankly, without a lot of inventory at hand, it matches up pretty well to our production.

Okay. And one question on your salt side. So I have a little model here trying to get your margins based on different shipment volumes level--levels, and I try and tinker with it over time. But when I look at the third-quarter, I have to say the per ton margins actually seem to have declined from 3Q to 3Q and, given the 20% price increase on the deicing salt and the very large volume increase, I mean, I'm kind of wondering why the per ton margins weren't meaningfully higher than a year ago instead of below those levels. And I admit the cash production costs per ton have shifted down, too. But is there a way that we could kind of think about translating these stronger volumes--much stronger volumes into kind of reported operating income?

Yes, Dave, this is Rod. When you look at it on an operating income per ton basis, which is I'm assuming sort of a stat you're looking at--is that the right--well, I'll just assume. It was relatively--it went up 4% on a per ton basis. Remember, there's a difference between the operating income per ton of a ton of highway deicing salt, which sells for on average $45--roughly $45 a ton, versus an operating income per ton of a consumer and industrial ton of salt, which sells on average in that $140-plus range. And so, when you have a period like this year where our tonnage increase on highway deicing was close to 50%, and we had good strong volumes on C and I, but the percentage increase wasn't as high. When you look at that on a per ton basis across the whole salt segment, you'll end up with a different mix just across the whole salt segment. The increase in the operating income per ton was about 4% and that was principally a function of mix.

But what I will say is, during the third-quarter it's really--the oil prices started to decline fairly rapidly about midway through the quarter. And--but all during the quarter we were still delivering product at fuel prices that were more commensurate with what would have happened the first half of the year than what we expect to happen now in the last three or four months of 2008. So our fuel prices were as high--almost as high as they were in the second-quarter. And while our price increases had taken effect, especially on the highway deicing side, it was probably the last quarter we expect to see the high fuel prices that partially offset the increase in selling price. So it will--as we look into the fourth-quarter, it will be somewhat dependent upon what oil does and the impact of fuel on our shipping and handling costs.

But we currently believe that as we look into our production expectations for the fourth quarter that our unit cost in both of our segments, but specifically in the highway segment, will be relatively consistent with what we saw last year in the fourth quarter on a per unit basis, which with higher salt prices, should increase the margin and operating income per ton. But the third-quarter was significantly influenced by 50% higher volumes on the highway deicing, which just carry with it a lower per ton margin.

Okay. Thanks very much.

Your next question comes from the line of Bob Koort with Goldman Sachs.

Thank you. Good morning.

Good morning.

Could you guys talk a little bit about the composition of your delivery costs? In other words, is the predominant share of the cost getting it from the mines out to your own depots, or is it getting it from your own depots and warehouses into the customer site?

Well, yes, that's a good question. It, of course, varies by customer. So to the extent we have a customer in Detroit where the salt is a short delivery from the Goderich mine, the--and we service it out of the Detroit depot and we're serving it all the way into central Michigan, well the bigger percent is going to be on the delivery side versus getting it to our intermediate storage site. Whereas, if we're serving a customer in Detroit, then the--and I'm just using this as an example--then the bigger cost is going to be getting it to the depot.

I would say that on average the biggest cost is getting it to the depot and that our delivery costs to the customer are typically 50 to 150-mile range of truck delivery. And that even though the water delivery is cheaper on a per ton basis, it's really getting it into the depot that would be the more--the larger share of the logistics cost.

Got it. And then, I think you mentioned you've got a different customer base and a tight customer base in your specialty potash. But we're hearing quite a bit about demand destruction in commodity grade potash. Do you not see that amongst your customer base on the specialty potash?

Yes, this is Angelo. Demand destruction is kind of a word that goes around a lot. Most of the sales that we have are to growers of crops, like fruits and vegetables or wine grapes or tree nuts, that get--have to get planted every year. They don't get replanted. They're perennial crops. So demand destruction in that sense would mean to basically abandon your vineyard or abandon your almond tree for a subsequent year. So I think it's a different sell. And the customers are using SOP because they have to, because if they used MOP or KCl, the chloride hurts the root system of a perennial crop. On an annual crop, like corn or wheat, you don't care about next year, because you kind of replant it every single year. And I'm not a farmer, so that's kind of as far as I can go on that one.

No, that's helpful. I appreciate that. Then the last thing is you're switching over to more solar pond based SOP. What do you guys expect in terms of margin progression, if everything else was held constant, other than your sourcing or production method for SOP over the next year or two years?

Yes. I mean, we have two manufacturing processes, as we've outlined in the past. The process that relies on the source material is a higher cost one and the one that's more susceptible to changes in raw material input costs. The solar evaporation process is a more stable process for us because basically we control it and we rely on the sun. Currently, about 65% of our margin comes from pond-based production, solar evaporation pond-based production, and we expect that to grow to something close to 90% by 2011 as we add more of the pond-based capacity. So it should help us lower our costs and it also should help us increase the amount of control we have over our costs and make us less vulnerable to fluctuations in the cost of sourcing raw materials.

Thanks, Angelo.

And your last question is a follow-up from the line of Mark Gulley with Soleil Securities.

Just a couple follow-up questions, if I may. Rod, you talked about CapEx projects that seem to generate a 20% internal rate of return over the life of the project. But I'm aware of another project, another investment, that generates a maybe even higher than 20% return in terms of free cash flow yield, and that's your own stock. Do you factor in purchases of your own stock as a base case relative to expansion projects as you prepare your capital expenditure requests for the board?

It's something where, of course, we don't exclude it from consideration. I think we've chosen to--where we've had purely financial transactions, what we've chosen to do this year is to take the guaranteed kind of favorable interest arbitrage return on reducing our--using our cash to repay our 12% notes. I think obviously in the environment we're in, I think we've seen some pretty dramatic shifts in our share price. And as it gets lower, that becomes more attractive. But what I would say is that those purely financial transactions probably take a second seat to our strategic investment alternatives that we really view as driving Compass Minerals over the long term, and are more certain than whatever the return could be from a share repurchase.

Yes, this is Angelo. Just to add something on that, I mean, if the market and the share of our price was trading on fundamentals and outlook into the future, if we were trading where we're trading and we were sure the fundamentals counted, we would be very bullish on buying back our stock. But I don't think anyone right now can explain what the market is trading on and where the bottom is. There have been a few players out there that are in similar industries that made what looked like very good decisions to buy back their stock with excess cash maybe three or six months ago, and are now looking at stock prices half of what they bought their stock back at. So a pure financial play on our stock, while it should be something that is important and should be considered, we're just so uncertain about where this whole thing is going in terms of valuations. And when we compare it against transactions such as our strategic investments, which are both strategic and have good financial returns, we kind of opt for that. Plus, as Rod explained, the retiring of our 12% high yield notes is a certain financial return and lowers our interest expense. And there's really no uncertainty in the benefit of that transaction. So maybe call us too conservative right now, but I think during these times, preserving cash and making those correct strategic/financial decisions is our priority.

Okay. I'm going to challenge you, Angelo, with an agronomy question, if I may. And that is, the concept used in row crops is mining the fields, that is, that farmers can--growers can reduce their application rates of a fertilizer for a year if they have already built up enough fertility of the various nutrients. Given your specialty crops, again, citrus and all the rest, do growers--can growers--have they in the past delayed or, let's say reduced, application rates for a year to avoid the high cost in a given year?

Yes. And again, I'm not an expert. But from the research I've done, that opportunity is there. They could blend in MOP. They could reduce the K. But just remember, K is typically the least applied nutrient versus the optimal level. So the potassium is the nutrient of the big three that really requires the biggest increase in application just to catch up to optimal. So--and it's a one-year phenomena. But again, we've been in the SOP business for 40 years, so we'll wait whatever timing games--and maybe games is the wrong word--that might be played by the growers, we'll wait those out. Our inventory is extremely depleted. It's at historic lows. So if a small percentage of our customers decide to miss a season, we're a small player in the global market. There are a lot of international markets. Potassium is an underserved, oversold nutrient. We don't think it will put a lot of pressure on our demand.

Okay, thank you.

Thank you.

And at this time, there are no further questions.

Thank you very much, everyone.

This concludes Compass Minerals' Third-Quarter Earnings Conference Call. Thank you for your participation. You may now disconnect.