Compass Minerals International Inc (CMP) 2009 Q2 法說會逐字稿

Good morning, my name is Rachel and I will be your conference operator today. At this time I would like to welcome everyone to the Compass Minerals second-quarter 2009 earnings 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. (Operator Instructions). Thank you. I would now like to turn the call over to Miss Peggy Landon. Ma'am, you may begin.

Thank you, Rachel and thank you all for joining us today. With me here are Angelo Brisimitzakis, our President and CEO, and Rod Underdown, our CFO. Before they begin their remarks today let me remind you that 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, July 29, 2009, 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 forms 10-K and 10-Q. 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 of 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 turn the call over to Angelo.

Thanks, Peggy, and thank you all for joining us this morning. I am very proud to be able to report that in spite of the worst economic environment in more than 50 years Compass Minerals has posted its ninth consecutive quarter of year-over-year net earnings growth with both of our segments setting record second-quarter operating earnings results.

Our salt segment demonstrated the solid steady profitable growth that makes salt such an attractive, recession-resistant business. And our specialty fertilizer segment again showed its ability to generate very attractive earnings despite extremely unfavorable market conditions. Understanding the strength of each of our two segments is essential to understanding the balance of reliability and profitable growth that is at the heart of Compass Minerals.

Looking first at our salt segment, both of our salt businesses contributed to our 13% year-over-year salt sales growth and our $14.4 million, or nearly 300% gain, in salt operating earnings. Highway sales volumes were up year-over-year because of some preseason buying in North America and the UK. The price improvements we achieved this past season combined with a positive product mix shift yielded a 22% year-over-year improvement in average selling prices for highway deicing salt.

Our second-quarter consumer and industrial sales volumes declined by 12% and average selling prices increased by 16%. They reflect our strategy to maximize the value of our assets. That is, we've been willing to cede some lower-value sales if necessary so that we can focus on customers and the products that generate the most value for our enterprise. This strategy materially strengthened our salt operating earnings.

As we look ahead we expect more of the same from our consumer and industrial business. The economy has had only a modest impact on consumer and industrial demand and we don't anticipate a material impact going forward. Our customer base and applications of our consumer and industrial products are very diverse. The cost of our minerals is typically quite low in their end uses and our minerals are usually essential in their applications, all of which make this business as attractive and as recession resistant as our highway deicing business.

Turning to our outlook for highway deicing business, we had high early-fill orders for highway deicing salt in the third quarter of 2008, which we currently have no reason to expect to see again in the third quarter of this year. And we expect the current trend of lower sales to chemical customers to continue at least through the end of the year. The product mix shift away from lower-priced salt for chemical customers should positively impact our average selling price again in the third quarter. Also our new 2009-2010 highway deicing pricing will take effect in the quarter which will also provide a pricing lift.

Our North American bid results to date are materially better than our typical 3% to 4% year-over-year price improvement. We've completed about 80% of the bid season and our award prices have averaged about 8% above the very strong prices we secured last season. We've also been awarded more volume to date than we had been awarded by this time last year. And we expect to end the bid season with more awarded volume than last year, consistent with our 750,000 ton annual capacity expansion now completed at the Goderich mine.

As a reminder, the bids establish our selling price for the coming season and establish a volume range, though the actual sales volumes are determined by the weather. I suspect that these very positive bid results will surprise those who don't understand the recession-resistant nature of highway deicing salt. So I want to take a few moments to remind you of the key dynamics of this business.

First and foremost, highway deicing salt is viewed by both governments and the public as a generally non-discretionary critical public safety need. For those of you who live in snowy regions you can imagine the public outcry if your local government decided to stop buying highway deicing salt because of the bad economy. And we know that highway deicing salt comprises a relatively small percentage of most every government's budget.

So there is simply too much risk to public safety and too little overall benefit to the budget to compel governments to substantially reduce their highway deicing salt budget. It makes more sense for governments to cut funds from more discretionary line items during difficult economic times.

The other important dynamic to the highway deicing industry is the rock salt shortage that has affected the Great Lakes region of North America for the past few seasons. That shortage left some governments in the upper Midwest with no North American deicing source last season, causing them to import rock salt at very high prices. Thanks to our additional 750,000 tons of annual rock salt production capacity from the first phase of our Goderich mine expansion, we believe we have successfully -- we are successfully displacing many of those opportunistic importers this bid season.

Because of all these factors, the results of the bid season so far are better than the year-over-year improvement we typically see in this business. We'll give you the final results of the bid season no later than our third-quarter conference call.

Turning now to our sulfate of potash business, our second-quarter performance was almost exactly what we expected. Our sales volume was very similar to our first-quarter volume, a 63% decline from the prior-year quarter, and our selling price remained very strong, generating a 15% improvement in specialty fertilizer operating earnings compared to the prior year and setting a new second-quarter record.

Consistent with the broader potash industry trend, customers are focused on cutting costs and conserving cash, so blenders are continuing to draw down their existing inventories and many growers are cutting costs by skipping their potash applications this year.

Our SOP customers are also postponing purchases as they wait to see how recent changes in commodity MOP prices will affect SOP specialty fertilizer prices going forward. And it is true that the average selling price of SOP is strongly influenced by the much broader market selling price of MOP as the majority of SOP produced worldwide uses MOP as a raw material.

In the third quarter of 2008, our SOP average selling prices were already $750 per ton on a volume of 98,000 tons and we generated record specialty fertilizer operating earnings in excess of $42 million. We don't expect that level of specialty fertilizer operating earnings in the coming quarter because we don't expect sales volumes to return to those normal levels that quickly. However, we do expect attractive SOP pricing to continue to generate very strong operating margins even on less volume.

More specifically, our July sales volume has been very similar to the trends we've seen in the first half of the year. However, we believe we're approaching the rebound side of the volume decline and expect to see modest progressive sales volume strengthening through the end of the year. Although we don't expect to return to more normal SOP demand until 2010 when growers will face the consequences of potassium deficiencies in their soil and the damaging effect that can have on their crops, coupled with more clarity and confidence on the future commodity MOP pricing.

As we wait for the broader potash industry to stabilize we are continuing to produce SOP at near normal levels to take advantage of our low-cost solar-evaporation-based production process. The cost efficiencies we can achieve this year far exceed our cost of storage. So we are taking a long-term view of the value creation and we continue to invest in our specialty fertilizer business.

I'd like to summarize by saying that it's hard to imagine a better environment in which to demonstrate the earnings resilience of our company. This quarter Compass Minerals once again delivered year-over-year earnings growth in the midst of the most significant economic downturn in recent history and despite the most volatile potash market in memory.

Among the attributes that make Compass Minerals unique is its balance, its balance between strength and profitable growth based on the essential nature of our products, their diverse and recession-resistant end markets, our low-cost operating model, our advantaged assets and our endless opportunities for sustainable leadership. Now I'll pass the call to Rod to discuss the second-quarter results in some detail.

Thanks, Angelo. Thanks for joining us this morning. Our second-quarter sales, net of shipping and handling costs, increased by 2% year-over-year, which was the result of year-over-year gains in salt volumes and average price improvements in both our salt and specialty fertilizer businesses. These increases were partially offset by lower specialty fertilizer sales volume and unfavorable impact from foreign exchange rates.

On a per ton basis, shipping and handling costs to deliver our products declined 5%, mainly because of customer and product mix and lower fuel costs. Similarly, our cost of sales on a per unit basis were almost unchanged from the prior year in both our salt and specialty fertilizer businesses, reflective of solid cost focus and our continuing operational excellence emphasis.

These steady costs combined with price improvements in both segments yielded a 48% improvement in gross margin from $37.1 million to $55 million in the second quarter of 2009 and an 84% increase in operating earnings to $34.8 million. Our gross margin and operating earnings percentages expanded significantly in both segments on higher delivered prices with flat or declining costs. SOP operating earnings margins increased from 40% to 65% of sales on the quarter while the full operating earnings percentage expanded by over 1,100 basis points.

Interest expense was lower by $4.4 million or 40% year-over-year chiefly as a result of retiring $90 million of our 12% notes in 2008 and also due to lower interest rates on our floating rate debt. We redeemed the final $90 million of those 12% notes this past quarter and replaced them with $100 million of 8% notes. On an annualized basis this refinancing will reduce our interest expense approximately $3 million.

We had no borrowings under our revolving credit facility at quarter end. Our $492 million debt balance consisted of the new 8% notes and $395 million in bank term loan debt. With the increase in trailing 12-month adjusted EBITDA to $348 million our total debt leverage ratio now stands at 1.4 times.

We incurred $5 million of costs associated with the 2009 refinancing recorded in other expenses. We've excluded this charge which, on an after-tax basis, was $3 million or $0.09 per share, when reporting our earnings excluding the special items. Our income tax expense increased by $6.4 million over the prior year reflecting higher taxable earnings and adjustments consistent with our expected full-year tax obligations and tax rate. We continue to expect our full-year effective tax rate to be approximately 31%.

Cash flow from operations through June 30 was $88.3 million compared to $178 million in the prior year period. Our 2009 cash flow is influenced by an approximate $50 million year-to-date investment to build potash inventory since the beginning of 2009. Salt inventories are also stronger than last year when our highway deicing salt inventory had been significantly depleted by unusually high demand during the preceding winter season. This year-over-year inventory recovery combined with our increased production capacity at the Goderich mine gives us the ability to serve more highway deicing customers this coming season.

Last year in the first half of 2008 we utilized more than $90 million of our cash generated from operations to pay down our highest-cost 12% debt. Thus far in 2009, we've elected to instead invest in low-cost potash inventory and in salt inventory to position both businesses well in the short and medium term horizons. We're confident all of our stakeholders will benefit from these strategies.

Capital expenditures have been $29 million thus far in 2009 and we continue to expect about $100 million of capital expenditures for the full year. Our expansion activities at the Goderich mine and at our solar evaporation facility at the Great Salt Lake have kicked off and progress is expected to accelerate in the last half of 2009 with on-schedule completion of the current phases about a year from now. These two projects continue to be strategically important to us.

And finally, our cash balance at June 30, 2009 was $66.3 million compared to $40.7 million at June 30, 2008 and available liquidity was also higher than last year at $181 million. So now we'll open up the call for questions. Rachel.

(Operator Instructions). Jason Miner, Deutsche Bank.

Thanks, good morning. Firstly on SOP, Angelo; if I look back to 2005-2006, MOP averaged perhaps $160 a ton and SOP segment margins for you guys were in the high 20% range. But you continue to make a number of changes in the segment. Maybe if you could just -- if I imagine a world, however fanciful, where MOP might slide back toward the sort of 2005-2006 levels, maybe you could talk about what might have changed since that time frame that might make margins a little different or what should we expect in margins if we were to be there again?

Yes, I mean, that's the $1 million question is where is MOP going to settle and what is going to be the SOP price based on wherever MOP settles. So I think over the last few years a couple things have happened, one driven primarily by the global MOP producers, which has been a step change in MOP pricing. And I think they've done a very good job and, as somebody who buys MOP, I watch them, obviously, in creating value for their product.

And all the factors that you hear on an MOP call of growing population and less arable land and biofuels and the fact that you only find potash in a few places around the world and the fact that it costs a couple billion dollars to build a greenfield mine and it takes five-plus years to have it running. I think all of those coupled with just a few sales channels that exist within MOP, I think you make for some very strong market structure in MOP and I think they've successfully managed that structure into a new higher pricing level.

Obviously it got pushed extremely high this last year and, as we've recently seen with some of the recent tenders in Asia and India, unsustainably high at those exceptionally high levels. Now where they appear to have settled is still a step change from where they were in the 2005 period that you referenced, some $300 higher than that. So their ability to sustain those levels I think is quite strong, but only time will tell and since we don't sell MOP we really don't have a horse in that race.

However, as I said in my comments, the SOP price is very much dependent on the MOP floor. And the reason why that is is because, again, both MOP and SOP provide potassium to the grower so the grower has a decision -- will they pay the higher price for the benefits of SOP? The other important part is from a producer's point of view of SOP as most SOP is produced from MOP.

So the other factor that's occurred over the last couple years is, and I can only speak for Compass Minerals and our Great Salt Lake Minerals business that sells SOP, is we've been able to increase the value spread of SOP over MOP through our marketing efforts. Because we believe if a customer, if a grower can use MOP they should because the grower should always use the lowest cost product that works in their application. But in many applications on many crops the MOP is not an effective fertilizer because of the damage it causes to the root system.

So we've been able to increase the spread and we believe we can preserve that increase. But again, we're talking about the future, but we're encouraged to see some stabilization and transparency on MOP pricing and we're also encouraged that we don't appear to have lost any share to MOP during this very volatile period. And we're also encouraged by the expansion of our spread that we're going to work very hard to maintain, but we're going to watch it very carefully. And if we think we've gone too far we'll obviously adjust to keep our share.

That's an excellent additional perspective, I appreciate that. If I could just come at it one other way. In addition to -- so many of those things are outside of your control, but in addition to perhaps the sustainable higher spread from the appreciation of the value of the product, are there improvements in the evaporated efficiency or the cost base that are within your control that we should be aware of as we think about those volatile MOP markets and what might happen?

Yes, as you may -- it's a good question because, as you may recall, close to up to 40% of our SOP production we make through a purchased MOP route, only about 60% of our production currently is purely based on our low-cost solar evaporation ponds. However, we're in the midst of a $40 million expansion project that will increase our solar evaporation production by 100,000 tons and will shift that mix and over time our mix will go greater and greater towards the lower cost solar evaporation route as we gradually exit the higher cost KCl route.

So yes, we have kind of a longer-term strategy that we're now implementing in its first phase to increase the amount of production and the percent of our production from our advantage route, which is the solar evaporation route, which we believe is the low-cost route in the world.

Excellent, thanks very much. I'll get back in queue.

Jeff Zekauskas, JPMorgan.

Good morning, I have a few questions. So I think Potash Corp. dropped its price to $472 a ton FOB the mines and I think you can buy it in the Midwest between $515 and $535 a short ton. Have you changed your prices on a price list yet or have you not done that for SOP?

No, we've not done that. I mean obviously a lot of what you mention is live information, it's all happened within the last few days. We sell SOP to customers we've sold over the years. They make significant purchases at various stages. I suspect each future transaction will have a discussion associated with it and it will be around what is the corresponding MOP price in their relative market and whether it's a domestic market or an international market will make a difference or could make a difference. And then what we think the extra value is for SOP.

And unlike MOP, the premium we think we can get is dependent on what crop that customer is primarily focused on. And a turf application is different than a fruit or a vegetable or tobacco or nut. And so we have a very clear expectation of what we think the spread should be depending on the application. So to answer your question, we haven't changed our price list, but we are actively discussing with customers what future prices should be.

So when do you expect to change your prices? I mean don't you have posted prices for SOP regardless of the customer application?

We have a single posted price which was very helpful to us as we were increasing prices rapidly over the previous period. I suspect going forward there will be discounting, some discounting off our $1,000 a ton price list. And if and when that price list and that list price becomes unrealistic I think we'll make a decision about modifying it.

But again, we're not a commodity product, so we don't adjust as quickly and as often as what a commodity might be. And I'm not convinced that for a new customer who's buying a small quantity for the first time for us that the first discussion with us shouldn't be at list price. Although recognizing our larger volume longer-term customers will request and probably deserve discounts.

Okay. Just a couple of other small questions. In your consumer and industrial business your pricing was up about 16% though your volume was down 12%. And in your description what you said was that you had relinquished some lower value sales. There are two puzzles for me.

I would think anything that you sold in this business would be pretty high value given the difference in price between the consumer and industrial per ton price and the deicing price, so why would you want to get rid of any business at all? And is the pricing increase a function of the lost volume or if you looked at comparable tonnages what would have been the price change by the same application? In other words, is this mix or is this price?

I think -- it's a really good question. I think your first comment about all the business being good is probably the place to start. Within our consumer and industrial business we actually sell three types of salt and many different minerals including magnesium chloride and potassium chloride and calcium chloride. And within salt we sell evaporated salt, we sell solar salt and we sell rock salt. Each one of those salts has a different cost basis, with evaporated being the highest and rock salt being the lowest. So we have vastly different margins based on the application.

So we, during the course of 2008 and into 2009, instituted two very significant price increases across the board in our consumer and industrial segment. And we pushed very, very hard on achieving full price realization on those lower-margin applications and customers and we lost some of them. And we're okay with losing those because we protected our higher-margin application and we achieved real price increases on those higher-margin applications. We achieved real price increases across the board.

So when we look at the shift in our business, much higher price with some volume loss, it actually resulted in more margin dollars and a higher-margin percent. So we feel very comfortable that we made the right decision in terms of getting the most value from our assets. Now we're of course going to watch that; there's a point where that cost volume equation changes and we have to make sure we don't cross that.

But sometimes you have to be willing to lose a ton of sales to make sure you've got the maximum price. And my experience has been until you lose that ton you're not at the edge. I think we found the edge, we're at the sweet spot right now of price volume, we intend to stay there. So we see going forward a much better mix of business and a healthier C&I business.

So I think I understand what you said, but again, of the 16% how much of that is price and how much of that is mix in the consumer and industrial change?

Right, Jeff, well the majority of it is price, real price to customers, but some of it is mix, again, because of dropping the lower margin and therefore lower-priced customers that weren't willing to go up with us on the price. And I think our sales force did a great job in consumer and industrial of maximizing the value in that part of our salt business.

And although we don't report absolute margins for the sub portions of our salt segment, I think we've alluded that the absolute dollar margins of C&I improved nicely, although we don't disclose what they were.

All right. And then lastly in your highway deicing salt, what percentage of the volume was done at prior season prices and what percentage at new prices?

Well, I think second quarter is -- Rod, it's all at the old price.

It's all at the old price.

Yes, I mean, obviously we have chemical customers that we've talked about the sales being down there, but they're typically on an annualized basis somewhere around 2 million to 2.5 million tons. So if you subtract out that annualized 400,000, 500,000, 600,000 tons the rest of the volume --

The deicing volume.

-- the deicing volume would have been done at contracts that existed for the past winter season.

Okay, thank you very much. Thank you for your patience with this.

Mike Judd, Greenwich Consultants.

Good morning, congratulations on a good quarter. Just wanted to discuss maybe a little bit more detail of the commentary that you gave around potentially maybe -- I thought you said building some inventories and I was just wanting to make sure I understood in the potash area what your outlook was in that regard.

So for instance we have the absolute inventory number on the balance sheet was $202 million and it generally seems to -- over the last few years it's been around $106 million to $109 million in inventories. And it's up sequentially from the March quarter by roughly $65 million or so.

I guess the question here is as we think about your cash levels on the balance sheet, what are you thinking about in terms of we're not going to be paying down some debt here, but are the cash levels going to remain steady here at the same time that the inventory levels are potentially going up? That is my first question. Thanks.

Sure, Mike. I think if you look at the history of the company, the third quarter is typically the quarter where we build the most inventory and that is typically in both of our segments, as the third quarter for potash is typically the lowest-volume quarter sales wise. And then we continue to completely ready ourselves for the upcoming winter in the salt segment as well.

So if you look at past years second-quarter to third-quarter cash balances, they have typically declined. And I think as I pointed out in my remarks, the cash balance this year is about $25 million more than last year. And that same amount is true for our liquidity position where we are almost, I guess, $180 million of liquidity, which is also in excess of where we were last year.

So yes, I think we would expect that our inventories would rise, seasonally rise as they have typically done in the third quarter, and that would result in less cash on the balance sheet but albeit no significant change from where we would have been from the end of the second quarter to the end of the third quarter in prior years. With the exception of SOP inventory where even at -- even third-quarter volumes in the past, even though they have been lower than the other four quarters, we would probably be in a position to be producing a little more inventory than what our sales are in the third quarter this coming year in 2009.

Okay, so again going back and just looking at the volumes in potash or SOP over the last few years, I see the pattern that you have alluded to of lower volumes. But can you just add some commentary? You won't expect it to be down, obviously, in the third quarter, but is the level of buying really dried up?

We are hearing commentary from farmers and the like that they are just really not adding any -- that they are not buying potash right now. So the question is will this be an unusually sharp decline in volume this September quarter versus perhaps other years?

Yes, this is Angelo again. I think what we have said in prior quarters, and I think we have the same belief, is the second-half volume of SOP that we will sell will be at less than normal, but it will be better than the first-half volume. And we don't expect normal to return until 2010.

I think that is fairly similar to what the MOP guys are saying. So I think we see it the same way, but of course the grower is going to decide, and the distributor or the blender that supplies the grower.

We also know science is on our side because we know there is significant depletion of potassium in the soils. I think it is pretty well established. And we also believe just through surveying our customers that the amount of inventory in the supply chain between the grower and the producer, us, is near zero or very, very low.

So you can't fool Mother Nature. So unless there is going to be less plantings, and again our crops are perennial crops, so you can't turn them on and turn them off. So unless the grower is willing to suffer severe impacts on yield and quality, there is going to be a return to more normal levels. And we think we're basically building an inventory bridge here to that point.

Just remember, less than a year ago we were on the other side of that equation where we didn't have enough capacity and we were scrambling to get our expansion plan developed and commenced. So we think we are acting responsibly for the long-term interests of both the customers and the investors.

We know the cost of producing this incremental inventory right now is very attractive, while the cost to store it is quite low. So we think it is the right balance. We probably have another half a year to get through until we start seeing that return to normal, and we think we will manage it responsibly. Should we be wrong in 2010, we will obviously revisit it.

Well, why wouldn't you just hold price here? I mean, you know, they've got to come back eventually. What do you care if one quarter the volume is low? If they've got to come back in the fourth quarter or first quarter of next year, why wouldn't you just hold price here versus having to raise price at some later point?

Well, again, there are other SOP competitors that have established their certain market share that we have each established, and we are not willing to cede market share. So we are going to hold our share.

There's also a decision that the grower makes between KCl and MOP and there is some point where if the spread is too large on certain crops where we'll lose share to commodity MOP. So we have to balance that also. So I think these are negotiations that are going to happen now in the third quarter as we get ready for the next large buying period which typically is in the fourth quarter.

And, Mike, if I could just add to that. I think we've mentioned in the past that the 2009 sourcing price that we have is quite favorable. And depending on where our assessment of demand is for 2010 will represent a separate decision on whether, when the contract price resets for 2010, whether that's something that we fully source or partially source or what our decision is there. So I think while we have the advantage and the favorability in 2009 we think that's the right decision for us to be making.

Thanks.

Mark Gulley, Soleil Securities.

Good morning, everybody. I've got a question on salt before I turn to SOP, if I may. Angelo, can you provide a little bit of help to us in assessing the increase in awarded volumes year-over-year? I realize weather will control what you sell, but in terms of your awarded volumes what is that increase?

Yes, I mean we don't get specific on the numbers obviously, we see very little of -- we don't see at all from our competition, they see a lot of what we say. So we kind of hedge it a little bit. But we have available to us the additional 750,000 tons from the first phase of the Goderich expansion.

So our goals for this coming season were to replenish our inventory position that had been severely depleted from the prior winter and to responsibly place some of that additional volume that was available to us from just market growth and from the expansion of Goderich into the marketplace. And I think we've been successful in both.

So I think what you'll see from us this upcoming season will be a more robust inventory position, which will allow us to capitalize should the winter be severe and to better serve our customers. You'll see a higher level of commitment even in a normal winter than what we've had in the previous season. And you'll see that 8% better pricing that is 2X the normal.

So we feel really good about those KPIs, if you may, that are aligning. Of course, the winter can make it an exceptional year or can make it a pretty lousy year. And we don't control that, but the factors we control -- kind of inventory at our depots, commitment levels to customers and pricing -- we feel really good about those three.

And, Mark, I'll just add to that. I think in the past we've mentioned somewhere between 500,000 and 1 million tons of awarded volumes last year got awarded by governmental entities where they had to source that product from imported sources at extremely high prices that were only profitable for those importers at those extremely high prices.

So this winter season -- for the awards for this upcoming winter we would expect for there to be very little of that sort of illogical importing going on at prices that are more commensurate with what the -- market clearing prices for highway deicing salt.

So it actually -- in a way it made it easier for us to place that additional capacity because what we were able to do was displace importers who were very opportunistic last season who just couldn't compete this season with North American production that we had. So it actually worked out well for us.

That's very helpful. Now let's turn to SOP pricing because that's clearly on people's minds. When K+S lowered its MOP price, which has now been lowered even more, do you have any idea what they have done with their SOP price? I think you're going to be a bit of a price taker since they're much larger than you are. So do you have any idea of what kind of MOP/SOP price spread they are looking at?

Well, unlike what they did on MOP, we have not seen any public announcements or press releases or anything like that on their SOP price. So I don't know their official position. All I do know is that they have been and all other SOP producers have been very competitive account by account historically and they remain that way.

So, we will monitor their activity as well as the activity of the other SOP producers. And in North America, which is our core market where two-thirds of our sales occur, we will be leaders. In other international markets where we're a smaller player -- I mean, you've got to remember the SOP market is about 7 million tons globally. We only produce about 400,000 tons and two-thirds of that go into the domestic market.

So we have a very small footprint outside the US and I suspect some of these other guys that you mention are much bigger players internationally than we are. So it's more likely we'll see their actions there than in the US.

And finally, although I know there are specialty attributes to SOP, at the end of the day it's a commodity. So let me ask the question this way -- if you want to get to normal volumes of 400,000 tons next year what is going to be approximately the decline in the SOP price to provide a market clearing price to get to that volume? You can't control volume and price both, so if you want normal volumes what price are you going to have to put out there in order to secure those volumes?

I don't know if you can't control volume and price both. I think you have to look at the supply/demand dynamics of the industry and clearly if there are large amounts of excess capacity it's kind of hard for any one producer to manage both of those. In a normal situation I think the supply/demand balance of SOP is pretty tight. In a normal situation we're the only North American producer of any substance of SOP. In a normal situation our competitors in our North American market have significant barriers to overcome, both exchange rate and freight and logistics.

So I think we -- I know we actively manage both and try to find a sweet spot. For us the sweet spot is selling around 400,000 tons a year and getting that at the highest price we can get. We're obviously starting at a real good point where our price now is in the $900 plus range, but a year ago our price was $750 a ton in the third quarter.

So if you look at our price over the last year it's ranged between $750 a ton and $1,000 a ton and those are exceptional prices for us. And we'll be very happy if the market clearing price as you called it or the price we're able to negotiate with our customers one by one ends up within that zone. And if you could put 400,000 tons behind that number in a normal year I think you've got a hell of a business.

Okay, we'll see how it works out.

Edward Yang, Oppenheimer.

Good morning. Why did SOP prices decline sequentially this quarter?

Well, I think that's kind of the point I was trying to make. It's not -- SOP is not like MOP in India where one guy sets a price, then there's a negotiator with the second, he matches, the third guy matches, the fourth guy matches and they do a series of tenders and at the end of the day they all have the same price.

For us each customer is unique, each application is unique and there are differences. There are differences based on product applications so the price for one crop might be slightly different than the price for another crop. The price in the US might be slightly different than the price in Japan. And of course timing is different.

So what you saw in the second quarter was some transactions occurred within our portfolio of sales that reflected some of the emerging weakness in the broad potash market pricing. And I suspect there will continue to be transactions that will reflect that emerging weakness. I don't expect us to maintain a $900 plus per ton SOP price if MOP settles at $460 a ton clearing price in India or China.

But where it will land is the important question and how much spread can we achieve. And our spread has grown nicely over the last couple of years and we intend to work really hard to keep the maximum spread. But it's going to be interesting and tough negotiations, customer by customer and of course the competitors will be in there also and they'll be influenced by the same supply/demand balances that I reflected, but also by freight rates that vary wildly based on fuel costs and also by exchange rates that have also varied wildly.

So you see us matching up perhaps on an international market with someone who's selling in euros. And if the dollar goes one way or the other you may see an adjustment in our dollar base price just to match up to a strengthening or a weakening euro. So it's a little more complicated than MOP, and I'm not disparaging the MOP guys, but when one guy falls into line in India they all fall in line. That doesn't happen in SOP.

Okay, understood, Angelo. And I understand you haven't changed the list price of $1,000. But -- and you're taking it on a case-by-case basis. But still you must be selling some SOP volume. So what's sort of the average spot price that you're arriving at so far in the third quarter?

Again, we don't do that on pricing in terms of guidance or anything like that. Because it's just so uncertain I don't want to have to tell you I was wrong. I'd rather just tell you what I think is going to happen from a general trend. I think it's fair to say, and I think it's reflected in our second-quarter actual prices, that our SOP price is currently discounting off our list.

And we're going to drag as much as we can and push that out as long as we can and keep it as high as we can. But I expect it to level at something very attractive. And again, we started this journey a year ago and we're at $750 a ton. So I'd be thrilled if we can stay in the range of our list and what our price was a year ago third quarter.

Okay. And you said that second-half volumes will be better than the first half on SOP. That's a fairly low bar. So far in the third quarter are volumes looking better than the second quarter? And have you seen any bump up in SOP volume since I guess prices have declined or are buyers buying more because the product is cheaper or are they even more frozen because they're looking for lower prices?

Yes, I guess to answer directly your question, in July we haven't seen the volume pickup yet. But before the actual shipments occur there's a lot of activity that occurs in terms of negotiation with customers and we've seen a pickup in those discussions. We've seen a pickup of our customers entering the pool again or entering the water again -- they're still in the shallow end of the pool, but we're having a lot more discussions about price and volume than we did in the first half of the year. And I think they're waiting to see a little more clarity on the MOP pricing because that's all happening real-time now over the last couple weeks.

So I think what it's going to take is for them to be more fully convinced that the MOP floor has been set and once they're convinced the MOP floor is set, at least for the short to medium term, then I believe their risk in buying SOP goes down and therefore I think science takes over and Mother Nature takes over and the replenishing of the supply chain begins to occur and the application rates occur. But I think some of the customers are still concerned that the MOP price may not have found its floor and until they're convinced it has I think they're still going to stay cautious.

And maybe just final a question for Rod just on the net debt again. I understand the seasonal aspect to it, but -- and I think in the prior year your net debt actually declined about $6 million sequentially in the second quarter, this year it was up about $58 million. Just to clarify again, was that just all on inventory and was that more on SOP inventory or salt inventory?

Well, it was mostly on inventory and it was split between salt and SOP. I think I mentioned in my remarks that on the year so far we've invested at about $50 million in potash inventories and that split between quarters is about equal because we have produced about the same amount per quarter and we've sold about the same amount per quarter. So about a $25 million impact each quarter for potash inventories, the remainder would be salt.

That's helpful. Thank you very much.

Elizabeth Collins, Morningstar.

Thanks for hosting this. Could you comment a bit more about the competitive dynamics in highway deicing salt this season? You mentioned displacing importers, but given that you're getting price increase and you're looking to serve more customers is there anything else going on there?

Good question. Again, we've come out of two seasons that have been really stressful on the North American supplier base with a really, really strong winter in the '07-'08 just absolutely putting the industry on its heels. It gave an opportunity for imports to enter last season, they did opportunistically. Frankly, I'm happy they did because the worst thing for us as an industry is not to serve a customer on their critical public safety needs.

But as you may have read in the press over the last season, there were some astronomical prices, well over $100 a ton, which were unprecedented. Those thankfully have gone away, but they're being replaced by North American supply, mostly ours because we believe we're the only North American producer that has any real material increase in production for this upcoming season, at least in our served market.

So I think we've been able to enjoy a price improvement at the expense in large part and a volume and improvement of those importers who enjoyed it for a year and now are going to sell that salt into some other global market that we don't participate in.

Thanks.

There are no further questions at this time. I would now like to turn the call back over to management for closing remarks.

Yes, I don't have anything formal to say, but I do appreciate everyone taking the time to be on our call. I think it's an exciting time for Compass Minerals. I think it shows the best that we have to offer. I think our salt segment is more of the same but just better. And our SOP business, in spite of really unprecedented potash volatility, is hanging in there nicely, has a terrific long-term outlook, it's got some speedbumps that we've been going through really for the last three quarters.

But you know, if the global potash MOP stabilizes where it appears to be stabilizing we're going to be real happy with our SOP business going forward. So appreciate everyone's attention and look forward to talking to you after our third-quarter results.

This concludes today's conference call. You may now disconnect.