Compass Minerals International Inc (CMP) 2009 Q3 法說會逐字稿

Good morning, ladies and gentlemen. My name is Tina 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. 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). I would now like to turn the call over to Ms. Peggy Landon, Director of Investor Relations and Corporate Communications. Please go ahead, ma'am.

Thank you, Tina and thank you to everyone for joining us this morning. I am joined by Angelo Brisimitzakis, our President and CEO and Rod Underdown, our CFO.

Before I turn the call over to them, 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, October 28, 2009, and involve risks and uncertainties that can 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 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.

Thanks, Peggy. Good morning, everyone. Thank you for joining us today. Throughout 2009, we have been talking about the balance that Compass Minerals offers investors. That balance was clearly demonstrated by our third-quarter results. Our steady, reliable salt segment performed exceptionally well this quarter and helped to blunt the impact on our results of the worldwide stagnation of potash fertilizer demand.

Our salt segment posted a $20 million increase in operating earnings year-over-year, a third-quarter record. Our salt operating margin improved from 14% of sales in the third quarter of 2008 to 28% this quarter. This was despite lower gross sales year-over-year, which was largely the result of a difficult volume comp.

There was a shortage of deicing salt last year, so some transportation departments, retailers and maintenance professionals started to build inventory in the third quarter of 2008 to secure their supply for the beginning of the winter. Historically, in the third quarter, we have sold about 1.2 million tons of highway deicing salt. So our volume of 1.5 million tons this quarter was still well above the long-term third-quarter average, partially bolstered by our increased bid award volumes.

Other factors that contributed to lower salt sales volumes year-over-year were the ongoing decline in lower-value rock salt sales to chemical customers -- those volumes are down about 450,000 tons year-to-date -- and our ongoing focus on maximizing the value of our consumer and industrial production, which has led us to relinquish sales to some of our lowest value customers. This value-building effort has helped us generate an 8% improvement in average selling prices for consumer and industrial products and made a significant contribution to our overall salt segment operating margin growth.

Highway deicing average prices were up 10% because 2009/2010 winter season pricing began taking effect during this quarter and, to a lesser extent, because lower-value sales to the chlor-alkali industry represented a reduced percentage of our sales volume.

Looking ahead, we expect more of the same from our consumer and industrial business. We will continue to have a tough comp for our consumer and professional deicing products through the end of the fourth quarter since winter weather in the fourth quarter of 2008 was severe. However, we aren't expecting any significant changes in nonseasonal product sales because of the nondiscretionary, low-cost nature of most of those applications.

Our highway deicing business also has a tough comp for the fourth quarter because of severe winter weather in the fourth quarter of last year. However, we won approximately 750,000 tons of additional bid awards for the upcoming season in North America. That is roughly the equivalent of the additional tons we sold in the 2008/2009 winter season because of above-normal weather, though we would expect less of the volume to occur in the fourth quarter than last year. In addition, the full benefit of our 2009/2010 average bid award prices increasing 8% over prior-season prices should fall to the bottom line.

We were able to win the additional volume because of the ongoing expansion of our mine in Goderich, Ontario, allowed us to meet demand that the North American salt producers didn't have the capacity to meet last season. These are sales volumes that went to importers who opportunistically served some communities last winter at very high prices. Since we can now more fully serve this market demand at more traditional prices, we believe that our expansion has already been beneficial for our customers as it is for us.

We are frequently asked why highway deicing sales haven't declined due to government budget cuts, so I want to remind you that governments consider deicing salt critical to the safety of their citizens, and deicing salt typically represents less than 1% of a government's operating budget. After all, it only costs roughly $50 for a whole ton of rock salt that will deice approximately eight lane miles or more of roadway depending on the temperature. In the end, it is the weather that has the greatest impact on our highway deicing sales volume, and I can't give you any guidance on that.

The excellent performance of our salt segment this quarter helped to cushion the company's results from the impact of the ongoing worldwide decline of potash fertilizer sales. Our specialty fertilizer operating margins declined by about $30 million from last year's record third quarter due to a 65% decline in sales volumes and a modest 6% decline in average selling prices. However, the segment remains solidly profitable with an almost 50% operating margin.

The ongoing decline in our specialty fertilizer segment sales is consistent with the results reported by other global potash companies and with the updated outlook we provided in mid-September. It is being driven by growers who are skipping potash applications and depending on the residual potash in their soil. However, the residual potash will eventually be depleted and growers will have to replenish it in order to maintain healthy crop yields.

Our SOP sales aren't heavily influenced by any single crop the way that standard potash, or MOP, is affected by the major grains. So the recovery of our SOP sales shouldn't be directly tied to grain prices, but we would expect to see demand return when there is an overall recovery of the fertilizer industry. We originally expected to see that recovery begin this fall, but obviously it hasn't happened. In fact, we now expect our fourth-quarter sales volumes to be only modestly better than the volumes in the first three quarters of this year.

So far in the fourth quarter, we are seeing average selling prices at only slightly below our third-quarter average. We don't currently know if selling prices will change over the next couple of months because, to a large extent, the average selling price of our SOP is linked to the price at which MOP sells, especially to North American agricultural customers. We don't expect a return to more-normal SOP buying patterns until sometime in 2010. However, we are very confident that normal buying patterns will resume eventually simply because the essential food supply cannot be sustained over the long term without sufficient nutrients in the soil.

Currently, we believe that there is very little SOP inventory within the supply chain. So when growers fully return to the fertilizer market, we expect our customers to demand quick replenishment. We have built a strong, low-cost inventory of finished SOP so that we will be prepared to respond when buyers reenter the market. In addition, more lower-cost, solar pond-based tons will be available to us next year from our yield improvement project at the Great Salt Lake in Utah.

Because of the lower overall demand for SOP, our strong, low-cost inventory position and the additional solar pond-based capacity coming online next year, we expect to purchase very little MOP under our long-term supply agreement in 2010. Lowering our MOP purchases will also help to moderate our product costs, thus helping us to maintain healthy SOP margins in the face of uncertain pricing and demand environment.

So, to summarize the SOP outlook for the fourth quarter and beyond, we expect continued, slower, lower -- slower-than-normal demand in the fourth quarter and perhaps into early 2010, though that remains unclear at this time. However, we expect to return to more normal volumes during 2010 at average selling prices that will continue to allow for strong segment profitability.

Our salt segment results over the next two quarters will, as usual, be somewhat dependent on the weather in our served markets. If the weather is normal in the fourth quarter, we should have slightly lower highway deicing volumes than in the prior year but at 8% better pricing, and lower consumer and professional deicing volumes in comparison to the volumes generated by the more-severe-than-normal weather in the fourth quarter of 2008. We should also continue to see the positive effects of our targeted efforts to maximize the value of our consumer and industrial products. If our markets have normal weather in the first quarter of 2010, our highway, consumer and professional deicing sales volumes should be higher year-over-year because the weather was somewhat mild in the first quarter of 2009.

You can see our revised presentation on our website, www.compassminerals.com for more information on the company and our outlook. Now I will turn the call over to Rod to discuss our financial results in some more detail.

Thanks, Angelo. As Angelo mentioned, our very solid quarter was the result of strong margin gains in our salt segment and continued strong, though lower, margins in our SOP specialty potash segment.

I would like to draw your attention to our per-ton profitability improvements and discuss our thoughts as we look into the completion of 2009. First, our specialty potash segment. Our third-quarter operating earnings per ton were about $90 per ton lower than in the 2008 quarter, mainly the result of an almost $50 per ton decline in our year-over-year average selling price. We have also experienced higher production costs in 2009 as we saw a step-up in our MOP sourcing price under our supply contract this year.

While in the first and second quarters of 2009 we were working down inventory produced in 2008 at the lower MOP cost, we have seen the full impact of the higher per-unit MOP cost in the third quarter of 2009. Since contract prices only adjust once a year, we currently expect our per-unit production costs to be relatively stable for the remainder of 2009. As Angelo mentioned, we are planning to significantly cut back our MOP purchases next year, thereby helping to keep our per-unit cost of sales stable.

When you look at our salt segment, we have seen a trend of higher pricing continue into the third quarter of 2009 as both our highway deicing and our consumer and industrial products have shown meaningful price increases, which, on a combined basis, have averaged $6 to $8 per ton for almost every quarter for the past two years. We don't expect any meaningful change in this trend as we go through the upcoming winter season, though product mix, weather and foreign exchange can have an unforeseen impact on either side.

Beginning in the fourth quarter of last year, we started to see the positive effects of lower energy prices, principally diesel fuel costs, which resulted in lower costs to deliver our salt products to our customers. Our per-ton shipping and handling costs peaked in the third quarter of 2008 at an average cost of about $23 per ton and have consistently fallen since that time to an average of about $18 per ton in this year's September quarter, a $5 per ton swing.

As we look forward, energy prices have rebounded slightly from their 2009 summer lows, but remain similar to year-ago fourth-quarter levels. And our 2009 salt unit production costs have been steady to slightly favorable to the prior year as we have continued to find efficiency opportunities at our plants and mines.

For the third quarter, interest expense declined $3.5 million year-over-year as the company continues to benefit from our capital structure improvements, including the repayment of 12% notes in the fourth quarter of 2008 and the refinancing of the remaining 12% notes with 8% paper in June of this year, and lower market rates on our variable rate debt. We currently expect interest expense of around $26 million in 2009. Our tax expense declined $3.4 million in the quarter, reflecting lower taxable earnings this year. We continue to expect our tax rate to be approximately 31% for 2009 and are anticipating a similar rate for 2010.

Our operating cash flows at September 30 were $68.5 million compared to $176.4 million for the same period in 2008. As we mentioned before, we made the decision early in 2009 to invest in low-cost SOP inventory that we expect to use when the fertilizer industry recovers from its current slump. We remain extremely confident this will be a very profitable decision over the next couple of years.

Our salt inventory is also higher this year than at the same time last year, which is mainly a result of our 750,000 additional tons of North American highway deicing bid volume. You may remember that, each year, North American highway deicing producers build rock salt inventories through the spring, summer and fall and hold them for the upcoming season until winter begins. So our additional bid awards need to be supported by incremental inventories and safety stock until we are able to convert that inventory into cash during the winter season.

Depreciation and depletion and amortization should total approximately $44 million for 2009. Capital expenditures have totaled $53.6 million thus far in 2009, compared to $36.5 million in the 2008 period. We continue to expect our full-year capital spending to total approximately $100 million, and we are projecting a similar amount for 2010 as we will near the completion of the next phase of our Goderich mine expansion and the first phase of our SOP yield improvement project at the Great Salt Lake.

Total debt declined modestly to $491.7 million at September 30, resulting in a trailing EBITDA leverage ratio of just 1.5 times. We had no borrowings on our revolver at quarter-end and our available liquidity was $128 million, just above the amount at this time last year. All in all, we have been able to keep our leverage modest, while continuing our long-term investments and our advantaged facilities at Goderich and the Great Salt Lake and also paying for our short-term investment in low-cost potash inventories.

And so now I will open up the call for questions. Tina?

(OPERATOR INSTRUCTIONS). Douglas Chudy, KeyBanc Capital Markets.

Good morning, nice quarter.

Good morning. Thank you.

I guess my first question is on the salt business. You saw a nice increase in awarded bid volume of deicing salt. Can you give us an idea how the industry fared as a whole? Were bid volumes up year-over-year, relatively flat, kind of how that worked out?

Yes, one of the beauties of the salt industry is there is, at least on the government side which is the majority of our sales, there is 100% transparency if you want to take the time and go through public records. In our service areas where we focus primarily, we have seen essentially the same bid volumes this season as we saw last season. So we had some concern and caution going into this bidding season that bid volumes were going to be reduced, but when we checked kind of line item by line item, again the areas we serve in North America, we saw them virtually unchanged versus last season, which was very encouraging to us.

Okay. I mean any concerns that even with bid volumes for the industry relatively flat that customers could be more conservative with their usage of deicing salt this winter season due to any kind of budget constraints?

The governments had budgeted the dollars in their awards, so I think the way governments typically work is; now the Department of Transportation has a budget and they have signed a commitment to buy, typically a minimum of 80% of that commitment, and we have an obligation to supply up to 120% of that target. And snow event by snow event will determine how it is executed. Are there conservation programs going on? Everywhere there should be. I mean people shouldn't use more product than they need to and we certainly encourage responsible deicing activity. So I don't expect anything more than normal, but certainly in this environment, I wouldn't be surprised if customers continue those efficiency efforts.

All right, thanks. And just one quick one on the SOP business. We have heard from a few of the commodity potash guys that they have been trying to move some product forward in the distribution chain to I guess facilitate how quickly sales could be made once demand returns. Have you had any kind of consideration of doing something similar with SOP?

Yes, I mean we have forward-deployed our inventory. It is not all sitting in Utah at the Great Salt Lake, so we have moved it to primarily our key markets on the West Coast and Florida. So it is sitting there ready in warehouses for the eventual return of demand.

All right. Thank you very much.

Joel Jackson, BMO Capital Markets.

Hi, good morning. Thanks for taking my call. Strong quarter. I just want to talk to you a little bit about SOP. You had said that SOP pricing currently is not much down below what it was trading in the average of Q3, is that correct?

Yes.

How did you find SOP pricing falling across Q3? It seemed to me that maybe it fell a little bit quicker than I would've thought if we kind of take the Indian potash contract settlement as kind of a benchmark of a time in July.

Yes, that's a good question. I mean to bring it back, I think our prices went up more slowly than the potash, the MOP-based product, because we were tied into a lot of 12-month fixed-price agreements. But you have got to remember that SOP sells off of the MOP price foundation. Growers recognize the value of SOP over MOP based on yields and what the chloride and MOP does to the root systems of their crops. And they have shown historically a willingness to pay $150 to $200 a ton premium to buy SOP versus MOP. The MOP price went down very quickly with the settlement of the price of MOP into India. That whole adjustment occurred in less than a week from when the first MOP producer agreed to a price in India to the rest of the MOP producers matching that price.

So obviously that price from India translated to our markets. We don't sell in India, but we sell against MOP in North America. For example, as the North American MOP price adjusted to the $500s, $550 per ton, SOP had to adjust accordingly or else it would have sat at a premium well beyond the $150 to $200 per ton historic premium level. So we adjusted accordingly as the MOP price translated through the distribution system in North America and in our served markets.

We drag -- I mean we go as slow as we can go. Obviously the later that decline occurs the better, but it is very important that we maintain our relative competitiveness to MOP and to other specialty potash fertilizers, such as potassium nitrate and potassium magnesium sulfate. So it is a very delicate balance between our competitive position versus other SOP producers, our indirect competitive position versus MOP producers and our indirect competitive position versus other specialty potash producers. But we think we are about at the right spot now at $700 a ton, but we do acknowledge we see fourth-quarter sales at slightly below that level.

Helpful. Thank you. And just a little bit on SOP and salt inventories. So it seems like your inventories in Q3 are about $100 million above what they typically have been in a Q3, if that is correct. Are you able to sort of break down how that broke down between SOP and salt inventories?

Yes, Joel, it was roughly 50/50. As I mentioned, holding some more inventory on salt has really been necessary because of the incremental business that we need to be prepared to serve. And, you might remember with the North American, specifically U.S., business, most of the time the contracts require us to service at the contract price at volumes that are in excess of the contract to the extent winter is severe. So we have an incremental inventory requirement going into the winter season for salt. And then we have been talking about the potash inventory all year and wanting to make sure we maximize the value of our assets there in Ogden related to the potash business. And that includes fully purchasing under our supply agreement all throughout 2009.

Wouldn't it be fair to say that it is possible -- let's say that SOP demand comes back at a 400,000 ton per year level in 2010 and 2011 -- isn't it conceivable that you could maintain or get back to that sales level in 2010 and 2011 without buying any additional MOP in 2010 or 2011? Is that reasonable?

Yes, this is Angelo again. Yes, and again I bring you back to kind of our long-term SOP plan. The Phase 1 of our Ogden project was really a yield project to increase the amount of production that we get from the lower-cost solar evaporation route. We have two routes at Ogden. We have a low-cost solar evaporation route. And then we have a second route where we add purchased MOP to extend that harvest and that MOP then gets extended to SOP. That is our higher-cost route.

Our first phase of Ogden increased the solar evaporation route from 250,000 tons per year to 350,000 tons per year at the end of next year. So if you peg normal SOP demand in a year at 400,000 tons, which is a pretty good number to peg it at, by next year, 350,000 tons can be produced completely internally at Ogden without any MOP. And recognizing our inventory position on SOP, yes, we can easily go through 2010 without any purchases of MOP. And as we continue to expand our own solar evaporation path, yes, we see an opportunity to completely wean ourselves off of the higher-cost and unpredictable and uncontrollable, for us, MOP-based route, because we don't control our destiny there. The MOP market controls the destiny of the MOP price. We do control our cost and our destiny on our solar evaporation route on the Great Salt Lake in Utah.

Okay, great. Thanks a lot. I will pass the baton.

Amy Zhang, Goldman Sachs.

Thank you, good morning. Thanks for taking my question. My first question is related to your salt pricing. And obviously over the past several years you guys have done a very good job managing the pricing on the salt side, and the average bid price for 2009-2010 season jumped 8% despite a still-favorable cost environment. I am just trying to understand why you guys can achieve that kind of pricing contract, and then, is there are any structural change in this market to really help you guys and establish probably a new norm for this deicing salt pricing going forward?

Yes, that's a great question and it really is at the heart of a lot of the success we have seen in our salt segment, has been around price and price management. To take it to the highway segment, which is the biggest part of salt, and that is where these prices that you quoted have been realized, I would like to hope that we have reached a new plateau or a new level of price realization above the typical 3% to 4% a year, which had existed probably for the last 20 years.

I am not sure that is a sustainable pace, the higher pace, because you have got to remember we had one exceptionally strong winter back in the '07/'08 period. And also remember that the supply/demand balance has been very tight, particularly in our service region. So I can't tell you what the weather is going to be and that in part will set up the following season pricing mechanism and pricing competition.

And on the supply/demand balance, we have been fortunate to be the ones that have added the new capacity and we are going to be very responsible in how we introduce that capacity in the marketplace. So I see a very good supply/demand balance going forward. I see the same competitors that we have competed against historically. I see our customers continuing to see the essential nature of our products and making it a really nondiscretionary purchase. So I see nothing that would tell me why salt could not continue at the historic 3% to 4% pace. And there is a possibility of doing better than that as we have done over the last few years, if we get a little cooperation from Mother Nature.

Thank you. My second question is can you just comment a little bit about deicing salt inventories at the industry level? Obviously you guys have been building some for the upcoming winter season. If the winter weather pattern turns out not very favorable as probably the producers expect it, how would you guys manage this inventory?

This is Angelo again. That is kind of the beauty of the salt industry is that the customers hold very little of the inventory. So there really isn't pressure at the end of the season from the customer because they are basically depleted -- they take the salt from us as they need it, kind of a truck at a time. So if at the end of the season the producers, and I can't speak for others, but I will speak for ourselves, if we are sitting with inventory at some of the 75 depots we have, we will just adjust how much inventory we ship back to those depots during the spring, summer and fall.

And because a lot of our production is variable in its cost structure, we will just produce less in our mines during that period. And again, we have some flexible labor agreements and we can cycle our production hours up and down and we can have some pretty good control of our costs even at reduced production levels. So it is a wonderful industry because it kind of rebalances itself every season, and again, we have shown the ability to manage -- to control production and match it to demand.

Thank you. My last question is, obviously, you are going to bring new capacity coming online on the solar pond-based capacity on the SOP side and then to reduce your dependence on the MOP conversion. Can you just remind us what is the current mix for your capacity -- solar pond-based versus MOP-based? What would the mix look like next year, and then what is your ultimate target for the mix?

Yes, and I would refer you a little bit to some of our presentations, particularly the one we have on our website right now, that kind of walks through that. But basically when we started the yield improvement project we were sitting at 250,000 tons of solar-based capacity and 200,000 tons of capacity from MOP, making our SOP capacity in total 450,000 tons. So what the yield improvement will do, it will raise the solar route from 250,000 to 350,000. We will still maintain the option to produce 200,000 tons of SOP from MOP, thus making our total capacity at the end of Phase 1 550,000 tons.

But of the 550,000 total, 350,000 will be available to us from lower-cost pond-based capacity. But remember, our demand right now is much less than the 350,000. So in 2010, we have the ability to produce all of our demand from our own solar evaporation ponds. And even if demand were to return to normal, and we are predicting it to do that, to start returning to that rate back sometime during 2010, we have 350,000, or 85% of our normal demands covered internally from our lower-cost solar pond-based capacity. A little complicated, but I hope that makes sense.

Thank you so much.

Mark Gulley, Soleil Securities.

I am going to continue with some questions on SOP if I can. Now Rod, accounting-wise, because you are buying MOP let's say today and you harvest that product let's say two years hence, if my premise is correct accounting-wise, when do we see the earnings benefit of nil MOP purchases for '10 and perhaps nil MOP purchases for '11?

Right, Mark. When you look at it on purely an accounting basis, we kind of have a first in/first out accounting. So our 2010 costs that we report on our income statement will be more related to the 2009 production than it will be the 2010. So then it is just a matter of how quickly do we burn through the inventory from '09 and when do we start recognizing 2010.

Now, I indicated in my remarks that the production costs in 2010 would be relatively stable, maybe down a little bit from where they have been in 2009. That down would be the result of not purchasing any MOP and while that -- and using that in our production method. So while that MOP cost is higher, it does provide some fixed cost absorption. So the offset and the higher variable costs -- it is partially offset by a little bit of a reduction in our production rates at that facility. So hopefully that helps you out.

I think what you said, therefore, is the full benefit of this strategy we talked about we don't get until 2011. I think that is what I heard.

Well, it depends on what the demand is like in 2010 and how quickly we go through our inventory from our 2009 production and what we carry into 2010. But yes, it would be likely later in 2010.

Okay. Now secondly, Angelo, you indicated that volumes head back to 400,000 at some point, but to the extent that you're a low-cost producer in North America and to the extent you have the ability to serve this market and perhaps some export markets, to what extent would you want to buy anyway, buy MOP anyway, so that you could take full advantage of the low-cost position? In other words, I would think you would want to maximize gross profit dollars, not gross profit percentages. So can you help me understand your philosophy related to continuing to buy MOP to sell at a premium down the road?

Well, our goal here, and I think we have discussed this in the past, is to get to the day where we are not buying any MOP and have enough capacity at the Great Salt Lake through the ponds we operate to satisfy all our needs, not only today, but well into the future. We've been making SOP out of the Great Salt Lake for over 40 years now.

Our Phase 2 of our program or expansion program is based on leases and we have secured leases for over 140% expansion of our footprint on the Great Salt Lake, which would more than double our capacity. We're still waiting on those permits and that is going to take awhile because of the an environmental kind of impact study. So we want to wean off of the MOP, and I would like to get off of it as quickly as possible. And 2010 gives us a perfect jumping-off point to do that.

So as we secure those permits and secure our solar future, I see us getting off of MOP completely, and whether that is 2010 or 2011, I am not prepared yet to make that statement, but it is going to be as soon as we can do it. To take, to buy MOP, whose price is going up to us, right, because our contract, as we have said in the past, has kind of a lag effect. And as MOP prices have gone up in the marketplace, our MOP costs will go up as they did in '09, they would go up even more in 2010.

So it becomes less and less attractive, as our MOP raw material costs go up, to sell into a marketplace where SOP prices are declining, as you saw in the third quarter and as modestly is continuing in the fourth, and as our SOP volumes are less than half of normal. And to go out in a declining-volume market and to try to gain share around the world just because we can generate a few incremental margin dollars is probably not the best strategy to maximize the long-term profitability of the franchise. And we are playing this for the next 40 years, not for the fourth quarter or for the first quarter. So I don't know if that answered your question, but I kind of wanted to give you a whole answer.

I think that is very helpful. Finally, if I may, you remained optimistic about returning to normal volumes at a 400,000-ton pace. What kind of market-clearing price do you think is going to take it to get to that level? If you want to sell 400,000 per year, is $700 the right number for growers when you talk to customers? Do you need a lower number to get to these levels?

I mean the first part of your question about being optimistic that it will eventually return -- I am a chemist and I kind of look at facts, and agronomy is probably not as precise as chemistry, but if you take the nutrients out of the soil, the crops need those nutrients. So there will be a yield loss. There is data that says that potash levels in the soil are declining. There is data that says that SOP in the distribution chain and supply chain is down. I think farmers and growers are looking at the balance of their fertilizer costs versus their yield and quality loss. There are other factors such as weather and a lot going on on the seed-side that affects it, so it is a very complicated question.

But I am convinced that when the psychology is right, when the grower is confident, they will return. I can't predict when that is going to happen, so I won't. I think it is going to happen sometime during 2010. I think the spring application period will be important to look at. That would be the first window for us, significant window for us, into 2010 will be that spring application period.

And I don't think -- I don't think it is price-sensitive on SOP, I think there is a broader psychology going on here. And I think a lot of it has to do with the MOP price, and I think a lot of it has to do with the MOP price in China. And when an MOP price in China for 2010 is established and when there is certainty and transparency at that price, I think it then will become safer for growers and our customers, the distributors and blenders, to reenter the market, to restock the supply chain and to return to normal demand or more-normal demand.

Until that happens, and again we have no control over the global MOP price or the price in China -- we don't sell MOP and we don't sell in China -- so until that happens, we are kind of at the mercy of a bigger game that is going on and we are watching it anxiously from the sidelines.

That's very helpful. Thank you.

Edward Yang, Oppenheimer.

On salt, incredible performance. You doubled your third-quarter salt margins year-over-year. Your fourth-quarter margins are typically your highest. Holding all things equal, what kind of margins should we kind of anticipate for the fourth quarter for salt? Would a number in the high 30s%, 40% range, would that be outlandish or do you think reasonable?

Well, yes, I think when you look at our performance year-over-year in the third quarter, and I tried to break that down in my comments, a big part of that were the price improvements. But I also indicated that we also had a tailwind through the third quarter on shipping and handling costs where, if you look at last year, we were kind of at the peak of energy costs. Oil had peaked out at almost $150 a barrel in July last year, and that caused the cost of our deliveries to rise last year in the third quarter.

This year, we saw the exact opposite effect where there was like a summer lull and low in energy prices. And so our per-unit shipping and handling costs had declined to about $18 per ton and, again, this is on a combined salt basis, average. So that was a $5 swing. What we had seen last year by the fourth quarter is that prices for energy had come down fairly dramatically during that fourth quarter and they were about the levels that we are currently seeing in the fourth quarter of this year. So that tailwind on shipping and handling isn't nearly as great in '09 fourth quarter as it has been in the '09 third quarter when compared to last year.

Having said that, we have seen pretty good pricing increases over the last couple of years quarter-over-quarter and I would expect -- we are expecting that to continue really through the winter season for salt as we have really locked in our winter prices on highway deicing and we continue to have some nice momentum on the consumer and industrial side. So it is kind of a long answer to say that you are astute in noticing that our fourth-quarter and first-quarter margins are usually the highest on a year basis, and so we would expect some expansion into the fourth quarter. But when you look at where we were third quarter to third quarter, we also had the tailwind that we don't expect to be nearly as great in the fourth quarter on shipping and handling as we saw here in the third quarter.

Okay, and just thinking longer term about salt, are your competitors, like Cargill or Morton, are they able to increase production? I would think that because salt is such a profitable business right now and the margins are so high, why wouldn't all the producers start to try to increase capacity?

Yes, this is Angelo. Some of it has to do with your assets and some of it has to do with the geology of our mines. And I am sure where our competitors' assets and geology and investment priorities make sense, I would assume that they are taking advantage of those opportunities. However, I think we might have a better geology and a better asset at our Goderich mine than perhaps some of them have in their mines. We are kind of blessed with location. We are kind of blessed with very large seams of salt and we are fortunate to have the expandability and particularly all of that salt that comes out of the mine has got to go through a shaft or a straw and if you can't make the straw any bigger or the shaft any bigger, you can't get any salt out. So you might have 100 years of reserve underground, but if it is all coming out through that one straw and if that is your rate-limiting step, then you are stuck.

So I am not an expert on our competitors, all of our competitors' mines in detail, but what my team tells me with kind of a little bit of understanding of their assets and their geology and kind of our mousetrap, I think we have got a better mousetrap. I am sure they are doing kind of incremental de-bottlenecking. But if you look at our Goderich mine expansion phases 1 and 2, which we are taking the mine from 6.5 million tons prior to our expansion to 9 million tons at the end of our expansion, that is adding 2.5 million tons of capacity. That 2.5 million tons is larger -- that increment that we are adding is larger -- than most of the mines we compete against. So there is an issue of scale here also.

Okay, understood. And Angelo, on the MOP side on pricing, you are still getting a $200 to $250 premium to MOP. Is that spread -- do you expect that spread to remain stable going forward, to decline or to increase?

Well, historically, it had been about $150. When MOP prices took off and SOP prices took off and they all were reaching for the stratosphere, our spread went to probably unsustainable levels in the $400 to $500 a ton range at certain points of time. A lot of that had to do with the timing of the MOP price increases, the timing of the SOP price increases.

Now we are kind of facing that in the opposite direction. MOP is coming down quite quickly as the Indian price was settled. Will it reset again if China comes in at a different price? As you saw in the third quarter for us, SOP prices came down quite quickly versus their high of over $1,000. So again, we are in a timing lag period. All I know is at $150 approximately a ton, SOP can effectively compete with MOP. Would I like more than $150 a ton? Absolutely. Are we going to try to hold on to more? Absolutely. Are we willing -- are we going to lose share to prove the point? No. We are going to listen to our customers, market the enhanced value of SOP as best we can. But at the end of the day, we know that, at a certain premium, we are not going to sell SOP.

So we can't cross that premium and we won't. And it is going to be transaction by transaction. The problem is that the prices are changing quickly and in any one quarter the gap may be greater than $150 or even less than $150. We are just going to have to watch it very, very closely until we find the floor on MOP. And once that floor is found, I think SOP will resume its more historic level in the $150 to $200 per ton premium range.

That's very helpful. Thank you.

Jason Miner, Deutsche Bank.

Thank you, good morning. Just on salt quickly, the expansions at Goderich for the 2010/2011 season, if we are at 7.25, if I am right about that for this year, should I read this to say that an incremental million tons will be available for the '10/'11 season? Can you just sort of remind us of the timing as we get toward 9 million tons?

Yes, I mean I think we have got two numbers at play here. One is what will our annual capacity be at the end of the expansion? It will be 9 million tons. The problem is when you do as massive of an expansion as what we are doing where it affects our shaft, it affects our surface storage, it affects our material handling system underground, it affects our mobile equipment underground --there are a lot of tie-ins that occur. So during 2010 we will be tying in all that new capacity, and these tie-ins cause us to take down capacity for short periods of time, or even extended periods of time, to safely be able to work on the shaft improvements and to safely be able to expand the overall capacity.

So we actually take a step back to take two steps forward. So at the end of next year, we will get to that 9-million-ton annual rate going forward, but next year is going to be a year of kind of nip-and-tuck, bringing in the new assets. And also this winter has to play out. If this winter is a weak winter, we are going to be sitting with a full inventory of salt at the end of the season and that will allow us to be -- to have a more robust supply for the upcoming bid season. If we have a harsh winter, we will be depleted going into the following season and our bidding strategy will have to be adjusted accordingly. So it is really hard to predict. I think what you can count on is some incremental available tons from us assuming a normal winter season this year.

That's helpful. Thank you. Just to take another tack at the margin question, not sure I fully parsed your earlier comments, Rod, but at 28% this quarter, if prices held in there and fuel didn't change a lot, would you expect -- would 2010 season margins be similar at that 28% level?

Yes, I am sorry it was a little confusing, Jason, I was trying to give a full answer. But I think what I was -- maybe to summarize what I was trying to say is that price will absolutely fall through to the bottom line for the upcoming winter season. I think the question that was asked previously is, when we saw a 14% increase in margins from Q3 last year to Q3 this year, will that same level of percentage increase carry into the fourth quarter or the winter season?

And I was just trying to indicate that we had a bigger tailwind in the third quarter than we will see in the winter season because of fuel. So we would expect there to be margin expansion versus last year in the salt segment on a percent-margin basis, and it is correct that the first and fourth quarters are typically our highest margin quarters in the salt segment. So hopefully that is helpful.

Okay, that's helpful. Just shifting gears, as you liquidate this MOP inventory next year, or the SOP based on MOP, you have the high-class problem of freeing up a fair amount of cash. How much do you expect that might be, and what do you plan to do with all the cash?

Right. We noted in our comments as well that we expect our capital spending, our capital investment, to maintain at somewhere around the $100 million level that we saw in 2009 as we complete the next phases of each of our expansions at the Goderich mine and at the Great Salt Lake. So I think we certainly are eyeing that extra cash that we would expect to be able to liquidate over the next couple of years as it relates to that inventory, but we will probably cross that bridge when we come to it.

Fair enough. And just a last one on sort of a technical understanding of how SOP works. I recall as we saw the inflation in all these fertilizer commodities, list prices sort of stepped up. At the moment, the list prices for all the SOP grades you guys are selling still look like they are around $1,000. So are there rebates that let us get down to the $700 figure that we just effectively realized, or can you help me understand how the pricing structure works there?

Yes, I mean list prices -- they're helpful -- this is Angelo again. List prices are a helpful tool to kind of provide clarity to our customer base of where we would like to sell. And if there was a new customer who came in tomorrow and asked for a truckload of SOP, we would probably start off and say our list price. However, if they have done any kind of homework, they will quickly realize that product is selling at well below our list price.

So basically what is occurring is there is transactional pricing going on. In a market that is changing as quickly, we are having to respond to changes in MOP prices and competitive SOP threats that we have always responded to. Again, we compete with folks who make SOP in Europe, we compete with folks that make SOP in South America. So transaction by transaction, customer by customer, we respond competitively. However, as a market reference point, the list price remains.

That's fair. Thanks for all the help.

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

Great. Thank you very much. I would like to conclude our discussion today by reiterating that Compass Minerals is a unique company because of the remarkable balance of our two exceptional segments. Our specialty fertilizer segment, like most fertilizer businesses, is being significantly affected by the ag economy. But we remain optimistic about the long-term outlook for this segment because growers will eventually have to apply specialty potash to their soil in order to sustain the quality and yields of their crops. Therefore, we think this segment is well-positioned to benefit from the eventual demand recovery.

In our salt segment, our foundation continues to provide solid, steady returns through this difficult economic environment because of the essential nature and low relative cost of our products. We expect strong results from our salt segment in the coming months because of our improved pricing and the additional highway deicing tons provided by phase 1 of our Goderich mine expansion, assuming our markets in the Great Lakes region and along the Mississippi and Ohio River valleys have a normal winter. So we will be hoping for lots of snow and we look forward to discussing our fourth-quarter results with you in February. Thanks again.

Ladies and gentlemen, this does conclude today's teleconference. You may all disconnect.