Compass Minerals International Inc (CMP) 2009 Q4 法說會逐字稿

Good morning. My name is Carmen and I will be your conference operator today. At this time, I would like to welcome everyone to the Compass Minerals fourth-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.) We request that participants limit themselves to one question and one follow-up question to allow others on the call an opportunity to participate.

At this time, I would like to turn the call over to Ms. Peggy Landon, Director of Investor Relations and Corporate Communications. Ma'am, you may begin.

Thank you, Carmen, and thank you all 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, February 9, 2010, and involve risks and uncertainties that could cause the company's actual results to differ materially.

The differences could be caused by a number of factors including those identified in Compass Minerals most recent Form 10-K 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 our conference call today. 2009 was another good year for Compass Minerals thanks to the balance created by our two strong operating segments, salt and specialty fertilizers. We are looking forward to an even better year in 2010.

I believe that our ability to increase underlying net earnings in every one of the six years we have been a public company, especially 2009, reflects the uncommon strength and resilience of Compass Minerals. Some people may think that our salt foundation is boring, but as one of my shareholders said to me earlier this year, boring is the new exciting.

Salt is essential for public safety, animal and human nutrition, water care, and countless other mostly nondiscretionary applications, making it truly recession-resist. In 2009, our salt segment posted a 21% year-over-year gain in operating earnings despite pressure on revenues caused by substantially milder winter weather than in 2008. Our 2009 salt operating margin expanded 7 percentage points to 28% for the full year. That is very exciting in the context of the most difficult economic environment in decades.

I know that some investors are going to say to themselves that this type of margin expansion is unsustainable for any commodity and that all commodities must revert to some normal price or profitability level. But believe it or not, Compass Minerals' salt business should not be viewed as your standard commodity. Though it is true that virtually all sodium chloride salts are both chemically and physically alike, there are several uncommon factors that distinguish our served industry from those of other commodities.

Firstly, the distribution of salt is quite limited by transportation because the cost of shipping salt can quickly exceed the value of the salt itself. Also salt mines and plants are operating at or near production capacity in our markets and we are the only company that has announced a capacity expansion.

In our served markets, highway deicing salt is sold through a very unusual blind-bid process. And then finally and most importantly, deicing salt demand is highly price inelastic. Governments simply don't compromise when it comes to public safety.

So while salt prices can plateau from time to time, and they did decrease briefly at the turn of the millennium when a new entrant came online and temporarily lowered prices to establish market share, industry prices have trended steadily upward over the long-term, just like prices in other similarly structured commodity industries such as aggregates. In fact, aggregates have some similar characteristics to salt such as their low value-to-weight ratio, which makes competition (technical difficulty) also very regional for that rock commodity.

Of course the similarities quickly break down on a number of fronts such as the very different factors influencing demand. Aggregate's demand is significantly tied to the economy. Salt is not.

Our salt sale's demand is of course heavily influenced by winter weather. When you add together our highway, professional and consumer deicing sales, they comprise about half of the company's total sales. So when you have a milder-than-normal year like 2009, our salt sales volumes will obviously decline. But unlike a more typical commodity business, our 2009 salt sales volumes should not have a significant impact on our 2010 results.

The 2010 weather will primarily drive the 2010 demand. Since salt producers retain most of the product inventory at depots they control, this prevents the sales channels from being overfilled and thus bid award prices for the next season should not be heavily influenced by the prior one. We have seen this same pattern over the many decades of highway deicing sales activities in North America.

Demand for the other non-winter applications for salt, which make up about a third of the company's total sales, is also largely price inelastic. For example, ranchers can't stop providing salt and other minerals to their herds without risking serious health consequences. Households and businesses with hard water don't typically eliminate their salt purchases in order to save the few dollars it costs to keep their water conditioning units running. And chemical manufacturers can't use an alternate mineral because there isn't a substitute for salt.

And since I know some of you are wondering, we don't sell much culinary salt in New York City, so Mayor Bloomberg's latest anti-salt campaign isn't likely to have a material impact on Compass Minerals. I will tell you, though, that there should be no debate that salt is an essential nutrient that cannot be eliminated from the human diet. But that's really the only comment I want to make on that topic.

The expansion of our advantaged rock salt mine in Goderich, Ontario, is progressing and we expect it to be essentially completed in 2010. The expansion will give us the capability to gradually grow into 9 million tons of annual production over the next few years as demand warrants.

As we begin 2010, deicing sales have remained moderately soft through January due to weather. You may have noticed that we have begun posting on our website a quarterly summary of snowfall events in our primary North American deicing region.

The trend that began in the fourth quarter, which was about 15% milder than normal, continued into January. This moderately mild weather is a normal variation and February and March can more than make up for that or be even milder. We are prepared either way.

For our non-seasonal salt sales, we have begun to see a demand rebound from our lower-value chemical customers. This is our one end-use that is somewhat tied to the broader economic environment. We expect our strategy of maximizing the value of our consumer and industrial mineral production to continue to generate the kinds of improved margin we reported in 2009.

So to us, salt isn't boring at all. We think that its strength, stability, and profitable growth potential make salt a very exciting business for the long term.

Our specialty fertilizer segment and the broader potash industry as a whole were clearly affected by the past year's difficult economic environment. Our 2009 specialty fertilizers segment sales declined 46% and operating earnings declined 35% from the record year of 2008. But the segment operating margins were a remarkable 60% in 2009, compared to 51% in 2008.

The 2009 sales and operating earnings decline was due to a broad-based decline in demand. By that I mean that it wasn't driven by the economics of any one crop or groups of crops. In fact, there is no one crop that dominates our specialty fertilizer sales. Rather, our direct customers, who are generally custom fertilizer blenders, focused on destocking to protect their inventory investment and improve cash flow. And their customers, the growers, reduced, delayed, or eliminated potash applications in order to lower short-term costs as credit became less available.

But potash is an essential soil nutrient for all crops that can't be eliminated over the long-term. In fact, it is this essential nature of potash that helps to make this attractive industry so resilient.

As a case in point, only approximately 25% of our 2009 SOP sales went to international customers compared to about 35% in 2008. Many of our international customers simply didn't buy any SOP at all in 2009, so now that the potassium nutrient in their soils has been drawn down, they are the first to rapidly return to the SOP market in the first quarter.

Our fourth-quarter SOP sales volumes were the highest we posted all year and we expect to achieve significant quarter-over-quarter sales volume improvement in the first quarter of 2010 as well as year-over-year. The SOP average selling price in 2009 was $828 per ton compared to $596 per ton in 2008. Prices steadily increased in 2008 whereas they peaked at $1,020 per ton in the first quarter of 2009, but ended the year at an average of (technical difficulty) per ton in the fourth quarter.

As you know, SOP prices for our customers are generally $150 to $200 per ton higher than commodity MOP prices in similar ag applications. However, our reported price may have a different spread from MOP producers' reported price, but we believe these variations generally have to do with differences in applications, timing, geography, and customer mix.

Our SOP average selling prices in January appear to have bottomed and we are in the low $500 per ton range, much lower than the first quarter 2009 but well above the 2008 first-quarter price. In addition, we notified our customers last week that we will be raising selling prices by $30 per ton beginning April 1.

Because sulfate of potash is somewhat economically sensitive, we are optimistic about the outlook for this segment and we are expecting both the ag economy and potash demand to significantly recover in 2010. We currently don't expect our 2010 volumes to be in our historical range yet, which is about 400,000 tons per year, but we do anticipate underlying demand to increase as we progress through the year and we expect prices to continue to provide for attractive margins.

Our SOP yield improvement and capacity expansion investment at our advantaged Great Salt Lake facility will provide us with about 300,000 tons of lower-cost solar pond-based SOP production for 2010 and about 350,000 tons of pond-based production for 2011, which will help us keep our costs moderate as we move forward.

So, as you can see, we are off to a good start in 2010 and we are optimistic about the contributions of each of our two operating segments will make to our results this year. I believe there is a good chance we will be able to keep our six-year profitable growth streak alive.

Now I will let Rod talk about the specifics of our fourth-quarter results.

Thank you, Angelo. Our net earnings, excluding special items, declined 22% in the fourth quarter compared to last year as lower prices and demand for SOP and a very difficult winter weather comp for deicing salt were offset by higher locked-in winter season deicing salt prices and the positive benefits of lower financing costs.

In the fourth quarter, we also had an approximate $0.06 per share unfavorable swing in foreign exchange gains and losses compared to the prior year quarter, and that's recorded in other income in our income statement.

I will start with providing a few details on our specialty potash segment. Operating earnings were sharply lower this quarter when compared to last year, declining from $36.6 million to $12.6 million. Volumes sold remained subdued as the waning demand for potash fertilizers, which began in the fourth quarter of 2008, continued throughout 2009. At the same time, prices which had peaked at the end of 2008 fell throughout 2009.

Now our purely agricultural base end-uses have continued to sell at $150 to $200 premium to standard commodity potash but the fourth-quarter average price was $640 per ton and that was $335 per ton lower than the prior year.

As Angelo mentioned, our optimism is buoyed by short-term market activity that is providing some clarity in the pricing and demand for 2010. Our first-quarter 2010 SOP pricing has seemingly found a floor of support in the low 500s level and as importantly, demand has bounced off of last year's historic lows with enough vigor that we currently anticipate first-quarter 2010 sales volumes to be about double last year's first-quarter sales volumes.

We have also announced a $30 per ton price increase for shipments beginning April 1. Should that price increase be effective, we believe the first-quarter 2010 average price would represent the low point on the most recent roller coaster of potash demand and prices.

On the cost side, our specialty potash costs in 2010 should be relatively predictable. We built low-cost potash inventories during 2009, and at year-end we had about six months of SOP inventories on hand, assuming normal annual demand of around 400,000 tons. And because of this inventory position and our increasing solar pond-based capacity at the Great Salt Lake, we currently don't expect to buy much KCl under our supply contract in the future.

So lower costs, solar ponds will represent most all of our output and as we previously discussed, the combination of an all-solar-pond production mix with reduced volumes produced is expected to result in a modestly lower cost per ton on 2010 production volumes.

Looking at salt, the story is a little simpler. Of course our actual results are always influenced by winter weather in our markets and year-over-year comparisons have the added complexity of not only what happened in the current year but also remembering what the severity of the winter was like in the prior year. That comparison complexity is the main reason we give an estimate of how mild or severe winter weather has affected our results following each winter quarter and while the calculation is consistent year-to-year, it is not an exact science.

During the fourth quarter, the salt segment's operating earnings were just $1.7 million lower than last year, even though volumes sold were lower by 23% or 1.2 million tons. The decline in sales volumes were the result of a moderately mild period in 2009, compared to a very severe winter weather period in the fourth quarter of 2008. In fact, the estimated winter impacts of the fourth quarter of 2008, which had higher-than-normal results, and the fourth quarter of 2009, which had lower-than-normal weather results, represent an approximate $30 million unfavorable swing in operating profit. And despite this unfavorable winter weather comparison, our salt segment earnings actually almost equaled the prior year.

This was possible because of pricing improvements locked in during the 2009 bid season for the entire winter that increased our average highway deicing salt prices by 8% while consumer and industrial salt products continued their strong performance with an average 12% price increase. As a result, we have continued to see expansion of our salt margins. This quarter the expansion was almost 400 basis points.

As for that average salt price increase, I want to spend just a moment on the impact of product mix on our salt prices and costs in the fourth quarter. As you saw us report, our fourth-quarter average salt price was up 12.5% over the prior year for the salt segment, yet when you look at the components, our highway deicing prices were up 8.1% and consumer and industrial prices were up 12.2%. It would be seemingly impossible for the average of the two to be higher than the individual components, but of course the main reason for this is the percentage of consumer and industrial volumes that increased for the salt segment due to the weather impacts and those products have higher sales prices and higher per-unit costs to produce.

So when you factor in the different mix of highway and consumer and industrial products, our average salt prices and our average unit cost of sales were also increased, again when looking at the average for the salt segment. If one were to make a simple assumption of equal margin percentages between highway deicing and consumer and industrial products, on a mix-adjusted basis, our average salt price increased 9% and our unit costs increased between 3% and 4% over the prior year.

Now you may remember last quarter I mentioned that the tailwind we've been experiencing in salt related to lower year-over-year shipping and handling costs. It would come to an end in the fourth quarter of 2009 as 2008 fuel prices had fallen dramatically during that fourth quarter of last year. Thus our fourth-quarter shipping and handling costs are almost flat per unit with the prior year. We expect this cost stability to continue into the first quarter of 2010.

So while our salt business is as healthy as ever, we need just a bit more snow to make it hum on all cylinders. Following moderately mild winter quarters during the first and fourth quarters of 2009, January 2010 has also begun moderately mild in our service territory. Sure, we have been given a boost in the UK by severe winter weather in January, but snow days in our much larger North American market have been lower than the 10-year average, which is on the same basis as the snow data we released a few weeks ago.

Now a full winter season isn't made in one month and we can't predict February and March, which are also big snowfall months historically. So we will keep you posted as we have opportunities during the first quarter.

Just to finish up, our tax expense for the quarter and year was in line with our increases and decreases in pretax income. Our effective rate for 2009 was about 31%, and we currently expect our 2010 rate to be similar.

Cash flow from operations for the year totaled $119 million and were impacted by the investment in inventory we had been making all year. This investment had many facets but a significant impact was the decision to maximize our KCl supply purchases in 2009 due to the low contractually determined annual price. As we previously mentioned, we expect significantly less of any purchases of KCl under this contract in 2010 and beyond. The lack of planned inventory build is expected to result in a significant increase in cash flows from operation in 2010 when compared to 2009.

Even with the 2009 investment in working capital, we were able to fund a significant portion of our Goderich rock salt mine in Utah SOP expansions and end the year with no borrowings on our seasonal revolver and keep our total debt leverage ratio at 1.6 times, the same as the prior year. With the completion or near completion of those projects this year, along with our $40 million to $50 million of sustaining capital spending, we currently anticipate we will spend about $100 million for capital investment in 2010 as well.

After a couple years of elevated capital spending, we expect our 2010 depreciation to rise to around $55 million.

With that, I will turn the call back over to the operator for questions. Carmen?

(Operator Instructions) Joel Jackson, BMO Capital.

Thanks for taking my call. Congratulations on a strong quarter despite the weather. I don't think people in Washington, D.C., although it's irrelevant for Compass, thinks that salt is boring the last couple of days.

Nice.

But what I wanted to talk about was a little bit SOP pricing, so you indicated that SOP pricing had gone down to about the low 500s in January. How did pricing -- what was the drop in pricing around the time of December 23, 24, when the BPC China contract settlement happened, and how quickly did pricing drop and at what sort of -- how did it drop across December and early January?

This is Angelo. A good question. Again, we've got to step back and recall that SOP isn't the kind of commodity product that MOP is. MOP has a lot more of a spot rhythm to it. Prices are highly influenced by big purchases from China and India and those changes occur very, very rapidly. Our typical sales pattern is quarterly pricing. We went to that during last year; previously we had been on an annual price cycle. So when there was clarity in the Chinese market, it kind of invited everyone to go back and revisit their potash purchases, and what we saw starting really in January was a reemergence of demands and it's building to be good demand. We expect probably something close to a doubling of our first-quarter demand for SOP versus prior year. And we saw the bottom of pricing, which was around in the low 500s. We felt confident enough that we had seen the bottom that we then announced a price increase, but effective April 1, which is the normal quarterly price point.

So we're going to have a lot of discussions and negotiations with our customers in February and March. We are not going to take anything for granted. We are going to watch the interim material competition to MOP and other specialty fertilizers. But basically the clarity in China gave us an opportunity to reengage with our customers. We did that aggressively at year-end and in January and they have responded.

Just on a follow-up on that. So it's interesting because maybe clarity in China prices today -- it's a little bit murky just because we are trying to figure out what the Canpotex spot sale to Sinofert is in the last day or so. But what I am trying to get at is your $30 a ton, short ton, increase seems -- it seemed just maybe coincidentally or not to be timed with BPC's indications of raising potash price about $25 a ton. Did that play in some of your decision to do the 30-ton announcement increase?

No, we really don't compete directly with BPC in most of our markets. There had been previous announcements about MOP price increases, both in -- from the Canadian producers but also from a German producer which did include some increases in SOP. So I think there's a general consensus among potash suppliers is that we are past the bottom on price and certainly past the bottom on demand. And I would be surprised if the Canpotex price in China had a spot transaction that they concluded is any lower than the prior price. In fact, I'd bet you that it's higher, if anything.

So it is just coincidental to the BCP, MOP pricing?

It would be just coincidental.

Okay. Thanks a lot, guys.

Jason Miner, Deutsche Bank.

Thanks, good morning. If you were to end the season with higher salt inventories -- let's say it were to remain weak, I'm just trying to work through what that could mean in terms -- how that works into costs through the summer as you run Goderich. I think impacts have been limited in the past, but does it mean lower operating rates? Can you just sort of walk through for us what a little additional inventory at your depots would mean if it were a weak winter through and through?

Yes, this is Angelo. Obviously we would like to be dealing with the other side of that question, where demand is above normal, but this is a company that has been built for both sides of it, meaning we try to keep our costs as variable as possible. And as we've shown in the past, we are very willing to take steps aggressively to try to keep production to match demand.

In the case of the depots filling, obviously that will have an impact on future production. The good news is that the inventory at the depots is in our control, it's not in the customer's hand. So firstly, it shouldn't create any kind of sentiment or pressure on customers, and again with the competitive bidding process, it's really the producers that set the price, not the customers.

So what the reality will be is we will take the opportunity in the second and third quarters and the tail end of the first quarter to -- based on the end of the season -- to readjust our production to maintain the targeted inventory levels. So we run a fair amount of overtime during harsh periods. That will be cut back. We have in the past temporarily laid off employees. That will also be a tool that we will utilize. But we are not going to let the weather force us into a position that might affect our inventories or that might affect our pricing strategies.

We will enter the 2010/2011 bidding season with the targeted inventory and with the mindset that has existed in this industry for the last 20 to 40 years, which is average price increases have historically been around 4% a year and we have been spoiled the last couple of years because we've come off some really harsh winters. But we have also seen periods over the last 40 years where winters have been very weak or very strong or normal and yet the same pattern exists -- consistent price increases and consistent actions by producers to manage inventories appropriately.

That's helpful. Just to review, the cost structure is variable enough, you would expect -- you would not expect a significant impact on the cost per ton if you were to have to take some of the measures that you had mentioned and run a little lighter through the summer?

Jason, that's right. I think we have talked about that quite a bit in the past and while any mining operation has some fixed costs, the most significant cost for us in our mining ops, which are the primary operations that are involved in the production of the rock salt used for highway deicing. The largest single cost there is manpower and then the next cost is electricity to operate the mine. And those are largely variable, as we've talked in the past.

I do just want to remind you that February and March are typically large snowfall months for the company, so we try not to call the winter mild or severe in total until we are at the end.

And the good news, I checked, Rod, it's snowing today in Detroit and Chicago and Milwaukee and St. Louis. Those are big cities for us, so it's a welcomed change in pattern.

I assume you ordered the snow for the call. That's great. I have just one last one on the Goderich expansion. I know we got another 750,000 tons sold this bidding season. Excluding the weather as you look at what's happening in the marketplace, do you have a sense that you might be able to sell incremental tons to come through the summer given the expansion goes on?

Again for the 750,000 tons really got placed into commitments by our customers to buy. But of course the weather will determine whether they get sold or not. As Rod just said, there's still a lot of winter ahead of us so we are hopeful that those get sold. But you've got to remember we put salt in about 75 different places in North America, and the snow patterns are so variable place to place. You know, a depot in -- near Washington, D.C., would be a good place to have a lot of salt these days.

So we will -- the industry kind of zeroes out at the end of each season. So we will be entering the next season with that zero mentality and if customers choose to buy product early -- remember they have very limited storage capability -- so if they choose to buy product early, we will gladly supply them. It's better and it puts less pressure on our supply chain. But typically there's a modest amount of preseason sales, but most of the sales occur from November through March.

That's helpful; I will get back in queue. Thank you.

Mark Gulley, Soleil Securities.

Good morning, guys. I appreciate the historical snow event data that you provided in that disclosure a couple weeks ago, but actually I have got a couple questions on it, so let's start with the following.

Do we have enough historical data there, enough years, to really come up with the average number of snow days per winter? And do we have enough data based on what you provided to kind of come up with North American volumes per snow event? So my real question is is that a broad enough sample so that we can use those averages to come up with what a normal winter looks like?

Yes, I would -- this is Angelo -- I would be careful that you don't read too much into the data in the sense that we've picked out 11 cities. I think the data is more than valid for those 11 cities. Rod, I don't know if we used 10 years, 20 years, but we have a lot of data over a lot of years. But to try to then extrapolate from those 11 cities is tough because, number one, our sales are not equal in those 11 cities. Our commitments are not equal. So the report kind of assumes that each one of those 11 cities has the same impact on Compass Minerals results, which is not true. And the balance between those 11 cities in our results will change from season to season based on the impact of the bidding process.

So I would caution you from trying to mathematically connect it. But what I would say is if you see those 11 cities well above the normal, people are probably smiling in Overland Park. If you see it well below the normal, there's probably busy activities to try to work on the cost side, as Rod just explained, at the mine.

Yes, and Mark, what I would say is don't -- I would view it as a directional indicator, but probably it would be dangerous to just use just pure percentages to use it as a predictor. It's more of a directional indicator.

Just for example, if you look at the 10-year average in the fourth quarter, it's about 49 snow day events and the 10-year average in the first quarter is over 100 snow day events. Yet our first-quarter average sales volumes aren't twice the fourth quarter average if you look back historically.

So there's many factors and we simply wanted to get something out that we could start publishing on a very regular, quarterly basis that would provide directional guidance, but shouldn't be used in any statistical manner for a variety of reasons, some of which Angelo mentioned.

Okay, that's helpful. Now I want to switch to SOP if I can. In terms -- how shall I think about the profitability that the cost for SOP in '10? You said moderately lower per ton going forward. Can you talk a little bit about how you account for the lack of KCl purchases from the large Canadian producer and how should we think about modeling your cost per ton going forward?

Well, I think I had mentioned over the last couple of quarters that we had sold through in the first half of 2009 our opening inventories and so the last half of 2009 really represents the cost effect of 2009 production. And as I mentioned, we have a couple of -- about six months worth of inventory should we sell 400,000 tons over a normal year. So that means we are expecting kind of much of 2010 to be costed at similar unit costs of what the last half of 2009 was.

As it relates to 2010 production, yes, I think moderately lower would mean 20% or 30% but you could think of it in terms of kind of low single- -- low double-digit decline in terms of on a per-unit cost. That will give you a good idea how to think about 2010 production. But again, a lot of those tons won't be sold until the latter half of 2010 on the accounting basis.

This is Angelo again. From a broader perspective and a strategic perspective, I think you should also view 2010 as the transition point in our production mix strategy, which has been to try to shift more and more of our production to the lower-cost solar pond-based route, the one that we have 100% control of, and that originates with brine that only existed a few places in the world, one of which is the Great Salt Lake, and to transition away from what has served us well but is a much more variable and higher cost route, which relies on sourcing from third parties.

So I think going forward, you will see very little of the KCl route and almost exclusively the solar pond-based route. And that gives us full vertical integration back to the mineral, which is what we are comfortable with and what we are used to in our salt segment.

If I could just conclude, though, given that positive spread between $150 to $200 a ton between SOP and MOP, given the fact that you can make that spread if you are buying MOP, why wouldn't you go for that spread by purchasing KCl? Thanks a lot.

And again, I don't want to get too much into the production route but even if we can buy it at a good price, we still have to process it through our plants and dry it and compact it and ship it. And when you go through all of those cost additions to convert the source KCl into the sold SOP, it's just -- although profitable, we see a lot more upside with our solar route and with the volatility in KCl and MOP and markets, we would never want to get into the position where we buy a raw material and by the time we run it through our manufacturing process and sell it, we are on the wrong side. It's upside down.

So we just feel a lot better now that we are able to get our pond-based production very close to our annual sales of SOP on a normalized basis, we are very comfortable to just move forward with the much more secure route that we control.

Jeff Zekauskas, JPMorgan Chase.

Good morning. If I could just sort of, I guess, pursue this same theme that Mark was pursuing, your cash production costs in SOP came down sharply from the third to the fourth quarter. Why is that? Can you just say once more why your cash production costs should go down next year in SOP given that you have so much MOP inventory that you have bought?

Well, you know, the first half of that question, Jeff, the cash production cost each quarter we are estimating what the expectation is for our full-year production costs, and so our inventory accounting just -- we need to estimate what that is and our costs came in favorable to that in 2009. Part of that was just a mix of how much KCl versus MOP versus solar pond-based product we produce. But we did have a favorable quarter there.

And then as it relates to the 2010 costs, the vast majority of what we purchased under that contract was run through our plant and converted into finished product during 2009. So when we talk about having an inventory on hand, we are really talking about having finished goods inventory on hand and not a raw material that we have yet to process.

So some of -- so if I understand what you have said, as it were some of the costs of next year's product were included in the income statement for the sales of this year's product?

Yes, we made the decision early on to buy everything that we could in 2009 and that really the best operational lowest-cost way for us to deal with that in the face of declining demand was to go ahead and convert that into finished goods and forward-place some of that inventory at locations where, when the surge happens that we are certainly expecting, that the logistics of getting that product to the customer is much more seamless than it would be if we were trying to crank out the plant to run at volumes that it had never run at before. So that was the operational decision we made early in 2009 and I think as we go through 2010 and 2011, that is going to serve us very well.

Edward Yang, Oppenheimer.

Good morning. Angelo, you touched on UK salt a bit and I think it's about 6% of your salt volume, so a fairly small percentage. But how does the pricing dynamic work in the UK business relative to North America? And several -- I believe several of your competitors were volume-constrained. Were you also sold out as well? And I would just like to gauge the near-term impact or benefit from the snow fallen in the UK.

Yes, I wish we could take some of the UK weather and transport it to the Midwest. It has been phenomenal weather for us in the UK, both last season and this season, to the point where it's a national crisis. They rely heavily on roadways, and we were happy to be the largest supplier in the nation.

It has a similar structure to North America, and that's why we like the UK. But it's important -- and I'm not trying to knock the UK -- but we sell more salt from a single depot in North America than we do from all of the United Kingdom.

So just to put it into perspective, it's not a material part of our deicing franchise, but it's an attractive part. So yes, we were sold out. Yes, we are running 24/7. Yes, it should set us well for continued price improvement and margin expansion. But there's just not enough there to really move the needle significantly for Compass Minerals, but we're very happy to have the weather in the UK and we're very happy to have our UK franchise.

Okay. And you talked about long-term salt pricing running about 4%. And in the last five years or so, your own pricing has been more like 2 to 3 times that on an annual basis. Going forward, in terms of pricing and margins, what do you think is a sustainable level of salt margins? Will you look towards pricing as a means of targeting a specific margin range in the salt business?

Well, you know, the competitive bidding process will determine the price, and it takes more than one player to set it. So typically, there are three or four or five people bidding on every line item. I think there's something like 5,000 line items that we actually put a price-volume combination in.

Now over the last 20 to 40 years, that has yielded approximately 4% year-over-year price improvement. So I think it's more likely that event will occur than the exceptional events that have occurred over the last two years, where we had close to 20% one year and 8 -- and those are anomalies.

I am most happy with those anomalies, and we're going to attempt to make it three anomalies in a row, but I wouldn't take that to the bank yet. But I think the 4%, if you were modeling for the long-term, is a good number. So that's where I'd leave it.

But again, the competitive bidding process, which is very robust, is going to determine the exact price. I think what gave the last few years an extra boost on pricing was a combination of some strong winter a few years back, a really strong winter, but also that the market had allowed itself to get undersupplied.

And as the market leader, Compass Minerals, we had allowed ourselves in essence to not have enough production capacity to fully serve that strong demand. Now we have solved that problem through the multi-phase expansion in the Goderich mine, but in essence, over that period we are going to go from 6 million tons a year to 9 million tons per year of capability at Goderich, which is the equivalent of a new salt mine in North America.

So as long as we responsibly place that product, it should have really no impact on the competitive bidding process, but what it should do is provide security of supply to our customers and to the society who relies on deicing salt for public safety.

Okay. Then my final question is just on SOP and your $30 price increase that you announced last week. What was the reaction in terms of your order flow to that announcement? Are you seeing customers pre-buy ahead of that price increase? And regarding your expectation for SOP volumes in the first quarter to be about double year-over-year, was that -- did the pace of orders reflect the change after you announced the price increase?

No, the pickup in demand occurred prior to the price increase announcement. People were already re-entering the waters. Again, I think the clarity in China kind of was the last event that needed to occur, and although it occurred far away in a product we don't sell in a market we don't sell to, it did have a ripple effect across the entire potash segment. And we obviously benefited from that.

So we saw strong demand prior to the $30 per ton increase. That actually encouraged us to go for the price increase and we haven't seen any material change in demand from the point at which we announced the increase.

Douglas Chudy, KeyBanc Capital Markets.

Good morning, first off I guess on the SOP business, just to touch on what we have been talking about here in volumes, it sounds like you anticipate a nice pickup here in Q1. Can you talk a little more how you see demand trending for the remainder of the year? Do you think Q1 could be the low point in terms of volume?

This is Angelo. I would say if you go back to normal periods, we could probably give you good guidance on the spread of our sales by quarter. Clearly March and April are important periods. October and November are important periods. But 2009 was such an anomaly, both in terms of the seasonality of the sales, clearly the volume of the sales, and the pricing was just an absolute roller coaster. And since we are not through that period and we view 2010 as a bit of a transitional recovery year, to try to give you any kind of guidance on how 2010 will play out from a seasonal point of view is really tough.

So I would just leave it that we are encouraged by the first-quarter demand. We see doubling versus first quarter. We see a strong pickup versus the fourth quarter. We see that continuing through the year. We think 2010 will be a good year, but not back to normal, and we think pricing has bottomed out and we are hopeful that it will improve from there and thus we announced a $30 increase.

Okay, thanks. And secondly, I guess shifting gears here to the salt segment, it's been discussed a little bit here but is the 4% average pricing increase for deicing salt over the last 40 years, is that talking for the U.S. salt industry in general? If so, do you think that pricing power in your core markets due to the Great Lakes focus and I guess more consistent snowfall, do you think that the pricing power within your core markets could be better?

Yes, Joel -- I mean Doug, excuse me. The 4%, 3% to 4% is definitely across North America and certainly the regional nature of salt has a bit of a different dynamic in those insulated interior markets that are around the Great Lakes and the river systems, where import capabilities are -- exist but are limited. I think we saw last winter what getting import salt into the interior of the U.S. meant in terms of pricing when those prices were $120 to $150.

So certainly the dynamics are different, but having said that, there is enough sort of mines that are on the fringes that they can go either east or west with product. Those things do tend to even out, but we like the competitive landscape in those interior markets better than the pure coastal markets that are there in New York or Boston or D.C.

Okay. Thank you, that's helpful.

Nathan Weiss, Unit Economics.

Good morning. Just following up on the North American rock salt markets, we have seen incredible snowfall totals kind of around the perimeter of your core market, which unfortunately hasn't benefited you so much winter-to-date. But does this provide any potential over the next few weeks to move some salt that maybe you wouldn't otherwise? And how do you see this changing your negotiating position for the 2010/2011 season?

Good question. We are seeing some good pickup in some of what we call our southern markets, mid-Atlantic kind of areas, so we are probably going to see a lot of depletion of inventories in those markets, both ours and our competition's, and actually some of the product that maybe in the past headed towards the Great Lakes region gets pulled eastward, which might actually set up -- set us up well in the Great Lakes. It's still all playing out and I think as Rod said before, we've got a lot of winter left and this whole change, this whole balance can change.

We are happy when it snows anywhere that affects us or our competition and we are happy when it affects us -- we are more happy when it affects us -- but depleting some of the competitor's stocks on the East Coast can only help us in the long term because there is competition between competitors and regions.

Nathan, I will just remind you that one of the things that is an important factor, it's actually a very stabilizing factor in the industry, but it is important, is the commitments that the producers make to specific communities when we -- when we are awarded tons for the current winter season. When that happens, we need to maintain our inventory in those specific markets for those communities because winter can change quickly. March has in the past -- I've been here for over a decade -- and March has in the past represented in one case our biggest single sales month of the winter. So we have to be mindful that we made commitments to communities and to move salt out of those communities to some other region is something that would really damage our promise to those communities over the winter.

Elizabeth Collins, Morningstar.

Good morning. We are trying to help out with a lot of snow today in Chicago. And this evening, too. Thinking about salt operating costs, you guys held unit costs inflation or increases in check. You guys have that flexible -- the ability to be flexible. But I'm wondering if you guys got any relief in 2009 on, say, natural gas or other mining consumables? And what's your outlook for those types of materials in the near term?

Yes, Elizabeth, good question. Energy of course represents our second largest cost and is, depending on the year, between 10% and 15%. And while lower natural gas costs do impact our evaporated salt business and we like that, the strategy that we put in place is to hedge a fair amount of our natural gas out 12 to 36 months and so we tend to take out the peaks and the valleys. So we didn't really see a large impact, but somewhat favorable, but not large from natural gas year-over-year.

And as it relates to consumables, I think first that isn't a real large part of our cost, but there was just a little benefit as the softening economy allowed us to reduce our costs on a number of just maintenance materials over the course of 2009. But neither of those would be considered real large.

Okay, thank you.

Ladies and gentlemen, we have reached the allotted time for questions and answers today. I will now turn the call back over to Angelo Brisimitzakis.

Thank you and thank you, everyone, for joining our call today. I hope you share our excitement regarding both the short- and long-term prospects for Compass Minerals. 2009 certainly tested the business robustness and our business model, and I believe we performed quite well again sitting an annual earnings record. Hopefully 2010 will have less drama and stronger winter weather. But regardless, we have built the business for any reality we might face and plan to continue managing it that way. Compass Minerals is truly a company for all seasons.

Please see an updated version of our value proposition in the investor relations section of our website. I look forward to speaking with you all again in April. Have a great day.

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