Compass Minerals International Inc (CMP) 2010 Q1 法說會逐字稿

Good morning. My name is Kanesha and I will be your conference operator today. At this time I would like to welcome everyone to the Compass Minerals first-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 like to turn the conference over to Ms. Peggy Landon, Director of Investor Relations. Please go ahead, ma'am.

Thank you, Kanesha; and thank you all for joining us this morning. I have with me here Angelo Brisimitzakis, our president and CEO, and Rod Underdown, our CFO.

Before I hand 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, April 28, 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 the Risk Factors section of our annual and quarterly reports on 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.

So now I will turn the call over to Angelo.

Thanks, Peggy. Good morning, everyone. Thank you for joining us today.

You've heard us say many times that Compass Minerals is a unique company because of its balance and resiliency. Once again those unique qualities helped us deliver very solid results this quarter.

Our sales were up and our adjusted EBITDA held steady year-over-year, thanks to very good growth in salt prices and sulfate of potash volumes, and despite the effects of lower SOP selling prices and mild weather in some of our key deicing sales regions.

Our sulfate of potash sales volume more than doubled year-over-year to 102,000 short tons, which is similar to what we historically sold in a first-quarter period prior to the industrywide decline in potash demand in late 2008 and throughout 2009. We continue to expect SOP sales volume to improve above 2009 levels throughout 2010, sustainably returning to more normal demand levels later in the year.

Specifically, the second-quarter volumes should be about double our sales volume in the second quarter of 2009, and we expect 2010 full-year sales volumes to be more than 300,000 tons.

Our SOP sales volume increase is part of the worldwide increase in demand for all types of potash fertilizers, which we believe was triggered by more settled world MOP prices and the well-established science of the essential benefits potassium nutrients provide to crops.

Our SOP average selling price firmed in the low $500 per ton range, as we told you to expect. This was well below our first-quarter 2009 price, which was a record high $1,020 per ton; but it is well above our long-term average prices.

The global potash industry has been on a wild ride for the past two years but now, as the dust is starting to settle, it seems clear that there has been a positive step-change in our specialty potash pricing and resulting profitability. In previous years, when we were selling about 100,000 tons in a quarter, our prices were in the low $300 to $400 per ton range. Now, with SOP prices appearing to have found a floor in the low $500 per ton range, we expect to be able to grow this business at even better margins than we expected when we first initiated Phase 1 of our SOP capacity expansion projects back in 2007.

As you may know, we introduced a $30 per ton SOP price increase which was effective April 1. We are having success implementing it.

Our salt prices were also very strong this quarter. For our salt segment as a whole, prices were up 9%, including a 19% increase in highway deicing prices and a 5% increase in consumer and industrial prices. Salt segment volumes were up 3% even though our results were well below what we would expect in a normal weather year.

I will take a little more time than usual to walk through our salt segment performance. I'll begin by reminding you that our primary deicing selling regions are Canada, the upper Midwest, around the Great Lakes, and along the Mississippi, Ohio, and Tennessee rivers, and in the United Kingdom.

We were able to win more highway deicing contracts in North America this last winter season versus the prior season by displacing opportunistic importers. This was enabled with tonnage available from the first phase of the expansion of our largest mine in Goderich, Ontario. Naturally, the greatest number of our deicing customers are served by that mine; and unfortunately it was a very mild winter in those key Canadian, upper Midwest, and Great Lakes regions. In fact, parts of our Canadian sales region had the lowest snowfall on record this last winter.

So, if you reference the snow events data that we have begun releasing at the end of each winter quarter, it's important to keep in mind that the cities on that document don't have equal importance to our results. The fact that Pittsburgh had eight more snow events than the 10-year average is far less significant to our results than the fact that the Toronto area had four fewer events than normal. So as we said last quarter, think of the snow events data as a directional indicator and not as an exact mathematical formula for our winter sales.

When we calculate our weather-driven deviations from normal sales and operating earnings, we use both the long-term average consumer and professional deicing volumes and contract commitment volumes for our North American highway deicing products, where we have long-term regional history on how sales volumes compare over time to contractual bid commitments. During this quarter and full winter season, our sales volumes fell well short of our increased bid commitments, indicating an overall mild impact from the winter.

Consumer and professional deicing first-quarter sales volumes were also below normal and well below last year because our customers tend to be concentrated in the same regions of North America as our highway deicing customers, and because of the timing of snowfall this season, especially when compared to last season.

We don't expect the milder-than-normal winter to have a material impact on our upcoming bid season. First, I want to remind you that the highway deicing salt producers retain most of the inventory because governments don't have adequate storage space to keep all of the rock salt they need. So most of any extra inventory that may be carried over into next season is sitting in the producers' storage facilities, not the governments'. For a full review of the dynamics of the North American highway deicing industry, I would like to refer you to a new presentation we just posted on our website.

Year-to-date, we have produced less salt at our North American mines than we extracted last year. We produced a greater-than-typical amount in the first quarter of 2009. We normally slow our annual production during the first quarter. This year at our Goderich mine we scaled back production when our storage facilities became fully stocked at the end of the winter shipping season so that we could undertake some of the larger construction work needed for the Phase II expansion of that mine. This reduction in production had a very modest year-on-year unit cost impact on the quarter. But our lower production in the first quarter of 2010 will allow us to begin next winter with the right amount of salt to serve our customers not too much or too little.

A strike began on April 7 at our Cote Blanche, Louisiana, mine over wages and work schedule flexibility. While no one wanted a strike, we were well prepared for it. We are committed to resolving it fairly for all involved and hope to come to an agreement soon.

In the meantime, managers and supervisors have safely operated the mine in a limited fashion through last week. Since last weekend, we have supplemented them with full crews of highly trained contract miners to more fully operate the mine. We expect production volume at Cote Blanche to quickly return to near normal levels on a sustainable basis and have similar unit costs during the balance of this labor dispute.

Again, the modest short-term reduction in rock salt production at our North American mines should allow us to start next winter with just the right amount of highway deicing salt.

Regarding our rock salt production capacity, we expect that the completion of the $70 million Phase II expansion project at our Goderich mine by year end will allow us the opportunity to grow for the next several years by gradually producing and gently placing incremental tons into the market as demand grows. Following this phase of our long-term expansion project, we will be at 9 million tons per year of capacity at our Goderich mine, already the largest rock salt mine in the world.

Beyond the current expansion there are more relatively low-cost capacity expansion opportunities that we can also pursue at our North American mines and evaporated salt production facilities.

Our longer-term SOP capacity expansion opportunities are also very exciting, but the amount and manner of those projects aren't yet fully defined. As a backdrop and as a reminder, the historical annual production capacity at our Ogden, Utah, plant was about 250,000 tons from our lower-cost solar evaporation ponds alone. Plus we could combine the excess sulfate present in the pond harvest with purchased potassium chloride to produce up to an additional 200,000 tons, for a total historical annual SOP capacity of up to 450,000 short tons.

In 2007, we began Phase I of a long-term SOP expansion program, which was a productivity improvement project that will give us approximately 100,000 tons of additional lower-cost solar pond capacity beginning in 2011, taking our preferred solar-pond production annual capacity up from 250,000 tons to 350,000 tons next year.

During 2009, while sales were low, we did take advantage of the very favorable price we were paying under our potassium chloride supply agreement to build a large amount of SOP inventory. The contract price won't have the same favorability this year or next, so our 2009 potassium chloride purchases were likely the last ones we will make under that contract for the production of SOP.

The combination of extra SOP inventory at the start of 2010 and the higher production expected from our solar ponds this year will allow us several years of normal sales volumes at around 400,000 tons per year.

However, we recognize that over the long term we will need more SOP capacity -- and potentially significantly more capacity -- to meet the expanding grower needs to improve yields for their fruits and vegetables that would greatly benefit from using organic SOP as their potassium nutrient source. Therefore, we have been developing several investment options, Phases II and III, to cost-effectively further expand our low-cost solar evaporation operations at the Great Salt Lake.

Firstly, we continue to progress on our proposed expansion of solar pond acreage. This project would add up to 70,000 acres of ponds to our current 40,000 acres on the shores of the Great Salt Lake. The proposed ponds could produce up to 400,000 additional short tons of SOP annually, assuming we receive all the requested permits from the Army Corps of Engineers.

We would expect to begin extracting SOP from these new ponds approximately four years after we receive the permits, as pond construction should take about a year and the evaporation process takes three years.

This project could be developed all at once or in stages. We are uncertain when the permits will be granted. It could be imminent or several years off. Additionally, the permits could have provisions which would affect the way the solar evaporation ponds are built and/or operated. Therefore, the design and the cost of the next phase of our SOP expansion aren't precisely known yet. However, if we develop all of the requested acreage, we would expect a significant investment in both pond construction and associated SOP plant facilities.

In addition to this opportunity, we continue to focus on developing technological advances that would improve the output and yield from our existing solar pond system. These advances, as they come to fruition, could be as significant as the solar pond expansion in terms of added SOP capacity and investment intensity.

These potential projects would continue to provide CMP substantial profitable growth opportunities into the future and would strengthen the trend toward a greater balance between our salt and specialty fertilizer segments. They also reinforce the synergies between our two operating segments and the benefit those synergies provide to Compass Minerals.

Of course, these new investment opportunities would also be built on the solid foundation of advantaged low-cost assets in attractive markets which has provided our track record of solid results over time.

Now I will turn the call over to Rod, who will provide more detailed analysis on our first-quarter results.

Thank you, Angelo. Since Angelo outlined the factors contributing to our sales improvement over the 2009 quarter, I will focus my remarks on the year-over-year changes that impacted adjusted EBITDA and earnings.

When looking at the March 2010 quarter's adjusted EBITDA, the nearly $10 million improvement in the salt segment was offset by an almost $10 million decline in our SOP specialty fertilizer segment.

So looking first at SOP, it's important to put the current results into an historical context. In the 2009 quarter, our segment operating margin was a record 70%, a result which was heavily influenced by record selling prices which, as Angelo mentioned, averaged over $1,000 that quarter. But SOP prices have historically been at a $150 to $200 premium over standard potash fertilizers, or MOP, due to its favorable characteristics, which positively impact specialty crop production. So when MOP prices fell throughout 2009, our SOP prices similarly fell.

With the apparent stabilization of potash prices at current levels, we reported last quarter that our expectation was for SOP prices to reach a floor in the low $500s and that demand had firmed to the point where we were implementing a $30 per ton price increase effective beginning in April 2010. Indeed, our March quarter price averaged $514 per ton, and following the $30 per ton increase we implemented for April 1, thus far our sales have averaged $542 per ton for the month of April.

So in the 2010 quarter at the lower year-over-year prices, operating earnings were $17 million on sales volumes of 102,000 tons, with the segment generating a still very profitable 32% operating margin. The year-over-year operating margin decline for the quarter was almost entirely the result of the previously mentioned price changes.

However, our SOP product cost of sales were also higher this quarter than in the prior year, primarily because higher potassium chloride input costs and higher sales-based royalty costs were exactly where we guided investors on our last quarterly call. The higher potassium chloride costs may be confusing, so I will take a moment to walk through the inventory strategy we first discussed last year.

Historically, we have purchased KCl to supplement our lower-cost evaporation pond production. As Angelo mentioned, we stopped purchasing KCl for this purpose in 2010 and don't anticipate doing so in the future. But in both 2008 and '09 we purchased our full allotments under that supply contract, and we had very favorable purchase prices as calculated under the formula in that supply agreement.

When demand for potash fertilizers waned in 2009, this allowed us to build a relatively low-cost inventory at a cost basis for KCl which would not be available for us until 2010. The impact of that in our financial statements has lagged, in that we sell inventory on a first-in/first-out basis for accounting purposes. So for example, the inventory we were selling in the first quarter of 2009 was actually produced in 2008. Currently, in 2010, we are selling inventory that was produced in 2009 which was a blend of both our lower-cost pond-based SOP and higher-cost SOP produced with potassium chloride.

So we entered 2010 with a 200,000 ton inventory balance in SOP. So even at the pace of sales from the first quarter we will be costing this inventory in our financial statements through at least the first half of 2010. Similarly, under projections Angelo outlined for you, we would be selling 2010 production at the beginning of 2011, and so on.

Now as a reminder, we have said our normal SOP demand is approximately 400,000 tons per year and growing. And we don't expect to be at that rate of sales in 2010. We expect to produce about 300,000 tons of SOP this year, and with normal evaporation rates, we expect to be able to produce 350,000 tons in 2011 from our solar ponds.

Now back to the cost discussion. In the first quarter of 2010, SOP costs were higher than in the first quarter of '09 because of differences in the cost of KCl that we source. Note that the unit costs were about the same as the last half of 2009, and since we use the FIFO inventory accounting method, our SOP cost will remain around the current levels until we work through the full 200,000 tons of inventory we carried over from 2009. When those 200,000 tons have been sold, our SOP product costs, excluding SG&A, are expected to decline modestly in the absence of KCl costs, but will be partially offset by higher fixed-cost absorption on fewer tons produced and higher sales-based royalty costs.

As for that decline, last quarter we projected that decline in unit costs at around $20 per ton. Currently we expect that decline to be about half that amount, as our ending phases of construction for the expansion will require a longer-than-previously-planned outage this fall. This short-term impact on 2010 is not expected to diminish the prospects of producing at around $200 per ton or less in the future.

Switching now to salt, this segment was solidly profitable, maintaining a 28% operating margin despite the impact of mild weather on both sales and operating earnings. In fact, salt segment operating earnings improved by more than $8 million or 11%, offsetting most of the specialty fertilizer segment decline.

This increase was generated by price improvements in both highway deicing and consumer and industrial businesses within our salt segment, as a 6% improvement in highway deicing volumes and beneficial foreign-exchange effects also improved the results. These improvements were partially offset by a 15% decline in consumer and industrial sales volumes.

As Angelo described how our weather depressed our results this quarter, I would like to expand on why this season's mild weather had a more significant effect on our salt segment and, specifically, our consumer and industrial deicing sales compared to the mild weather in the first quarter of last year.

The number of snow events exceeded the number in the prior year and equaled the 10-year average in the 11 cities we analyze. As you can imagine, those cities have varying degrees of importance for our highway deicing sales. Because governments don't hold much road deicing salt inventories, highway deicing sales are generally closely timed to the actual snow events. But for our consumer and professional deicing sales, the timing of sales and winter events is different. Retailers and professional deicers fill up on deicing products in the last half of the year, well before winter begins, in preparation for the first snowfall. Much of these sales are destined for retail stores. We don't typically get a lot of restocking orders until the end of the fourth quarter after winter has settled in.

Now during a normal year, consumer and professional deicing customers will continue to restock those products through early February. But after mid-February they simply run out the remaining deicing inventory to make room for spring lawn and garden supplies in the retail stores. Rarely are there any significant sales of consumer and industrial deicing products in March and April, which of course isn't true of our highway deicing products.

So since the fourth quarter of 2008 was more severe than normal, our consumer and professional deicing customers continued to place orders well into the first quarter of 2009. Plus there were weather-driven sales early in the first quarter of 2009 which drove retail restocking orders all the way through February last year. However, this winter season started mild in the fourth quarter of 2009 and remained mild until about early February in almost every one of our major markets. So there were unusually low restocking orders in December, which continued throughout the first quarter of 2010. These deicers are some of our highest-priced and highest-margin consumer and industrial products, which increased the sales and earnings impact of losing those sales tons.

So when we reported that the salt segment sales were $40 million to $45 million lower than normal and operating earnings were $15 million to $20 million below normal due to mild weather, keep in mind that an important part of that weather impact was on our consumer and professional deicing sales, and the mild weather impact those products had was much greater this year than in the first quarter of last year.

Our salt segment operating earnings were also affected by higher per-unit production costs, particularly at our consumer and industrial salt plants as we began to reduce production to bring both deicing and non-deicing inventory levels lower. The production slowdown for consumer and professional deicing products is part of the mild winter impact; while the non-deicing product follows a period in the latter part of 2009 when our production exceeded demand.

We expect an approximate $3 million impact in the second quarter of 2010 on our salt segment operating earnings, which is very similar to the March quarter impact of this production slowdown. The inventory corrections should be essentially completed by June and therefore are expected to have very little impact on the results for the second half of the year. We also purchase some KCl-based products in our consumer and industrial product lines to round out our product offering in water softener uses. Those costs are projected to be about $3 million higher per quarter for the remainder of 2010 when compared to 2009. So to summarize all that, while the impact of these changes will unfavorably impact the June 2010 quarter salt margin versus 2009, we expect full-year salt segment operating margins and salt operating income per ton in 2010 to be similar to the results posted in 2009.

Looking at other non-operating expenses, our interest expense declined by $1.6 million as a result of our refinancing activities in 2009 and lower interest on variable-rate borrowings. Our other expense increased by $4.8 million year-over-year due to the effects of $3.9 million of foreign exchange losses on inter-company trade note and financing arrangements in 2010, compared to foreign exchange gains of approximately $1.1 million in the 2009 quarter. This impact was a hit to EPS of about $0.07 in the 2010 quarter and an approximately $0.09 per share swing when compared to the prior year.

Cash flow from operations during the first quarter was $137.3 million, about $25 million higher than the prior-year quarter, and our cash balance was $118 million at the end of March, which was approximately equal to the 2009 balance.

The first quarter of each year is when our cash flow from operations is seasonally highest. Our debt-to-adjusted-EBITDA leverage at March 31 was 1.6 times.

Our outstanding debt of $490 million includes maturities of our term loan B bank loans of $392 million in late 2012 and $98 million of long-term notes maturing in 2019. Additionally, our current undrawn bank revolver expires in December of this year. Our existing credit facility, which governs our term loan B and revolver, has pricing that is significantly favorable to today's market rates. So we are considering all of the various options that are currently available to us.

One option is to allow the revolver portion of the credit agreement to expire this December, which would allow us to continue to benefit from the current favorable market spreads embedded in our credit agreement. Other options include entering into a new facility, or amending and extending the existing credit facility, which would be expected to relax covenant restrictions.

One final comment on cash and debt. Over the past couple of years, we have spent a great deal of time articulating some of the near-term strategies around our larger strategic investments, most specifically the $70 million multi-phased expansion of the Goderich mine and the $40 million SOP yield and productivity enhancement project at the Great Salt Lake. We continue to expect to substantially complete those projects by the end of 2010 and that will drive 2010 capital expenditures to approximately $100 million.

As Angelo mentioned, we are evaluating opportunities to substantially increase our capacity at the Great Salt Lake through what could be very meaningful amounts of investment in increased capacities. We always factor those potential investments into our thoughts on capital structure and refinancing. We hope to have more details if and when we firm up our project plans in the future.

So, in summary, we continue to benefit from improved salt profitability, though the second quarter will likely see a contraction in margins due to our inventory reduction in the consumer and industrial part of the salt segment. And we look forward to enhancing our profits from our continued growth opportunities that our world-class rock salt assets provide. We are excited about the higher-than-historical profitability our SOP business seems capable of achieving at existing market prices and demand. That profitability should support continuing investment in our low-cost solar pond-based capacity.

So with that, I'll open up the call for questions. Kanesha?

(Operator Instructions) Mark Gulley. He withdrew his question. Amy Zhang.

Thanks and good morning. My first question is about the consumer and industrial salt. The pricing declined on a sequential basis, but the much larger deicing salt business actually was up in terms of pricing relative to fourth quarter of last year. So can you just give us a little bit more color about the sequential pricing decline for C&I?

Sure, Amy. Yes. I think when you look at our history of pricing there, typically the fourth quarter is the highest quarter of the year. As I mentioned in my remarks, the average price for consumer and professional deicing products is higher -- both the price and the margin on those products -- is higher than the average consumer and industrial product. So the lack of consumer deicing sales for this quarter in that particular area did impact our sequential pricing. But very typically our pricing is flat or down from the fourth-quarter average price.

Okay. Then a second question, also about pricing for SOP business. You announced a $30 per ton price increase effective April 1. I think the commodity guys, MOP guys, did the same thing, but their price hikes didn't go through. So I am wondering how shall we think about, on a sequential basis, year-over-year basis, for SOP prices in 2010 as the quarters progress.

Yes, this is Angelo. I think the year-over-year part is really not so relevant, because last year first and second quarter we had astronomically high prices. But I think the sequential one is a good reference. Rod, I think, quoted our April pricing on SOP, and it is up just about $30 versus our first-quarter average. So we believe we have achieved it, we believe we will sustain it, and we are comfortable with our order pattern. So we feel very comfortable with it. Again, there is a range of premium that we can achieve over MOP. We have demonstrated that historically. There is probably a $50 range in that. And we think that when you look at the second-quarter price of MOP to North American agricultural applications, which are mostly domestic U.S., and compare it to our SOP price, which is mostly domestic U.S. ag, we will be comfortably in that historic range.

Okay. My last question, again SOP volumes and then obviously this quarter the volumes were very, very strong, 102,000. Then going forward, I think before you expected the SOP volumes will go back to a normalized level, about 400,000 by 2011. Is that still your expectation? Or how shall we think about on a sequential basis the volume progress for the year?

Yes, this is Angelo again. Yes, I think we have said for a while that we think sometime during 2010 volumes will return to the normal basis on a rate basis, although 2010 will not be a normal year.

We got off to a very good start. There were several factors that helped the first quarter. There was the return of the grower, which is the most important factor, where application of potash in the field has increased. There was some activity in restocking the supply chain and the channel. And also when you announce a price increase there is always a little bit of pre-buying by customers to avoid the price increase. But we don't believe the market yet is back to normal. We are predicting second-quarter volume to be about double what it was last year. We think in the second half we believe that on a sustainable basis we will enter a period where our demand is more normal. But we don't expect 2010 volumes to be normal, but we do expect them to be above 300,000 tons in calendar year 2010.

Thank you.

Mark Gulley, Soleil Securities.

Angelo, can you talk a little bit about the permitting process for the yield improvement piece of the Great Salt Lake plans that you talked about earlier?

Great, yes. The yield improvement piece is our Phase I and it really didn't require permits. That is why we are able to do it so quickly, and we will have that complete by the end of the year. That got us the first 100,000 tons because all we basically did was improve the existing footprint both at our ponds and at our processing plant.

No, I'm sorry, I think I meant the additional work that you talked about in terms of having as much of an impact on production and maybe costing as much as the expansion of pond area.

Right. We have two large opportunities ahead of us to really step-change our capacity and potentially take it from something that will be about 350,000 tons a year when we finish Phase I to 1 million tons if we so desire. One would be to increase the amount of acres of ponds. Now we have those leases already obtained from the state of Utah. What we're trying to do now is obtain the permits from the Army Corps of Engineers. That is an extensive Environment Impact Study which we are now several years into.

We expect to be successful for most, if not all, or a significant part of what we have applied for, and that would potentially add 70,000 acres of ponds to our existing 40,000-acre pond system. That's going well. There is a lot of work to be done, as you can imagine, on the environmental side. We are pleased to do that work because, again, our footprint there is very environmentally favorable. We use solar evaporation. We take three years; it's a very gentle process. And we make organic fertilizers for fruits and vegetables. There is no better profile that a company can have than what we do on the Great Salt Lake. But again, the Army Corps of Engineers are diligently going through that.

The other part of our expansion opportunity is to improve the yields even further at our existing ponds. As you can imagine, with 40,000 acres there is a significant amount of yield loss just in that physical environment.

We believe we have some good opportunities to again materially increase our capacity by upgrading the capability of those existing ponds. That second project that I mentioned does not require additional permits because those would be done on existing pond footprint. So we think that that actually, which we kind of call Phase III now, that one might actually come to fruition earlier than the new acreage project.

Then finally, if I can, typically in past years you have provided an update on ice control pricing kind of like half-way through the season. When do you think you might be able to provide that data point this year?

Yes, I mean we are just starting the bidding season now. It is starting normally. This is, I think, my fifth cycle now in the bidding season. So it's starting normally. And I would imagine -- Rod, correct me if I am wrong -- but by the July call we will have a very good view of both volume commitments and pricing trends. And we plan on giving an update then.

Yes, typically, Mark, by July we are about 50%, sometimes 60%, of the way through the bid cycle.

Okay. Thank you.

Joel Jackson, BMO Capital.

Hi, good morning. I just wanted to ask if you guys are commenting that you think that SOP demand this year will be at least 300,000 tons of volume not returning to normal until the second half. I just want to know what you think normal SOP demand is. And then comment, because it seems like Q1 was a normal, relatively normal, traditionally normal quarter for volume unless it was just sort of a very large restocking period. Maybe just comment on that.

Yes, I mean -- this is Angelo. Our normal -- what we define as normal -- is about 100,000 tons per quarter, about 400,000 tons in a calendar year. And you are correct that the first-quarter results appeared normal. However, if you go below the surface there were several things that occurred. The farmer kind of went back into the marketplace and started applying potash. I think there was a bit of a surge of there. We also had a price increase effective April 1, so there probably was a little bit of pre-buying by our customers -- any good purchasing agent would do that. Then thirdly, since the channel had been so severely depleted over the last 18 months, there was probably a little bit of channel refill.

Now, we believe the biggest factor was the grower returning to field application of potash, which is kind of the primary driver of our business. But we don't want to be misled and we don't want to mislead you to think that we believe all is now back to normal just because we sold 100,000 tons in the first quarter. We think by year-end that rate will become sustainable, but we are predicting for the year sales of only more than 300,000 tons, not the full 400,000 tons.

Just switching topics. In some of the cities that you operate in, like I believe that was Toronto's first snowfall -- first winter it didn't have snow in November or March in something like since 1845, and I think I read that Buffalo deicing salt volumes were down 70% year-over-year in a local newspaper. I am imagining in some of your markets, some of your contracts may have triggered take-or-pay provisions. If you could speak about that and how that would affect bid season, and if you are seeing sort of a higher rate of take-or-pay provisions being triggered this year relative to previous years.

Yes, this is Angelo again. This is a wonderful market in that it is structured very symmetrically in terms of the customer needing to buy a minimum, which is typically 80% of the commitment, about. But also the supplier having to provide up to a maximum of 120%. So this year in a few places, just a few, there were below-minimum takes; and in those places that had below-minimum takes where we did have a minimum, we have gently prodded local governments and they have responded and have taken some product at the end of the season and into April. But it's not a big factor to really drive our results.

Okay, thank you. Just finally, talking about the -- you gave the estimated effect of the weather on the salt segment performance. Are you able to give a little more guidance in terms of the split between the weather and sort of the negative impact between C&I, consumer deicing products, and highway deicing? So if you say it was $15 million to $20 million negative impact on operating earnings, can you give a little more guidance on how that broke down in terms of C&I versus highway deicing?

Yes, I mean -- certainly the largest effect this year was on highway deicing, Joel -- well more than half. I think I discussed, though, C&I because the timing and the way winter happens really affects C&I in a different way than it affects highway. So I was making the point that the year-over-year difference in the assessment of mild weather was fairly significantly influenced by consumer and industrial -- consumer and professional deicing, whereas last year that effect was negligible on that part of the business.

Okay. Thank you for taking my questions.

(Operator Instructions) Jason Miner, Deutsche Bank.

Hi, just to touch on the SOP purchase contracts, I know that perhaps the price provisions are not advantageous at this point. But Angelo, I thought you might have mentioned something about when that contract will end. So I wonder, is that contract actually expiring, or is there a possibility that it becomes advantageous again in the future?

Yes, this is Angelo. We really don't want to get into the exact details of a very long-term agreement we've had with a key supplier. However, it's fair to say -- and the other point is we have numerous KCl connections; I think Rod talked about one that applies to water conditioning products. I think historically we have only talked about the part that goes into SOP. The part that we use historically for SOP would be coming to an end in the future, just based on the timing, however, the economics I think has brought to an end quicker, and our expansion of our pond-based capacity.

We wanted -- I wanted -- to get off our dependency of a sourced raw material which could provide large swings in our cost profile and return more to our mining roots. On the Great Salt Lake there is a lot more SOP than we had been extracting. With Phase I now completing and taking our capacity at the end of this year to 350,000 tons per year solely from solar ponds, we have just about replaced the impact from the sourced MOP. So we believe the economic factors with the volatility of KCl prices, the expansion of our pond-based capacity, and our ability to build an inventory bridge of SOP, which Rod explained could carry us for a fair amount of time, gives us the perfect opportunity in 2010 to wean us off this sourced raw material. So I expect us to be off this year and to stay off.

Now, could KCl collapse in the future? I sure hope it doesn't, because our SOP price is somewhat predicated on that. But I really don't expect us to get back into the MOP sourcing business for our SOP business. We're going to handle that going forward strictly from our lower-cost solar pond-based capacity, which we have significant growth opportunities in based on the two projects I outlined in Mark Gulley's question.

That's very clear and helpful. So I wonder if you could take a moment to talk about the cost basis of this new world with the Corps of Engineers permitting process you mentioned perhaps containing new provisions, maybe construction costs are higher than the last time you'd expanded the ponds. I wonder if you look at the $200 per ton -- maybe that is more of a run-rate cash cost -- but what would your cost of production do over time, do you think, as you work through these two opportunities? Would it be somewhat higher cost?

This is Angelo again. I mean since we don't know exactly the investment and whatever permitting we get -- and remember I talked about two pieces of capacity growth. The one piece that is in the existing ponds don't require permitting. So that piece would just depend on the investment intensity. And just preliminarily I would expect those costs to be very similar to our historic pond-based cost and to be at or below the $200 per ton level.

The other piece that requires new permits. I really don't expect material differences in pond construction, but they may tell us to put the ponds in a more north-south region or avoid this area or that area. But I wouldn't expect that to be very different than our existing pond construction, so I would expect those to be at or below $200 a ton.

So I am very optimistic that we can substantially increase our SOP capacity through those two methodologies. One would be improvement of existing pond structure, the other would be new ponds, and end up with a cost at or below $200 per ton for solar pond-based production.

Lastly -- that's helpful. I know we started talking about new expansions in this business before profitability was stabilizing at this much-better level. So if you care to comment on the returns you might expect, what do you typically look at? And how would the returns on those projects shape up given the current profitability of this business?

Yes, these projects haven't been fully defined. But some of the things we look at is, obviously, we want to grow our earnings so we have very high hurdle rates. I think we have a very attractive return on invested capital, and we like to preserve that, if not improve that. Secondly, we look at what are competitive expansion opportunities. There is a lot of data out there now on what it costs for a greenfield potash mine, what it costs for a brownfield investment. And our Phase I investment on the Great Salt Lake compares very favorably to those benchmarks. Certainly any future investment in SOP we would want to also be favorable or at least competitive to those brownfield investments that are out there. Certainly we will be favorable to any greenfield investments.

So assuming the investment intensity is where we think it should be, and looking at current pricing -- which is a step-change improvement versus where it was in 2007 and before that -- and then operating cost to be around that $200 or less, we think this is a terrific franchise to build on.

Again the fundamental growth rate in specialty crops and specialty fertilizers is in that 3% to 4% growth rate. We think that combination - let me remind you that the SOP market is about a 7 million ton market. We only participate right now in a very small, 5% approximately, global share. So we see a lot of opportunity to take our low-cost production around the world in addition to our current U.S. market which makes up most of our sales.

Thanks very much.

Douglas Chudy, KeyBanc.

Good morning. I guess first of all, I realize salt is a very regional business; but I'm just curious. Does expansion at Goderich give you any ability to competitively expand the size of your geographic footprint, maybe touching into a couple of adjacent markets where you don't currently bid?

Yes, it's a great question. This is Angelo. It's a great question.

We enjoy the fact that salt is regional. It gives us kind of a sheltered position versus importers on both coasts. So wherever we can get to by water, we go. You are correct. As you take the Goderich production further east, there are markets in upstate New York and areas that we don't typically serve that are now accessible.

Now historically we have served these markets, but as capacity got constrained, for margin reasons we pulled further and further back closer to the mine. Now as our capacity has expanded it gives us an opportunity to target some areas, but it certainly is not going to make a major increase in our footprint possible.

Okay. Thank you. That's helpful. Then secondly, and I apologize if I missed this, but the average price increase for deicing salt contracts was about 8%, you mentioned, for the winter season, yet deicing salt was up closer to 20% during the quarter. I assume this has to do with mix. But can you just give a little more clarity on what drove I guess this variation?

Yes, that's a good question, Doug. You're right, mix had a large part in that. As you can imagine, regionally because of logistics cost differences, there are differences also regionally in prices. So when you have areas that are farther from your mines -- for example, let's just say Pittsburgh,(and I don't want to overplay that particular city, but just for example), where they are farther away from the mine -- those prices are going to be higher. But that doesn't necessarily mean a higher profitability mix.

So that played a role. The other thing to remember is -- and we mentioned that foreign exchange had a positive impact. And that impact on highway prices was about 4% of that increase on the quarter versus the last year price.

All right. Thanks very much.

Jeff Zekauskas, JPMorgan.

Good morning. This is Olga sitting in for Jeff. I have a couple of quick questions.

First, just wanted to make sure that I understood it correctly. So when you were talking about SOP production costs being lower -- I don't know, like $10 per ton -- was it a sequential expected decline? Year-over-year? What exactly you were referring to?

Yes, and when we talk about that, we have to go through sort of the painful process of talking about how accounting works.

Right.

As I mentioned, the first 200,000 tons we sell this year will be at last year's produced inventory cost. So it won't be until we work through that 200,000 tons that we would start costing that inventory at a $10 per ton decline. So call that sometime in the third quarter. I think we have said second quarter we expect about double the volume of last year, which would put us somewhere around 80,000 tons. So we're somewhere into the third quarter before we start seeing the effects of that decline.

Okay. Then I guess similar for salt, when you were talking about salt margin contraction in the second quarter, were you referring just to the consumer portion or to the consolidated salt? And what was the year-over-year margin contraction?

Okay, well in the first quarter, salt margins were almost the same; I think it was about 0.5% lower this year versus last year. What I mentioned was that the second quarter would contract, and that would be principally based on this inventory adjustment that will take place and will be essentially completed by the end of June.

I apologize. It does normally contract sequentially from the first to the second quarter. So were you talking about the year-over-year margin decline?

I apologize for not understanding your question. Yes, there is normally a contraction; and it will be a bigger contraction than it was last year in the second quarter. But on a full-year basis, we expect very similar margins for the salt segment versus what was posted in 2009.

Understood. Then the other quick one, did you mention the SOP price in April of $542? Was it the posted price or what was that?

Yes, that has been the average price that we have achieved thus far in April. I think Angelo mentioned our order pattern was somewhat normal.

So that was realized price?

Our realized price, yes.

And if I may, the very last one. So it appears that you used KCl you purchased from the third party for your salt business as well, which is kind of new information for me. So do you disclose how big is this portion out of normal -- I don't know -- 200,000 tons you purchase?

Yes, this is Angelo. We have consumer products that we sell at retail that include KCl. We actually have water conditioning products that include KCl. We actually have some food products that include KCl. We actually have some consumer deicing products that include some KCl. It's not material, on a volume basis it's really less than 1% of our total salt sales volume, but because of the significant cost or price increase that we've experienced, we thought it was important to call out that inflationary pressure on a raw material. But it's a small part of our business and we're obviously managing through that appropriately in the marketplace. But it did affect our costs, and we just thought it was important to give you some visibility on it.

Right, but is it a small part of your purchase agreement with the third party?

It's a different part. As I said in a prior question, we have many KCl purchase agreements. The one --

Oh, so it is not the only supplier you use?

It is not the only. As I said we have a large supply agreement for KCl for SOP production and one type of bulk application. We have KCl for water conditioning. We have KCl for food, and we have KCl for deicing. Those are all different agreements, not always with the same producer, by the way. And those C&I ones are quite small, very small, compared to the one for SOP.

Understood. Thank you very much.

Edward Yang, Oppenheimer.

Hi, thank you. Good morning. On the salt side, deicing -- that includes chlor-alkali, doesn't it?

Our highway deicing does, yes.

Okay. Did that offset, help offset, some of the seasonality in the first quarter? And should that help you in the second quarter? That industry seems to be enjoying some better volumes in the first quarter and second quarter year-to-date.

Right, Ed. I think as we talked last year, our chemical chlor-alkali volumes were significantly off as that industry was down. I think we described that as more than 0.5 million tons of decline last year. We have seen improvements there, although it doesn't appear to be back to normal. So we are seeing some increase in our volumes in that particular area.

Just as a reminder, our chemical sales are lower price and lower margin. So the impact up or down doesn't tend to be material. But yes, we saw a little bit of an increase in margins due to some modestly increased sales to chemicals in the first quarter; and we would anticipate that continuing through 2010.

Okay. Rod, is there usually a delay that you would see from salt sales into this end market in the chlor-alkali industry? Because I believe the chlor-alkali sector now is operating around 90% plus or minus, so it is kind of back to pretty strong levels.

Right. Just as a reminder, some chlor-alkali producers have a captive source of brine. Some don't and require rock salt to be brought in as part of their production. So it depends on which plants are up and down, depending on whether it affects rock salt sales or not.

Okay.

But to get a little broader on that, this is Angelo. We haven't -- the share issues have not changed. So we're coming into 2010 with the same customers we had in '09. So as that industry recovers, we look forward to that recovery, too. Although, as Rod correctly pointed out, a ton of rock salt in deicing is more valuable to us than a ton of rock salt into chlor-alkali.

The nice part about the chlor-alkali demand is it's not seasonal. And from a production point of view, we enjoy that.

What percentage of it is -- as a percentage of total volume? I understand it's lower-priced.

Yes. In a normal year, it is 2 to 2.5 million tons, but we haven't been at that rate for the last probably 18 months.

Okay. Thank you. Finally on the salt side in terms of supply, have there been any industry announcements from your competitors on mine expansions and so on?

This is Angelo. Unfortunately, our competitors aren't as publicly active as we are in talking about things, so we are not aware of any significant material expansion anywhere in our service area, which would be U.S., Canada, and the U.K. So we are not aware of any. That doesn't mean something is occurring and they just haven't announced it; but we are not aware of any.

Thank you very much.

We've reached our allotted time for questions. I would now like to turn the conference over to Mr. Angelo Brisimitzakis for closing remarks.

Thank you, Kanesha. I would like to conclude our discussion today by pointing out once again that Compass Minerals is a uniquely resilient company. Unlike what you would expect from a traditional manufacturer or from a chemical company, Compass Minerals has been able to generate strong operating margins and cash flow amid wildly varying circumstances. Our salt segment has proven its ability to produce robust earnings through many environments. We are optimistic about the outlook for our specialty fertilizer segment given the pricing stability of SOP at these new, higher levels and the very positive current demand trends. Plus we are developing very exciting investment opportunities to increase shareholder value into the future, so that we can continue to build on the strengths of this company for all seasons. Please see our website for an updated presentation on Compass Minerals' value proposition.

Thank you for joining us today. I look forward to talking to you again in July.

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