Compass Minerals International Inc (CMP) 2010 Q2 法說會逐字稿

Good morning. My name is Celeste, and I will be your conference operator today. At this time I would like to welcome everyone to the second-quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (Operator Instructions)

I would now like to turn today's call over to Ms. Peggy Landon. Please go ahead, ma'am.

Thank you, Celeste, and thank you all for joining us this morning. Here with me today are 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, July 28, 2010, and involve risks and uncertainties that could cause the company's actual results to differ materially.

These 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.

Now I will turn the call over to Angelo.

Thanks, Peggy, and good morning, everyone. Thank you for participating in our second-quarter earnings call.

The second quarter is always an interesting one for Compass Minerals because our product mix is very different from the winter quarters and our volumes are much lower, so variations from the norm seem magnified. However, when you look at the key drivers of this quarter, you still see that our results illustrate the attractive attributes of salt and specialty fertilizer that underpin the durable earnings power of Compass Minerals despite some short-term impacts that may reduce reported income from time to time.

We posted sales volume increases in each of our product lines this quarter which, together with price improvements and foreign exchange impact, generated a 12% year-over-year increase in CMP revenue. Our cash flow from operations were strong and grew by $57 million during the quarter, which is significant in this uncertain global economic environment.

At the same time, we made some key decisions during the quarter that had short-term negative impact on our reported earnings. But we're very comfortable with those decisions because they will benefit the company over the long term.

Looking first at our salt segment, our highway deicing sales volumes were up 14% and average selling prices were up 12%. Our U.K. business, which normally has a very modest impact on our second quarter, was a key contributor to this improvement with very strong early-fill orders and strengthening prices, reminiscent of a couple of years ago when there was a stampede for rock salt demand in North America following a very strong winter.

Our salt segment sales volume improvements also reflects the ongoing rebound of lower margin sales to chemical customers in North America. In addition, consumer and industrial sales were up 5% over the prior year, consistent with long-term trends for this business.

Despite these positive drivers, our salt operating margins compressed year-over-year. Every year, the second quarter is the quarter with the lowest salt earnings and operating margin, so the operational decisions I mentioned earlier can have a disproportional impact on our results.

We talked to you last quarter about our plans to reduce both highway and consumer and industrial deicing inventories following the mild winter in our primary service area. We said to expect a second-quarter cost increase of about $3 million due to reduced capacity utilization, principally at our consumer and industrial plants, which is reflected in our second-quarter results. We also talked about lower production at our Goderich, Ontario, mine which we didn't expect to have a material impact on costs, and the strike at our Cote Blanche, Louisiana, mine which we expected to increase costs by about $1 million to $2 million.

As the quarter progressed, it became clear from early bid results in North America that tender sizes following this mild winter would be modestly lower than we had anticipated and that our salt production volume needed to decline a bit further to better match anticipated demand.

Therefore, at the Goderich mine we made the decision to opportunistically reduce salt production even more than we had planned and install our new hoist a couple of months ahead of schedule. The hoist is the key part of our capacity expansion which I will discuss in a moment. The decision to install it ahead of schedule made the construction process simpler and less destructive than we had originally planned.

More significantly, we also further reduced production at our mine in Cote Blanche, Louisiana. The higher-than-normal inventory we were carrying following the mild 2009-2010 winter gave us a strong platform from which we could also patiently work on implementing better and safer work rules that should sustainably improve our operating flexibility at that mine. Though the strike lasted 10 weeks, which was longer than we expected, the union unconditionally returned to work in mid-June.

Importantly, we now expect to have the appropriate salt inventory levels in North America to serve all of our customers in the upcoming winter. But our consumer and industrial and rock salt mine second-quarter salt production reductions added approximately $6 million of higher unit costs in total. The strike itself also added one-time incremental hard costs of $1.3 million that was within the range of earlier guidance.

As we discussed last quarter, we continue to see the ongoing $3 million quarterly impact from the higher cost of sourced potassium chloride used in some of our bagged water conditioning products.

The net result of these mostly one-time costs was that our salt segment operating margin this quarter was similar to our historical average second-quarter operating margin. However, this is just a coincidence and I don't want you to think that the margins have reverted to a mean. We have achieved true underlying margin expansion, and that should be evident when salt production and sales normalize.

We needed the reduction in highway deicing inventory because our North American customers are requesting about 3% less salt for the upcoming winter than they contracted for last season. This modest decline is understandable following a winter that was the mildest on record in some of our service territories. In addition, our customers had significantly increased the size of their bid requests after the severe winter weather and salt shortages of 2008 and 2009, so this is a reduction from record-high bid sizes.

When you combine the North American bid seasons of 2008, 2009, and 2010, bid demand has achieved a 3% compound annual growth rate, which is ahead of the long-term average volume growth rate of 1% to 2%. Similarly, average bid prices for the upcoming season are essentially flat so far, which is not entirely surprising in light of the 20% and 8% price increases we achieved in 2008 and 2009, respectively. So over the past three seasons, we have achieved an approximately 9% price CAGR in North America, which well exceeds the long-term average of 3% to 4%. Keep in mind, though, that our actual winter season sales will be determined by weather. If we have normal weather this upcoming winter, our sales volumes in the fourth quarter of this year and the first quarter of 2011 should be higher on a year-over-year basis despite the lower expected bid volumes.

Now that the new hoist has been installed, we will soon add 1.5 million tons of annual capability to the Goderich mine's current capacity of 7.5 million tons of rock salt. That means we will have the infrastructure in place to process, hoist, store and load up to 9 million tons of salt each year. Because of the variable cost nature of the mine, that extra production capacity won't add any significant ongoing costs.

We will gradually add variable costs as market demand warrants, just as we have through the decades of prior expansion that took this mine from its original 0.5 million ton annual capacity in 1960 to its current level.

The final stages of infrastructure expansion will be completed in the third quarter, which should provide us with modest efficiency improvements in 2011 as well as additional sales capabilities in 2011 and beyond, depending as always on upcoming winter weather.

Turning now to our specialty fertilizer segment results, I am pleased that the demand has continued to rebound and that, as we projected, pricing has stabilized and improved versus the first quarter. I imagine that some of you were surprised that our second-quarter average selling price was about $20 per ton lower than the average price of $540 per ton we reported as our actual quarter-to-date price in mid-May.

Two things happened that lowered our reported second-quarter average selling price. First, more of our late-quarter sales volumes came from international customers than we anticipated. Since international export prices are generally lower than domestic prices, the customer mix had a material impact on our average selling prices. The second impact came from a new fertilizer product trial that we conducted in the second quarter. We had one-time sales of this product that we're test marketing, but I don't want to elaborate on it for competitive reasons. The only reason I even mention it is because these very low-volume one-time sales lowered our reported segment average selling price by $14 per ton. We haven't determined if we will pursue this product and, if we do, what the ongoing price will be or what the long-term volume will be. That is why we are test marketing it. If we think it might be a viable product, we will let you know early next year. Even if we go forward with it, we believe the earnings benefit will be modest at first. You shouldn't expect to see any further impact from this trial or hear any more information from us before then.

The effects of this product trial and the sharp increase in international sales late in the quarter camouflaged the fact that the $30 per ton price increase we implemented on April 1 was largely successful in our primary domestic market. If you exclude the product trial and look at the true second-quarter average selling price for SOP alone, it was actually $533 per ton, which is more consistent with the updates we gave you during the quarter.

In the second half of the year, we are expecting more-normal international sales, so our reported average selling price should more fully reflect our achieved price increase. We expect our sales volume for the remainder of the year to be about twice the volume of the second half of 2009, but the sales may not be proportionate by quarter. We still expect total-year SOP sales volumes to exceed 300,000 tons during 2010 and return to more-normal levels during 2011.

We are nearing the completion of the first phase of our SOP capacity expansion at the Great Salt Lake. To complete it, we will shut down the SOP processing plant for a few weeks during the third quarter to install new equipment that will improve our ability to recover minerals from the solar-pond harvest. We will finish the bulk of the remaining expansion work during the fourth quarter, which should bring the plant to its annual lower-cost pond-based production capacity of about 350,000 tons.

We have mentioned last quarter that we are also evaluating another SOP-capacity expansion project that could meaningfully increase the productivity of our existing solar evaporation ponds. We are still conducting feasibility studies, which means we don't yet have enough information to make a go-forward decision or to determine the potential timing, course, cost, or resulting capacity improvement. We expect to complete that evaluation before the end of the year and will let you know the outcome as soon as we are able. If we do make the decision to go forward with the project, it would be completed before we expand our pond acreage at the Great Salt Lake. So we are now calling this potential pond-yield-improvement project Phase II of our long-term SOP expansion program.

So to summarize the quarter, there was a lot of noise that makes the underlying results more difficult to recognize. To highlight those results again, we posted a 12% increase in revenue and volumes improved across all of our business units. Cash flow from operations increased by $57 million in the quarter, which more accurately reflects our cash-generating capabilities than were evident last year when we were building inventories. Plus, we are very close to completing the current phases of our key rock salt and SOP expansion projects at our advantaged facilities. And we have two SOP capacity projects under evaluation that we are very excited about.

We have also recently launched several new value-added consumer industrial products that will help us continue to differentiate that business. From a big-picture perspective, I am very pleased with our achievements this quarter, and I am optimistic about our outlook.

Now I will ask Rod to discuss our second-quarter results in more detail. Rod?

Yes, thank you, Angelo. As Angelo discussed the significant items leading to the increases in our sales for the quarter, I will wrap up that part of our discussion with just a couple of final thoughts.

Our sales improvement this quarter definitely benefited from our broad geography, as the U.K. made a greater impact than it has in the past, principally due to the second consecutive severe winter there, which is motivating governmental entities to more aggressively build their stockpiles. We expect they will carry larger inventories in the future, which is improving our summer and early-fall sales expectations this year. Given the size of the U.K. to our overall salt business, it is unlikely to have such a large relative impact on next quarter's results as it did in the second quarter.

Our year-over-year salt sales improvement included a 3% benefit from changes in foreign exchange rates on our Canadian-based sales. There was almost an identical dollar impact on our unit cost this quarter, so the earnings impact from foreign exchange was negligible.

As for our decline in specialty fertilizer operating earnings, the most significant factor was the year-over-year decline in SOP average selling prices, which produced a $10 million decline in those operating earnings. While the comparison to prior year's very high price is a dramatic change, the more relevant comparison is for our sequential pricing. On that front -- and much of this as Angelo mentioned -- we felt good about our April 1 price increase mostly holding in the market, although the reported price of $519 was influenced by factors Angelo mentioned. I want to reiterate that our second-quarter pricing was very solid at $533 per ton for sulfate of potash, and the factor reducing our second-quarter average reported price either isn't expected to persist through the remainder of 2010 or will be muted. As a result, and based on current market conditions, we expect to report a higher average SOP price in the last half of 2010 than the $533 per ton price we experienced in the second quarter.

As for our salt segment operating earnings, the earnings for the quarter declined about $6 million or 6 percentage points when compared to the prior year for the reasons Angelo described. Of those elements, only the $3 million per quarter increase for the sourced potassium chloride should be considered as ongoing.

Looking ahead for our salt segment, we expect only a relatively modest impact to remain for the rest of 2010 from reducing deicing salt production levels. And as Angelo mentioned, North American highway deicing prices have been flat thus far into the bid season. Logistics are currently lower than last year, and we expect that benefit to partially offset the remaining effects of our inventory correction and the potassium cost increase. So, salt operating margin percentages for the next couple of quarters are expected to approach, but not quite reach, the 2009 levels. Given that 2009 was a significant step change, I want to point out that assuming current fuel rates and consistent bid results through the end of the bidding season, we expect second-half 2010 salt operating margins to be well above 2008 levels.

So in the end analysis, salt continues to perform exactly as we said it would over time. The past winter was one of the mildest on record in many of our core markets. Yet, because our customers hold very little inventory, the channel isn't jammed and bid volumes are not significantly lower, only about 3% for the markets we serve.

In fact, a few of our customers completed their contract minimums late in Q1 or early in Q2, which likely modestly impacted bid volumes for the coming season. And despite higher producer inventories following the mild winter, prices on average have not fallen. Of course, our final bid award volumes and prices won't be known until mid-fall, and we will report the results of that bid season in our third-quarter earnings release, as we do every year.

We reported other income of $1.9 million this quarter, which reflects the effects of non-cash foreign exchange gains on intercompany accounts and notes, compared to other expense of $5.9 million in 2009, which included $5.9 million of cost to refinance our remaining high-cost debt.

For the rest of 2010 we expect our income tax rate to be between 28% and 29% for the year. Cash flow from operations for the six months was up $83 million from the prior-year period. Our 2009 investment in inventory has started to generate positive cash flow as we have sold more SOP than we produced thus far into 2010. I am sure you will recall that we invested to build an inventory of lower-cost SOP last year.

We have invested $46 million in capital expenditure projects so far in 2010. We continue to expect full-year capital expenditures to be at least $100 million in 2010, and depreciation is expected to exceed $50 million on the year. We will provide an expectation of our 2011 capital investment expectations in the future.

Cash on hand at June 30, 2010, was $112 million compared to $66 million last year. There was no balance on our bank revolver at quarter-end, which expires in December of this year. Our outstanding debt at June 30 was $488.8 million.

Our existing credit facility which governs our term loan B and revolver has pricing that is favorable to today's market rates. So one short-term option we continue to consider is to allow the revolver portion of the credit agreement to expire this December, which would allow us to continue to benefit from the low spread and our current credit agreement.

The revolver has historically only been drawn for short periods in the fall and early winter during the final peak stages of our seasonal working capital builds. Based on our expected cash flows and investments through the end of 2010, we expect to have enough liquidity through the end of the year to avoid any need for a revolver. But we also continue to assess our many other options, with a focus on minimizing the step-up in financing costs that a full refinancing would bring, while increasing the flexibility of our financing arrangements.

Now we would be pleased to take questions. So, Celeste, would you please prepare the queue?

(Operator Instructions) Mark Gulley, Soleil Securities.

Hey, good morning, everybody. I guess my question regards salt pricing. After an outstanding track record of ice-control price increases, as depicted in one of your slides -- I guess it is slide 8 -- it looks to us as if perhaps that story has stalled. So is this a long-term secular problem? Is it maybe coincident with the fact that K+S bought Morton? Or is it simply just the mild winter and excess inventory?

Great. Hey, Mark, thanks. This is Angelo and good morning, everyone. Thanks, Mark, for referencing the two presentations actually that we have posted. We have added another tool to help explain our quarterly results, so there is one that focuses exclusively on the second quarter that is posted, and then our typical longer-term, what I call value proposition of CMP, over the long term.

To answer your question, you have to step back and look at our salt industry over the long term. Historically, it averaged price of about 3% to 4% per year. There were some years that were below that; there were some years over the last 40 where it was negative price. And then as we saw over the last two years, we had extraordinary price inflation of 20% followed by 8%. I think we mentioned at the time that those were unsustainable and they were fairly unique. They followed stronger winters and very severe supply-demand shortages.

Therefore we have to put it all into context. This last season was milder than normal, so having flat prices -- although it is disappointing versus the average -- when you put it into the context of the last three seasons, three years, we average way above-normal results. You can almost look at this season as consolidating the successes of the last two seasons. And I certainly would not allow one point to create a trend.

I would refer you back to that page 8 that you referred to, and you can see a steady, long-term trend. We expect that to continue, although weather will certainly play a factor in future results. Following severe winter weathers, we probably should expect above-normal price realization. During normal winters we should expect something closer to the norm, which is that 3% to 4% we reference. And when we follow mild winters, we should expect -- it is logical to expect -- something less than the norm.

As a follow-up, with Morton's new ownership, K+S, have you seen any difference in their bidding strategy?

You know, Morton was always a major competitor to us in North America, and K+S did not bring any new assets into North America that Morton didn't already have. So we expected to see the same kind of Morton during this upcoming -- this winter and 'til now that is what we have seen. No real material change in their bidding strategy, and no real change in their tactics. So, so far it has really been a non-event for us on the highway deicing side.

Then finally, Rod, can you explain why SOP prices will be up sequentially in the second half? I couldn't quite catch why you think they will be up versus the $533 that is the underlying number for the second quarter. Thanks very much.

Yes, Mark. When we just look forward at our just general customer mix, we expect there to be a little less international; and even some of our domestic mix has some variations in it and is expected to result in something better than the $533.

Edward Yang, Oppenheimer.

Hi, good morning. Angelo, I agree completely in terms of the salt business has been on a remarkable run; and it makes some sense to evaluate your price performance on a long-term framework. But that having been said, as you noted, salt prices in the last three years have been running at a 9% CAGR, and 3% to 4% has been the long-term average. So what is to say that flattish salt prices or plateauing of salt prices don't persist for another year or so?

Yes, it's a good question. I mean, if you tell me what the winter weather will be this upcoming winter season, I could probably give you some better clues as to what the bidding environment will be next year. I just have not seen anything in the years I have been in this business that would suggest that the 3% to 4% is not what we should expect under normal conditions.

I will just reference you back to some of the questions over the last few quarters, was -- you know, following the 20% and the 8% price increases, a lot of the questions were -- why isn't the new norm 7% or 8% or 9% price increases going forward? And we were very persistent in saying, do not extrapolate the 20%, and do not extrapolate the 8%. We are more comfortable with the 3% to 4% rate that we have seen over the last 40 years.

So I would also caution everyone to not take a relatively flat result in a very -- following a very mild winter in our service area -- to be the new trend either. I would fully expect that if we have normal winter weather I haven't seen anything that would suggest a normal pricing result in that 3% to 4% going forward.

Could you remind us why a milder or more severe winter might impact prices? It was my understanding that customers don't carry much inventory. So why would that affect prices? Has something else changed to change the pricing outlook? Is it the economy, for example, or have there been any changes in supply?

Yes, that is a really good question. I think there are a lot of factors, and I'm not sure I could pinpoint the one that explains it all, but I will give you some of the factors that I think played out here.

Number one is, we followed 28% of price increases, and there were some exceptionally high prices that came in from imports when there were shortages. I like to call those prices radioactive, because they really didn't typify the existing market. If the existing market at the time was in the $50 to $60 price range per ton, those pieces were at $100 a ton. So having those small pieces fall back to the normal market price is logical.

In addition, bid volumes in a couple key states, which didn't have a lot of snow, shrank. On average they shrank by about 3% across our service area. So you have a little more rivalry when you have the same number of competitors competing for 97% of the pool versus prior years where they were competing for 100% or 103% of the pool.

You know, is there maybe a little conservation mixed in? Is there maybe a little economy mixed in? Is there maybe a little carryover inventory mixed in? Probably. So you mix that all together and, unlike other cyclical markets where you will see huge swings in price up and down, if a bad year -- quote unquote -- for the salt market is 0% price, that is pretty good. That is still pretty good.

That is a fair point. Just finally on SOP, and forgive me if this is a naive question, but why are international sales prices lower than North America? And why were the international sales higher than normal in the second quarter?

This is Angelo again. We are happy that the international sales were higher. We are not unhappy with our domestic sales; we just got a little surge there at the end.

I think the international folks actually exited the market more aggressively over the last two years than our domestic growers. So their need for replenishment was really more severe. So when they came back in, they came back in in a more dramatic way.

On the domestic side, we sell primarily on a delivered basis. On the international side, there is a lot of export sales, and we either sell to a port, then somebody else makes the final delivery, one of our distributors. So we have a little bit of apples and oranges.

It is fair to say that we prefer the domestic business because we have higher netbacks to our production facility in Ogden, so our margins tend to be higher. So that is why. Selling price is a surrogate for that reality that the domestic business, because we have lower shipping costs, typically is more attractive to us than the international.

But we are happy with both pieces of business. And frankly, the growth rates are higher on the international basis. So I think you will see us becoming more and more of a global player in SOP over time, particularly if we move forward with those expansions that we talked about earlier.

Thank you for the color.

Jeff Zekauskas, JPMorgan.

Hi, good morning. A couple of questions. You said that the bid season is about 50% over. At this time last year, how much had the -- what percentage of the bid season had concluded? Are we ahead of last year or behind last year?

We're a little behind last year. You might remember that we talked last year about the bid season being a bit accelerated in North America, especially really in the U.S., and that was principally because the prior year the prices were up dramatically, especially on those volumes that were bid at the end. So states tended to move their bids forward last year. It is a more typical year this year, with between 50% and 60% of the bidding completed. Last year it was a little more by this point.

Right, so thanks for that. So I am trying to think back in time. I think in 2006 your highway deicing tonnage was around 8 million tons, whereas in 2005 it was about 11.5 million. And 2007 was a very good pricing year. So sometimes it's the case that deicing volumes can really drop but pricing can be good. So what is it about this environment in 2010 that's different from the environment back in 2007, if you recall?

This is Angelo again. I think on the pure pricing side, I think this bid season is following an exceptional 28% run-up in price from the prior two bid seasons, while I think in the case of the '06/'07 period it didn't follow that magnitude of a run-up. I think that is one factor. I think there is a bit of consolidation occurring more this season than perhaps that period where we also had three quarters of fairly modest or weak winter weather.

I think the other factor is that influence of imports in the mix, that I also believe wasn't a big factor back in the '06 period, and those radioactive tons at $100 or more per ton of selling price, which we knew at the time was not sustainable, but we were happy to take advantage of them. You know, when those normalized to the market prices -- you know, market prices today are on average higher than they have ever been -- so when they normalized back to the market, they did cause some mass which resulted in price reductions on those line items. So you mix those reductions in with the typical couple-percent increases on the other lines, you average out to something around zero.

I think you can't look at it in one monolithic way. There are literally thousands of distinct line items, each of which have their own competitive dynamics based on who you compete with, what the prior price was, what the logistics and supply-demand balances are in that particular area. We ship some of the salt out of the north, out of Goderich, via boat. We ship a lot of it out of our mine down on Louisiana via barge. Barge rates change; boat rates change; competitors come in; competitors come out; pricing is different. You just end up at the end averaging in several thousand line items, and so far it is averaging out at about zero.

Then lastly on your specialty potash business: what tends to be your split in a normal year between your volumes sold to the domestic market and volumes sold to the offshore market, (which I assume is Europe; am I incorrect about that)?

Yes, to answer your first question, I think typically again we want to sell as much as possible domestic.

Sure.

And we do. About 75% of our sales tend to be domestic on average.

The exports are actually not into Europe, although Europe is one of the larger SOP markets in the world. Most of our exports are to natural markets in Latin America, such as Mexico, in South America, or some exports to the Far East. But not to the big markets of China or India, but to the smaller markets like Australia, New Zealand, Japan.

So why are offshore prices lower than domestic prices?

I kind of got into that a little bit. We sell through different channels and different supply chains going internationally. We go through distributors and brokers often, and we sell to port location, so there is somebody else that gets between us and the grower more often in an international market than in a domestic market.

We also have the added complexity of exchange rate and competing with competitors that might be costed out in euro, for example, so we have the whole issue of dollar/euro competition, which is much more prevalent in our international markets than we see in the domestic market. The domestic market, it is always dollar price.

So it is just a little different for us. We like the international market. It is growing at a higher growth rate but our netbacks are more attractive on those domestic customers that are very close to our production facility.

Okay. Thank you very much.

Joel Jackson, BMO Capital Markets.

Good morning. Thanks for taking my call. I have a couple questions. Are you able to give some color on historically where bid volumes have lined up as a percentage of eventual shipments? Or maybe put it the other way, which is where shipments line up as a percentage of where bid volumes were for that winter. Sort of historical color on that?

Yes, Joel, our range has been as low as just a little less than 80%, which was the result from this year, for this past winter, as well as much as almost 120% --I think we've got to 117% or something like that. And this is -- I am talking now in a time frame of the last 10 to 12 years. I can't really speak to it before that. So we have seen very mild and very severe winters. '08 would have been -- the '07-'08 winter would have been one of those very, very high years, more than 110%. And the '06-'07 and '09-'10 winters at close to 80% would have been very low winters.

In what we would think of as a normal winter with normal precipitation, (inaudible) precipitation, would we think of bid volumes -- excuse me, of shipments equaling roughly bid volumes?

Yes, that's right. So over time we have about 25 years of data from our particular markets. I couldn't speak to North America as a whole for the regions that we don't compete. But over that long-term period of time, it averages almost exactly 100%. There are some regional variations to that, but as a rule it is 100%.

Are you finding -- I know you have mentioned in your press releases that pricing varied throughout the different regions. Maybe you could give some color on the different ranges, at least for some larger contracts or larger bids, successful bids.

This is Angelo now. Are you talking salt or SOP?

Well, for example, I can read that the Toronto market had a three-year contract; and during the third year of the contract it's a 7% selling price increase from last year, just from what I've seen. Or some other states or counties or cities where it may be down 2%.

I'm just trying to see what, for a decent-sized contract, what the range of pricing growth is across your region, selling regions.

Can you take this one?

Yes, I think we even mentioned in our release that the range of prices was quite wide. When you look at what happened in the market this year, there were some prices from the past that had been below market and some, as Angelo mentioned -- a few, not a lot -- that were at very high prices.

We look at this year as somewhat of a consolidation pricing year in that most of the prices -- by the time you net out the logistics effect of any particular customer being farther or closer to delivery points or to mines -- this is somewhat of a consolidation year where the range of variability in prices is a lot lower than it has been for the last couple of years, when you had some customers that were paying extraordinarily high prices and a very few customers that had rollover capabilities from prior years that they continued to exercise through the turbulent pricing period.

Thanks for that color. Just staying with highway deicing and I think following on a line of questions that Mark was getting at, let's talk if there's any other systemic changes going on. Are you seeing any changes in terms of counties or states aggregating bids from counties or cities or townships, and coming to the different producers and putting out -- trying to get bids for larger blocks of geographical areas?

Are you also seeing changes where cities or counties or states are requesting three-year contracts or two-year contracts like you might see in places like Ontario, versus one-year contracts?

Yes, this is Angelo. We are really seeing no change in pattern. I mean every season some counties get together and aggregate; and every season some cities decide to disaggregate and leave the prior season's county bid.

Buyers are resourceful -- having been one earlier in my career -- you check the county price, you bid it locally yourself, you see where you can get the best deal. They move in that direction; so really no macro change in bidding pattern across our service area.

I think in the U.K. we are seeing a bit of a transformation. I think following two very severe winters in the U.K. I think there is a generalization being accepted that they don't carry enough inventory in some of the cities. The pricing was too low. So we are seeing actually increases in customer early-fill. We are seeing increases in the amount of inventory customers are willing to keep. We are also seeing increases in the selling price, similar to the robust actions we saw after those severe winters that Rod just referred to.

Joel, I would also add to that that when there are cities or counties that either add to or remove themselves from a larger bidding process -- so a particular state or a bidding consortium, when they are added or subtracted -- the bids are awarded on a delivery-point by delivery-point basis. There are a few minor exceptions; but overall, it is on a point-by-point basis. So the award isn't -- don't think of the award as, well, the state of Illinois is bigger so we either win or lose the whole thing. It is still done on a point-by-point basis, so the effect of that is relatively minor in terms of the bidding dynamic.

I just wanted to ask one more thing about -- in the last few years, where you have given guidance in July-August at the end of Q2 results for how bid season has been tracking in terms of pricing, and where it has ended up if you look at Q4-Q1 -- where realized pricing for highway deicing salt ended up going -- it can range from 5% to 10% either way. Can you maybe speak about what the largest sources are for the deviations?

Yes, I mean -- it's Angelo. You've got to remember what we report is the weighted-average aggregate of a Canadian market, a northern U.S. market, a what we call southern U.S. market, a western market, an eastern market, and a U.K. market. You mix all that together, and depending on where it snows you might get more from a higher-priced market, you might get less from a lower-priced market. but I think, as you I think reported today, if you kind of mix all that together our average price, the guidance we give, is pretty close on average to what our actual is. So we are actually pleased to see that.

And, foreign exchange can affect as well, Joel, and we try and give a sense of that every quarter.

But the largest source of deviation you're suggesting is weather, and this year you are indicating that the variability of contract pricing around your region is a little bit lower than usual. Is that right?

Well, there is weather and there is sales mix, which is -- weather will drive the sales mix. Add to that foreign exchange --

That's what I meant, sorry. Weather at the different cities depending on what their contract prices were. But this year you're reporting that variability is lower than usual?

Well, what we are assuming is that the contracts all -- the weather is normal, based on the contracts we have earned and expect to earn over the balance of the bidding season. So assuming -- and, Rod, help me if I am wrong here -- assuming normal weather, and execution of those contracts, and stable currency, then the net result should be flat pricing to the reported pricing of the previous season. That is a lot of assumptions there.

Yes. Fair enough.

That is what we -- that's the guidance we give.

Okay, thanks for the color, guys.

David Begleiter, Deutsche Bank.

Thank you. Angelo, good morning. Of the customers with lower-priced contracts versus last year in highway deicing, is there a common theme to as how they got lower pricing?

Yes, and again, we have to recalibrate our view of how these prices are established. There is not a negotiation with the customer. There is -- we also bid blind bids. Say there was a county in Illinois that had a price from the prior season that was $100 a ton, versus the neighboring county that might have had a price the prior season of $70 a ton, so now all the competitors are separately sitting in their rooms deciding what number to put on that piece of paper that gets submitted to that neighboring county that is $30 above the other county.

The bullish guy would say, "Hey, listen, it's at $100. I will go up my normal 3% to 4%, and I will try to get it up to $103 or $104 a ton." The other person may think, "Hey, it's $30 higher than the neighboring county. It doesn't make sense; it needs to normalize." And they go in at $73, $72 a ton. Those get put out and the buyer opens up those pieces of paper and says, "$73 wins." Therefore the guy who had it at $100 just experienced, if they had won it, $27 of price erosion on that line item.

That is how it works out. The buyer really had nothing to do with it. It is really the interactions which all occur in public at the bidding table that occur between the competitors. It's a very dynamic process. It really is more like game theory then selling. Then we take all that data back and then process it for the next bid. We literally do that day by day, bid by bid, hundreds of times.

Understood. On the issue of imports, Angelo, I thought imports were mainly an issue on the coast and didn't really impact your service territory. Is that still the case? If it is, why does the influence of import prices impact your pricing to any large degree?

No, David, you are absolutely right. Imports affect North America primarily on the coasts. However, following the previous very severe winter, there were shortages in the Great Lakes area. That allowed some opportunistic imports on a kind of a one-time spot basis to push in. The prices of those imports were well over $100 a ton, much higher than the prevailing market price.

So when the market renormalized and the domestic producers were able to recapture those tons and effectively push the imports out, the prices on those line items didn't stay at $100. They reverted back to where the local market had been, plus the typical price inflation that they should have achieved.

But you were not realizing those $100 per ton levels, were you?

We had some, absolutely. In our 20% and 8% above-normal pricing, we did point out that some of that were bids and some of that were opportunistic spot sales.

Understood. On logistic costs you mentioned they will be down next year. Can you quantify how much they will be down year-over-year?

Yes, I think what I mentioned is that currently shipping and handling costs have been running lower in the salt business. That is a combination of factors, one of which is that fuel oil has not been significantly different than last year. In some of our freight rates, the base rates have actually declined. So while we expect that trend to be continued or at least flat, that is also giving us some lift versus the prior year -- or versus the price change.

This is Angelo again. It's just important to point out, while we have good visibility on freight rates, and we're able to negotiate those with carriers and lock them in and feel pretty good about that, a very big portion of our costs tied up in diesel fuel, which is kind of driven by the energy market, which is also driven by macro economic activity and could be very volatile. So I don't think anyone could tell us what the price of a barrel of oil will be in six months, so there is always volatility. And since we lock in our prices on a delivered basis, on highway deicing primarily, there is always risk.

So while right now we expect logistics costs to be flat to slightly down based on our current view. that can change very quickly based on those macro economic effects.

Thank you very much.

Doug Chudy, KeyBanc.

Hi, good morning. You have noted your awarded bid volumes tracking about 3% below usual. Can you put this in the context of what you're seeing in the broader market? Are you winning the same percentage of bids as you have in the past? More, or less? Is the 3% similar to what you are seeing in the market?

Yes. I mean, when we do our analysis, we throw all of the bids that we have into a bucket and look at it in total. As we have seen and as we have said over time, market share rarely changes very much year-on-year. There is just too much structure in the market and too much need for this essential product --and, frankly, we carry a lot of the excess capacity in the market -- to ever allow our market share to decline very much.

So over time we have actually -- our share has inched up as we have gained a disproportionate amount of the growth. And again we don't expect any major changes in share this season.

Okay, that's helpful. Then secondly, you noted you are seeing the higher potassium chloride input cost this year. Do you think you have got the ability to fully offset this with pricing over time? Or has the margin profile on I guess the water conditioning products changed a bit here?

Yes. This is Angelo again. There is just so much that you can charge a consumer -- now we're talking like an end-consumer, like you and I -- for a bag of potassium water conditioning, and I think we are pretty close to that point. Of course, we had huge margins when KCl was lower in price. We now have less margins but still attractive when KCl is higher in price. And that I think is just a volatility we are going to have to be willing to accept.

Yes, Doug, I think the price point on that particular product, that is really a lifestyle product. It is potassium-based and not salt-based. But it is a lifestyle product, and therefore the consumer looks at it as a pricing point versus a more standard salt product. So that pricing differential is close to maximized.

How big is that of a business for you guys?

We don't get into that detail.

Okay, thank you.

Bob Koort, Goldman Sachs.

Thank you. Good morning. Angelo, I'm curious if -- I don't think you addressed it -- but what is the scope for getting the dividend up to a higher yield going forward?

Yes, this company has always valued the dividend ever since its launch in 2003. We have increased it every year we have been a public company. We increased it again healthily this year, 10%. Therefore, I would expect we will continue to put importance on the dividend.

Our cash position and our cash flow is encouraging. It's growing. It is very attractive in the second quarter.

We will continue to prioritize dividends against our internal investment opportunities, which we have just indicated we got some very attractive ones coming up hopefully on the Great Salt Lake; we're just finishing a large investment at the Goderich mine. And we haven't been shy to say we're looking for good strategic acquisitions, but we don't want to overpay for them. So I think once we have exhausted that list of very good options, a financial vehicle to return some of that cash to the shareholders will certainly be considered. But till then I think you can just expect us to retain a good healthy dividend and to continue to increase it year after year, as long as our cash flow allows.

Okay. Rod, I think you made reference to lower logistics. Is it possible that therefore you have a higher netback on deicing salt over the next year?

Yes, I think the lower logistics was talking about specifically the second quarter. While we don't see any significant further reduction in logistics on a relative basis, we expect them to be very close or potentially modestly below last year. But as Angelo mentioned, much of that will be based on what happens with fuel and energy prices in general. And we have in the past, as you know, seen wild swings. So I hate to get too live with predicting exactly what shipping and handling will be in the event we see oil go from $80 to $100, which would be a negative impact on our shipping and handling costs.

Would you expect to see in a flat bid price environment greater turnover of your customer base? Will you see a greater shift in those customers because it takes a little bit more effort to find the best netback? Or no?

No. I mean there is always movement in line items year-to-year between the competitors, but we've established a freight-logical core market that suits our assets and maximizes our netbacks; and I am sure our competition has established a freight- logical core of customers that maximizes their netback. For example, the state of Ohio, both Morton and Cargill have mines in the state of Ohio, so sales in the city of Cleveland are more likely to go to them versus us, who would have to ship product from far away to get there. So it just gravitates.

I think the producers are all rational and they pursue the markets that give them the highest netback. And those are the ones that tend to be closer to your asset or the ones where you have some kind of advantage in providing logistics to the end delivery point.

Got it. One last question. I appreciate your patience. If we look over a 20- or 30-year history of this industry, there have been periods of pricing lulls before; and it is not always clear that there is a direct correlation between excessive snowfall one year and price increases the next year. So I am just curious. What do you think would need to happen in the environment so that a year from now, when we're talking about progress on the bid season, prices will be up again?

Well, this is Angelo again. I think if we have a normal winter weather there is really no reason not to expect the normal pattern to continue. I think if we have a severe winter I would hope we could do better than the norm. But based on what we see this season, if it is milder I think it is just logical that you would be below the norm. And that is how you establish a norm, it is an average of belows and aboves. If we had our way every year would be normal, and we would take the volatility out of the discussion.

Got it. Okay, thanks, guys.

Ladies and gentlemen at this time we have reached the allotted time for our question-and-answer session. I would now like to turn today's call over to Mr. Brisimitzakis. Please go ahead, sir.

Thank you, Celeste, and thank you all for a good discussion. I feel like we made some important strides towards moving Compass Minerals forward this quarter. Our sales were strong, with good underlying demand, our cash flow was strong, and much of the margin pressure we reported this quarter was driven by one-time events.

We have launched new products. We're test marketing others. We have two very important expansions at our advantaged facilities concluding in the next few months, and there is the possibility of two more significant SOP capacity expansions.

I hope you agree that these are very exciting times for Compass Minerals. Thank you for joining us this morning. I look forward to talking with you again in October. Have a good day.

Ladies and gentlemen, this concludes today's second-quarter earnings call. You may now disconnect.