Compass Minerals International Inc (CMP) 2011 Q2 法說會逐字稿

Thank you for standing by. Good day and welcome to the Compass Minerals second-quarter earnings conference call. Today's call is being recorded. At this time, I'd like to turn the call over to Ms. Peggy Landon. Please go ahead ma'am.

Thank you Matt and good morning everyone. Thanks for joining us this morning.

I have with me of course 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 29, 2011, and involve risks and uncertainties that could cause the Company's actual results to differ materially. The differences could be caused by a number of factors, including those identified in Compass Minerals' most recent Forms 10-K and 10-Q. The Company undertakes no obligation to update any forward-looking statements made today to reflect future events or development.

You can find reconciliations of any non-GAAP financial information that we discuss today in our earnings release, which is available on the Investor Relations section of our website at CompassMinerals.com.

Now I will turn the call over to Angelo.

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

Compass Minerals made solid gains this quarter with a 20% year-over-year increase in operating earnings, a 24% increase in net earnings, and a 27% increase in adjusted EBITDA on essentially the same sales volumes as in the second quarter of 2010. These improvements helped us generate the best six-month cash flow from operations in our history of $194 million, and we achieved these second-quarter gains despite some headwinds that were largely external.

It is unusual for weather to play much of a role in our second-quarter results, but weather had a significant impact on sales volumes in both of our operating segments this year. Heavy rains in California and other Western states this spring hampered fertilizer applications to many fruit, vegetable and nut crops, which in turn suppressed our specialty potash fertilizer sales in the second quarter.

It is our experience that, once the potash application season has passed, growers simply skip the application for that growing cycle, so unfortunately these sales aren't unlikely to be recaptured. However, Big Quill Resources which we acquired in January, contributed more than enough new sales to increase our overall segment sales volume by about 4% over last year's second-quarter results.

Excluding this weather impact, demand for sulfate of potash is improving from what we've experienced over the last couple of years. This rebounding demand has supported stronger prices in the marketplace.

The stronger potash market, combined with the benefit of higher price sales from Big Quill Resources more specialty application, lifted our second-quarter average selling price by $81 per ton, or 16%, over the 2010 quarter to $600 per short ton. Shipping and handling costs rose by $12 per ton for the same period last year, so our net year-over-year pricing gain was about $70 per ton.

Our second-quarter SOP production costs were flat with the first quarter of this year but they did increase over our 2010 costs because the higher value sulfate of potash sold by Big Quill Resources has higher per-unit production costs than the potash we produce at the Great Salt Lake. Despite these higher costs, our specialty fertilizer operating earnings increased 26% to $18.7 million, and our operating margin expanded by 2 percentage points over the prior-year quarter and by almost 3 percentage points sequentially.

As for the second half of 2011, I'd like to be able to say that weather challenges are behind us, but unfortunately that isn't the case. Like the other Western US states, Utah experienced a cool, wet spring. This has affected our solar evaporation process, which is fueled by hot, dry, sunny weather at the Great Salt Lake. With a shortened solar evaporation window this year, we are likely to have a reduced mineral harvest in the fall. As a result, we expect to produce less SOP for the rest of 2011 and 2012 than we had originally planned, which in turn will increase our per-unit production costs.

We anticipate that the reduced solar production will also require us to constrain and optimize our overall segment sales to around 160,000 tons of SOP during the second half of 2011 and to about 350,000 tons for 2012. However, we expect our average selling price to continue improving and to be around $625 per ton, potentially more, for the second half of 2011.

So factoring all these year-over-year SOP the changes, that is significantly higher average selling prices, higher production costs and lower sales volume, we still expect our Specialty Fertilizer operating margin percentage, operating margin dollars, and operating earnings per ton to strengthen through the end of 2011 when compared to the prior-year quarters.

Before I conclude this discussion on our Specialty Fertilizer segment, I want to emphasize that our analysis of this year's solar evaporation season continues to be fine-tuned. We will have more information for you on our third-quarter conference call, as our solar a vibration cycle will be completed. I also want to point out that we don't currently expect this to impact our mineral harvests in future years, nor should it affect our ability to sell magnesium chloride or solar salt core products from the Great Salt Lake facility this year or next. It also doesn't change our plan to reduce per-unit production costs of solar pond-based SOP to less than $200 per ton when the Phase 2 expansion is completed in a few years.

Switching now to our Salt segment, ours sales volumes were about average for a second-quarter period. They were unfavorable to last year, but you'll recall that, last year, our customers in the UK started building stockpiles very early due to two consecutive seasons of record snow. In our North American market, it had been a very mild winter, so the minimum purchase take-or-pay provisions were enacted in some of our contracts, which also gave us a lift to our second-quarter Salt sales volume last year.

Wet weather also played a role in our Salt segment sales this quarter. As most of you know, we ship rock salt from our Cote Blanche mine in Louisiana up the Mississippi and Ohio rivers by barge. This year, spring flooding in the Northern Plains states interfered with shipping on the Mississippi and Ohio rivers throughout much of May and June. Fortunately, we were able to adjust the mine's operation and did stockpile the salt at our site to ensure we'll have enough for our deicing customers later this year, but we missed out on some sales that we otherwise would've had this quarter. However, we have now increased our shipping volume and expect to recapture most of those sales in the third quarter.

So the optics of our second-quarter Salt sales volumes were not as positive as we believe the underlying demand trend to be.

Collectively, our three rock salt mines are running at much higher rates than in 2010 and our production cost per ton has dropped significantly from last year. We expect our production improvements to continue, so we expect our salt product costs of the materially lower in the upcoming winter season than in this past winter. In fact, we believe we have already turned the corner as we began to moderately expand our Salt segment operating margins in the second quarter in spite of the fact that salt shipping and handling costs were almost $3 per ton higher year-over-year.

Our second-half Salt segment results will be influenced heavily by our highway deicing bid results, and so far the results of the bidding season have been about average. We are approximately 2/3 of the way through the bidding season, which is typical progress for this time of year and the average prices of our bidder wars to date have been approximately 3% above last year's average awarded price.

We're also seeing governments in our served markets request more typical volumes than last year. If you recall, in 2010, customers throughout the North American market we serve requested, on average, about 3% less salt than they had the year before, mainly because they still had salt in storage after a very mild winter. Winter weather was more normal this past season, so we've seen a moderate increase in bid sizes recovering the dip from last year's bids. With about 1/3 of the season left, our market share seems to be in the typical range as well.

We expect our third-quarter salt margins to be essentially flat with the 2010 quarter primarily because of the impact of higher fuel costs year-over-year. However, given the moderately stronger highway deicing bid award prizes, market volumes returning to pre-2010 bid levels, and our improving production costs, we currently expect fourth-quarter Salt segment operating margin percentage to be much stronger than the fourth quarter of 2010 and to approach the margin percentage we achieved in the fourth quarter of 2009, even if fuel prices remain where they are today.

In summary, we demonstrated again this quarter that our essential products and advantage assets makes Compass Minerals a resilient company that can generate strong financial performance through a variety of operating environments.

Now, I'll turn the call over to Rod to cover our financial results in further detail. Rod?

Thanks Angelo. I will review some of the financial details of the segment results and our forecast before discussing some corporate items.

While Salt sales volumes were down 7% in the second quarter compared to the prior-year period due to the reasons outlined by Angelo, average salt prices in the quarter modestly improved by 2%. Together, these factors resulted in a 5% decline in total Salt revenues in the quarter versus the second quarter of 2010.

Shipping and handling costs in our Salt segment rose 16% versus the 2010 quarter, reaching $21.36 per ton on average. Essentially all of this year-over-year increase related directly to higher fuel costs.

You may recall that, in the past, we've given a general rule of thumb way to think about oil price changes which eventually determine the retail market price for diesel fuel and ultimately impacts our per-unit shipping and handling costs. As a reminder, every $10 per barrel change in oil translates into a little less than $1 change in per-unit shipping and handling costs. With oil hovering around $100 per barrel for most in the second quarter as compared to approximately $75 per barrel last year, our cost this quarter compared to last year rose commensurately. Of course, at time, that impact can be lagging or somewhat different, but that rule of thumb provides a way to approximate how oil price changes can ultimately impact our Salt business.

Operating earnings in our Salt segment were $13.6 million, essentially flat with last year's quarter but up 9% on an operating earnings per-unit sold basis, reflecting modest price improvements as well as lower salt costs. Total per-unit salt costs, which include the cost of goods sold, as well as segment SG&A costs, improved by more than $2 per ton, or 5%, versus the second quarter of 2010 when per-unit costs were negatively impacted by lower salt production and $1.3 million in direct costs associated with the 2010 strike at our Louisiana mine.

The 2011 quarter's per-unit sold costs would have improved even more but were also negatively impacted by one-time costs we incurred when some of our UK employees accepted our offer to transfer out of the defined benefit pension plan there, the only such plan in the Company. While that cost in the quarter was about $1 million, it will result in a much larger decline to our future pension obligations.

We anticipate margin improvement in the Salt segment continuing in the second half of 2011. Specifically, we expect our operating margin per ton in the third quarter to be flat compared to last year's third quarter.

Now, as a reminder, in last year's third quarter, oil prices dipped to their lowest levels of the year while in the last half of 2011, we assume that current higher oil and diesel prices continue at those levels, which would result in an approximate $4 per ton headwind just for the third quarter. However, during the fourth quarter when our rock salt sales volumes are significantly greater, we currently expect per-unit cost of goods sold to be appreciably lower than compared to the 2010 period when the impacts of higher 2010 production costs were most pronounced and the per-unit shipping and handling headwind to moderate when fuel prices were at their 2010 peak in the fourth quarter last year. So, we currently expect fourth-quarter 2011 Salt segment operating margins to be around 29%, rebounding significantly from the 25.7% reported in the 2010 fourth quarter but not as high as the 32.7% reported in the 2009 fourth quarter. When compared to 2009 quarters, our Salt costs have higher sourced potassium chloride costs for some C&I water conditioning products, and that began in 2010.

Specialty Fertilizer sales prices for the second quarter improved a healthy 16% year-over-year, averaging $600 per ton while sales volumes were up only 4% to 83,000 tons. The higher prices remain well above standard potash prices and drove a 26% increase in Specialty Fertilizer operating earnings.

SOP costs per-unit sold were flat compared to the first-quarter costs and are expected to rise above current levels in the second half of 2011 and into 2012 due to the impacts of lower plant throughput caused by the cooler weather than normal weather at the solar ponds, as Angelo discussed. This reduced production is expected or estimated to add about $20 per ton to SOP costs in the second half and an additional $20 per ton to 2012 production costs.

As in our Salt segment, per-unit shipping and handling costs for SOP of $73 per ton remained higher compared to the second quarter of 2010. We continue to expect shipping and handling costs to average around $75 per ton for the second half of 2011 in our Specialty Fertilizer segment.

Looking forward, we expect to see second-half SOP prices to improve to around $625 per ton or higher. Our second-half sales volume guidance is a little lower than last year and our [prior] guidance because of the impact of lower evaporation rates this spring at our Great Salt Lake facility. Because of this issue, we don't expect our 2012 production to keep pace with the rebounding demand. Thus, we have adjusted our sales plan for the rest of 2011 and into 2012. For the next 18 months, we intend to focus on serving the domestic market and our best international markets where we achieve the highest net-backs.

SG&A was $22 million for the quarter and $45 million year-to-date. We expect to run at that rate or higher for the last half of 2011.

Company-wide second-quarter operating earnings rose 20%, or $3.7 million, and our consolidated operating income percentage was a full 200 basis points. These increases resulted from higher operating margin percentages in both of our key business segments.

Looking at other elements of our income statement, interest expense totaled $5.2 million in the quarter, similar to our quarterly expectations for the rest of 2011. Income tax expense in the quarter was $3.3 million, slightly below last year's reported amount in the second quarter of 2010. The year-to-date tax rate reflects our expected full-year effective tax rate of approximately 27%.

Net earnings for the quarter were $14 million, compared to $11.3 million in the second quarter of 2010. This yields $0.42 of earnings per diluted share compared to $0.34 per diluted share last year.

Cash flow from operations reached another historic high at $194 million for the six months ended June 2011. This was a 13% increase from a year-ago period. Capital expenditures in the six months totaled $60 million and we continue to expect that capital spending for the full year of 2011 to be around $110 million. $50 million to $60 million of that amount will go toward maintenance of business needs.

There was no balance on our bank revolver at the end of the quarter and our outstanding debt was $485 million. Cash on hand at the end of the quarter was $158 million. The increase in EBITDA resulted in a total leverage ratio of 1.7 times 12-month trailing EBITDA as of June 30, 2011.

So now I will turn the call back over to the operator to begin the Q&A session. Matt?

(Operator Instructions). Edward Yang, Oppenheimer.

How much salt was pushed -- salt volume was pushed out from the second quarter into the third quarter?

This is Angelo. We estimate it around 50,000 tons.

Did the salt bidding and the pricing, did that strengthen as the bidding season progressed? I thought you were guiding towards flat and now you're looking up 3%. So where do you think that this will all end in terms of pricing up year-over-year?

Yes, just to correct it, we didn't guide towards flat. I mean flat was we guided toward last season which actually did materialize. For this upcoming season, for the season we're in now, our feeling was since we were ending the winter with more normal weather and we thought inventory levels at both competitors and customers were more typical, we were expecting a more typical normal result. To date, our results are about 3% on price and about 4% up on volume, which would recover the decline in volume from the prior season. So that's where we are and it has been relatively flat through the bidding season. There hasn't been at lot of drama this season. Obviously, we keep a close eye on the fuel component, and that still remains the wildcard out there as we implement these prices during winter.

What about the state of your municipal customers' finances? I know this concern has popped up in the past and you believe that salt demand is relatively inelastic, which has kind of played out, but an update on your thoughts there?

Yes, I think public safety is kind of the highest priority that governments place on their application of their monies. In this case, we've seen a nice rebound in demand. In our served market, we are seeing good volumes up about 4%. So, I think that is an indicator of the importance and inelasticity of the demand of salt and the essential nature of deicing salt. So I don't think, in this cycle, that the economic environment is having a major impact on the bidding process.

Terrific. Thank you.

Bob Koort, Goldman Sachs.

Angelo, what was the most recent time in history you've seen that weather-related on your fertilizer business out West?

Yes, I mean, we went back and did a little bit of looking. I think some of the data would suggest about one every seven years, we have above -- 33% above the normal amount of rainfall in our Great Salt Lake area, so one in seven years is kind of the 40-year sequence that we've looked at. This year, what we've seen in may and June is almost 50% more rain than typical. So, it is one of those one in seven years plus some. Thus, the impact is very large.

You know, the other thing I should point out, and maybe we could have explained it a little more in the past is, we suspended using or purchasing KCl about two years now or 2009 to make SOP. We did that for several reasons but primarily was an economic one where we didn't see a way to consistently make money sourcing KCl in the open market and converting it to SOP in a fairly inefficient process that we had to convert. But that KCl purchase in that sense was a bit of a rain hedge since some of our production was coming from KCl and the balance of the production was coming from the Great Salt Lake and its solar evaporation process.

Now, in essence, we are 100% exposed to the weather in our production but we're also 100% exposed to the lowest cost route to make SOP. So while strategically it makes sense for us to be low-cost, I think implicit in that comes with the weather risk that solar evaporation provides. So we avoided the KCl sourcing risk, but we now have more of the solar evaporation weather risk, if that make sense.

Yes, it's helpful. And then as a follow-up, can you give us some sense of what you've seen or expect to see from your competitors around the capacity standpoint on salt? Obviously, several of them are private, so it's a little bit tough to get information. But what are you seeing as you guys add capacity? Is the rest of the industry doing the same, or do you think?

You know, I think it was important for us to add that capacity at the Goderich mine. In effect, we added the equivalent of a rock salt mine, you know, taking it from when we started this multi-phased expansion from about 6.5 million tons to now a capability of 9 million tons. That is the equivalent of 2.5 million tons of additional capacity, which is similar to most of the mines we compete with. So in our primary North American market, with the addition of the Goderich capacity, there is no need now for any major capacity expansion by our competition because the market is fully served and in fact we have excess capacity ready to deploy if and when the market warrants it.

We have also not seen any material public announcements of any of our competitors increasing capacity substantially. But as any good company does -- and we company with a lot of good companies. I'm sure their engineers are looking for incremental expansions through operational excellence, and so I'm sure they're keeping up with demand growth, which in salt typically has been 1% to 2% per-year demand growth. So, I don't see the supply-demand dynamics changing dramatically within the North American producers.

Great, thank you.

David Begleiter, Deutsche Bank.

Angelo, I would've expected maybe a little bit higher pricing in salt. Did you make a decision to perhaps push volume a little bit more than pricing to -- given your new expanded rock salt capacity in Goderich?

I would have wanted a higher price also but you have to recall this is a highly competitive market. What I want and what we get isn't always the same thing. Our market share in this upcoming season is essentially equivalent to historical levels, so we did not push for excess share because of the Goderich mine expansion, so that really wasn't a factor in the price just being normal.

What was the factor is the typical competitive rivalry which exists among several very strong companies. We ended up with a result that it's in the normal range but certainly with the inflationary risk on fuel, I would have wanted a higher end result.

Are you seeing any further imports into your region, or was that more of a coastal issue?

Yes, I think the imports that come into North America for this cycle are mainly going to be limited to the typical coastal areas on both the East and West coasts.

Just on the Great Salt Lake, is it feasible to build inventory for these once every seven year issues or is that too expensive?

It's a good question. One of the main results of our pond-sealing initiative which is part of our Phase 2 expansion at the Great Salt Lake is to give us a bigger harvest. The harvest is essentially the raw SOP that comes out of the lake prior to the washing and cleaning of the product into its final form. So ultimately, as pond-sealing gets implemented and as our footprint in ponds increases as we implement Phase 3, I fully expect our harvest capacity to exceed our plant capacity, in which case that harvest in essence becomes a rain hedge for those one in seven years where whether is not cooperating. Of course, when you say one in seven, it's not always one in seven. It could be two in seven for one cycle and zero in seven in the next. So, it's very hard to predict when that year will come.

As you can imagine, early rains are worse than late rains. If you are in the last 10% of evaporation season and it rains, well, you have 10% of that season at risk. If it happens in May, at the front end of the solar season where you have 100% of evaporation left, that impact will carry all the way through. Unfortunately, the rains this year were May and June.

(Operator Instructions). Mark Gulley, Ticonderoga Securities.

A couple of questions. First of all, if I'm doing my math right, the price increase in ice control salt will be about $1.50 a ton, and you talked about shipping and handling being up $3. a ton, so that looks like a material margin squeeze going forward. Is it possible that the costs you're seeing now could mitigate or are all of the competitors basically surrendering $1.50 a ton on a go-forward basis?

You know Mark, when we look at the third quarter, certainly last year's oil and therefore diesel prices were at their lowest and so I did talk about a bigger headwind like that in the third quarter. However, by the time we get to the fourth quarter, oil last year had risen to $85, approaching $90 a barrel and continued an upward trend through the first quarter. So that is why, when you hear us talk about the flat expectation for the third quarter, that's a little better costs and there's a couple of reasons we could talk about for that. But oil and shipping and handling costs are a big headwind in the third quarter. As we go into the winter -- and again, those are the bigger volumes in the higher earnings quarters -- the margin is expected to expand not only because of the significant impact of cost reduction, but that headwind on shipping and handling cost is smaller.

For example, last year, our costs rose almost $3 from the third quarter to the fourth quarter on average shipping and handling costs. That is a function of what happened with oil and diesel costs late last year. That really continued on through the first quarter. So, the margin squeeze, there isn't a margin squeeze on the current prices but I would say it barely covered -- recovered fuel through the winter at current prices.

Secondly, sticking with pricing, can you kind of talk a little about the net-back lift you would hope to enjoy given your lower production next year? Because of course you'll be reaching out less to more distant customers, so there should be a net-back lift there, irrespective of whether or not you were to change price.

I think that's -- when we have just guided to the $625 mark, we said $625 or perhaps higher. I think we would expect that, absent any further price strengthening in potash, that that average per-unit sales price would be higher just because of the mix impact that you talked about. That will, on a per-unit basis, put us in good shape not withstanding a little bit lower volumes run through the plant and therefore slightly higher costs. So, yes, I think we guided to the $625 price and I think we feel really good about that as we sit here right now.

Then finally, if I may Angelo, is there anything you can do, practically speaking, to accelerate the yield improvement project, given the fact that you're missing out on selling some nice high-margin tons next year in '12? Thank you.

That was exactly the question that I've been asking the last couple of weeks. We did take actually some very discrete action to at least give us a chance and set us up better for the next season. We had started Phase 2 of our expansion and the part that we started was the pond-sealing part. If you recall, pond-sealing was an enabler (technical difficulty) gives us the biggest harvest. We were initially timing the pond sealing to be completed when the plant expansion was completed, which would push it out into the 2012 period. But because, as I said earlier, that pond sealing in addition to enabling us to run more tons through an expanded plant also becomes a weather hedge in effect. We have doubled the speed in which we are sealing the ponds, and essentially running 24 hours a day. Previously, we had only been running half of that. So that the pond sealing project will be finished by May of 2011, which is the start of the 2011 -- 2012 -- it will be finished by May of 2012, which will be the start of the 2012 solar evaporation season. So that will set us up better and give us a larger harvest although, as you can imagine, we're talking about sealing 45,000 acres of ponds. It's a large undertaking that isn't necessarily 100% precise. It's not like a chemical reaction where you have flow meters and buttons to push. You're essentially putting an impervious material and keying that around the perimeter and reducing the amount of leakage.

So I think we're set up well to get the largest harvest we can in the 2012 evaporation cycle but as far as the 2011 one is concerned, we're essentially stuck with what we have. Now, there are still a few months left, right. Obviously, July, the end of July, which is just about over, and then August and some of September will also have evaporation, but we did pick up those rains in May and June that we have to overcome.

And sorry, just one clarification -- the accelerated timetable you just eluded to is reflected in the 360,000 number you provided.

350,000 number, yes.

Okay, right.

Although, again, you could have an above better, above average evaporation cycle and get more based on weather and you can have a below average cycle and get less. We're kind of thinking it's going to be normal next solar evaporation cycle, and much like we do in our Salt segment, we plan for normal.

Thanks Angelo.

Joel Jackson, BMO Capital.

Good morning. Maybe I will keep on the line question here on SOP. Can you -- you've given guidance in the past when you announced the Great Salt Lake expansion Phase 2 project, how you're going to step to the 220,000 tons of additional capacity through 2015. I believe the first 50,000 tons of new capacity was coming on next year. Can you give us some guidance, best guess? I realize it's a little bit hasty right now, but what you think your production capacity will be at the Great Salt Lake in 2011, 2012, 2013 relative to previous guidance?

This is Angelo. That was a hard question before the rains came to Odgen, and isn't an even harder question now because, in essence, the rains in May and June kind of trumped the 2012 and 2011 evaporation seasons and in essence delayed the opportunity we have to get this super-sized harvest that we could then convert into larger amounts of SOP and expanded plants.

In addition, to be frank, the delays we had on the Phase 1 expansion has caused us to take a more cautious approach to the engineering and design and construction of the Phase 2 plant. So since we don't have the raw materials to really run a -- we don't have the raw materials yet to run a Phase 2 plant at a full rate and there are a lot of learnings from the Phase 1 experience, think it has pushed the whole project out a year or two.

So what we have decided to do is to go ahead and actually accelerate the first part of the project, which is the harvest part, which is the pond sealing. That gives us kind of the raw material to fully capitalize on the Phase 1 expansion, which takes us to a 350,000 ton capacity but also gives us that rain hedge I was talking about which will give us more of a hedge if it rains to make that 350,000. Then incrementally, as Phase 2 is constructed, we'll have the harvest already piled up and as that plant is constructed, we'll be able to capitalize and get to the additional we estimate 220,000 tons that Phase 2 will bring.

Can I read through that to say that you would kind of guess that production this year at Great Salt Lake would be about 300,000 this year, 350,000 next year, 400,000 in 2013? Would that sound about right?

Yes, I don't think we really get into production a lot. We talk about our capability. Really, what we've said is that we're going to have to, over the next 18 months, manage our sales and really optimize the mix to maximize the margin. What that will be, as the last caller emphasized, will be more domestic sales, less international sales. Those international sales will be selected based on margin and kind of the strategic importance of the customer. That, in effect, will give us a better mix of sales but at a reduced volume.

So, I think the guidance we've given today for the second half and then we gave guidance for next year, sales next year would be around 350,000 tons and sales in the remaining part of this year will total 340,000 tons for the year. So essentially, we're going to have two years of flat sales in SOP from the Great Salt Lake due to this constraint.

Now, how we produce that we haven't really discussed but we're going to produce it in a way that minimizes our cost. You know, we have inventory and we have production and we're going to balance that to allow us to have relatively flat sales in 2011 and 2012. Then our expectation would be, when we get to 2013, the benefits from the expanded pond sealing and the benefits from perhaps the beginning of the plant expansion from Phase 2 will kick in and will allow us to move our production up.

In addition, we have the addition of Big Quill Resources which we acquired in January, which give us an extra 35,000 to 40,000 ton lift on our total SOP franchise. We'll be looking to maximize the mix between the applications that Big Quill brings, which are higher priced applications, and the applications in the more traditional ag market that our Great Salt Lake mineral business brings.

Angelo, if we go back over the 40 year (inaudible) that you spoke of and the one in every seven years typically on average where you get a 33% above normal rainfall, historically over the 40-year cycle, what has that meant for production on the Great Salt Lake? What does the 33% above normal rainfall mean relatively for production at the lake?

It really depends on when the rains occur. Like I said, if they occur towards the -- if they occur before the solar evaporation season or after, it's irrelevant. If it occurs at the beginning as it did this time, it's painful. If it occurs at the end, it has very little impact. So it's a complicated question. It's not just rain. It's temperature and it's the timing of those events. But we felt strong enough that what we saw in June was material enough and from all the years experience -- I think we've been on the Great Salt Lake 41 years -- that rains in May and June are bad, so we felt confident enough to share that with you now. While typically if May and June and July had gone well and we had a little rain in August, it probably would've been something we could manage through, but because of the early nature of this activity and the fact that the rains in May and June were 50% above normal, we're very convinced that this will have a material impact on our harvest. If we don't have harvest, we can't make SOP.

Switching to SOP pricing, it would seem that, this quarter, the compression, spread compression, excuse me, the SOP over MOP spread compressed by about $40 a ton when you compare your selling price to the North American Potash Corp.'s price relative to about five, four or five prior quarters. Do you have any sense of what was happening? Was it a mix issue that caused the spread to compress this quarter?

Yes, I think you have to kind of step back and appreciate that they're both potash products but they're different products that go to different growers, often in different geographies, applied to different crops. So while our sales are typically coastal sales in the US going to fruits and vegetables that have their dynamics, the MOP at least in the United States is more of a Midwest and row crops and corn, wheat and soy and have their dynamics.

What we've seen is, in the crop area, high increase in prices of basic commodities like corn, wheat, say, and growers able to support much higher prices and make a lot of money selling corn at $6 or $7 a bushel. The typical almond producer that we might sell to in California has not seen the kind of increase in selling price of their crop, almonds, as the corn farmer has seen selling corn. So therefore, when we go with price increases -- and we have raised the price $80 year-on-year -- a lot of that is coming as margin compression to our customers.

So, gain, we have to be very careful that we don't destroy demand. We all saw what happened a couple of years back when potash prices zoomed to near $1000 a ton. So we're being very careful and trying to be sensitive to our customers and making sure that there remains enough demand for high-margin customers, particularly in our domestic markets, that will fill out our capacity. I think we're managing that well. In fact, over the next 18 months, since we're in a constrained environment, it's going to be even more important for us to make sure that we place those limited tons in those highest-margin applications. So it's not as simple as adding the MOP price plus $150, although that is a simple way to look at SOP. The devil is in the detail as they say.

Joel, I just might add that when you look at our price versus the one potash -- smaller potash competitor that is completely domestic, our price is kind of very close to that historic $150 spread. So I know we typically talk about it versus the larger competitors' North American price and that's still relevant but unclear as to whether they had anything special going on in their second quarter whereas the other domestic-only competitors seem to have a price that was more consistent with our $150 spread.

But don't get us wrong. Seeing demand for potash as a category and prices of potash going up on the international market, even though we don't participate in a lot of those crops or even a lot of those geographies, that is really the underpinning of the specialty potash market that we play in.

Let me ask one final question, which is, in some of the two and three-year contracts that you signed this summer for highway deicing salt, can you speak to what you're seeing in terms of some of the escalators, the price escalators, [that are] built into those two and three-year contracts? Are they faring within the normal or the historical 3% to 4% pricing range?

Yes, Joel. First, I want to point out there are many that are multi-year on a percent basis that would be a small part of our contracts. Very typically, the inflation there is -- I mean the second and third years, sometimes it's at the election of the government. Sometimes it's at the mutual election of the seller and the government to roll into the future. Where there are prices that are stipulated on a multi-year basis, it's typically either tied to an inflationary component or it's related to an inflationary component that we would expect there to be in the market.

So nothing different, say, from this year versus last couple of years in terms of those CPI or index or inflation-based escalators?

Pretty typical?

Yes, that's correct.

The vast majority of our bidding is an annual cycle and I think we like it that way.

Okay guys. Thanks a lot.

Thanks.

With no other questions at this time, I would like to turn the call back over to Mr. Brisimitzakis for closing comments.

Thank you Matt.

I'd like to conclude our discussion today by reiterating our somewhat complicated outlook for the second half of 2011. Firstly, we expect average selling prices for our Specialty Fertilizer segment to increase to about $625 per ton, perhaps higher. Our SOP production costs should run about $20 per ton higher than in the first half of 2011 because of our reduced SOP harvest. We expect to sell about 160,000 tons in the second half. Despite these changes, we still expect to post year-over-year improvements in our Specialty Fertilizer operating results. Our highway deicing bid awards have been priced at about 3% higher than in the 2010 season and governments are requesting volumes similar to historical levels.

Importantly, our salt mines are operating at normal rates, which has significantly reduced our rock salt production costs and should materially increase our fourth-quarter operating margins versus 2010. Together, we expect these changes to further expand the operating margins of Compass Minerals as a whole later this year.

Thank you for again joining us today. We look forward to talking to you again in October.

That does conclude today's call. We do thank you again for your participation and have a good day.