Compass Minerals International Inc (CMP) 2012 Q1 法說會逐字稿

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

Thank you, Bill. Good morning, everyone. Thank you for joining us this morning. I have with me here 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, April 27, 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 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'll turn the call over to Angelo.

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

I'm sure it didn't come as a surprise to anyone that weather was a challenge for us this quarter. It's our most winter-dependent quarter, with deicing typically making up approximately two-thirds of our Company's earnings. The first-quarter snow data and highway deicing volumes that we published earlier this month gave you some idea of the mild weather conditions in the primary regions of North America we serve.

In reality, it wasn't just our service area that seemed more like spring than winter. According to a report published by NOAA this month, this was the warmest first quarter in the U.S.'s lower 48 states since they began keeping records in 1895. It was also mild in the UK and in southern Ontario. In total, the North American cities we track and report on recorded the fewest snow days for a full winter season in at least 15 years.

From time to time, I have been asked to describe the worst-case weather scenario for our deicing business. From now on, I'll just point to the winter of 2011-2012.

But given this context, I think most people will also agree that the first quarter helped prove what we've said all along. Our salt business is remarkably resilient. Though salt segment sales volumes of 3.6 million tons was the lowest first-quarter volume since we became a public company in 2003, our salt segment sales of $254.3 million were well ahead of any first-quarter period prior to the heavy snowfall year of 2008.

And removing the effects of the tornado, our pro forma salt segment operating-margin percentage increased a full 200 basis points over the first quarter of 2011, despite a less favorable product mix. These results demonstrate the real underlying growth of our salt segment operating earnings, which we can attribute to the improvements we have made in pro forma per-unit salt costs.

Rod will discuss the impact of the tornado on our results in just a few moments.

Now unfortunately, the reality is that the impact of the mild winter isn't fully behind us yet. It's likely that bid volumes will be lower this year, though it's hard to know how much lower. The reference points I can give you are that after a very mild 2009-2010 winter, bid volumes were down 3%, while after the very mild 1999-2000 winter, bid volumes were down 4%.

The bottom line is that our customers probably have more inventory than they normally do at this time of year. We know from history that most customers can only hold a small percentage of their full season's requirements at any time. Each customer is different, though, and there isn't any accurate way to get a good sense of how much salt customers are holding in aggregate.

So we won't know what the actual impact is on bid volumes until we receive a representative sample of bids, and that won't happen until around mid to late June. We'll update you as we know more.

For those customers who have typical min/max supply contracts, but didn't meet their bid minimum take requirements, we've been attempting to negotiate new agreements that would allow the unmet contract volume commitment to roll over into the upcoming winter season commitment, extend the deadline for physically taking last season's salt, and to provide for a reasonable price increase. We've some other customers who have taken or are taking the minimum orders, but not enough to materially affect our second-quarter highway deicing sales volumes, and some contracts don't expire for a while, so we haven't had meaningful conversations with them yet.

There are a number of customers, particularly in Canada and the UK, who don't have minimum purchase requirements in their contracts. So, it's a mixed bag so far and it's too early to say where all these scenarios will land. And we really can't predict very well our bid prices right now, but they may end up less than the average increase we have historically achieved.

The bottom line is that the deicing business is a bit different than other businesses. At its core, highway deicing salt is a public safety necessity. When it snows, roads must be deiced. And since there are no cost-effective substitutes, rock salt is the preferred highway deicing material.

As a result, customer demand in one winter doesn't influence the next. When it snows in December or February, our customers will ask us to replenish their stockpile for the next storm. It's essential.

So here's how to think about the remainder of 2012. Bid volumes are likely to be lower and prices less than historical average increases. There may be some sales noise in the second quarter, but it shouldn't be material. And we expect any bid volume declines to primarily affect the key preseason sales period in the third quarter.

In anticipation of lower bid volumes, we have reduced production at our Cote Blanche mine and we have been operating at reduced capability at our Goderich mine since the tornado struck in late August. There are a couple of significant pieces of equipment that will be replaced there later this year. Because of the size and complexity of the work, we have to shut down or at least slow down the mine. So we plan to make the best use of those four shutdown periods to manage our inventory, while minimizing the impact on production costs.

Our production goal will be to have enough inventory for an average winter, as well as an appropriate amount of extra inventory so that we can serve an above-average winter, should that occur.

As an aside, we haven't been able to hold above-average inventory for the past few years, so this is a little bit of a silver lining for us.

I also want to remind you that our rock salt mines have a substantial variable cost component, so we have some flexibility to reduce rock salt production without significantly affecting per-unit product costs. But that said, rock salt production costs aren't fully variable, so there will be some impact. We currently expect our 2012 full-year pro forma salt costs to be similar to the per-unit costs we reported for the full years of 2010 and 2011.

Before I move onto our specialty fertilizer segment results, I want to take a minute to update you on the tornado recovery efforts at Goderich. The hard work and dedication of our employees has been impressive, and we're happy to report that the mechanical evaporation salt plant has been fully restored to its pre-tornado production capacity and we are now producing our full range of consumer and industrial products there.

The Goderich mine has regained full hoisting capabilities just a couple of weeks ago. We also made significant progress towards rebuilding our on-site storage capability. The two significant replacements that will cause us to temporarily shut down our Goderich mine are the installation of our permanent aboveground electrical distribution system and the installation of a permanent high-volume ship loader. Those activities are still a few months off.

Turning to our specialty fertilizer segment, we were pleased with our results and the relative stability of the global potash industry in general, in light of some recent volatility in the broader fertilizer market.

We sold 96,000 tons of specialty fertilizers in the first quarter, which is very consistent with our long-term average first-quarter sales. And our average selling price for the quarter was an attractive $613 per ton, which is a 5% increase over the first quarter of 2011. This steady demand and strong pricing lifted our specialty fertilizer sales 6% over 2011 first-quarter sales results and pushed our operating earnings up 7% from the prior-year quarter.

We have now sold through our low-cost prior-year SOP inventory, so as expected, beginning here in the second quarter we'll start to feel the pinch of the very poor 2011 solar evaporation season at the Great Salt Lake.

We've been able to maintain our key long-term customer relationships because of the potassium we source and secure to supplement the poor pond-based SOP harvest last fall. But because of the lack of harvest last year, our specialty fertilizer per-unit cost will increase by about $100 per ton year over year beginning here in the second quarter and continuing through the end of the year, which will impact our specialty fertilizer margins through the remainder of 2012.

We still expect our per-ton cash production cost to improve significantly in 2013 for two reasons. First, if we simply have a normal solar evaporation season at the Great Salt Lake this spring and summer, we'll have enough raw materials to sustain normal operating rates in Ogden without having to purchase a higher-cost external potash source. And secondly, we expect the SOP plant to be operating at our full Phase I 350,000-ton target annual rate by 2013.

But keeping our focus on 2012, we continue to expect sales volumes to grow by about 30,000 tons over our 2011 sales volume, and we expect to be able to maintain our historical price premium over standard MOP potash of $100 to $150 per ton.

Strategically, we're maintaining our unwavering focus on building long-term sustainable shareholder value. Late this year, we plan to begin introducing the continuous mining process at the Goderich mine. This will allow us to safely produce salt even more cost effectively than our traditional drill-and-blast mining method and will allow us to grow into the mine's expanded capacity even more efficiently than we had originally expected.

Our multi-phased SOP expansion at the Great Salt Lake is steadily progressing, and assuming normal evaporation this year, we will begin reaping the benefits of our investment in that advantaged asset in 2013. And we are focused on leveraging our increasing magnesium chloride production capability by expanding its use as a specialty fertilizer, road stabilizer, and, hopefully next season, as a specialty deicer.

So now I'll turn the call over to Rod to discuss the details of our first-quarter results. Rod?

Yes, thanks, Angelo.

And as Angelo described, the winter weather, or maybe more correctly the lack of winter weather, significantly limited our salt sales and earnings in the first quarter. Our non-deicing sales volumes were materially -- were not materially changed from prior-year results and were consistent with industry trends.

Sales volumes of highway deicing salt declined 27%, while consumer and industrial sales volumes were down 13%, compared to the results of 2011. You may recall that we estimated last year's first quarter as being an average winter-weather quarter for Compass Minerals.

Pricing results were mixed with highway average selling prices improving 3% year over year, but consumer and industrial average salt selling prices dropping 7%. This consumer and industrial products decline -- price decline entirely resulted from the impact of lower sales volumes of higher-value consumer deicing products in the 2012 quarter. The highway deicing average price increase was the result of higher overall pricing achieved for highway customers in last summer's bid season.

Of course, there are other factors usually at play, such as regional or customer mix, foreign exchange, etc., but all those netted to zero and the quarter price improvement was consistent with our bid results.

Our pricing gains in salt were substantially offset by higher per-unit shipping costs as increased fuel prices have persisted through the winter quarters. With current fuel prices close to prior-year prices, we currently don't see significant headwinds in year-over-year shipping and handling costs for 2012. Of course, that can be a volatile element and changes in that cost component can happen quickly.

Operating earnings in the salt segment fell $24.8 million from the first-quarter 2011 results of $77.2 million, again as a result of very tough weather situations and the continued effects of the 2011 tornado.

We estimate that tornado-related losses were $14.2 million this quarter. Remember that these losses are a combination of increased product costs due mostly to higher purchased salt and a smaller amount of lost margin on sales resulting from curtailed bidding last season. These tornado-related losses have hidden the impact of the improved mining efficiencies we've achieved at our rock salt operation, since much of the tornado-related losses are reported in cost of goods sold.

Without the tornado, our pro forma per-ton salt product cost would have been $1.30 lower than in the first quarter of 2011 and our operating margin for the salt segment would have been 200 basis points higher, or 25%. I want to point out that this improvement in cost would be significantly better than just $1.30 per ton, were it not for a negative mix impact from the lower percent of highway deicing rock salt tons as a total percent of salt tons sold.

Going forward, we expect around $10 million to $12 million more of tornado-related losses to run through our operating earnings, reported on the GAAP basis in our financials. Most of this is expected to impact our financial statements in 2012 about equally over the next three quarters. That would mean much lower amounts reported for tornado-related losses each of the remaining quarters in 2012 than has been reported in the last two quarters.

We also expect to complete the tornado recovery-related capital spending during 2012 with around $35 million of additional spending. We continue to expect almost all business interruption losses and capital replacement work to be covered under our insurance policies, subject to just a nominal deductible.

Now, I'll turn to even the larger impact of winter weather on our salt segment. Due to below-average winter weather in our service areas, we've estimated that our first-quarter operating earnings were unfavorably affected between $25 million and $30 million.

It should be noted that this effect cannot be known with absolute precision, but the estimate is based on consistently-applied methodology each period that analyzes the deviations of our sales volumes from contract commitments where we have long-term data. It also considers changes in average consumer and commercial deicing volumes, adjusted for known changes in our distribution base.

This year, the tornado effect added an element of complexity to the computation, but we're confident we've properly analyzed the information and have reported the proper estimated range effects. In analyzing the information, we assess the impact to be at the high end of the ranges reported in the 2011 fourth quarter, and therefore the estimated combined range for the full winter season is at the high end of the range.

So, summing up the impacts of the tornado and the unusually mild winter weather on our salt operating earnings for the first quarter gives us the following analysis. $52.4 million in GAAP operating earnings, plus $14.2 million in tornado impact, plus $25 million to $30 million in winter weather effect yields $92 million to $97 million in operating earnings, again which exclude both the tornado and adjusting for weather. This would indicate normal year-over-year growth of $15 million to $20 million.

The majority of this adjusted pro forma earnings increase represents improvements in underlying production costs versus the elevated levels in the prior year. This amount contains a lot of pro forma effects, but since we expect full recovery for business interruption claims from our insurance carriers and since our tornado effects don't double-count any weather effects on our business, we believe this is a fair way to think about our current run rate results.

However, as Angelo mentioned, the rest of 2012 has a couple of headwinds in our salt business. He's mentioned the uncertainty around the bid volumes, which, if it does decline, would almost certainly disproportionately reduce our third-quarter salt sales volumes from the record levels achieved in the 2011 quarter.

As a result of the lower sales outlook and our inventory position, we have taken action to reduce production at our deicing facilities. The notable exception has been the Goderich mine, where we are attempting to time inventory realignment with the major tornado-related construction projects that aren't ready to be completed yet.

The timing of those actions is uncertain due to the construction uncertainty. However, what is certain is that our costs will be impacted modestly during the rest of 2012. This will essentially negate the improvements we've made the last four quarters on a pro forma basis, again which excludes the effect of the tornado.

Now, let's look more closely at the specialty fertilizer segment where the details are more straightforward. Our specialty fertilizer segment demonstrated continued strong earnings potential in the first quarter. Sales were $58.5 million, which was 6% improvement from the 2011 sales total.

Sales volumes were relatively flat with the year-ago period, and the average selling prices for our specialty fertilizer products was 5% higher than the results of the prior-year quarter.

Looking forward, we expect to maintain our traditional $100 to $150 per ton premium to standard fertilizer and we expect to sell approximately 85,000 tons of specialty fertilizer in the second quarter at stable, attractive prices. And we are maintaining our full-year outlook for 375,000 tons.

Production costs on a per-unit basis for specialty fertilizers continued to be a little higher than historic levels this quarter, as a result of the effects of poor solar evaporation season we experienced at our Ogden production facility this year. These costs, which include all production-related costs plus SG&A, rose about $20 per ton when compared to the first quarter last year. As a result, our operating margin held steady at 35% in the quarter.

I wish I could report that the impact of the lower harvest from 2011 has dissipated, but as previously reported, we continue to expect that the average per-unit production cost will step up about $100 per ton for the remainder of 2012 when compared to 2011.

Looking farther into the future, assuming normal evaporation rates at the Great Salt Lake, we do expect a significant drop in costs for our solar pond-based production in 2013 and into 2014. This is based on incremental harvest feedstock that will be generated by the pond-sealing project, as well as the higher operating efficiencies at our plant as we complete the SOP yield improvement project, otherwise known as Phase 1 expansion.

Net earnings for Compass Minerals were $39.9 million, or $1.19 per share, for the quarter. Excluding the special item of the tornado, but not excluding the effects of the mild winter weather, we generated net earnings of $49.5 million, or $1.48 per share, compared to net earnings of $1.69 per share in the first quarter of 2011.

Interest expense in the quarter totaled $5 million, down from $5.7 million in the prior-year quarter. Over the next couple of months, we expect to refinance about $150 million in debt that is maturing in December of this year. Preliminary indications are that we should have a step down in our total borrowing costs following that expected refinancing.

Income tax expense was $14.9 million, representing an effective tax rate of 27% for the quarter, similar to the rate we expect for the full year.

Capital expenditures in the quarter were $30 million, of which about $9 million was used to replace assets damaged or destroyed by the tornado. We still expect to spend about $150 million in capital spending for the full year. In addition to the $35 million more in tornado-related CapEx, we also expect to incur about $60 million in normal sustaining capital spending for the full year. The principal remaining components of our capital spending will be used to begin our investment in continuous mining at Goderich, as well as to continue our Phase II expansion project at the Great Salt Lake.

We generated $96.9 million in cash flow from operations, which, while healthy, was lower than what we produced in the first quarter of 2011. However, when we account for changes in working capital, the two years are much more similar. We'll just need to wait another winter to convert that deicing salt inventory into cash.

We ended the quarter with no balance on our revolver and $184 million of cash on hand.

And now, I'll turn the call back over to the operator. Bill?

(Operator Instructions). David Begleiter, Deutsche Bank.

Angelo, just on Q2 salt production costs, I know there's a lot going on, can you help us again focus on how we're thinking about those costs in Q2?

Yes, Dave, it's a little difficult to predict exactly the timing of some of the slowdowns or the shutdowns on the capital, so the best we can do is really to just, you know, let you know that for the last nine months of the year, we expect our costs to be similar to the reported amounts for 2010 and 2011.

Fair enough. And just on SOP pricing, why was it down sequentially? And are we looking at flattish pricing in Q2 versus Q1?

Yes, I think we've essentially guided to flattish pricing in Q2. And I guess my expectation -- or my analysis is that, similar to other reported results, our price change was in line sequentially with others.

Yes, this is Angelo. I'll just add a little bit to that. I mean, about 25% of our sales are typically export sales that have a different pricing profile to them. Our exports tend to be a bit lumpy, so in any given quarter, you'll see a little bit of volatility in our selling price, depending on whether we're above or below that average 25% export volume that we typically do.

And Angelo, just lastly, on highway deicing pricing for next season, could it be down year over year?

You know, there have been very few times in our history that it's been down. I think we looked back and found one following a very mild winter, and that one year, the price was actually down 1%.

We had another very mild year, which I believe was the 2009-2010 winter, where volumes were down, I think, about 3%, but pricing was flat. So we kind of gave you those as bookmarks or benchmarks to look at it.

On the flip side, in a harsh winter we've seen prices as high as 20% up. So I think you need to look at our business kind of in those contexts. Modest volume declines following very mild winters and pricing less than the historical increase of 3% to 4%, but certainly not the kind of collapse that you might see in a more cyclical business such as chemicals [for say].

Ivan Marcuse, KeyBanc Capital Markets.

Hi, thanks for taking my question. A quick question, when you say SOP cost should be down substantially in 2013, what does substantially mean? Can you define it a little bit more? I know your long-term goal is $225 (per-ton), but do you expect to get there in 2013 or would you be more closer to $300 or $275 or somewhere in that range?

Well, substantially, if I had to place a dollar amount, it would be more than $100 in terms of where we're at from 2012. So it will be significant. And the more immediate goal is $225.

Just as a reminder, that $225 doesn't exactly sync up with our reported number that you can calculate because the reported number would include SG&A and some costs from our Big Quill operation that are higher on a per-unit basis.

So Ivan, it would not be unreasonable for you to assume somewhere around $100, at least for the majority of 2013. We'll have a little bit of carryover inventory from 2012 going into 2013, but it will be substantial in that kind of context.

Great, and then, if you look at your -- at the salt business, assuming a normal winter going into next year and with everything you've done to improve the operations, can you get the business back down below $30 per ton unit cost? Is that a reasonable expectation or would you expect to stay elevated?

I think where we've historically pointed people back to is the 2009 period, where we were around $29 on a full-year basis. Of course, there's a bit of inflation, so if you add 2% or 3% to that, you end up with $0.60 to $0.80, $0.90 a year in just some inflationary impacts.

We have been investing and will be investing in a mining project that we'd hope -- or that we'd planned to save a little bit. But I think where we're at on a trailing basis is around -- somewhere around $33, and so I think you have to think of it as something greater than $30 on an average basis.

That $33, by the way, is probably affected by around $1.00 per ton on just some negative mix effects of just lower deicing as a percent, which is the lower-cost salt product, but a -- lower rock salt mix.

So I can't really give you an exact amount, but getting back to $30 would be very difficult at this point.

Got you. And then, you said that it looked like you had pricing in your chemical salt also increased. How does that work? Is that more of a spot business or is that a contract, and you would expect higher pricing, at least on the chemical salt business, continue to roll through through the year, or is that -- how should I think about that when you look at second and third quarter?

Yes, this is Angelo. I mean, our chemical business is a little bit different than our deicing business, but they both use rock salt from our rock salt mines.

What we like about chemical is the fact that it's not a seasonal business, so we do get steady demand throughout the year. It is more tied to the economy and thus more cyclical, so it'll go up and down in demand based on economic drivers.

The pricing mechanism is kind of the more traditional pricing dynamics in which we negotiate with companies, normally agree to multi-year agreements, and we have -- we set price typically on an annual basis within those multi-year agreements.

So over the years, we've been working with our customers to kind of align the selling price more with the realities of the marketplace and the costs and what's going on in the other segment of deicing because that is our alternate use of that salt. So we've been able to get some price increases consistently in the chemical side, which will last for the entire year.

Great. One last question, I'll get back into queue. Rod, a quick one on the corporate expense for the year. Where do you expect that to sort of fall out?

We certainly expect that to be a lower amount than it was last year, and just looking at it, I think we would assume that our current first-quarter run rate would be about the amount per quarter.

Okay, so think $44 to $45 million?

Yes, somewhere in that range.

Edward Yang, Oppenheimer.

On the SOP side, why are you expecting volumes to be down sequentially?

Ed, this is Angelo. SOP does also have a little bit of seasonality into it.

If you looked at our historical sales pattern, we have typically some strong first-quarter sales, it tails off a little bit and picks up later in the year. It's just kind of the rhythm.

I wouldn't read much into the forecast being slightly different than the actuals of the prior quarter. I mean, so far the quarter is looking pretty good, so I'm optimistic.

Unfortunately, our availability of product is constrained due to the very poor harvest. So we're doing a little bit of sales control, frankly, to make sure we don't outsell our production capacity. So again, you see us perhaps passing on some lower-margin export business and really making sure that we protect our core North American market, both on the east and west coasts.

Okay, thank you for the color, Angelo. And on the salt side, I thought slide eight was very helpful. You provided the prior seasons where there was less snowfall than expected and the subsequent periods after that.

But how could good a comp is -- if I were to look at 1999-2000, for example, is that a good comp? I mean, this winter season was, as you mentioned, more severe than, again, some of the prior periods. So is down 4% for the bidding period, which is what you saw in 1999-2000, is that good enough or should we expect a meaningful haircut to that?

You know, I'm hopeful that we'll do better than that.

On the volume side, I think we have a lot more visibility in the sense that it doesn't take a rocket scientist to figure out that our customers are carrying extra inventory, and we know that for sure because some of them haven't met, as I described, their minimums.

So as in the process of meeting their minimums, they're taking product that they would normally take next season, they're taking it early to meet last season's commitment. So we know they're going to be going into the winter with full inventories, but for the customer, that's not a lot, but it could be enough to suppress bid demand by a couple percentage points. And we saw that in the last two very mild winters.

Pricing is tougher because pricing is based on a competitive bidding process. It involves what our competitors are also seeing, so it involves their cost profiles. It involves what's going to happen in fuel and logistics. It involves their supply/demand balance as well as ours. And those dynamics -- I mean, we literally have thousands of bids, and those dynamics have just now begun.

So there really is a lot of uncertainty where prices will end. The historical average has been 3% to 4%, and obviously we would rather achieve that than what we achieved in 2009- 2010 or in 1999-2000.

Okay, and Angelo, you mentioned -- did I hear you right that because of the mild winter again, you're getting an opportunity to build up some salt inventory? Does that mean your competitors are also building up salt inventory? And if that's the case, wouldn't that pressure bid prices?

Yes, I don't know what our competition is doing on inventory. I just know that for the last couple of years, we've been on the other side of that equation, kind of chronically short and really unable to capitalize on spot opportunities that strong winter weather would provide.

So going into this coming winter, we're going to get to kind of the optimal inventory position, which is one that fully satisfies our commitments both on the min and max side, but also leaves a little discretionary inventory in the field that should there be opportunities for incremental sales beyond the maximum commitments, we can enjoy those.

Historically, that has been a card that Compass Minerals has been able to play to get a disproportionate amount of the growth in the market in severe winters, and with our capacity expansion at Goderich, we typically -- we believe that we're really the only ones that have a structural excess capacity.

Now we're not going to produce that salt just because we have the capacity to produce. We'll let weather and market demands drive our production. But I do think we will enter this season with a healthy inventory position.

Okay, thank you.

Mark Gulley, Gulley & Associates.

(Multiple speakers) couple questions. One, one of your U.S. competitors just got approval to expand their mine. Now I know it's from a different agency and a different situation, but it kind of prompted me to want to ask about -- can you update us at all on expanding pond capacity at the Great Salt Lake?

Yes, and I think you're referring to a solution mine in an MOP or more MOP environment.

But we're working through the Army Corps of Engineers. We've been doing that now for almost five years. It's a very detailed process. I think we're seeing some light at the end of the tunnel. I'm optimistic that it is truly light. But until those permits are granted, you know, we can't declare success.

We will meet all the requirements that the government lays out, and it's a good balance between the environment and our desire to produce organic SOP from naturally-occurring brines on the Great Salt Lake using solar energy. It's a pretty green project, so it generally has broad support.

So, again, those plans are for our Phase III, which still is many years out. So the fact that it's taking a while really isn't hurting us. We have to get through Phase II first, which, if you recall, adds an incremental 200,000 tons, 220,000 tons, and the first part of that is the pond sealing, which we're probably two-thirds of the way through now and be done by the end of the year. But then we have to go and expand our plant, which is the large part of that investment, and we're in the engineering phase of that and we're not going to rush it because it's a complicated process, as many of you saw when you visited our facility last year, so we want to do that right.

So I think the permits are coming along nicely. Whether we'll get everything we ask for in the way we want it is uncertain, but there are a lot of contingencies and trade-offs that we can make that will give us a good third leg to our multi-phase expansion plan.

Okay, and then a couple financial housekeeping questions really for Rod. Rod, you talked about the ability to refinance higher-cost debt. Can you give us an idea of what kind of incremental interest-expense reduction that might provide you on an annual basis and when that might occur?

Yes, Mark, I'd hate to get too live on that. I think we're confident that we can reduce our overall borrowing costs, but with our bank debt being kind of a weighted average, a LIBOR plus 225 to 250, somewhere in there, any refinance of that weighted average debt would not provide anything substantial, but -- in terms of savings, but would -- we're expecting it to step down.

Okay, and then on the CapEx side, I wasn't quite exactly sure I understood the detail you're providing, so maybe you could go through it again. What is your normal CapEx this year, and then, how much is attributable to repair of damage due to the tornado? And how should we think about that going forward?

Yes, so we've said around $150 million of total capital spending, and of that, about $40 million to $45 million is related to the tornado damage recovery.

So that leaves just a little more than $100 million of other spending. About $60 million of that is sustaining capital spending. The remainder is really principally focused in two areas. One will be the Ogden expansion; the other one is the continuous mining equipment that will be purchased later on in 2012.

The $100 million is kind of a normal number for Compass at this juncture?

I think, you know, every year we start with zero dollars and we say, what do we need for sustaining, and we have found that to be between $50 million and $60 million, and other spending investment needs to garner an attractive return to spend the dollars.

I think if you look at our Investor Day presentation, we kind of said over the next couple of years that we expect that number to be around $125 million, based on our -- on the table plans.

Got it. Okay, that's helpful. Thank you.

Joel Jackson, BMO Capital Markets.

Hi, good morning. Maybe you can provide a little bit more color on that 1999-2000 winter. Maybe a history lesson. Wasn't that year that one of your competitors added some new supply to add a rock salt mine in the U.S.?

You know, Joel, that is a good point. You're asking me to go back into the -- long into the memory banks, several transactions ago.

But yes, that year from a weather standpoint was quite mild. I don't think it was on par with this year. It wasn't that mild, but it was a very mild year. And as importantly, there was -- the only rock salt mine that's been built in the last 50 to 60 years started operations in a way that had a meaningful amount of production come online that year.

So, it was kind of a double effect, low demand from the prior winter and more supply on the market that was built based on project economics that they needed to, I'm sure, support. So it was -- that was the effect that happened in that particular bid season.

Do you recall which mine that was?

Well, it would have been the new mine in New York state.

In New York state, okay. Okay, let me know -- and I know, I'm sure, it's very hard to simplify all these things, but help me if my simplifying assumptions are right.

So if we assume in your U.S. rock salt business that snowfall was roughly half of a normal winter, and if we assume that your average min/max provision is 80% minimum, can we assume that for every 8 tons of awarded volume out there, or every 10 tons of awarded volume out there, you've only sold -- or it's only been sold about 5 tons of those 10 tons, so there's 4 tons or 5 tons out of 10 tons sitting somewhere in either your system, at a depot, at a customer's warehouses, their sheds. Can you sort of see what I'm getting at?

Yes, I do. I think we've always mentioned, you can't reduce it to math in that way. And I would add that there's an aggregate number of customers that are significant that are outside of the 11 cities we measure, so places in Wisconsin and Michigan and Ontario that aren't part of the major cities, or Minnesota, for example, that aren't part of the major cities had more snow events than the major cities had, and so you can't necessarily just reduce it to math in that way.

I think -- as we've also mentioned in the past, there's a bit of a phenomenon that happens, which is when it's a severe winter, each event really results in less per-event salt usage, and that's because there's the bias to conserve, knowing that there's limited resources. And the opposite is true in a severe winter when the proper amount of deicing material is added as opposed to a diluted amount. So I think there's other factors at play, and you absolutely can't reduce it to that math.

Let me ask it a different way, too. Is -- I understand the 11 cities and the point of revealing that information. Would you say, in what you know right now, that you would expect to sell -- at least sold or will sell through the end of the contract period roughly half of the awarded volume, or can you give us a better number to think of?

(Multiple speakers) thinking of your entire contract portfolio in the U.S.?

Well, we're way more than -- well more than half through March, so it would be -- it's not just half.

So you were well more than half through March, is that what you said? Sorry.

Yes, yes, (multiple speakers) right.

Oh, okay.

So I think, Joel, when we think about it, the point is is that the reduced bid volume are almost certainly to acutely affect the preseason, and while there can be some second-quarter effects to that, it really is more acute to the third quarter where those early sales are just not going to happen because governments have inventory to carry over this year.

What it won't affect will be the winter season sales. When it snows in November, December, through March, they'll take just like they always have. It's just the preseason.

Okay, finally on the cost side, I just had a couple questions. Can you review roughly or generally what the variable versus fixed component of your freight costs? Or how we should think about the fixed component of your freight costs for both -- more for salt, really, but maybe SOP as well.

And also, what sort of quantitative impact is the introduction of continuous miners at Goderich going to mean?

Okay, I'll take the freight.

Yes.

You know, I think when we have seen oil, and therefore, by extension, diesel fuel, at very low kind of $50, $60 per barrel prices, we've seen our average freight rate be in the $18, $17, $18 range, and when it's been at current $100 to $110 prices, we've seen the $22 to $23.

So what we've kind of always said is, while there is a bit of a not exactly matched up on a real-time basis effect, the short and the long of it is that for every $10 of oil, you can expect it to be a little less than $1.00 per ton just across a several-quarter period. And I mentioned in my remarks that because oil and fuel costs approximate where prior-year levels were, while that market can, of course, change quickly, we currently don't see any headwinds on our shipping and handling costs for the next quarter or two.

Yes, this is Angelo. On continuous mining, I think that's a strategic shift we're making.

As you may know, we've been in continuous mining for about a decade in our mine in the UK. And what we've seen over that decade is a couple of benefits. Number one is we think it's a safer process in the sense that there are no explosives involved in continuous mining.

It's also because the word is continuous, it's a continuous mining process. So it doesn't have the starts and stops that the traditional drill and blast is. And from a maintenance point of view, it's a single piece of equipment that replaces many pieces of equipment that are required for drill and blast. So typically, you get some efficiency in your maintenance spending.

So we're trying to translate that from a relatively small mine in the UK to a very large mine at Goderich, so we're doing it in steps. So we've committed to a couple of continuous miners that will take a percentage of our capacity and we'll introduce them. We've obviously justified that based on the kind of investment hurdles that Rod previously described, which has been historically the high teens or 20s for these low-risk kind of projects.

You know, I hope over time, number one, to validate the initial investment, but then to continue to implement it more and more across Compass Minerals. So I don't think there will be a material change in our costs in the early phase. There's a fair amount of learning and getting used to this new manufacturing process, and we saw that in our experience in the UK.

But I would think if you look back at Compass Minerals 10 years from now, I think this event of introducing continuous mining at the Goderich mine will be an important turning point in our production efficiency at that mine.

Olga Guteneva, JPMorgan.

I apologize if this question has been asked already, but of your winter highway contract volumes, roughly what portion was -- what portion got to the take-or-pay level? And of that, how much did you actually enforce?

Yes, this is Angelo. We really didn't get into those statistics, nor that I think we should because I think it implies almost a coercive approach to our customers where we're saying, well, you have a commitment to 80%. Where do I ship it?

Instead what we've chosen to do, and this has been our historical pattern, is go to those customers who haven't met their minimum, but who we know will require materials next season, and try to bridge the two periods and work out a deal that would roll the commitment from one season into the commitment to the next season, and maybe delay the period in which we would ship those tons from the prior season, but also negotiate an appropriate price increase for the extra costs that we incur by holding material longer.

So I think we try to work collaboratively with our customers, but I think the fact that we do have minimums in our contracts does give us a little bit of leverage and inside position to work out transactions that bridge one season into the next.

Elizabeth Collins, Morningstar.

Hi, can we get a better sense for how much your volume suffered after the winter of 1999-2000? I'm looking at your IPO document. It doesn't look like it's possible to break that out?

Yes, on page 8 of our earnings document, which we issued together with our press -- or earnings release, the 1999-2000 says volumes were down minus 4% and prices (multiple speakers) down 1%.

Yes, that's bid volumes in the subsequent season. In terms of how much -- how many tons you actually sold in Q4 of 1999 and Q1 of 2000, can you give us an idea of that -- how much that was below average?

I just don't remember that. I remember it as being a very mild winter period, but in terms of that information, I just don't have that at my fingertips. I'm sorry.

Okay, no problem. Then last winter, Q4-Q1, was approximately normal. Can you please remind me, did you have any customers in your territory that needed to get served by higher-cost suppliers from outside the Great Lakes region?

I believe the last time that happened would have been kind of the 1999 (multiple speakers) I mean, 2009 year. I don't believe there was any illogical imports into the interior of North America past 2009.

Sure, okay, that makes sense. Thank you.

Gregory Macosko, Lord Abbett.

Yes, thank you. Yes, most of my questions have been answered. I just, and maybe I missed it, but just from the standpoint of salt and your point about building -- basically producing at your normalized rate, and given the inventory levels that you have and what you are expecting you'll build the internal inventory up to, quote, a normal level, does that imply, then, that you're -- based on the fixed costs and the like, there would be obviously some coverage of that cost and that would be included in that inventory? Is that a fair way of looking at it?

Greg, I'm not sure I exactly followed that whole thing. What I would say is that we are taking this opportunity to have an inventory position that we haven't had for several years.

The winter of 2007-2008 resulted in a shortage of salt. We were not subsequently able to make that up in a decent 2008-2009 year, and then we had some production problems in 2010, and then the tornado happened in 2011, and that has left us with it being several years since we've had kind of a small surge capacity.

So there would be some cost benefit from not pulling back to try and thread the needle on inventory versus what we need to serve our bids, and so I think that was your question, and so, yes, we will enter the season with more than we've had in the past, but with the goal of capitalizing on above-average winter.

I understand that and it makes sense to me. Just so I understand, though, then, and there are not any particular added costs at this -- in the production that you expect going forward, correct? I mean, there's -- it's kind of a normal -- and it will be a normal run, in effect, a normal run, and given the lower-than-expected volumes and inventory build, but the run itself, there's no added costs in that production from the Goderich mine, right?

Well, I would say there's no added cost dollars, but because we will be reducing production, that's where we've indicated that we expect over the next nine months to have costs (multiple speakers)

Unit costs.

-- per-unit costs that are similar to the last two years, which would have been at an elevated level of roughly -- if you look at the numbers, it would be roughly $2.00 per ton over that time period.

Okay, so the inventory cost would not be that much different from last year, right, or am I thinking that right?

From last year, that is correct.

Okay, good. That was my question. All right. Thank you very much.

I'm glad you clarified that, Greg.

Yes, thank you.

That concludes the question-and-answer session for the Compass Minerals first-quarter conference call. I'd like to turn the conference back over to Mr. Angelo Brisimitzakis. Please go ahead, sir.

Thanks, Bill. You know, I opened this call by talking about the remarkable resilience of our salt business. However, our specialty fertilizer business and, most importantly, our people are equally remarkable and resilient. Over the next several months, we expect to continue demonstrating to you just how strong Compass Minerals is.

Thank you for joining us today. I look forward to talking to you again in the third quarter.

And again, that does conclude today's conference call. Thank you for your participation.