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Executives

Peggy Landon – Director of Investor Relations and Corporate Communications

Angelo Brisimitzakis – President and Chief Executive Officer

Rodney Underdown – Chief Financial Officer, Secretary and Treasurer

Analysts

Edward Yang – Oppenheimer & Co.

Robert Koort – Goldman Sachs

David Begleiter – Deutsche Bank

Mark Gulley – Ticonderoga Securities

Joel Jackson – BMO Capital Markets

Compass Minerals International, Inc. (CMP) Q2 2011 Earnings Call July 29, 2011 9:00 AM ET

Operator

Good day, and welcome to the Compass Minerals’ Second Quarter Earning Conference Call. Today’s call is being recorded. And at this time, I’d like to turn the call over to Ms. Peggy Landon. Please go ahead, ma’am.

Peggy Landon

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 to-date to reflect future events or developments. You can find reconciliation of any non-GAAP financial information that we discuss today in our earning release, which is available in the Investor Relations section of our website at compassminerals.com.

Now, I'll turn the call over to Angelo.

Angelo Brisimitzakis

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 earrings, 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’s unusual for weather to play much of a role in our second quarter results, but weather has 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’s our experience that once the potash application season has passed, growers simply skip the application for that growing cycle. So unfortunately, these sales are 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 the last year's second-quarter results. Excluding this weather impact, demand for sulphate of potash is improving from what we’ve experienced over the last couple of years, and 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 gains was about $70 per ton.

Our second-quarter SOP production cost 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 produced at the Great Salt Lake.

Despite these high year costs, our specialty fertilizer operating earnings increased 26% to $18.7 million and our operating margin expanded by two percentage points over the prior year quarter and by almost three percentage points sequentially.

As for the second half of 2011, I like to able to be 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're 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 segments sales to around 160,000 tons of SOP during the second half of 2011 and to about 350,000 tons for 2011. 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 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 evaporation cycle will be completed. I also want to point out that we don't currently expect this to impact our mineral harvest in future years, nor should it affect our ability to sell magnesium chloride or solar salt coproducts 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 II expansion is completed in a few years.

Switching now to our salt segment, our sales volumes where about average for the second quarter period. They were unfavorable to last year but you will recall that last year our customers in the UK, started building stockpile very early due to two consecutive seasons of record snow. And in our North America market, it has 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 to Mississippi and Ohio Rivers by barge. This year spring flooding in the Northern Plain space interfered with shipping on the Mississippi and Ohio Rivers throughout much of May and June.

Fortunately, we were able to adjust the mines operations and de-stock piles of 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 have 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 believed the underlying demand trend to be. Collectively, our rock salt mines are running at much higher rates than in 2010 and our production cost per ton had dropped significantly from last year. We expect our production improvements to continue so we expect our salt product cost to be 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 two-thirds of the way through the bidding season, which is typical progress for this time of the year. And the average prices of our bid awards to-date have been approximately 3% above last year's average awarded price.

We're also seeing governments in our served market 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 bid from last year's bids. And with about one-third 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 prices, market volumes returning to pre-2010 bid levels and are improving production costs, we currently expect fourth quarter salt segment operating margin percentage to be much stronger than in the fourth quarter of 2010 and to approach the margin percentage we achieved in the fourth quarter of 2009, even the 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 details. Rod?

Rodney Underdown

Thanks, Angelo. I will review some of the financial details of the segment results and our forecasts 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 of the second quarter, that's 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 salt basis, reflecting modest price improvements as well as lower salt cost. Total per unit salt cost which include the cost of goods sold as well as segments SG&A costs, improved by more than $2 per ton or 5% versus the second quarter of 2010 when per unit cost were negatively impacted by lower salt production and $1.3 million in direct cost associated with the 2010 strike at our Louisiana mines.

The 2011 quarter’s per unit salt cost would have improved even more, but we’re also negatively impacted by a one-time cost 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 obligation.

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 on 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 salts 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 more pronounced, and the per unit shipping and handling headwinds 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 assize the 32.7% reported in the 2009 fourth quarter. When compared to 2009 quarters, our salt cost have higher sourced potassium chloride cost 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 remained well above standard product prices and drove a 26% increase in specialty fertilizer operating earnings.

SOP cost per unit sold were flat compared to the first quarter costs and are expected to rise above current levels in the second half of 2010 and end of 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 cost 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 the SOP of $73 per ton remained higher compared to the second quarter of 2010. We continue to expect shipping and handling cost 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 private guidance because of the impact of lower evaporation rates this spring at our Great Salt Lake summit 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 then to 2012.

For the next 18 months, we intend to focus on serving the domestic market and our best international markets where we achieved the highest netbacks.

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 rose 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 from 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 $40 million compared to $11.3 million in the second quarter of 2010, this year was $0.42 per 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’ll turn the call back over to the operator to begin the Q&A session, Matt?

Question-And-Answer-Session

Operator

Thank you, sir. (Operator Instructions) And we will take our first question from Edward Yang with Oppenheimer.

Edward Yang – Oppenheimer & Co.

Hi, good morning.

Angelo Brisimitzakis

Good morning Ed.

Edward Yang – Oppenheimer & Co.

Good morning. How much salt volume was pushed out from the second quarter into the third quarter?

Angelo Brisimitzakis

This is Angelo. We’d estimated around 50,000 tons.

Edward Yang – Oppenheimer & Co.

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

Angelo Brisimitzakis

Ed, just I'll correct it. We didn't guide towards flat. I mean, flat was regard towards last season, which actually did materialize. For this upcoming season, for the season that we’re in now, our feeling was since we where ending the winter with more normal weather and we saw the inventory levels at both competitors and customers were more typical.

We were a expecting a more typical normal result and today 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's been relatively flat through the bidding season. There hasn't been a 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.

Edward Yang – Oppenheimer & Co.

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

Angelo Brisimitzakis

Yeah, I think public safety is kind of the highest priority that government plays on. They are on their application of their money. And in this case, we’ve seen a nice rebound in demand. In our served market we’re seeing bid volumes up about 4%. So I think that's a indicator of the importance and elasticity of the demand of salt and the central nature of the salt. So I don’t think in this cycle that the economic environment is having a major impact on the bidding process.

Edward Yang – Oppenheimer & Co.

Terrific. Thank you.

Operator

We will go next to Bob Koort with Goldman Sachs.

Robert Koort – Goldman Sachs

Hi good morning.

Angelo Brisimitzakis

Good morning.

Robert Koort – Goldman Sachs

Angelo, what was the most recent time in history you have seen that whether related issue on you fertilizer business out there.

Angelo Brisimitzakis

Yeah, I mean we went back and did a little bit of looking. I think some of the data would suggest that about one every seven years, we have 33% above the normal amount of rainfall in our Great Salt Lake area. So one in seven years, it’s 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's one of those, one in seven years plus some, and thus the impact is very large.

The other thing I should point out and maybe we could have explained it a little more in the past is we suspended using our purchase in KCl about two years now or 2009 to make SOP. And we did think that for several reasons, primarily it 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 essence with a bit of a rain hedged in some of our production with coming from KCl and the balance of the production was coming from the Great Salt Lake in solar evaporation process. And 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 below cost, I think implicit in that comes with the weather risk that solar evaporation provides. So we avoided the KCl sourcing risk, but we’ve now have more of the solar evaporation weather risk, if that make sense?

Robert Koort – Goldman Sachs

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. What are you seeing as you guys add capacities, is the rest of the industry doing the same or what do you think?

Angelo Brisimitzakis

I think it was important for us to add that capacity at the Goderich mine. And in effect, we added the equivalent of a rock salt mine, taking it from, when we started this multiphase expansion for about 6.5 million tons to now a capability of 9 million tons, that’s 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 wants it.

We’ve also not seen any material public announcements of any of our competitors increasing capacity substantially, but you know as any good company does and we compete 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 are keeping up with demand growth, which is so 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.

Robert Koort – Goldman Sachs

Great, thank you.

Operator

We’ll go next to David Begleiter with Deutsche Bank.

Angelo Brisimitzakis

Good morning, David.

David Begleiter – Deutsche Bank

Good morning Angelo. Angelo, I would have expected may be a little bit higher pricing in salt, did you make a decision to perhaps push volume a little more than pricing to give me a new expanded rock salt capacity in Goderich?

Angelo Brisimitzakis

I would have wanted a higher price also, but you have to recall this is a highly competitive market, and 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 and the price just being normal. What was the factor is the typical competitive rivalry which exists among several very strong companies and we added 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.

David Begleiter – Deutsche Bank

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

Angelo Brisimitzakis

Yeah. 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.

David Begleiter – Deutsche Bank

And just on the Great Salt Lake, is it feasible to build inventories at least once every seven year issues, was that too expensive?

Rodney Underdown

Well, I mean it's a good question. I mean one of main results of our pond sealing initiative, which is part of our Phase II expansion at the Great Salt Lake, is to give us a bigger harvest and 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 III, 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 weather is not cooperating. And 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.

And as you could imagine early rains are worst that late rains. If you are in the last 10% of evaporation season and it rains while 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 your evaporation left, that impact will carry all the way through, unfortunately, the rains this year were in May and June.

David Begleiter – Deutsche Bank

Thank you.

Operator

(Operator Instructions) We’ll go to Mark Gulley with Ticonderoga Securities.

Mark Gulley – Ticonderoga Securities

Hey, good morning guys, 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 and you talked about shipping and handling being up $3 a ton. So it looks like a material margin squeeze going forward. Is it possible that the cost you’re seeing now could mitigate or all the competitors basically surrendering $1.50 a ton on a go forward basis?

Rodney Underdown

Well, 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’s why when you hear us talk about the flat expectation for the third quarter that’s a little better cost and there is a couple of reasons we can talk about for that. But oil in 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, 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 cost rose almost $3 from the third quarter to the fourth quarter on average shipping and handling costs in that. That’s a function of what happened with the oil and diesel cost late last year. And 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 barely covered fuel, recovered fuel through the winter at current prices.

Mark Gulley – Ticonderoga Securities

And secondly sticking with pricing, can you kind of talk a little bit about the netback lift you would hope to enjoy given your lower production next year, it is of course you will be reaching out less to more distant customers. So there should be a netback lift there irrespective of whether or not you would have changed price?

Rodney Underdown

Yeah, I mean, I think, that's, when we have just guided to the 625 mark, we said, 625 were perhaps higher, I think, we would expect that absent any further price strengthening in potash that average per unit sales price would be higher just because of the mix impact that you’ve talked about. And that will on a per unit basis, put us in good shape notwithstanding a little bit lower volumes run through the plant and therefore slightly higher cost. So, I think, we guided to the 625 price and I think we feel really good about that as we sit here right now?

Mark Gulley – Ticonderoga Securities

And 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 are missing out on selling some nice high margin tons next year and in ’12? Thank you.

Angelo Brisimitzakis

Yeah, so was exactly the question that I've been asking in the last couple of weeks. We did take actually some very discrete action to at least give us a chance to setup the better for the next season. We head started Phase II of our expansion and that the part that we started was the pond sealing part. If you recall, pond sealing was an enabler in fact gives us the biggest harvest. We were initially timing the pond sealing to be completed when the plant expansion was completed, which we’d 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 have only been running a half of that.

So that the pond sealing project will be finished by May of 2011, which is the start of the 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 a 100% precise. It’s not like a chemical reaction were you have flow meters and buttons to push, you’re essentially putting an impervious 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, 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 is May and June that we had to overcome.

Mark Gulley – Ticonderoga Securities

And so, just more classification. The accelerated time table you just alluded to is reflected in the 360 number you provided?

Angelo Brisimitzakis

350 number right, yes.

Mark Gulley – Ticonderoga Securities

Okay, right.

Angelo Brisimitzakis

Although again you could have an above average evaporation cycle and get more based on weather and you can have a below average cycle and get less. We are kind of thinking it is going to be normal next solar evaporation cycle and much likely do our salt segment we plan for normal.

Mark Gulley – Ticonderoga Securities

Okay. Thanks, Angelo.

Angelo Brisimitzakis

Thank you.

Operator

We will take our final question from Joel Jackson with BMO Capital.

Joel Jackson – BMO Capital Markets

Hi, good morning.

Angelo Brisimitzakis

Good morning Joe.

Joel Jackson – BMO Capital Markets

We’ll keep on the lining of question here on SOP; you’ve given guidance in the past when you announced the Great Salt Lake expansion Phase II project. How are you going to step to the 220,000 tons of additional capacity through 2015? And I believe the first thousand tons of new capacity was coming out next year. Can you give us some guidance best guess I realize it’s a little bit hazy right now, but what you think your production capacity will be at the Great Salt Lake in 2011, 2012, 2013 relative to previous guidance?

Angelo Brisimitzakis

Yes, this is Angelo. I mean that was a hard question before the rains came to Austin and it’s an even harder question now because in essence the rains in May and June kind of prompt the 2011 and 2012 evaporation season and in essence delay the opportunity we have to get this supersized harvest that we could then convert into larger amounts of SOP and expand the plants.

In addition to be frank, the delays we had on the Phase I expansion has caused us to take a more cautious approach to the engineering and design and construction of the Phase II plants. So since we don't have the raw materials to really run, we don’t have the raw materials yet to run a Phase II plants at full rates, and there were lot of learning’s from the Phase I experience. I think it has pushed the whole project out a year or two.

So what we've 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. And that gives us kind of the raw materials to fully capitalize on the Phase I expansion, which takes us to a 350,000 ton capacity, but also gives us that range hedge I was talking about, which will give us more of a hedge if it ranges to make that 350. And then incrementally as Phase II was constructed, we’ll have the harvest already piled up and as that plants is constructed we’ll be able to capitalize and get to the additional, we estimate 220,000 tons at Phase II will bring.

Joel Jackson – BMO Capital Markets

Can I read to that to say that you were trying to guess that production this year at Great Salt Lake could be about 300 this year, 350 next year, 400 in 2013, will that sound about right?

Angelo Brisimitzakis

Yeah, 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. And what that will be as the color kept aside will be more domestic sales, less international sales, and those international sales will be selective based on margin and kind of the strategic importance of the customer. That in effect will give us a better mix of the sales, but that will reduce 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 are going to have two years of flat sales in SOP from the Great Salt Lake due to this constraint.

Now how we produce that is that we haven’t really discussed, but we're going to produce in a way that minimizes our cost. We have inventory and we have production, we’re going to balance that to allow to us have relatively back sales in 2011 and 2012. And 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 plants expansion from phase II will kick in, and it 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. And we will 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 than our Great Salt Lake minerals business brings.

Joel Jackson – BMO Capital Markets

Angelo, if we go back over the 40-year cycle you spoke off in the one in every seven years, on average, will you get a 33% above than normal rainfall? Historically, over the 40-year cycle, what does that meant for production of the Great Salt Lake? What is the 33% above normal rainfall mean for relatively for production delayed?

Angelo Brisimitzakis

It really depends on when the rains occur. Like I said 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. And it’s not just rain, its 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 now 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, we had a little rain in August, probably would have 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. And if we don’t have harvest, we can’t make SOP.

Joel Jackson – BMO Capital Markets

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

Angelo Brisimitzakis

Yeah, I think you have to kind of step back and appreciate that they’ve booked potash products. But there are 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 U.S. going to fruits and vegetables that have their dynamics.

The MOP in Western United States is more of a Midwest and row crops in corn, wheat, soy and has their dynamics. And what we’ve seen is in the crop area, high increase in prices of basic commodities like corn, wheat, soy and growers able to support much higher prices and made a lot of money selling corn at $6 or $7 official.

The typical almond producer that we might sell two in California has not seen the kind of increase in selling price of their crop almond has 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 again we have to be very careful that we don't destroy demand. And we also, what happened a couple of years back when potash prices zoom to near $1,000 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.

And I think we’re managing that well and in fact over the next 18 months, since we’re in a constraint 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 a simple as adding the MOP price plus $150, although that is a simple way to look at SOP that doubles in the detail as they say.

Rodney Underdown

And Joel, I just might add, when you look at the our prices versus the one potash, smaller potash competitor that is completely domestic, our prices and kind of very close to that historic 150 spread. So I know we typically talk about 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, where as the other domestic only competitor seem to have a price that was more consistent with our $150 spread. But it’s okay, that’s wrong, I mean seeing demand for potash as the category and prices of potash going up on the international market even though we don’t participate in 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.

Joel Jackson – BMO Capital Markets

And just 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 just what you’re seeing in terms of some of the escalators, the price escalators in building those two and three year contracts, are they fairing within the normal the historical 3% to 4% pricing range?

Angelo Brisimitzakis

Yeah, Joe, first I just want to point out, there are many that are multiyear on a percent basis that would be a small part of our contracts. And very typically the inflation there is, I mean the second and third years, sometimes such as the election of the government, sometimes it’s at the neutral election of the seller and the government to roll into the future. And where there are prices that are stipulated on a multiyear basis, it’s typically either tied to an inflationary component or is related to an inflationary component that we would expect there to be in the market.

Joel Jackson – BMO Capital Markets

So nothing different say from this year versus last couple of years in terms of those EPI or index or inflation based escalators.

Angelo Brisimitzakis

Yes.

Joel Jackson – BMO Capital Markets

Be typical.

Angelo Brisimitzakis

That’s correct.

Joel Jackson – BMO Capital Markets

Okay, guys.

Angelo Brisimitzakis

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

Joel Jackson – BMO Capital Markets

Okay guys, thanks a lot.

Angelo Brisimitzakis

Thanks.

Operator

There are no other questions. At this time, I would like to turn the call back to Mr. Brisimitzakis for closing comments.

Angelo Brisimitzakis

Thank you, Matt. I would 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. And we expect to sell about a 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 de-icing bid awards have been priced at about 3% higher than in the 2010 season and governments are requesting volumes similar to historical levels. And importantly, our salt mines are operating at normal rates, which have significantly reduced our rock salt production cost 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.

Operator

And that does conclude today’s call. Thank you for your participation, have a good day.

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