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Compass Minerals International (NYSE:CMP)

Q3 2011 Earnings Call

October 27, 2011 9:00 am ET

Executives

Peggy Landon - Director of Investor Relations & Corporate Communications

Angelo C. Brisimitzakis - Chief Executive officer, President, Director and Member of Environmental, Health & Safety Committee

Rodney L. Underdown - Chief Financial Officer, Principal Accounting Officer, Vice President, Secretary and Vice President of Finance for Compass Minerals Group Inc

Analysts

David L. Begleiter - Deutsche Bank AG, Research Division

Ivan Marcuse - KeyBanc Capital Markets Inc., Research Division

Mark R. Gulley - Ticonderoga Securities LLC, Research Division

Manav Gupta - Goldman Sachs Group Inc., Research Division

Joel Jackson - BMO Capital Markets Canada

Edward H. Yang - Oppenheimer & Co. Inc., Research Division

Operator

[Operator Instructions] Good day, and welcome to the Compass Minerals Third Quarter Earnings Conference. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Peggy Landon.

Peggy Landon

Thank you, Gwen. Good morning, everyone, and thanks for participating in our call this morning. With me here today are Angelo Brisimitzakis, our President and CEO; and Rod Underdown, our CFO.

Before I turn the call over to them, let me remind you that today's discussion may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on the company's expectations as of today's date, October 27, 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 Form 10-K and 10-Q.

The company undertakes no obligation to update any forward-looking statements made today to reflect future events or development. You can find reconciliations of any non-GAAP financial information that we discuss today in our earnings release, which is available in the Investor Relations section of our website at compassminerals.com.

Now I'll turn the call over to Angelo.

Angelo C. Brisimitzakis

Thank you, Peggy. Good morning, everyone. Thanks for joining us today. Candidly, it's been a while since we had one of those quarters in which the leadership of Compass Minerals achieved much of its goals, and we gave you an upside surprise. Now I'm not suggesting that all is perfect. There's some good, some bad, some ugly things to discuss today, but I'm happy the good outweighs the others. And as for the second quarter in a row, we've improved on some key metrics, so that you can start to see us sustainably delivering on a few significant long-term value creators.

I'm very pleased to report that we achieved exceptional sales, earnings and cash flow this quarter. Our sales of $229 million approached the third quarter sales record we set in 2008. Our operating earnings improved 49% year-over-year. And our net earnings set a new third quarter record at $34.6 million, nearly 80% above our net earnings result last year.

Sales were strong in both of our operating segments. In our Salt segment, we set a record for third quarter highway deicing sales volumes at 1.9 million tons. The increase was dramatic when compared to the prior year period. Last year's third quarter followed a mild winter season, so North American customers needed less salt than normal last year to build their initial inventory in preparation for winter. So admittedly, it was a bit of an easy comp.

However, highway deicing sales surpassed other third quarters in our history as well. Customer orders in all of our key deicing service areas surged above what we would have expected as customers began building their stockpile earlier than normal.

In the U.S., we believe this past winter season's more typical weather left customers with fewer tons than they were comfortable with entering this winter, resulting in modestly larger orders this year.

Customers in the U.K. are coming off of their third consecutive severe winter season and have restocked more aggressively. We believe they are trying to prevent a repeat of the short-term shortages that occurred throughout the U.K. when very harsh early-season weather quickly depleted local supplies in prior years.

In Canada, some of the sales increase was due to a few customers ordering early out of concern about our ability to deliver salt during the winter to meet our commitments following the tornado that struck our Goderich mine. Those concerns were ill-founded, which I will discuss in a minute.

The increased sales volume also had a particularly dramatic impact on average reported prices compared to last year's third quarter. Last year, we had low early-season demand for highway deicing salt, thus a greater percentage of our sales volume last year was for lower-priced rock salt for chlor-alkali customers. This change in sales mix, along with solid pricing improvement in the U.K. at an average 3% increase in North American Highway deicing prices, lifted the reported average selling price 20% above the third quarter of 2010.

In our consumer and industrial business, our sales mix similarly shifted to higher-priced value-added products. This had the effect of reducing our total salt sales tons but increasing our average selling price as well as the revenue generated by that business.

The event that most significantly impacted us this quarter was the F3 tornado that struck Goderich, Ontario on August 21. The storm struck our salt mine then traveled a few miles and hit our mechanical evaporation plant on the other side of town. There was significant surface damage to both aboveground structures at both locations. The mechanical evaporation plant suffered the most damage since everything at that location is above ground except for the brine wells. However, the critical evaporators and other operations infrastructure were largely left intact. As a result, we focused initially on returning the complex packaging and other product finishing parts of our operation to normal. We were able to restart our rock salt bagging operation there at the end of September. And just last week, we began producing high-purity evaporated salt again.

Our other mechanical evaporation plants in the U.S. and Canada also quickly stepped up production to help make up for some of the production we temporarily lost at the Goderich salt plant.

At our underground rock salt mine in Goderich, the tornado destroyed our single shiploader, significantly damaged much of our aboveground storage capability and took out our power distribution system among other things.

Once we got the power restored, the mine's recovery accelerated. We used some creativity to work through most of the short-term production constraints, and we're loading ships with rock salt again within just 16 days of the storm. The mine is operating at approximately 85% of our pre-tornado rate, and we believe we will be operating at these reduced rates for the winter or until our normal late-winter slowdown when the Great Lakes freeze and inhibit shipping. However, it should be a relief for you to hear me say that none of the damage to our facilities will impact our ability to produce salt following these relatively short-term events. And we expect to return to full production later in 2012 after our final tornado recovery investment decisions are made in a couple of weeks.

When recovery investments are complete, we will have even better assets at Goderich than we had prior to the tornado.

Today, almost all of our employees are back to work at both facilities. Tragically, we lost one valued coworker in the storm. Yet, our Goderich area employees, as well as employees from around Compass Minerals, have come together to recover our plant and mine production capability as quickly as anyone could have possibly expected. To help offset our lost salt production, we plan to purchase about 400,000 tons of rock salt in the fourth quarter at approximately $25 per ton premium to our production cost. These tons, together with our current inventory and expected production, lead us to believe we will be able to meet every one of our highway deicing commitments this season up to the maximum delivery required by those contracts.

Immediately following the tornado, we did slow our bidding to ensure we would be able to meet all of our delivery commitments. The bid season is almost over now. And due to our somewhat reduced bid activity, we expect our 2011, 2012 winter bid award volume to be essentially the same as the volumes we were awarded in last year's bid season. And we expect our bid award prices to average approximately 3% above the average price of last year's awards. This is consistent with the historical range of bid outcomes.

Based on our analysis of the bid information we collected, we estimate that the industry-wide North American demand for highway deicing salt improved by about 4% this season. Given the state of the economy and local government budget, particularly in the U.S., we believe once again we're witnessing an example of this product's essential recession resistant nature due to the critical role it plays in public safety and commerce.

We're disappointed that we temporarily aren't able to share any industry volume rebound this season, but we consider ourselves very fortunate that the tornado didn't have a more profound effect on our long-term ability to serve customers.

Next winter season's bidding will start again in the spring, and there will be relatively few carryover volume commitments. We plan to be back to full production capabilities for the 2012, 2013 winter thus enabling us to reestablish our traditional share at that time.

Our specialty fertilizer segment also posted large increases over the third quarter 2010 in sales, operating earnings and operating margin percentage. Year-over-year, sales were up 39%, and segment earnings increased 67%. Sales volumes increased 11%, and prices continue to climb, increasing $125 per ton or about 25% above last year's quarter.

Our specialty fertilizer sales volume increase was almost entirely due to the sales from our Big Quill Resources production location in Wynyard, Saskatchewan, which we acquired in January. The increase in the average selling price of our specialty fertilizer products is in line with the encouraging trajectory of the broader potash market. The segment's operating margin expanded by 6 percentage points year-over-year, reflecting improved pricing, partially offset by higher per unit cost.

The unit cost increase was caused by a couple of factors. First, the higher-priced, higher-value SOP we produced at our Big Quill Resources location had higher production cost of standard SOP from our Utah location. In addition, as we explained last quarter, there was unusually poor solar evaporation at the Great Salt Lake this summer due to cooler and wetter than normal weather. As a result, our raw material harvest is down substantially this year. With less product going through our Utah plant, our per unit cost increased. Unfortunately, these higher costs will continue into the fourth quarter and accelerate in 2012 -- 2012 when we'll feel the full impact of lower solar-pond-based SOP production.

The lower production will also affect our sales volumes for at least the next 4 quarters, so we will continue to be strategic with our limited tons by selling them to the highest valued customers first. This should help to keep our specialty fertilizer margin strong while me manage through this medium-term challenge.

The final performance record I want to discuss before I turn the call over to Rod is the $200 million of cash flow from operations we've generated so far this year. This robust cash flow will help fund some important capital investments and eventually help us rebuild inventories to levels that allow us to better maintain sales in the event we were to have short-term production challenge.

Last month, we announced our plans to install 2 continuous mining machines at our Goderich mine, which would simplify a portion of our mining operations there and improve our operating efficiencies. A continuous miner more safely does the work of at least 5 different drill-and-blast related mining machines.

We've used continuous mining in our U.K. mine for many years, so we are very familiar with the technology and the efficiency it can provide. We expect to install the miners during late 2012 and expect them to be fully operation for 2013 rock salt production.

And we continue to work towards expanding our SOP production capacity at the Great Salt Lake. Our Phase II pond sealing project continues to progress on time and on budget. We have installed about 50% of the battery walls, and we expect to complete the pond sealing portion of the project by next May in time to increase our harvest during the next solar evaporation season.

Now I'll turn the call over to Rod to discuss our quarterly results in greater detail.

Rodney L. Underdown

Thanks, Angelo. Good morning, everyone. As Angelo has provided some operational detail about our recovery from the August 21st tornado in Goderich, I will spend a few minutes discussing its financial impact on this quarter's results and what we expect in terms of the impact on near-term operating results.

Our third quarter financial statements reflect asset impairment charges and slight cleanup expenses that we incurred during the quarter due to the tornado. These losses are recorded on our product costs on the income statement and totaled $9.4 million in the quarter. However, this quarter, these incremental unusual costs were offset by $9.4 million of recognized insurance recoveries also on the product cost section of our income statement.

We expect to have fewer tornado-related asset impairment and site restoration and cleanup costs in the future to the extent that we have more of these kind of costs, we would expect to recognize offsetting insurance recoveries because the value of the damaged and destroyed property is far greater than its net book value. Therefore, the ultimate insurance recoveries for those items should far exceed any future impairment and cleanup costs. But unfortunately, that isn't the end of the tornado's impact or its future income-related impact on our results. Indeed, there will be a greater impact on future periods and particularly in the next 2 quarters. The impact to recognize the next couple of quarters will relate to expenses and losses that are covered by business interruption insurance. Under this portion of our insurance policy, we are covered for both the incremental cost and discrete losses incurred by our ongoing business due to the tornado.

These expected costs and discrete losses include the impact of operating our facility in a way that increases the cost of our production above normal costs, the incremental cost of purchased product to service existing customers and the cost of lost business, just to name a few.

Now there was no significant impact for these kinds of costs in the third quarter. However, in the fourth quarter, we do expect to see approximately $15 million of these types of incremental costs and losses related to the business interruption caused by the tornado. And it is unlikely that these costs will be offset in the income statement by any insurance recoveries recognized in that period.

We also expect an even larger amount in the first quarter of 2012 with what -- with much smaller effects for the remaining quarters in 2012.

Now we do expect business interruption losses and our business interruption claim to be significant, though we don't yet know the final amount and won't until much later. U.S. generally accepted accounting principles will not allow us to recognize expected insurance recoveries for this business interruption portion of the insurance claim until they are finally settled with the insurers. So while we expect our insurance to cover most all, if not all, of these losses, the recognition of this portion of our insurance claim will be in a period later when the cost -- then when the cost and losses are incurred. We expect to report our estimated business interruption losses as a special item in upcoming quarterly disclosures.

Any insurance recoveries we do ultimately recognize for business interruption will be recognized in the product cost portion of our income statement, again, only when finally settled.

So returning to our regular ongoing financial performance in the quarter. Our salt sales and earnings significantly exceeded prior year results despite the challenges posed by the tornado on our salt operations. There was a small positive impact to our third quarter 2011 sales volumes, which benefited from sales delayed from the second quarter of this year due to flooding along the river system transportation routes. But by far the larger impact was strong early-season demand for the upcoming winter in all of our highway deicing markets. This helped push third quarter salt sales volumes, up 27% from the prior year quarter's depressed levels. We estimate these strong early-season sales in the third quarter will reduce sales volumes by about 150,000 tons in each of the next 2 quarters assuming we have normal winter weather. As a reminder, our prior winter season was about average for us, so we expect our sales volumes in the fourth quarter of 2011 and first quarter 2012 to be lower than the prior year quarters if weather is normal.

As Angelo mentioned, our salt volumes we won through this bid season are expected to be similar to the prior year bid volume awards. So sales in September will reduce expected normal winter sales in the upcoming quarters. And our sales in the fourth quarter of 2010 and the first quarter of 2011, last year's winter season, were approximately normal.

In the third quarter, average highway deicing salt prices rose 20%, while consumer and industrial average prices increased 6% on a year-over-year basis. Looking ahead, we expect to see fourth quarter prices benefit from the 3% overall highway deicing price increases we garnered in the North American bid season and the impact of more robust price increases in our smaller U.K. highway deicing business.

Per unit salt segment costs, which include both product cost and SG&A, saw a decrease of almost 8% or close to $3 per ton compared to the third quarter of last year. In the third quarter of 2010, our per-unit costs were starting to be driven by higher -- were started to be driven higher by lower rock salt production volume levels at the Goderich mine and the lingering effects of the Cote Blanche strike. While sales mix had some favorable impact on average per unit cost in the quarter, we also expect year-over-year improvement in per-unit salt cost in the fourth quarter when excluding the impacts of the tornado.

Higher per unit shipping and handling costs, which average about $3 per ton in the third quarter, offset the benefit of the lower per unit cost of goods sold. The higher shipping and handling costs were primarily due to increased fuel prices. Given how oil and diesel prices rose towards the end of last year and factoring in current cost levels, we currently expect the year-over-year difference in the fourth quarter shipping and handling costs for the salt segment to be about $2 per ton higher in the prior year quarter.

Salt operating earnings in the third quarter increased 32% to $40.5 million as a result of the higher sales volumes and average prices. While our operating margin percentage remained basically flat, we expect our fourth quarter salt operating earnings to be similar to fourth quarter 2010 results after adding back the incremental costs and losses associated with the tornado in the fourth quarter. That is, we expect our underlying per-unit cost improvements to be partially offset by higher per-unit freight costs on modestly lower sales volumes.

Now looking at our Specialty Fertilizer segment. Sales volumes increased 11%, reflecting the addition of Big Quill Resources high-value tons. And prices continued to improve this quarter, up 25% year-over-year. Average selling price was also helped by improved mix of business, principally more domestic versus international sales in this year's third quarter.

As we expected, Specialty Fertilizer production cost did increase in the quarter as a result of lower plant throughput at our Ogden, Utah facility due to the effects of the reduced pond harvest as we discussed.

Per-unit production cost increased 16% compared to the third quarter of last year. We expect to see similar per-unit cost in the fourth quarter. Looking forward, we expect the largest impact of the reduced solar harvest to be in 2012. This is expected to inflate our per-unit production cost in 2012 by approximately $75 per ton over the third quarter 2011 average costs.

We expect our fourth quarter Specialty Fertilizer sales volume to be approximately 70,000 tons as we continue to focus on sales to our domestic customers and strategic international customers in order to maximize the value of the limited production we're currently experiencing. We expect the average selling prices to be similar to third quarter levels.

Company-wide, third quarter operating earnings rose 49% or $15.9 million. Our consolidated operating margin percentage increased over 200 basis points, similar to the increase we reported in the second quarter and similar to what we expect from our fourth quarter results, excluding the impact of the tornado.

Other income was $1.7 million in the third -- in the third quarter, while last year's third quarter, we reported other expense of $1.3 million. Both of those results were mainly related to changes in foreign exchange rates.

Income tax expense was $10.7 million, well above the $6.8 million reported in 2010 quarter. And our effective rate was 24% compared to 26% in last year's quarter. For the year, we expect our effective tax rate to be similar to our year-to-date rate of 25% to 26%.

Net earnings for the quarter were $34.6 million compared to $19.3 million in the third quarter of last year. This yields $1.3 of earnings per diluted share compared to $0.58 per diluted share last year.

Capital spending, year-to-date, through September totaled $66.5 million. And we continue to expect capital expenditures for the full year to be just over $100 million, approximately $50 million to $60 million of that will go toward maintenance of business needs. We will start to see the impact of the tornado on our capital spending beginning in the fourth quarter of 2011. However, we expect to see more significant capital spending, which should also be recouped by insurance proceeds to be incurred in 2012. We don't have a strong estimate about spending right now but excluding the tornado-related capital spending, our 2012 estimate is around $125 million. There was no balance on our bank revolving credit facility at the end of the quarter, and our outstanding debt was $484 million. Cash on hand at the end of the quarter was $123 million.

And now, I'll turn the call back to the operator to begin the Q&A session. Gwen?

Question-and-Answer Session

Operator

[Operator Instructions] We'll take our first question from Mark Gulley with Ticonderoga.

Mark R. Gulley - Ticonderoga Securities LLC, Research Division

Angelo, the first question has to do with the salt pricing dynamics going forward. Given the restricted supply that you've already talked about for this winter, as you look ahead to the next bid season, and I know it's early, do you think that lower supply may have an influence on bid pricing?

Angelo C. Brisimitzakis

Yes, Mark. I think the bigger factor is going to be the weather. I mean, our net reduction of production from the Goderich mine, as large as it may be, is -- was 16 days. We've sourced the gap. We're back whole and moving forward. So I think the swing in weather will have a much greater effect than a small impact that we might have had back in August and early September.

Mark R. Gulley - Ticonderoga Securities LLC, Research Division

And secondly, you led off your comments by talking about the good, the bad, the ugly. If I were to try to put some of the comments that came after that into the various categories, would I be correct in assuming that the ugliest thing we've heard in the call today was that $75 per ton cost, unfavorable cost element for SOP for next year?

Angelo C. Brisimitzakis

Yes. I mean, the impact of the lower smaller harvest is certainly an ugly event, also weather driven, but the impact it will have on our cost and secondary impact on reduced tons for sale is a significant hurdle.

Mark R. Gulley - Ticonderoga Securities LLC, Research Division

And then lastly, on SOP pricing, the first part of my question is going to be a bit naïve but I'll ask it anyway, and then the second part will be more on point. Do you think you're going to able to recover those higher costs in your selling prices for SOP given your excellent U.S. position? But a more serious part of that is the fact that earlier, you talked about the fact that the crop economics for your end use markets aren't as good as row crops. But today, it sounded like the SOP price is following the MOP price. So my overall question has to do with the SOP price going forward. Are you more linked now to the MOP price? And/or can you recover your higher costs given the fact you had such a good market position?

Angelo C. Brisimitzakis

Yes. I mean, to take the first part of your question, yes. I don't think our strong market position is strong enough that it can recover an internally driven cost premium. I mean, we compete in a 6 million or 7 million ton global SOP market. Our 400,000 tons of participation certainly does not set the global price. So I think on SOP and in potash in general, we do follow those macro trends, which are often driven by kind of the row crops and wheat, corn and soy that the big boys participate in. But again, as you correctly pointed out, our growers tend to participate in different crops that have different economics. And that's why if you were to look kind of under the covers, you would see a large range of spread to MOP based on the crop or the region we participate in. So clearly, on crops and regions where those crops are performing well and have good return to growers, we're able to push the spread kind of to the upper limit and for crops in regions in where farm economics are not as attractive to the grower and where MOP is perhaps a very viable option, those spreads are smaller. So what we need to do over the next 15 months, where our production is constrained and therefore our sales are constrained, is to selectively pick those areas that maximize the spread and protect our strategic accounts for the period where our harvest returns to normal and our expanded capacity is available through our expansion. So we're playing the game for the long term, but we do have a -- probably a 15-month, 5-quarter impact from a reduced harvest, and that certainly can be classified as ugly.

Operator

And we'll take our next question from Edward Yang with Oppenheimer.

Edward H. Yang - Oppenheimer & Co. Inc., Research Division

On the deicing salt side, there were a bunch of puts and takes. If I look at the 558,000-ton year-over-year increase in highway deicing salts, you mentioned the second quarter postponed shipments. I think previously you sized that at 50,000 tons. Was that the correct number?

Angelo C. Brisimitzakis

Yes, that ended up being very close to the number.

Edward H. Yang - Oppenheimer & Co. Inc., Research Division

And you're sizing the pre-buying at about 300,000 tons, is that correct? And you expect that to have an impact of about 150,000 tons per quarter?

Angelo C. Brisimitzakis

Yes, roughly that's right, yes.

Edward H. Yang - Oppenheimer & Co. Inc., Research Division

And you're saying that because of that salt volumes in the fourth quarter and the first quarter, do you expect that to be down year-over-year?

Angelo C. Brisimitzakis

Right because...

Edward H. Yang - Oppenheimer & Co. Inc., Research Division

Because of the comparisons and the pre-buying?

Angelo C. Brisimitzakis

Yes. Last year's winter season was about average in both quarters for us, the fourth quarter of 2010 and the first quarter of 2011. And so when you factor in that we had more early-season buying this year, that would pull from those normal volume assumptions that we experienced in last year's fourth and first quarters.

Edward H. Yang - Oppenheimer & Co. Inc., Research Division

Got it. And I thought customers don't hold much inventory. So with this pre-buying, are you holding the salt for them, or are they holding it themselves?

Angelo C. Brisimitzakis

Well, yes. Any of the pre-buying would not have been applied by the customer in -- for August and September deliveries. So they do have storage capabilities, and they seem to have been anxious to get started early on their orders. I'll say that, really the early orders are principally related to a couple of states that have early buy programs. And so, it's really just a function of their buying patterns that always influence whether these sales occur in the third quarter or the fourth quarter. I don't know that I would attribute it to anything in particular, it might be their own internal state budgets and whether they have money available from the prior year, exactly what internally is going on, it's hard to say. But I don't view it as any foreshadowing of their expectation for the winter. It's purely a buying pattern. That really has no bearing on ultimately what the winter weather usage will be.

Edward H. Yang - Oppenheimer & Co. Inc., Research Division

Okay. And finally for me on the -- staying on the salt side. At your Analyst Day last month, I think you were expecting second half salt operating income to be flat year-over-year. Given the third quarter performance, should we change that view? And what accounts for, I guess, some of the lumpiness?

Angelo C. Brisimitzakis

Well, I guess, when you look at the results from the third quarter, we were up about $10 million. And I believe the flat recommendation at the time was that we weren't exactly sure of what kind of insurance recoveries we would be able to book -- to record. So our feeling was that the -- we would report that number excluding -- without considering any insurance recoveries. As it turns out, we were able to record about $9 million and in fact have received much of that money from the insurers.

Edward H. Yang - Oppenheimer & Co. Inc., Research Division

Okay. So now -- now you wouldn't -- second half salt operating income should be up year-over-year, taking that into consideration.

Angelo C. Brisimitzakis

Taking that into consideration.

Operator

And we'll take our next question from Joel Jackson with BMO Capital Markets.

Joel Jackson - BMO Capital Markets Canada

I just want to follow up a bit on what Ed's questioning was, a little bit different. I think in your -- one of your -- either your presentation or your press release, you talked about -- so you expect $50 million of losses because of tornado-related effects in Q4, and if not for that, then Q4 cost per salt would have been about similar with Q4 2010. Is that correct?

Angelo C. Brisimitzakis

No, I think what we've said is, it will be similar without considering the impacts of the tornado. And by the time we consider the impact of the tornado, we expect improvement in our per-unit costs.

Joel Jackson - BMO Capital Markets Canada

Sorry, I must have misspoke -- we're saying the same things, sorry. So what I wanted to ask was, so if we go in a kind of an annual top at a normal winter quarter Q4, and we talk about 4 million tons of total salt volumes for Q4, is it right to think about that if the tornado hadn't happen, Compass might have achieved about $4 a ton of lower salt cost in Q4 versus last year?

Angelo C. Brisimitzakis

Well, I think the number that we mentioned for the fourth quarter is about $15 million. And if all of that were salt costs, that would be $4 per ton, some of that represents losses other than salt -- salt cost or purely incremental costs. So I think what I tried to indicate is that the relative spread of the cost differential in Q3 is after factoring in insurance recoveries is similar to what you would expect in Q4. Meaning, the third quarter per unit costs were down roughly $2, almost $3 per ton. And after factoring in the insurance recovery, we'd expect something similar, maybe not quite as big in the fourth quarter on a per-unit basis.

Joel Jackson - BMO Capital Markets Canada

$2 or $3 a ton, more on the lower part of that range?

Angelo C. Brisimitzakis

Yes.

Joel Jackson - BMO Capital Markets Canada

Okay. I want to switch over to SOP. I notice in your presentation, you show a nameplate capacity now for your SOP, your 2-plant nameplate capacity for SOP. It looks to be something around 390,000 tons, which makes sense for 2012. You're still guiding to 325,000 tons. Is that number or that bar graph, is that just sort of an ideal situation? I'm trying to figure out why 325,000 is so far below 390,000.

Angelo C. Brisimitzakis

Yes. This is Angelo. I mean, I think we've footnoted on that graph that says production limited by wet cool solar evaporation season. So I think the graph is the production capacity. That's assuming a normal raw material supply from a normal weather evaporation season. Obviously, since we're in the midst of a below normal evaporation season, our actual production will be below normal. So I think the asset has the capability to hit that 390,000 that you referenced. But that's predicated on having the harvest to enable it. So we say here actual production in sales will depend on weather.

Joel Jackson - BMO Capital Markets Canada

What kind of range can we expect in 2013 company-wide for production?

Angelo C. Brisimitzakis

Well, I think with normal evaporation, you would expect the numbers that are on that page, which is the 390 approximately with 40 coming from Big Quill Resources.

Joel Jackson - BMO Capital Markets Canada

So of the issues, I guess, from the sort of west pond, the Great Salt Lake, that might have -- they would all have sort of dissipated by the time we got to 2013 assuming normal weather from now on?

Rodney L. Underdown

Well, the issues were -- that we've been talking about on the harvest was basically a wet weather early in our evaporation season retarded the amount of evaporation that would have occurred, which left us with a smaller harvest. The harvest is directly related -- the size of the harvest is directly related to the amount of SOP we manufacture. Our new evaporation season will begin in May. It will have sealed ponds, which will give us an opportunity actually to have a larger harvest. And assuming normal weather, we should have enough product to generate the capacity that that chart shows.

Operator

And we'll go next to Robert Koort with Goldman Sachs.

Manav Gupta - Goldman Sachs Group Inc., Research Division

This is Manav. I had a couple of questions. Basically, on the consumer and industrial side, the volumes were slightly lower. And it appears that was a deliberate action, so can you elaborate a little more on what you're trying to achieve in terms of price mix?

Angelo C. Brisimitzakis

Yes, I mean, this is Angelo. Obviously, in the middle of August when the tornado hit, it impacted both our highway deicing and our consumer and industrial business. Although most of our discussion in impact from a financial point of view affects our rock salt mine and our highway business. We did have severe damage in our consumer and industrial facility, also in Goderich. So some of the loss sales and production were assigned to consumer industrial. And also, we've made a shift over time to sell more package higher-value goods and less bulk lower-priced goods from our consumer industrial business. So you'll see that shift occurring, which did have some effect on volume, but I think you also saw a robust increase in selling price consistent with that strategy.

Manav Gupta - Goldman Sachs Group Inc., Research Division

Okay. And just one more question. The $15 million that you were taking into account in the fourth quarter, is this just an actual loss or it also takes into account some of the business opportunity loss because of the tornado?

Angelo C. Brisimitzakis

Yes. Manav, it would mostly be incremental cost as a result of the impacts of the tornado. But there is some assumption in that number, maybe 25% of that number for truly lost business, probably a little bit less than maybe 20%.

Manav Gupta - Goldman Sachs Group Inc., Research Division

And eventually you will recover all this to the insurance probably in the first half of 2012?

Angelo C. Brisimitzakis

Yes, I mean, the ultimate recovery is one of negotiation and proving the loss, and we certainly expect that the kind of numbers that we're capturing and talking about are real losses and real incremental costs that are directly attributable to the tornado, so that's what we expect. But Manav, I couldn't give a guarantee there that ultimately -- to be filed with the insurers and will be the subject of final negotiations sometime probably late in 2012 or even early the following year.

Operator

And we'll go next to Jeff Zekauskas with JPMorgan.

Olga Guteneva

This is Olga sitting in for Jeff. I apologize I got disconnected, so I apologize if I -- if my questions have been asked already. So not to beat a dead horse, but can we go back to the salt segment, to the operating income for a quick second? I thought at your Investor Day, you said that the second quarter 2011 operating income is going to be $30 million higher year-over-year. Is that correct?

Angelo C. Brisimitzakis

I think what we said at the Investor Day, Olga, was the -- you said second quarter, I think you meant second half. And I think what we said is the -- we expected the results to be flat with the prior year for the second half, excluding any expectation of any insurance recoveries to be recorded and...

Olga Guteneva

But that would include $30 million of the expected tornado hit?

Angelo C. Brisimitzakis

Yes, that's right. That would include $30 million associated with that.

Olga Guteneva

Okay, so if we exclude the tornado effect, then it's $30 million higher year-over-year. And so far, it's been $10 million high in the third quarter. And now, you're saying that the fourth quarter is probably flat year-over-year. So where is this $20 million, where did it go?

Angelo C. Brisimitzakis

Well, the tornado effects are expected to be around $15 million, so we had in the fourth quarter now. So the -- keep in mind, we had -- when we had estimated back at the Investor Day, that was over a month ago, and now we've gotten a little smarter. So the fourth -- the third quarter number was $9 million. We kind of expect $15 million in the fourth quarter, so there's now $25 million. So I know the insurer -- the insurance -- the net insurance, the insurance netting is a bit of a confusing thing, and I'd be happy to take that kind of offline with you, if you would like.

Olga Guteneva

Okay. That would be great. And reaching to the SOP, again, back at the Investor Day, I thought you said that the third quarter volumes were going to be about 70,000 or 71,000 tons, and you came at like 10,000x higher. Does it mean that the fourth quarter -- like why did it happen? And why -- because it was at the very end of the quarter, and I thought you had a pretty good visibility, like why such a big change in your third quarter numbers?

Angelo C. Brisimitzakis

Yes, this is Angelo. You're right. It was -- it's a positive -- we're actually pleased with the surge of orders at the end. I think a couple of dynamics there. One is we had a price increase announcement out there for October 1. And more customers than we anticipated took advantage of the timing to place orders and receive products prior to the impact of the price increase. Also since we do have international shipment which a delivery day can flip a few days, forward or backwards based on when the boat actually arrives at the port, it's really hard when you have orders scheduled for the end of the quarter to be precise in which periods they're going to fall into. Sometimes they come forward, and sometimes they get delayed into the next quarter. So I think those 2 factors broke in our direction, some accelerated purchases from customers trying to get in before the price increase, and some shipments that actually the timing were positive and didn't get delayed into the fourth quarter. So that was a positive surprise.

Olga Guteneva

And -- but you still kept your fourth quarter shipping forecast. And I was on the impression that you have high inventories because of bad weather. So where did you get this additional product?

Angelo C. Brisimitzakis

Yes, I mean, again, we have a production capability as we've discussed before at about 390,000 tons if you include -- well, we have the Big Quill Resources. I think if you just added the math together, it's about 10,000 tons where you could say, well you shipped 10,000 more in the third quarter, why aren't you saying 10,000 less than the fourth quarter? I think we're going to find a way. We've got inventory in a lot of places, but we're going to try to find a way to be more efficient in how we run our operations in terms of utilizing inventory. But I'd be misleading you if I told you the 70,000 has the kind of precision that you perhaps are ascribing to it because you correctly pointed out, we also said the 70,000 tons for the third quarter, and we actually came in at 81,000 just a few weeks later. So I think it will be around 70,000, and I think the arrow bar is on that, could be in that 10,000-ton range.

Olga Guteneva

So you can ship more if there is demand for that? You have sufficient supply.

Angelo C. Brisimitzakis

But it would just -- it would just put a bigger hole into 2012. I mean, we're unfortunately, as we pointed out, this 18-month period from the second quarter of 2011 through the end of 2012 is a constrained production period. We're 100% exposed to our solar evaporation harvest at the Great Salt Lake. We don't control the rain, and our harvest is smaller. So that's a zero-sum, we could sell it all in the third and fourth quarter this year and have nothing next year, or we could try to balance it. And what we try to do is balance the periods and protect our strategic customers. It certainly is a challenge both from a sales and supply chain point of view.

Olga Guteneva

Okay. And if I may on the SOP production cost, when you talk about higher production cost for 2012, is it the case that they will be at a similar level throughout the year, or like high in the beginning of the year and then going down as the year progresses?

Angelo C. Brisimitzakis

Yes, the 2012 production cost that will be recorded in the financial statement should be roughly the same regardless of which point in time in the year. I will say though that there is -- we expect to have carryover inventory from 2011. And so the first part of the year might be lower than that 2012 production cost numbers. So as we sell out on a FIFO basis, our 20,000 -- our 2011 production, we'd expect more like 2011 kind of cost in the first quarter and then higher cost as we go through the year.

Operator

And we'll take our next question from David Begleiter with Deutsche Bank.

David L. Begleiter - Deutsche Bank AG, Research Division

As you try to recover your volume or your share next year, do you expect any pressure on the bid season pricing?

Angelo C. Brisimitzakis

That's a good question. I mean, it's about a 4% volume growth that we didn't participate in. We're not talking massive numbers, and we're talking about bidding over 20 million to 30 million tons of market demand. So I think -- and literally thousands of line items. I think it was a single unique event. There probably is more risk, but because it's over a 6-month bidding period, thousands of line items, large quantities, which may again grow again next year depending on the severity of the winter, I think we have enough experience in both up and down cycles to place those tons appropriately. So no, I don't think it will have a material impact on the pricing.

David L. Begleiter - Deutsche Bank AG, Research Division

Angelo, on the U.K., what were your highway deicing bid increases this year?

Angelo C. Brisimitzakis

We don't usually disclose that other than to say they were attractive. I mean, the U.K., we hope this weather comes to North America but not on a personal basis but on a Compass Minerals basis. I mean, they ran out of salt early in the season. This is 3 years in a row where there were salt prices of a national proportion. The government chose to intervene and create strategic stocks, our typical customers wanted more, wanted more early. And some of our competition is more focused on producing potash than salt, which is their primary business model. So I think it was just kind of a good environment for us and had very robust pricing, but we don't disclose specifics.

David L. Begleiter - Deutsche Bank AG, Research Division

Can you remind us the size of the U.K. highway deicing business on a ton basis?

Rodney L. Underdown

Yes. In a normal year, it's around 1 million tons, so it's roughly 10 percent-ish of our whole highway deicing franchise.

David L. Begleiter - Deutsche Bank AG, Research Division

Just lastly, on the SOP price in Q4, does that flattish pricing reflect just the mix of customers, given the October 1 price increase?

Angelo C. Brisimitzakis

Yes. I think -- this is Angelo again. I think we are currently expecting a larger contribution from international shipments, which tend to have a lower price, so that would offset some of the domestic momentum we talked about for the third quarter and some of the effects of the increasing price from the price increase. I think we said the price would be similar, but there's certainly a possibility of mix changing during the quarter. And we will certainly favor those potential customers that have the highest netback and have the most strategic value to the corporation.

Operator

And we'll take our next question from Ivan Marcuse with KeyBanc Capital Markets.

Ivan Marcuse - KeyBanc Capital Markets Inc., Research Division

I just have a couple of quick questions. Just so I have it clear. In the fourth quarter, all in, in the salt segment, are production costs expected to be flat year-over-year?

Angelo C. Brisimitzakis

On a reported basis, we're expecting them to be flat to just a little bit up. But excluding the impacts of the tornado, they should be lower, and we will certainly give you a flavor for that. I think an earlier caller, we talked about that being an order of magnitude around $2 per ton. Again, that would exclude the incremental costs associated with the tornado.

Ivan Marcuse - KeyBanc Capital Markets Inc., Research Division

Got you. And that will ultimately be called out when you report?

Angelo C. Brisimitzakis

Yes.

Ivan Marcuse - KeyBanc Capital Markets Inc., Research Division

And then on the higher salt or the higher cost salt that you had purchase to fill the gap, does that run through evenly in the first -- in the fourth quarter and the first quarter? Or would you expect for production costs to be up in the first quarter because of the higher cost salt?

Angelo C. Brisimitzakis

Well, it is hard to say. We have estimated less than half of it running through the fourth quarter and more of it running through the first quarter, and that's just a function of when the physical shipments are expected to arrive and that salt be available for sale. So I wouldn't call it even but -- and it will more impact the first quarter than the fourth quarter.

Ivan Marcuse - KeyBanc Capital Markets Inc., Research Division

Okay, so all else equal, which is probably impossible to predict, but you would expect cost to be a little bit higher in the first quarter versus the fourth quarter just the fact that you have higher cost salt running through the P&L?

Angelo C. Brisimitzakis

Right. Well, I mentioned that the impact from the tornado. So on a reported basis, which would include all incremental costs and losses, the impact of the first quarter is expected to be higher than the impact on our fourth quarter.

Ivan Marcuse - KeyBanc Capital Markets Inc., Research Division

And then in the Fertilizer segment. Since you'll have lower production next year, would you expect to have less international sales thus improving your mix next year? Or is the mix between international sales and net domestic sales stay about the same?

Angelo C. Brisimitzakis

Yes, this is Angelo. And it's a fine balance. We have some very loyal and strategic international customers. And certainly, even though their netbacks might be lower, we're playing this business for the long term. So I think it'll be a balance between favoring the higher netback domestic sales but also maintaining the strategic lower netback international sales. But if it's a jump ball, it will go domestic because that creates more margin.

Operator

And there are no further questions at this time. I would now like to turn the call back over to Angelo Brisimitzakis for closing remarks.

Angelo C. Brisimitzakis

Thank you very much. I'd like to thank everyone once again for your interest in Compass Minerals. We were pleased with our results this quarter in the context of substantial weather challenges. Our Compass Minerals employees have done a remarkable job of safely overcoming these hardships to deliver increased value to our shareholders. I look forward to reporting their achievements to you again next quarter, so please plan to join us again in February. Thank you very much. And everybody, have a good day.

Operator

Thank you, everyone. That does conclude today's conference. We thank you for your participation.

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