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Compass Minerals International, Inc. (NYSE:CMP)

Q2 2012 Earnings Conference Call

July 30, 2012 9:00 AM ET

Executives

Angelo Brisimitzakis - President and CEO

Rodney Underdown - CFO, Secretary & VP, Compass Minerals U.K.

Peggy Landon - Director of Investor Relations and Corporate Communications

Analysts

Ivan Marcuse - KeyBanc Capital Markets Inc.

David Begleiter - Deutsche Bank Securities Inc.

Jeffrey Zekauskas - JP Morgan Chase & Co, Research Division

Robert Koort - Goldman Sachs Group Inc.

Edward Yang - Oppenheimer & Co.

Mark Gulley - Gulley & Associates LLC

Joel Jackson - BMO Capital Markets.

Operator

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

Peggy Landon

Thank you, Brandi. Good morning, everyone. Thank you for joining us this morning. I have with me here Angelo Brisimitzakis, our President and CEO and Rod Underdown, our CFO.

And 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 30, 2012, and involve risks and uncertainties that could cause the company’s actual results to differ materially. The differences could be caused by a number of factors, including those identified in Compass Minerals’ most recent Forms 10-K and 10-Q.

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

Now I'll turn the call over to Angelo.

Angelo Brisimitzakis

Thanks, Peggy. Good Monday morning everyone. Thank you for joining us this morning. As you know from our earnings release our results this quarter were very consistent with the outlook we provided last quarter. But some of you may have been surprised to read that we expect our highway deicing sales volume to be about averaged this coming winter, if the winter weather is more typical than this season last year. And that the average price we’ve achieved during the bid season so far has been approximately flat.

I know there is generally a lot of interest in the highway deicing bid season, so I will begin my remarks by explaining the dynamics that are playing out in our served markets this summer.

First, keep in mind that the bid seasons are a lot like winter weather seasons. They develop over the course of many weeks and months. Governments generally don’t consult with one another on deicing purchases because each one is trying to make the best decision for its own constituents. So, trends generally don’t emerge until about this time in the summer when the bid season is at least half over.

And we sometimes see trends shift as the season progresses from this point to early fall. This bid season is highly unusual because of the record breaking warm and mild weather we experienced in North America this past winter. A lot of our customers salt storage facilities are already filled full of carryover inventory that they bought over the past six months to meet the minimum purchase requirements specified in the contracts we signed with them last year.

It’s important to remind you here that minimum purchase and maximum delivery obligations are primarily a function of contracts in the United States. Most Canadian and British contracts don’t have these features. Turning back to our customers who do have minimum purchase requirements, some customers haven’t fully met their purchase obligations under last years contracts because they just had nowhere to put more salt. A few customers do have large storage facilities, but most can only store enough salt for a couple of snow events.

We’ve worked with these customers to try to find creative ways to solve their dilemma. The common strategy has been to grant an extension of the deadline for taking salt under last season’s contracts and blend this carry over volume into a new commitment covering the upcoming winter season. Predictably these customers are requesting lower volumes this bid season, but they still plan to begin the winter season with a normal amount of salt.

They plan to meet their typical winter season deicing salt volume requirements through the combination of their new bid request, the tonnage they still have to purchase under the old contracts, and the higher than typical amount they currently have in storage. In the end, our customers’ priority is to secure a normal salt supply for the upcoming winter. This is a public safety imperative. When it snows this winter, our customers will replenish their supply of deicing salts.

Well, let’s be clear. We’re still managing through the over hang from the unusual weather events of the past 12 months or so. You saw the effects of low restocking in our second quarter salt segment results. Salt volumes decline 10% driven by a steep decline in highway deicing sales. However, both our highway and salt segment average selling prices increased 5%. And on a pro forma basis, our salt product costs were lower leading to moderate salt margin expansion again on a pro forma basis.

To refresh your memory, pro forma figures remove the estimated effect of tornado that struck our Goderich operations in August of 2011. Both the Goderich mine and the Goderich evaporation plant are now able to fully operate at pre-tornado production rates. But we don’t expect to work through the higher cost tornado affected salt in this inventory until year-end.

The message I want to communicate here is that the underlying profitability of our salt segment remain strong. Prices remain attractive and underlying production cost have declined. Once we emerge from these lingering weather related issues, and assuming typical winter weather this season, we expect our salt cost to decline to more normal levels. But in the immediate future the over hang from the record mild 2011-2012 winter will have an even more profound impact on our third quarter results and some associated costs will extend into the first part of 2013.

In the third quarter we expect to sell only a million tons of highway deicing salt, which will be mostly sales to chemical and dust control customers. We’re projecting consumer and industrial sales volumes to also decline in the third quarter compared to the prior-year, because our retail and commercial deicing customers also have large carryover inventories.

Our customers aren’t the only ones with high carryover inventory. Unfortunately we ended this season with high deicing inventories too. In order to match our supply to typical winter demand, we scaled back production at both of our North American rock salt mines beginning in the second quarter.

As you know we have a pretty flexible cost structure that allows us to reduce our work force without a significant impact. However, production slow downs aren’t without cost. So we currently believe our per-unit salt costs will be higher year-over-year for at least the next two quarters with the greatest year-over-year increase occurring here in the third quarter. Rod will discuss our projected salt production costs in just a minute.

So let’s turn now to our specialty fertilizer segment. By comparison our specialty fertilizer result has been a lot easier to understand. Sales volumes increased 10% year-over-year and prices improved 2%. Prices and demand has been stable for several quarters now. And we’re projecting this stability as it continues at least through the end of the year. The crops that use SOP are faring much better than corn and soybeans this summer, due in large part to the high percentage of acreage that’s irrigated for these high value crops.

In areas of severe drought we’ve seen some degradation of specialty crops, but we don’t expect that have a significant impact on our sales volumes. We continue to have confidence in the growth potential of this value added specialty crop market. The issue is that our production capacity is currently constrained, thus our focus on cost effective capacity expansion investments.

As a reminder, in 2011 the weather at the Great Salt Lake was unusually cool and rainy and this hindered the solar-evaporation process that extracts the raw materials we used to produce our sulfate of potash. Fewer minerals were deposited in our solar-evaporation ponds, so we’ve been purchasing some higher-cost potassium containing minerals in order to fully serve our existing customer base.

As we told you previously this combination of low solar pond base production tonnage and higher-cost purchase potassium containing minerals increased SOP per-unit cost by about a $100 per ton year-over-year and correspondingly, but temporarily compressed our specialty fertilizer operating margin. But now the weather is finally somewhat in our favor. Conditions at the Great Salt Lake has been near ideal for solar-evaporation so far this summer and we currently anticipate a good mineral yield from our ponds.

During the first quarter of 2013, we expect to return to meeting our SOP feedstock needs fully from lower cost solar-evaporation at the Great Salt Lake thus yielding much lower unit production cost. Despite all of this discussion of weather, it’s important to remember that these issues are temporary and they aren’t deterring us from our strategy to fully leverage our advantaged assets and to create sustainable long-term shareholder value.

At our Goderich rock salt mine, the largest in the world, we will be introducing a more efficient continuing mining process by year-end. While at the Great Salt Lake, yield improving, pond sealing activities will be completed during the fourth quarter as we continue to design engineering portion of our Phase 2 SOP plant capacity expansion.

Interestingly, pond sealing should give us more mineral feedstock, which we can stock pile as a hedge against another poor solar-evaporation season, until the Phase 2 plant expansion is complete. We’ve gained some interesting insights from the Phase 1 phase that will influence our approach to the plant expansion piece of Phase 2. We want to fully absorb and incorporate these insights into our plants. These aren’t needle moving changes, but we do want to ensure that we build the most efficient plant possible.

We will update you on our Phase 2 expansion plan over the next couple of quarters. Both our Goderich mine and Great Salt Lake investment projects will help us control costs, increased production capabilities and profitably grow for the long-term. Finally, I want to restate that we believe earnings improvements are on the horizon, assuming more typical weather patterns.

Though salt costs and sulfate of potash costs are both currently inflated by the effect of unusual weather events over the last 12 months, we expect to shed those high cost inventory during the first part of 2013. We project SOP demand to remain healthy and stable in the foreseeable future with prices remaining near their current attractive levels. And although the bid season isn't complete, our early results suggest that our 2012-2013 highway deicing season sales volumes should be similar to our 10-year average if winter weather is typical in our served markets this coming season. We believe we're squarely on track to rebuild and restore the healthier operating margins you expect from Compass Minerals.

Now, I’ll turn the call over to Rod.

Rodney Underdown

Yeah. Thanks, Angelo. This morning I’ll focus my remarks on the financial details related to the Company's performance in the second quarter and what to look for from us for the remainder of 2012 and into 2013.

Beginning with the salt segment, Angelo explained that total sales volumes in the quarter were down 10% compared to the second quarter of 2011, this included a drop in highway deicing volume of 15%, partially offset by a 2% increase in consumer and industrial sales volumes. The highway deicing sales volume decline was principally the result of lower, the more average pre-season sales in the U.K. when compared to the robust pre-season sales there last year.

In our North American markets, highway deicing volumes were relatively consistent with the prior-year, as some of our customers took the remainder of their unmet minimum commitments in the second quarter. Also during the quarter, we began to experience some softness in the rock salt sales to chemical customers, which we believe to be reflective of a general slowdown in the broader chemical industry.

You may remember that our highway deicing sales volumes and prices are a combination of rock salt and other minerals sold into highway deicing applications as well as rock salt sold to chemical customers. We wouldn’t expect this slowdown in sales from the chemical end use to be a material factor in our earnings this year. But it does contribute to our expected weaker third quarter highway deicing sales volumes, especially when compared to the record sales volumes in last year’s third quarter.

I will spend more time discussing our third quarter expectations in a moment. Consumer and industrial salt sales volumes improved modestly this quarter by 2% over the prior-year and were in line with our historical second quarter consumer and industrial sales volumes. The second quarter is usually a clean, non-weather impacted period because it has essentially no consumer deicing sales impacts.

Prices in the salt segment were mixed this quarter. The average selling price for highway deicing was 5% higher compared to the prior-year largely reflecting improved pricing from last year’s bid season results. Consumer and industrial average selling prices declined 4% in the same period.

The majority of the C&I change is customer and product mix changes, in fact our per-unit gross margins in this part of the salt segment has modestly increased over last year as we have focused on effectively managing our customer mix to maximize margin dollars.

We expect our consumer and industrial average selling prices to decline in the third quarter by a similar amount as the second quarter, but during the third quarter period the average price decline will result from lower pre-season sales at the consumer and professional deicing products. Those products tend to carry a higher overall average price.

The projected sales volume for consumer and industrial is projected to be a decline as the result of those consumer deicing customers also having high carryover inventories just like the highway deicing government customers have, so early sale will be a little slow there.

We estimate a decline in total consumer and industrial product sales volumes of about 5% compared to last year’s third quarter. Our second quarter salt segment performance resulted in an operating margin of 11% which was essentially flat with the results of the second quarter in 2011.

The second quarter is historically our lowest margin quarter for the salt segment both in terms of dollars of earnings and percent margin to sales due to the seasonality of our salt products. However, these second quarter results include losses related to the 2011 tornado which totaled an estimated $2.9 million this quarter bringing the year-to-date tornado impact to just over $17 million.

The estimated losses this quarter are all related to increased product costs mostly due to higher cost salt we purchased in 2011 and sold this quarter to ensure we could fully serve our customer base during the winter following the 2011 tornado. When we factor out the estimated effects of the 2011 tornado, our salt operating earnings would have totaled $15.7 million or 15% increase over the second quarter of last year, that pro forma adjustment would also have resulted in the operating margin of 13% a more than 200 basis point improvement.

So excluding the effects of the tornado, our average per-unit salt cost have steadily dropped each of the last four quarters as our mining operations trended back towards more typical levels of output and productivity. I know it’s been hard to see in our reported results because of the effects of the tornado, but our underlying reduction in per-unit salt costs have been noteworthy.

We will be thrilled when we are no longer in need to report the estimated tornado effects, but we believe it’s an important element to have as an understanding of our underlying performance. With that in mind, the effects of the tornado are almost behind us. We expect about $4 million of tornado related losses the rest of 2012 as we sell this remaining higher cost purchase salt.

We will continue to report the estimated effects of the tornado on our operating earnings through the rest of 2012. In addition there are asset replacements we need to complete in order to permanently rebuild all of our facilities and we project those will be complete before the end of the year.

Of course our final insurance settlement will need to be completed before we can finally close the tornado chapter and we expect that to occur in 2013. Once that occurs the proceeds related to the business interruption will be recognized as income in our reported results. We would of course separately disclose those recoveries which would be a gain as a special item when that occurs.

Also as we reported in the release, our per-unit salt cost for the upcoming winter will be impacted by the very mild past winter season. We have higher than typical rock salt inventories, so we need to produce less salt during 2012 in order to bring our inventories into alignment with the expected upcoming winter demand.

While our rock salt mines have a significant variable component, we aren’t able to adjust the fixed cost components as dramatically in the short-term, thus our per-unit cost will be elevated compared to what they would be under normal circumstances.

The impact of these higher per-unit costs will be most dramatic in our third quarter results when sharply lower projected sales volumes and the full impact of current year slowdowns will have the largest effect. We estimate our average third quarter 2012 per-unit salt cost to be approximately the same as the second quarter cost of $44 per ton which is significantly higher than typical for a third quarter in our salt segment.

Assuming typical weather across our served markets during the upcoming winter periods, our per-unit salt segment cost which include all cost of goods sold and SG&A are expected to be approximately $34 per ton in the 2012 fourth quarter and approximately $30 per ton in the first quarter of 2013. These amounts are lower than our reported results this past winter season, but higher than last season’s pro forma per-unit cost which excluded the estimated effects of the tornado.

You will notice that we’re also providing a little more specific sales volume forecast guidance than we have generally done in the past. This is particularly true with regard to highway deicing portion of our salt segment. We wanted to make it clear that we expect the greatest remaining sales impact from the extremely mild weather of 2011, 2012 winter will occur in the third quarter this year. We expect that our highway deicing customers will have enough of their own carryover inventories to be prepared for early winter weather and are therefore planning to forego pre-season orders which often take place in the third quarter; so we expect third quarter highway deicing sales volumes of about 1 million tons.

However, when we consider our bid results to-date and the amount of total commitments we expect to have once the remaining approximately 40% of the bid season is complete, we believe our two winter quarter’s combined sales volumes will be approximately 7.5 million tons and almost equal to our 10 year average for those two quarters.

Moving on now to our specialty fertilizer segment; sales volumes in this segment increase 10% year-over-year with 2% improvement in average selling price; together this resulted in $56.2 million in total segment revenues, 14% increase from the second quarter of 2011. Our view of the specialty fertilizer market remains positive, sulfate to potash continues to be a consistent performer despite some volatility of the larger standard potash market. We are maintaining our 2012 sales volume guidance of around 375,000 tons and expect stable prices through the remainder of the year.

Unfortunately our per-unit operating cost had a large step change this quarter in line with our prior guidance due to the lingering effects of the 2011 poor solar-evaporation season as Angelo mentioned. Per ton costs this quarter were about $398 per ton compared to $298 in the second quarter of 2011; those per-unit costs include all cost of goods sold and SG&A for that business segment. This created significant downward pressure on our operating earnings which dropped to $13.9 million from $18.7 million in the prior-year quarter.

As Angelo discussed, we do expect to see at least $100 per ton improvement in these unit costs in 2011 after we sell the higher cost 2012 inventory. We expect the improvement to occur sometime during the first quarter of 2013 which would result in an operating margin percentage in the specialty fertilizer segment returning to levels similar to those of 2011 at around 37%.

Of course, the improvement is enabled by the more typical summer solar season we have experienced this year at the Great Salt Lake. Should the current, typical hot and dry weather continue, we would have a full deposition of minerals in our solar ponds. This would provide a great amount of lower cost raw-material feedstock than what we would have had throughout 2012. So I’ll closeout my remarks by moving on to other items in the income statement.

Interest expense for the quarter was $4.5 million, 13% below prior-year levels as our borrowing costs have dropped which was partially aided by the refinancing of our bank loans this quarter. Our refinancing in May extended the term loan maturities by around 2.5 years and dropped the average spread to market rates by about 50 basis points. We expect an annual $2 million savings from this refinancing. We incurred a pre-tax charge of $2.8 million to refinance the debt this quarter which we’ve included as the special item in our earnings reconciliation.

The company’s tax rate this quarter was skewed by the effect of a tax benefit of $3 million as a result of an audit that was completed this quarter. We expect our tax rate for the remainder of the year to be about 26%. Second quarter net earnings amounted to $9.5 million compared to $14 million in 2011, but we had several special items this quarter, I’ve already mentioned we had estimated losses from the tornado, a tax benefit and charge related to refinancing our term loans.

Net earnings excluding these special items equaled $10.3 million or $0.31 per diluted share outstanding. Our cash flow from operations remained attractive levels coming in at $116 million year-to-date but was clearly impacted by the past mild winter and the higher levels of inventory than we had at this time last year. Depreciation was $15.8 million in the quarter and we expect similar quarterly amounts for the remainder of 2012.

Finally our capital expenditures to-date in 2012 have been $64 million, about $20 million of this was spent on tornado related asset replacement. We continue to project $150 million in total capital expenditures for the year including around $30 million for tornado related capital replacements.

And so with that, we’ll open up the call for questions. Brandi?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And we will go to our first caller, Ivan Marcuse with KeyBanc Capital Markets.

Ivan Marcuse - KeyBanc Capital Markets Inc.

Thanks for taking my question.

Angelo Brisimitzakis

Good morning, Ivan.

Ivan Marcuse - KeyBanc Capital Markets Inc.

Good morning. The contracts that you talked about, about 50% have been negotiated. Is the next half – is there any difference between the first half or would you expect sort of – sort of as the business as usual or pretty much the exact same thing that happened with an excess?

Angelo Brisimitzakis

Yeah. Ivan, this is Angelo. Obviously we would hope the pattern will continue because this is kind of what we thought was going to develop and it actually has developed that way so far, but it’s really hard to predict if there will be a change or not. The make-up change is over time, I mean; we have activities in two different countries. We have activities with governments and non-government entities. We have activities that are tendered and non-tendered. So each of them has their own subset of dynamics, but at this stage we’re believing that it’s going to end in a similar manner to what it’s been so far.

Ivan Marcuse - KeyBanc Capital Markets Inc.

Got you. And then if you look at in your second quarter in your salt sales, the way I understand is its mostly chemical sales in there since there’s no snow in North America. So in the third quarter I’d assume there’s no deicing sale. So would the price -- sort of your deicing price mix, because I know it includes chemical, would that be flat basically sequentially or would that still be down on a sequential basis, and what sort of moves that, if it’s just sort of chemical salt to chemical salt?

Rodney Underdown

Ivan, this is Rod. Yes, in the second quarter we did have a little bit lower chemical sales but we still had some deicing sales in the second quarter. In the third quarter we expect very little of that, so there would be a mix effect, it would -- we’re projecting that it would not be flat, that it would be down maybe 5% or 10%. So, we’re kind of thinking a price in the mid-40s as opposed to last year’s third quarter price which was around $48 for that part of our salt business.

Ivan Marcuse - KeyBanc Capital Markets Inc.

Got you. And then my last quarter, I’ll get back in the queue. You talked about cost in your specialty fertilizer business sort of falling to -- I think you said $300 in the first quarter, but in your presentation you talked about in the second quarter. So is there -- am I misreading it or did I just misunderstand something when you talked about it? And then going forward, why wouldn’t costs be lower than $300 going into the back half of the year if you have probably, just bad as it was evaporation last year is as good as it’s probably been this year and then you should have some of the benefits of the operating improvements that you put through?

Rodney Underdown

Yeah good question, Ivan and I apologize if there was some ambiguity about the $300 and the timing of it. Certainly it depends on sales and when we work through the 2012 production the expectation is that currently, is that; we’d have some inventory starting January 1 that would be 2012 production, we do FIFO accounting kind of basis, so we need to work through that. We expect to work through that during the first quarter, so the first full quarter of the step down in cost would be the second quarter. It would likely – some of the first quarter sales would likely also be at the lower cost.

As for the $300, just as reminder versus our prior guidance – the cost that we’re talking about does include the Big Quill Resources production and sales in that product because of it’s even greater premium quality does allow for increased prices and some non-Ag , but it does carry with it a higher cost.

Also I just want to remind you that it includes SG&A and royalties. It’s a full cost of goods sold plus SG&A and we have been making some investments in our selling area and marketing area to plan for larger volumes there that we’re expecting. So, as I mentioned or as we mentioned, we expect at least $100 improvement. We certainly don’t want to over promise and would expect to do better if the Phase 1 efficiencies are fully realized.

Ivan Marcuse - KeyBanc Capital Markets Inc.

Got you. Is Phase 1 complete now – fully complete?

Angelo Brisimitzakis

Yeah, this is Angelo. I mean, with the yield project, I think you’re never fully complete in extracting efficiency from a plant. So, I would say we’re materially complete, but we still have projects that we believe will continue to incrementally give us additional yield. In fact a good organization never stops doing that. So, our recovery is based on the amount of mineral that is in the lake, our goal is to get to 100%, obviously that’s far off, but we’re taking those learnings from Phase 1 and we’re using that to design our Phase 2 plant expansion.

Ivan Marcuse - KeyBanc Capital Markets Inc.

Great, thank you for taking my questions.

Operator

And we’ll go next to David Begleiter with Deutsche Bank.

David Begleiter - Deutsche Bank Securities Inc.

Good morning, guys. Angelo, just on highway deicing volumes, have you been able to gain back any share that you lost last year due to the Goderich constraints?

Angelo Brisimitzakis

We haven’t lost any share further from what occurred last year. Obviously, coming of the tornado week, we paused our bidding, usually following an extremely weak period it’s not the most ideal time to regain share. So I would say our share today and again the bidding isn’t over yet. So I’ll have to be careful with my comments, but based on where we are, our share is very similar to what it was in the last season. But we fully expect over time to reestablish our share and then grow share as we have historically during periods of very strong winter where we tend to be more opportunistic on the spot side and also getting a disproportionate amount of the normal 1% to 2% market growth rate which again we haven’t seen this last period, but we fully expect going forward those dynamics to continue.

David Begleiter - Deutsche Bank Securities Inc.

And just on pricing in highway deicing, when was the last time prices did not rise for a season?

Rodney Underdown

Yeah, Dave, if my recollection is right, I believe it was two years ago. There was a fairly mild winter -- I want to say it was the winter of ’09 and ’10 -- 2009 and 2010 and prices were essentially flat that year as well.

Angelo Brisimitzakis

I believe in the late '90s there was another period where there was a mild winter and prices -- volumes declined modestly and prices were near flat. So, this season it seems to be falling into that pattern. Again I caution you there’s still a fair amount of bidding left and as we talked before there are different submarkets to our bidding whether it's Canadian markets, U.S. markets, tendered, non-tendered, government, non-government, but the composite so far has been the pricing essentially flat.

David Begleiter - Deutsche Bank Securities Inc.

Are you seeing any more or less imports into the U.S. for this coming season or the last season?

Angelo Brisimitzakis

Again in our service area which tends to be somewhat protected from imports being in the central part of North America, we very rarely see imports and we haven't seen any -- I don't believe we've seen any this cycle. I can't comment really for the East Coast where we don't participate, I would expect more typical import patterns at that part of North America.

David Begleiter - Deutsche Bank Securities Inc.

Thank you very much.

Operator

And we’ll go next to Jeff Zekauskas with JP Morgan.

Jeffrey Zekauskas - JP Morgan Chase & Co, Research Division

Hi, good morning.

Angelo Brisimitzakis

Good morning, Jeff.

Jeffrey Zekauskas - JP Morgan Chase & Co, Research Division

Hi, good morning. In the second quarter in your salt margin, did you benefit from some of the take or pay features of your contracts and if you did, by how much?

Rodney Underdown

Yeah, we certainly had some amount of sales in the second quarter that were customers who do have storage capabilities and did take their unmet minimum commitments from the prior season, because our sales volumes was 1.1 million tons, it wasn’t a significant percentage, couple of hundred thousand tons. But there were some sales that met that -- where the customers were meeting their unmet requirements from the prior-year.

Jeffrey Zekauskas - JP Morgan Chase & Co, Research Division

Okay. So, this is a difficult year for Compass and, so I would expect management incentive compensation to be down this year versus last year; by how much might it be down, if it is down?

Rodney Underdown

Yeah, actually it is …

Angelo Brisimitzakis

Unfortunately it is down.

Rodney Underdown

It is down Jeff, and I don't have a percentage for you, but because of the expectation for the year and our first quarter results, the vast majority of that decline in the accrual was recognized in the first quarter.

Jeffrey Zekauskas - JP Morgan Chase & Co, Research Division

Okay.

Rodney Underdown

If I had to put a percentage to it, I’d call it 25%.

Jeffrey Zekauskas - JP Morgan Chase & Co, Research Division

And then lastly, is there a normal split between your fourth quarter deicing salt volumes and your first quarter of the following year deicing salt volumes; and if there is a normal split what is that and will this year be a normal split or not a normal split or you can’t tell?

Rodney Underdown

Well, yeah, there is a normal, and the normal is around 45%, 55%; so 45% in the fourth quarter of a winter, 55% in the first quarter. In terms of what to expect this year; we would plan on something similar to that. What I would -- of course, I’d never want to predict the winter and we always say; a winter isn't done until mid-April. So, you never know how the winter is going to land. But, I think just overall we’d probably plan on a little lower percentage than that in the fourth quarter and a little higher percent, but not materially different than that.

Jeffrey Zekauskas - JP Morgan Chase & Co, Research Division

Okay. Thank you very much.

Operator

And we’ll go next to Bob Koort with - Goldman Sachs.

Robert Koort - Goldman Sachs Group Inc.

Thank you very much. Good morning.

Rodney Underdown

Good morning.

Angelo Brisimitzakis

Good morning, Bob.

Robert Koort - Goldman Sachs Group Inc.

I always find the slide deck you guys provide quite helpful. I had a couple of questions actually on couple of those slides. Angelo, if I went to Slide 14, which shows your historic cash flows, it appears that in the last five years there’s been a meaningful step-up in cash flow, nearly double what it was in the preceding five years and I know early in Compass’s public life it was a pretty high yielding stock. It seems like you guys have more cash than you need. Is there any chance you could start inching that dividend back up to a higher payout, I mean, beyond the 10% increase you talked about earlier this year?

Angelo Brisimitzakis

Yeah, I mean it's a good question. I mean, every year we've – since we've been a public company we've increased our dividend and even during this period where other companies suspended and cut back their dividends, we increased it by double-digit. So, I think we're pretty proud of our dividend and our dividend yield. I believe about $65 million, I think that’s the number Rod, of our cash, currently gets allocated.

What I would remind you is during this period we've also embarked on some very aggressive investment, whether it was at the Goderich mine, where we invested over $75 million or at the Great Salt Lake where we're talking about investments between Phase 1 and Phase 2 in the hundreds of millions of dollars. And then in addition, unfortunately we’re having to reinvest in assets damaged by tornado. We fully expect to get a recovery from insurance but our capital investment plans have been elevated in the last couple of years and plan to be elevated for the next couple of years.

So, again we have to find that right balance of honoring the dividend and the dividend yield, but also to make sure we’re investing strategically in our advantage assets for the future. We think we found that balance, but clearly assuming our cash flow stays high and improves and are ultimately our investment intensity declines as we finish our strategic investments and we don't find kind of a needle moving acquisition. We fully expect to utilize other financial mechanisms whether its dividends or share buyback to return to the shareholder their cash.

Robert Koort - Goldman Sachs Group Inc.

Angelo, if you were to find something that was attractive, would you consider using equity or do you think because your balance sheet has plenty of room, you’d be more likely to use debt?

Angelo Brisimitzakis

Yeah, Bob -- I think it would of course depend on size, but assuming that was a reasonably sized investment, I think our bias would be towards debt.

Robert Koort - Goldman Sachs Group Inc.

And my last one if I might; as a chemical analyst we hear talking, there’s some discussion of some expansion of Chlor-Alkali facilities in the US. Not quite sure if any of those are – were your customers, but would you expect there to be some growth in your salt into the Chlor-Alkali markets over the next few years?

Angelo Brisimitzakis

I mean – its Angelo again. I mean, we’ve seen good traction and improving business in salt for chemical application, so we’re very happy with that. A lot of the projects rely on brine that's kind of in-situ where we don't participate, but certainly in those projects that source rock salt or a solid product we expect to participate. We currently enjoy good share there. We have a pretty strong business model to support it, so I think marginally increasing our outlook into that segment.

Robert Koort - Goldman Sachs Group Inc.

Thanks.

Operator

And we’ll go next to Edward Yang with Oppenheimer.

Edward Yang - Oppenheimer & Co.

Hi, good morning.

Angelo Brisimitzakis

Yeah. Good morning, Ed.

Rodney Underdown

Good morning.

Edward Yang - Oppenheimer & Co.

Second quarter consumer volumes, what happened there? Volumes were up about 2%, they were down in the previous quarter and you’re expecting that to decline again in the third quarter?

Rodney Underdown

Yeah. Ed, I don't think there’s anything particularly noteworthy about the volume increase. I mean, it's a segment where our share hasn’t and share typically doesn't change dramatically, but there can be just minor movement in the timing. If you look at our year-to-date volumes they’re down, but that's entirely due to the deicing. So, I really just would attribute that growth somewhat just a timing and not any particular other noteworthy factors.

Edward Yang - Oppenheimer & Co.

Okay. And what are your contingency plans if -- again the weather doesn't cooperate and your customers don't need to fulfill or don't plan to commit -- fulfill their volume commitments by the December deadline?

Angelo Brisimitzakis

Yeah, this is Angelo. I mean, certainly we've gotten a lot of practice on our contingency planning based on the three highly unusual weather events in 2011. In fact, the last action we’ve taken has been in the second quarter of this year, where both of our North American mines have been a slowdown or shutdown for extended periods, in order to rebalance our inventory. We feel it's essential that we enter the winter with the right amount of inventory and the second and third quarter really provides us the period, which is post the winter season to correct that.

We do have quite a flexible cost structure at our mine, particularly in labor. And we have agreements that allow us to flex up and down our headcount, and we do that over the number of hours worked. So, I would imagine if winter weather comes in very, very strong, we’ll flex up. And I imagine unfortunately if winter weather were to come in very, very weak, we’ll flex down. We probably would not make the call on that until the first quarter where we’re sure we’re through the winter, but typically the company has been very active in rebalancing its inventory and making sure we’re positioned with the right amount of inventory going into the subsequent winter.

One thing about winter weather unlike, some of the comics have been about the chemical industry. There’s not really an economic cycle to deicing salt. There is really not even a weather cycle to deicing salt. The pattern is random and next winter might be the harshest winter we ever had and it could follow the mildest winter we ever had. So, we always have to prepare for the typical winter and be capable to flex up to the maximum commitments that we've made, and we like that challenge, that contingency. But we also unfortunately on occasion as we head through this last season have to flex down to keep our inventories correctly balanced.

Edward Yang - Oppenheimer & Co.

And is it fair to say Angelo that, this has sort of been an unprecedented year, I mean not just with the tornado and the other issues; but in terms of working with your customers and this amount of volume and magnitude in terms of the carryover inventory issues and so on?

Angelo Brisimitzakis

Yeah, I would say 2011 and the winter of 2011, 2012 is unique, I mean -- and that's just one of three weather events we've had to deal with. I mean, the winter was somewhere between the mildest for us in 15 to 30 years depending on the region or the product line. We've never experienced a tornado in Goderich, I am not sure the town of Goderich has ever experienced a tornado; but as far back as the weather records are they couldn't record one. And the solar-evaporation season, which we count on at the Great Salt Lake, it’s a late 80s before there was that much rain and moisture early in the evaporation cycle.

So, it wasn't kind to us. Again, we’re not complaining. We would have preferred the other side of it, but I think it points to the resiliency of the company and the contingencies we have to react. And I would say almost the courage we have to take those actions when it’s obvious that the environment we assume going into the year was not the environment we were handed. And we will continue to be responsive and then communicate our actions, but also try to give you kind of an underlying sense of what our results are, had they not been for these unusual events.

Rodney Underdown

So Ed, if I could just add to that, I think we feel like we’re turning the corner with typical weather. We would expect to achieve the guidance that we gave you today. But you might – everybody might specifically look at the third quarter, because it's where we feel like the biggest single impact is from the winter period is going to be in the third quarter. So there are some unique things happening in the third quarter that are affecting not just sales volumes, but also salt costs and of course we will have the continuing SOP costs. But we’re definitely turning the corner on those things and we would expect a more normal winter season in salt.

Angelo Brisimitzakis

To go a little bit beyond that, I mean, we read everyone’s reports and I think we have some really good analyst that really follow us well and give us – give good insight to the investor as to what to expect. I do have to say that third quarter as Rod pointed out, there appears to be a disconnect. So, we put a page into our presentation that was referenced before, it’s on Page 4. It talks about the third quarter specifically. So I would encourage everyone to kind of take a look at those – that guidance and look at the estimates and the consensus and really make sure you got that one right.

Edward Yang - Oppenheimer & Co.

All right. Thank you.

Operator

(Operator Instructions). We’ll go next to Mark Gulley with Gulley & Associates.

Mark Gulley - Gulley & Associates LLC

Hey, good morning guys.

Angelo Brisimitzakis

Hey, Mark.

Mark Gulley - Gulley & Associates LLC

Couple of things. It’s been 10 months since your Investor Day in the Great Salt Lake and I’m wondering if you have any updates on some of the new product opportunities that you talked about there. I think one of them had to do with specialty ice control products, and other one had to do with some innovations in crop nutrients that you guys were talking about. So any update there would be helpful?

Angelo Brisimitzakis

Yeah, that was long a time ago. But obviously we haven’t had a chance to talk about our marketing efforts having to deal with the numerous weather events. We were very excited at the time about magnesium chloride, particularly into some chloride deficient soils on the Ag side. We still are, where the Ag business unlike the chemical industry, I mean, you could prove something out in plastics or chemicals with one trial over a short period of time. On the Ag side, trials take years. Trials are affected by weather. Obviously, a drought might delay a trial or render it meaningless if the conditions are so abnormal. But we continue to stay to be very excited about magnesium chloride.

The other piece we're very excited about is the Big Quill Resources. I think Rod mentioned it a lot of non-Ag applications, which we talked about on Investor Day and subsequently, some of it’s on our website. In terms of higher priced specialty applications that aren’t tied to the Ag cycle that have quite high margins that were new and came to us on a synergy with the acquisition for Big Quill.

Rodney Underdown

And Mark if I can just add to that, on magnesium chloride, we’ve also seen a summer that has been hot and dry and part of our magnesium chloride is soil stabilization, de-dust application that thus far has been our most successful new product with magnesium chloride and we really seem to have a lot of momentum there. So, you might remember that the magnesium chloride, the incremental cost is very low for us on that and so we feel good about that. I mean, 2013 could be a breakout year. It would require a lot of hot dry weather in the west, throughout the west, but we feel good about our moment there.

Mark Gulley - Gulley & Associates LLC

All right.

Angelo Brisimitzakis

And if you look at magnesium chloride, it’s really the only mineral that’s used by each of our kind of three businesses. It’s used by our salt business, as a specially deicer, and as Rod talked about as a de-dusting material. It’s used by our consumer industrial business, as – again, a specialty deicer, but also a blend stock and it’s used by our Ag business. And our SOP expansion brings along mag chloride essentially free because as we expand our SOP and seal our ponds, we get automatically additional magnesium chloride. So as Rod said, it’s a terrific product and expect us to be talking more about it as we go forward.

Mark Gulley - Gulley & Associates LLC

Thanks for the update. And if I could just wrap up, what kind of SOP price trends are you seeing for your specialty crops maybe compared and contrast to what the MOP producers might be seeing?

Angelo Brisimitzakis

Yeah – and again, this is where we kind of have both sides. I mean, clearly, we sell potash. So, we’re always interested and will be affected indirectly by whatever happens in the broader MOP market or whatever happens in commodity crops, corn, soy, wheat. Our crops have not suffered the drought conditions typically that the row crops have suffered in the Midwest; partly we don’t sell that much in the Midwest.

And then secondly, a lot of our crops because of the higher value are irrigated crops. So, I think dynamics of our crops have held up reasonably well. They have not surged in pricing as some of the commodity crops have surged, but they also have not suffered in terms of yield as many of the commodity crops have. So what we’ve seen on SOP pricing, in spite of kind of the volatility in MOP, we’ve seen quite stable demand and quite stable pricing. And that's not just the phenomena in the second quarter, we saw that in the first quarter and we saw that dating back into the end of next year.

So, when we look forward, we have to acknowledge that there is a lot of uncertainty around MOP, MOP crops and that whole global potash, but assuming that stays reasonably together, we expect the SOP markets and our sales to be similar going forward as they’ve been in the last couple of quarters. Also remember, unfortunately we’re capacity constrained in SOP. So therefore, any surge in demand, we probably would not be able to enjoy right now until we get our expansion program, which takes many years recognizing the three year cycle to produce SOP.

Mark Gulley - Gulley & Associates LLC

Thank you.

Operator

And we’ll next to Joel Jackson with BMO Capital Markets.

Joel Jackson - BMO Capital Markets

Good morning.

Angelo Brisimitzakis

Hi. Good morning, Joel.

Rodney Underdown

Hi, Joel.

Joel Jackson - BMO Capital Markets

Could you maybe break down a little bit for your guidance for Q4, Q1 of 7.5 million tons of highway deicing salt assuming a normal winter? Could you maybe give a rough idea of what percentage of that would be unmet minimum purchases versus sales under new awards?

Rodney Underdown

Yeah Joel its – that’s a good question. I’d describe the unmet minimums as not a huge amount. Certainly somewhere less than 500,000 tons, but it is an important element in making sure we – everybody understands kind of where the sales versus our commitment volumes or what’s going on in the bid season, it’s an important element in understanding how the future sales expectation is related to the bid season. So, I don’t – I can’t really get any more lives on that, but its – but I would not describe it is as a huge component of the upcoming winter.

Angelo Brisimitzakis

The weather will be the largest component of our sales for this upcoming season as it always is.

Rodney Underdown

And Joel those commitments would – those unmet commitments would be expected to be taken by contract all during the fourth quarter, not – none of those in the first quarter.

Joel Jackson - BMO Capital Markets

It sounds like from your previous guidance earlier in this call, what you did for Q2 in terms of unmet minimum purchases, if it sounded right, it’s about three quarters million tons of unmet minimum purchases in total?

Rodney Underdown

That’s order of magnitude. That's not a bad total, yeah.

Joel Jackson - BMO Capital Markets

Okay. For your guidance of flat pricing so far 50% of the way through bid season, does that guidance include, is it just new awards or you also including some of the unmet minimum purchases maybe some of the multi years?

Rodney Underdown

Yeah. We are including everything that has been contracted yet, regardless of the type, whether it's a multi-year or it’s a rollover or exactly whatever. So, it – yeah it includes all types of awards today.

Joel Jackson - BMO Capital Markets

So has pricing for new awards been underperforming the flat? Is it slightly down, is it slightly up, is it flat?

Rodney Underdown

Yeah. I mean, with the flat because of the multi years and remember there aren’t very many multi years, but there are a few. The multi years typically have some kind of an inflation based inflator on the price in those. So, those would be up a little, but the – and that would mean that just down slightly would be the bid, the actual bid volume awards.

Joel Jackson - BMO Capital Markets

So I’m just trying to make sure understand, so we still have the bid season to come, but that would just all new awards, is that right? Of what’s left to come in?

Rodney Underdown

Yeah, the – what would be left would be totally related to new bids.

Joel Jackson - BMO Capital Markets

So, if the trend continued, it would be down slightly?

Rodney Underdown

Yeah. Our comments are meant to be reflective of where we’re at currently and kind of a forward look as to where we would expect to be with those.

Joel Jackson - BMO Capital Markets

Okay. That’s great. Thanks. A little bit on Q4 for C&I, I know you gave some guidance on C&I for Q3. With the inventory build in C&I to reduce a little bit pre-season buying in Q3, would you expect Q4 – assuming a normal winter, of course, would you expect Q4 C&I volumes to be about normal or would you expect a little bit of the – sort of inventory situation to impact Q4 as well?

Rodney Underdown

Yeah. That went a little more difficult. We wouldn’t expect as large of an impact in Q4 if any at all. The buying base there on consumer products usually does their pre-season earlier than the highway business, but that business is probably more subject to in-season winter in the fourth quarter. So it’s tough to say, Joel. Right now we don’t expect a large effect on our fourth quarter consumer deicing volume.

Joel Jackson - BMO Capital Markets

Okay. And finally, maybe it’s a little bit longer term thinking around Big Quill. What are your ideas here for Big Quill? I mean, assuming you would like to increase production, I assume also that your cost advantage long-term MOP supply agreement probably has a set amount of tons every year. So, I mean, what are your thoughts on being able to and desire to expand production at Big Quill and what are your option there in terms of other long-term supply agreements, expand your existing ones, buying MOP on-spot, and how that would potentially affect incremental margins on potentially new production?

Angelo Brisimitzakis

Yeah Joel, it’s Angelo. I mean, that’s a great question. The first point is we’re very pleased with the acquisition. They’re hot acquisitions a year or so later that companies make that they can’t say they are pleased with, so I’m very pleased to be able to say that. Second thing is to agree with you. We would love to find ways of increasing – cost effectively increasing the capacity there. But there are constraints both in the assets that we have, just the kit that’s in place to produce SOP. And as you correctly pointed out, constraints in terms of how much of MOP we can source with those favorable economics in order to make SOP.

But then as I commented previously about the Great Salt Lake minerals, yield is a big deal for us in terms of these types of processes. I mean, you literally lose a very large portion of your production to recycle to dust, to lack of conversion, to waste disposal. So there are significant yield opportunities to reduce the amount of waste and to increase the percent conversion of the process at Big Quill Resources, as it is at the Great Salt Lake.

So, our focus will be primarily on sizing the plants to the maximum capacity that we had sourcing capability against and then increasing the yield in order to extract more tons from the same amount of input, i.e., productivity. But it’s not going to double or triple the production, but it could give us opportunity to grow.

The other thing we’re doing is perhaps shifting some of the low end production that Big Quill had been producing for standard agricultural applications, shifting that to the Great Salt Lake and then allocating more and more of Big Quill’s production to those higher value applications.

Joel Jackson - BMO Capital Markets

Thank you.

Operator

And this concludes today’s question-and-answer session. I’d like to turn the call back over to the Compass Minerals’ CEO, Mr. Angelo Brisimitzakis, for any additional or closing remarks.

Angelo Brisimitzakis

Great. Thank you. You said that well. In conclusion, I want to reiterate that Compass Minerals is quite a resilient Company and we're turning the corner on multiple weather challenges we faced in 2011. The underlying improvements in both of our segments will begin to be apparent, assuming more typical winter weather returns in the fourth quarter, and as our per-unit salt and SOP cost improve in 2013.

Thank you so much for joining us today. I look forward to talking to everyone again in October. Have a nice day.

Operator

And this concludes today’s conference. We do thank you for your participation.

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