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Executives

Peggy Landon - Director of Investor Relations and Corporate Communications

Angelo Brisimitzakis - President and Chief Executive Officer

Rodney Underdown - Chief Financial Officer, Secretary and Treasurer

Analysts

David Begleiter - Deutsche Bank

Mark Gulley - Soleil Securities

David Silver – JP Morgan

Robert Koort - Goldman Sachs

Elizabeth Collins - Morningstar

Jon Braatz - Kansas City Capital

Compass Minerals (CMP) Q1 2008 Earnings Call April 29, 2008 10:00 AM ET

Operator

Welcome to the Compass Minerals’ first quarter earnings conference call. (Operator Instructions) Ms. Landon, you may begin your conference.

Peggy Landon

With me are Angelo Brisimitzakis, Compass Minerals’ President and CEO and Rod Underdown, our Chief Financial Officer. Before we begin, I will read our Safe Harbor statement to you.

Today’s discussion may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on the company’s expectations as of today’s date, April 29, 2008 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. 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 will hand the call over to Angelo Brisimitzakis.

Angelo Brisimitzakis

We are very happy to be able to report our second consecutive quarter of record sales, earnings and cash flow. Certainly the primary contributor to our record-setting quarterly results was strong winter weather especially when compared to milder than normal weather in the first quarter of 2007.

However, the first quarter results also reflected structural changes in our business that we have introduced over the last few quarters especially our specialty SOP fertilizer segment executing on their plans very well in light of the strengthening tailwind in the broader fertilizer industry.

Our sulfate of potash is a specialty fertilizer product that is not normally used on commodity crops like corn, wheat or soybeans. Historically this important distinction caused SOP pricing and volume trends to be somewhat steadier than commodity MOP or standard potash. We will still like this trend if and when there is ever a substantial downturn in global fertilizer demand.

However, the dynamics of the potash fertilizer market has changed. The dramatic increase in demand for MOP has reduced the amount of all potassium-based nutrients available to growers of specialty crops who have traditionally been able to use either MOP or SOP.

With less MOP available for specialty crops, demand for SOP has also climbed. Similarly the rising price of MOP has created strong support for SOP prices because most worldwide SOP production starts with MOP as a raw material. We believe this provides a floor, a natural spread for SOP prices to continue to outpace MOP prices in the open market. Historically the spread has been between $100 and $175 per ton. However, the nature of this potash market structure creates a lag effect on the timing of SOP pricing movement versus its MOP building block.

In the first quarter, the average price of our specialty fertilizer products was up nearly $88 per ton to more than $388 per ton, a 29% increase over the 2007 quarter. On a sequential quarter basis, the average price for our specialty fertilizer segment increased more than $47 per ton or 14% from the fourth quarter of 2007. We are pleased with the pricing momentum we have achieved and continue to see acceleration through the balance of 2008.

Entering 2008, about half of our SOP customers were still buying on long-term contracts which offered up to 12-month price protection. As these contracts expired, they are being actively renegotiated with no more than 90-day price protection. Therefore, we expect that it will not be till year-end until our current list price of approximately $658 per ton is fully reflected in our average selling price.

Our specialty fertilizer sales volumes were up 15% year-over-year from 107,000 tons in the 2007 quarter to 123,000 tons in this year’s quarter. However, we are keenly focused on the pricing opportunity even if it might come at the expense of some volume gain. So we currently don’t expect substantial year-over-year volume growth through the remainder of 2008.

We are expanding our SOP production capacity at the Great Salt Lake via a multiphase project. By 2010, we will have an additional 100,000 tons per year of low cost pond-based SOP capacity from Phase I, giving us a total of more than 325,000 tons of SOP that we can extract directly from our solar evaporation ponds. We currently add MOP as a raw material to our ponds harvest to extend it by up to another 200,000 tons per year. So by 2010, we will have a total SOP capacity in excess of 525,000 tons per year.

When you think about our SOP production, keep in mind that our solar evaporation process is dependent on warm, dry weather conditions. A wet or cool evaporation season will temporarily reduce the capacity of that facility.

We also anticipate significant cost inflation over the next few years on the relatively declining portion of our overall production, as we’ll be absorbing increases in the cost of purchased MOP that we use to extend our SOP pond-based harvests. We have the flexibility to reduce the volume of MOP we purchase or to not purchase any at all. Well, as of today, the expected future SOP selling price and MOP supply costs look favorable for us at least through 2009.

In subsequent years which are still somewhat uncertain, we will make decisions whether to use MOP as a raw material input to produce SOP based on the market dynamics at that given time. Regardless of that decision, our sulfate of potash volume growth potential will be somewhat constrained until Phase II of our long-term expansion plan which is still several years away.

Turning next to our salt segment, there is no question that the winter of 2007-2008 was more severe than normal in our primary North American Highway deicing markets and the weather was substantially more severe than in the mild 2007 first quarter. There was more snowfall than average in the first quarter and even more significantly, there were more snow days than average in the regions we serve around the Great Lakes and throughout Southern Canada.

By that I mean our customers experienced more frequent snowstorms that required repeated salt applications during the quarter. The increased precipitation combined with the frequency of the weather events helped us to generate a 25% year-over-year increase in highway deicing sales volumes when compared to the milder 2007 quarter.

This season we had more higher-priced non-contract spot sales than normal because many Great Lakes area communities reached the maximum volumes guaranteed under their highway deicing supply agreements whether they were our customers or someone else’s.

In addition, the weather patterns were more concentrated in our high-value sales territories. These two factors combined with our bid price improvements and the effects of foreign exchange helped boost our average selling price by 13% over the first quarter 2007 average selling price.

Our consumer and industrial sales were also positively impacted by winter weather. Sales volumes increased 31% over the 2007 quarter with most of the gains coming from deicing sales but also reflect strong volume and price growth in non-deicing application. Average selling prices improved 13% primarily due to the benefits of improved mix of deicing product sales and the effects of foreign exchange but also because of pricing and growth initiatives we broadly introduced during 2007.

Two factors partially offset the season-on-season gains in North America. First, the weather was significantly milder than normal in the UK this quarter. The UK is an important market for us, so lower than expected sales in that region had a deflating effect on the average selling price and margins. Second, our logistics costs were higher due to several factors but primarily because of fuel costs which were higher than we anticipated when we priced our bids last year.

Sales of our DeepStore record management business in the UK increased by 39% due to significant new long-term contracts. Though this business is still immaterial to our consolidated results, it continues to post solid growth and we like its potential to more substantially decrease the seasonality of our UK sales and improve the overall profitability of Compass Minerals UK.

We are also keenly focused on continuing to improve our operating margins. We will work to recover expected higher fuel and carrier cost increases in our highway deicing bid season and through the diligent implementation of our consumer and industrial pricing initiatives.

Looking forward to the upcoming highway deicing bid season, it should be noted that we ran our Goderich mine at full production levels throughout the first quarter in order to meet the unusually high seasonal demand. Because this strong demand lasted throughout the quarter, we ended the quarter with very low inventories. We will need all of the tons we’ll gain this year from the first phase of the Goderich mine expansion just to bring our inventories back to the levels we had at the beginning of the 2007-2008 winter season.

So we expect incremental product availability to be very limited for the upcoming winter and as a result, we don’t currently expect to make significant bid award volume gains for the 2008-2009 season. However, as we implement the remaining phases of our Goderich mine expansion through 2010, it will allow us to fully accommodate long-term organic growth in the markets we serve plus provide us the capacity to more fully respond to our customers in severe winter weather season like the one just completed.

We eagerly look forward to the 2008-2009 highway deicing bid season which is just beginning to get underway. It’s too early to have a sense on how the bidding will progress but we will be able to provide solid information for you at the next call.

I am also quite encouraged by the gains we achieved broadly across our consumer industrial business and of course we continue to be very optimistic about our ability to deliver the accelerating growth in specialty fertilizer sales and earnings that we first discussed with you last quarter. Overall, 2008 is shaping up to be a very exciting year for Compass Minerals following our record 2007 performance.

I will turn the call over to Rod now for a more detailed look at our first quarter results.

Rodney Underdown

As you can see from last night’s release, every business line contributed to our record-setting first quarter results. Our year-over-year sales increased 44% to $380 million due to both volume and pricing gains in every product line including the severe winter in our North American markets. We estimate that the winter weather which was more severe than normal added approximately $40 to $45 million to our first quarter 2008 sales. By contrast, we estimate last year that milder than normal weather reduced our first quarter sales by around $20 million.

Shipping and handling costs increased 53% over last year primarily due to greater tons shipped but also due to substantial increases in fuel surcharges, increases in carrier costs and the effect of foreign exchange. Due to the severity and uneven distribution of winter weather in North America, we also used more trucks and more expensive winter vessels to move highway deicing salt to where it was needed to maintain our service commitment to our customers and to deliver to underserved areas.

These spot sales of highway deicing salt increased our shipping costs on an absolute basis because we can’t always use the most cost-efficient shipping methods when those customers need product quickly. However, it is essentially a pass-through cost because we can price spot transactions to recapture the higher shipping costs.

Our first quarter sales net of shipping and handling costs increased $70 million to $246 million in the first quarter of 2007, a 40% gain on last year. Of this net sales increase, about $46 million was due to increased sales volumes including the more severe winter weather related increases. Sales prices net of higher shipping and handling increased about $12 million and the remainder was primarily due to foreign exchange.

Our margins for the quarter include a benefit from the efficiency of increased rock salt production at Goderich mine that Angelo mentioned. Typically demand for deicing salt begins to wane towards the end of the first quarter so we usually use that time period to slow down the mine for some routine annual maintenance.

This year we maintained full production levels practically through the entire first quarter and postponed the maintenance slowdown period by a couple of months. As a result, we expect the $3 million benefit we enjoyed in the first quarter to partially reverse in the second quarter due to these changes in our North American operations, while our UK mining operations should be similar year-over-year.

SG&A increased $3 million in the quarter when compared to prior year, primarily because of higher compensation and benefits particularly variable compensation and selling commissions because of the strong performance this quarter. Operating earnings improved by $29 million over the prior year quarter, a 59% increase. We estimate that severe winter weather contributed $10 to $12 million to our first quarter operating earnings of $78.1 million. By contrast, we estimate that our first quarter operating earnings were about $10 million lower in 2007 than we would expect in a normal weather year.

Our highway deicing contract awards are based on full winter season so each year we like to provide you with a snapshot of how weather affected our full winter season results. We estimate that the 12 months ended in March of this year for that period, our sales benefited from more severe than average weather by $70 to $80 million and our operating earnings benefited by $15 to $20 million. This is in contrast to the mild winter impacts from last season’s full winter season effects.

Back to our first quarter results, interest expense declined by $1.9 million from last year, as a result of our refinancing activities in the fourth quarter of 2007 and lower interest rates on floating-rate debt. The benefit of these lower average interest rates was partially offset by higher interest accretion on our remaining discount notes.

This final tranche of discount notes becomes callable in June at the fully accreted value of around $180 million. We are currently evaluating strategies to reduce interest expense in the near term, while remaining poised to take advantage of market opportunities that will provide an optimal long-term capital structure.

We had other income of $1.9 million, which is primarily the effect of foreign exchange on inter-company transactions. And this was principally a non-cash item that fluctuates with Canadian dollar and British pound to the US dollar.

Our effective tax rate was 28% in the 2008 quarter, which is similar to the effective tax rate we anticipate for the full year. This is a slight increase from the previous guidance because the tax efficiencies we have implemented in the past are primarily fixed in nature as our actual and projected earnings increase, our estimated effective tax rate increases as well.

Our record earnings and the greater seasonal liquidation of working capital into cash when compared to the prior year contributed to our record quarterly cash flows from operations of $145.5 million. With the earnings of our specialty fertilizer business expected to improve even further through the end of ‘08, we expect strong cash flows from operations in our next few quarters as well.

Our capital expenditures were principally for routine capital projects in the first quarter, however, we continue to expect our productivity and expansion investments at our Ogden and Goderich facilities to increase capital expenditures to an estimate of a little more than $60 million for 2008. These expenditures will be weighted towards the last half of the year.

We also used our record levels of cash flow from operations to repay $34 million that was outstanding on the revolver from last year-end. The combination of our increased earnings and the lower debt balances has reduced our leverage at March 31 by more than half a turn since year-end at about 2.7x trailing EBITDA.

And now I will open up the call for questions for the operator.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question is from David Begleiter - Deutsche Bank.

David Begleiter - Deutsche Bank

Angelo, looking at SOP prices, is the $658 list price, I know international prices are lower, which you’re trying to raise, but is $658 the current bogey for 2009 SOP prices to start with?

Angelo Brisimitzakis

Yes, that is our list price and we wanted to provide some clarity so we reissued the list and we are working real hard to get everyone to that number. Historically, the international pricing had been lower but with this recent wave of activity in the broader fertilizer and potash markets, international prices have actually in some cases gone above domestic US prices on some fertilizers.

So looking into ‘09, I would expect very little difference between domestic prices and international prices on SOP and we expect to be fully active in all markets and to approach that $658 number less what might be some small discounts for volume and other types of agreements by year-end.

David Begleiter - Deutsche Bank

And Angelo, looking at some of the $1,000 per ton MOP prices being quoted today; any reason your SOP prices couldn’t be a premium to that prices long term?

Angelo Brisimitzakis

Yes, I think the structure of the potash market requires SOP to be priced at a premium to MOP no matter where MOP goes because the majority of the production of SOP comes from MOP. So you would be destroying value if you were to sell SOP at below MOP prices.

Now whether the MOP market will get to $1,000 a ton, I will let greater minds on the potash side of the business the pure potash side of the business comment on that. I think others have said it will get there quickly. I think there is some speculation in the third quarter. Others have said it will take a longer time. Others have commented that there are customers in this equation also that need to be considered. We certainly want to make sure that whatever happens is in the best long term interest of our products and our customers.

David Begleiter - Deutsche Bank

And will there be any elasticity or demand issues with SOP amongst your customers?

Angelo Brisimitzakis

We haven’t seen any. There is clearly that concern always out there. These are unprecedented times in the broader fertilizer market but as you are beginning to read, there is an overall lack of food products in many, many categories and stocks have gone down. SOP can be used in a pinch to replace MOP so as there are MOP shortages, SOP gets pulled in so we are actually seeing very strong demand.

We are in an active sales control program to limit customers to historical volumes. We are very selective on what customers we ship. We wish we had more product to sell but these types of mineral investments take really years to develop whether there are mine or in the case of salt, or an evaporation pond in the case of SOP, you can’t just turn it on and turn it off. So we don’t see a lot of pressure on demand but we will keep an eye on that.

Operator

Your next question is from Mark Gulley - Soleil Securities.

Mark Gulley - Soleil Securities

The purchase agreement with Mosaic now is increasingly important given the visibility of your SOP business. Can you provide some more details for us, Angelo, on the term of that contract, what price provisions you have so we can get to how sustainable that portion of your business is because this certainly is a big piece of the pie.

Angelo Brisimitzakis

Yes, our sourcing agreement on MOP is a key building block of our SOP franchise. Fortunately, it’s becoming a smaller and smaller component as we effectively expand our pond-based production. We enjoy a favorable to market agreement currently and expect to enjoy that agreement for a number of years although I would rather not get into the specific length for competitive reasons. This contract will continue to provide us a discount to market but it is not a fixed price per se.

So therefore as the overall MOP market goes up, our price of MOP will go up although there is a lag. And as long as SOP market prices can stay substantially above MOP market prices, this route should remain a profitable route to us. But the most profitable route to us is our pond-based route and that is becoming a bigger percentage of our production. So the sourcing agreement remains important.

We have a very strong supplier but we are not limited to that one supplier going forward and we expect to maintain a discount but this is a very difficult market to negotiate any long-term potash supply agreement. But who knows where that market will be in the future years when this contract will need to be renegotiated.

Rodney Underdown

And Mark, if I could just add to that I think we have mentioned in the past that there is no requirement for us to purchase volumes on this so if it were to ever become uneconomic from that spread that Angelo mentioned, we would not be required to purchase any volumes under the arrangement.

Angelo Brisimitzakis

Yes, and just to speculate when a supply agreement in this market could get upside down, is if and its unlikely now the basic MOP price and SOP prices were ever to start declining at a time when our contract costs could be escalating due to a lag, it could get upside down and therefore we would just stop buying it. So as Rod explained, we are never going to make a bad decision here but it may limit our upside.

Mark Gulley - Soleil Securities

Is there anything in the public domain maybe the former filing agreements between your company and IMC Global; is there anything out there in the public domain that is worth trying to chase down that would provide some more details here?

Rodney Underdown

No, not that I am aware of, Mark.

Operator

Your next question is from David Silver – JP Morgan.

David Silver – JP Morgan

On your SOP business, first, I would just like to go to your cost side so if I look at it on a sequential basis, your average costs per ton excluding depreciation, so cash costs based on your reported results have been ticking up for a few quarters here and they went up again from 4Q to 1Q by my calculation. First of all, could you discuss maybe why your costs per ton were higher year-over-year and also sequentially from that part of your business? And then also where you think that cost trend in that part of your business might be as we move through 2008?

Angelo Brisimitzakis

It’s important when you look at our SOP franchise to appreciate that we have essentially two manufacturing routes. One is the solar evaporation, low cost pond route and that is a very favorable route. We believe it is the low cost route in the industry and its growing in size and in proportion to the total SOP production which we have. The costs of that route are very, very stable and in fact, will probably be more efficient as we expand our ponds. So short of bad weather that affects our harvest, wet weather, lack of sun, things like that, that is a very stable production route and our preferred.

The other route, the one Mark was and I were just discussing, is predicated on sourced MOP and we have a long-term sourcing arrangement that lags the MOP market and its a discount from the MOP market but as the MOP market goes up, the cost from that route will increase. And so we have seen and will continue to see that route’s cost to increase as the purchase price of MOP to Compass Minerals increases.

And so that’s what you’re seeing in our underlying cost is this blended cost of those two routes. One route, the majority route being very, very stable and very, very attractive, the other route increasing over time as the MOP cost to us increases over time.

David Silver – JP Morgan

Even in the first quarter working from existing inventories, you are saying it’s largely due to the increasing cost of purchased MOP then. Is that fair?

Angelo Brisimitzakis

Yes.

David Silver – JP Morgan

On the SG&A line, Rod made some introductory comments about I think it was incentive comp and then also selling commissions. And I would ask you the same question but when I think of compensation, variable compensation, I think of your stock price, I think of earnings both of which I think are on a pretty sharp trajectory upward.

I also wonder about selling commissions for products with rising prices. Sometimes they are on a percentage of sales price basis as opposed to a fixed cost per ton basis. So I would ask you the analogous question but where could we be seeing the SG&A line going as we move through the years based on either an incentive comp or percentage commission type of effect?

Rodney Underdown

When you think about our SG&A, of course, it was a little pronounced this quarter because last year, as we accrue for our annual incentive, we would have reduced that accrual last year because the results were milder with the winter and we’re not tracking where we would expect to be as a company. So I think when you look at the year-over-year change in the first quarter, its quite a bit more pronounced than you should expect to see any other quarter in 2008 compared to 2007, absent other large movements or changes in the results.

So I think the incentive accrual is one that is significantly influenced in the first quarter in terms of our direction of that accrual. The commissions that we talked about are primarily related to some deicing products that go through consumer, a big-box grocery and so would be something that would more keenly relate to winter activity and not necessarily related to the SOP activity.

David Silver – JP Morgan

On your CapEx, Rod, you put out a number of $60 million for this year, maybe a little bit back-end loaded. And if I recall, I think that’s a higher number than you’ve been public with before. So could you just give us a rough breakdown between segments on the $60 million? And if I am correct, if you have increased your CapEx budget, where the increase was?

Rodney Underdown

The primary changes to our CapEx year-over-year are going to be related to the projects that we have talked about in the past. We are coming up on a more heavy spending period related to our Goderich expansion, the first phase and so of that $12 million project, a big part of that’s going to be here during the last part of 2008 to complete that and finish buying the equipment necessary.

And then, of course, we’ve talked about our Ogden expansion and while that’s ongoing, there is more of that capital required. And I think we’ve talked about that Phase I Ogden being about a $25 million project in total with a fair amount of that spending in the last half of 2008. So that’s currently our plans and those would provide the primary changes from our capital spending in the prior years.

Angelo Brisimitzakis

If I could just expand on that, based on the severe winter we just experienced and then couple that with the very positive outlook of our SOP business, I would love nothing more than to spend more capital faster to get those tons into our commercial organization’s hands to sell at these favorable terms. So the problem we have is that both of the projects that Rod described are both expansions of existing facilities. One is our solar evaporation pond and plants at Ogden and the other is our Goderich mine.

So it’s challenging to expand facilities at the same time that we’re asking those facilities to produce more than they’ve ever had with the existing assets. So there is a trade-off and in this winter for example it was very, very important for us to have every ton of rock salt for our customers in order to ensure public safety in the communities we serve. At the same time, we’re trying to expand those same assets. So I would love nothing more than to overspend capital right now and get our projects online quicker and get those tons into the marketplace.

Operator

Your next question is from Robert Koort - Goldman Sachs.

Robert Koort - Goldman Sachs

Rod, you provided some slides that were helpful. I just want to make sure I understand on your salt slide where you talk about a 1% net price. Does that then suggest that most of the pricing gains are eaten up by transportation costs?

Rodney Underdown

Yes. That is a net sales bridge and the price on there is indicated net of shipping and handling costs.

Robert Koort - Goldman Sachs

So does that give you a little more firepower when you go to the municipalities looking for the bid activity going into next year to suggest that you only had a realized price increase of 1% even though their costs maybe going up more?

Angelo Brisimitzakis

If it was just us and the municipalities I think it would be an easy discussion. Obviously these are very competitive bids and they are publicly open. So we believe that the inflation in fuel, energy and just overall transportation costs are huge and we undershot that last year. If we knew then what we knew now, I’m sure we would have achieved or we would have tried to achieve even higher price.

But clearly, we are in uncertain times. I heard a forecast this morning, I don’t know if it came out of OPEC or not but it was a $200 a barrel crude oil projection. Well, if that trickles through to diesel during the upcoming winter season, there is a lot of price that we need to just overcome that and on the highway bids, the risk on the fuel sits with us.

In our consumer and industrial business, a lot of that is negotiated with the customer in fuel surcharges. So we have a mechanism to capture that on our consumer industrial business. On the highway side, unfortunately we eat it and those are the terms that the states and municipalities and provinces mandate and if you are not willing to play by their terms, then they will buy from somebody else.

Robert Koort - Goldman Sachs

Angelo, you mentioned an effort to expand the solar ponds and increase your solar-based SOP. Am I right in thinking you got about 60% of your production in ‘07 from solar and how high can that go two or three years down the line?

Rodney Underdown

And from a 2007 perspective, just over 50% it would be close to 60% would have been a pond-based SOP production with the other 40% being supplemented by the KC1 additive.

Angelo Brisimitzakis

Just to continue on the go forward plan, we are expanding our ponds by about 100,000 tons right now and that’s based on acreage and assets we already have on the ground. So that’s a sure bet and that’s Phase I. Phase II would expand our existing network, which is 43,000 acres by an additional 23,000 acres. So you could do the math on that and if we’re successful achieving permits on all those acres, our SOP production from ponds would expand proportionally.

And then we have a Phase III in mind that potentially could get us to 1 million tons a year and that’s where we would like to end up at the end of a very long process on the Great Salt Lake. So a doubling of our effective capacity, which right now will be at about 525,000 tons after Phase I. If we could get to 1 million tons at the end of this, we would be quite pleased.

And again, based on the need for food, vegetables and fruits that are being projected broadly across the agriculture industry, I think our society needs more fertilizers and we’re very pleased to be able to do that on the Great Salt Lake.

Robert Koort - Goldman Sachs

Angelo, I recognize and there is a lot of visibility around row crop production and consumption trends and continued deficits. Does it matter in the SOP specific crops what supply and demand is doing for those kinds of products, tobaccos or fruits and vegetables, or do you just ride the wave that the broader row crops are going to provide in terms of MOP inflation?

Angelo Brisimitzakis

That’s a great question and one that we debate often. I think there are two scenarios. Scenario A is when there is excess MOP and excess SOP availability, in which case I believe SOP stands on its own and the supply/demand balance of the SOP crops will determine in large part the spread over MOP and the demand of SOP.

But we’re not in that Phase right now. We’re in a phase where the world does not have enough MOP and SOP at $100 or $150 premium to somebody that’s desperate for potassium is a small premium for them to get potassium fertilizers.

And remember, a lot of the basic crops whether it’s corn or wheat or soybeans are still very profitable to the grower. So as long as they can buy a potassium-based fertilizer and that right now is any potassium-based fertilizer, even SOP, if they can’t get MOP, then we really don’t have a problem there because whatever the supply/demand balance is on the SOP crops it’s being overwhelmed by the hangover from MOP.

Operator

Your next question is from Elizabeth Collins - Morningstar.

Elizabeth Collins - Morningstar

When assessing the threat of SOP prices falling below, say, $658 in the long term, are you more concerned about increases in SOP supply or even MOP supply because you were talking about the hangover or about drops in food and grain prices that would reduce, say, the economic benefits of application or reduced farming comes and therefore ability or willingness to pay higher fertilizer prices?

Angelo Brisimitzakis

Yes, that’s an extremely broad and challenging question that we’re really not an ag company per se so to give you my crystal ball view of long-term corn or soybean or those crops and their profitability would be tough. My view is the fundamentals in agriculture in general are very strong now for all three nutrients, the N nutrients, the P nutrients and the K nutrients. So unless populations shrink, unless standard of livings decline, unless people eat less food and less proteins and unless biofuels decline, it’s hard to imagine a drop in overall fertilizer demand in the foreseeable future.

Now understanding that there have been a lot of announcements of capacity expansions in fertilizers, in all products that eventually the supply/demand scenario might change but these projects take many years and cost billions and billions of dollars. So I think for our horizon which is 2009, 2010, 2011, we see strong supply/demand balance in potash fertilizers including SOP, in which case it’d be unlikely to see price erosion or a supply/demand balance changing dramatically or having excess in those foundation crops like corn or soybeans or wheat.

But anything could happen. Our crystal ball gets real cloudy after 2010.

Elizabeth Collins - Morningstar

Could you walk me through your approach to dividend increases?

Angelo Brisimitzakis

Yes, that’s an important part of our value proposition. It’s been an important part of our value proposition to our investors for a long time and we expect the dividend to be an important part going forward. We’ve increased the dividend steadily throughout the brief public history of Compass Minerals, which is entering its fifth year now.

But we’ve seen unprecedented for us, we’re very pleased, appreciation in our stock. So as the stock price has appreciated over 70% this year in a very short time, the value of that dividend in relationship to our stock price has gotten smaller but we still increased our dividend by 5% for calendar year 2008. And I would expect the dividend to remain important for us going forward.

Operator

Your next question is a follow-up from Mark Gulley - Soleil Securities.

Mark Gulley - Soleil Securities

I’m going to pursue this SOP thing just a little bit further, if I may. In looking at the costs of production, the sourcing from Mosaic, the pond-based product, can you give us at all any benchmarks, Angelo, on what those costs might be? The guys up in Canada say they can produce, their cash cost might be $65 per metric ton and all in, their costs, not KCl now, might be $85 a ton. So maybe using that as a benchmark, is pond-based SOP, how does that compare to KCl and how do things compare within your company?

Angelo Brisimitzakis

Yes. And again, you can appreciate for competitive reasons we don’t want to get into the cost of the two routes we utilize. We provide a blended cost and that’s more information I think than any of the SOP competitors we compete with provide. So as much as I’d love to share with you the two pieces in a specific way, I hope you can appreciate why I can’t do that.

But what I can say is the pond base is becoming increasingly more attractive than the MOP route base as the MOP price goes up in the marketplace. So the spread that’s always existed between our two routes is increasing as the MOP cost goes up to us. And the MOP cost that will go up to us will go up proportionately with the MOP market price over time, although there will be a lag.

So I really can’t get into the specific model and timing, but if you want to model out the MOP price and put in a lag for us and apply that to us, you can get an appreciation for that while the SOP route from ponds will stay very constant and in fact on a per ton basis, should go down as our production volume goes up, similarly, as the potash mines get leverage from that additional volume.

Mark Gulley - Soleil Securities

You’ve talked about that lag time. Can you give us any sense at all as what the lag time is? Is it six months? Is it nine months? Is it years, two years? Can you frame that lag time?

Angelo Brisimitzakis

It’s at least a year.

Mark Gulley - Soleil Securities

You talked about in your introductory remarks the historical spread between SOP and MOP $100, $175 a ton, how does that compare to your conversion costs? And therefore, is there still a decent margin left even after your conversion costs?

Angelo Brisimitzakis

Well, what we’ve seen is in a stable market price for potash, which is what we existed in historically until this unprecedented ‘07, ‘08 surge in potash prices that with the supply agreement that we have and with a stable to gradually increasing price in potash fertilizers with a gap of $100 to $175 per ton premium SOP to MOP, we can make attractive profit on that MOP route.

Like I said before, that could go upside down, should SOP prices and MOP prices decline during a period in which our costs of MOP still are going up. But we don’t see that over the next couple of years. And as Rod explained, we always have discretion to not buy that high priced MOP so we would never do a bad thing and lose money. But as long as we can incrementally make money from that higher cost route, we will. However, the lion’s share of our profitability in our specialty fertilizer business will come from our solar evaporation pond route.

Operator

Your next question is from David Silver - JP Morgan.

David Silver – JP Morgan

I hear you sell deicing salt as well as SOP.

Angelo Brisimitzakis

Yes, and we just came out of a great winter.

David Silver – JP Morgan

Yes. But I did want to go back and touch on a couple of the comments and maybe you could help me think about next year. So a couple of things that you said that I was hoping you could expand on. One thing was that you talked about limits on your bid volumes, tied to the low starting inventories and the strong demand throughout this past winter. And I was wondering if you could talk about that?

And then, also you talked about the phased expansion underway at Goderich which has been underway for a while. But all things equal, can you just walk us through the timing of the capacity development that you’re anticipating for Goderich?

Angelo Brisimitzakis

We just came off a very strong winter season and as we enter the next winter season, all the producers are anxiously trying to replenish their stocks to that level that’s required to effectively satisfy the demand that is going to come in the upcoming winter season. And, of course, since no one can predict the winter and because our sales agreements are based on a normal volume but they require us to cover either 20% or 30% often above normal, that we need to have on the ground more salt than our commitments require to respond to those higher volume scenarios that come from a severe winter.

So going into this upcoming season, and before we came into this harsh winter, we expected to have from our Goderich Phase I expansion approximately 250,000 tons or more of additional volume even after we accounted for normal winter replenishments. And because we had a more severe winter, that 250,000 or more tons from Goderich and whatever we can make at our Cote Blanche mine and whatever we can provide from our Ogden salt facility, will go just to get our inventories back to normal.

So while we were hoping for some growth in actual sales volume, unfortunately, we are going to have to recover our inventories that were depleted back last winter that we have now enjoyed in our first quarter earnings. So that Goderich expansion for the ’08-’09 season will really not materialize in increased sales volumes.

However, that Phase I expansion has now begun producing. In fact, we are now mining the first fruits from that first phase and that’s a very important phase, and it will add approximately 750,000 to one million tons a year of capacity at Goderich. It will take us from 6.5 million tons a year to 7.25 million tons per year.

The second phase, which we’re phasing in, in 2009 and 2010 will take our Goderich production from 7.25 million tons to 8.25 million tons and we expect that to come online in 2009 and 2010 and position us very well for those winters, again, assuming a normal 2008-2009 winter.

But when we get to the end of this in 2010, we expect our Goderich mine to remain the largest in the world, to be even larger than anyone else’s mine and to be fully capable of satisfying the normal steady organic growth in the Great Lakes region and to easily satisfy the surges in demand that come from a harsh winter.

And we believe as the leaders in this that it’s our obligation to have those tons available for our customers should they be needed. But what’s nice about this industry and its structure is we don’t make the salt unless we need it and we can cut back on production should we not need it. So it’s a very flexible production model. So it will be a couple of years of nip and tuck to get there but by 2010, we should be very well-positioned for long-term growth.

David Silver – JP Morgan

I imagine a lot of municipalities, a lot of salt users really got stuck this year much greater than in a normal year. So do you anticipate a change in the purchasing behavior of your customers? In other words, are they going to want more products sooner or are they going to want bigger buffer stocks to start off the season so that a repeat of this past winter doesn’t occur? Or is that not in the cards in your opinion?

Angelo Brisimitzakis

Yes, it’s human nature coming together with politics and budgets. There are certain municipalities that never want to get caught short. There is legend that says in the city of Chicago a mayor didn’t get reelected in the past because he didn’t have salt to keep the roads open. And the city of Chicago for example, keeps a year’s worth of inventory on the ground in their possession before the season even starts, so they were very well-positioned this season. They served their voters well by keeping the roads open and they actually used the model that we recommend all our customers to use.

We would love nothing more than all municipalities to be fully stocked with inventory before a winter even occurs. However, politics and human nature and also budgets come into play and although they might want more salt on the ground before the winter occurs, the budget constraints tell them they don’t have that flexibility. They haven’t invested in storage silos and therefore they wait until the last minute.

The other part of it is since we experienced mild winters right before this last winter, human nature says, well, if you didn’t need it last year you’re probably not going to need it next year and they got caught short. And a lot of them either didn’t get salt or paid a stiff premium by buying it on the spot market. I would expect some of them learned the lesson and will be more active on preseason replenishments.

We’ll make sure that the volumes that they acquire will at least cover normal situations and I hope governments are able to allocate adequate budgets to salt. But I have no way of predicting what will happen. The bid season just started, and as I said before, we’re optimistic on this upcoming bid season but who knows. There are too many factors at play here.

Operator

Your final question comes from Jon Braatz - Kansas City Capital.

Jon Braatz - Kansas City Capital

Does SOP provide the same nutrient value to crops that MOP does?

Angelo Brisimitzakis

The overall category is potash and they are all potassium based fertilizers. So on a potassium basis, SOP provides the same potassium fertilization to a crop that MOP does. However, SOP has an advantage. Standard MOP potash is based on potassium chloride and some crops, particularly fruits and vegetables and tobacco and turf are sensitive to that chloride. So on some crops, standard potash doesn’t work or works poorly.

SOP is potassium sulfate, so you have the advantage with SOP that number one, it doesn’t contain chloride so it doesn’t negatively affect those chloride sensitive crops. And it also brings along sulfur which is another nutrient. So it has again that added advantage to MOP. So that’s why SOP sells at $100 to $175 a ton premium to MOP because of the chloride sensitivity and the additional nutrient effect of sulfur.

Operator

There are no further questions at this time.

Angelo Brisimitzakis

I’d like to close by saying that we’re very excited about how the business is performing. We believe that we are delivering strong results for today, but we’re also making the right long-term strategic decision for Compass Minerals’ future. This includes multi-phased investments in additional SOP and rock salt capacity; investments in new profitable applications and markets; and investments in key people, processes and tools.

I look forward to sharing our progress with you again this quarter and I thank you for your participation. Have a great day.

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Source: Compass Minerals Q1 2008 Earnings Call Transcript
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