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Compass Minerals International, Inc. (NYSE:CMP)

Q2 2008 Earnings Call Transcript

July 29, 2008 10:00 am ET

Executives

Peggy Landon – Director of IR and Corporate Communications

Angelo Brisimitzakis – President and CEO

Rodney Underdown – CFO, Secretary and Treasurer

Analysts

David Begleiter – Deutsche Bank

David Silver – J.P. Morgan

Bob Koort – Goldman Sachs

Mark Gulley – Soleil Securities

Operator

Good morning. My name is Leslie, and I will be your conference operator today. At this time, I would like to welcome everyone to Compass Minerals’ second quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. (Operator instructions) Okay. Miss Landon, you may begin your conference.

Peggy Landon

Thank you, operator, and thank you all for joining us today. In a moment I’ll the call over to Angelo Brisimitzakis, Compass Minerals’ President and CEO, and Rodney Underdown, our Chief Financial Officer. But first, I’ll read our safe harbor statements.

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 29th, 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 Web site at compassminerals.com.

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

Angelo Brisimitzakis

Thank you, Peggy. Hello. Good morning to everyone. I’m very pleased to be talking to you today about our 27% sales growth, continued strong cash flow, and for the time in Compass Minerals’ history, our profitable second quarter. This is a remarkable achievement when you put it into context.

As you know, Compass Minerals sales has always been dominated by highway deicing, which are at their lowest in the second quarter, resulting, historically, in second quarter losses. While we still enjoy the distinction of being the leading highway deicing supplier in North America and the UK, our results this quarter demonstrate that we’ve become so much more.

Without a doubt, our sulfate of potash specialty fertilizer segment was the most significant contributor to our second quarter profitability. Our SOP sales increased 52% year-over-year and increased 15% over the first quarter driven by our pricing momentum, which is continuing to accelerate. The pace of our pricing gains is driven by the rate, at which our customers’ price-protected contracts expire and can be replaced with current pricing.

To give you an idea of the rate of our SOP price acceleration, our average selling price for SOP specialty fertilizer was $445 per ton in April. In May, it was $499 per ton. In June, it was $536 per ton. And in July, we’re anticipating our average selling price to be approximately $675 per ton. That’s over 50% in the last three months. Our latest announced price increase of $255 per ton is our largest and takes effect on August 15th or as contracts allow. We expected to impact our average selling prices in the fourth quarter. As a reminder, our spot customers will start paying the higher price on August 15th, but our contract customers now generally have 90-day price protection.

Therefore, we expect our reported average selling prices to approach the $1,000 per ton mark in the fourth quarter based on existing sales agreements and assuming that the global agriculture and fertilizer markets remain robust. We see no reason today to believe that they will not.

Our second quarter SOP production cost were higher on a per unit basis primarily due to higher energy, transportation and royalty costs, and greater investments in maintenance as we enhance reliability during this period of running the facility at maximum productive output and as we prepare to increase the overall throughput of the plant. Our cost increase was not due to KCl input cost, which today impact to approximately 45% of our total SOP production, but less on a margin basis. This KCl-based route will be a declining percent of our total SOP production going forward as we increase our lower cost solar pond-based production.

Our KCl costs are thick into the fourth quarter, and we already know the price of our KCl supply for 2009. I can assure you that our KCl supply contract is quite favorable through next year. In fact, at our anticipated 2009 selling prices, we expect the significant increase in specialty fertilizer segment profit for the year.

Our second quarter SOP sales volume were down a few thousand tons year-over-year due to the timing of shipment at quarter-end, but the plants are essentially sold out through the end of the year. We’re anticipating our total SOP sales volume to be about 5% higher in 2008 versus 2007 as a result of strong global demand coupled with the yield improvements we’ve been making on our solar evaporation plant in Ogden, Utah.

We remain on track to grow our SOP production capacity by another 25,000 tons in 2009, and to add another 50,000 tons in 2010. This phase one investment is based on improvements we are making to our existing plant and solar pond complex. Because of this ongoing expansion program and our resulting increase in lower cost pond-based product, we expect much improved, relatively consistent specialty fertilizer segment earnings for 2009 through 2011, assuming today’s market dynamics holds.

The second phase of our SOP production expansion involving additional solar ponds is proceeding and we are at the parallel stages of permitting and detailed engineering. We believe that it will be a couple of years before we receive a permit, complete construction, and begin the two to three-year solar evaporation process. I trust you could see that we are aggressively pursuing our strategy to substantially increase our SOP production by leveraging our superior Ogden asset. It’s a very detailed and lengthy process, but we are very excited about the long term outlook for this business.

Turning now to our salt segment, as I mentioned a few minutes ago, the second quarter is historically the lowest sales quarter for our highway deicing business. Yet, highway deicing sales volumes were up 12% year-over-year. This reflects the increased rock salt sales, chemical customers, and volume gains on DustGard, our specialty magnesium chloride-based dust control product.

Costs were unfavorable year-over-year on a per ton basis due primarily to annual maintenance shutdown we took in the second quarter instead of the first quarter this year and the resulting higher maintenance cost to get associated with our planned upcoming increase in rock salt production levels.

Of course, the summertime is key for our highway business because this is when we submit our bid for our North American deicing market for the upcoming winter season. We’re about two-thirds of the way through the current highway deicing bidding, and our average bid prices are up approximately 20% over 2007-2008 season bid prices. This increase will be more than enough to recover inflation and higher fuel prices, and should nicely expand margin dollars per ton even at current fuel rates. These new prices will begin immediately in the last half of 2008.

Actual sales volumes are, of course, influenced by weather as we saw this last winter season. There are many factors, which have influenced our favorable bidding results to date. Last year’s demand left both customers’ and producers’ inventories depleted at the end of the winter. As we discussed, we ended the first quarter with less rock salt inventory than normal because of the unusually severe winter season. As a result, the first tons from our Goderich mining expansion program are being used to return our inventories to last year’s level rather than to expand bid commitment volumes. So we are planning to run both our North American rock salt mines and at their full rates for the rest of 2008. This should give us some unit cost deficiencies during this period.

The scarcity of rock salt highlights more than ever the need for our previously announced multi-phased capacity expansion plan to ensure a fully-served market in the Great Lakes region. Phase one of the Goderich mine expansion is proceeding as planned, and we expect to have the full 750,000 tons of additional annual capacity available to us by the beginning of 2009-2010 winter season. Phase two of the expansion, which should give us at least another 1 million tons per year of annual capacity by the end of 2010, is also on track. When that phase is complete, the annual capacity of the Goderich mine will be more than 8.25 million tons. Again, consistent with our strategy to leverage our superior assets.

Turning, lastly, to our consumer and industrial business, volumes were up a strong 13%, and average selling prices were up 5% in the second quarter. Our year-over-year improvements were primarily due to strong sales to agricultural and industrial customers. We are expecting strong consumer and professional deicing sales in September and October this year as our customers begin placing orders for the upcoming winter from generally depleted stock levels.

We’ve announced an average $22 per ton price increase for most of our consumer-industrial products. This price increase took effect yesterday as contracts allow. We’ve also initiated a program to pass through fuel surcharges to all of our consumer and industrial customers. These will be tough, but necessary negotiations with our valued customers.

In summary, the results for both our salt and specialty fertilizer segments underscore the stability of our business even in tough economic periods. Both segments are exhibiting strong momentum on volume and on price, which we believe will continue to outpace increased transportation energy and other inflationary headwinds. Our SOP average selling prices are accelerating nicely and should approach the $1,000 per ton mark in the fourth quarter based on existing contracts. And as I mentioned before, SOP input cost, except for energy-related items, are expected to remain stable into the fourth quarter. Thus, we are looking for another significant SOP margin expansion in 2009. Highway deicing average selling prices should be up significantly in the last half of 2008 and early 2009, and we currently expect good margin per ton and total margin dollar expansion at current fuel prices, weather permitting. And thus, we expect – and we expect strong retail and professional demand for our consumer-industrial deicing product at the beginning of the winter seasonal sales period, and continued profitable growth in non-deicing applications.

Compass Minerals will continue to make proactive investments to increase SOP and rock salt production capabilities. And we will continue our long term focus on high returns, internal investments, and growth and productivity. We’ve talked about a number of internal projects in the past to improve efficiencies and increased production when warranted by market forces. We continue to see opportunities for investing in these lower risk projects with potentially rewarding returns.

As we mentioned last quarter, our capital investments will accelerate in the second half of 2008 as our expansion and productivity projects get into full swing. We are still expecting capital expanding in 2008 to be about $60 million, and initially see 2009 project spending exceeding 2008 levels by approximately 50% as we continue to amass sustainable competitive advantage to our best-in-class assets.

I will ask Rod to discuss our second quarter results in more detail.

Rodney Underdown

Yes. Thank you, Angelo. As you can tell from Angelo’s discussion, each business in the Compass Minerals portfolio is changing to contribute growing earnings and revenues and stronger operations. We’ve made some significant strides in a number of areas that impact these goals during the quarter.

Of course, we had anticipated the significant increase in revenues and profitability of our SOP specialty fertilizer segment in the second quarter, principally due to price. We’re also anticipating, as we mentioned, the significantly greater pricing levels for the rest of 2008 as our third and fourth quarter average prices are expected to grow in approximately equal amounts to our current list price in the fourth quarter of 2008. But as a reminder, in this sold-out market, we’re also making progress in our capacity growth too, which should further boost our product availability in future periods.

Our SOP business operating income was nearly 2.5 times last year’s quarterly results, and is essentially right where we expect it to be at this point. Of course, we are anticipating further significant gains in the coming quarter and 2009 based on our pricing expectation and the demand outlook.

Our salt business result was lower than in the prior year as it was expected to be. We had a different timing to our major maintenance activities at the Goderich mine, as we mentioned last quarter, and that activity impacted our year-over-year results by about $3 million or about $0.06 per share of earnings. The timing of this activity was the right thing to do operationally. We haven’t planned anymore shutdowns for the mine through the end of the year so our rock salt production efficiency should be as good or better in the second half of the year than the prior year efficiency.

We also have the last quarter of salt pricing at old rates before our new pricing kicks in this quarter and continues into the following winter period. The old pricing in our highway deicing segment was locked-in a year ago before oils assent to over $125 per barrel, which of course, impacted our diesel fuel cost escalators and the delivery contracts with higher per unit delivery cost. In the second quarter, salt delivery costs were higher than the cost in the 2007 quarter by around $4 a ton largely due to fuel prices.

As Angelo reported, our average price increase, through about two-thirds of the bid season in North America, is approximately 20% higher. Our average highway deicing price in the last 12 months has been about $40. And you probably know this, but the bid process covers our rock salts sold in North America for highway deicing uses. These awarded bid price increases more than offset current fuel cost and other inflation to give us good anticipated margin dollar increases at current fuel prices. In our consumer and industrial products area, we’ve also implemented fuel surcharges on practically all customers with the goal of increasing the fuel surcharge recovery we incur in the delivery of our products.

As important, for the mid and long term outlooks, we have continued to make strides in our operations to increase the capacity of our advantage assets, such as what Angelo mentioned at the Goderich rock salt mine and the SOP side at the Great Salt Lake. These improvements are, of course, important strategic plans that will shape our leadership role in these markets for the foreseeable future.

Turning to the numbers for the quarter, our 27% sales increase demonstrates the strength and recession resistant nature of our businesses. After shipping and handling costs, our product sales improved 24% over the prior year. Of that 24% product sales gain, which excludes shipping and handling, pricing gains were approximately 17% of the improvement, 4% was the result of volume, and we had a lift of 2% from the effects of foreign exchange. We also had a rise in revenue from DeepStore, our records management business.

As we have regularly communicated, salt is a non-discretionary purchase in most of its applications so sales volumes tend to grow steadily with population growth regardless of the economy, but of course, with some winter weather variability. And potash fertilizers continue to be in high demand because of the needs of emerging economies around the world and interest in non-carbon-based fuels here at home. Although we had a 4,000-ton decline in our quarterly sales volume compared to the prior year, and that impacted our earnings about $0.02 per share, this impact is purely (inaudible). Year-to-date sales are up by about 12,000 tons, and we continue to expect, as Angelo mentioned, about 5% volume growth for all of ’08 when compared to 2007 volumes.

Our costs of SOP also increased in the second quarter when compared to the first quarter. We had higher energy maintenance and royalties that led to a jump in unit production costs. These costs were more concentrated in the second quarter than our expectations for the future quarters, except for our expectation in greater royalties as our projected sales price continues to rise.

We’re also making ongoing investments and growth and productivity initiatives that increase our SG&A cost to support and strengthen our salt segment growth plans.

So that brings us to operating earnings, which almost doubled year-over-year from $9.6 million to $18.9 million in the current year. And likewise, our adjusted EBITDA increased over $10 million, when compared to prior year, to $29 million for the quarter.

Interest expense declined $2.5 million as a result of our activities to reduce the cost of our capital structure. You may remember that in June of this year, we called $70 million of our 12% senior subordinated notes. We incurred one-time pretax costs of $5.1 million for that call, which is recorded in other expense. We have $110 million of the 12% notes remaining, which are fully accretive [ph] and now have converted to more traditional debt. We will continue to monitor the credit market and our free cash flow for the best opportunity to reduce our cost of capital.

The second quarter debt reduction combined with our prior refinancing will further reduce our interest expense in the second half of 2008 by an estimated $8 million when compared to the second half of 2007.

Our tax rate appeared to be about 50% this quarter, but that was an anomaly, of course. And as I’ve mentioned in the past, as our pretax income projections increase, we have a higher effective tax expense rate because our tax rate benefits are somewhat fixed, and of course, the inverse would be true. Based on our higher full year earnings expectations, we adjusted our expected full year tax rate up almost 2%, and recorded the full year-to-date impact of that change in the current year. This negatively impacted our second quarter EPS by about $0.04. That brings the year-to-date result in line with what we now expect for the full year tax rate.

In spite of the tax accrual increase, our net earnings improved from a loss of $3.9 million in 2007 to our first ever second quarter profit. Excluding the one-time call premium on the 12% notes, our net earnings were about or were $4.7 million or $0.14 per diluted share. We also had a record cash flow from operations of $178 million for the six months ended June 30, compared to $110 million in the prior period. This improving cash flow has allowed us to reduce our total debt by almost $100 million since last year-end.

Capital expenditures were $20 million in the year-to-date period, and as we discussed last quarter, our capital spending will be weighted more towards the last half of 2008 and are expected to be more than $60 million for the year.

So now we’ll turn up – open up the lines for questions for the operator, Leslie.

Question-and-Answer Session

Operator

(Operator instructions) We’ll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Mr. David Begleiter of Deutsche Bank. Your line is open.

David Begleiter – Deutsche Bank

Hi. Good morning.

Rodney Underdown

Hi. Good morning, David.

Angelo Brisimitzakis

Hi, David.

David Begleiter – Deutsche Bank

Angelo, just on the SOP operating cost in Q3 and Q4 on an operating ton basis, shouldn’t it be slightly higher than what they were in Q2 given what you – given your commentary?

Rodney Underdown

Yes. I’ll go ahead and take that. I think what we tried to indicate is that we did have a little bit more concentration of some maintenance cost and other items in the second quarter. So those would be on a unit basis lower in the second half. We will see, though, some higher royalty expenditures. And so net of those things, it would be relatively consistent, maybe slightly lower over the next couple of quarters.

David Begleiter – Deutsche Bank

And just on your SOP’s volumes, this 5% year-over-year increase with full year implies negative volumes in Q3 and Q4, again, is that due to high [ph] shipments or is there something else happening?

Angelo Brisimitzakis

Yes. This is Angelo. I mean we’re up about 5% I think on a year-to-date basis and we expect the same – about the same performance in the second half. I’m not sure about the decline.

Rodney Underdown

Dave, I’m talking here at the sides, I think last year’s total sales were on the four – I want to say 425-range. So 5% would be up about 20,000. I think year-to-date, we’re up 12,000.

David Begleiter – Deutsche Bank

Okay. No, you’re right. I apologize.

Rodney Underdown

Yes. That’s okay.

David Begleiter – Deutsche Bank

Just on your full year tax rate is now around 30%?

Rodney Underdown

Yes. The current rate is in the 29% to 30% range.

David Begleiter – Deutsche Bank

And lastly, the – are you expecting flat highway ice control volumes next year?

Angelo Brisimitzakis

Yes. This is Angelo. I mean, obviously, the weather will determine the volumes, and coming off a very, very strong winter this last season, we expect normal. So normal would be less volumes than last year because the last season was higher volumes. So we planned for normal. We hope for stronger than normal, but who can predict the weather.

David Begleiter – Deutsche Bank

I meant the base – bid activity that you are pursuing.

Angelo Brisimitzakis

The bid activity will be flat, perhaps slightly down. Again, we’re fighting this issue of making sure we have enough inventory to adjust the surface level requirement. However, with the 20% price increase and the volumes we forecast, we think that – we believe we will have both an expansion and margin per ton and total margin dollars coming from highway deicing.

David Begleiter – Deutsche Bank

Thank you.

Operator

The next question comes from the line of Mr. David Silver of J.P. Morgan. Your line is open.

Angelo Brisimitzakis

Good morning, David.

David Silver – J.P. Morgan

It’s me. Yes. Hi, guys. So I’m juggling a couple of conference calls here so I’m going to apologize if I repeat a question that’s already been asked. I have a couple of questions on your cost of production in this current quarter. So Angelo, could you elaborate on how much the additional or the different maintenance schedule affected your second quarter earnings in the salt segment?

Angelo Brisimitzakis

Yes. I think we said it was about $3 million shift from a cost that would have normally occurred in the first quarter, but now occurred in the second quarter.

David Silver – J.P. Morgan

Oh okay. Thanks for that. And then on the SOP side, you mentioned in your opening remarks that your cost per ton increased as well, and you cited some of the sources. Should we assume that higher cost space will remain going forward for the balance of 2008 or might there be some pullback to the levels of the quarter of two prior?

Rodney Underdown

Yes. What I had mentioned earlier, and no problem Dave, what I mentioned earlier was that we had a couple of things. We had a greater concentration of some of our maintenance cost in the second quarter. And so overall, all things being equal, for the last half of the year, we might expect a decline. However, we will have higher royalties as we pay royalties on the value of the product we produced there. And so the combination of those things should result in some relatively equal cost over the last half of the year compared to what it was in the second quarter.

David Silver – J.P. Morgan

Okay. Very good. I have another question on the salt side, and this would be kind of one of these things where the generals tend to fight the last war again. So I guess as generals go, so goes municipal and state highway officials. Have you noticed any noticeable difference in the bidding patterns or the requests for bids from the typical municipality or state that got hit by the unusually severe winter weather last year? In other words, are they upping their base volumes in the contracts? Are they requesting more products in position sooner? In other words, is this bidding season qualitatively different in any way that you could point out relative to – that’s maybe tied to the unusually severe winter weather last year in the sold-out market conditions?

Angelo Brisimitzakis

Yes. This is Angelo. I mean there is not a pattern that every municipality follows. And as you can imagine, there are literally 100 different buying entities that we negotiate with or we bid for their business. But I think if you want to point out a couple of changes, we recommend, and I believe the Salt Institute and our entire industry recommends, that the municipalities begin the winter season with one years’ worth of inventory to really insulate them from the weather. They typically don’t do that, and we’re heavily exposed to that this last season, and several municipalities got burnt.

So I think some of them decided to get a little bit better in their planning. So we see a little bit more pre-buying or early sales. We see some municipalities increasing the amount of product they buy. We see some municipalities pooling together to insure that they secure volumes at the best possible economics. But there has not been an overall change in the bidding approach. There have been a few changes that I mentioned, frankly, all of which are good for us and our industry, and we believe, the consumer. But again, there are still too many municipalities out there that begin the winter season without stock in place and do not secure contracts and commitments to cover severe winters as we experienced as of last season.

David Silver – J.P. Morgan

Okay. And just to clarify, the Goderich expansion will not afford you any additional product for this coming winter, the ’08 or ’09 winter.

Angelo Brisimitzakis

Well, it will afford us additional product. It’s just we are allocating that product kind of as we just discussed to inventory because we have a responsibility and an obligation to carry enough inventory to respond to severe winter. So we originally intended to make that product available for additional sales, but due to the depletion of inventory this last season, the extra production capacity has been reallocated to just restocking our inventory levels.

David Silver – J.P. Morgan

Okay. Very good. Thank you for the clarification. I’m sorry for asking – for the repetition I might have caused.

Angelo Brisimitzakis

No, no. That’s okay.

David Silver – J.P. Morgan

Thanks a lot.

Angelo Brisimitzakis

Thank you.

Rodney Underdown

Thank you, David.

Operator

Your next question comes from the line of Mr. Bob Koort of Goldman Sachs. Your line is open.

Bob Koort – Goldman Sachs

Thank you. Good morning.

Rodney Underdown

Yes. Good morning, Bob.

Angelo Brisimitzakis

Good morning.

Bob Koort – Goldman Sachs

Angelo, I appreciate – you’re probably desire not to be too specific about it, but I know you’ll appreciate our need for more transparency on the SOP contracts. Could you just remind us again what the contract terms are, the structure of that contract, when it gets reopened for pricing, how often it gets adjusted for pricing, et cetera?

Angelo Brisimitzakis

Yes. As you can imagine, there’s not only commercial and competitive sensitivities, there’s also legal restrictions on confidentiality on what I can disclose and what I can’t disclose. I think what we’ve said in the past is a long term favorable contract that has several years left to it. It gives us a fixed price during a particular year. And there’s a lack of setting the price of at least a year in setting the price for the next year. So we’re in good shape for ’08. We don’t expect really any changes in our early costs in the second half of the year. And we already know our ’09 price because it’s based on a prior period that’s already historic. And it’s a very favorable price for us in ’09. It’s fixed for calendar year ’09, and will give us a very nice margin on that production.

Bob Koort – Goldman Sachs

Is there a guaranteed volume you have rights to?

Angelo Brisimitzakis

Yes. We have a guaranteed volume that we have rights to, but also we have no obligation to buy. So if it ever went upside down, which I can’t imagine it going upside down, but if it ever did, we don’t have a take-or-pay provision and we’d only buy product if and when the product is profitable to us. So we expect this to really be profitable in 2009.

Bob Koort – Goldman Sachs

Got it. It sounds like if we had to worry about any compression per margin, it wouldn’t be until 2010 since then.

Angelo Brisimitzakis

Yes. I mean as SOP prices increase, which they have, it catches up with us, but the lag is serving us very well on the way up.

Bob Koort – Goldman Sachs

And you have good protection on the way down of not buying it if it gets ugly.

Angelo Brisimitzakis

Absolutely and perfect.

Bob Koort – Goldman Sachs

Got it. And then on your industrial customers for SOP, are there alternative products that they can start reaching out to given the dramatic increase in price beyond demand structure?

Angelo Brisimitzakis

Could you clarify what you mean by industrial there –

Bob Koort – Goldman Sachs

Oh sure, if you start in the drilling market, typically.

Angelo Brisimitzakis

No. Our sales are almost exclusively (inaudible).

Bob Koort – Goldman Sachs

Okay. And then when you talk about the 20% prices, I would imagine – I mean my history on the salt business is only as far as your company and maybe a little bit more than, but I can’t recall anything that we’re even close to 20%.

Angelo Brisimitzakis

Yes. We’re really excited about the 20% price. Again, it follows a record winter, which depleted inventories, but also appreciate that the supplier, us, takes the risk on freight, to deliver to the customer during the upcoming winter. So we’re sitting in the summertime, negotiating pricing, forward pricing, on shipments that we’re going to have to make in January, February, March, hopefully, April. So there’s a lot of uncertainty and there’s a lot of risk, and obviously there’s a lot of inflation in the energy/fuel market. So the entire 20% is not a net improvement for us. Some of it will be eroded by inflationary pressures, particularly on transportation. However, we think net, it’ll leave us both with a margin per ton improvement and a total margin dollar improvement for the upcoming season.

Bob Koort – Goldman Sachs

Got it. And one last and I appreciate your guys’ time, Angelo, when Compass came out as a public company, the initial goal is to target a yield on the dividend on the 5% range. Obviously, you’ve had exceptional stock performance so that yield has shriveled up quite a bit. Can you sort of discuss what your mid to long term plans are around yield and return of cash?

Angelo Brisimitzakis

Yes. I mean we’re having some high end problems of increasing cash generation and looking at the best way to invest that. We value the dividend. I think the company has valued the dividend from the day it’s been established. I believe it’s up 79%, 80% since we went public in December of 2003. We’ve increased the dividend again this year.

However, our stock price, at least until lately, has been continually reducing the dividend yield. So I expect the dividend to remain important, but we don’t have a preset formula on that and we don’t have a preset target. But I expect the dividend to remain important for us. I expect us to continue to invest our increasing amounts of excess cash in internal projects, both around SOP and rock salt. We’ve used cash in the second quarter to buy down some very expensive debt that we inherited when we went public. That remains an option for us going forward. And then, we’re always looking for right synergistic material-based acquisitions that we can add-on.

So the dividend’s important, but there is no preset formula on the company.

Bob Koort – Goldman Sachs

Very good. Thanks so much.

Operator

(Operator instructions) We’ll proceed with our next question from Mr. Mark Gulley of Soleil Securities. Your line is open.

Angelo Brisimitzakis

Hi, Mark.

Mark Gulley – Soleil Securities

Good morning, guys. How are you?

Angelo Brisimitzakis

Good morning.

Rodney Underdown

Hello, Mark.

Mark Gulley – Soleil Securities

A couple of questions, one, with respect to how the model – the MOP purchase price for next year. I know that – I’ve heard what you said about confidentiality and all that, but is one approach to simply look at a percent increase? In other words, would you see the same percent increase, ’09 versus ’08 that we might see in published numbers for MOP, Midwest prices or something like that?

Angelo Brisimitzakis

It’s not a bad low surrogate. I mean, again, I think I gave you the Holy Grail on how to figure it out when I said the lag is at least a year. I think if you just look period-over-period and put a year of lag, you get an appreciation for the kind of increase we’ll be experiencing.

Mark Gulley – Soleil Securities

It sounds like an 18 months lag because you already know what your price is for next year. Am I doing that right, Angelo?

Angelo Brisimitzakis

Yes. I don’t want to go any further than what I think I’ve already indicated.

Mark Gulley – Soleil Securities

Okay.

Angelo Brisimitzakis

But you’ve seen the MOP pricing really accelerate most recently. We don’t see that in ’09 because our pricing is going to be set from a period well before the extreme acceleration of MOP.

Mark Gulley – Soleil Securities

And then finally, with respect to the SOP price, thanks for that monthly progression with respect to this year. One, is that something that you’ll think you might get – update us from time to time, and two, can I extrapolate that for a little bit to come up with what I think might be the average selling price during the course of the fourth quarter?

Angelo Brisimitzakis

Yes. I hope pricing continues to develop. We’ll have a need to continue to give you a monthly pricing. I mean historically, the prices haven’t been this volatile, but we felt it was important to give you a feel for the acceleration. And with August 15th, really a very important date, because that’s the date our $255 increase goes into effect, as contracts allow. And as you know, we’ve unwinded all of our annual contracts now to a 90-day max price protection. So you can see our ability to get that last $255. It’s a lot better than our ability to get prior increases on the short tem basis.

So we expect to have pricing approaching the $1,000 early in the fourth quarter. And we’ll – I don’t know if there’ll be an opportunity to give you a blow-by-blow update as we enter the fourth quarter, but we are – I always worry when I say our pricing is like a hockey stick. But it truly is like a hockey stick, and right now we’re at that high inflection point. I think you saw it in July. You’ll see it also again in October.

Rodney Underdown

And Mark, just one other thing, I know there are a couple of calls going on. I’m not sure if you’re bumping back and forth. But in my remarks, I mentioned that the pricing escalation, average pricing escalation, was expected to be about equal over the next two quarters.

Mark Gulley – Soleil Securities

Equal to what then, Rod?

Rodney Underdown

By the time we get to that average price, approaching that average lift price in the fourth quarter, the price escalation, on a quarterly basis for the averages, would, from where we were in the second quarter, be at about equal increments.

Mark Gulley – Soleil Securities

I’m going to get back and queue in a couple of follow-ups. Thanks.

Operator

At this time, there are no further questions. I would now like to turn the call back to Angelo for any closing remarks.

Angelo Brisimitzakis

Yes. I don’t know. Mark, did you have a few extra questions? I don’t want to cut you off there. If not, I’ll be happy to wrap up. Thank you, Leslie.

Operator

Okay. Mr. Gulley is back in queue. Would you like to take his questions?

Angelo Brisimitzakis

Absolutely.

Operator

Thank you. Line is open.

Mark Gulley – Soleil Securities

Hey. This is a longer term thing. With respect to the excess sulfur you have, I think in your system in the Great Salt Lake, do you think that there’s a developing sulfur shortage out there both elemental sulfur for (inaudible) or as a micronutrients, they’re in specialty crops or even road crops for that matter? Is there a way that you can monetize the excess sulfur your system – maybe through ammonium sulfate or something like that, or is that just too challenging or too much for pain to take advantage of that, Angelo?

Angelo Brisimitzakis

Yes. I mean that’s a great question, and it’s one that we’ve asked. I mean I think two parts to the answer. One is we are ready to get value for sulfur in the premium that SOP gets versus MOP. As I’ve said, in the past, it’s up to $150 a ton premium we get. And we get that for two reasons, number one, is we don’t have chloride sensitivity in SOP that MOP does, and, number two, is you get the added nutrient of sulfur.

We actually have a marketing expert on the way now to promote the benefits that sulfur brings to SOP in an attempt to try to increase that spread over MOP because we think there’s additional value in our specialty fertilizer SOP than commodity MOP.

And the second part is kind of a technical hurdle. How do you extract – how best to extract the sulfur molecule from everything else that’s in the Great Salt Lake? As you know, we extract sodium chloride, we extract magnesium chloride, and we extract potassium sulfate. Right now, we believe that the prices chemistry of the Lake is best suited for what we do. We don’t have a cost effective route [ph] to better isolate the sulfur.

So we’re trying to get more value for sulfur through SOP marketing, and we don’t – and it’s a significant technical challenge should we want to change the chemistry of the Lake.

Mark Gulley – Soleil Securities

Okay. Thanks for that clarification.

Angelo Brisimitzakis

Great. Okay. Well, in conclusion I like to conclude with some remarks by saying we’re extremely pleased with our progress this year, and very optimistic about the prospects for the remainder of 2008 and beyond.

If you go to our Web site at www.compassminerals.com/presentations, you’ll find an update, the value proposition presentation that we first made available to you in February. In that, you’ll see how we believe the factors we’ve discussed today could add even more value to Compass Minerals in the future. We believe that the accelerating SOP price improvements we’ve already demonstrated and announced this year will be the greatest contributor to our increasing segment profitability.

In addition, our low cost SOP production capacity expansion will continue to add value over the long term. We’ve achieved substantial gains in our highway deicing bid prices, and look for continued profitable growth in our salt segment overall, plus we’ve made significant improvement in our financial and capital structure. We believe that this combination of sustainable, profitable growth drivers will benefit our shareholders throughout the foreseeable future.

Thank you for participating in our call this morning. I appreciate your interest in Compass Minerals, and look forward to talking to you again next quarter. Thank you.

Rodney Underdown

Thank you.

Operator

This concludes today’s conference. You may now disconnect.

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Source: Compass Minerals International, Inc. Q2 2008 Earnings Call Transcript
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