Compass Minerals' CEO Discusses Q3 2012 Results - Earnings Call Transcript

Oct.29.12 | About: Compass Minerals (CMP)

Compass Minerals International, Inc. (NYSE:CMP)

Q3 2012 Earnings Call

October 28, 2012 09:00 am ET

Executives

Angelo Brisimitzakis – President & Chief Executive Officer

Rod Underdown – Chief Financial Officer

Peggy Landon – Director of Investor Relations and Corporate Communications

Analysts

Ivan Marcuse – KeyBanc Capital Markets

Edward Yang – Oppenheimer & Co.

Bob Koort – Goldman Sachs

David Begleiter – Deutsche Bank

Joel Jackson – BMO Capital Markets

Jeff Zekauskas – JP Morgan

Operator

Good day, ladies and gentlemen, and welcome to the Compass Minerals Q3 Earnings Conference Call. One note that today’s call is being recorded. At this time I’d like to turn the conference over to Peggy Landon.

Peggy Landon

Thank you, Sarah. Good morning, everyone. With me here today I have Angelo Brisimitzakis, our President and CEO, and Rod Underdown, our CFO.

But before I turn the call over to them I will remind you that today’s discussion may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on the company’s expectations as of today’s date, October 29, 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 on the Investor Relations section of our website at www.compassminerals.com. Now I’ll turn the call over to Angelo.

Angelo Brisimitzakis

Great, thanks Peggy, and good morning, everyone. Thank you for joining us today. First let me hope that this ugly weather on the East Coast doesn’t affect you folks too much or too badly. Hopefully everyone will stay safe. However, if a little bit of early gentle snow were to show up somewhere in our service area that would be fine with us.

Certainly weather is a big factor in Compass Minerals’ story. Compass Minerals just concluded one of our most difficult 12-month weather driven periods in our nearly ten-year history as a public company, but I firmly believe that we’re now back on a positive trajectory.

I realize that it may not be immediately apparent when you look at this quarter’s deicing sales compared to last year’s record-setting Q3 sales, but here’s why I say that: on a percentage basis, this quarter marks the peak impact from the weather challenges of the past year and we are confident that assuming typical winter weather, deicing sales demand dynamics will reset in Q4.

The historically mild 2011-2012 winter left our highway, consumer and commercial deicing customers with plenty of inventory to start the new season so they didn’t need to place their customary Q3 pre-season orders. But once the snow starts to fall this season they’ll use up their inventories just as they would in any normal weather year, and they should resume their normal in-season order pattern – all assuming that we have typical weather this season.

Most importantly, highway deicing prices generally held up pretty well during the bid season with only a 2% decline in bid prices season-over-season, despite the fact that last winter was the mildest in at least 15 years. I don’t know many materials-based industries that can show that type of resiliency in the face of such depressed demand and high inventories. 2012-2013 winter bid volumes are down significantly, but a few of our customers still have purchase obligations under their old contracts that will generate sales for us this winter, too. Rather than parse out the bid results versus purchase obligations, here’s the simplest way to think about the upcoming winter.

If the weather is typical this winter season, our highway deicing sales volume should look a lot like our sales volume in the 2009-2010 season. I consider that a strong outcome considering the circumstances. The average highway deicing sales price this coming season should be higher than that during the 2009-2010 season but salt product costs should be somewhat higher, too, at about $34 per ton. That cost is inflated from what we would consider our normal salt product costs but it’s a significant improvement from our Q3 costs of $47 per ton; and again, it illustrates that even though our Q3 was tough, Q4 should mark the beginning of our Salt Segment recovery.

As we anticipated and discussed for several months now, the mild 2011-2012 winter had a big impact on the Q3 Salt Segment results because this is traditionally when highway, consumer and commercial deicing customers start building their stock for the winter. Unfortunately they had plenty of left-over inventories to begin the winter season this year. We can attribute nearly all of our Q3 year-over-year salt volume declines to very low pre-season demands for deicing products, and as we expected, the loss of high-value deicing sales caused a product mix shift that depressed salt average sales prices.

Average per-unit salt costs were inflated this quarter by three key issues: the product mix shift that increased the relative importance of our high-cost, mechanically-evaporated salt; lingering effects from the 2011 tornado at Goderich; and low operating rates at our North American mines. Let me take a minute to explain the Q3 2012 production slowdowns.

Beginning the quarter, we were already in the midst of reducing our rock salt production in order to right size our inventory. We had intended to operate at a reduced level during much of Q2, Q3, and Q4. We continued to slow production at our mines early in Q3 for this purpose but then we had two shutdowns that weren’t exactly what we had planned.

At our Cote Blanche mine we suspended hoisting activities for about four weeks this quarter in order to focus on some immediate maintenance needs; and we took a six-week strike at our Goderich mine, which was unfortunate but in the end yielded a mutually beneficial collective agreement. Our new three-year contract at Goderich includes competitive pay increases commensurate with normal inflation, some new production schedule options that allow us further flexibility to match production to both demand and weather, some scheduling options designed to increase the mine asset utilization, and also a new merit-based skill level requirements and work rule provisions for the successful implementation of continuous mining technologies.

These shutdowns essentially brought our inventory in line with what is needed at this time of the year to fully serve our customers in the upcoming winter, even if weather is severe. So now fortunately there is no need for additional managed slowdowns for the balance of 2012.

One final note about the Q3costs: you’ll recall that for the past three quarters we’ve provided pro forma Salt Segment results that removed the estimated effects of the August, 2011, tornado. The effects of the tornado increased our salt product costs by almost $1.00 per ton during Q3. In spite of the recent poor winter we continued to plan our deicing business with a long-term view.

This upcoming winter could be one of the snowiest on records, or it could be a repeat of last season’s mild weather. We can handle either extreme, but certainly prefer the former. But either way, we expect the long-term fundamentals to continue. So we are continuing to make long-term strategic investments for our future. In August, we announced our cost sharing agreement with the town of Goderich to expand and enhance the key Port of Goderich so we can have greater operating and logistical flexibility in the future and that the town can attract new industry and new jobs for the local economy.

And we expect to begin phasing in continuous mining at our Goderich mine this winter. We will bring this more efficient technology fully online and train our Mining Team this coming year. Then, beginning in 2014 this initial investment will begin to benefit cast production costs on about 25% of what we produce in Goderich.

And earlier this month we announced our acquisition of rights to mine high-quality, world-class salt reserves in the Chilean Atacama Desert. Our next step will be to secure a suitable logistics infrastructure there. This investment will give us low cost expansion options should we need them in the future. Specifically, it could diversify our production capability and provide backup rock salt supply to our North American and UK customers. It could also provide the opportunity to expand our service footprint.

That could mean allowing both our highway deicing and consumer and industrial businesses to competitively reach the East and West Coasts of North America, or it could mean international sales opportunities or both. These and other options will be explored over the next few years.

Let’s turn now to our Specialty Fertilizer Segment. Starting with our critical summer solar evaporation season at the Great Salt Lake, the weather has been a lot kinder to us lately than it was a year ago, so our overall operating fundamentals there seem to be stabilizing and showing signs of improvement. The current SOP harvest has just begun. Harvesting is when we remove the raw material feedstock from our solar evaporation ponds, and so far it looks like we have an above-average harvest. So as soon as we work through the higher-cost carryover inventory from last season our SOP production costs should drop substantially.

Our Specialty Fertilizer Segment posted its best Q3 sales volumes since 2008 and we posted our third consecutive quarter of year-over-year sales volume gains. Average selling prices declined 3% from the 2011 quarter, primarily due to a shift towards more international customers. We had a higher percentage of international sales in the current quarter than in the 2011 quarter, and as you know international SOP sales are generally lower-priced. However, the average price this quarter was essentially the same as we posted throughout all of 2012.

Specialty Fertilizer product costs were consistent with Q2 and similar to our projections for Q4 and early 2013 as well. These elevated costs resulted from the other unique weather event that has challenged us for the past twelve months. To refresh your memory, exceptionally cool and rainy weather at the Great Salt Lake in summer, 2011, greatly suppressed the solar evaporation process. This resulted in an unusually low mineral harvest from our solar evaporation ponds last fall, so we purchased higher-cost potassium feedstock which allowed us to maintain our customer base. This was important for our long-term profitable growth plans for this business.

The combination of low solar pond-based production tons and higher-cost mineral feedstock has depressed our operating profit margin through higher per-unit costs and will continue to do so until we deplete this high-cost inventory. We currently expect to sell through that 2012 production sometime during Q1 2013, so by Q2 2013 we expect per-unit SOP production costs to drop significantly from current levels and correspondingly improve our operating margin in this segment.

With our expectations of near-term SOP pricing and volume stability, and improved operating margins, we are cautiously optimistic about the Specialty Fertilizer outlook. We have also now completely sealed all of our eastern solar ponds at the Great Salt Lake, which means we will start seeing increased mineral harvests from these existing ponds over the long term.

It will be about five years before we have the plant capacity to fully utilize this additional harvest. In the meantime, we expect to be able to build SOP harvest safety stock that could insulate our production from the consequences of poor solar evaporation seasons in the future; and we’ll be able to produce incrementally more SOP in 2015 and 2016 as we approach the full Phase II expansion run rate in 2017.

So while this was certainly a rough quarter following a very challenging 12-month period, I hope you can see that finally the company again stands at the threshold of a bright future. That’s why I felt like the timing was right to announce my retirement. Beyond putting the multiple 2011-2012 weather issues behind us, over these last seven years we have significantly strengthened both of our operating segments.

In Salt, we have completed a multi-phase expansion of our Advantage Goderich Mine as we embarked on expanding our port and introducing more efficient continuing mining technology there. We also acquired world-class, low-cost salt reserves in Chile as we have greatly expanded our weather-normalized operating margins.

In Specialty Fertilizers, we have developed and commenced a strategic multi-phase SOP expansion plan at the Great Salt Lake while at the same time acquiring the only other SOP producer in North America. Timing has also been favorable, as we’ve benefited from both the growing improvement of the global pot ash fertilizer industry dynamics as well as the food megatrend to greatly increase our operating margins here as well.

I’ve been flattered by many people who have told me that I’m too young to retire, but frankly I’ve always wanted to retire early and after almost 35 years of fulltime employment, now feels like a good time for a change. With a relatively young family including three sons still at home, I am eager to invest my time with them, numerous philanthropic organizations that I am passionate about, as well as staying active in the industry via challenging Board service.

Our Board has an active search underway for my successor and I know they’re focused on finding someone who is ready to execute the vision that we – I, the CMP Leadership Team, and the Board – has developed over the past several years. I’ll miss being part of this organization but I know I’ll be leaving it in very capable hands. With that I’ll pass the call over to Rod for a more in-depth discussion of our results.

Rod Underdown

Thanks Angelo, and this morning I would like to review the financial details of the quarter and then explain the further expectations we currently have about our businesses which give us optimism that 2013 will yield significant earnings improvements. As Angelo explained, we believe Compass Minerals is poised to turn the page on a very weather-challenged chapter of our company’s history.

So beginning with the Specialty Fertilizer Segment, we reported sales of $54.9 million in the quarter up from $51.1 million in the 2011 quarter. We sold 90,000 tons of specialty fertilizer at an average price of $615 per ton. These results were very comparable to our Q2 results, although on a year-over-year basis our average selling price was down 3%, chiefly due to a slightly higher mix of international sales in the current year.

Operating earnings for this segment continued to be pressured by the short-term step change in cost associated with sourcing a potassium mineral feedstock to supplement our solar pond production. Unit product costs, which are calculated a net sales minus operating earnings per sales [ton] increased to $398 for the quarter compared to $323 in Q3 2011. As a result, our operating margin declined to 24% from 38% in the prior-year quarter, and this was the driver of the $6.3 million drop in operating earnings this quarter.

The step change to the higher per-unit cost level began in Q2 this year. We expect these higher unit costs to continue to constrain our Specialty Fertilizer operating earnings in the final quarter of 2012 and into Q1 2013. In fact, we’re forecasting Q4 costs similar to Q3’s results, and we anticipate selling the last of this higher-cost SOP during Q1 2013. Following that, we expect roughly a $100-per-ton product cost drop from current levels to occur in Q2 and continue through the remainder of 2013.

Now to achieve the full cost improvement, our SOP plant will need to operate consistently at the Phase I design rates that it has achieved but hasn’t yet sustained. This would result in meaningful operating margin expansion for this business at current attractive prices.

We expect demand for SOP to remain stable for at least the next couple of quarters for a few reasons: growers of specialty crops continue to value the yield and quality improvements SOP creates for their high-end crops. The value proposition is all about economics and science. Also the blenders, who are the middle men in this industry, tend to buy SOP on a more just-in-time basis which avoids price speculation that creates more volatility in the larger standard fertilizer products arena. And finally, we pruned a few spot customers because our production is constrained to our former capabilities. So if demand from our longer-term customers were to decline we may be able to serve some of those spot customers again.

Now, turning to the Salt Segment, this past historically mild 2011-2012 winter season did continue to impact our sales and earnings all the way into this Q3. Total sales for the quarter declined 30% from the prior-year results to $122.5 million, again due to lower sales of deicing both in our highway deicing and our consumer and industrial salt businesses.

In the highway deicing business specifically, the comparison with the prior year was especially difficult because last year we had record breaking preseason orders for deicing rock salt. Those higher deicing sales also increased our average selling price last year by reducing the impact of lower-priced sales to chemical customers. This quarter the mix shifted towards non-deicing sales and that in turn reduced our reported average sales price of highway deicing products.

Similarly, in the consumer and industrial business lower demand for the value packaged deicing products resulted in a 6% drop in sales volumes. Non-deicing product volumes are virtually flat versus prior-year results. As Angelo mentioned, given some of the economic forces which can modestly influence this part of our Salt business, we believe the performance of this segment as a whole has been solid.

Pricing in both of our Salt businesses was impacted by the effect of reduced volumes for the higher-priced deicing products. On a mix-adjusted basis, gross selling prices were actually slightly higher than in the prior year for both of our Salt businesses. The other significant factor impacting Salt Segment results was clearly our increased average per-unit salt costs. Angelo discussed earlier that we took several production slowdowns in Q3 which served to adjust our inventory levels to better match anticipated customer demand; and although we have variable costs in our rock salt productions these slowdowns certainly had an impact on our per-unit costs.

But by far, the largest impact on our total Salt Segment per-unit costs in the quarter resulted from a higher mix of consumer and industrial product sales when compared to an average Q3. As a reminder, consumer and industrial products generally have a higher manufacturing costs and selling price because most of those products are manufactured through a more expensive mechanical evaporation process and require more processing; and most also require some form of packaging.

So, to a significant degree it’s really just algebra, similar to the way in which our average salt selling price in the quarter increased about $7 per ton even though the individual averages for highway deicing salt and consumer and industrial salt products each declined for the reasons I previously mentioned. So after all that, of the average cost per ton for the Salt Segment, about $8 relates to sales mix effect of more consumer salt products which have both higher prices and the higher per-unit costs.

In the end analysis, real average per-unit costs increased about $2.50 per ton, net of estimated tornado effects in the Q3 2012. So the combined effects of the significant drop in demand resulting from the prior mild winter, and the effect of the unit costs of our production slowdowns resulted in Salt Segment operating earnings falling to $12.8 million from $40.5 million in Q3 2011.

Looking into the near future, as Angelo mentioned we don’t expect to take any additional shutdowns for the remainder of the year as our inventory levels are appropriate for our forecasted demand. This is expected to result in improved operating rates but we still have some tornado effects impacting our costs. We expect Q4 unit costs to drop to about $33 per ton and to $31 per ton in Q1 2013.

In addition, despite a 2% decline in deicing bid prices this winter we expect increased salt sales next quarter due to higher volumes and modestly higher average highway deicing prices due to an improved sales mix. Both of those expected improvements are compared to the prior winter season when the mild winter negatively impacted both sales volumes and average reported prices. This outlook, as usual, assumes typical winter weather events in our served market.

I’m also happy to say that we’re nearing the end of our need to report estimated losses due to the 2011 tornado in Goderich. As I mentioned, these losses total $1.2 million on a pre-tax basis this quarter and we expect about $3 million in additional losses through Q4 2012, with some possibly lingering into Q1 2013. Of course this won’t mark the end of tornado-related special items. We expect to report a benefit to our results when we finalize the insurance settlement sometime in mid-2013. We expect the resulting recognized gain to be material and will call it out as a special item, of course.

Before turning the call back to the Operator I’ll round out the discussion on just a few more details. Interest expense for the quarter was $4.2 million, down from $5 million in the prior-year quarter, reflecting reduced rates from the refinancing of our long-term debt in May and a continuation of low short-term rates. Income tax expense dropped to $0.8 million from $10.7 million as a result of lower pre-tax income and other factors which served to decrease our expected full-year tax rate. We’ve reduced our expected tax rate for the year to be in the low 20% range.

Depreciation for the quarter was $15.6 million and we do expect that to be modestly higher in Q4. Capital expenditures in the year-to-date were $98.9 million and this includes about $30 million related to tornado repairs. We anticipate ending 2012 with about $150 million in total capital expenditures including tornado spending, and we are introducing an estimate for 2013 capital expenditures of around $150 million also.

This estimate includes several broad categories of spending. Our routine maintenance of the business will be around $60 million. In addition, we plan to spend about $25 million on special nonrecurring maintenance of business capital investments, principally at Goderich and Ogden. There will be the final spending from the effects of the tornado but that will be less than $10 million. We also intend to complete the installation of continuous mining technology in Goderich and to invest around $40 million in the next phases of our Specialty Fertilizer expansion at the Great Salt Lake site. So as you can see, this investment plan is focused on achieving long-term profitable growth and is also focused on our advantaged assets.

So with that I’ll turn the call over to the Operator for the question-and-answer session. Sarah, are you there?

Question-and-Answer Session

Operator

Certainly. (Operator instructions.) We’ll go first to Ivan Marcuse from KeyBanc Capital Markets.

Ivan Marcuse – KeyBanc Capital Markets

Hey guys, thanks for taking my questions. So one thing about costs that you mentioned during your remarks was that there’s going to be new trainings for Goderich for continuous mining, so will that increase costs next year and then on a per-unit basis for your salt projects? And then the same thing: since you were able to get some of these maintenance projects done at some of your mines this year, will that lower costs so it’ll offset net-net nothing going into next year?

Angelo Brisimitzakis

Hi Ivan, it’s Angelo, good morning. You know, the training on the continuous mining is going to be done adjacent to the current work. In fact, we have pretty good experience in continuous mining from our mine in the UK. I think we’ve been using that technology for about eight years now so it’s a matter of translating skills we already know in the UK – we’ve already had teams back and forth sharing some of that information and introducing it. It shouldn’t be a material change in our costs.

Ivan Marcuse – KeyBanc Capital Markets

Great. And since you’ve been using it, what do you expect the benefits to be from the continuous mining? So where do you ultimately [see] the unit production costs going for salt once training is up and the miners are going?

Rod Underdown

Yes, hi Ivan, this is Rod. The continuous mining technologies, so just to get everybody on the same playing field here: the continuous mining technology that we’re introducing at Goderich is for between 20% and 25% of our Goderich-based production – so a little less than 20% of our total highway deicing production across our system. We’d expect the per-unit costs there beginning in 2014 to be affected by around $0.20 per ton, so it will help beginning in 2014 offset some normal inflationary pressures that again, it’s just order of magnitude. It’s not the whole Goderich mine.

Ivan Marcuse – KeyBanc Capital Markets

Great. And then your Chile investment, what kind of costs would be needed to get that asset up and going or is it ready to go once you make a decision? And what sort of spending would be required to get it going, and what would be the timing on that?

Angelo Brisimitzakis

Yeah, I think you need to look at Chile as a long-term option that any mineral-based mining company needs to consider in order to keep its product line and its asset base vibrant and moving forward. Those assets in Chile are some of the highest-quality, lowest-cost salt in the world. We actually have two competitors that currently exploit that salt so we know it can be brought to market cost effectively and competitively. But right now it sits in the middle of a desert, and it’s basically on the surface so it would require a surface mining operation which tends to be much easier and lower-cost to –introduce than underground mining – significantly lower-cost to introduce although we don’t have a specific estimate for you today.

The other thing that has to be done is roads and ports would have to be secured. Again, this is a very isolated area in Chile. Once that’s secured, you can take that salt really anywhere in the world. There’s some really effective logistics both to North America, both East and West Coasts, into Europe or even into Asian markets. So it certainly provides us a backup supply to our current mining operations in the US, in Canada and the UK and that’s very important as we saw last year when we had a tornado that affected our primary Goerich Mine.

It also opens up those new markets I mentioned, and another point to recognize is we currently serve for example our C&I business, consumer and industrial, we currently serve customers on the East Coast in a very disadvantaged way; meaning we have to ship product for example from Lyons, Kansas, where we have our closest evap facility or Chicago, Illinois, where we have our closest packaging facility. Giving us ability now to ship product directly onto the East Coast to serve existing customers could really drive some productivity in the future.

So I would look at this as a step-by-step approach. We secured what is probably the essential piece, which is the mineral rights. We’ll develop logistics over the next couple of years as well as a mining plan. We’ll assess market and then we’ll have more to talk about as we go forward. But certainly don’t look at this as a short-term opportunity; look at it as a long-term option that really any good mining/mineral company needs to be developing as they develop their current assets as well.

Ivan Marcuse – KeyBanc Capital Markets

Great, and my last question: on your SOP pricing assumptions, you’re assuming flat for Q3 and for the near future, I guess for a couple of quarters. So is that built on the anticipation that MOP is going to remain flat or do you expect a more favorable spread due to the value that SOP brings?

Angelo Brisimitzakis

Yeah, that’s a great question because we have seen some choppiness in MOP. I think many of you have probably heard the others’ calls, and I think as Rod has pointed out, MOP is a little bit different in the sense that since it is a primary fertilizer for many growers that the dealers tend to load up on inventory and there’s really a different cycle. Ours is more of a just-in-time, plus the crops that we serve tend to be more stable than some of the volatile commodity crops. So we see perhaps a little bit of disconnect right now going on between MOP and SOP.

What we see on SOP is both the demand and the pricing showing a little bit more stability than you might see on some of the international MOP pricing discussions. So it might result in a slightly higher spread but we don’t think that’s going to be a material difference, and we do think that all pot ash is predicted to strengthen as we approach the spring of next year.

Ivan Marcuse – KeyBanc Capital Markets

Great, thanks for taking my questions.

Operator

Thanks. From Oppenheimer we’ll move to Edward Yang.

Edward Yang – Oppenheimer & Co.

Good morning. On the guidance for deicing salt, you mentioned that the volumes are going to look a lot like 2009. But do you expect it to be distributed differently between Q4 and Q1? Is it going to be more heavily skewed towards Q1 as customers work through their inventories?

Angelo Brisimitzakis

Yeah, I think we typically think about it as about a 45/55 split just roughly, and there’s probably a minor expectation for a shift there but probably nothing more than 5%. So you could think about it in terms of a relatively normal split.

Edward Yang – Oppenheimer & Co.

Okay. And on consumer industrial, why the different trends there? I mean you’re still expecting volumes in Q4 to be down year-over-year?

Angelo Brisimitzakis

The buying patterns, the buying habits of customers are a bit different in the retail area than they are in the highway deicing area. So yeah, I think we are expecting a flattish to down volume and that that would be a Q4 expectation. However I think assuming normal Q4 weather we would certainly expect to see a lift in that sub-segment in Q1.

Edward Yang – Oppenheimer & Co.

Okay. And what’s your assumption for the tax rate in 2013?

Rod Underdown

Yeah, we haven’t introduced that yet. We typically think of a normal year as being somewhere around 30%, so that would be the right longer-term rate to use. But as I mentioned, there are several factors influencing us this year and we think of our full-year rate as being in the low 20%s.

Edward Yang – Oppenheimer & Co.

Alright, thank you.

Operator

Next we’ll hear from Bob Koort with Goldman Sachs.

Bob Koort – Goldman Sachs

Thanks, good morning. Angelo, I was wondering if you could just review for us the spread of contract terms in terms of the upside volume obligation if we do get a better or even a normal winter in light of reduced bid volumes going into the season? Is it pretty standard across your customer base or are there varying percentages that you’re obligated to meet?

Angelo Brisimitzakis

Yeah, good question. I mean kind of the marquee, large, primarily US states that we depend heavily on, the typical arrangement has an upside of 20% versus the targeted volume at which we’re obligated to supply, under penalty if we can’t, at the predetermined price. So we typically store added safety stock to meet those obligations. Beyond the 20% we’re not obliged to supply, there are no penalties if we can’t, but that provides us with a tremendous opportunity for upside because the pricing is then renegotiated at whatever the market will bear in that high-demand scenario.

And we believe our inventories going into this season are not only adequate to support the plus 20% requirement but also a spot that might be above that. Again, it might be wishful thinking but there was actually a study that Weather Trends International put out that said about 90% of the time following an exceedingly warm winter that’s well below normal snowfall, that the following winter is 10% to 25% more snow than average. So again, I’m not a big fan of weather forecasts – they’re often wrong – but this was kind of statistically based and it certainly provides for a hopeful winter for Compass Minerals.

Bob Koort – Goldman Sachs

And can you help us with, you mentioned the bid sizes were down. On average how much down were they?

Angelo Brisimitzakis

Yeah, and that’s kind of the other variable. We kind of had an unusual buildup to our winter season for this year because we’re going to have the normal bids that we receive plus whatever bids weren’t fulfilled last season. And we think the combination of those two will give us a volume around 7 million tons over the winter which is slightly down from our ten-year average of about 7.5 million tons. So we think net-net with average weather we’re going to end up pretty well. However, we got there really through a much larger than normal carryover effect and smaller bid sizes.

Bid sizes, if you read some of the public available, some states, some areas were down almost 50%. Others were actually flat; some were slightly up. Maybe on a weighted average basis something around 15% smaller bid this cycle than typical but again, what we look at is what do we expect to sell and we benchmark it against an average winter; and we expect to sell something slightly less than our average sales in a winter.

Bob Koort – Goldman Sachs

And my last question, I appreciate your time: is it possible to even gauge a typical price premium when you get beyond the 20% upside?

Angelo Brisimitzakis

Well, the last one we had was a few years back, and actually a good winter sustains itself for two years. You actually benefit in the cycle that you’re in, in the winter that you’re in, and then you can imagine it sets you up for a pretty positive and dynamic bidding cycle thereafter. Unfortunately, a mild winter also gives you two years of effect – the mild winter that you currently go through, and it sets you up for a fairly boring and somewhat depressed bidding cycle.

What we saw in the last year, which was the 2008-2009 winter where we had a severe winter, we had a price increase on average on bids of 20% which is super-sized versus our typical 3% to 4% price. And then the following year we had an increase of 8%, so that was the two-year effect where we achieved 28% pricing over a two-season period. And in fact, during that winter of 2008-2009 spot prices in places in Illinois, for example, reached over $100 a ton; and I believe at the time, Rod, correct me if I’m wrong – prices were normally around $50 a ton.

Rod Underdown

That’s about right.

Angelo Brisimitzakis

So we saw in effect a doubling of pricing in those few areas. Now, some of those regressed back to the average but that 28% really was never given back. So this industry tends to move in chunks and normally chunks forward after harsh winters. It rarely moves back, and when it does move back like it will this season it moves back very little. We look at (-)2% and say following a historically mild winter with bids down 15% and probably near record customer inventories, to only give back 2% selling price? I struggle to find another industry in the materials space that can boast those kinds of dynamics.

Bob Koort – Goldman Sachs

Great, thank you for the help.

Operator

And next we’ll hear from David Begleiter with Deutsche Bank.

David Begleiter – Deutsche Bank

Thank you, good morning. Angelo, back on the Q2 call you referenced that pricing was trending flat in highway deicing for this year; obviously you finished (-)2%. So basically what happened in the back half of the bidding season? What really drove the price decline versus the first half?

Angelo Brisimitzakis

Yeah, I think you’re correct. I think when we gave guidance this time three months ago we were looking at flattish. I think Rod updated it last month at a conference to slightly down and now we’re able to put clarity around it, now that the whole season is finished. You know, bidding… Imagine a process where there was essentially thousands of prices put in and thousands of reactions by multiple competitors to each subsequent price offered; and you start out probing for the appropriate level that will sustain the market and get you the volume that you seek.

In a strong market, for example that year we talked about, 2008-2009, when you probe your normal pricing you end up achieving more volume than you intended, so your next bid tends to be at a higher price in order to manage your volume. And that continues to go forward until you end the bidding season at the targeted volume and whatever price you get. And we ended up in that year 20%.

Unfortunately this cycle it started out differently. Some of the early bids actually had higher prices, and as we went along those higher prices were not achieving the targeted necessary volumes to support our asset base to maintain our market share. So the only response we have in order to continue to maintain share is to respond price accordingly. It’s kind of like a game of musical chairs – when you get down to one or two chairs it gets pretty dicey.

So I would say the end of the bidding season was a lot dicier than the beginning was, but again, we look at it overall and we look at the volume that we achieved plus the carryover, plus an average net price only down slightly; and we look at it following what we would call an historically mild winter – certainly milder, with fewer snowfall events than the last 15 years at least. And we feel pretty good about what we achieved, and we feel really good that the structure of the industry maintains itself.

And that’s why we always say this industry resets itself after every subsequent winter because there really isn’t a cyclicality to weather. This winter may be the harshest ever just like last winter was one of the mildest – there is no pattern. It’s a random event. Weather is a random event and therefore people react to what’s in front of them and not necessarily what happened the season before.

David Begleiter – Deutsche Bank

Understood. And Angelo, what is your highway deicing market share right now for the upcoming season?

Angelo Brisimitzakis

We really don’t disclose specific market shares but I think it’s fair to say that it’s relatively unchanged from last season. And again, in a cycle where demand is down it’s important that we keep that share and it probably will not be a very smart time to be going after additional share.

David Begleiter – Deutsche Bank

And just lastly, given the good solar evaporation harvests how much more volume would you have to sell in next year, 2013, versus this year?

Angelo Brisimitzakis

Yeah, and this is where we really need to separate the harvest from the SOP production. The SOP harvest is merely the raw material that has the various minerals in it – the salt, the magnesium chloride, and the potassium sulfate – that we then process through an SOP plant in order to have sellable SOP. That SOP plant is constrained currently at around 350,000 tons per year plus we have about 40,000 tons available to us from the Big Quill acquisition in 2011.

So our total SOP capacity is around 390,000 tons to date regardless of the amount of harvest. So even though our harvest is increasing we don’t have a plant that can utilize it yet. Our Phase II expansion would allow the plant to grow to potentially 570,000 tons from its current approximately 350,000 tons. So between now and the beginning of the SOP Phase II expansion we are constrained between that 350,000 tons and 390,000 tons range that I gave you for our SOP facilities.

David Begleiter – Deutsche Bank

Very good, thank you very much.

Operator

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

Joel Jackson – BMO Capital Markets

Hi, good morning. Congrats, Angelo, on your upcoming retirement. I want to just poke around on a couple things here. On your cost guidance you gave for Q4/Q1, just going back to something Rod said a few minutes ago: I think, Rod, you had said that there was about a $2.50 per ton impact on salt costs in Q3 net of the tornado effect. Does that include net of mix impacts?

Rod Underdown

Yeah, the $2.50 is a real cost. There is no mix. There is zero mix in that number.

Joel Jackson – BMO Capital Markets

Okay. So if I look to your Q4 and Q1 salt guidance, you’re obviously guiding for a little bit below average Q4 and Q1 highway deicing volume – what would be a normal Q4 and Q1 salt cost if we sort of assumed a normal Q4/Q1 volume and not any more impacts from the Goderich tornado?

Rod Underdown

Yeah, I think, Joel, you might have heard us talk in the past about kind of going back to the 2009-2010 period, recognizing we have a structural increase of about $1.00 and then adding inflation for that, which kind of gets you from the ’09 cost to the current expectation of… Across a full year it would be somewhere between $33 to $34. I can walk you separately through the quarterly some other time off the call, but that would be the general way that I would encourage you to look at it.

Joel Jackson – BMO Capital Markets

So ’13 may be closer to $34, but ’14 might be closer to $33 – something like that?

Rod Underdown

Order of magnitude that doesn’t sound incorrect but you know, we really haven’t introduced anything for 2014.

Joel Jackson – BMO Capital Markets

Okay. On your highway deicing price outlook, I know you said bid season pricing is down about 2% and you’re guiding to highway deicing prices in Q4 and Q1 to increase because of improved sales mix. Can you walk us through a little bit how you will go from (-)2% to a little bit of an increase when we talk about rollovers and multi-years and the chemical salt base load?

Rod Underdown

Yeah, sure. Well, as you probably remember, our chemical bas load is not seasonal at all. It’s very consistent. And while sometimes chemical plants produce more or less there’s not a huge variation in demand over the course of a year. So last year when our highway deicing sales were constrained, the chemical sales became a larger portion of our sales mix. And so when you factor that in, last year in Q4 we actually had prices that we reported down almost $3.00 versus the prior year while the pricing last year was flattish.

So the effect on chemical, a bigger portion of chemical sales last year was seen in our Q4 2011 results. When you factor in normal weather expected for Q4 this year we would expect to report a higher average selling price for the exact opposite reason.

Joel Jackson – BMO Capital Markets

Okay. Let me ask a question as well: there’s a lot of investors talking about special dividends in the US because of some of the changes to dividend taxes next year. You have a very enviable cash position; you’re getting an insurance settlement next year. What’s your view on possibly offering a special dividend before year-end?

Angelo Brisimitzakis

Yeah, this is Angelo. That’s obviously a hot topic of all the business journals these days. We’re in the process of talking to our key investors to understand what their preferences are. Certainly the dividend is extremely important to Compass Minerals and many of our investors. We’ve made no definitive decision yet. It’s being evaluated but we’ve made no decision.

Joel Jackson – BMO Capital Markets

Okay. Maybe if I can just go into SOP a bit, too: you talked about how you had an above-average solar harvest season. When you say “above-average,” I’m assuming your pond sealing is essentially done if I understand. So is that what led to an above-average season harvest and if that wasn’t the case you may have had a below-average harvest?

Angelo Brisimitzakis

Yeah, that’s a good question. Again, you can imagine across 40,000 acres there’s a lot of things going on in solar evaporation, so we look at certain key performance indicators: what was the temperature? What was the rainfall? What’s the humidity level? And all of those will affect the evaporation, and we compare those to historical levels. So we have maybe ten to twenty years’ worth of data. In the summer of 2012 we had quite high temperatures, very low humidity and low rainfall, so those factors – those factors and those factors alone – would give us a good harvest because those are proxies for the amount of evaporation that will occur.

In addition to those factors, throughout last year and this summer we were sealing our ponds and we just completed our pond sealing very, very recently. So it takes a while for the effect of sealing those ponds to influence our harvests but that process has also begun. So the 2012 harvest was above average mostly because the weather was more favorable than average; however, there’s probably a small positive impact already from pond sealing.

But we expect that impact to increase over time, recognizing that our solar evaporation process on the Great Salt Lake is a three-year cycle. So now that they’re all sealed, next year the impact will be even greater and the year after that it’ll be even greater. So we really need a combination of sealed ponds plus good weather dynamics to get that extra-sized harvest that will support Phase II.

Joel Jackson – BMO Capital Markets

Okay, and finally just furthering the discussion on SOP prices: obviously SOP prices have been pretty flat the last few quarters for Compass Minerals. We’ve seen MOP prices come down across this year. Can you speak to is there a lag effect that we should be thinking about for SOP prices and sort of what your average contract duration is or where pricing may be changed – if it’s 90 days, 60 days, wherever you are right now? I know there was a lot different contract provisions in place let’s call it four, five years ago and things have changed recently over the last few years at least.

Angelo Brisimitzakis

Yeah, that’s a good question. I mean our typical contract duration is 90 days or less where we guarantee pricing. Now of course we guarantee supply for longer periods, and if you look at our customer base we typically supply customers year after year, but we have the opportunity to look at price at least every quarter. We also sell to different crops than the MOP guys do, and a lot of our sales are concentrated in the West where KCL or MOP isn’t that dominant as it is in other parts of the world.

So we believe we have a different crop base, a different geographical base, a different customer base; and again, as I said in my comments before we don’t sell as much to dealers that keep large quantities of inventory so we tend to not get into that rollercoaster of our dealer customers having too much SOP and really pushing the price down to move it; or having too little SOP and pulling the price up to get it. We’re not in that cycle.

So we like this price stability. We like the boringness of prices in the low $600’s because based on our costs and our improving costs, $600 a ton for SOP is a very attractive margin for Compass Minerals.

Joel Jackson – BMO Capital Markets

I might sneak in one more question if you don’t mind. Can you just maybe comment generally if there were any trends this year from your bid season contract portfolio versus last year? For example are there any geographical areas that you may have gained overall share in or lost share in, just so we can get an idea of how things trended year-over-year?

Angelo Brisimitzakis

Are you back to salt?

Joel Jackson – BMO Capital Markets

I’m back to salt, sorry, yes.

Angelo Brisimitzakis

Well you know, every year it’s kind of like the duck on the pond – it looks very calm at the top, looking down. As I said our shares is essentially unchanged; our pricing off 2% considering the low demand and you think that nothing’s happened. There are literally thousands of bids and within those there’s probably multiple hundreds in which we’ve lost or we’ve won.

So there’s a lot of noise under the surface but in general we remain in those areas that are critical to us in those large states. We sell a lot less in places where we have disadvantages – for example, in the state of Ohio where we have a 5% barrier to sell, it’s kind of protectionist there for Ohio and we don’t participate as much. We don’t necessarily get to the East Coast because our logistics are disadvantageous. We tend to do very well in Ontario; we tend to do very well around the Great Lakes in Wisconsin and Illinois and Michigan. Those haven’t changed in a material way.

Joel Jackson – BMO Capital Markets

Thank you.

Operator

And next we’ll hear from Jeff Zekauskas with JP Morgan.

Jeff Zekauskas – JP Morgan

Hi, good morning. In a typical Q4, what’s the distribution of your monthly shipments? In other words, in a normal quarter what percent is shipped in December, what percent in November and what percent in October?

Rod Underdown

Yeah, a really good question, Jeff. October is almost always the lowest by far. November, there’s typically a step up in the 2x range and in December it’s 2x again. So just order of magnitude December is by far the largest month in our quarterly dispersion.

Jeff Zekauskas – JP Morgan

So by 2x again you mean 2x November.

Rod Underdown

Yes, that’s correct.

Jeff Zekauskas – JP Morgan

Okay. Secondly, in your SOP shipments you said that you shipped more to the offshore markets. What percent do you usually ship to the offshore markets, how much did you ship and which are the key offshore markets for SOP?

Rod Underdown

Yeah, sure. Historically Q3 is the quarter where we do more of our international shipments. That’s because we have a number of customers that are more Southern Hemisphere and so the growing cycle is obviously different, and our export shipments there tend to focus – for those specific customers tend to be Australia and New Zealand area. But we do sell a fair amount into Latin America and so some of our export sales were there.

As I look at the percent change in domestic and export, last year was an unusual mix in that we had very low exports last year and they were almost doubled this year. So the mix was just slightly different but not all that unusual from a typical Q3.

Jeff Zekauskas – JP Morgan

So do you usually ship, I don’t know, 25% offshore in Q3?

Rod Underdown

Yeah, more like a third in Q3 typically.

Angelo Brisimitzakis

So for the year 20%, 25% is a good proxy, right?

Rod Underdown

For the year yeah, 25%.

Jeff Zekauskas – JP Morgan

Why was the tax rate 9% in the quarter?

Rod Underdown

Yeah, so as I had mentioned we had a couple of factors that came into play which affected our outlook for the full year tax rate. So where we had previously expected it to be in the mid-20%’s and we’re now expecting it to be in the low 20%’s. And when we record our tax expense for any quarterly period we’re always truing up the year-to-date to match what we expect it to be for the full year absent any kind of special items.

Jeff Zekauskas – JP Morgan

So these adjustments relate to prior years or to the current year that have decreased your rate?

Rod Underdown

It’s all related to current-year events, Jeff.

Jeff Zekauskas – JP Morgan

Okay, thank you very much.

Operator

Ladies and gentlemen, this does conclude the time allotted for our question-and-answer session. Mr. Brisimitzakis, I’ll turn the conference back over to you for any additional or concluding comments.

Angelo Brisimitzakis

Oh, you said that very well, Sarah. Thank you. [laughter] With our essential products safely produced from our advantaged assets, with our large moats selling into attractive, highly-structured markets that enhance life – whether it’s public safety or nutrition – Compass Minerals has a very bright future ahead of it. I’ve been honored to have been its CEO for these past seven years and to have worked with each of you; also with our 2000 or so employees and a Leadership Team and Board of Directors that are both very supportive and world-class.

I am most proud of what we have accomplished together for our shareholders: an ever-increasing dividend from greatly improved cash flow and operating earnings, and a market cap that has tripled. I truly believe CMP’s best days are ahead and I look forward to enjoying them as a long-term shareholder just like the rest of you. Thank you very much and let it snow!

Operator

Ladies and gentlemen, that does conclude today’s conference. Thank you for joining.

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