EXHIBIT 99.1
FINAL TRANSCRIPT
[THOMSON STREETEVENTS LOGO]
CONFERENCE CALL TRANSCRIPT
CMP - Q2 2004 COMPASS MINERALS INTERNATIONAL INC EARNINGS CONFERENCE CALL
EVENT DATE/TIME: AUG. 04. 2004 / 10:00AM ET
EVENT DURATION: N/A
CORPORATE PARTICIPANTS
PEGGY LANDON
Compass Minerals International - Director of IR
MIKE DUCEY
Compass Minerals International - President and CEO
ROD UNDERDOWN
Compass Minerals International - CFO
CONFERENCE CALL PARTICIPANTS
LAWRENCE ALEXANDER
Deutsche Bank - Analyst
MARY BETH CONNELLY
Goldman Sachs - Analyst
MICHAEL JUDD
Greenwich Consultants - Analyst
PETER PARK
Park West Asset Management - Analyst
DAVID SILVER
J.P. Morgan - Analyst
JEFF CIANCI
UBS - Analyst
ROBBIE CONOFF
West Lab Asset Management - Analyst
PRESENTATION
OPERATOR
Good morning, My name is Kristy, and I will be your conference facilitator
today. At this time I would like to welcome everyone to the Compass Minerals
International second-quarter earnings conference call. All lines have been
placed on mute to prevent any background noise. After the speakers' remarks,
there will be a question-and-answer period. (OPERATOR INSTRUCTIONS) Now it is my
pleasure to introduce the Director of Investor Relations, Ms. Peggy Landon. Ms.
Landon, you may begin your conference.
PEGGY LANDON - COMPASS MINERALS INTERNATIONAL - DIRECTOR OF IR
Thank you operator and thank you all for joining us this morning. With me here
are Mike Ducey, our President and CEO; and Rod Underdown, our CFO. Before we
begin I will take a moment to read our Safe Harbor statement. 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 current expectations and involve risks and uncertainties that could
cause the Company's actual results to differ materially. Differences could be
caused by a number of factors including those factors identified in Compass
Minerals International registration statement on Form S1 filed with a Securities
and Exchange Commission on June 29, 2004.
The Company will not update any forward-looking statements made today to reflect
future events and development. Also you can find reconciliations of non-GAAP
financial information in the Investor Relations section of the website at
CompassMinerals.com. With that, I will turn the call over to Mike Ducey.
MIKE DUCEY - COMPASS MINERALS INTERNATIONAL - PRESIDENT AND CEO
Thank you, Peggy. Good morning. Compass Minerals has had another very solid
quarter with 9 percent growth sales improvement over the second quarter of last
year and we've made good customer and product mix gains in both our operating
segments. We had a net loss per share of 19 cents which is comparable with our
net loss last year last year excluding the special items.
As I'm sure you know, we typically record a loss in the second and the third
quarters when we are building our rock salt inventories for the upcoming winter
season. Adjusted EBITDA was 17.3 million for the quarter ended June 30, 2004 an
improvement of $.5 million over the prior year.
Sales, adjusted EBITDA and net income available for shareholders excluding
special items were higher for the 6 months ended June 2004 compared to the prior
year. All these increases are significantly influenced by the results from the
first quarter. The primary driver behind our second-quarter sales increase was
our sulfate or potash or SOP business. Salt sales were flat for the quarter;
however, the prior year quarter included approximately $4 million of sales
related to unusual late winter season snowfall in April of 2003.
Other salt sales, including our general trade product lines partially offset
this decline, primarily through improved pricing. Sales of our SOP product in
the June quarter increased 58 percent over the prior year, mostly due to the
integration of our Carlsbad acquisition that we completed in December of 2003.
Our SOP sales volumes over the last 12 months have increased to 327,000 tons,
which reflects most of our anticipated growth from the Carlsbad acquisition.
We expect some additional gains in the fourth quarter, which should bring our
total SOP sales volume to around 340 to 350,000 tons for the full year of 2004.
This should give us a market share of more than 50 percent in the U.S. and
Canada.
Prices for SOP are also on the rise. We announced another price increase in
February this year. Much of the increase has not been reflected in our current
results for the quarter and year-to-date. We also announced another price
increase in July. These increases have been facilitated by cost increases that
are impacting our import competitors, including cost increases for ocean-going
freight and change in foreign exchange rates. We also have some functional
competition with commodity potash, MOP, which is an industry that has been
seeing recent price increases.
Average second-quarter SOP prices were more than $12 a ton higher than prior
year. We see nothing in the immediate future that will reverse these gains.
More good news for the SOP business is that the recent rail log jams on the West
Coast and in other parts of North America have not affected us even though most
of our product shipments out of Ogden are facilitated by rail. In our General
Trade salt business, we've seen steady demand during the second quarter, and we
expect our customary modest volume growth to continue through the remainder of
the year. We are also typically we've seen a price increases of 2 to 3 percent
in North America, though we've had a larger price increases in years when costs
have increased substantially. Our General Trade product pricing has improved
nicely compared to prior year, and we have announced a new price increase in
June.
In our highway deicing business, we are in our bidding season which means we've
been working to secure the commitments for the upcoming winter season. There are
a couple of key dynamics that are impacting the bidding for the 2005 winter
season. We've seen freight rates rising for imports just the same as we have for
SOP that have come into the East Coast markets; as well as for transportation in
the Great Lakes and the Midwest markets due to tight supply of available
carriers and increasing fuel costs.
By the way, we take the impact of these costs on us and our competition into
consideration when we prepare our bids for the upcoming winter season.
Additionally, we expect our North American competition to be more successful at
winning bids on the East Coast market this year because of these rising freight
costs and also the strengthening of many foreign currencies when compared to the
U.S. dollar. This doesn't directly impact us because we don't serve the East
Coast markets, but it does tighten up the supply position in our core markets.
As a result of these dynamics, we have seen positive bidding results thus far
this season. We are approximately two-thirds of the way through the bidding
process. So far on average the market size is flat to slightly higher than a
year ago. Our average price increases to date have been about 5 percent with a
net increase of about half of that due to higher transportation and
port-security costs. We believe that our overall share of the market will
probably be similar to the 2003 and 2004 winter season.
However, we won't know the final number or share number until we complete the
bidding season in October. SO we will be able to provide you with the final
results at the third-quarter conference call.
Due to the positive bid season and the prior year winter, which was normal for
highway deicing and slightly stronger for consumer deicing, we have been
operating our North American mines at a higher capacity utilization rates. This
is a projected production increase of about 7 percent over the prior year, and
although much of our mine costs are variable, there are some favorable impacts
on costs of production that we foresee for the remainder of 2004.
We believe our competition is also producing at slightly higher rates. These
production dynamics don't change our cost advantage over our 2 primary North
American competitors. We've estimated that are rock salt mining costs are lower
than our competitors by 30 to 45 percent depending on the mine we're looking at.
We've continued to manage our costs wisely in our business. Manpower efficiency
rates are higher, which helps offset the higher impact of wage rates.
Additionally, we focused on controlling our energy costs. While spot natural gas
prices have risen dramatically, our costs are about flat with the prior year in
part because we've managed our costs through a prudent hedging program, which
Rod will discuss later.
In addition to maintaining our gas costs, we've focused on some other capital
spending in the areas that can help reduce our energy consumption. Those
projects have paid off handsomely and will
begin to further decrease our natural gas consumption in the second half of
2004.
Now I would like to turn the presentation over to Rod so he can walk you through
the second quarter performance in a little more detail.
ROD UNDERDOWN - COMPASS MINERALS INTERNATIONAL - CFO
Thank you, Mike. Our second quarter sales of 96.9 million represent a 9 percent
increase over the second quarter of 2003 and our product sales which exclude
pass-through shipping and handling costs increased 10 percent or $6.6 million
over the prior year quarter to $67.6 million.
Shipping and handling costs increased $1.6 million this quarter compared to the
prior year due to customer and product mix and to a lesser extent higher freight
rates. Shipping and handling costs as a percentage of sales were almost
identical to the prior year.
For the 6 months ended June 30, 2004, our gross sales of $347.4 million are 15
percent ahead of the same period last year and excluding shipping and handling,
our product sales are up 16 percent to $250.3 million.
The primary driver behind our second quarter year-over-year sales increase was a
58 percent increase in our SOP business. SOP sales were $22.6 million compared
to $14.3 million in the second quarter of 2003, primarily due to the integration
of our Carlsbad SOP acquisition. We also announced a price increase in February
of this year, which contributed to our top line growth.
Our average price increase was almost 6 percent for the second quarter when
compared to prior year. For the 6 months ended June 30, our SOP sales were up by
$17.8 million to 44.4 million, which is a 67 percent increase, again primarily
due to the Carlsbad acquisition last November.
The Carlsbad business that we acquired is seasonally skewed toward the first
half of the year, so we expect our sales on EBITDA to be much less affected by
that acquisition in the next 6 months. Most of that remaining 10 to 20,000 ton
volume impact will be in the fourth quarter of this year. However, over the next
6 months, we will begin to see the remaining benefits of our February price
increase, as well as the benefits of another price increase of $20 per ton that
we announced in July.
Turning now to our salt segment, our second-quarter gross sales of 74.3 million
were virtually even with our second quarter 2003 sales. We had a $3 million
year-over-year increase in General Trade sales, which was matched by a decrease
in the highway deicing sales. For the 6 months, salt sales were up 10 percent
over prior year to $303 million as a result of first-quarter sales.
Looking at our second-quarter salt sales, our highway deicing sales were in the
typical range this year compared to unusually strong sales in the second quarter
of 2003. Last year winter precipitation continued in April in our North American
markets, which is not typical. This increased our sales volume in the second
quarter of 2003, an impact of about $4 million and also changed our product mix
for the quarter so that the average price per ton was higher in 2003.
In a typical second quarter like the 2004 quarter, our highway deicing
(indiscernible) sales are dominated by sales to chemical customers at a lower
average price per ton.
In the second quarter of 2004, our highway deicing sales benefited from
marginally higher sales in the UK when compared to the same quarter last year.
The second-quarter General Trade sales increase was due to year-over-year price
improvement due to changes in foreign exchange rates and a price increase that
was announced in June of last year in North America. We just announced another
price increase in June this year, which will benefit future periods as current
contracts expire. This recent price increase takes into account our cost drivers
and varies by product.
Foreign exchange rates increased in our second quarter salt segment sales. The
combined impact on both highway deicing and General Trade was approximately $2.5
million this quarter. For the 6 months ended June 30th, foreign exchange rates
have benefited our salt segment about $11 million. Foreign exchange rates have
virtually no impact on our SOP segment sales.
Our gross margin for the quarter was 21 percent, which was even with the second
quarter of 2003. For the 6 months ended June 30, 2004 our gross margin was 27
percent compared to a gross margin of 24 percent for the same period last year.
Our year-over-year margin expansion has been the result of our operational
excellence program, higher utilization rates at our facilities and product mix
improvements.
Our second-quarter SG&A expense increased by $1.1 million when compared to 2003.
The increase was primarily the result of an increase in variable compensation
costs due to improved financial results and the impact of foreign exchange rates
on our UK and Canadian SG&A costs.
We also recorded other charges of $400,000 for the secondary stock offering that
closed on July 14th. We expect additional charges of approximately $300,000 in
the third quarter for the final expenses associated with that offering.
Our interest expense was $15.1 million for the quarter, which is a $2 million
increase over the second quarter of 2003. The difference is primarily due to the
discount notes that were issued in May of 2003.
Our non-cash accrual for the payment in-kind interest on our 12 percent senior
subordinated discount notes and our 12 3/4 percent senior discount notes was
$5.7 million for the second quarter of 2004.
Our interest expense for the first 6 months of this year increased $5.5 million
to $30.5 million. The difference is primarily due to the May 2003 issuance of
the discount notes.
Our other expense of 200,000 this quarter is chiefly due to non-cash foreign
exchange losses of $300,000. Our tax benefit for the second quarter of 2004 was
$2.3 million. We continue to estimate that our 2004 book tax to be approximately
27 percent.
Our cash tax rate will be lower than that (ph). We believe our cash taxes paid
for 2004 will be approximately $10 million. Our net loss for the quarter was
$5.9 million compared to a gain of $1 million in the second quarter of 2003. A
key item that contributed to this net income differential was a gain of $8.2
million on the redemption of preferred stock in the prior year period. Excluding
special charges, the second-quarter 2003 loss was $6.6 million compared to a
$5.5 million loss for the second quarter of 2004. Excluding special charges, our
net income improved $1.1 million or 17 percent year-over-year.
For the 6 months ended June 30, 2004 our income was $24.4 million, a decline of
$1.5 million from the prior year. However, excluding special charges our income
was $24.8 million for the 6 months ended June 30, 2004 compared to 18.9 million
for the prior year, which is a 31 percent year-over-year improvement.
Our second-quarter 2004 EBITDA improved by $1.2 million over the prior year or 8
percent to $16.7 million. Our year-to-date EBITDA of $84.3 million is a 26
percent improvement over the first 6 months of 2003, and our adjusted EBITDA for
the first 6 months of the year improved 25 percent to $85.4 million. This
improvement is a result of the impact of improved sales volumes and production
costs in both the first and second quarters.
Year-to-date we've generated $108.4 million in cash flow from operations, which
is a $25 million increase over the same period last year. The second quarter
added $6.7 million to cash flow from operations. As you know, we are net
consumers of cash from operations during the third quarter of the year primarily
because we are building deicing salt inventories for the coming winter.
Consistent with the prior year, we expect our use of cash from operations to be
about $30 million during the third quarter.
Our second-quarter capital expenditures were $4.7 million, bringing our
year-to-date total to $8.6 million. Consistent with how we've managed our
capital spending the past couple of years, we spend more during the first half
of the year than we do the last half. This allows us to maintain the greatest
flexibility for spending until we determine the outcome of the winter season. We
continue to expect our maintenance capital expenditures to total 22 to $23
million in 2004, and we have earmarked an additional $3 million for
discretionary payback projects.
So for the year, we continue to expect our total capital expenditure to be in
the 25 to a $26 million range. Our payback projects for 2004 have primarily been
focused on energy efficiency and automation at our General Trade and SOP
facility. We have also used cash in the second quarter to voluntarily repay
another $10 million on our term loan and to pay a 25 cent per share dividend
totaling $7.6 million.
Over the quarter, debt net of cash increased approximately $12 million. For the
first 6 months of the year, debt net of cash declined approximately $75 million.
Our cash balance at June 30th was 54.9 million.
Before I turn the call back over to Mike, I want to take a moment to talk about
our energy costs and our natural gas hedging program. Many people have asked how
the recent increase in the market price of natural gas in North America will
impact Compass' results. First let me say that natural gas represents about 7 to
8 percent of our total production cost so though it is a significant cost that
we manage, it is not nearly as large as other costs -- as other costs are to
produce our product.
We take the conservative approach when it comes to managing this raw material
cost. Our hedging policy is to layer in gas costs for the subsequent 2 fiscal
years beginning in January. We hedge routinely over that time period up to and
including those fiscal years knowing that we probably won't perfectly time the
market to achieve the lowest possible price, but also we avoid the peaks in the
spot market prices. We can be up to 90 percent hedged for our anticipated gas
needs prior to commencing a fiscal year.
Our remaining 2004 anticipated gas needs in 2004 in North America are more than
50 percent hedged, while we are hedged on approximately 40 percent of our
anticipated needs in 2005. Presently we do not believe that natural gas costs
will significantly impact our year-over-year comparisons for the remainder of
2004. We will keep you updated should the situation change.
And with that, I will turn the discussion back over to Mike for some concluding
remarks.
MIKE DUCEY - COMPASS MINERALS INTERNATIONAL - PRESIDENT AND CEO
Thank you Rod. I'd just like to conclude our remarks by saying that I feel good
about our second-quarter results and our outlook for the remainder of the year.
We have implemented price improvements in each of our business units. The
highway deicing bidding season is off to a nice, solid start, and we expect to
see the final benefits of our Carlsbad SOP acquisition in the fourth quarter
this year.
As always, we are continuing to focus on operational excellence, which means
that we are in a process driven, financially disciplined and focused on the
metrics. These are the concrete measurable ways which we are working on to
increase the shareholder value for all of us.
I'd like to open it up for questions. Operator?
QUESTION AND ANSWER
OPERATOR
(OPERATOR INSTRUCTIONS) Lawrence Alexander (ph) of Deutsche Bank.
LAWRENCE ALEXANDER - DEUTSCHE BANK - ANALYST
Good morning. My first question is on pricing. You are off to a very solid
start this bidding season. How reliable is your progress so far on what pricing
will be like on the remaining outstanding bids? Or is there quite a lot of
fluctuation to be expected?
MIKE DUCEY - COMPASS MINERALS INTERNATIONAL - PRESIDENT AND CEO
With the fundamentals that we are seeing in the marketplace right now of supply
potentially being on the snug side, as competitors tend to build up momentum
through the bidding season -- in other words get their place markers and their
bets down, generally speaking when you go into a season like that, the prices
tend to tail a little higher towards the end than fall off.
LAWRENCE ALEXANDER - DEUTSCHE BANK - ANALYST
Okay thank you. And on the FX impact, was there any net FX impact on the EBIT
line or on the EPS line?
ROD UNDERDOWN - COMPASS MINERALS INTERNATIONAL - CFO
There was almost none on the EPS line. If so, 1 cent would be the most. I think
it was almost a breakeven on the net income line. On the EBITDA line, it would
have been about $400,000 year-over-year.
LAWRENCE ALEXANDER - DEUTSCHE BANK - ANALYST
And finally, can you give us an update on the UK storage facility contract? How
much volume we should see for the remaining quarters in the year and when that
would be done?
MIKE DUCEY - COMPASS MINERALS INTERNATIONAL - PRESIDENT AND CEO
As far as the document storage business goes, all the UK Government documents
are in place right now, so the maximum income stream of that will be generated
through the remainder of 2004 and fully absorbed in 2005. There's been no
substantial other
than small contracts we've added since then. So I would say that you could see
about a 700,000 pound type impact coming into -- for the full year 2005 for that
business. We still do not have the permit for the waste storage. It is currently
being reviewed by the equivalent of the UK Supreme Court with a ruling due after
the summer break. So right now we are still treading water on any favorable news
on the waste storage part of the (indiscernible).
LAWRENCE ALEXANDER - DEUTSCHE BANK - ANALYST
Thank you.
OPERATOR
Bob Koort of Goldman Sachs.
MARY BETH CONNELLY - GOLDMAN SACHS - ANALYST
Actually it's Mary Beth Connelly (ph). Thanks. Quick question again on pricing,
just to follow up specifically on SOP. If we looked at some of the commodity
potash producers this quarter, they had anywhere in the range from 15 to 20 or
25 percent price increases. So just curious if you can give a little color on
the correlation between MOP and SOP pricing?
MIKE DUCEY - COMPASS MINERALS INTERNATIONAL - PRESIDENT AND CEO
There's 2 things that you have to keep in mind when you look at our pricing.
First of all, a significant number of our agreements are on an annual basis
contract base of sales agreements, which I think is kind of dissimilar to
commodity potash. That's the first thing. The second thing is we have
conditioned the SOP market to kind of anywhere between 45 to 60 days notice on
implemented price increases. So as you can imagine, they tend to load up their
supply in advance of an announced price increase. So I think as Rod mentioned,
you will see the favorable impact on pricing of both the February and the price
increase that we just put through. By the way the one in June, July is after the
season. So you won't see much impact on that until the fall. So I think while we
are pleased that the price is up as much as it is, we still think we have
significant upside on the remaining 2 price increases to catch up with the MOP
position.
MARY BETH CONNELLY - GOLDMAN SACHS - ANALYST
Great. Thanks. And then a quick question on the debt. Can you just tell us
kind of give us an update on what the bank debt balance is right now? And then
are you still planning to pay down roughly 40 million in debt this year?
ROD UNDERDOWN - COMPASS MINERALS INTERNATIONAL - CFO
Yes, the plan is to continue to pay down the bank debt by $40 million over the
year, and the bank debt balance right now is right at $58 million. So $10
million less than last quarter.
MARY BETH CONNELLY - GOLDMAN SACHS - ANALYST
Great. Thank you.
OPERATOR
Michael Judd of Greenwich Consultants.
MICHAEL JUDD - GREENWICH CONSULTANTS - ANALYST
Good morning. Last year in the third quarter the volumes of the SOP were around
59, and obviously this year there has been a pretty big ramp up in terms of the
volumes. Could you kind of help us out in of understanding on a year on year
basis what third quarter could look year-over-year, please?
ROD UNDERDOWN - COMPASS MINERALS INTERNATIONAL - CFO
Yes, I think we tried to indicate in our remarks that the remaining increase
due to the Carlsbad business would primarily be in the fourth quarter. And so as
we look at our third quarter volumes we see relatively consistent volumes
year-over-year.
MICHAEL JUDD - GREENWICH CONSULTANTS - ANALYST
I hate to beat this to death, but on the SOP, with the price increases --
annual contracts with 45 to 60 day notice, does that imply that if you announced
an increase -- and I think you said June to July time period, we would basically
have to look 45 to 60 days for that to be implemented? Is that the right way of
looking at it?
MIKE DUCEY - COMPASS MINERALS INTERNATIONAL - PRESIDENT AND CEO
Generally that's correct. We'll make a price announcement -- let's just take
the July 15th announcement was actually made I think on May 15, so there was a
60 day -- by the time we put it in the press and when the effective date of the
announcement, it is anywhere between 45 to 60 days. So it's not 60 days from the
date when he said the effective increase is. It is just we announce it in
advance, which also, as I mentioned earlier, it encourages our buyers to fill up
ahead of the advance.
MICHAEL JUDD - GREENWICH CONSULTANTS - ANALYST
Lastly, it's pretty incredible given what has happened with oil prices and
natural gas prices that when you looked for this year's -- 66 percent of your
volumes for the highway deicing looks like the transportation costs -- I guess
associated with that you think is going to the only up at 2.5 percent. That
seems -- I know you've been doing a great job on the hedging there, but is there
anything else that we need to be aware of or just to keep an eye out for,
please?
MIKE DUCEY - COMPASS MINERALS INTERNATIONAL - PRESIDENT AND CEO
Well, we are concerned. There is no doubt about it. We are more concerned rather
than price about availability, not only availability of trucks, but also
availability of railcars. Right now, as I mentioned, we are seeing some
significant bottlenecks that are taking place along the rail lines, not only
affecting our highway business on some chemical sales, but also more importantly
around our GSL and our General Trade business.
So while price is one issue to deal with, it is also getting the availability of
truckers to handle the product. And we are managing that extremely well, I
think. The second issue is while we say it is going up 2.5 percent, remember 2.5
percent is on about 30 to 40 percent of our total delivered costs. So a 2.5
percent rise on the total is a pretty significant rise on our distribution
outlook.
MICHAEL JUDD - GREENWICH CONSULTANTS - ANALYST
Thank you.
MIKE DUCEY - COMPASS MINERALS INTERNATIONAL - PRESIDENT AND CEO
But I'd like to reiterate we're getting it passed back through to our customers
in the process, which I think is very encouraging, not only getting it passed
back through, we're also getting some expansion.
OPERATOR
Peter Park (ph) of Park West Asset Management (ph).
PETER PARK - PARK WEST ASSET MANAGEMENT - ANALYST
Good morning. I just wanted to go over my assumptions for run rate EBITDA on a
normal weather basis. I've previously been using something like 152 on a normal
weather basis, and my question is why shouldn't I shift that up by at least 5
million bucks or so just given all the good things that have been happening,
particularly on the SOP business? Thanks.
ROD UNDERDOWN - COMPASS MINERALS INTERNATIONAL - CFO
I think where you were in your previous assessment was right on the money with
where we had previously talked about the numbers. And of course not having the
April snowfall, that was a negative for us this quarter and shouldn't be viewed
as a reduction in terms of normal winter.
With the increase in the SOP business and the increase in both volumes and the
price, you would expect that that would increase how you would view your normal
winter, normal year EBITDA run rate. And with the increase on the highway
deicing prices on a net basis net after increased transportation to the extent
that sticks or even improves throughout the remainder of the bid season, I would
expect that our normal run rate would increase from the previous discussions
that we've had.
PETER PARK - PARK WEST ASSET MANAGEMENT - ANALYST
$5 or $10 million or is that low?
ROD UNDERDOWN - COMPASS MINERALS INTERNATIONAL - CFO
Well, I think if you look at percent -- a percent on price and how many deicing
volumes we have, every percent is probably closer to $1 million. It's sort of in
that range.
PETER PARK - PARK WEST ASSET MANAGEMENT - ANALYST
How about on the SOP side? Because I think that during the road show when you
talked about what you wanted the acquisition to add on the SOP side, and just
the general outlook for the SOP business, it was attractive, but I think in some
ways we are seeing business is so much better than when you talked about it in
December.
MIKE DUCEY - COMPASS MINERALS INTERNATIONAL - PRESIDENT AND CEO
Exactly.
ROD UNDERDOWN - COMPASS MINERALS INTERNATIONAL - CFO
Your assessment is correct on that.
MIKE DUCEY - COMPASS MINERALS INTERNATIONAL - PRESIDENT AND CEO
And we didn't forecast in our acquisition model that we would be seeing the
kind of price increases in SOP that are currently in our pocket and currently on
the horizon. So when we talked about roadshow of 4 to $4.5 million of EBITDA, I
think that --.
PETER PARK - PARK WEST ASSET MANAGEMENT - ANALYST
That was incremental EBITDA?
MIKE DUCEY - COMPASS MINERALS INTERNATIONAL - PRESIDENT AND CEO
That was purely putting those tons, that 90,000 tons through our existing
underutilized facility and the leverage of throughput that we got to our bottom
line.
ROD UNDERDOWN - COMPASS MINERALS INTERNATIONAL - CFO
At existing prices.
MIKE DUCEY - COMPASS MINERALS INTERNATIONAL - PRESIDENT AND CEO
At existing prices. That is the way we look at all of our acquisitions, by the
way. We don't know what the future is on pricing per se, so we take a
conservative approach when we look at acquisition models.
PETER PARK - PARK WEST ASSET MANAGEMENT - ANALYST
Thanks. Good luck.
OPERATOR
David Silver at J.P. Morgan.
DAVID SILVER - J.P. MORGAN - ANALYST
Good morning. I have a question for Mike and then maybe one for Rod. Mike,
during our last conference call you know you had talked about an additional kind
of sustaining level of salt demand of maybe 300 -- I think 300 or 400,000 tons
based on some efforts in consumer ice melt (ph) and some regional situations in
highway deicing. It's another quarter down the road, and I was just wondering if
you could update us maybe on that your sense of what that sustainable kind of
increase and your ongoing base level of salt business might be?
MIKE DUCEY - COMPASS MINERALS INTERNATIONAL - PRESIDENT AND CEO
Okay. I think our 300 to 400,000 was pretty much solely in highway. So that
represents that 3 percent market share gain that we got in the last winter
season. And I think I mentioned in my remarks that we are now two-thirds of the
way through, and we have not seen a significant shift in that market share. And
with the dynamics we see taking place, i.e. along the East Coast, I don't see
anything in this year's bidding process that would say that that 300 to 400,000
tons is not sustainable at least through this season.
I also believe where we've picked up that business significantly in Eastern
Canada and closer to our mines, would lead me to believe that from a mine net
back standpoint that that can be a sustainable type of business that we want to
hold onto. Now that's not saying, David, that we as the market leader -- we may
find it necessary sometime to be more rational than that at the benefit of
price. So that's how we manage the businesses. We manage it around market share
and pricing rather than just saying that we want to stay at a certain market
share. We will give it up if we think it's in our best interests.
DAVID SILVER - J.P. MORGAN - ANALYST
Okay and if you are going to maybe apply that same thinking to the General
Trade side of the salt business, Mike, any kind of niches or any kind of
business areas where you think that sustainable level of volumes have picked up?
MIKE DUCEY - COMPASS MINERALS INTERNATIONAL - PRESIDENT AND CEO
Well, in the General Trade business we're not the market share leader. So we've
got to be a little more quick and agile on our feet when we are competing
against the Mortons (ph) of the world. So we view the business as a little bit
differently there. Now we did have about 100, 150,000 ton increase in the last
winter season in that business related to what we would call better than average
winter season in New England where we participate in the General Trade business.
We don't view that on a normal winter basis to be sustainable, and I think we've
indicated that in the past.
We certainly hope that the winter cooperates and we maintain that this year, but
we don't bet on it. And so I would say when we look at our General Trade
business, we want to grow our business in a rational, but 2 to 3 to 3.5 to maybe
4 percent range. We like the water conditioning business, which we've made some
significant inroads into because it does offer some higher growth rates than
just bulk salt. But our goal there is to just to work on our mix. We are running
at 91 to 92 percent of capacity utilization at our evaporated plants. So market
share grabs don't really interest us there either. It's trying to figure out how
we better utilize our plant facilities at higher margins.
DAVID SILVER - J.P. MORGAN - ANALYST
Okay. Ron, I was hoping to just ask you a question on the SOP side in terms of
the cash margins and maybe how we should, could look them. So if I was looking
at it sequentially first quarter to second quarter, it looks like your average
price went up about $12 a ton, but your average cash margin went up -- I don't
know -- $32 or so from maybe $50 in the first quarter to 82 or so in the second.
And the volumes, the volumes seem to be pretty close. I was just wondering if
you could kind of walk us through how we got the significant per ton pickup in
cash margins sequentially and what that implies maybe for the going forward
numbers?
ROD UNDERDOWN - COMPASS MINERALS INTERNATIONAL - CFO
Sure. I think what you are seeing there is the effect of probably really 2
different things on the business. First, there is a difference in domestic
versus export volume prices. Generally speaking, our domestic volume net backs
and margins are higher than our export volumes. And so you can see
quarter-over-quarter when you try and look sequentially that even though the
volumes may be consistent, you may be dealing with a different relative mix of
(indiscernible).
And then the other thing is, we've really made quite some substantial inroads
and gains on our production costs at our Ogden facility and some of those are
starting to show through in the results of the business. There has been a number
of things as we mentioned, we put some capital into automate and make the plant
there more efficient. And we are starting to see the benefits of applying
operational excellence to a facility that hasn't had that applied in a while.
MIKE DUCEY - COMPASS MINERALS INTERNATIONAL - PRESIDENT AND CEO
David, to make the OE trick work, you've got to have a plant running, and
you've got to have them running hard. Then you can have everybody looking for
every possible way to take the costs down. And that's why the acquisition of
Carlsbad was so critical to our SOP business. And when you are running at 55
percent of capacity, it is hard to get people motivated and running hard and
seeking out ways to maximize the production of the plant and reduce the costs.
So by being able to incrementally add that 90,000 tons has done wonders to not
only the plant, but to the outlook and the mentality of the workforce that we
have now going in the right direction.
DAVID SILVER - J.P. MORGAN - ANALYST
If I was just to maybe follow up on both of those comments -- I guess I agree
with everything you said and I was just wondering if that same kind of metric or
that same kind of dynamic can be pushed a little bit further. I guess from the
point of view of it is somewhat of a competitive perfect storm here with rising
selling prices, high freight rates, cheap dollar, giving you some competitive
advantages versus imports. Can the domestic market share be pushed up and can
you even further kind of utilize the Ogden capacity beyond what you indicated
earlier in the call?
MIKE DUCEY - COMPASS MINERALS INTERNATIONAL - PRESIDENT AND CEO
The Ogden SOP is not an easy process, David. I'd like to invite you out some
day if you are in Salt Lake to look at it. There is a physical cap to what you
can produce there, and it's not necessarily equipment. It is the ability with
the ponds and everything else to get out the raw potash, SOP out of the lake. So
there comes a time -- and it's also a balance between that and evaporation
season. So to say you can produce 450,000 tons on a routine basis which is the
nameplate, that may not be the best way to run the plant to optimize the income
of the plant. So, I think we want to talk to you about disconnecting SOP just
pure volume and driving it up versus how best to maximize the return on that
particular facility for the Company.
DAVID SILVER - J.P. MORGAN - ANALYST
So it's a co-product issue among others (multiple speakers) .
MIKE DUCEY - COMPASS MINERALS INTERNATIONAL - PRESIDENT AND CEO
It's a co-product issue. It's an evaporation issue. I mean if it rains 6 inches
in July, then your evaporation rate is not going to be as good as if it doesn't
rain in July. So there's a lot of factors, weather related factors -- a lot of
things around the business that we have to manage it not only from just a pure
output run against the wall, so to speak, against balancing out how best to make
the most marginal cost per ton or marginal profit per ton.
DAVID SILVER - J.P. MORGAN - ANALYST
Okay, very good. Thanks a lot.
OPERATOR
Jeff Cianci with UBS.
JEFF CIANCI - UBS - ANALYST
A little elaboration on the bidding season kind of pricing -- what was the
effect on the inventories from last year -- presuming you had a more normal
winter this time? Did you have any carryover -- do your competitors have any
carryover, number one? Number 2,
on your pricing versus costs, I heard you on the freight costs, and I'm sure you
don't want to advertise too much in your margins on the open call here, but do
you believe at this point that the price supports everyone in the industry can
lead to margin expansion or perhaps just you guys?
MIKE DUCEY - COMPASS MINERALS INTERNATIONAL - PRESIDENT AND CEO
Let me talk about the pricing and the margin first and then I will turn it over
to Rod and he'll take you through the inventory plan this year because our
inventory plan is a little different than what it may have been last year or the
year before and we will talk about that in a minute. But yes, I think right now
the rising tide carries all boats up, and from what we see and we track all the
bidding that is taking place. What's happening in the market is not unique to
us. We are seeing our competitors, by the way and we would like to see our
competitors do well also. So we're seeing a market that is rising.
And for the reasons that I talked about in the presentation. And from a
sustainability standpoint, we at least see that through the season. Both our
competitors and our mines are running their mines at a little higher level
because the inventory -- and this goes back to what we've always said is the
inventory is not maintained by our customer. It is maintained by the producer at
the depots, so therefore everybody knows pretty well what the overall industry
carryover inventory is going into the season. And that carryover inventory was
normal to slightly below normal for this year, which would have required jacking
up the mine production for everybody. So it's not unique for us. I think it's
basically an indication that the market is doing well at the moment.
ROD UNDERDOWN - COMPASS MINERALS INTERNATIONAL - CFO
To further expound on the inventory, coming out of the winter season our
inventory was right about average. Right in the middle of the pack of where we
normally exit the winter season. Even with the higher volumes we had planned
last year to have higher production rates. And we produced a little bit more
during the winter season than we otherwise would have in order to meet the
demands of the winter season. So we exited the winter season with about average
inventory.
We believe that our competitors probably had a little less than normal
inventory, primarily because they do have more of the East Coast market, which
experienced an above-average winter last year. So that is really where the
inventories ended.
In terms of what we're doing this year, because of our expectation of
maintaining market share, of ending up with commitment volumes that are roughly
similar to where we ended last year, we are going to be building inventory and
have been doing so earlier this year than we did last year. And we have invested
about another $5 million in inventory this year at the end of June that we
didn't have invested last year. And so I think what you are seeing is a slightly
earlier inventory build. But we would project that by the end of the year we
would be at roughly the same point we were at the end of last year.
MIKE DUCEY - COMPASS MINERALS INTERNATIONAL - PRESIDENT AND CEO
And Jeff, one of the reasons were doing that this is -- this isn't because we
just want to build inventory. Giving you one example of why we're doing this
year. Last year we got caught short because winter boats across the Great Lakes.
The Lakes froze early. When winter boats also after about mid-December start to
cost about $4.00 a ton more to deliver than preseason boats. So we took a
purposeful decision around the Great Lakes this year to build higher inventories
to number one to avoid the $4.00 a ton increase, which is a significant increase
on salt to do winter boats. And also to make sure it is there this winter where
last winter we were scrambling around shifting product from depot to depot,
which is not really in our OE model. So that $4 million or $6 million of
increased inventory investment we figured just on avoiding winter boats is about
a $600,000 cost avoidance. That's assuming we sell it all, but we plan on doing
that. So it is a pure return on an investment standpoint, and we think it's good
for the investors.
JEFF CIANCI - UBS - ANALYST
That's a great answer. Thanks -- the only remaining issue is you apparently
have a visibility of confidence that you won't have too much even if the weather
starts off unfavorable.
MIKE DUCEY - COMPASS MINERALS INTERNATIONAL - PRESIDENT AND CEO
That's exactly right, because if you remember back to all of our conversation
on how we manage our mines, if we see come December it isn't snowing, we won't
be producing at our mines. So that's not saying we won't get caught with some
inventory if we have the most mild winter around back to 2001 or whatever it is.
But we will mitigate it. You can trust us to do that.
By the way, one other comment I wanted to add to your answer, I don't know what
our competitors do on OE. I know we can control our cost base. So while we're
sitting here talking about how everybody is doing well from a pricing
standpoint, I still have confidence that our OE goals that we put out there that
we will achieve them and we will do better.
JEFF CIANCI - UBS - ANALYST
Thanks.
OPERATOR
Robbie Conoff (ph) of West Lab Asset Management (ph).
ROBBIE CONOFF - WEST LAB ASSET MANAGEMENT - ANALYST
I had a question on capital structure. I do realize your discount notes are not
callable until '07 and '08. But are you guys looking at maybe doing something
creative -- refinance at either some sort of exchange offer for cash gain debt
or equity callbacks? Are you looking at doing anything with those instruments
prior to the plan being callable?
MIKE DUCEY - COMPASS MINERALS INTERNATIONAL - PRESIDENT AND CEO
Yes, we are. Part of our value creation going forward is the fact we have
opportunities as long as we can continue to generate the type of cash that we
are generating to figure out how best to utilize after all shareholders returns.
We look at it just the same way you are. We are constantly looking at what our
options are relative to that. And I will turn it over to Rod to be a little more
specific on that but you're absolutely right. The great opportunity here is
trying to figure out how we work the balance sheet to our favor.
ROD UNDERDOWN - COMPASS MINERALS INTERNATIONAL - CFO
If I could maybe add to that a little bit. In terms of it is not just our -- is
not just our discount notes, but also our senior sub. notes that are at 10
percent. We look at the cost of all of our debt and believe that we can do
better than that. And certainly there is at the very latest we look at would be
the earliest call provision date. There are some limitations in our indentures
that may not allow us to refinance some of them early, and so we are looking at
the difference between -- we are constantly looking at what our opportunities
are and what our debt agreements indentures will actually allow us to do. And so
we are focused on that. As Mike said, we recognize that there is a lot of value
to unlock by reducing the cost of our capital structure. And I think you can
rest assured that at the soonest economically sensitive or sensible date to do
something, we will be doing something there.
ROBBIE CONOFF - WEST LAB ASSET MANAGEMENT - ANALYST
Do you have any sort of timeframe in mind internally -- is it 12 months were 18
months?
ROD UNDERDOWN - COMPASS MINERALS INTERNATIONAL - CFO
I think as I mentioned, the first call date is in August 2006. So we are a
couple years from the first prescribed call date under the indenture. Under the
indentures to the extent we can do something before that and it makes economic
sense for the Company, we would be doing something.
MIKE DUCEY - COMPASS MINERALS INTERNATIONAL - PRESIDENT AND CEO
We have a lot of bondholders that right now love us, and even trying to get our
hands on bonds, they are selling at effective yields of 7 percent or less on
those 13 or 12 percent type notes. The returns when you work the numbers right
now today just aren't in our favor. But that doesn't mean if interest rates go
up or whatever happens in the bond market that that could be substantially
shifted to our favor.
ROBBIE CONOFF - WEST LAB ASSET MANAGEMENT - ANALYST
Great. Thank you.
OPERATOR
There are no further questions at this time. This concludes today's Compass
Minerals second-quarter earnings conference call. You may now disconnect.
ROD UNDERDOWN - COMPASS MINERALS INTERNATIONAL - CFO
Thank you.
MIKE DUCEY - COMPASS MINERALS INTERNATIONAL - PRESIDENT AND CEO
Thank you.
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