Peggy Landon - Director of Investor Relations and Corporate Communications Francis J. Malecha - Chief Executive Officer, President, Director and Member of Environmental, Health & Safety Committee Rodney L.

Underdown - Chief Financial Officer, Principal Accounting Officer, Vice President, General Manager, Secretary and Vice President of Finance for Compass Minerals Group Inc

Edward H. Yang - Oppenheimer & Co.

Inc., Research Division David L. Begleiter - Deutsche Bank AG, Research Division Ivan M.

Marcuse - KeyBanc Capital Markets Inc., Research Division Angel Castillo Malpica - Goldman Sachs Group Inc., Research Division Elizabeth Collins - Morningstar Inc., Research Division

Thank you, Noah. Good morning, everyone.

Thank you for joining us this morning. I'm joined here today by our President and CEO, Fran Malecha; and by our CFO, Rod Underdown.

Before I turn the call over to them, I'll remind you that today's discussion may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on the company's expectations as of today's date, July 30, 2013, and involve risks and uncertainties that could cause the company's actual results to differ materially.

The differences could be caused by a number of factors, including those identified in Compass Minerals' most recent Forms 10-K and 10-Q. The company undertakes no obligation to update any forward-looking statements made today to reflect future events or developments.

You can find reconciliations of any non-GAAP financial information that we discuss today in our earnings release, which is available in the Investor Relations section of our website at compassminerals.com. Now I'll turn the call over to Fran.

Thank you, Peggy, and thanks to all of you who are listening to our call today. On a consolidated basis, our net earnings this quarter were stronger and we generated nearly 3x as much cash flow from operations as we did in the 3 months ended June 2012.

That being said, the seasonal sales and earnings dip we typically post in the second quarter of the year belies the activity that occurs in our company in the spring and summer months. During this time, we are steering our business to prepare for the next season.

For the salt business, the next season is clearly the winter. We're well into the highway deicing bid season, which I'll discuss in a moment, and we're actively aligning our production targets with our bid results.

A bit less obvious, perhaps, in specialty fertilizer this time of the year, we work hard to have our solar evaporation ponds covered with saturated brine from the Great Salt Lake, in preparation for the evaporation season. Then we continually move in more brine as the hot and dry weather produces our mineral harvest, which we will convert into SOP in the subsequent 12 months.

And we plan our SOP production logistics to take advantage of the important fall and spring fertilizer application seasons. All of these activities influence our success in future seasons but aren't apparent in our financial results.

So I'll be updating you on some of these activities and providing high-level financial highlights for both of our segments. Turning first to our salt segment.

Salt sales were up 6%, which was entirely due to stronger deicing sales. In addition to benefiting from late winter snow in North America, our customers in the U.K.

began the highway deicing restocking season much earlier than normal in response to the harsh winter there last season. These higher sales volumes more than offset the effects of some weakness in our sales of rock salt to chemical customers and resulted in a higher average selling price for highway deicing products.

As for the North American highway deicing bid season, we were hopeful that the late winter snows would help restore typical supply/demand dynamics for the North American market and set up a more normal highway deicing bid season. And in some of our service areas, this did happen, but it wasn't the norm.

At this point, we're about 50% of the way through the bid season. So far, we're seeing bid volumes rebound significantly from last season's very depressed levels, but not all the way back to the levels achieved in the 2011 bid season.

In particular, bid volumes continue to be depressed in the southern markets of the U.S. regions we serve, where this past winter was mild.

Because the bid volumes were below what we would typically expect in those areas, we can deduce that those customers continue to carry higher than normal inventories. Due to the competitive actions in the marketplace, we also believe that producer inventories were higher than normal coming out of the winter, as we know ours were.

Together, these factors all contribute to a lower bid pricing result. So far, our average awarded bid price for the upcoming winter is about 2% below last year, but we have a wide range of awarded prices this year.

This result was not what we had hoped for at the beginning of the bid season, but we're pleased to have retained our share of the market and to be seeing much larger volumes in the bid requests than last year. Our increased bid volumes should give us better preseason sales in late third quarter and early fourth quarter, particularly compared to the very depressed destocking demand the company experienced in 2012.

We currently expect that this rebound could result in third quarter highway deicing sales volumes that are around 40% higher than last year's result. We also expect more normal preseason earning patterns for packaged consumer and commercial deicing products to provide a lift to our consumer and industrial salt business in the second half of the year.

And we continue to expect full year salt production costs to improve. Much of this improvement will be based on running our mines at about 80% or 85% of capacity, which is closer to normal compared to last year, when we produced at less than 70% of capacity.

However, based on the bid season prices, we are adjusting our full year operating margin forecast down from 22% to between 20% and 21%. Now let's take a look at our specialty fertilizer segment, where some course corrections to our full year plans have had an impact on our second quarter results but are also preparing us to take full advantage of the next seasons of fertilizer applications.

We talked to you last quarter about our constrained product availability and our plans to focus SOP sales on the highest net backed markets. The focus on these key markets, in addition to shedding some lower-priced sales to international customers, has had 2 effects on our results.

First, once the spring application season stopped in North American markets, sales slowed toward the end of the second quarter and we begin to build inventory for the fall season rather than sell our products to lower-margin international markets. Second, we were able to maintain a strong SOP price throughout the quarter and had higher margins because of our keen focus on these higher-value domestic markets.

In fact, the average price of $638 per ton that we reported in the second -- is the second highest quarterly average price since 2009. We expect strong pricing to continue through year end due to our sales focus on those markets that provide the greatest value to our specialty fertilizer business.

And we expect to sell approximately 160,000 tons in the second half of at the year. Our production costs have improved from last year, as we produced more tons with pond-only feedstock.

This contributed to some of the margin expansion we achieved this quarter. Our Ogden plant is running more consistently, but we've had to make some adjustments to our overall expectations for the productivity improvements we made there.

After careful examination of all aspects of our manufacturing process, we now believe that our current effective capacity from recently completed yield improvement project is between 300,000 and 320,000 tons per year at this time. We will be working to maintain stable production rates at that facility, and with improved reliability, we should be able to operate at the high end of that range.

And we'll continue to look for further improvement opportunities in order to meet our original goal of 350,000 tons. Even without further improvements, our investment today is generating a healthy internal rate of return at current prices.

This analysis will contribute to our evaluation of further expansion of our Great Salt Lake facility and, importantly, allow us to begin more detailed engineering for our next potential expansion project. We expect our sharpened go-to-market strategies to generate strong average selling prices for the remainder of the year.

So we are maintaining our operating margin target of 30% for the full year for the fertilizer business. We'll continue to focus on improving our execution with a keen eye on yields and efficiencies and to take every opportunity to obtain greater value from our portfolio of assets.

Now I'll turn the call over to Rod to discuss additional details of our financial results.

Yes, thank you, Fran, and good morning. I'll begin this morning with the salt segment, where we reported $127.3 million in sales, which, as Fran mentioned, was a 6% increase versus the second quarter of last year.

Late winter weather resulted in higher sales volumes of highway deicing products, offsetting a decrease in rock salt sales to chemical customers. This sales mix contributed to the 5% increase in average selling prices this quarter.

Our Consumer and Industrial business posted a 2% increase in both average prices and volumes over the prior year results, as this business continued to benefit from relative stability in its numerous end use markets. The salt segment benefited in the quarter from lower shipping and handling costs, which dropped about $1.50 per ton from the 2012 results.

We expect shipping and handling costs to return to prior levels -- prior year levels for the rest of 2013. Salt operating earnings in the quarter were $15.7 million compared to $12.9 million in the prior year period, but when we take into account the adjustment for the estimated tornado effect on our prior year results, salt segment operating earnings were basically unchanged from the prior year.

EBITDA for the salt segment rose to $26.8 million from pro forma EBITDA of $25.4 million in the second quarter of 2012. We do have higher depreciation in 2013, as we've placed new replacement assets into service in 2012 following the Goderich tornado.

Per-unit salt costs, which we define as net sales minus operating income per ton sold, were almost $46 per ton compared to $44 per ton in the second quarter of 2012. These elevated costs principally related to some work stoppages and other costs incurred at one of our mines due to a workplace accident.

Going forward, given our expectation that we will achieve an increase in highway deicing bid volumes, we expect to operate at more normalized rates at our rock salt mines for much of the remainder of the year. As a reminder, last year, we produced at less than 70% of our total asset capacity.

This year, we expect to run at around 80% to 85% utilization. These rates are still below the more typical 90% to 95% utilization and did not factor in our increased capacity at the Goderich mine.

However, with the overall winter being below average again this past year, the bid volumes have not bounced back all the way to the long-term average levels, which would be similar to the 2011 bid results season. Still, the improved utilization rates we expect for 2013 should reduce per-unit production costs by approximately $3 per ton, below last year's result, to about $35 per ton on a full year basis.

Now this $35 per ton estimate for the calendar year also includes some elevated costs from 2012 production that was sold early in 2013. Assuming normal winter weather, in the fourth quarter, we would also expect to see improved deicing sales volumes in both the third and fourth quarters.

This would produce a richer mix of sales in both our highway deicing and our consumer and industrial businesses and increase our average selling prices during the second half of the year over last year's weather depressed results. So turning to our specialty fertilizer segment results.

We reported segment sales of $44.1 million compared to $56.2 million in the second quarter of 2012. We sold 24% fewer tons this quarter compared to the year ago period, primarily due to our production capacity constraints.

Although we were able to build some inventories during the latter part of the second quarter, we specifically sold less in the second quarter by foregoing lower-value international sales. This decision will allow us to more fully serve our key markets in the upcoming fall application season and, of course, even into next spring.

Growers in our domestic markets have been willing to invest more of their dollars in SOP because they understand the benefits of our specialty product over standard potash. Our average sales price increased $26 per ton year-over-year to $638, and that was also $23 per ton above the first quarter result.

We were able to keep our per-unit production costs lower when compared to the 2012 quarter. These costs held steady with the first quarter and dropped almost $30 per ton from a year ago.

Depreciation for the segment was $10 per ton, above the prior year. Operating earnings for the segment were $14 million, just higher than last year's result, but our operating margin increased to 32% from 25%.

And EBITDA increased to $19.9 million from $19.1 million, which was an 1,100 basis point improvement as a percent of sales. Looking forward, we do expect our average sales price for the remainder of the year to be similar to the $6.25 we realized in the first half.

Now while on a customer to customer basis, some prices might drift downward, reflecting the pressures being felt in the standard potash market, we do not expect our average reported price to fall back commensurate level. Our average price spread to MOP is increasing as we focus on those markets where the end user is receiving the greatest value.

On the production front, with 5 to 6 weeks remaining in the solar evaporation season, we believe once again, this year, the conditions for solar evaporation have been excellent. We will use the mineral deposit that is accumulating in our solar ponds for production later in 2013 and for most of 2014.

The larger mineral deposit, the more likely we are to be able to avoid supplemental sourcing of potassium feedstock, which keeps our product costs lower. As for 2013, we continue to expect per-unit costs for the second half of the year to be lower than the prior year.

And as we've described in the past, the per-unit costs we report include SG&A and royalties, which are each running about $30 a ton right now. In addition, depreciation and amortization for this segment currently totals approximately $70 per ton.

So taking these items into account, that gives you a sense for what our underlying cash costs are currently running. With lower costs in 2013 as compared to 2012, combined with our $625 forecast for average SOP prices for the remainder of the year, we still expect our full year operating margin to be approximately 30%.

In 2014, we expect per unit costs to trend a bit lower as we improve the consistency of our operations at the Great Salt Lake, thereby producing more finished product tons. We may also be able to implement additional efficiency projects there.

I'll wrap up by discussing some other corporate items. As I mentioned earlier, depreciation and amortization has increased in both of our segments due to placing of assets in service.

On a consolidated basis, depreciation and amortization totaled $18.1 million in the second quarter and is expected to be approximately $18 million in each of the next 2 quarters. Last year, depreciation averaged about $16 million per quarter.

We reported higher SG&A expenses this quarter, in addition to a temporary increase in professional service fees. Approximately $1.7 million is attributed to costs related to our management reorganization.

As we stated when we announced the streamlined structure, we expect the lower headcount to provide immediate cost savings. Some of those cost improvements will be offset by higher marketing expenses as we return to more normalized activity after a period of cost containment initiated by the very mild 2012 winter.

For the next couple of quarters, we expect SG&A of approximately $24 million per quarter. We expect full year income tax rate to be approximately 27%, and on a year-to-date basis, we reported $55 million in capital expenditures.

For the full year, we anticipate about $125 million. Our capital investments in 2013 continue to be influenced by some special sustaining capital spending, which is expected to be completed by 2015.

This year, we've estimated the special capital to total about $35 million. These investments are primarily associated with our mining assets.

We're also wrapping up the investment and repairs related to the 2011 Goderich tornado. These should amount to between $10 million and $15 million this year.

Finally, the company generated $174 million in cash flow from operations for the first 6 months. This was an increase of around $60 million from last year's dip in cash flows.

Last year's result, of course, was influenced by the mild winter weather impact on our earnings, which resulted in high levels of deicing product inventories following that mild season. So with that, I'll turn the call back over to the operator for our Q&A session.

Noah?

You mentioned you expect to operate your salt mines at 80% to 85%, but that excludes the Goderich expansion. So what would that be including the expansion, and why would you calculate that rate excluding that expansion?

Yes. So the Goderich expansion, as you might remember, we spent about $70 million on a 1.5 million-ton expansion.

That expansion, we currently don't have the mining assets to run at that rate, but what we did is we built the infrastructure to be able to handle that incremental amount of tonnage. And I was purely trying to put the percentages in terms of our historical capacities, just to keep it apples-to-apples, Ed.

Obviously, we're not -- we don't have the additional manpower and the equipment. So the addition -- at this point, the additional costs are principally just related to the depreciation on some of those assets that increased the capability of the mine.

So Rod, what would it take to, staying with operating rates, what would it take to get back to that 90% to 95% you would be typically? Would it be a harsh winter, lower inventory levels?

Yes, that's a good point, Ed. That is what it would take.

What we're seeing today is bid volumes that significantly bounce back. And of course, the bid volumes just really are a precursor to what a normal winter amount of need is for the upcoming season.

And as we've gone through the bid season, the Canadian and Northern tiers of the U.S. have bounced back significantly, just generally speaking, almost all the way back to that pre-2012 winter level.

But those, the Southern areas of the U.S., those really experienced that -- kind of that second mild winter, and it would really require some of those markets to return. I think it is important to note that in many of those markets, the bid volumes did return back to that pre-2012 level, and I think it speaks to the importance of salt and the public safety element to it.

But when it doesn't snow, there isn't a need for salt. So that's what it would take, Ed, would be a severe winter.

Just a final question. Fran had comments on -- I mean, it sounds like there's some price competition going on, particularly in those areas where they did have a milder winter.

Who's driving that? And maybe talk just generally why, in a local oligopoly, you would see that because it sounds like you've maintained market share so everyone is matching each other.

So why would anyone instigate that?

Well, I mean, I would say that this is a -- it's a tender process for these bids, and it is a competitive market. There's a number of players, not just the 3 major players, that participate and you really get into local markets when you go through this bidding process.

So I won't comment on our competitors, but we felt like we continued to manage the pricing and market share effectively given what we've seen in the last 2 seasons. And I think as we get back to -- we would expect, as we get back to normal volumes, which we haven't quite got to -- back to yet, that our leadership in the category would continue.

Fran -- again on the pricing issue, Fran. Do you think normalized pricing is still up in that 3% to 4% range in highway deicing?

And what do you need supply/demand dynamics or cost initiative [ph] to be to get that type of pricing?

Well, we certainly haven't seen the price increases the last 2 years, and that's been -- we think it is a result of the weather and the supply/demand. We need to clear inventories out to historical levels.

It would be certainly beneficial to have a more severe winter and really clear out those inventories and, we would think, get back to more normal historical pricing.

And just on the SOP pricing issue, given today's news on the commodity side of business, what would a $100 decline in the MOP price, do you think, mean for SOP prices?

I think, as we've talked in the past and certainly talked today, we continue to think about our fertilizer as a -- creating value for our customers and really continue to insulate ourselves from more of those commodity movements. I think the spread, if you just compare pricing, continues to widen.

We don't really think about it as much of a spread as we try to think about the value to our -- to ultimately the growers and the crops that they're growing and the impact that SOP makes. So certainly, our price will go up and down, but we would continue to work hard and think that we'll continue to mitigate those commodity influences over time.

So it would be down less than the decline in the SOP and the MOP price?

That's certainly what we would -- how we think about it. And I think the other thing is, as you get to the lower end of the range, we would expect our prices not to go down as much, and probably to offset that is when you have blowup prices at the top, we may not match those prices one-for-one, and really working closely with our customers and their economics to ensure that we have stable demand over time and also getting fair value for the fertilizer that we're providing.

First, in the SG&A, so you had $1.7 million costs related to the management turnover. How much were the professional fees for the quarter?

Sure, Ivan. Yes, they ran just over $1 million more than last year.

Got you. And then if you looked at -- you commented in your release about unplanned downtime.

How much did that impact your results? And what was that associated to?

Was that just due to the lower demand, or was there an operating issue?

That was primarily -- those costs were primarily due to a workplace accident that we had at one of our mines and then the downtime that followed that as we worked through that with regulators. And certainly, we'll apply learnings going forward across our operations to improve our operations.

Great. And then the last question is that you lowered your, sir, your capacity expectations for the Ogden plant.

What drove the change there from what you've been saying in the past? And does this impact sort of your -- the pricing remains fairly strong, so it implies that demand remains pretty good in SOP.

So how do you look at the Phase II going forward? And is there any update to their -- sort of your planning and growth in that business?

Yes. I think we really continue to increase our, certainly, our experience there and our experience running without KCl that's been added in the past.

And I think we have just found that we needed to increase the number of scheduled maintenance days to improve the plant's stability and really the reliability of the plant. And with that, we think we'll be able to run at the higher end of that range and get that consistency in production that we and our customers can rely on.

We may be able to improve that somewhat over time with additional capital and debottlenecking but we like the returns on that -- on the investment, the expansion that we made. So we're certainly thinking about that as we do the analysis on expansion.

And I think, as I mentioned on our last call, that's a decision that we expect to make later this year, and we still think that we're on that timeline.

This is actually Angel on for Bob. I was just wondering, just getting back to the SOP pricing and the news out today, I was -- last quarter, you mentioned some commentary from growers on the positive potential for SOP based on yield.

And I was wondering if your conversations with growers have changed tone at all around this?

No, they really haven't. I mean, if you think about the acres that SOP is really impacting, it's not the more traditional commodity markets like corn and soybean, that certainly is impacting the price of commodity potash.

So generally, the crops that we're helping to create value on are strong right now. The economics are good and we continue to -- we think it paid for the value that we're bringing with our SOP.

So nothing has really changed fundamentally in the acres that we're selling to.

So thinking about the cost curve for SOP producers. Uralkali has today said -- quoted an MLP price of less than $300 per ton, so let's just use that as an assumption, and Compass has put out industry cost curves in the past for SOP.

Using that MLP assumption of $300 per ton, do you know what the cost of SOP production would be for those high-cost guys at the far right of the cost curve?

We wouldn't know that or comment on that if we did.

Yes, I think, Elizabeth, there's obviously 2 primary ways to produce the SOP. One is the natural way that we do it.

The other is that Mannheim process, and there are some -- there is a very large producer in Europe that uses that, and then a number of the Chinese SOP manufacturers have that. And the cost curve is, to some extent, based on the value of one of the co- or byproducts that's achieved out of that process, which is the hydrochloric acid.

So it would vary based on kind of the general value of hydrochloric acid in that market and how that particular producer values that HCL as part of their costing.

Okay, fair enough. And then can I ask a question about crossover crops, like the crops where growers will use SOP to boost yield?

If SOP isn't too expensive, but then they'd be more than willing to use MOP instead if it was cheap enough. What are those crossover crops again?

Yes. I mean, I would say most crops have some ability to use MOP on a short-term basis, but it would not be suitable for long-term use.

So I think there's a different answer maybe in the short term than over longer term. Many of the established root crops that are orchards and whatnot, you would not want to apply the MOP, the grower would not want to more than just a season.

So I would say, in the short term, there's probably a greater ability to switch than there is over the long term.

Thank you. And once again, we want to thank you for your participation in our call today, and we look forward to providing another update in late October.