Feb 12, 2008
Executives
Peggy Landon - Director of IR and Corporate Communications Angelo Brisimitzakis - President and CEO Rod Underdown - CFO
Analysts
Mark Gulley - Soleil Securities Mike Judd - Greenwich Consultants David Silver - JPMorgan James Sheehan - Deutsche Bank
Operator
Good morning. My name is Regina and I will be your conference operator today.
At this time, I would like to welcome everyone to the Compass Minerals Fourth Quarter and Full Year 2007 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 session (Operator Instructions). Thank you.
Ms. Peggy Landon, Director of Investor Relations and Corporate Communications, you may begin your conference.
Peggy Landon
Thank you, Regina. Good morning everyone.
Thank you for joining us this morning. With me here are Angelo Brisimitzakis, our President and CEO; and Rod Underdown, our Chief Financial Officer.
Before we begin our remarks this morning, I'll read the Safe Harbor statement to you. Today's discussion may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.
These statements are based on the company's current expectations and involve risks and uncertainties that could cause the company's actual results to differ materially. The differences could be caused by a number of factors including those identified in Compass Minerals' most recent Form 10-K.
The company undertakes no obligation to update any forward-looking statements made to-date 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.
And now I'll turn the call over to Angelo.
Angelo Brisimitzakis
Thanks Peggy. Good morning everyone.
Thank you for joining us today. I am very pleased to report that we achieved record net earnings of $50.4 million for the fourth quarter and $80 million for 2007, as well as record sales in cash flow for the same period.
There were a number of contributors to these positive results, including some one time items and the weather of course. But the more important contributors were the structural changes we made in the business during 2007, because those factors will contribute to the company's result in 2008 and beyond.
Throughout our remarks today, we will discuss the structural changes in some detail. You can also find a summary of these changes as well as the overall Compass Minerals value proposition in our updated corporate presentation.
I encourage you to review that representation on our website at www.compassmineral.com/presentation, if you haven't seen it already. The structural improvements we made in 2007 include several very successful pricing initiatives.
In our Specialty Fertilizer segment, we announced price increases between March and December of 2007 that totaled $150 per ton on domestic Sulfate of Potash and $210 per ton on international shipments. These price increases were announced throughout 2007, but the frequency and magnitude, both increased towards the end of 2007, providing us with price momentum that should become significant by the beginning of the second quarter.
In the first six weeks of 2008, we already announced two more large price increases on Sulfate of Potash, totaling $185 per ton on domestic shipments and $220 per ton on international shipments. These price increases, if fully realized and sustained, could result in more than $50 million of additional annualized gross margin.
This assumes that the announced price increases are incorporated into all contract and list price sales. We've taken these pricing actions in response to record demand for Sulfate of Potash.
Domestically, the increased demand is the result of what you might call a trickle down effect from increased demand of standard potash, for niche crops, where SOP competes directly with standard potash, such as potatoes, fruits, and tree nuts. Growers who haven't purchased SOP in the past are buying now because of the stronger value of SOP and because of the tight standard potash supply.
In addition, international demand is growing rapidly, because growers in developing countries have began implementing more sophisticated farming methods to keep up with population growth and dietary improvements in their countries. This increased SOP demand translated into record Specialty Fertilizer volume for us in 2007, with sales of 423,000 tons for the year, a 12% increase over 2006.
And we expect additional production volume of 20,000 tons to 25,000 tons in 2008, which would be made possible by the capacity improvement project at our SOP production facility in Ogden, Utah that we announced last fall. To summarize, in 2008, we should have up to 5% greater Specialty Fertilizer volumes to sell at progressively growing prices.
And we expect to continue profitable SOP volume growth to continue into 2009 and 2010. Specifically, in 2009 we expect to add approximately 25,000 additional tons to our annual pond-based SOP production capacity through planned yield improvements.
So by the end of 2009, we will have 50,000 more tons of annual SOP production capacity from solar ponds, than we produced in 2007. And then in 2010, we will have another 50,000 additional tons of pond harvest per year, which we will, which will complete our Phase I expansion plans.
At the same time, our low cost solar pond capacity will be more than 300,000 tons per year. Electing to continue to source standard potash input under our long-term contract would give us an additional 200,000 tons of SOP for a total of more than 500,000 tons of annual production capacity.
And this is only the first phase of our SOP capacity expansion plans. We are working to obtain permits to increase our pond acreage by up to 75% and our ultimate goal is to eventually be able to produce up to 1 million tons of SOP annually at the Great Salt Lake.
We also created significant value in 2007 through pricing gains on consumer and industrial mineral products. For the full year, consumer and industrial average prices improved by $15.51 per ton or 14%.
Then late in the year, we introduced $9 per ton average price increase that will be implemented throughout 2008. And we continue to explore opportunities to expand volume in this business, through new products and new applications.
For example in 2007, we expanded our Safe Step professional de-icing product line through the addition of four new formulations, as well as introduced pool salt focused on non-winter growth. Two of these new deicing formulations were made with magnesium chloride.
You may recall that we completed the expansion of our magnesium chloride production capacity in 2006. That expansion made it possible for us to sell just over 400,000 tons of magnesium chloride products in 2007, including our new Safe Step products as well as the liquid magnesium chloride used for highway deicing and for commercial dust control.
There were also some important structural changes in our highway de-icing business in 2007. Firstly, our bid award volume was about 5% higher than the prior season, which returned our bid awards to pre-strike levels.
In addition we improved our average bid award prices by 4% over the prior winter season. Keep in mind though, that our bid award prices include freight, so changes in fuel costs are to the company's benefit or detriment.
In the fourth quarter, diesel prices were higher than in the prior year, which drove some incremental fuel surcharges on our transportation. Looking ahead to 2008 in our highway deicing business, our fourth quarter fuel prices have remained steady with the fourth quarter.
Of course, when we begin the next bidding season in late spring, we will take these higher fuel costs into consideration. Also in 2008 we will begin to benefit from our Phase 1 expansion at the Goderich Mine.
We expect to have an additional 250,000 tons of rock salt available for the 2008, 2009 bidding season. To refresh your memory that initial expansion should be completed by the end of 2008, so the full rock salt capacity from this Phase I expansion won't be fully available for us until the 2009, 2010 winter season.
At that time we will have 750,000 additional tons of capacity taking the mine to an annual capacity of 7.25 million tons. We are also working on the Phase II expansion, which will add another one million tons of annual capacity in time for our 2010, 2011 winter season.
And will take our total annual capacity to 8.25 million tons for our primary Great Lakes service region. In addition to these structural changes, we were the beneficiaries of very favorable weather in North America in the fourth quarter.
The weather added about $8 million to our operating earnings versus what we would expect in a normal weather fourth quarter. The benefit was somewhat magnified by comparison to the very mild 2006 fourth quarter.
For the full year the effect of the severe weather at the end of the year essentially counter balanced the effect of mild weather on the first quarter sales. As a result our full year sales were roughly in the normal range.
However, we had an unfavorable geographic mix of sales due to the weather that lowered operating earnings by approximately $5 million from what we would expect in a normal weather year. In our Records Management business, we more than doubled prior year sales through organic growth and acquisition of a complementary lending competitor.
While this is still a very small but profitable business, it's an excellent example on how we can convert a vacant underground asset into a valuable non-seasonal enterprise. Recapping our overall sales improvement; our 2007 fourth quarter's net sales, that is sales less shipping and handling costs, improved by 48% over 2006.
About 36%, was due to volume gains, particularly in the Salt segment, approximately 10% was due to achievement of price increases. We improved our full year net sales by 30% over 2006 levels, approximately 17% came from volume, 10% was due to price.
The remainder was from the effects of foreign exchange and our newly consolidated records management business. Not all of our year-over-year improvements were relating to selling or production activities, we made significant improvements to our financing costs, to a debt refinancing in October, that should reduce our annual interest expense by $5 million, and we further our ongoing tax efficiency by approximately 3% to 4%, at a constant earnings level.
Rod will elaborate on those changes in a few minutes. Lastly, we made several key organizational changes which are important to our long term growth of our company.
We added innovative products and marketing leaders in our consumer and industrial business to drive profitable growth, and we are investing an additional supply chain and engineering personnel who will lead our expanding operational excellence initiatives. We also completed final implementation of our first ever ERP system as we introduced new supply chain management strategies and tools with the goal of meaningfully impacting our distribution and manufacturing cost structure.
And I am most proud to report that in 2007, we achieved our best safety record ever. These structural changes along with our profitable growth and operational excellence initiatives have helped us build a better and stronger company that will provide a solid foundation for future sustainable growth.
Rod will walk you through the specifics of our fourth quarter financial performance and then we will open the phone up for questions. Rod.
Rod Underdown
Thanks, Angelo. It has been a record fourth quarter and year for Compass Minerals in many ways.
For the year we set records for sales, operating earnings, net earnings and cash flow from operations. We achieved these records with full year winter weather effects, which were slightly unfavorable as a severe winter in the fourth quarter in North America was offset by the impacts of the very mild first quarter and mild weather experienced in the UK for the second consecutive year.
As for the fourth quarter results, our 54% sales growth came from improvements throughout the company's operations. Our highway de-icing growth came from weather of course, but as well as price and volume gains we made in our bid season.
Our highway de-icing average selling price increased approximately 13% over the prior year quarter, about half of that year-over-year price gain was due to foreign exchange and there were some positive mix effects. Consumer and industrial, average selling prices increased by nearly $20 per ton over the 2006 fourth quarter.
The price improvement included about $6 per ton of favorable product mix effects from higher de-icing sales and a positive effect of foreign exchange. Overall, salt sales volumes were robust in the fourth quarter.
Now, in addition to measuring actual sales, as you know we evaluate the company's results on what we call a normal weather basis. Our normal weather measures or estimates, they are not precise calculations, but we use the same methodology every year, so that the estimates are consistent from year-to-year.
We think it's important to weather-normalize the company's performance, so that we can evaluate the season-over-season progress of our underlying deicing business. We estimate that our 2007 fourth quarter sales included a $25 million to $30 million benefit from more severe than normal weather.
By contrast, our prior year fourth quarter sales were $30 million to $40 million lower than they would have been in a normal weather year. We combined the favorable fourth quarter weather impacts with the effects of extremely of mild weather in the first quarter of 2007.
Salt segment sales for the full year 2007 were about average. Our operating earnings were also favorably impacted by wintry conditions in North America in the fourth quarter that were partially offset by mild weather in our UK markets.
We've estimated this benefit as $6 million to $10 million increase to fourth quarter operating earnings. For the full year, an unfavorable regional sales mix during the remarkably mild first quarter reduced our full year '07 salt segment operating earnings by about $5 million.
Turning to our Specialty Fertilizer business, our fourth quarter sales in that segment benefited from continued strong demand and the beginning effects of our price increases. Our pricing actions were weighted to the back of the year, so that they were only partially realized during 2007.
Many of our customers are on separate contracts that renew throughout the year. We believe we have significant pricing momentum heading into 2008.
These companywide sale gains were partially eroded by higher shipping and handling costs, resulting from higher surcharges for diesel and increased rail rates and by continuation of higher production costs at our Goderich mine, resulting from our capacity and maintenance improvements activities there. The combination of increased prices, volumes and distribution costs resulted in $30 million increase in gross margin for the quarter.
SG&A costs for the fourth quarter reflect increases, principally in results based variable compensation, the investments and personnel that Angelo mentioned earlier, volume driven selling expenses and foreign exchange effect. Operating earnings grew $24.9 million or 56% to $69.4 million for the quarter.
In addition of the weather related improvement, core operating earnings improved through the multiple structural value enhancements that Angelo discussed. Many of which have been only partially realized in 2007.
We also have taken some significant steps in improving our ongoing costs of financing and tax obligations. In the quarter, we replaced $123.5 million of 12.75% senior subordinated notes, with pre-payable bank debt that carries an interest rate of 200 basis points over LIBOR.
So currently we're paying an average of less than 6% on that debt, which should reduce our 2008 interest expense by about $5 million compared to 2007. The refinancing will also impact our cash flow, as a result of the changes from the non-cash interest accretion on the discount note to the cash interest on the term loan.
We expect our cash interest to run approximately $6 million to $7 million in each of the first two quarters of 2008, cash interest in the last half of the year will depend on how we refinance the remaining high yield note. We have one more discount note that is callable in June of this year.
It has a fully accretive value of $180 million and carries a 12% rate. We are evaluating our options to refinance these notes depending on market conditions.
We believe this next refinancing opportunity will also allow us to obtaining a further material reduction in interest expense, though at present, the timing is uncertain. Also during the fourth quarter, we made favorable changes in our ongoing tax expense.
We worked with the taxing authority to clarify some of our uncertain tax positions. This combined with the close of tax examination years, significantly lowered our estimate of current and future tax obligations, which we had accrued.
As a result in the fourth quarter, we recorded a benefit to income tax expense of $14 million, related to changes in our tax reserves for prior year obligations. We have excluded this benefit, when calculating the net earnings excluding special items.
Additionally, because of this clarification from the tax authorities, we now believe our ongoing estimated effective tax rate at similar earnings levels, is lower by 3% to 4% per year. So for 2008, we currently expect our effective tax rate to be in the mid-20% range, and we expect to maintain cash taxes at less than $20 million.
Of course, our tax rate is influenced, sometimes quarterly by many factors, including the jurisdictional mix of income and the amount of income achieved or projected for the year. For example as our income increases our effective and cash tax rates also increase, because many of our tax benefits are more fixed.
Our mid 20% tax rate estimate for 2008 considers all of these factors. Reported net earnings were $50.4 million or $1.53 per share in the fourth quarter.
Excluding special items, which were the refinancing costs and the impact on tax expense from the release of tax reserves, our net earnings were $43.2 million or $1.31 per share. Likewise our 2007 annual results are significantly better than the prior year at $80 million of reported net income or $2.43 per share.
When excluding the special items our net income was $68.7 million or $2.09 per share, which was an increase of $0.40 per share or 24% compared to 2006. Our investments in profitable growth and operational excellence contributed to our 2007 capital expenditures of $48 million.
Continued investments in growth and productivity initiatives particularly the multi-phase expansion to Goderich and our Ogden SOP facility are expected to result in approximately $65 million of capital expenditures during 2008. Our improving operating earnings and proactive financing and tax initiatives have helped us achieve record cash flow from operations in 2007 of $118.5 million, a 24% increase over 2006.
Our quarter and full year results contained significant gains, which were certainly influenced by more severe winter weather year-over-year. However the increases also reflect a portion of the many structural improvements that have been made in the profitability of the company both operationally and financially.
Now we'll open up the lines for questions, Regina.
Operator
(Operator Instructions). Your first question will be from the line of Mark Gulley of Soleil Securities.
Mark Gulley - Soleil Securities
Hey good morning guys.
Angelo Brisimitzakis
Good morning, Mark.
Mark Gulley - Soleil Securities
I love the presentation a lot more detailed, but referring to slide 21. I'm a little bit confused.
I want to make sure I'm doing my math right. If I take a look at the price increase data, you've provided domestic international kind of roll it up.
I come up with about $285 per ton increase. And when taken against your production of, you call 425,000 tons per year, that will suggest an increase in gross profit margin of more than $100 million, and you gave $50 million.
Am I missing something, perhaps on net-backs or something like that?
Angelo Brisimitzakis
Good morning, Mark, it's Angelo. A good question and as you know we don't really give specific earnings guidance, so my comment will be kind of framed on a big picture basis.
We are very pleased with the momentum that we are achieving on price increases in SOP. It's obviously leveraging what's going on in the broader potash market, and we talked a little bit in our prepared comments about those drivers.
When we put this slide together, we wanted to try to give an overview of the timing and the sequencing and the building of these price increases. There are going to be a lot of factors that come into play that will determine what the net benefit is for the company.
For example, these are competitive markets with customers that have other buying options. So what competition does at each account will often determine how much of the price we realize and when.
The second factor would be the timing of these increases. We are not commodity potash, and we believe we have a specialty product.
As part of being a specialty product, many of our contracts are annual agreements where the pricing is firm for either three months, six months or even one year. And we just don’t go in there and tear the contract up and start from zero.
We allow those contracts to mature, or we go in and try to renegotiate some kind of blended formula going forward. So, although the announced date of the price increases would lead to a much larger number, when you take into effect the competitive factors that are out there.
You've taken into effect the customer management and the uniqueness of every contract that we have. And you also take into effect the cost side of the equation, because as you know, some of our input costs, particularly KCL, have inflated over the last few years.
And again, you take our conservative orientation. We felt more comfortable giving an estimate of $50 million.
And again, that also assumes that whatever increases are achieved are then sustained for a full year and of course the consumer, the buyer on the other side will work very hard to reverse those trends. But I think what you can't see or you will see is accelerating price increases hitting our bottom line as we go through '08, and those meaningful increases will be seen definitely in the first and second quarters.
Mark Gulley - Soleil Securities
That's very helpful. I also wanted to ask a question on slide 23.
I know you've been reluctant to provide earnings guidance in the past. I want to make sure I'm reading slide 23 correctly.
It appears as if you are suggesting that net earnings and net income will improve by approximately $50 million year-over-year, and about half the gain from SOP price improvements. Again, am I reading that slide correctly or perhaps I am missing something?
Angelo Brisimitzakis
I'm not sure our PowerPoint skills were that good on this one. But I mean we were trying to bridge the '07 to '08 year and give everyone an appreciation for those underlying factors.
I would not take out a ruler and measure each box there to get a quantitative. However, taken in their entirety, I think what you are saying is essentially right.
Although, some of the benefits did occur in '07, and also some of the benefits will continue past the end of '08, I think on a macro basis, the five drivers that we outlined here will come into play heavily in '08 with the SOP pricing being the largest one. And as you can see by the way we've tilted that bar, that's the one increasing through the year or accelerating through the year.
Mark Gulley - Soleil Securities
And finally at the Great Salt Lake, the 75% expansion in pond surface area. Can I [interpret] that to mean, the 75% increase is in output from all key products?
And what might that 75% expansion cost, when it's all done?
Angelo Brisimitzakis
Good question. As far as the cost of the 75% expansion, we are not sure yet.
As we said when we announced the expansion in the second half of last year, we are in the middle of a very long-term leasing and permitting process with the state of Utah, and the various governmental entities that are required to give us approval. Depending on which ponds we get approval for, when we get those ponds approved, how many ponds we'd actually get approved and the engineering of that, will determine the price tag of Phase II.
I believe we are set for Phase I, which we are now in the middle of. We talked about $25 million in cost, with approximately 100,000 ton net capacity add.
The second bite or Phase II, we hope to be much larger. It will be more costly, but it is several years out in terms of its implementation, and frankly it is a while out, before we know exactly the permits that we would be granted and the detailed engineering.
Now once we expand those ponds, all the products that are made in those ponds will increase proportionately. We are obviously targeting SOPs since it is the most attractive product we have coming out of the Great Salt Lake.
But we will also get commensurate increases in magnesium chloride and in salt. Now the salt, we already have more salt than we need out of the Great Salt Lake, so salt increases will not really be meaningful for us.
But the magnesium chloride increase will be meaningful, and we intend to market that magnesium chloride, both the liquid form into the deicing market and dust control market, and then the solid form as we talked about previously into our value-added consumer products.
Mark Gulley - Soleil Securities
Thanks Angelo. That was very helpful.
Angelo Brisimitzakis
Thank you.
Operator
Your next question will be from Mike Judd of Greenwich Consultants.
Mike Judd - Greenwich Consultants
Good morning, and congratulations on a good quarter.
Rod Underdown
Thank you, Mike.
Angelo Brisimitzakis
Thanks.
Mike Judd - Greenwich Consultants
In the SOP business, your volumes in the fourth quarter were up around 20% year-over-year. I'm just wondering, as we look into the first quarter, you are having obviously capacity expansion going on, this and the other, but if you could talk a little bit about what our expectations should be, just in the first quarter?
I mean, I realize it's too early to make a prognosis for the rest of the year and that's the first question. And then the second question is in the highway deicing area, you had very good results there in the fourth quarter, and there was more snow, I guess than normal.
And here we are in the middle of February. Maybe you could just comment on how the conditions have been through the first month and a half of the first quarter?
In other words, how are snow conditions relative to normalized conditions for this time of the year? Thank you.
Angelo Brisimitzakis
Thank you. Two good questions.
On SOP volumes, I mean frankly right now, our primary focus is price realization. There is a lot more leverage on our earnings right now by achieving those price increases, as fully and as quickly as possible.
As you also know, we are somewhat constrained on SOP volume, but we are predicting to have up to 5% additional volume to sell in 2008. So how that 5% or 25,000 tons will play out on a quarterly basis, I'm not quite sure.
This is because those international shipments can easily move 15, 20 days at the end of a quarter, based on the boat availability or some congestion at the port. And we've had problems in the past where we thought it would go in one quarter and it went into the next.
But I think for the year, don't expect a lot of volume growth on SOP, but we are going to try to sell everything we can sell. But more importantly, we are going to try to sell it at the highest possible price.
The other factor that plays in on SOP volume, which won't affect '08 but could affect '09 and beyond this is a predominantly solar evaporation process. So we're carrying on Mother Nature and good dry sunny weather for that evaporation process to occur.
We feel good about the '08 harvest and that's set us up well. But as you look at this business over in the long term you just need to always remember that there is another weather effecting Compass Mineral's beyond the deicing effect, which was the second part of your question.
There is the solar effect that's been very important for our solar business. Fortunately, the last year or so and our forward outlook from the current harvest looks good.
But over the long term, there is probably a rainy season somewhere in our solar harvest that will have an impact. I am switching gears now to the complete opposite side, which is the deicing side.
I am looking out of the window here in Overland Park and its snowing and across the country there is severe winter weather and in the Artic front across the Midwest in Canada and that is very good for the deicing business. Again, our deicing business isn't limited to North America.
I would say year-to-date our UK weather has been a little less than what we would like. Clearly, the North American business is much better than last year, and so far normal to better to normal.
But there is still a lot of winter ahead of us and it could stop tomorrow. Spring could break out and we could be left with a very different scenario, but so far this year, we feel pretty good about it.
The distribution isn’t normal yet, so we are seeing more snow and snow storms in the United States than in Canada, and we are seeing less in the UK. So we have that mix issue to always deal with.
But we feel good about the year so far. We need those rivers and the lakes to stay unfrozen and to continue to move products throughout our 75 depots, and to keep our customers supplied.
We are managing that very closely and carefully. Our supply-chain is being pushed to its limits but it's being managed very well and we are trying to make sure that all our customers remain fully supplied.
Mike Judd - Greenwich Consultants
Okay, and just a follow-up on the SOP pricing, which you mentioned was going to be a more important factor. Sequentially, the prices in the fourth quarter versus the third quarter, they were almost flat.
Obviously, we are expecting a pretty significant increase in the March quarter. What's the goodwill sum to think about in terms of just near-term pricing for the March quarter?
Angelo Brisimitzakis
As far as the third to fourth quarter sequential, you are correct. I would just point out again that we have a different mix of international and domestic business.
Our domestic pricing is a lot higher than our international pricing, and we had more international on a percent basis in the fourth quarter. So it kind of throws those sequential average prices off a bit.
It also is the reason why we've raised our international prices more than our domestic prices, to try to catch up to those international markets to the higher prices we see in the US. So I don't want you to be misled by the sequential price.
We are forecasting steady increases through the year in each of the four quarters on SOP pricing. We've modeled it out contract-by-contract, again these are a lot of projections that we have made to try to lay out each one of our contracts out by quarter: how much that customer will buy, when they will take the price increase, and how much they will take.
We see an almost even split through those four quarters. So if you took that number we gave you in terms of up to $50 million impact on our margins, you could spread that out almost evenly over those four quarters.
Mike Judd - Greenwich Consultants
Okay, does that imply that basically from a pricing perspective you have taken approximately half of the price increases, because you are averaging it in? Is that the way to think about it, recently near term?
Angelo Brisimitzakis
Yeah, Mike. I think because there are many customers that are on contract.
That is when the contracts do come up for renegotiation all during the year. I think taking a percentage like 50% would be a good way to think about it and probably not lead you too far astray or get you too far out in front of where we think we are going to be.
Mike Judd - Greenwich Consultants
Congrats again on a great quarter.
Angelo Brisimitzakis
Thanks.
Operator
Your next question will be from David Silver of J.P. Morgan.
Angelo Brisimitzakis
Hi David.
David Silver - JPMorgan
Yeah, hi. Good morning.
So first off, I would like to say Rod, thanks for the presentation of the seasonality effects, I guess, versus last year and this year. And then secondly, I would say that I thought your PowerPoint skills were pretty good.
You have it color- coded and everything here.
Rod Underdown
I will pass that along to Peggy. Thank you.
David Silver - JPMorgan
There you go.
Angelo Brisimitzakis
And I didn't understand, so I didn't apply that her skills were good. I just wanted to get that this is not a table you could take a ruler out to, and you said exactly what each wedge is worth.
David Silver - JPMorgan
Well, based on my skills, its kind of saying that in the land of the blind, the one-eyed man is king here. So, I benefited from it.
I have a couple of questions on the deicing business first. The one thing that struck me was, if I do my own kind of cash margin per short ton analysis, 4Q versus 4Q, you had a tremendous difference in volumes and weather conditions.
And yet the cash margin per ton was almost identical, by my calculation. So I guess that means your production costs were up a little, and certainly there's fuel that you indicated that was included in your bid price.
So, I was wondering if you could talk about how you view the per ton margin that came through in the fourth quarter versus a year ago?
Rod Underdown
Yeah David, I think what we said on our remarks, we attempted to recover what we expected to be higher fuel costs during the year. And as you know, on our highway business, because we bid on a deliberate price basis, any changes following when we put in the bid price are awarded that volume at that fixed price.
Any changes to the supply chain and cost of delivery are to our benefit and detriment. And what we indicated in our remarks is that the pricing for diesel, which follows fairly close to oil, although there can't be a lagging effect there, was higher than what we had anticipated.
So when you look at our fuel shipping and handling costs, as a percent of sales, it was up about a percent year-over-year. So going from roughly $75 oil to $90 oil, had an affect on our margin per ton.
As we've said in the past, it isn't a huge effect. These things shouldn't be.
They should be viewed in contacts and not too disproportionately be compared to what the real effect is on the company. But, there were some effects.
So, when you combine the fuel costs driven by higher oil, and some impacts to continuing higher production costs at Goderich that we've had over the last half of the year, driven by just the tremendous amount of activity we have going on at that mine, improving the reliability, doing some maintenance, longer-term maintenance, doing several major capital projects there, that are meant to either directly or indirectly be able for the mine to take additional capacity on an annual basis of output. When you combine all those factors together, having about the same margin per ton is about the right way to think about it year-over-year.
David Silver - JPMorgan
Okay. So, based on the factors under your control, with the things you could see, that's not an unusual result, not better volume leverage than a year ago?
Rod Underdown
Yes.
David Silver - JPMorgan
Okay. So now looking forward, I was wondering if you could talk about your in-season adjustments.
So in the past, you've talked about your ability to manage production and employment and do some discretionary spending changes. And usually we talk about it in the context there with mild winter.
But I guess this year, it's the opposite. So can you talk about what type of shorter-term volume improvement or marketing strategies you might be able to implement to kind of exploit?
It's probably the best winter season weather-wise for you guys in quite a while.
Angelo Brisimitzakis
Yeah. This is Angelo, I'll take that one.
Yeah, its lot more fun managing this winter season than last winter season. If you recall the last winter season, at this time, we were putting the brakes on all our facilities to meet the lack of winter weather.
This season, it's the opposite challenge, and we're running everything as hard as we can. And we are attempting to move products, freshly produce as far as we can move them up the river, or around the lake, to keep up with demand.
So, coming out of this season, we would expect customer inventories to be a lot lower this year than they were last year. We would expect our inventory to be lower also.
We would to expect to want and need to run harder and longer to replenish. We would also expect, going into the bidding season, to see larger bid awards or states that are looking to replenish their depots, and are also going to come off a strong season.
So they are going to project, also, that positive message versus coming off a weak season. So I think it all plays out well, both on the highway and also the consumer side.
You remember on the highway side, this market kind of zeroes out at the end of the season. Customers zero out and suppliers have no business into the next season.
But I think the psychology and the dynamics will be a lot better for us both on the highway side and on the consumer deicing side. As far as the fertilizer side, again, there is a bigger phenomena going on than the weather in North America.
The global fertilizer demand is driven by demographics and dietary changes. This new phenomenon around biofuels has just strengthened crop prices, crop demand and, therefore, fertilizer prices.
This is one of those rising tides raise old ships. We are benefiting from that, although our products don't go directly into many of those applications that I just mentioned.
We are benefiting, but we want to, in the process, maintain the specialty aspect of our product, because fertilizer is notoriously cyclical. Now people are predicting this cycle to be very long, and maybe not even happen.
I am not sure about that, but what I am sure of if we maintain the specialty aspect of our product, those anemic customer relations, and the contractual basis in which we sell when the overall fertilizer market might go down, we are going to be less vulnerable to that. So we are going to ride it on the upturn, but we are not going mortgage all those important things that have served us so well in the prior years during downturns in the fertilizer market.
But it's all about price right now in fertilizers.
David Silver - JPMorgan
Okay if I could just indulge you with one more question. I guess there was a spokesman for Cargill, who was quoted in the papers yesterday about the difficulty in barging salt across the Great Lakes, due to ice and some other issues.
So, I was wondering if Compass, with their big Goderich operation, is it an issue for Goderich in this season? And just broadly speaking, I guess there are some difficulties and logistics it raises, the issue of maybe potential penalties that for non-delivery that might be written into the contracts.
So is that an issue at all for Compass here or are you guys pretty set on meeting all your contractual commitments in terms of delivery times, locations and volumes?
Angelo Brisimitzakis
Yeah, I mean that's another good question and we obviously know where those delivery penalties are, and we work very hard to shift our supply chain to make sure that those are the ones that are met first. So I don't think that's a factor you need to worry about, but it's a factor we manage actively.
Again, with our 75 depots, we are moving lots of products around. Frankly, sometimes there are less sufficient moves to customers, but we make those moves in order to keep those customers supplied.
So if depot A is the closest depot, and they are running short; depot B is 100 miles away, and they have product access, we'll make this shipment from depot B, instead of depot A incur a little extra freight, and keep that customer supplied. We rely, as I think many of our competitors are moving products around even in the winter.
There are just such massive quantities of salt that you couldn't possibly pile them up high enough in the fall to anticipate, even for the most severe winter. So considering the severity of December, a lot of those inventories were depleted both at the customer and at the suppliers.
So we work very hard in January and still in February to keep on moving very large quantities to our depot system. And yes, as Artic air right now goes over the Great Lakes, we have seen some freezing and there are some limitations now and how many ships we can move.
And they move during the day light versus night time and they need ice breakers. So it does slow down a little bit, but they are still getting through, although not as fast a pace that we would like.
We are also seeing issues coming up the River system, particularly right outside Chicago, where it has been freezing. But again, those barges are coming through, albeit, not as quickly as we would like.
But again, a lot of this is to meet incremental demand beyond our commitments. That's the kind of the upside which we want to be able to report on next quarter.
So I think we have our commitments well-covered. I think what we are seeing now is how much of the additional opportunity are we and others going to be able to capture.
And whoever has the most salt lying around, and whoever is able to move it most effectively to where the weather is, is going to get the most upside. Everyone has got a different supply-chain to work off us.
Everybody has a different geography in which they sell. So depending on where it decides to snow and where the salt is, will determine who gets the benefit on the upside.
Sorry for the long answer.
David Silver - JPMorgan
That was a lot more than I expected. Thanks very much.
Operator
Your next question will be from James Sheehan of Deutsche Bank.
Rod Underdown
Hello James.
James Sheehan - Deutsche Bank
Yes. Good morning.
Angelo Brisimitzakis
Good morning.
Rod Underdown
Good morning
James Sheehan - Deutsche Bank
I'd like to get back to this issue of the SOP prices being flat in Q4 with Q3. Now, you had a price increase of $20 a ton, both internationally and domestic on September 1st, and then you had $35 a ton domestic and $60 per ton international price increase for December 1st.
Does this really imply that virtually all of your international SOP business is on contracts and hasn't been renewed yet? If so, how much of that business do you except to renew in Q1?
Angelo Brisimitzakis
Yeah, a good question. Again, we had a strong international mix in the fourth quarter.
So, you will see a suppressed average price in the fourth quarter due to the mix change between domestic, which is higher priced than international. So, it's difficult to read across and we don't provide detail on what is our domestic price, and what is our international price.
So you have to have to trust us, that there was a mix effect from the third to fourth quarter. The international pricing agreements mirror the domestic, in that some of them are three months fixed pricing and some are six and some are longer.
And we are just weighting those out through '07. Of those that were strictly spotted, they go up right away.
And those are contracts that go up when they expire or are able to be negotiated in the interim. So, I don't think we were more or less successful domestic or international.
I just think you'll see a mix of agreements, all accelerating price through the year in '08 and we have achieved some of it in '07. But you really don't see that as fully because of the mix effect between more international in the fourth quarter, and more domestic in the third.
James Sheehan - Deutsche Bank
Okay, that's helpful. And how much of your international sales, or I should say how much of your total sales are international in Q4?
Is that going to differ substantially in Q1?
Rod Underdown
Yeah, we don't really talk about it on a quarterly basis. Each year, for the last 4 or 5 years, our international shipments have been about 25% of our sales volumes.
We don’t really see that mix changing dramatically over the next 12 months.
Angelo Brisimitzakis
Our preference would be, if we could sell it all domestically, we would. So we sell as much as we can in the domestic market.
That is our primary market, our core market, our home market, and it's the most profitable market. And then we use that 25% to 30% of our production in the international market.
It is improving as these price increases go into effect, and therefore, our go-forward outlook is to continue in those markets, and expand our overall capacity to be able to serve both segments fully, going forward.
James Sheehan - Deutsche Bank
Okay. And could you also address the lag and your recognition of MOP costs?
Does your expansion of SOP capacity lower your production costs enough to fully offset? Do you expect an increase in MOP costs in 2009 to 2010?
Angelo Brisimitzakis
Yeah, interesting, it's a bit of a complicated question. I mean, I think you have to look at our SOP as really having two distinct manufacturing processes, both of which have different cost basis.
On the pond base, we believe it is the one of the lowest cost process in the world, and we are expanding that as much as we can, and as quickly as we can. We believe that this process will always be very attractive, and will always be our preferred process.
So most of our expansion activities, if not all of our expansion activities, are geared towards pond expansion, yield improvements via the pond, and whatever we can do to get additional pond capacity. Our second manufacturing process is one that uses KCL or MOP or standard potash, all the same, as the input.
That is a higher cost process and we constantly need to look at our lowest selling price SOP, against our highest cost KCL based SOP produce. So we have a favorable supply agreement.
It does lag the market pricing that's out there, and it has been profitable for us over many years, and we expect it to remain profitable going forward. But who knows where the KCL price will go, and who knows where the SOP market price will go.
And therefore there are scenarios in the future which could make that business unattractive, and so that's our discretionary production. We are prepared to flex that up and down, if that production route turns unprofitable.
So we watch that very carefully. It is discretionary, it has been good to us historically, and we see it continuing to be good.
But there are scenarios which make it less good and we have to be mindful of those.
James Sheehan - Deutsche Bank
Okay, thank you. And also my last question is on the Highway Deicing Salt business.
I am just looking at your price increase there of 13% during the quarter. And I am just trying to reconcile this.
You talked about the salt price, the bid price being up 4%. Now I understood that with your consumer and industrial salt, you are able to ratchet up freight surcharges during the year.
How were you able to get higher pricing on the highway deicing salt?
Rod Underdown
Sure, on the Highway Deicing side there is an influence there of foreign exchange. We have talked about that in our remarks, about half of the price increase being related to foreign exchange.
That is unique to the sales price, but because we transport quite a bit of our products from Canada into the US on a net margin basis, there is very little effect associated with foreign exchange. But it does show up in the selling price essentially for those products that are sold inside the Canadian market.
And because of the weakening of the US dollar versus the Canadian dollar over the course of 2007, the exchange rate changed about, I want to say, it was around 15% year-over-year. That certainly had an impact on the sales price, but don't think of the margin effect of that as being very large.
James Sheehan - Deutsche Bank
Okay. Thank you very much.
Rod Underdown
You bet.
Operator
Your next question will be a follow-up from David Silver of J.P. Morgan.
Angelo Brisimitzakis
Hi, David.
David Silver - JPMorgan
Yes, nice. Okay, I had a couple of questions for Rod.
So, first of all Rod, could you just repeat the number for CapEx in 2008, I didn't quite catch whether its 55 or 65?
Rod Underdown
Yes, 65.
David Silver - JPMorgan
65.
Rod Underdown
And that's again influenced by the couple of projects that we've talked about, the expansion at Goderich, and the yield and capacity improvements of the plant out at our Ogden SOP facility.
David Silver - JPMorgan
Got you, and then on the refinancing opportunities. So, first on the one that you guys did take advantage of in December.
I mean, you mentioned it's about $123 million in principle value. You mentioned that you're replacing 12% or so that was 6% or less debt, certainly if it's based on LIBOR.
So I'm just doing some quick math, and it seems like my view would be if you're starting with the refinancing in December, the full year '08 refinancing cost-reduction would be greater than the $5 million. Can you, is there a piece I'm missing, I guess, I'm wondering about that?
Rod Underdown
Well, there are a couple of factors that are offsetting the basic $123 million times they change in interest rates. The first thing is of course to call the bonds or to early tender the bonds, there was a cost associated with that.
So the net debt that we end up with at the end of the day is a little larger than what we've refinanced.
David Silver - JPMorgan
Sure.
Rod Underdown
So that's in effect of that. There is also -- when we're giving our $5 million amount, we're also taking into account that we still have those 12% discount notes outstanding and because the interests on those accretes, interest year-over-year on those notes would be a little higher in 2008 than they were in 2007, just because of the interest on the accreted interest.
So those are all things that come in to play when we kind of throw out the $5 million number we have tried to factor in all of the impacts to our interest expense over the course of the year.
David Silver - JPMorgan
Yeah. Okay so it is kind of a blended effect?
Rod Underdown
It is a blended effect. That's right.
David Silver - JPMorgan
Yeah and then you mentioned there is some opportunities obviously in June for another refinancing, but if you could look past that, what is the appropriate capital structure. I think Angelo in his remarks and in your slides you talked about kind of lowering your cost to capital.
And given your tax situation and then some other things. I mean, my sense of it, but if we are speaking here a year from now and we say to you Rod what's your target debt-to-capital or what debt level are you comfortable with kind of on an ongoing basis.
What do you suppose; I am sure you have strategizing about this for years. But where do you think Compass should be set up for the long-term in terms of capital structure?
Rod Underdown
When you look at it on a leverage basis, we have been approaching three times for quite a while and so on a leverage basis getting to that level wouldn't be something that we would shy away from. When we think about within the capital structure having 50% bank and 50% longer term money kind of seems like the right mix for us and we have tended to focus on maybe a little bit richer mix in terms of a fixed rate for the company, so 60%, 70% fixed versus floating is kind of where we have internally targeted and believe that we'll land in terms of our debt mix.
So that's kind of the direction that we are heading again the credit market as you probably know are in a state of turmoil right now. So the timing of our refinancing is a bit uncertain.
I think we could refinance today or any time between now on the call date. We believe that we could do that and we would have a problem actually obtaining the financing, I think would be a little bit more opportunistic about in that, will wait for a good window that is available for high quality companies like ourselves that just need to wait for the right timing and can get a little bit better interest rate and we could garner in the market today.
David Silver - JPMorgan
Okay. And then last question on foreign exchange, so you guys went and talked about how currency effected the revenues and what not, but would I be correct in assuming that when it comes to the bottom line effect of all the foreign currency changes Canada, UK et cetera that the effect was kind of minimal like maybe $0.01 or $0.02 per share after tax?
Rod Underdown
It would be minimal, I don't know about $0.01 or $0.02, but it would not be a big number David. We would normally have expected a little bit more of a lift on the foreign exchange from our UK operation because the dollar also weakened in relation to the pound.
But because of the mild winter there the earnings didn't pan out as heavily as we or as great as we would plan in a normal winter. And so yeah, the impact of foreign exchange to us this year is very minimal.
David Silver - JPMorgan
Okay, very good I appreciate now.
Angelo Brisimitzakis
Yeah, thank you.
Operator
Your final question will be from Mark Gulley of Soleil Capital.
Angelo Brisimitzakis
Hello, hi Mark.
Mark Gulley - Soleil Capital
Hi, there. Hey, Angelo when you were walking through the various phases of expansion in SOP in your remarks.
At one point you referred to I think 2,000 tons of purchase product. I may have written that down incorrectly.
I was writing very fast, you recall what you said there with respect to the various layers of expansion and purchase product?
Angelo Brisimitzakis
Yeah, well the expansion was kind of a separate discussion, is that's phase growth where we said we are going to get in the first phase a 100,000 tons of pond based 25, 25 and 50 over the three years that we've talked about and then up to 75% expansion of our ponds, which is the second phase of the expansion. And we don’t know how much we are going to get there.
But we are hoping to get a lot, which is going to depend on permitting. I then said we have a second manufacturing process that's based on buying KCL, not buying SOP but buying KCL as an input and then converting it to SOP and that's about 200,000 tons a year.
And that is kind of discretionary to us, we buy it and use it when we can make SOP and sell it at a profit. We will stop buying it and stop using it if the market economics make get impossible to be profitable.
So it's our second production route, it's about 200,000 tons. It's been good to us today.
We expect it to be good to us this year, next year but who know where it's going to go over the long term.
Mark Gulley - Soleil Capital
Now the 200,000 to be very clear, that's measured in terms of potassium sulfate output, correct?
Angelo Brisimitzakis
Yes, that is correct.
Mark Gulley - Soleil Capital
That's not what you buy from your supplier; it's what you are able to produce from what you purchase from them?
Angelo Brisimitzakis
Yes.
Mark Gulley - Soleil Capital
Right, good, thank you
Operator
This concludes our question and answer session for today. I would now turn the call over to Angelo Brisimitzakis for any closing remark.
Angelo Brisimitzakis
Great, thank you Regina. 2007 was a year of records, but more importantly, it was a year of building an even better and stronger Compass Minerals for the years to come.
Please take a look at our value proposition presentation on our website. I look forward to sharing our progress with you and I thank you for participating in this call.
Have a nice day.
Operator
That concludes today's conference. Thank you for your participation.
You may now disconnect.