To “recover” a password you just create a “new” password. That is what they are telling you.
You have a form with all the user’s info including username and password. You put the password in a password field. When that form gets posted it is sent to a PHP file. In that file you use your form’s data to run thru the format that was given to you. You then insert the user’s info and the output from the code you posted. When the user comes back to log in, they enter the userid and password, you use the same routine with the password again. Then, you compare the two outputs, the one you saved first and the version from the new log-in. If it is the same, then it is validated and you continue. If it is not the same, they can not log in. Give them the option at this point to “recover” the password by making a new one. If they want to do that, you ask them two or three secret questions to verify they are who they say they are…
Hope that explains it all. Or you can find HUNDREDS of samples in google. SALT is just a random “seed” for the MD5 encryption. Nothing more. It’s a way to add more security to the MD5. So, here is one link that talks about it and maybe it will help further:
http://pbeblog.wordpress.com/2008/02/12/secure-hashes-in-php-using-salt/
Good luck!