Intrepid Potash Inc (IPI) 2021 Q2 法說會逐字稿

Thank you for standing by. This is the conference operator. Welcome to the Intrepid Potash, Inc. Q2 2021 Results Conference Call.

(Operator Instructions) And conference is being recorded. (Operator Instructions)

I would now like to turn the conference over to Matt Preston, Vice President of Finance. Please go ahead.

Thanks, Therese, and good morning, everyone. Thanks for joining us to discuss Intrepid's second quarter 2021 results. With me on the call today is Intrepid's Co-Founder, Executive Chairman and CEO, Bob Jornayvaz; also available to answer questions during the Q&A session following our prepared remarks will be our President, Brian Stone; and our Vice President of Sales and Marketing, Zachry Adams.

Please be advised that our remarks today, including answers to your questions, include forward-looking statements as defined by U.S. securities laws. These forward-looking statements are subject to the risks and uncertainties that could cause actual results to be materially different from those currently anticipated. These statements are based on the information available to us today, and we assume no obligation to update them. These risks and uncertainties are described in our periodic reports filed with the Securities and Exchange Commission, which are incorporated here by reference. During today's call, we'll refer to certain non-GAAP financial and operational measures. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures are included in yesterday's press release. Our SEC filings and press releases are available on our website at intrepidpotash.com. I'll now turn the call over to Bob.

Thank you, Matt, and good morning, everyone. Our second quarter was highlighted by another strong performance in our fertilizer segments as strong demand and increasing prices resulted in strong bottom line results. We recorded second quarter adjusted net income of $7.4 million and adjusted EBITDA and of $16.9 million, significant improvements over both the prior year and the first quarter of 2021. As expected, cash flow from operations was impressive, with $32.3 million in cash flow in our second quarter alone and $51.4 million for the first 6 months of 2021, already exceeding our cash flow from operations for the full year 2020. In addition to strong results, we received notice of full forgiveness on our Paycheck Protection Program loan from the SBA and paid down the remaining $15 million on our senior notes. Our balance sheet is clean and strong and will allow us to execute on the significant opportunities in front of us in the oilfield market. Second quarter results also benefited from $6 million received for the sale of another small 320-acre tract of land located adjacent to our 60,000-acre intrepid South Ranch and the associated saltwater disposal permits with it, generating a satisfactory gain considering we purchased the assets about 2 years ago for $3 million. We ended the quarter with $55 million in cash on hand and approximately $30 million outstanding on our revolving credit facility and expect to pay that down in the third quarter. Earnings for our nutrient business improved dramatically in the quarter as we continue to layer in sales at increasing price levels.

Potash pricing has continued to improve in both the U.S. and global markets since our third quarter price announcement, and we are currently layering in spot agricultural sales at $250 per ton above the 2020 summer fill price levels. We expect to continue to layer in spot sales during Q3 at increased pricing levels, leading to another quarter of higher average net realized sales prices in the quarter. Solid agricultural economics across the global cornucopia of crops from coffee, sugar, cotton, palm oil, soybeans, corn, wheat and other ag commodities, help boost and further strengthen the global farming economy, which in turn provides a foundation for firm potash pricing.

Good application rates across our markets like most distributors low in inventory at the end of the spring season and buyers have been eager to restock depleted inventory levels. We expect good demand will continue through the second half as increased farm income levels, combined with the potential for an on-time harvest remains supportive of fertilizer application. Our Oilfield Solutions business improved compared to the second quarter of 2020, although margins were slightly reduced as we intentionally high graded and deferred to later scheduled water sales on our South Ranch in anticipation of higher margin sales in the second half of the year from fracs that are closer to our wells and based on a sliding scale and pricing tied to West Texas Intermediate. Water sales are already picking up in the third quarter with approximately $1.5 million in sales in July alone, and we have a great outlook for the rest of the year.

Oil pricing remains supportive, particularly for the Northern Delaware Basin, and our South water rights are fully committed in the second half of the year, and the runway into early 2020 looks very promising. Other revenue sources, which include a produced water royalty, caliche brine sales and surface use agreements improved significantly in the second quarter compared to the prior year, highlighting the improved oilfield activity near our operations. We continue the pivot to ESG-friendly full cycle water management systems, investing in additional recycling equipment during the second quarter, and we look forward to expanding on the full cycle water management products and services we offer in the Delaware.

We expect to mobilize our first $70,000 per day barrel recycled unit in the next few weeks with the potential to steadily increase volumes to over 200,000 barrels per day over the next few quarters, as we bring additional recycled units online. And now I'll turn the call over to Matt for a review of our financial results and outlook.

Thank you, Bob. As Bob noted earlier, strong fertilizer demand and rising prices kept the momentum going in the second quarter, driving significant improvements in our consolidated results and across all segments. The Potash segment generated $10.1 million of gross margin in the second quarter as higher net realized sales price and increased volumes drove significant increases compared to the prior year. Second quarter production saw the benefit of an above-average 2020 evaporation season as increased pond production allowed us to extend the harvest season compared to the prior year and enable us to sell additional tons. The last few months saw steady increases in Potash pricing as strong commodity prices across all industries and good weather led to above-average demand as farmers were eager to make up for below average application seasons in the past 2 years. We announced a $20 increase to Potash price in May and booked historic volumes for third quarter delivery as distributors restocked warehouses after a busy spring. Since the May announcement, Potash pricing has moved up considerably in the barge and inland warehouse markets as buyers compete over limited supply for third quarter delivery.

We expect third quarter average net realized sales price will be between $355 and $365 per ton with additional upside into the fourth quarter 2021. Our Trio segment recorded a great quarter, generating $3.2 million in gross margin on higher volumes and price compared to the second quarter of 2020. First half Trio sales volume exceeded the prior year by 5,000 tons as strong customer relationships and robust demand led to record domestic deliveries, which more than offset reduced international volumes. We increased Trio price $20 per ton in May and another $35 per ton in June as the Potash market continued to move higher. We began taking orders for third quarter delivery after the $35 per ton price increase in June and expect to realize all of this increase in Q3, with an expected net realized sales price of between $310 to $325 per ton. Our posted price is now up $135 per ton compared to the summer fill levels, and we are mostly booked through the third quarter.

Total second quarter water sales were $2.8 million, similar to the prior year as we manage our South Ranch in order to meet higher demand -- higher margin demand later in the year. As Bob mentioned, our other revenue sources increased in the second quarter, and we expect improving margins in Oilfield segment results as our water sales increase in the second half. As Bob discussed, our debt position decreased to $30 million outstanding at quarter end, all of which was under our revolving credit facility with BMO.

As of today, we have paid back all but $10 million under the facility and expect to pay down the remainder in the coming weeks. With the senior notes paid down and improving EBITDA, we now have full availability under our credit facility, and we'll look at possibly expanding that facility in the coming quarters. We spent $6.6 million on capital investments through the first half of the year and now estimate 2021 capital investment of between $20 million to $30 million. That concludes our prepared remarks for today. We're ready to take questions.

We will now begin the question-and-answer session.

(Operator Instructions)

The first question comes from Joel Jackson with BMO Capital Markets.

This is Bria Murphy on for Joel. We're obviously seeing a surge in Potash benchmarks recently, including now around $600 per ton in the Midwest. But it seems a lot of global producers aren't transacting at these levels. How liquids do you think these benchmark prices are? And are you booking business at these levels in the fourth quarter?

That's a great question. I'll let Zack answer to that. We've been very methodical in which -- in the timing of the orders that we take. We're seeing in our region, very strong demand, but I'll let Zach give some color to that.

Yes. Thanks for the question. I think as far as the first part around the liquidity at the current levels, most buyers in the market, in the Midwest have the tons in place or on order already for what they're going to need to get started this fall. So we don't see a lot of liquidity at those levels today. We certainly have transacted on some spot tons from our mine site to that point. Looking ahead to Q4, we've not booked any tons for Q4 yet on the potash side. We're going to hold off from booking tons there and the market remains tight, and we feel comfortable what we have for Q3, and we'll address Q4 later.

Okay. And then in Oilfield Solutions, revenue was obviously down year-over-year in the first half, but you pointed to the potential for steady growth in the second half, I believe in anticipation of higher-margin sales in the second half, what level of growth do you expect to see?

Yes. It's a good question. Certainly, Q2 was down considerably from Q1 of 2020 as we really just held back water and opportunistically scheduled that for the back half of the year. We expect to sell out of our acre feet of water on the South ranch. So I can't give you a margin number, but we will see significant growth in revenue towards the second half of the year. It really hopefully in line kind of with where we had been pre-Covid.

Okay. That's helpful. And then just the last one back on, I guess, Potash and Trio. Obviously, pricing is expected to rise in the third quarter. How do you expect margins to trend well costs also rise or do you expect margins to expand?

Yes. So we're in kind of middle back half of the evaporation season right now. Our cost structures to say pretty similar. Those tons are in inventory right now that we'll be selling. We're going to start up our production here at HB this week, in our Utah facilities, late August or early September. So the cost side is going to stay pretty consistent, obviously, with some adjustments just based on where we're selling out of. And when we see higher pricing, we see a lot of that fall to the bottom line, roughly 5%, 5.5% royalties. So with the $10 increase, we see 95% of that fall to the bottom line in most cases, and so we expect that in Q3.

The next question comes from Vincent Andrews with Morgan Stanley.

This is Will Tang on for Vincent. I'm wondering if you guys can comment on your Potash inventories? And how you're thinking about sales versus production as we go through the year and exit fall season?

I'll let Matt address the inventory issue. But as you know, we're a relatively small producer, regional producer. So we've always had the ability to sell out our inventory I'll let Matt address the current levels and how we've tried to manage our book, seeing the strength of the agricultural commodity markets. There's no reason to believe that we're not going to see continued strength in the fertilizer markets. So we've been trying to manage our sales book in anticipation of the really strong agricultural economy. So Matt, I'll let you talk to the specific inventory levels.

Yes, we're certainly coming off a very strong 2020 evaporation season. We had above-average tons in inventory combined with those down application years that we've been able to sell over the past 12 months as demand has just really kept going since really October of 2020.

Certainly, I'd say we're in the kind of the middle half to back half of evaporation in 2021. And so we don't have any updates as far as production and inventory for next year. But certainly, we continue to be pretty smart about holding back tons, supplying historic volumes to our high netback customers and holding back tons for a fall season and hopefully, early 2021 -- or 2022, excuse me, which we expect we'll continue to see some price appreciation from where we are today.

Got it. And then one more question, if I may. I'm wondering if there's any concern with given how high Potash prices are right now that the farmers might turn to mine the soil and the applications this fall and next spring? I guess, in other words, do you guys see or see any like demand destruction happening related to worsening affordability?

We all lived through the price increases in '07, '08 and '09 and watch the demand destruction that occurred when potash prices got up in the $800, $900 range. I don't think we're remotely near pricing where we're going to see demand destruction. I think when you look at farmer economics, they're doing extremely well right now globally. We tend to look at all commodities that use significant amounts of Potash, and we're seeing strength across the board. So if you look at coffee prices, hitting the prices they have, sugar, cotton, all too often people focus on corn. And we like to remind people to look at everything else because it provides such a solid foundation for where we are.

So given the strength across the entire spectrum, we believe that we're finally at what is reasonable market pricing. I think when you look at pharma economics, we've got plenty of room, and we should not see any demand destruction at these levels. Zach, I'll let you add some color.

No. I think Bob covered it well. I mean, I think as long as we're at these levels of economics for growers, even if these heightened input levels for potash specifically, it still makes financial sense from a rate of return perspective for Potash on the ground and bushels. And I think we're seeing that with just the increase we saw for this fall around the fall demand from growers and just things we're picking up from visits with our customers as well that they're not seeing a downtick in demand yet from growers.

The next question comes from John Roberts with UBS.

Congratulations to Brian on promotion. You also added an energy Board member during the quarter as well. does Brian's background and the addition of energy know-how to the Board signal any kind of step change plans here in advancing the water and oil field strategy?

Absolutely. This is Bob. And John, thank you for the question, and I'll let Brian take his victory lap here in a minute. We're really proud of the addition of Lori Lancaster and really want to stress her financial expertise in the oil and gas energy space. So it's not just the energy experience, but the financial experience. We've clearly been describing and trying to articulate our pivot in the full cycle water management. Our increased emphasis on recycling, the units that we picked up, the units that we're -- the process of putting to work. We're working on some interesting projects on the disposal side. And so we just continue that pivot that we've been describing over the past several quarters and lining up the expertise to execute on that. Brian, if you want to add anything to that?

I think you said that very well, Bob. I just think this pivot to full cycle water management we think that there's a willing market there from an ESG standpoint, we think it's politically and from a regulatory standpoint, what the market is asking for. And we think it's highly synergistic with our our business in Carlsbad with the workforce of 300-plus employees, and so we think we're really well positioned in that market.

And then on the land sale in Texas, does that mean that all water growth is going to be recycled water? Or would you be expecting to just grow the disposal wells elsewhere and you'll grow both disposed water as well as recycled water?

We'll clearly grow it, probably not through SWDs. We'll talk about that in the upcoming quarters. But we clearly have plans to grow our ability to handle disposal opportunities.

So why the land sale in Texas then?

Well, it was adjacent -- I guess we just have better opportunities when we look at the disposal market. So it was 320 acres adjacent to our 60,000 acres that we have bigger plans for. And so if you look at Southeast New Mexico, like a giant jigsaw puzzle, there are people that are trading pieces so that their jigsaw puzzle makes more sense to them that they have more continuous pieces of their specific puzzle. And so if you look at all the different operators, all the different pieces of infrastructure, trading one piece of infrastructure, one piece of land for something else is just a useful allocation of capital. I wouldn't read anything into it other than it was literally trading jigsaw pieces.

Bob, I think I'd also add that full cycle water management requires large-scale on-demand disposal, and we just bought this asset, didn't meet those requirements, and we were able to sell it at a 2x.

(Operator Instructions)

The next question comes from Matt Farwell with Roth Capital Partners.

If you could just step back and on the oil services business and give us a picture of what the infrastructure in the business might look like in '22 versus '21, in the sense of -- and we've been talking about full cycle water management to source water delivery, recycling, blending, disposal. What might it look like? How is the business going to evolve over the next 12 months?

That's a great question. Throughout the entire Southeast New Mexico portion, we now have the ability to deliver source water whether it's freshwater or brine or brackish water to operate or the entirety of Southeast New Mexico. We've got 3 full recycled units ready to go up and running and are currently under negotiation, with a significant customer that we hope to announce literally any day. On the disposal side, we've got a very creative project that we've been working on in the state of New Mexico that we'll be talking about in the upcoming quarters that will put us smack in the middle of the disposal business given our location and the location of our facilities within the footprint of some of the biggest units, poker like unit and the Big Eddy unit in Southeast New Mexico.

So our goal, hopefully, by -- if not the fourth quarter, but the first quarter is to be able to deliver in the hundreds of thousands of barrels. I mean, right now, we've got the capacity on the freshwater side or source water side to be delivering 300,000 to 400,000 barrels a day and recycling at those same levels and hopefully disposing of those same levels going into 2022. Did that answer your question?

Yes, it did. Yes, that's very helpful. In terms of the -- how you're funding this? A lot of the funding is I imagine being expensed, but is some of this funding going to flow through CapEx on the cash flow statement? And if so, what -- might that number look like in 2022?

The great news is a lot of the capital has been spent. So if you look at our pipeline infrastructure, if you look at the recycled units, A big chunk of the capital has been spent, and so we're talking about bite-sized pieces that are easily paid for with cash flow or small drawdowns on our revolver. So we've -- as I tried to describe earlier, it's like a giant jigsaw puzzle that's slowly coming together. So everything that we're looking at is very much in bite-size capital pieces. It should be able to happen out of either cash flow or small drawdowns on the revolver.

Okay. Great. And is there any update on the litigation front as well as -- there is this commentary in the 10-Q about a customer deposit on alleged default on a sales contract. I don't know if that's just a rent for foundry disclosure, but any update you can provide on either one with these tool?

We're just -- we're eagerly awaiting the results from Judge Wexler in the adjudication trial. We can only assume he's taking his time to write a thoughtful opinion. I wish we had an update for you. We're eagerly awaiting that as well.

We've got several significant water permits that are in the process of being adjudicated, and we would love to be able to announce any day that they're complete. Expenses around procuring those permits, fighting the protests adjudicating the water rights, all those large legal expenses are behind us, and we're now just awaiting outcomes.

That's great. And the comment -- and the alleged default on the sales contract, is that also assumed in your commentary?

Yes. The words say what they say, and I'll just leave it at that.

The next question comes from Jason Ursaner with Bumbershoot Holdings.

Congratulations on the results.

Thanks, Jason.

Kind of following up on the last question, been asking about it for a long time. So I guess, no reason to get shy at this point. But the answer on capital structure and capital allocation plans for a while has been that it's kind of just too premature to talk about, and you need to execute first and then can focus on it. But just given that you brought it back to a strong net cash position now and looking out to next year with continued strength in Potash and even any improvement in the oilfield that cash position might grow pretty substantially to where you might come into the end of 2022, and you could be looking at a pretty significant percentage of your market cap in cash. So it's not a problem. It would be a champagne problem to have. But at what point -- is it going to be appropriate or maybe even unavoidable to start giving more details on the financial part of the strategy there?

And are you willing to kind of do that at all today in terms of the balance sheet or maybe where buybacks fit as part of the strategy?

Jason, it's a great question. I would say, if anything, that we are more inclined to some sort of a special dividend, if you will, we're looking at it. We're very aware of it. We would love nothing more than to return capital to shareholders as large as a shareholder, you know I'm very much aligned with you. We're glad to be where we are, and so we're now having those discussions very earnestly. We feel like a buyback program would be much more tax efficient, and so we're working as hard as we can and eagerly so that the next time you ask that question.

Okay. Awesome. And just last one. The land sale, just a quick follow-up on that. I'm assuming if you sold the 50% interest in the 652 acre -- like did it actually get carved out on 326 or it's just that the loving Texas piece that you bought?

It was partition. The piece of -- the 640 was partitioned in the 320 that we owned 100% and the other company owned 100%. And so what -- as I said, it was a nice return, and we literally doubled our money in '18. It was literally just a 320 track land right next to our 60,000-acre track land that made more sense to trade puzzle pieces, if you will.

This concludes the question-and-answer session. I would like to turn the conference back over to Bob Jornayvaz for any closing remarks.

We just want to thank you for your interest in Intrepid and your continued willingness to be a shareholder. We strive to perform and do our best. And once again, thank you for your interest, and I hope everybody has a great day.

Thank you.

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.