Intrepid Potash Inc (IPI) 2020 Q1 法說會逐字稿

Thank you for standing by. This is the conference operator. Welcome to the Intrepid Potash, Inc. First Quarter 2020 Q&A conference call. (Operator Instructions) I would now like to turn the conference over to Matt Preston, Vice President of Finance. Please go ahead.

Thanks, Anastasia. Good morning, everyone. Thanks for joining us for Intrepid's first quarter question-and-answer call with investors. With me on the call today are Intrepid's Co-Founder, Executive Chairman, President and CEO, Bob Jornayvaz; Chief Operating Officer, Brian Stone; and our Vice President of Sales and Marketing, Mark McDonald.

Please be advised that remarks today may include forward-looking statements as defined by U.S. securities laws. These forward-looking statements are subject to risks and uncertainties that could cause 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.

As we discussed on our Q1 call last week, we were taking e-mail and live questions. We're going to start the call reading through the e-mail questions we received before the call. The first one comes from investor [Kurt Georgiadis]. With the stock price near all-time lows, why has none of the management team bought any shares at these prices? This would show the market confidence in your company and instead it shows no confidence when no one buys. If you are privy to the full information, why not buy your stock and expect other people to?

This is Bob Jornayvaz, answering the question. As most of you know, there are very specific guidelines and time windows. But mainly the guidelines as to when Section 16 Officers, including the CEO, are allowed to buy or sell stock, there are very limited time windows and very strict guidelines. I have a very long track record of buying in open windows, and I'm proud of my long track record in buying in open windows, and I won't comment any further than that.

Our next question comes from investor [Todd Neugebauer]. How much of the $8 million in Q1 water sales were from the annual $15 million contract? And what is the booked liability balance on that contract as of March 31?

We're going to let Brian answer that question. Todd, thank you for the question. The first thing I want to make really clear is GAAP accounting for this is very difficult. What we want to make sure is under that contract that everybody realizes what we owe is barrels. And so when we look at our liabilities, our liabilities are in barrels, not dollars. And so we believe we have adequate barrels to satisfy, but we are required to account for them in dollars. That is different than the deferred revenue line, which I'm going to let Matt answer as it relates to the deferred revenue line. And then we'll talk about how much of the sales occurred in the first quarter that were part of that contract.

Yes. Thanks for the question, Todd. In our 10-Q, and you can see this information in Note 11 for revenue, we had an ending balance of $17 million of deferred revenue at quarter end. Of the $8.5 million in water sales for Q1, $3.4 million of that was recognized related to our balance of deferred liability during the quarter. As far as -- and Bob, do you want to take over on the water sales piece?

I think Brian's going to answer that part.

Okay.

And I'm happy to as well, it's all right. And so as it relates to our contract, this is the cash we've received for future water deliveries. This does not relate to our cost of delivering water. This is merely the cash we've received ahead of time for our future delivery of water, which we have a very low-margin in those deliveries.

Our next 3 questions also come from Todd Neugebauer. How much water is currently contracted through the remaining 3 quarters outside of the $15 million contract?

Okay. So this is Brian. Our contract that was referenced is a long-term contract. The balance of Intrepid's water sales and forecasts are a collaborative discussion with producers in our key area -- key business area. And it's a dynamic forecast that changes weekly or even daily as we talk to these key producers and operators in the area. There've been changes, and those are mostly postponements or rescheduling of completions. But the book of business changes on a daily or even weekly basis.

Moving to our next question. The company had mentioned production issues at Wendover last year and causing higher cost of goods sold and lower byproduct sales. Now that you're exiting the harvest season, how are inventories looking for potash and byproducts at each of the mines?

I'll answer that one, Todd. You're right. We have seen higher COGS in Q1, as a result of a below-average evaporation during the summer of 2019. That also impacted specifically our mag chloride production at our Wendover facility.

We certainly believe we have significant inventories to finish out the spring season and move into summer here, and we won't get into specific inventories by mine. And then as far as our mag chloride piece, Q2 will be a lower sales volume as we continue to replenish our inventories with evaporation. We think we'll be back to normal towards the end of the second quarter.

Our final e-mail question, when do you expect the first revenues from the Ross Track disposal wells to show up? And can you give some color on EBITDA contribution for the remainder of the year?

Yes. So this is Brian. I'll handle that one. The Ross Track is part of the area of mutual interest that we have with NGL. And Intrepid has a 50% undivided interest in the Ross Track. Today, we've drilled one water disposal well that's been drilled by NGL and a pipeline has been constructed. Water disposal will be handled under long-term contracts, typically 10-year contracts, and that water disposal service will begin as producers have the need to access those services.

Thanks, Brian. So that concludes the e-mail portion of our question-and-answer session. We'll now move over to the live portion of our question-and-answer session, so please queue up.

I just want to invite anyone that's on the call that if we -- if they asked a question versus -- via e-mail, I apologize, we're all wearing masks and wearing gloves and have sanitizer like you wouldn't believe. So it's kind of awkward given how far apart we all are in this conference room. So I apologize if we sound that way but that's how we have to be. I apologize.

If you sent an e-mail question, and you didn't feel like we've fully answered it, please tee up and ask a follow-up. We're more than happy to take follow-ups. We intend for this call to be as extended as it needs to be to answer all the questions. So once again, apologize for the awkward nature. We're all wearing masks and quite a distance apart.

So with that, we'll take live questions. And Matt, if you want to go from there.

Great. Thanks. Anastasia, let's turn over to the live Q&A part.

(Operator Instructions) Our first question comes from Joel Jackson with BMO Capital Markets.

This is Bria Murphy on for Joel Jackson. So if I could just start with potash, you spoke about Q2 potash pricing being similar to Q1 levels. But can you talk about your outlook for pricing in the second half of the year?

Boy, I tell you, just from a big picture standpoint, where the potash market -- we're seeing good, robust demand in volumes, as you would expect, having 3 absent application seasons. It's hard to -- I think it'd be hard to give a situation where you see significant strength in the potash market. I do think we're going to see solid volumes. I'll let Mark answer that. But we're seeing stable Potash pricing, and as we look around the world and we listen to some of the other calls, we're seeing the same indications of stability. I'll let Mark answer that, but I think it would be imprudent to suggest that, given the uncertainties, that we're going to see a lot more robustness or increasing in the price of Potash on a macro sense. Mark, if you want to give that some color.

Sure. Thanks, Bob. I think that, as Bob mentioned, the recent actions in the marketplace, we've seen some clarity based on the Chinese contract being settled. I think that's been important to establish that fundamental. And I think we've also seen some slight increases in certain regional areas based on those contracts. So I think as Bob mentioned, there's just a lot of numerous factors ongoing in the marketplace today to look maybe that far ahead. But right now, we can comment that a very good spring application season, we're going to see some good inventory move out. And based on that, I think the marketplace will -- we'll look to see what transpires here based on crop development and a lot of other global factors.

Okay. And then just on Trio, can you discuss the higher Trio costs in the first quarter? I know there were attributed to more sales of the premium product but what drove higher sales of the premium product? And what are the drivers of higher costs for the premium product? And then just what is your expected Trio mix going forward?

Yes. So I'll address the parts of those questions there. As far as the higher costs associated with premium, it's just this initial process that goes into making the premium product, which outside of our production process for our granular standard and fine standard products. So that's the additional cost. We also mentioned in our Q1 -- our 10-Q regarding -- when compared to prior year, we had some sales last year that had previously been written down due to lower of cost or market adjustments, which can take the comparison and throw that off a little bit. Mark, I'll turn it over to you as far as the sales mix going forward and...

Sure. One of the beauties of the Trio product is -- and I think we've seen this, and our results have shown this, is the fact that we really focus a lot on the trees, nuts, fruits, vines, crops. And I think as people are eating a more healthy diet, and we've noticed this over the last 60 days. Now that's important, and we're positioned well into those market areas. So when you look at citrus crops -- in fact, orange juice consumption is up quite substantially. And we feel that those markets are where we want to be positioned with, and we're currently looking to augment some of our past sales into those areas.

Our next question comes from Matthew Skowronski with UBS.

You mentioned last week that you'd been contacted by midstream services, and this could be upside. Can you just elaborate a little bit more on this? Is this something we could start seeing in your results in 2Q to kind of offset the decline in volumes that I expected you'd see? And can you talk about the size of this, either profitability or sales?

Sure, this is Bob. I'll talk about it. I would doubt we see any kind of Q2 results in that we really started having serious discussions in the middle of this pandemic. And so being able to get out and inspect systems, help people operate their systems. As you know, there have been massive layoffs; and we're very pleased that Intrepid has not laid anybody off in Carlsbad. And so we still have our workforce completely intact and are working hard to keep it intact. And so we're having people approach us to see to what degree we can either take over certain systems that they've got. And these would be bite-sized pieces if we were to do anything on an acquisition standpoint, but then provide management services for them as they've laid people off. So we've got a very consistent workforce in Carlsbad.

I really don't want to give you any financial guidance. I would think that revenues will start in the third quarter from this, and we've yet to see -- we're hearing and being asked about numerous situations to contribute -- we tried to give it as much color as we could in the script. And so it's an exciting piece for us because it allows us to not only utilize our entire -- our entire workforce and redeploy people, but also begin to pick up assets that people are just, frankly, having to lay people off and need help managing those assets that need to be run.

I don't know if that answers your question or not. And I apologize for the nebulous nature of the answer, but there's just so much that's happening on a day-to-day basis since the middle of March to today.

That's completely understandable. Thank you for a little bit more color. Secondly, you cut your CapEx guide. Could you just talk about how we should be thinking about sustainable CapEx levels for you going forward, maybe 2021, '22 plus?

Yes. I think we've always -- we've -- since we're primarily operating solar solution mines, the sustaining CapEx for those is significantly less. So I think you can always pivot around that $10 million number. And in terms of the opportunity capital that we cut, it's really a function on the produced water side and the recycling water side that the beauty of it is, as soon as you start spending money, it's like as soon as we get the green light from some of the operators as it relates to the Ross Track, we'll finish out the very, very small limited amount of CapEx required, and the revenues literally turn on. But to go ahead and spend the money, when you don't know if the operators are going to drill the well and actually use the service, it's the same on some of the recycling and the water transfer. The beauty is we're talking to these guys several times a week, at least numerous times a month. And so when we choose to spend the opportunistic capital, the cash flows start immediately with that. So I hope that answers your question. Happy to take a follow-up if that didn't.

Our next question comes from Vincent Andrews with Morgan Stanley.

This is Jeremy Rosenberg on for Vincent. I wanted to start out on oilfield services. I think there was a comment that some sales were being postponed rather than demand destruction. I'm wondering, in those conversations you're having with customers, are they talking about corresponding to 2021 or 2022 or what kind of sense do you have for when that spend and completion might come back there?

You know, it's really price driven. And so it's price-driven per operator. So I don't -- it depends on your crystal ball as it relates to oil price. There are a lot of our operators that pivot in the $35 to $40 range, and then there's a whole other set of operators that are smaller that pivot from $40 to $45, and we're pretty fortunate that we don't have a lot that pivot around the $50 number. So I would say, rather than trying to guess on timing, the activity pivots around oil pricing.

Okay. Got it. Yes, that's helpful. And then just in terms of just sticking with oilfield for one more question. Thinking about your costs year-over-year, obviously, the guidance is suspended for the water sales, but I'm wondering how you're thinking about how much cost of goods sold might decline year-over-year?

Well, COGS is going to be a function of volume, as you can imagine. And so every water job that we're doing where we have to add a bit of transfer pipe that's built into the job. So on a COGS basis, I can just see it slowly and continually coming down. Including in that COGS number has been a tremendous amount of litigation expense, which we're on the back side of a lot of that. And so built into that, we're just -- we're so far down the path on the litigation piece, and you've got to remember that that's been a big part that was built into the COGS. So it's good to be where we are on the protest front, on the litigation front.

And so I'm very confident that you're going to see a lot of these issues resolved in 2020, given where we are and the fact that they continue to move forward even during this pandemic that each and every one of those protests has hearings and conference calls and schedule. So each of them are moving forward, regardless of the pandemic.

And I'll just add a little bit onto the area. We don't have any kind of long-term contracts with any third parties. It's all sort of point of sale. So we won't have any costs extending into Q2 or Q3 for sales that aren't recurring. So we should see a pretty significant drop off when it comes to those variable costs. We've generally low fixed cost in our oilfield services business with some small labor and benefits. So you'll see the maintenance, electricity and all those transfer costs really come off very quickly.

Our next question comes from Mark Connelly with Stephens.

Bob, I just want to make sure I understood what you wrote. The incremental commitments that you need to make to spend in the interim when there isn't much business coming from water are pretty minimal. Is that -- that's correct, isn't it?

Yes. You hit the nail on the head.

Okay. All right. Fine. Just to me, I mean, we can talk all we want about when things come back, but that's just guesswork. Okay, so if we could switch to Trio, you spent a lot of time over the last couple of years talking about nutrient values. And I know that that relationship has been relatively frustrating. I'm curious, though, as you are in the market more recently, is nutrient value a primary part of the marketing process? Or is it more just a matter of farmers get that it's attractive, but you've got to convince them to try this versus using some other approach? I'm just looking for more color on the selling process currently.

Well, we've got a full-time agronomist that is really focused around the organic part of our Trio, Safe Food/Safe Feed part. And so the one thing I'm really proud of is from day one -- and Mark, you've followed us for years. We said we were not going to go out and buy our way into this market, and we've grown our way into this market. As you know, we've got one competitor in this market, and they're larger than we are. And they have an easier ability at driving price. Farmers seek great value.

I can just say with absolute certainty in both -- on both coasts, in the Pacific Northwest, our volumes have slowly grown and grown, and the nutrient value is discussed, and the unbelievable agronomy models that we make for our customers, they value that. At the end of the day, there are people that choose to sell based on value and others that choose to increase their market share. And so it's still a challenging, highly competitive market. And I will leave it at that.

Yes. I can certainly see that. Okay. And then just one last question. Obviously, we're having a good potash application season. But I think this is the first really good application season we're seeing in the Southwest in quite a while. Has the geography of your potash sales changed significantly? Or do you try to keep it -- keep all those regions open even when the Southwest is better? I'm assuming that those sales are more profitable to you.

Yes. The closer in, the better for us, so we really focus on margin and netback. And then it's all weather-driven. I mean, let's be honest. As long as we can make a solid netback margin-driven sale in a certain geography and the weather is good, we're going to take advantage of it. Over the last 3 application seasons, we've all been stung by weather. And so I'll let Mark add some color to that, but we're very aware. But across the United States, we're seeing, hearing, discussing with farmers, it's going to be a robust application season throughout the entire season. So Mark, if you want to add some color?

Yes. And I think, Mark, the one thing that -- again, keep in mind with Intrepid is, as Bob mentioned, we've got really strong strength in geographies and regions within close proximity to our plants. So the Pacific Northwest, California, those are very good markets for us. And I think it segments back to some of the crops I've mentioned in one of the previous questions, the trees, nuts, fruits, vines, really good value-add crops that we can focus in on. And I think thirdly, as Bob mentioned, the weather and the reasons I just mentioned, has been extremely good. When you look at the California, Pacific Northwest, they were extremely wet last year. We've seen good open-window application seasons. And I think, as we've mentioned, we've taken advantage of those, had a very good Q1, and it's segued nicely here into the next part of the season.

Our next question comes from Jason Ursaner with Bumbershoot Holdings.

Just actually following up on Mark's last question there and kind of going back to the first question you got, just given that it is a pretty good application so far and with all the capacity that came out in terms of extended shutdowns and some of the permanent -- or seemingly permanent reductions, why wouldn't we see supply/demand potentially get more imbalance as you move throughout the season and potentially lead to some better pricing?

Well, I don't think you can ignore the fact that we're dealing with $3.30 corn and $8 beans. You can't ignore the underlying commodity pricing. I think if you look at where sugar was headed, if you look at where coffee was headed, if you look at where cocoa was headed, a lot of the products that are the leading indicators for a strong potash market, if you go back and look at the pricing in January and February when we had a much better feel of global demand, all of those leading indicator commodities were doing extremely well. I mean I can give you examples of cut flowers that have had to cut back that use a lot of fertilizer. I mean, I can just go through crop by crop by crop. The impact that we've seen from this pandemic on trying to understand the demand side of things like coffee, sugar, cocoa, palm oil, I can go through the list, where demand will be impacted.

And so now where we were going to have significant supply deficits in a lot of these commodities that were going to set us up for pretty -- for a very unique opportunity. We were extremely excited going into this year, looking at a lot of those crops, but I don't think you can ignore $3.00 to $3.30 corn and $8 soybeans and sugar at $10. I just think they're going to grow those crops. They're going to grow them with great volumes. But -- and try to -- because they were going to have supply deficits. I just think it's hard in this environment to push price increases. The only group that I've seen other than the pharmaceuticals that have successfully gotten price increases is the Burlington Northern railroad. They have very successfully pushed through their price increase and taken advantage of their fuel decrease. So the railroad's holding tough, and they're going to do well.

So I don't know if that answers your question or not, Jason. But it's -- I just don't think we can ignore the underlying commodities that we service.

Sure. No, it's a lot -- good extra details. And then I guess just moving to Trio, I guess just first, you mentioned only one competitor. With the Mosaic settlement now out of the way, would you potentially anticipate that market becoming more constructive over time?

The market is there. The customers are there, the fruits, the nuts, the vegetables, we've set ourselves up, and there's -- it's a great market. And so that's a better question for Mosaic than for us. We've just got great relationships with our customers, we demonstrate the agronomic value repeatedly. And so I think that's a better question for them than for us.

Okay. And in terms of some of the nutrient competitors to Trio, in terms of the polyhalites and those Sirius mining getting a pretty large takeover offer from Anglo. Any comment on valuations in the sector for these specialty nutrients relative to, I mean, Trio whether you're getting 0 for it or maybe even negative at this point in the market? Any commentary on how you guys at the valuation for some of these?

Jason, when we look at polyhalite, we just don't get it. ICL has been producing polyhalite now for decades. And the 3 companies that we know that have bought it in the United States, it's still sitting in their warehouses. And so we know of virtually no repeat customers in Brazil. There are people that bought polyhalite from ICL. And so there's just no logic around the Sirius deal. I can't explain it. The volumes that requires us to make that -- they're talking about 10 million tons to make it viable. To try to think that they're going to displace, given it's only got a very limited potassium content and the rest of it's gypsum. You talk to the Brazilian distributors that actually sold polyhalite in Brazil, and the gyp buildup that they saw, I got to be honest, we just don't get it.

Okay. And then just last one for me. On the land sale that you guys did from the Dinwiddie Intrepid South ranch I mean, it sounds like the customer, I guess, felt it was strategically important to own that land before maybe making a significant investment. Are there any other potential similar situations? Or maybe you could just give some more color on how that land sale has happened?

Yes, there's several. They wanted to drill a -- I'll let Brian talk about that. We could have easily drilled the acid gas injectors for them, AGIs, and so that's why the land sale was so restricted. There's so many opportunities like that out there. Brian, do you want to comment on that, because you did that deal?

Yes. Bob, you're exactly right. We talked to this operator about several different structures of the deal. We could have provided that service -- Intrepid could have provided that service ourselves, treating the hydrogen sulfide through acid gas injection wells. In the end, it became more expeditious and a benefit for both parties to do the -- this highly restricted land sale. And I think we've gone through some of the parameters of those restrictions: retention of water rights, restrictions on use of caliche and other surface materials. And to Bob's point, yes, we're looking at several other such deals that could either to be structured as a land transaction or services provided.

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

I want to thank everyone again for joining us today and also last week, and hope everyone has a great day, and we'll be catching up soon. Thanks again.

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