Intrepid Potash Inc (IPI) 2008 Q2 法說會逐字稿

Good morning. My name is Ashley, and I will be your conference operator today. At this time, I would like to welcome everyone to the second-quarter 2008 quarterly results 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. Kimrey, you may begin your conference.

Good morning. Thank you for joining us today for our second-quarter 2008 earnings conference call. I would like to start by introducing today's participants from the Company -- first, Bob Jornayvaz, the Chairman, CEO and cofounding stockholder of Intrepid; next, Pat Avery, President and Chief Operating Officer; and David Honeyfield, Executive Vice President and CFO and Treasurer. Also joining is R.L. Moore, Senior Vice President of Marketing and Sales.

I would also like to remind everyone that statements made in this call that express a belief, expectation, or intention as well as those that are not historical facts are forward-looking statements within the meaning of the US securities laws. A number of assumptions which we believe are reasonable were made in connection with the expectations reflected in such forward-looking statements. The forward-looking statements involve risks and uncertainties, which could cause actual results to differ from our expectations.

For material information with respect to the risks, uncertainties, and factors which could cause our actual results to differ from our forward-looking statements, we direct you to our news release issued yesterday and the risk factors described in our filings with the SEC. All forward-looking information and statements are qualified in their entirety by such factors.

The news release from last night which is posted on our website includes a reconciliation of certain non-GAAP financial measures to the most direct comparable GAAP measures. All references to tons are short tons. I now turn the call over to Bob Jornayvaz.

And thanks to those who are taking time this morning to learn more about Intrepid and our second-quarter results. In the second quarter, Intrepid's employees executed well at every level, enabling us to meet our production, expansion, cost, and corporate objectives and allowing us to capitalize on the robust potash fundamentals. We're pleased with the results and look forward to sharing the highlights.

As to our second-quarter financial results, pro forma income was $32.4 million, which compares favorably to last year's second-quarter pro forma income of $4 million, and is 68% greater than our first-quarter 2008 pro forma income. Our second-quarter 2008 EBITDA was $55 million, which compares favorably to the $8 million in the same quarter last year.

As to our sales and pricing, our results were driven by the sale of 213,000 tons of potash and 47,000 tons of langbeinite at an average FOB price or net sales price of $425 per short ton of potash and $188 per short ton of langbeinite.

As a point of reference, our second-quarter 2008 net sales price for potash is $130 per ton higher than our first-quarter 2008 net sales price and $243 per ton higher than our second-quarter 2007 net sales price. Our income growth demonstrates the leverage we have to potash prices.

Speaking of price changes, we raised our potash pricing for red granular FOB Carlsbad $200 per ton effective August 1st, and we expect that increase to result in further income growth in the third and fourth quarters this year. Our posted price for red granular FOB Carlsbad has increased progressively through 2008 from $317 per ton at the end of 2007 to the current posted price of $782 per ton. Our posted langbeinite price has also increased from $156 per ton at the end of 2007 to $356 per ton for new orders placed after mid-July 2008.

Next, I would like to share some of Intrepid's strategy for growth. As many of you know, our potash mines are a consolidation of previously underutilized potash outsets in the Western United States. Under our management, the focus has been to maximize the production in an attractive extraction and processing cost basis. We make sure our business is conducted in a way that focuses on the long-term results to the Company and our stockholders.

We continue to utilize new technologies and adopt technologies from other industries to increase production, improve reliability, and add to our available reserves. As an example, during the second quarter, we increased our hoisting capacity at the West Mine through the adoption of innovative world technology and minor modifications to our skips. This improvement should gradually increase our production from the West Mine with no additional fixed costs.

As previously mentioned, our capital investment program is focused on projects that improve reliability, increase production, lower average production costs, and facilitate resource recovery. Our four reserves should allow us to produce potash well beyond our lifetime. This allows us to focus on long-term sustainable production while taking advantage of more immediate production improvements given the current pricing environment. A great example of our capital strategy is our focus on adding potash production that uses solution mining combined with solar evaporation to deliver low-cost tons rather than having to use large amounts of expensive natural gas. We expect to add potash production at our existing solar evaporation facilities in Moab and Wendover and are in the process of reopening the HB Mine in Carlsbad as a solution mine combined with solar evaporation. We expect our solar evaporation projects and de-bottlenecking projects to progressively expand our potash and langbeinite production over the next few years.

While we're focused on our expansion opportunities, we also like to note that our location in the Southwest United States affords us certain advantages. First, we market potash primarily in the United States as sophisticated, diversified and very consistent agricultural market. The core area in which we market consumes multiples of what we produce, which allows us to target sales to customers close to our minds, thereby reducing transportation costs that might otherwise reduce our net sales revenue per ton delivered.

As a result, over the course of 2007, our net sales per ton results were approximately $40 per ton higher than our peers. This, coupled with our marketing effort, has increased our net sales advantage over our North American peers to over $70 per ton in the second quarter of 2008.

A second financial advantage we enjoy relates to our royalty rates. Our royalty payments averaged 3.5% to 4% of our net revenues and we are not subject to a profit or capital tax. This allows us to capture over 95% of any price increase as operating income.

Finally, I would like to comment on the pricing of potash compared to other commodities. Many commodities trade on exchange and have an active futures market, which potentially allows for speculative bubbles. Commodities that trade on exchange typically can be quite volatile such as oil and natural gas. Potash, however, does not have a futures market, so the price is based on negotiations between suppliers and buyers of the commodity.

During this recent period of commodity volatility, potash prices have not gone down one pick. Instead, they have steadily increased as warranted by the fundamentals of demand outstripping available supply. Many of the recent reductions in commodity prices actually help us as we typically purchase natural gas, diesel, and processing chemicals. Further, reductions in oil and natural gas prices reduce farmers' input costs and the cost to produce nitrogen, which we view as positive to the financial help of the farmer.

I would now like to turn the call over to other members of our management team to provide updates on the areas of responsibility. With that, Pat Avery, our President and Chief Operating Officer will lead it off.

We enjoyed another productive quarter of operations and were able to increase our margins by focusing on operating efficiencies. In the second quarter of 2008, we produced 210,000 tons of potash, which equals our second-quarter production in 2007. On a year-to-date basis, we have produced 8000 more tons of potash and 28,000 tons more of langbeinite than last year. Our langbeinite production was up 58,000 tons in the second quarter of 2008. It was 41% higher than our second order of 2007. Higher langbeinite ore grades were a key factor in the increase in langbeinite production. As a reminder, our East Mine is a mixed ore body of both potash and langbeinite ore.

The production outlook for the remainder of the year remains within our prior guidance range of $870,000 to $890,000 tons of potash and 210,000 to 230,000 tons of langbeinite. As Bob has mentioned, as a result of our upgrade of the hoisting capacity at our West Mine, we expect to improve hoisting rates and de-bottlenecking as we work towards completing our underground and surface storage projects targeted for the beginning of 2009.

At our East Mine, we anticipate higher potash production for the remainder of the year as a result of our new underground drilling capability and improved mine planning technology. Our maintenance turnarounds for the Carlsbad mines will be performed in the third and fourth quarters this year, which will have an impact of limiting production for about a two-week period.

A short maintenance turnaround was completed at Wendover in the second quarter and Moab used the summer evaporation season to perform their turnaround work. We anticipate the plant startup for Moab will begin next week and we will begin harvesting potash at that time.

As noted in our first-quarter conference call, potash production typically declines in the second quarter relative to the first because of the cycles of our solar facilities. This quarter was no exception and was contemplated in our production guidance for the year.

Let's take a look at our costs. The cash production cost per ton of potash sold in the second quarter of 2008 was $142 per ton, an increase of $6 a ton from our first-quarter 2008 costs. Costs increased primarily due to the addition of personnel to staff our training and maintenance programs and increased natural gas expense. Langbeinite cash production costs in the second quarter of 2008 were $79 per ton, essentially unchanged from our first-quarter 2008 costs.

As a side note, the production of langbeinite is extremely helpful to our bottom line. Just to give an example of how meaningful the langbeinite production is to our overall profitability, let me offer an indicative example. If we were to treat langbeinite sales and production of the byproduct that simply reduces cost, then our average companywide potash production costs would have been lowered by approximately $18 per ton in the second quarter. Clearly the margins would not change, but it does demonstrate the benefit of the langbeinite circuit to the Company's overall profitability.

Let me update you on our capital program. Our capital investment program includes capital to sustain, improve, and expand our operating facilities and capital to reopen idled minds, which we consider brownfield expansions. Currently, the reopening of the HB Mine as a solution mine combined with solar evaporation is part of our brownfield expansions.

We've also engaged a qualified mine engineering design firm to compare a feasibility and design study for the reopening of North Mine. The firm has finished the first phase of the feasibility study, a fatal flaw analysis, and concludes there are no issues that present significant obstacles related to the reopening of the North Mine. Items reviewed include geology, environmental operating permits, shaft integrity, water resources, payment facilities and infrastructure.

The North Mine was producing potash at a rate of approximately 300,000 tons per year with an overall capacity of about 350,000 tons back in 1982 when it was closed due to low potash prices. We currently operate the North Mine surface plant to finish and ship potash produced at Intrepid's West Mine. Reopening North Mine will require the refurbishing of hoisting equipment, installation of underground mining systems, and rebuilding the ore processing facility. Intrepid anticipates using the current North Mine shaft and temporary hoisting equipment in the third quarter to send engineers underground to assess the existing mine workings and perform other preparatory work.

Capital investment in our operating facilities was approximately $13 million for the second quarter. We continue to make progress in our de-bottlenecking projects at our other facilities including oil storage projects and coarse tails recovery at our West Mine, improved thickeners at the East Mine, new potash caverns at the Moab Mine, and two more deep grind wells at our Wendover facility. We plan to expand capital investment on our operating facilities during the remainder of the year as our engineering group identifies opportunities to improve and increase production.

The HB Mine project progressed in the second quarter as it relates to permitting and design. Our capital expenditures related to the HB Mine in 2008 will likely be reduced to between $5 million and $15 million from an anticipated $20 million to $25 million. This deferral of spending on the project results from the anticipated timing of permitting. Construction will begin upon the receipt of final permits and we're in the process of selecting contractors to perform work on the project. The HB Mine is expected to ramp up production approximately one year after the start of construction and will be at full capacity after approximately two years.

Our capital investment budget for 2008 will remain in the $80 million to $95 million range. We have been able to add projects and accelerate some projects at our Carlsbad facilities which we expect to strengthen the reliability of our facilities. The result will be $40 million to $45 million in capital spending which we have focused on sustaining and improving the assets. We anticipate $30 million to $40 million in capital investments related to expansions, which includes the $5 million to $15 million investment of the HB Mine. The remaining $10 million is related to the reconstruction of our product warehouses at East Mine which is being reimbursed through an insurance claim.

Just to wrap up, the currently identified potash projects at our existing facilities are scheduled for completion in late 2008 and throughout 2009, and we also anticipate completing our langbeinite expansion project in 2010 which should allow us to further increase the productive capacity of langbeinite.

Now, I will turn the call over to R.L. Moore, our Senior Vice President of Sales.

During the second quarter, we raised our posted potash prices three times in response to strong demand throughout the markets we serve. As a benchmark, we ended the first quarter with red granular potash posted at $417 per ton. This price increased to $582 per ton during the quarter and was raised to $782 per ton effective August 1st.

We should also note that lately we have been able to implement our price increases approximately one month ahead of our competitors. Historically, there has been approximately a three-month lag between a posted price increase and the realization of that price. And we will continue to work towards shortening this lag time.

We entered the second quarter with pricing for approximately 70% of our second-quarter tons already settled. At the start of the third quarter, this number is approximately 60% of the available tons to be sold during the quarter. We have effectively increased our spot market exposure in part by moving most of our industrial customers from quarterly to monthly pricing. We believe this will benefit our stockholders in this price environment.

Langbeinite pricing has also continued to increase and is currently about 45% of the price of potash on a realized basis, which is approximately 120% of the price of potash on a potassium nutrient basis. This price indicates that the additional secondary magnesium and sulfur nutrients and the langbeinite are valued by growers. We are seeing a steady increase in the demand for this product.

Potash demand continues to outpace production, which is causing us to keep our products under allocation programs to our customers. Industrial demand remained steady as the oil and gas recount in the United States continues to climb. Year-to-date, our shelves have been a mix of 63% agricultural, 29% industrial, and 8% animal feed. We utilize our network of sales professionals and industry contacts to monitor the overall market and specifically the financial health of the farm industry.

I will now hand the call off to David Honeyfield, our Chief Financial Officer, for a financial update.

First, a comment on our second-quarter financial statement presentation. As a result of the consummation of our IPO, we're required to report the results of operations for the period from April 1, 2008 through April 24, 2008 separately from the remainder of the quarter. I'm sure that most of you have seen this presentation and other transactions where a predecessor company was involved. In our situation, Intrepid Potash Inc. is the successor to Intrepid Mining LLC.

In the press release, we presented the pro forma comparative results for each of the quarters in 2007 and the two quarters of 2008 to aid in your analysis of the Company. The pro forma results were presented in a comparative basis including the adjustments necessary for the stock compensation expense associated with the IPO, the reflection of repaying our bank borrowings following the offering, the pro forma impact of income taxes, and a calculation of earnings per share. Bob reported our pro forma income numbers already, but it's also important to inform you of our expected cash tax rate.

Our cash tax rate in the second quarter was 17.5%, primarily due to the benefit of a step-up of reporting the inventory for tax purposes in connection with the IPO. We expect that the cash tax rate of 21% to 23% should resume in the third quarter. We are reiterating our annual guidance for production, cost of goods sold per ton and capital investment. And we simply want to point out that our guidance is for production volumes, which can vary somewhat from actual sales for any changes in inventory volumes. As a reminder of the production guidance Pat stated earlier, our cash production cost of goods sold per ton is expected to be in the range of $140 to $150 per ton for potash and $75 to $85 per ton for langbeinite.

Our balance sheet is very strong. As of the end of July, we had over $100 million in the bank and we have $125 million available under our line of credit. As we have said before, our capital projects will be the first call on our capital as we can generate strong returns investing in the expansion of our existing facilities and bringing back idle potash capacity. Much of our capital investment will weigh heavily loaded towards the last three to four months of the year. And when we commence the HB construction, that also will begin to utilize some of our accumulated cash.

We would now like to open the line for any questions.

(Operator Instructions). Steve Byrne, Merrill Lynch.

The North Mine, is that a mixed ore body as well since its adjacent to the East Mine?

Pat?

No, that trend is -- North Mine is essentially a [sill biter] of potash ore body.

Okay. And regarding the langbeinite business, how would you assess your project at improving the recovery of langbeinite? Where is that project at right now?

Pat?

Steve, we've been conducting extensive testing this summer and will continue in the fall trying a number of basic float technologies. We've really seen some advancements in the last few years in efficient flotation. We've been testing those. We think we have a design we like. We believe we will finish final design this fall and winter, get the engineering done and be active in construction by late winter and spring of next year, again as we said, hopefully bringing on late 2009 or early 2010.

And will that increase your recovery of potash as well as langbeinite?

No, it will not.

So it's just langbeinite?

It is. It's just in the langbeinite circuit.

And Bob, can you talk a little bit about the demand outlook for langbeinite? How would you assess the health of the income level for those ag -- those specialty crops that you sell into for langbeinite? We followed the major road crops closely, but you are selling into somewhat different market there.

Steve, I am going to answer it -- the first part and then I'm going to let R.L. talk about the domestic market. We are seeing an excellent international market for our langbeinite products. In fact, we have no inventory. We're selling it as quickly as we can and the opportunities to expand internationally are growing faster than we can ramp up the production. The sales that we have had into China, into West Africa, South America, and the Caribbean Rim countries have exceeded our expectations. So we're trying to ramp our production up as quickly as we can to meet the excellent demand that we are seeing internationally.

With that, I will let R.L. address a little bit of the domestic demand increases that we are seeing as well.

What we are seeing in the domestic market is just the steady growth that we have had. I have dealt with this product for a number of years. And you always think that you are probably peaking and there is not a whole lot more room for growth. But Florida continues to be an extremely good market for us with the crops down there that require a low chloride or a chloride-sensitive application of fertilizer up and down the East Coast where they are growing fruit, specialty crops, even tobacco sale up in the Carolinas. There is a huge demand for the product there.

We are seeing the use of this product as a replacement for potash in some areas where the price of potash has gotten to the level to where they may not put an all pasture land, but they will come out there with the langbeinite product and use that for pasture fertilization. Right now, the langbeinite is allocated just like our potash is and the demand far exceeds what we can produce at this point in time.

Does that cover for it, Steve?

Yes. Just lastly on the langbeinite, your sales offshore, are they all standard product? And what is the spot price for the standard product relative to this 356 you have for granular?

We are exporting standard and granular into the offshore markets. At times, we have to combine a vessel of standard and granular to get the standard business. We do see more standard going to the offshore market, particularly China. That's a standard market for us. The relation in pricing to the export to granular, I can tell you that we are getting as much for our standard product going into the export market as we do the product going into our domestic market here in North America.

Okay thank you.

Edlain Rodriguez, Goldman Sachs.

Ed, did we lose you?

Let's go to the next question, please.

[Xavier Honoblu], Meyers Associates.

Could you explain a little bit about the difference between nitrogen, the nitrogen fertilizers and your product and how competition and sales outlooks will affect the future growth of the Company?

First, we are a potash-only producer, so we don't produce any nitrogen. 75% of the fixed cost of nitrogen is natural gas. I really can't speak to where the nitrogen market is going simply because we don't produce it. We don't market that product. As the price of natural gas does go down, we've made the assumption that the price of nitrogen products might go down as well, putting more dollars in a farmer's pocket to pay for potash. Pat, is there anything you'd like to add about nitrogen or--?

No, I think that's a fair assessment. That is certainly not our expertise, but we always believe in the strength of balanced fertilization. Let me just say that we are very concerned and always believe that our grower and our customer makes money and makes a good return. Again, I would just say that we do think they will use solid amounts of [NP and K] because fertilizer is the best returner for yield to a grower.

Thank you.

Next question please.

(Operator Instructions). [Magid Khan], Cobalt Capital.

Could you guys talk a little bit about cost inflation ex D&A and freight costs that you've seen in the quarter?

I will let Pat Avery talk about some of the cost inflation that we are seeing in terms of steel products, labor, et cetera. A lot of the inflation that we're experiencing is what you would expect as it relates to diesel costs, energy costs, which fortunately, as we're able to increase our potash pricing that we far exceeded any inflation that we have seen. We are trying to build up our staff and build a well-trained bench. And I will let Pat Avery talk a little bit about some of the investments that he is making in not only our team, our management teams, but in the employees, which does cost -- cause cost inflation.

Well Bob is actually right. And let me just say we are keenly aware of rising costs and watching them closely. And I think that was reflected in our only modest increase in cost of goods sold for the quarter. We all track various indices. We use a number of published industries and we do track our basket of goods at all of our facilities. That would include steel, concrete, diesel -- labor is a great example -- and a lot of times finished products like pumps, crushers, conveyors, things like that. And you are certainly on track.

We have seen increases over the last year or two of 10% and 20% in some of those products. The key, of course, is always working closely with your suppliers and buy early in some cases, make sure your order is locked up. As we've also alluded since we have a pretty steady stream of projects, we're able to work with a number of engineering firms and construction firms and suppliers to stay in the pipeline so to speak to get pretty effective pricing.

The last one I will touch on, as Bob alluded, this is labor. We are in a unique time that we don't feel we're capital constrained. Our only constraint sometimes is resources. We're actively, like everyone else, competing for engineers, IT people, technicians, draft persons, welders, electricians. And it's a very competitive market. I think we're using some very innovative recruiting techniques, recruiting in various places around the country and in the world in some cases, innovative ways of housing them or bringing them to our facilities.

But resources -- human resources are pretty competitive right now. We pay market, but we also use innovative approaches to get them. We are always looking ahead at net prices as we see our HB facility coming on next year. We are actually already getting bids and on expensive items and lining up long lead items, for instance, like for HB and North Mine.

(multiple speakers) I want to thank you for your time today. At this point, I would like to turn it over to Bob again.

Finally, I would just like to say that this is a very exciting time for potash producers with record demand for our product. We have well-defined plans in place to improve and expand our facilities that will allow us to capitalize on the market conditions and are actively working to reopen the HB Mine as a solution mine.

We also note, again, we're expediting our efforts to reopen the North Mine and expect -- continue to be able to report on this project in the future. We believe that if we execute on our strategic growth plans in a thoughtful and rational manner, we will achieve the best long-term results for our stockholders. We are focused on these efforts and thank you very much for your interest in our Company. Have a great day.

This concludes today's conference call. You may now disconnect.