Intrepid Potash Inc (IPI) 2008 Q4 法說會逐字稿

Good morning. My name is Thea, and I will be the conference Operator. At this time, I would like to welcome everyone to the fourth quarter and year-end earnings 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)

At this time I would like to turn the conference over to William Kent, Director of Investor Relations. Sir, please go ahead.

Good morning, Thea. Thank you all for joining us for Intrepid Potash's fourth quarter and year-end 2008 earnings conference call. I'd like to start by introducing today's participants from the Company. We have with us Bob Jornayvaz, the Chairman and Chief Executive Officer; Hugh Harvey, Chief Technology Officer; David Honeyfield, Executive Vice President and Chief Financial Officer and Treasurer; and R.L. Moore, Senior Vice President of Marketing and Sales.

I would also like to remind everyone that statements made in this call which express a belief, expectation or intention, as well as those that are not historical fact, are forward-looking statements within the meaning of the United States 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 last night and the risk factors described in our filings with the SEC. All forward-looking statements are qualified in their entirety by such factors.

The news release which is posted on our website included reconciliation of certain non-GAAP financial measures to the most directly comparable GAAP measures. All references to tons are short tons of 2,000 pounds.

As a reminder, this conference call is being recorded today, Friday, March 6, 2008 at 9:00 a.m. Mountain Time.

I'll now turn the call over to Bob Jornayvaz.

Thanks, Will, and thanks to those who are taking the time this morning to learn more about our fourth quarter and our year-end results. Our fourth quarter realized potash price rose nearly $140 per ton from our third quarter average to $762 per ton. And our fourth quarter realized price for Trio, our langbeinite product, rose 14% as compared to our third quarter realized price to $323 per ton.

Our balance sheet remains very solid with $98 million in cash at the beginning of March, zero debt, and $125 million available through our credit facility. Our fourth quarter 2008 EBITDA was $41.4 million which is a 251% increase over the same quarter last year. EBITDA for the full year was $215.1 million which equates to an EBITDA margin of greater than 50%.

Potash sales volumes in the fourth quarter declined 54% compared to the third quarter of this year due to a slowdown in both our agricultural and industrial segments. Further, during the fourth quarter, in response to a slowing market demand, we made the decision to reduce production in order to manage inventory more closely. Our net sales price advantage in the fourth quarter expanded as we realized the best net sales price per ton of potash amongst the North American producers and we continued to benefit from a more favorable royalty and tax structure. We believe that the long term fundamentals of our business remain quite strong as the world continues to need potash to produce enough food to feed a growing population.

That being said, the fourth quarter was challenging for Intrepid, as it was for many other fertilizer producers. We began to see the reduction and deferral of sales in the quarter and these conditions have somewhat persisted into the current year. In response to this, we have taken elective production curtailments with a view towards managing production to maximize margin. We have deferred certain discretionary capital and maintenance investments, and are actively managing costs in this environment. You will hear me say this repeatedly, but I want to emphasize that through this market turmoil we are committed to maintaining our strong balance sheet because we truly believe that balance sheet strength gives Intrepid marketing and operational flexibility as we navigate these unpredictable times.

I look forward to walking you through our results this morning with other members of our management team. Let's begin with our fourth quarter and full year financial results. In the fourth quarter of 2008, our net income was $22.7 million which represents a greater than fourfold increase from last year's fourth quarter pro forma net income of $4.7 million. For the full year, pro forma net income grew to $124.1 million. Our net sales price advantage relative to our North American competitors expanded in 2008 to $88 per ton compared to $39 per ton in 2007. Our continued ability to obtain higher net realized prices compared to our North American competitors by capitalizing on the location of our mines demonstrates one of Intrepid's unique attributes.

As a company, we remain focused on our internal growth opportunities. Additionally, we believe that our location in the Southwest United States affords us a certain financial advantage. First, we market potash primarily in the United States, a sophisticated and normally consistent agricultural market. The core area in which we market typically consumes multiples of what we produce, allowing us to target sales to customers close to our mines, and thereby lower transportation costs that otherwise reduce our net sales revenue per ton. This, coupled with our marketing effort, has increased our net realized sales price over our North American peers to greater than $200 per ton in the fourth quarter of 2008. We continue today, as we speak, to execute on this strategy.

Next, I'd like to address the current market for potash in the United States and our outlook. We make a concerted effort to talk to our customers on a daily basis. The health of the American farmer is a key metric we monitor. When we look at our consumer base, the farm producer is one of the healthiest groups of consumers in the world today. Farmers are coming off two record income years in a row. We believe their balance sheets as well as the balance sheets of agricultural lenders are reasonably strong.

In addition, the availability of farm credit in the United States appears to be fairly stable, especially when compared to other markets. Farmers do remain hesitant. Further, we cannot ignore the fact of the impact of raw emotion and many have not yet made their key planting decisions. The farmer does not need a lot of convincing in terms of the value potash brings to his bottom line, especially in terms of yield. Farmers are sophisticated businessmen but the farmer is like any other buyer in the world today. I don't care if you're buying iPods, computers, cars or real estate, if you have cash in today's market and you're buying something you feel entitled to a lower price. That's just the way the world is working today. Farmers are waiting because they believe they will be able to buy their raw materials at lower prices in the future.

I would like to take a moment to briefly address application rates which are also an unknown. There's been talk about reduced application rates around the country and the farmers opportunity to mine the soil for nutrients this year. We have every indication that application rates will be lower in 2009. We just don't know how much lower. We also know that it's going to be an erratic and unpredictable spring and that we're going to have to work hard to manage the business and production levels in response to the market.

Now having said that, we continue to ship product quite regularly, if not daily, at prices we believe to be quite attractive. In spite of this near term uncertainty, long term industry fundamentals are strong because population growth continues and we have to feed the world on a fixed amount of land. Potash is part of a balanced fertilization program, enables the higher yields necessary to feed the world. There's no way to ignore the fact that we have seen a demand slowdown. This spring season is taking longer to develop but in the coming weeks, spring will come, crops will be planted, farmers will farm, farmers will fertilize. The inventory that is in the dealer warehouses will eventually be applied.

And finally, I can assure you that at Intrepid, we continue to focus on margin. By focusing on margin, we believe we can create the most value for our stockholders.

Before I had the call over to other members of our team, I want to reinforce to the stockholders we cannot lose sight of how remarkable a year 2008 was for Intrepid Potash as our first year as a public company. During 2008 we made significant improvements to our facilities, realized significant growth and profitability, and exhibited strong EBITDA growth.

I'll turn this call over to Hugh Harvey, our Chief Technology Officer, and Co-Founder of Intrepid and he will take the call from here.

Thank you, Bob. First of all, I'd like to talk about some of our production and inventories and our capital investment. We continue to execute on our capital investment program at our various mines. We have made progress in addressing maintenance projects that have long term benefits at our facilities. As an example, during the fourth quarter, we made great strides at upgrading and replacing our underground and surface electrical systems at our Carlsbad facilities.

Regarding production, we produced 201,000 tons of potash in the fourth quarter of 2008 which was 7% less than the 217,000 tons produced in the fourth quarter of 2007. The production decline in the fourth quarter year-over-year was attributable to lower production at both the East and West Mines related primarily to our annual maintenance turnarounds, and our elective down time during which we performed electrical upgrades and other maintenance work. Additionally, we elected to reduce some production at our Wendover facility and our East Mine in the fourth quarter in response to prevailing market conditions.

For the full year of 2008, we produced 836,000 tons of potash, approximately 5% less than the 877,000 tons we produced the prior year 2007. Decreased production for 2008 was partially driven by the longer shut downs to perform the electrical upgrades I mentioned earlier at both of our Carlsbad, New Mexico mines.

It is important, however, to recognize that both of our Utah facilities produced at terrific levels during 2008, and we are seeing the benefits of our investments in the increased reliability at our West Mine and our North compaction facility. The East surface plant is also meeting our expectations; however we still have further improvements to accomplish at our East underground mine.

On the langbeinite part of our business, we saw langbeinite productions of 34,000 tons in the fourth quarter. For the full year, langbeinite production increased to 197,000 tons, an increase of 11% from the 177,000 tons we produced last year in 2007. In 2009, we anticipate higher demand for langbeinite and continue to focus our production efforts accordingly.

Regarding capital investments, capital investment in our operating facilities was approximately $43.9 million in the fourth quarter. During the quarter we move forward on a number of our key bottlenecking projects at each of our facilities including the ore storage projects, course tail recovery project at our West Mine, improved thickeners at the East Mine, new potash solution mining caverns at the Moab Mine, and two more deep line wells at our Wendover facility. As we had previously reported, the fourth quarter was a key capital investment period for us as two of our plants had their annual maintenance turnarounds which is typically when major capital components are installed.

This year in 2009, given the prevailing market conditions, we are looking at all of our proposed capital programs and prioritizing those that provide the greatest return in terms of enhancing productivity. We have built a matrix of capital projects which we can adjust, both in terms of scope and investment throughout the year based on the condition of the potash market.

Some highlights of this year's capital plan include the installation of the horizontal stacker at the West Mine, the installation of new thickeners to improve potash recoveries at the East Mine, continued pilot plant work and engineering related to increase in langbeinite recovery at the East Mine, drilling additional solution mining caverns at the Moab Mine, and the continuation of engineering and design work related to potentially reopening our North underground mine.

I also want to take this chance to give you a progress report on our HB solar solution mining project. Although we were disappointed with the delay caused by the BLM's decision in January to require an environmental impact statement for the project, during 2009 we intend to complete as much pre-construction work as possible so that when we do get the permit we can move quickly. Through our discussions with the BLM, we currently anticipate it could take 18-24 months to complete the EIS process. During 2009, we anticipate investing approximately $10 million towards the HB project. The HB mine is expected to ramp up production approximately one year after the start of construction and it will be at full capacity after approximately two years. We are confident that our ability to take this asset and utilizing non-potable brine solution we can produce a product which is ultimately used to support the agricultural industry, at the same time utilizing solar evaporation. And it's just the type of project we need in this current economic environment.

We have budgeted approximately $100 million to $140 million of capital projects in 2009 and we will adjust these levels based on market conditions. Of this total, $45 million to $65 million is scheduled to be invested in projects that add sustainability and improve the overall efficiency of our operations. The remaining $55 million to $75 million will be focused on investments in opportunity projects related to expansions.

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

Thank you, Hugh. As previously mentioned, our net realized price for potash increased to $762 per ton in the fourth quarter. Our Trio pricing increased to $323 during the quarter which is approximately a 117% of the price of potash on a potassium nutrient basis. The continued strong price of Trio indicates that growers value the magnesium and sulfur nutrients in the product.

As Bob addressed, fertilizer buyers remained extremely cautious due to continued uncertainty created by the financial crisis. From our perspective, it is important to understand the role that dealers play in the current market situation. Due to the fact that there were greatly reduced all applications of fertilizer, dealer inventories grew through the end of the fourth quarter. Continued buyer hesitation since the beginning of the year has left quite high inventories at the dealer level. Once the dealers are able to sell their current inventories, we expect purchasing to resume, though we cannot predict how robust buying will be in the near term.

The charge that we've given to our sales staff is to get into the field, visit our customers' warehouse locations, and determine current inventory levels. We're doing this first and foremost as we need to be prepared for the spring season, and secondarily we want to be on top of the restocking process. It's our belief that the whole supply system will turn over. We're currently making sales at price levels that are quite attractive. Sales are continuing on a regular basis, albeit at much more modest volumes than last year.

Before wrapping up, I wanted to talk about the industrial segment of our business. Industrial demand from the oil and gas drilling industry has historically accounted for approximately 30% of our sales volumes. During the fourth quarter we saw a significant slowdown in our industrial sales as the rig count began to decline. We fully expect that reduced demand for industrial products will continue through at least the first two quarters of this year, if not beyond. We believe demand for industrial products should track the rig count long term which historically tracks the future prices of oil and gas. With the reduction in demand for our wide standard industrial product, we have shifted some of the production to the agricultural market.

I will now hand the call over to David Honeyfield, our Chief Financial Officer, to wrap up our prepared comments.

Thanks, R.L. First, a comment on our fourth quarter and year-end financial statement presentation. I know I've mentioned this in previous calls, but I want to reiterate that as a result of the consummation of our IPO, we're required to report the results of operations for 2008 in two separate pieces. The period from January 1 through April 24 related to Intrepid Mining LLC is known as the predecessor period, and the period from April 25 through December 31, 2008 for Intrepid Potash is called the successor period. In the Press Release we presented the pro forma comparative results for the fourth quarter 2008 and 2007 and the full year period of 2008 and 2007 to aid in your analysis. You can refer to previous press releases for historical quarterly information going back to 2007.

The pro forma results are presented on a comparative basis, including the adjustments necessary for the stock compensation expense associated with the IPO to reflect repayment of all our bank borrowings following the offering, the pro forma impact of income taxes and a calculation of earnings per share.

Now, I'll move to our actual results. The cash production cost per ton of potash sold in the fourth quarter of 2008 was $267 per ton. Due to our largely fixed cost structure, as production rates decline, as they did in the fourth quarter because of the scheduled turnaround maintenance performed in Carlsbad, our costs go up. We'll manage this cost to the best of our ability; however the market should expect our cost per ton to remain near fourth quarter levels for a period of time as we lower our operating rates in response to current market conditions. Much of this higher cost production is in our inventory and it may take several quarters to work through.

Based on our current budgeted production models, we expect our annual per ton cash operating cost to be approximately 25% higher in the full year 2009 than the annual amounts for 2008. We also expect with the shut downs and the reduced number of operating shifts at our Carlsbad facilities that our total production volumes of potash will be more in the range of 600,000 to 650,000 tons this year as we work to manage our inventory levels. We're really not setting this range of guidance, rather we just want to continue to emphasize how unpredictable and erratic the market for potash sales will be this year.

That being said, we have the ability to quickly respond to an uptick in demand when the market opportunity arises. Suffice it to say, given the current market uncertainty, this will be a very dramatic year and we'll adapt accordingly.

Switching over to our Trio product, our cash production cost in the fourth quarter of 2008 was $101 per ton resulting in a margin of $171 per ton. The benefit of the langbeinite circuit to the company's margin continues to be evidenced by the highly profitable nature of the Trio sales relative to its costs.

Mostly operating highlights for the Company have already been presented and discussed by the rest of the team. There are a couple items, however, that we believe need to be reiterated about the quality of our balance sheet. Our balance sheet remains exceptionally strong. At of the beginning of March, we had $98 million of cash in the bank, zero debt outstanding and $125 million available under our line of credit. As we've said before, our capital projects will have the first call on our cash as we believe we can generate excellent returns investing in the expansion of our existing facilities and bringing back idle potash capacity. We'll balance this capital investment with our desire to maintain a strong balance sheet by keeping a close watch on the broader potash and fertilizer markets in order to maximize margin and prioritize projects that provide the greatest investment opportunities for Intrepid.

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

(Operator Instructions) Your first question will come from Steve Byrne with Merrill Lynch.

Hi. These current prices that you're selling the potash at now, how do they compare to the fourth quarter average?

Steve, this is Bob. Thanks for the question. Some are higher and some are lower. We are seeing diversity in the sideways selling that's going on at the dealer and warehouse level and so we have some very advantageous pricing for some products that we're taking advantage of and as we pick and choose the sales that we're making we're seeing attractive levels. We are seeing in certain regions pricing moderating.

Bob, do you believe that that price needs to moderate further to attract the recovery in demand?

I think it's going to play out, Steve. I don't know that a price decrease is necessarily going to stimulate demand right now. I think we need to work through the inventory that exists at the dealer level and then participate very actively in the restocking process. And so we're seeing erratic pricing throughout the country as dealers have inventory levels that they're holding that they purchased at different levels. And so as those holes fill, we're choosing to take advantage of specific opportunities as they arise. Therein we're seeing lesser volumes that we're moving. That's Intrepid's strategy for now.

And as you fill those holes, Bob, do you have the ability to just sell further away? I mean your share of the US potash market is 10% or so, so why not just sell further when demand recovers and even if it's below normal, would you not be able to maintain fairly consistent volumes just to sell a little bit further?

That's certainly one strategy that we're evaluating, Steve. As you know, we're just so margin driven, and we believe that if we are patient, that we are seeing holes develop, albeit more slowly than in years past, and as we pick and choose the appropriate locations and sales to be made that we can truly maximize margin. Because we're trying to move a lesser volume into a pretty significantly sized market, if we're careful about it and we're patient about it, we believe we can continue to maximize margin. And so I hope that answers your question.

And the drilling end market that you have, are volumes roughly half normal in line with drill rig counts?

That's fair right now. We're seeing pockets where it's not off quite that far, but as the rig count has fallen, we've seen a slack off in demand and we're compacting that product to turn it into agricultural product.

Okay, thank you.

Your next question will come from Don Carson with UBS.

Yes, thank you. First just clarification question. How much inventory do you have sitting around at this $267 cost? And then I have a follow-up on pricing.

Sure, Don, this is Dave. That inventory level is obviously significantly higher than where it's been. We're probably a little bit hesitant to give specifics on that, as you can appreciate, but I think if you look at the math on it, where our production volumes were at for the fourth quarter, where our sales volumes were at and then consider a little bit of normal inventory build, it gets you over 100,000 tons at the end of the year.

I will say, Don, that we have significantly more capacity to store product if we need it but I will reiterate that we continue to move product quite regularly, if not daily, as well.

Okay. And then, Bob, just to clarify what you said on pricing to Steve. When you say some prices are better, some are worse, what's your average price versus the $762? And what are you seeing in various markets? We're seeing posted prices of around $700 in the Midwest, and truck sales in the $650 to $700 range. What do you think the market clearing price in the Midwest is today?

You know, Don, it's just not that simple. There isn't one number out there that's representative of the market. And so what we're seeing is that there are individual holes that are opening up that provide better opportunities and that's where we're focused. The range that you stated is an applicable range and so we're trying to focus where we can get higher netbacks and stay away from the areas where there would be lower netbacks. And given our location that's one of the unique abilities that we have.

And what's your average realization currently relative to that fourth quarter $762?

You know, I'm just not going to go into where we are right now in the First Quarter other than to say that we're seeing it, we're taking the prices that we think are plenty attractive.

Okay, and then just a broader question. A lot of dealers bought at relatively high prices. They're sitting on some inventory losses. Is there pressure on you to provide some assistance to them? I'm wondering are you invoicing them at any lower prices, and within your inventory cost do you have some sales discounts and allowance costs in that high priced inventory, as well, or that you're contemplating?

Yes, right now we're not having to make any special deals or terms for anyone. We continue to watch credit extremely closely but we haven't had to help any dealers right now with carrying their inventory, if you will. I would agree that there are, I mean that's what's creating this diversity in the marketplace is that you have dealers that have purchased inventories at prices all over the place. And so, as I mentioned earlier, that's where we're really trying to focus on the unique situations that we can get into to get higher prices.

So finally, how do you see this impasse breaking then? You've got a game of chicken between the farmers and the dealers. It just brakes once they actually need the product?

Well, Don, it's breaking every day as we see it. I just can't emphasize enough that by having our sales staff out in the field, visiting customers, checking on warehousing, we're able to see where the holes are popping up, if you will, and then trying to take advantage so that we're negotiating on a restocking situation rather than trying to push on a row trying to make a dealer take a product when he doesn't have room. So it's playing out as we speak. Now it's just not playing out as quickly as it has in years past but it is playing out.

Okay, thank you.

The next question will come from Joe Gomez with Oppenheimer.

Good morning. I was wondering if you guys might be able to comment or give your views at least of the recent announcements on the Uralkali price from Brazil what you guys were thinking on that.

Well, clearly, we saw it. As we don't service the Brazilian market, it wasn't, I really can't comment on if that's going to stimulate the demand that they apparently felt they needed to move product. It's certainly not something that we would have done but that's what they did and we'll watch with interest to see how it plays out.

Okay. And when you say you have significantly more ability to store more inventory, can you give us a little flavor of size? How much more capacity do you have available to store?

Hugh, do you want to address that?

Yes. Of course, we have quite a number of different products in our repertoire, if you will, and they vary a little bit, but overall we're at about 50% of our storage capacity. It varies by facility but certainly within a comfortable working level.

Okay. And I know you guys talked today about the desire to maintain a strong balance sheet, but given where the stock price is trading today, has it given you any more thoughts about buying back some shares?

Well, it certainly causes you to think about it. These are very attractive levels. I just want to get through whatever this financial crisis is that we are clearly in the middle of. I think we'll know it. We're on the back side of it. It's much more important to get through it and to maintain the marketing flexibility that we've currently got and have clearly exhibited, and we believe it's our balance sheet strength that allows us to say no to a sale on a price that we don't find attractive. So we just want to continue to get through this situation.

Okay, thanks.

Your next question will come from Chris Willis with Impala Asset Management.

Thanks very much. I had a couple questions but they were asked earlier in the queue, so I'm all set. Thanks.

Okay, Chris. Thanks for the call.

The next question will come from Mark Gulley with Soleil Securities.

Good morning guys. You certainly talked a lot about the fact that you were talking to your customers, your dealers about what's going on out there in the marketplace. Have they given you feedback on what they think is going to ultimately be the application rate decline for potash between the fall of last year and the spring of this year when all is said and done as we go into the planting for 09?

We see it being really different throughout the country depending upon the crop you're talking about. We don't service just the Midwest corn crop. We service the hay crops in Texas which right now, we don't really see significantly lower application rates. There in Texas what they need is rain. Same thing in California. We've seen some rain developing. We've seen our markets pick up in our Pacific Northwest markets where we're servicing the potato crop. We're seeing a very, very modest discussion of decline in application rates there.

So it really, I think the big talk that we hear about is in the Midwest corn market and we don't know how much of that is a function of negotiation, waiting, procrastination, if you will, versus sincere beliefs they are going to have significant dropoffs in application rates. When we look at our Trio product, our langbeinite product, we're not seeing drop off in application rates for that type of a product. So I wish I could give you a very simple percentage that equates to the United States, but it really is a function of which specific crop we're talking about in a specific geographic area.

Okay, let's talk a little bit about the new price for potash, $750 per metric ton in Brazil would equate to let's say $680. I'm not going to factor netbacks in for the purpose of this discussion. If I understand it correctly your current list price is $800, I believe. So when do you think you need to move down your list price to reflect what's going on in various geographic markets? When will all of the net backs get factored in?

I think we would choose to move down our price when we believed it would truly stimulate demand, and so I don't think it's productive to arbitrarily lower a price when I don't believe it's going to stimulate demand today. This market is clearly developing. We're moving product, albeit at more modest rates and we're filling the holes. And so there's going to be a period of time out there in the next 30 to 60 days where price is going to have a bigger impact on stimulating demand, and we're going to cross that bridge when we get there.

We're very aware of what the market is doing. We're very on top of the market. But we are really focused on the places where we can achieve the maximum netbacks and maximum margin.

And finally, you talked I think about 600,000 to 650,000 tons of production this year. Given the need to maintain some kind of reasonable inventory levels, can I interpret that to mean that that could also be close to your sales volume levels, as well?

Mark, this is Dave. Clearly, we're managing production to reflect what we see as demand in the marketplace. I anticipate that we'll try to work down the inventory a little bit through the year but those numbers, keep in mind they are just very indicative and they are very reflective of what we're seeing in the market right now. If and when the market changes and there's an uptick, like I said before, we have the ability to change that and react appropriately.

And Bob, I just want to go back to the pricing discussion. If I think I heard you correctly, and at risk of saying something a little bit different, it sounds like you recognize the need to move price down, just not now?

I'm just not going to go there.

Okay. Thank you. The next question will come from Bob Court with Goldman.

Thanks, good morning. Bob, I'm just curious, you talk about refilling holes and I'm wondering if you can give us a little sense of your typical customer, how many times they would turn their inventory over at the peak of the spring season, and then what motivation they would have to refill those holes given they got caught a little bit when they did so last summer?

RL, you want to talk to how many times they might turn it over and I'll talk to the motivation?

Yes, I think the type of customer they were servicing shipping to their large warehouses in the Midwest, along the river system. Most of them will probably historically turn those warehouses over, I would say, at least somewhere between four to six times on an annual basis. If they've got storage for 5,000 tons of potash, they are probably going to move anywhere from 20,000 to 40,000 tons through there depending on what demand is in any certain year.

And Bob, as to motivation. What we clearly see is that if people are going to reduce application rates or choose to mine the soil, so to speak, they all say they've got to come back and then buy potash in either the next year, and given the significantly reduced fall application rates that we saw, we then get back to a situation where the farmer has got to put his potash down. So the motivation is we now have a farmer that has potentially reduced or skipped and he's back in the market having to buy, so that's how we see the motivation coming back in. And we see on different crops where last year, for example, in the Texas hay crop, where people chose last year and a little bit the year before to reduce application rates, and we're now seeing where they need to come back and apply because we need more hay. So the motivation is the guys that have already skipped need to come back into the market.

I guess, Bob, the hard core Midwest corn farmer wasn't reducing applications last year and they had reasonably good yields. I'm guessing they will wait until they validate whether their yields are penalized in '09 before they decide to buy so again I'm wondering, does this set up a case where the summer fill season and the fall application season can still be pretty modest? Or what gives you the confidence about that second half recovery?

Well once again, you mentioned the Midwest corn farmer, and the Midwest corn farmer represents, to our specific market, 20% to 30%, if not a little bit more, of our overall marketplace. So I would agree with how you've described the situation; however, that's why we're going to focus on the entirety of the country looking for the holes where we can put our product in most effectively. There are other crops than just the Midwest corn farmer.

Sure. Can you then give some indications, obviously you guys have a different selling radius than the guys up in Canada. Do you guys track customer retention or something like that? In other words, can you have a fairly high degree of confidence when that guy in Idaho or somewhere in California is going to put in an order that it's going to go to you? Or should we start to get concerned about competitive intensity increasing as the row crop markets in the Midwest are a little bit slack?

Our markets have always been competitive, Bob. I would say that we have the benefit of just in time inventory. We have the benefit of knowing our customers quite well and being out there. You ask a very fair question and we're just going to have to see how this spring and summer plays out. As we know, there are other parts of the world that will have an impact on the potash market, and so we are just in the beginnings of watching how the year is going to play out. I imagine it's going to be a highly competitive year, as it generally has been. It's just been the last two years that we've been out of product virtually every day up until the end of September. So I don't know if that answers your question but it's a fair observation.

Okay, thank you.

Your next question will come from Megan Davis with Morgan Stanley.

Hi, it's actually Vincent Andrews. Bob, maybe I could try the second question a little differently and that would be, what two or three things are you looking at, or maybe it's four things, that's going to be the determining factors in which you decide whether or not you'd lower price?

Well, Vince, first of all thanks for the question. I don't think that we are the guys that are necessarily driving the price in the United States. We are out there, as I continue to say, picking and choosing situations that really work for us, and each week, we're seeing situations arise, albeit not at the volumes that have occurred in past years. We are watching the market daily. I just can't stress the degree to which we're on top of the market, seeing what's occurring, and recognizing that there will be a point in time at which we need to (inaudible) to make a sale. So I just don't think that I can create a situation out there where I can tell you exactly what it's going to look like that will cause our specific marketing strategy to change.

But there isn't one or two things that would be more than some of the other things that you're watching on a daily basis?

We clearly are watching things developing. We're watching what our inventories are. We're watching what pricing is occurring throughout the rest of the world and then our own markets. So it's a very dynamic market that is developing each and every day and there isn't one factor that's going to cause us to change our strategy. It's a combination of all of them.

Okay, and then Dave, if I could just ask you, looking at your cash flow statement for the quarter, your cash flow from operations, you had an inventory build from a working capital perspective that was offset by an accounts receivable reversal, and I just wanted to make sure I understand the dynamic that occurred in the quarter. And how should we think about cash flow from operations and working capital through this year given all of the puts and takes that are going to take place in the market?

Vince, this is Dave. Yes, what you noticed on the accounts receivable is spot on. Clearly with the lower sales level we've collected a lot of that cash in the quarter and our balance at the end of the year was lower on a comparative basis. As Bob's touched on before, we're monitoring the receivables very very closely and we're not seeing issues there. Some of the cash flow during the quarter clearly went to, basically we converted cash into inventory which was part of the movement. We made some significant income tax payments so that gives you a little bit of color on the quarter. I think for the year we're fully anticipating that we're going to generate a healthy amount of cash flow and we're going to invest that into the business in the opportunities that we think make sense. So hopefully that answers your question.

Yes, that does. Thanks so much.

The next question will come from Fai Lee with RBC Capital Markets.

Thanks. Bob, just had a question on your outlook. Given your outlook right now, I know it's uncertain for the spring but do you expect after the spring is over to still have higher than normal inventory levels or do you expect to have them drawn down to more normal levels?

Our goal is to work them down to more normal levels, if you will. The last two years we've operated with no inventory and so it's better to operate with some working inventory so that you can take advantage of sales when they arise in different parts of the country. It's clearly our goal to work off some of that inventory if we can do it and maintain very acceptable margins. I don't want to talk in a round about way. Clearly we would prefer to work down to a lower inventory level but I just can't stress the degree to which we are focused on our margins.

Right. I'm just wondering if this spring is a little weaker but if you feel pretty confident about the fall demand returning at that point just because demand has been down since last fall whether you'd want to keep a little dry powder for the fall.

I guess we would rather just keep a more normal level of an inventory for the fall. We see there are good reasons out there why fall application rates should return. Very good agronomic reasons. Now do we want to bet the ranch and try to keep a bigger inventory for betting on the fall? I'd say no. We prefer to have a much more normal level going into the fall.

Okay, great. Can you comment a little bit, I know your target agricultural markets a little different than the Midwest. Can you comment about current farm economics in your target markets?

Yes. I would say starting in California and we look at the areas that have received more rain recently we're seeing more solid economics. The potato farmer has good margins right now. When we look at hay throughout the Southwest part of the United States, we're seeing a real need for more hay, if you look at where we are in terms of hay supply. When we then go over to Florida and look at the citrus crops we're seeing some strong demand there for our langbeinite.

I think what everyone always tends to -- and there's no question that wheat and beans are going to be a function of where commodity prices wind up pretty quickly. I still think there are a lot of decisions that need to be made whether the farmer is going to plant what level of corn and what level of beans. I don't think anyone is comfortable with where those acreage calculations or predictions are right now. Farmer's still holding his cards pretty close to the vest.

Right. But it sounds like for the other crops that may be more important for your markets they still seem reasonably profitable?

That's a good way to put it.

Okay, thank you.

The next question will come from Jason Votruba with UMB.

Hi guys. Thanks for taking my questions. First question I have is given that cash is king right now, and you have committment to maintaining a strong balance sheet, is there a certain amount of cash on your balance sheet we could expect you to maintain?

Jason, this is Dave. What we've done in looking at that is, through our budget process, we've really run a lot of different scenarios, and we think making sure that we have capital on hand to invest in those sustaining and improvement projects is really where we would like to maintain as a floor at the current time. Hugh had given some specifics around what level of investment that is in 2009 and that would be pretty representative.

Okay, given that you've just made $44 million in CapEx in the fourth quarter and I guess some in year-to-date, how could we expect the CapEx to span out through the rest of the year? Should we expect it to be more back end loaded or are you going to aggressively continue to expand?

It probably will not be as back end loaded as it was last year, certainly, but we are managing it quite closely right now. So we're deferring some projects until we have some more clarity in the market but directionally, it will be more consistent than it was in 2007 and it will have an upward trend, would be the direction, just not nearly as dramatic.

Could you give me a little more detail on your metrics? If this market continues to be saturated with potash, could you maybe maintain or just spend $25 million, $30 million? Or is there a minimum level you would throw out there?

There are absolutely cases that we could cut capital but we're not going to cut capital to a level where it would really impact the reliability of the operations. So probably somewhere around a $45 million a year number would be a floor on that. But I don't know if I'm answering your question spot on there.

Sure. I was just trying to figure out what your minimum level for maintenance would be, so that does answer it. Another question, you've got a deferred tax asset that's about 46% of your total assets. Could you explain what's in that number and your ability to recognize that asset?

Sure. I'm glad you asked actually. The deferred tax asset was generated at the time of the IPO. The way the transaction was structured, it was a taxable transaction to the selling shareholders. So the selling shareholders, when they received their distribution, were taxed, and as a result, the other side of that transaction, we get tax basis. So we generated, we have approximately $850 million of net tax assets and that's comprised of basis in mineral properties and basis in our plant and equipment. So the way we'll realize that effectively is by getting depletion adjustments, depletion expense, each year, depreciation expense and those amounts are greatly in excess of our book basis.

So it's really a great thing because it lowers our cash taxes that we have to pay every year. Keep in mind, as a mining company you get 14% percentage depletion and so we'll just continue to take that every year until we exceed our basis. And then at that point in time, you get excess percentage depletion. So it's an asset we're thrilled to have on the books and we think, given the outlook for the company on a long term basis, we get over any of the accounting thresholds in terms of evaluation allowance.

Okay. Would you anticipate you'll be free cash flow positive this year?

We do anticipate that.

One more question. With the lawsuits that have popped up, do you have directors and officers insurance that could cover that?

Yes, we have D&O insurance that we put in place at the time of the IPO.

Okay, thanks.

The next question will come from David Silver with UBS.

Yes, hi. I had a question maybe to follow-up on your comments both in the release and here about capital spending. So, a little bit new to the company but my understanding is a lot of your mines have been operating a long time and up until recently, you might say there's been some under-investment over a longer period of time. So you're pretty good at clarifying or identifying what you consider high value capital projects but I was wondering if you could put some financial metrics around them. In other words, for a lot of the projects you've identified for 2009, do you look at it on a simple pay back period or IRR? What are some of your hurdle rates and what are some of your expectations for either cost improvement or other profitability measures you anticipate from your capital program?

David this is Bob. I'll give you just a little color and let Hugh and David go into more specifics about potential rates of return. Anywhere that we have the opportunity to really get an efficiency or productivity recovery enhancement, so that where we've already spent significant amount of money mining a ton or hoisting a ton and then we have an opportunity to recover more tons so that they don't potentially go to tailings, those opportunities have significant rates of return, not to mention the fact that they just make us a much more profitable company.

I'll let Hugh go into some of the specifics of what some of those projects look like but some of them have very very attractive rates of return. Hugh?

Sure. First of all, I just want to start and just mention that our Utah facilities which are already using solar evaporation and solution mining technology are some of the lowest cost facilities in North America. And so our sustaining investments there are quite modest so we're not focusing a lot there. We're doing some drilling at our Utah facility this year to create new solution mining caverns.

Outside of that, the majority of our investments in capital spending is down at our Carlsbad underground mines. And over the last five years we've made enormous strides in bringing those mines back from where they were when we purchased them. They were not in the best of shape. However, now they're in good shape and we do have significant opportunities, as Bob mentioned, to increase recoveries, as an example. The payouts on many of those projects are less than one year, and I'm not sure exactly what rate of return that is but it's very healthy, as you can imagine. And since our cost of capital is quite low we really are aggressively pursuing every opportunity that we can. Most of our constraints honestly, honestly, are on the permitting side. As an example, at our HM solution mine, we encountered a two-year delay there on a project that, again, had a very high rate of return on investment.

David, I don't know that we have any other real specific comments on there other than I think you touched on the relevant facts, that we look at it on an IRR basis, we look at it on a payback basis, we look at places where we need to invest capital to break bottlenecks in the system. These are all projects that we know are just going to make Intrepid that much more valuable in the future.

Okay, thank you for that. Where I was going with that was, other than the HB Mine, which I guess is delayed for the environmental impact statement, you do have a very strong balance sheet, you do anticipate free cashflow generation this year, you're not paying a dividend or special distribution. But I was just wondering, is it a hurdle rate or is it just over-arching amount of caution? In other words, why is there so much flexibility in your capital budget here if these are really across the board necessary and high return payback projects?

I guess having witnesses what we've just witnessed in the stock markets, I think now is the time to have an over-abundance of caution. First and foremost, we want to just navigate the waters that we're in right now. In all markets we're seeing a bubble of unpredictability. And a strong balance sheet that allows you to just simply get through it, and get through it unscathed it, and not only get through it but get through it with the ability to execute on opportunities. So I hear you about an over-abundance of caution, but we would suggest that now is the time to be that cautious. Sure. One other question on your taxes. Can you give us some guidance on what an accrual rate for your taxes might be? I guess it's in the high 30s for this past year. And then what might be a cash tax rate that we might assume?

Sure, David. The accrual rate is 37.3%, was the annual number for 2008. That's pretty representative. Keep in mind we get a little bit of benefit for the manufacturer's deduction that lowers it from a full statutory rate. And then on the cash tax piece, for one of the items I mentioned earlier, the depletion deduction that we get on our mineral properties, what that does is it basically lowers our cash tax rate to about 60% rate on average of our total tax rate.

That's very helpful, thank you.

Ladies and gentlemen, we've reached the end of the allotted time for the question and answer session. Gentlemen, would you like to have any closing remarks?

We really just want to thank everyone that dialed into the call, and we really appreciate the questions and your interest. Thanks so much and have a great day.

Ladies and gentlemen, you may now disconnect.