Intrepid Potash Inc (IPI) 2009 Q1 法說會逐字稿

Good morning, and welcome to the Intrepid Potash Inc. first quarter 2009 earnings conference call. (Operator Instructions)

It is my pleasure to turn the conference over to Mr. William Kent, Director of Investor Relations.

Good morning. Thank you all for joining us for our first quarter 2009 earnings conference call. I'd like to start by introducing today's participants from the company. We have Robert Jornayvaz, Chairman and Chief Executive Officer, Hugh Harvey, Chief Technology Officer, David Honeyfield, Executive Vice-President, 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 and 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 factor described in our filings with the SEC.

All forward-looking statements are qualified in their entirety by such facts. The news release which is posted on our website includes a 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. I'll turn the call over to Bob Jornayvaz.

Thanks, Will, and thanks to those who are taking the time this morning to learn about our first quarter results. I'd like to begin by reviewing a couple of highlights from the quarter. Our balance sheet remains solid with cash of $102 million, no debt, and $125 million of availability under our credit facility. The average net realized sales price for our potash in the first quarter of 2009 was $727 per ton. This was a decrease from the $762 per ton realized in the fourth quarter of 2008. And our first quarter of 2009 EBITDA, was $43.6 million, which is a 20% increase over the same quarter last year.

The first quarter, although challenging, generally met our expectations. We've been diligent during the current period of depressed demand in managing our production volumes, and being selective as to the sales price we're willing to accept, all in an effort to maximize margins. The factors contributing to difficulties in the first quarter including pressure on commodity prices, farm input pricing volatility, buyer hesitation to purchase potash and uncertainty due to the economy have carried over from the fourth quarter of last year and into the first half of 2009.

On a positive note, we did begin to see the start of the dealer destocking process in the first quarter and it has continued as we have entered the planting season, albeit at a slower pace than initially expected. The wet spring weather in April and early May for many planting regions in the United States has delayed fertilizer applications by several weeks and exacerbated what was already a challenging spring.

We continue to believe that dealer destocking needs to occur before Intrepid will be able to mark higher volume at appropriate margins to Intrepid. It is at this point in the cycle we should be in a greater position of strength from which to market our product. The reflection of this strategy of choosing when and how to market is evident in our first quarter sales volumes. Our potash sales volumes were 99,000 tons in the first quarter, a decline of 54% compared to the first quarter of last year. On these sales we generated net income of $24.7 million. Offsetting this decline in volumes, however, was the increased in our realized price per ton and our continued net sales price advantage over our competitors. In the first quarter, our net sales price advantage expanded to $227 per ton, as we realized the best net sales price per ton of potash amongst the North American producers. Our sales price realized in the first quarter was largely driven by tons that were committed in late 2008.

As to our margins we continue to benefit from a more favorable royalty and production tax structure. We expect that potash application rates will be down this year compared to 2008. Based on what we know today, we also expect that our sales volume in the second quarter of this year will lag our first quarter sales volume. In the near term we believe that the sales of potash into the agricultural market will remain below rates needed to replace the nutrients removed by farming. However, we do not expect this demand decline to be permanent as it has been shown through decades of agronomic research that fertilizer plays a vital role in the crop yields necessary to ensure that world agricultural production meets the needs of the growing population. We believe that once dealer inventories deplete over the next few months that dealers will likely be cautious in their restocking decisions to keep their inventories low. We are working to advance our product until logistically appropriate warehouse locations so that we are ready to respond when demand resumes to more normal level.

I want to briefly cover the continued conversation in the market about the ability of certain farmers to mine their soil for nutrients. We fully understand the ability of some farmers to reduce or even potentially skip potash application if their soils currently have high potassium levels. However, we don't believe this is sustainable on a long-term basis. We believe farmers have a limited opportunity to do this continuously without detrimentally affecting crop yields which in turn affects farmers' profitability. Additionally, based on data from the International Plant and Nutrition Institute, IPNI, approximately 45% of the farmers in the United States will suffer an immediate yield impact by skipping the application of potash, because they already are at a medium to low potassium level in their soil. To put this into perspective, based on the data from IPNI, the soils who test medium to low of potassium, a typical corn grower has the opportunity to realize a 2.5 to 3 times return on his potash investment this year with proper application. The economics simply speak for themselves. We believe that those farmers who test high in potassium and choose to skip this year understand the risk they are taking and recognize how hard it is to get back to adequate levels of K in their soil if their potassium levels fall below the recommended test levels.

On the longer term front, we have evaluated historic apparent annual potash consumption rates in the United States based on data from the USGS. The consumption rate in the United States has averaged 10 million tons with an annual volatility of less than 10% over the last 25 years. The 10 million tons of average annual potash consumption has been during periods of very low agricultural commodity prices, negative farmer margins, droughts, low points in oil and gas drilling activities and a variety of other negative economic situations. This consistent level of demand exists because potash works and provides an economic return. If farmers used potash during periods of negative margins, we expect demand to return to a more normalized profile in periods when they have a positive margin opportunity. We expect that 2009 will be challenging at least through the remainder of the first half of the year, if not the full year, but given the underapplication that seem to be occurring, and the yield detriment that will likely occur if farmers do not apply potash, we are managing 2009 to be prepared for a significant 2010 demand recovery.

We are continuing to move forward with our capital investment program to enhance the reliability and productivity of our mine operations, although the cost of engineering services and the like have not necessarily decreased, the availability of top engineering and construction talent has improved substantially. For projects that have not yet commenced we are actively rebidding those projects where appropriate. Despite all of this near-term market turbulence, Intrepid remains focussed in delivering results over the long term. The long term industry fundamentals have not changed since the last time we spoke. Population growth continues and we have to feed the world on a fixed amount of land to satisfy this growth. And finally we just can't lose perspective on what we accomplished in the first quarter. We were able to sell more tons sequentially than in the fourth quarter, achieve higher net income than a year ago and realize substantial EBITDA all while maintaining the strength of our balance sheet. I'd like to turn this over to Hugh Harvey, our Chief Technology Officer, my long-term partner and Intrepid co-founder, he'll take the call from here.

Thank you, Bob. We produced 137,000 tons of potash and sold 99,000 tons of potash during the first quarter of 2009. This compares to 224,000 tons produced and 213,000 tons sold in the first quarter of 2008. Production declined in the first quarter of 2009 relative to the prior year first quarter due primarily to our election in January, to lower production at the East and West Mine by having two-week shutdowns at each facility and also by reducing the number of operating shifts at these facilities from four shifts to three shifts. All of this was done in an effort to match our supply with current market demand. We also elected to make modifications to the processing circuit in our Wendover facility during the first quarter of 2009, which deferred some production into later quarters.

On the langbeinite portion of our business, we produced 42,000 tons of langbeinite. Our langbeinite production was 25% lower than the first quarter of 2008. The decrease in langbeinite production was largely driven by the previously mentioned production curtailments at our East Mine.

Capital investment in our operating facilities was approximately $23.8 million in the first quarter. The dollars invested in the first quarter of 2009 were used to fund projects already in progress and for sustaining capital projects. Looking forward to the rest of 2009, we expect to invest between $90 and $130 million for the full year. The pace of capital investment will be somewhat dependent from the cash flows generated from operations and we may adjust the level of investments if market conditions do not materially improve.

Although we continue to make investments in our facilities every month, we are actively managing our capital investment as to not detrimentally impact our cash position. As Bob has already alluded to, the strength of our balance sheet is a key competitive advantage during the current market conditions and affords us great flexibility. Our long-term view of the potash market continues to be positive and we believe that increasing productive capacity of our operating facilities is essential to satisfying the demand that we expect will resume over time. I will now turn the call over to R.L. Moore, our Senior Vice-President of Sales.

Thank you, Hugh. The spring season has been unlike anything I've seen in my career in industry. Many dealers had significant inventories at the beginning of the quarter. Our expectation was originally that the majority of dealer inventory would have moved through the system by now, but this has not been the case. Continued buyer hesitation coupled with unfavorable planning conditions has slowed the destocking process. Market prices for potash continue to be under near-term pressure that has taken longer for the inventory at the dealer level to clear the system.

The process for potash varied by region and is highly dependent on location and product type. The fertilizer distributors continue to compete amongst themselves for sales to the retailer and farmer and it appears that the distributors seem to be doing just fine on margin if you look at it on a replacement cost basis. The destocking process just needs to happen so that dealers and non-traditional potash distributors sell through their inventory at which point Intrepid as a producer can get back to selling product in a more rational historical volume at true market prices.

Industrial demand for our standard product remains weak. Demand for our industrial product is highly affected by the declining oil and gas rig count. Given the ongoing weakness in oil and gas prices, the likelihood of a meaningful recovery in 2009 for the industrial market remains remote. In light of this, we can convert a portion of the potash produced for the industrial market into product available for sales into the agricultural market. This is accomplished by compacting our standard industrial product into granular form.

One area where we've seen consistent demand has been in sales into the animal feed market. Feed has historically accounted for approximately 80% of our business and during the first quarter of this year it accounted for 17%. Consistent with earlier comments, the current year's decrease and expected potash application rates is something we just need to take in stride. In my 37 years in this business, I've seen the same consumption trends that Bob described that are supported by the 25 years of USGS data and we believe we will return to historical average. I will now hand the call over to Dave Honeyfield our Chief Financial Officer, to wrap up our prepared comments.

Thanks, R.L.. I've mentioned this in previous calls and we continue to have prior period information reported on a pro forma basis in order to present 2008 data on a comparable basis to the current year. The types of adjustments to the prior period pro forma statements relate to accounting for stock compensation expense considering the fact that all debt way repaid at the time of the IPO, accounting for income taxes, and applying a weighted average share calculation for the EPS number.

Moving to the actual results now, the cash operating cost of potash sold in the first quarter of 2009 was $266 per ton. Due to our largely fixed-cost structure at lower production rates, like what we had in the first quarter, that were a result of the rolling two-week shut downs we took at East and West and the associated shift reductions, our cash operating per ton of manufacturing increased. We will continue to manage costs, but as I mentioned last quarter, until we see production operating rates and corresponding consumption return to a more historically normal range, you should expect our costs per ton to remain close to this level.

We remain focussed on margins and even with the increased cash operating cost per ton, our margins were very healthy considering our net realized sales price. Due to the fact that destocking of the dealer network has taken longer than anticipated, we are evaluating our previously-budgeted production rates to determine if we need to make any adjustments based on customer demand. We need to balance our need to have adequate inventories of product available for when the market recovers, with the storage capacity we have within our system, and the customer demand. With this in mind, and considering the anticipated sales lag in the second quarter that Bob described earlier, we believe that production will be deferred and that our annual production will likely be somewhat below 600,000 tons. Once again, let me remind you that we are not making this statement as guidance, rather we want to continue to emphasize how unpredictable the market for potash sales will be for the remainder of the year, and that the second half of 2009 may not be as robust as some people seem to be predicting in their models.

All things considered, though, we have the capability to respond quickly to an uptick in demand should the market opportunity arise. Suffice it to say given the current market uncertainty, this will be a very dynamic year and we'll adapt accordingly. In closing, our belief in the long-term fundamentals of the potash industry remains unchanged and we fully believe that demand will return to its historic norms. Our capital projects remain the first call on our cash, as we believe we can generate excellent returns investing in our operations and with the expansion of our existing facilities and bringing back idle potash capacity. We will continue to focus on costs and balance our capital investments with our desire to maintain a strong balance sheet, keeping a close eye on the broader potash and fertilizer markets, in order to maximize margin and produce strong results for our stockholders. You've heard us say it before, that a strong balance sheet is fundamental to our ability to market our product in a sound and thoughtful manner. We would now like to open the lines for any questions.

(Operator Instructions) Your first question is from the line of Vincent Andrews with Morgan Stanley.

Good morning, everybody.

Morning, Vince.

You know, in regards to the discussion about reducing application rates, and so forth, do you have any data or any benchmark or rule of thumb that you're using to forecast if a farmer goes below the recommended application rate for potash, what the potential negative yield response will be?

Well, what we're seeing right now, is based on the IPNI data that we've looked at, many, many decades of data. Farmers fall into three basic categories, people that have low, medium and high levels of potassium in their soils and the responses are each different depending upon which category you fall into. So if you have a high level of K in your soil and you choose to have a reduced application rate, or even choose to skip, you're going to have a very mild yield impact this year. If you fall into the low or medium category, you're going to begin to have a more significant impact. And that depends on whether or not you're talking about a corn farmer, a hay farmer or wheat farmer, and we've tried to break down those economics for each of those different pieces, if you will, because our market is more than just a corn market. And so without giving you specific percentages right now for each level, we've tried to do it for each crop, if that makes sense. What we will tell you, though, is that if you look at a typical corn farmer that's in the low to medium category, in terms of his current potassium levels in his soil, that this year, at today's potash prices, today's corn prices, he can achieve a two and a half to three times return on his potash investment. So what we're seeing is, what I referred to before as emotional demand destruction, not economic demand destruction. and we've really tried to differentiate between those two.

Can you give us some insight into what particular areas you're moving the most product into? Is it the corn belt or the regions around your natural geography?

It is around our natural geography. In one small case we've reached out a little bit but it is a very minor sale. But we're still focussed on our core market where we've always had our best margins.

Okay. And then maybe, lastly, you said the dealer levels are below where you thought they would be at this time, can you give us some sort of color on where you think the dealer levels will be and any view on current run rate, what month or at what point.

Let me back up. We've said that we think that inventories are higher than where we thought they would be right now. I apologize if you heard us wrong. We're tracking every major customer that we have, as well as a lot of other retailers, dealers and distributors, and talking with them several times a day to try to get a handle on the dealer inventories throughout the United States. And they differ very, very significant whether you're talking about the Pacific Northwest or the lower river. We're seeing the most dealer inventories concentrated on what we call the upper river, where we have some non-traditional potash players in the market, if you will, that have some hold over times. So it really depends on where we are. In the Pacific Northwest, the inventory levels are at very, very low levels. The lower river is at low levels. And the upper river is at higher levels. So, once again, it just depends on where you are in the United States. But what we're seeing is some of those non-traditional potash distributors with tons on the upper river, are impacting the rest of the market around the United States.

Okay. Thank you very much. I'll pass it along.

Your neck question comes from the line of Steve Byrne with Bank of America.

Hi, Steve.

Hi, Bob, how are you?

Good. Your volume definitely held up better than your leading competitors, and you indicated to Vincent that you are continuing to sell in your core geographies. Are you saying that you didn't extend your geographic reach, or was demand in your core geographies better than in other regions? How do you account for your outperformance in your volumes, because it doesn't appear that you are aggressive on price? A couple of different things. First, we fulfilled all of the old orders from the fourth quarter that were at higher prices, so there was one piece of that. Secondly, you've got to remember that we are in a more southern location, so that we have different crop planting going on across the south that we participate in. As I did say to Vince, we reached out in one case on a very small basis, but our core area, I think strong is too strong a word, but there was an up-demand for us to meet our numbers at the prices that we were willing to accept. There is a lot of sideways seller from dealer to dealer, where we are seeing dealers really trying to turn older inventory into cash, and we're choosing not to go out. We've chose in the first quarter not to go out and compete against those guys because they really need the cash. We also have seen continued strength in our feed markets where we have the ability to service that in a just in time basis.

And did you sell more into the feed market than you did into the oil and gas drilling end market in the quarter?

We did.

So is that a trend you expect to continue this year?

Well, once again, we're putting together the same data on the rig count that we did on the agricultural markets to look at historic usage and we get to a point where the rig count is going to be at some certain sustained level, and I don't know what that number is going to wind up being. But if we go back and look at 25 or 30 years of drilling rig rates, there's a corresponding level of potash consumption that I think we're going to see along those same lines. And I would expect in some of our upcoming investor conferences we'll start to share that data, so that we can get a more consistent review of what we think the demand profile is going to look like.

Steve, this is Dave. Just to clarify, we sold more feed relative to the ratios that we have last year. For example, the same quarter last year we sold 8% of our sales into the feed market. This quarter it was 17%. And last quarter our industrial sales were 29%. This year it was 22% of our sales for the quarter.

Okay. And then last one for me is I was wondering if, Hugh, could you give us an update on anything you've learned in the last few months regarding the feasibility study at the North mine and where you are in the increased langbeinite recovery project?

Sure, I can update you on both those. On our North plant, we've engaged a design build contractor to carry the thing forward through what would be traditionally called maybe a prefeasibility study. We're looking at the underground mine design, the plant design, tailings disposals, systems, et cetera. So it is simply a work in progress. I expect that it will take us substantially the rest of this year to finish the phase of the study that we're in now. And regarding the langbeinite expansion, yes, we're making significant progress on that, also. We've also engaged a design engineering group on that project. We've done a number of pilot plant studies at our East facilities, testing various technologies to make sure we pick the right one. And we're currently in the process of putting together the preliminary flow sheets for that facility as it will be modified. I don't have a time frame for you on the finishing of that study, because we still have pilot testing ongoing, and awaiting results. And the pilot testing is really to pick a technology that we're going to build from, not whether or not we can recover more langbeinite. Yes, that's correct. It is an optimization process .

Thank you.

Your next question comes from the line of Robert Koort with Goldman-Sachs.

Good morning, actually this is (inaudible) on behalf of Bob. Bob, a couple of questions. How much product do you believe is in the river right now?

I'll let R.L. answer that.

In keeping up with inventories over the last month, we would say the river system, and these are primarily non-traditional suppliers of potash into our industry, plus people that normally carry the product, we would say they are somewhere between 650,000 and 700,000 tons up and down the river, and that doesn't include product that's in the producer warehouses, the Canadians.

And has this number been increasing, or decreasing?

It's decreasing. From two weeks ago we've seen about a 23% drop in inventories from where they were at the middle of April. These are tons that are up and down the river system and in the warehouses that are located off of the river system. This isn't just barge tons that are out there.

And then our last question, our sources are telling us that the product in the river right now, is selling below $600 and still there are no takers at those prices. Aren't you guys concerned on something like that? Are you going to reduce your prices in order to those levels in order to spur some demand? Thank you.

Well, I think we've told you several times before we're not going to go compete with kind of these non-traditional potash distributors, if you will, at the prices right now. That's why it is so important to do the math. If you look at the tonnages that were sold into the United States by the various potash producers in the first quarter, you look at the inventory that is in the system, if you will, throughout the United States, and you begin to see that any demand return to more normal profiles, what's out there is going to get used up very, very quickly. We're also seeing product as recently as this week, we've seen product come off the river being loaded for re-export down to the Caribbean rim, as well as Brazil. As I've tried to tell you, we're not going to go and compete in kind of that downward spiral market. We would rather see the destocking occur, and get back to them in a more normalized demand profile.

Appreciate it. Thank you.

Your next question comes from the line of Dave Silver with UBS Securities.

Yes, hi, everybody.

Hi, Dave.

Hey, I have a few questions. I guess first off, in looking at your first quarter potash realizations, and the outperformance that you had there relative to your Canadian competitors, could you maybe talk about what the average price might have been if you excluded that slug of business that kind of rolled over from the fourth quarter, or could you maybe talk about maybe the monthly trend during the quarter? Where do you think the month of March was relative to the 1Q average?

David, this is Dave Honeyfield. We actually didn't analyze it in that way. You know, I think like R.L. and Bob have both talked about, certainly we've seen some near-term price pressure in the market, but we're choosing which tons we're going to sell and at what price. So, certainly the quarter-over-quarter decline in net realized sales price from the $762 to the $727, I think is indicative of what we were seeing. But I'm probably just not going to go down the path month by month.

Dave, I'd also like to discuss that throughout the United States we're seeing very, very disparate pricing. The pricing we're seeing in the Pacific Northwest is very different than what we're seeing at the river, which is different than what we're seeing in the feed market, which is different than what we're seeing in our Texas hay markets. So in our experience, this price disparity that we're seeing, is just something we haven't seen before. And we've just got to let that work itself through the system, so try to come up with one consistent price that we could say, as we probably could say last time last year, that price for potash is X. We're seeing pretty disparate pricing throughout the United States.

I'll just pick up on that. That was a question I was going to ask R.L. a little later but I'll just pick up on that. You guys are in region and you have some advantages over some of the larger guys who ship product from up north. Someone asked if you're extending your marketing radius, and that is one way, but are there also opportunities to maybe sell smaller volumes to different customers? In other words, you can reach out to certain customers, that the larger suppliers just as a rule don't try to serve? Or are you offering some incremental service quicker delivery or letting someone bring their truck up on short notice? Is that part of the volume and pricing dynamic that you're seeing?

It really is. We believe it is the unique ability to service just-in-time truck market, where we have the warehousing facilities to provide just-in-time inventory. That allows us to have a price advantage from that aspect, if you will. So we've chosen not to really get out and reach too far. We've chosen to focus on our core customer base, a lot of which do have smaller needs, and so as we've tried to say over the years, we're in a unique situation in terms of our ability to market into a whole variety of crops, a whole variety geographically, with alternate modes of transportation. So we're very fortunate in that regard.

Okay. I have a couple more questions, if that's okay.

Sure.

So you've kind of indicated that you don't anticipate 2Q sales meeting 1Q, and I'll just say you're not going to be especially busy at the mines this quarter. So if you could just talk us through kind of what opportunities or what kind of tactics you use in situations like this. So a couple of things. I mean, I know you have an extensive debottlenecking and expansion programs. If I look at the list of projects, there were a couple that were due to be completed in Q1 at the West Mine and at the East Mine, but do you accelerate work on some of these debottlenecking and efficiency projects? And I was wondering, maybe Hugh, this is your question, but do your labor contracts give you the right or the option to have them take unpaid vacation, if for whatever reason you're just not busy enough to keep them working? So just kind of some tactical thought on how you work through this maybe next few months of continued slow demand.

Let me give I was little bit of philosophical overview and I'll let Hugh address the details. First, we don't have any labor contracts at our Carlsbad facilities. The only union that we've got is at Wendover, and I think, we have about 30, 35 members of that union up in Wendover. So from a labor work force we have a lot of flexibility at our other facilities. We really focus on a matrix as it relates to capital and our debottlenecking high productivity type return projects and I'll let Hugh address a couple of those, but we're continuing to utilize the capital evaluation matrix to make sure that everything has the kind of rate of returns which we want, which is very high, when we're dealing with recovery projects and debottlenecking projects. Hugh you want to answer that?

Sure, you're absolutely right on when you say how do we take advantage of this opportunity, if you will, as production slows down. Just as an example, one of the bottlenecks in underground construction is getting things down the shaft. We use the same shaft s for production, hoisting tons as we do for lowering equipment. As as we reduce the number of shifts of production, we have more opportunities to get equipment underground and we definitely jump on those opportunities to get everything from new belt drives and new belting underground, new equipment, doing cleanout operations, as well as electrical upgrades. So there is certainly not an issue in the short term with keeping folks busy. And as Bob mentioned, we don't have any labor contracts in place down in Carlsbad, so we can shift people around as their skills permit to various jobs. We also shift around between plants. We'll have some underground mining crews moving from the West plant over to the East plant, as our demand for different products changes, we can change our product mix accordingly. So we do have a number of major projects that we're continuing forth with that use contract labor, our West Tails Recovery Project is breaking ground this week. We've got contractors also at our East facility putting in our new thickener system, and we have an extensive list and portfolio projects beyond those that we will be working on. Does that give you some color to answer your question?

Yes, and I guess I'm just wondering if you envision taking steps to utilize production workers who might not be fully utilized and I was just wondering some sense of cost controls or other saving measures or efficiency measures or tactics that you're going to be using during the next few months which you anticipate will be slower than normal. So that's fine. I have a question for Dave on the deferred tax situation. So if I look at your reported results, I think your tax accrual was a little over $15 million, and your deferred tax benefit for the quarter was, I think, $6.7 million. So, I'm just going to round, let's just say your deferred tax was equal to about 40% of your tax accrual for the quarter. You have a large deferred tax asset on your balance sheet and you've kind of talked about, utilizing that over time, but is that 40% rough metric is that the right number to think about in terms of the benefit from that this year, or how do you anticipate that large deferred tax asset might get utilized this year? How should we think about that?

Sure. I think you've analyzed it right, Dave. The cash tax rate we think is about 60%, so, therefore, the deferred rate is about 40%. And the largest driver of that is really just the fact that providing companies you get a 14% statutory depletion rate. So it knocks down your cash taxes and when we set up the tax asset, at the IPO transaction, a lot of that was assigned to the mineral properties. So I would really expect that 60% cash tax rate, give or take a few percentages here or there for a variety of reasons, but that should be a pretty steady long-term rate going forward.

Okay. Thank you for that.

Your next question comes from the line of Mark Gulley with Soleil Securities.

Yes, good morning, I have a couple of questions, if I may. First of all, with respect to application rates, is it your view that farmers will have to make up on a go-forward basis their underapplication of potash this year, or in the alternative is it possible that they have been overapplying in past years, so there will not be a catch-up effect?

I think everything that we're seeing is that they're going to have a catch-up effect in term of overapplications we're not seeing any real indication of that at all.

I'm talking about in previous years, maybe 2007.

No, I understand.

Right.

We don't believe that's been the case historically.

Okay. I guess the second question I've got is, I'm a little bit confused as to your characterization of farmers buying patterns of potash and I kind of view them as profit maximizers, and it would seem to me they're making purchasing decisions which will maximize their profits for this year. So I'm having a tough time understanding the so-called emotional side of it. It would seem to me that they're trying to make money this year, last year, next year, the same way all the time.

I think that's a great observation. I think that's how we would view typical economic behavior, if you will. And so when we look at all of the farmers' input costs whether we look at land cost, nitrogen, phosphate, diesel, rental costs, potash represents, depending upon the price of potash that you use, let us say approximately 5% of their total inputs, 5% generally isn't a driver in your process, especially when that will generate a return on the investment. So I would agree with you, that historically farmers have been optimizers if you will. But when we look at the applications that we're seeing and when we talked to specific farmers and we've talked to a lot of farmers, we're hearing a lot more emotional frustration at the price of potash, than good economics. In other words, the farmers that we sit down and go through their actual economics, some of which are choosing not to use potash, simply because they say the price is too high rather than going through the economics of what it actually costs them and the return that they're going to have. I would agree. We're not seeing it being totally rational behavior. I don't know if I've answered your question or not.

Okay. That's helpful. I think we'll probably have to see how the year plays out and how the numbers come out.

Mark, to go back to one more point. That's why we've gone back and looked at the last 30 years of potash consumption history and it's been very consistent between 9 and 12 million tons averaging just over 10 million tons. So when we go back and look at all of the agricultural economic distress, we had a very, very consistent potash demand profile over the last 30 years. So that's why we're having trouble when we begin to do the math on the potash that has been purchased and then the potash that we know is actually being applied. We know what's going to be mined in the soil through the harvest process. There's going to be a pretty significant deficit at the end of the year.

And, lastly if I may, I'll get back into queue, this is the second consecutive quarter that production has exceeded shipments. Is inventory building to a level that is unacceptable at this juncture? Do you have to reverse that? Can you talk about when you think production and shipments will equilibrate?

This is Hugh Harvey. At this point we're still okay on inventory space. We've chosen to move some tons into outlying warehouses, which in essence increases our inventory capabilities. At our Utah facilities, traditionally during the summer months we don't run the plants anyway, and we're entering the evaporation season. Actually today will be the last day of harvesting at Moab, so we will not be building any inventory there for several months, and of course we do have ongoing sales. We also have quite a number of warehouses at our Carlsbad facilities that still have substantial room in them, so right now we're not considering a point in time where we're going to have to start making adjustments related to inventory constraints.

Okay. That's helpful. Thank you.

Your next question comes from the line of Don Carson with UBS Securities?

Thank you.

Hi, Don.

Hi, Bob. I want to get back to this issue of potash use and application rates. What sort of your call now that we're at the end of the crop year, how much overall consumption will be down in the US of potash and what do you see shipments as being down because there doesn't appear to be a big destocking as well. And I guess my other question would be, we have seen improved plant genetics - in the last few years, we've seen lower application rates and certainly no reduction in trend yields. So the grower, it would appear, he's trimming his application rates and hasn't seen a yield impact yet. Obviously the new factor here is improved genetics. If you have a better root structure, it has moisture benefits, but it wouldn't it also have benefits in terms of accessing more nutrients in the soil? So I'm wondering if we're not seeing some impact of improved genetics on these long-term application rates?

You know, I think it is a very valid question. When we look at 2007, though, 2007 was a very significant application year. So I guess I would say that 2008 and obviously 2009 will be down from 2007. But once again, 2007 was up considerably from 2006. So that is why we continue to look at averages. Try to look at multi-year averages to understand what the demand profile looks like. Trying to understand what some of these genetically-modified seeds are actually doing in terms of necessary fertilizer rates, I just don't think we have enough history yet to draw the appropriate conclusions as to whether or not they're having an impact, or not.

And can you comment on your outlook we've heard other people forecast 20%, 25% declines in consumption, obviously shipments are running further behind that. What is sort of your call for the 2008-2009 year that ends soon?

You know, I think it's too early to make that call. I think that the kind of numbers that you're hearing are very realistic and appropriate given the low level of shipments that we've seen. I mean when we go back and look at everyone's first quarter results in terms of shipments in the United States, we're looking at some very, very low numbers. And so I think it's just too early to make a call on the entire year, but we're all very aware of what that first quarter looked like.

I was talking more about the crop year that ends June 30th, here we are almost at the end of planting season.

I agree, Don, I don't know how else to give you an answer other than it's going to be significantly lower than it's ever been historically.

Okay. Thank you.

I'll turn the call back over to the speakers for any closing comments.

We sure appreciate you joining us today and hope you all have a good day. Thank you.