Intrepid Potash Inc (IPI) 2013 Q1 法說會逐字稿

Good morning and welcome to the Intrepid Potash 2013 First- Quarter Conference Call. At this time, all call-in participants are in a listen-only mode. (Operator Instructions). I would like to remind everyone that this conference call is being recorded today, Thursday, May 2nd, 2013 at 8.00am Mountain Time.

It is my pleasure to turn the conference over to Gary Kohn, Vice President, Investor Relations. Please go ahead.

Thanks, Brock. Good morning everybody and thank you for joining us on our first-quarter 2013 earnings conference call.

Presenting on the call today are Bob Jornayvaz, Executive Chairman of the Board; Dave Honeyfield, President and Chief Financial Officer; and Kelvin Feist, Senior Vice President of Sales and Marketing.

Also in the room with us today are Hugh Harvey, Executive Vice Chairman of the Board; John Mansanti, Senior Vice President of Operations; Martin Litt, Executive Vice President and General Counsel; Brian Frantz, Vice President of Finance and Chief Accounting Officer; and Ken Taylor, Vice President of Business Development and Research.

I would like to remind everyone that statements made on this call that are not historical facts or that express a belief, expectation or intention, including statements about financial and operational outlook, are forward-looking statements within the meaning of the United States security laws.

These statements are not a guarantee of the future performance. A number of assumptions which we believe are reasonable are 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 more information with respect to the risks, uncertainties and other factors which could cause our actual results to differ from our forward-looking statements, we direct you to the news release we issued yesterday and the risk factors and management discussion and analysis of financial condition and results of operation in our most recent annual report on Form 10-K as filed with the SEC. All forward-looking statements are qualified in their entirety by such factors.

Also during today's call, we may reference certain non-GAAP financial measures including adjusted EBITDA, adjusted net income, and adjusted net income per diluted share, which we believe provide useful information to investors. Our earnings news release which is posted on our website at Intrepidpotash.com includes reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures.

With that, it's my pleasure to turn the call over to Bob.

Thanks, Gary. Good morning and welcome to everybody. We appreciate your time and interest in Intrepid.

In the first quarter, we delivered on the elements of the business that we can control. We had healthy sales, improved production, lower unit costs. We made great progress on our major capital projects.

As we've noted before, we've taken a very deliberate approach to growing and diversifying our customer base in the markets we serve. We're confident that our numerous product offerings, marketing flexibility, geographic advantage and the strong customer relationships that we've invested in and built over the long term position us to prosper even in the event of less than optimal market conditions.

Our first-quarter sales results demonstrate this quite well. We capitalized on the array of sales opportunities in our regional markets and despite the weather-related delays in spring applications, we delivered healthy sales results for both potash and Trio.

On the operations front, we continue to build on the momentum we established throughout 2012 at our East facility. We saw the benefit of the execution of our long-term improvement plan, with higher production and in lower per-ton costs of goods sold for both potash and Trio.

At our East facility, we produced 56% more tons of potash in the first quarter compared with the same period last year. We achieved the highest Trio production results in the last two years. In fact, we improved Trio production 53% in the first quarter of 2012 to 46,000 tons.

While we still have work to do at East, the benefit of our deliberate approach taken by our operations team is obvious when looking at our consolidated first-quarter cash operating costs of the goods sold for potash and Trio.

Our cash operating costs of goods sold for potash was $174.00 per ton which represents an 11% improvement from the same period last year.

Through the increased Trio production, we reduced our Trio cash operating costs of goods sold by 19% to $180.00 per ton.

These improvements at our East facility on both the potash and Trio sides are a testament to the focused, hard-working, innovative and extremely determined folks we have here at Intrepid.

Another opportunity we have been investing in to expand our margin and increase cash flow is our HB Solar Solution Mine. When in full production, we will produce an incremental 150,000 to 200,000 tons of potash at an estimated cash operating cost of less than $80.00 per ton, making HB one of the lowest cost potash facilities in North America.

We are confident that we can achieve this because of the long term success we have achieved in combining solution mining with our solar evaporation in our Utah operations.

You have heard me say it before, simply put Intrepid has a long, consistent track record of generating more cash to the bottom line for every ton of potash we sell than any of our North American competitors.

While some talk about their lower costs, when factoring in diverse products, proximity to markets, royalties, production taxes and higher net realized sales prices, Intrepid consistently delivers more margin per ton.

We believe margin, and the resulting cash flow, are the most important aspects of a business. Our 5 year track record of generating the highest margin is not an aberration. It is us creating value over the long-term by investing in our assets with a focus on the opportunities that lower our production costs per ton and by marketing our product in a responsible manner with a dedicated focus on achieving the highest average net realized sales prices in the North America.

Now, Kelvin Feist, our head of Sales and Marketing, will update you on our sales results and market conditions.

Thanks, Bob.

We sold 185,000 tons of potash in spite of the unfavorable weather conditions during the first quarter. The sustained cooler temperatures and wet conditions delayed planting and nutrient applications across the markets we serve. This compares to the first quarter of 2012 when we saw much warmer conditions which allowed for an early start to spring planting and potash applications.

Weather patterns vary and impacts our business differently from year to year, highlighting the importance of being flexible in our approach and to making investments in the relationships we have with our customers.

The buying patterns of our customers will have ups and downs. The piece that we can control is making sure we are well-positioned for the upcoming compressed timeframe for nutrient application. We're utilizing warehouse space and leveraging our close proximity to customers to sell our plant potash tonnage in the second quarter.

Our approach will allow us to respond quickly to serve our customers when the application window opens and the peaks in demand materialize.

While our customers are concerned about the recent weather, most areas still have a positive outlook and expect a decent spring season.

It is always important to maintain perspective and the fact is that there are some strong pockets of activity in the United States. The USDA corn planting estimate remains unchanged at 97 million acres in the US. And even if this number decreases slightly, we are still going to see a strong agriculture market in the United States. And we're well-positioned to meet the demand and to supply our customers.

In the near-term, we expect pricing to stay fairly stable. I was particularly pleased with the results for our specialty product, Trio, in the first quarter. The average net realized sales price of Trio increased by $49.00 to $351.00 per ton from the first quarter last year and was up an additional $4.00 per ton from this past fourth-quarter.

We sold 39,000 tons compared to 28,000 tons a year ago. We expect continued success with Trio in 2013 and plan to sell every ton we produce.

Thanks, and I will now turn the call over to Dave.

Thanks, Kelvin.

I am really pleased with both our operational and our financial performance in the first quarter. I attribute our achievements to our long-term disciplined approach to growing our business and increasing our production of lower cost tons, all of which make it possible for us to deliver the highest all-in cash margin in North America.

We have shown the discipline to stay focused on the longer term goals of our business. This is critically important because the reality is that there will always be quarterly variations in our cost of goods sold due to production cycles, the mix of sales from our different facilities and the seasonal nature of the business.

What remains important to us is having a management team in place that expects and understands these variations, having plans in place and flexibility in our operations and having the balance sheet and dedication to a long-term plan of growing production, of lower cost tons and delivering the best margins in North America.

While Kelvin touched on the sales volume for the quarter, I want to highlight the success we had on the pricing during the period. We earned an average net realized sales price for potash of $417.00 a ton, due to our strategic geographic advantage, our diverse markets and our marketing abilities, and in part, to our discipline in converting the right opportunities in the market.

I also want to make sure people recognize the amount of margin beginning to be delivered on the sales of our Trio product. This specialty product is delivering value to both Intrepid and to our customers.

We strive to lower cost of goods sold year-over-year and are making the right moves to obtain a positive trend as measured over time. We're pleased with the improvements in the first quarter as a result of the increased production at East, the solid results of our Utah operations which overcame some real challenges in January due to extreme cold weather, and the consistent and reliable production from our West and our North facilities.

We finished the quarter with cash and investments totaling $7.6 million and we have not had to draw on our unsecured $250 million credit facility.

As expected, we received $149.3 million in net proceeds from the funding of the senior notes in April. Our cash flow, balance sheet and access to long-term, low-cost capital afford us the ability to grow our business and invest in essential capital projects.

Intrepid's capital projects are designed to drive flexibility, growth and margin. Our estimated capital investments for 2013 remain steady in the range of $235 million to $285 million, with the vast majority being invested in our three major capital projects.

The team made great progress in the first quarter with $64.2 million in total capital investment. Looking forward, and specific to the remaining investment for the HB Solar Solution Mine, North compaction, and the third horizontal cavern system in Moab, we expect that approximately $120 million to $130 million will be invested over the remainder of this year for these three projects.

As these three major projects either are completed or near completion and the related capital intensity decreases in the fourth quarter of this year, we expect to reach an inflection point when cash flow from operations begins to exceed capital investment once again.

It's pretty impressive to see how the investment in the HB Solar Solution Mine continues to progress, driven by the skill and teamwork of those working on this project. The team is delivering against a very tight schedule. To date, we've completed the majority of the pond work. We've filled many of the ponds with brine. And construction of the mill is in full swing.

We're optimistic about being able to begin processing through the mill and delivering first production late in the fourth quarter of this year.

Additionally, the team overseeing development of the new North compaction plant is producing similar success. We remain on schedule to have the first and second compaction lines in service in mid-2013, well in advance of the expected production from our HB Solar Solution Mine and the increased production from the existing West mine.

We're building this high-capacity and more efficient granulation facility so that we will have increased flexibility to produce the products that our customers want when they want them. The flexibility we've built into our operations allows us to target the highest margin sales.

It's probably worth noting that our comments tend to focus on these three major projects, but I want to remind folks that we have a team of highly qualified people that are making good progress on a large number of other smaller scale capital investments that include both sustaining and opportunity projects.

In closing, we have a clear set of strategic priorities and are delivering on these. The strength of our first-quarter results and longer term trends demonstrate our ability to lower costs over time, increase production and drive sales by growing our markets.

We're off to a good start this year and we're pleased to be delivering on our promises to shareholders.

We'll now open the lines for any questions.

(Operator Instructions)

[Mark Connelly, CLSA.]

This is Kurt Shoen in for Mark. I was hoping you could give us kind of an update on how you see the HB volumes ramping into 2014 and how you see the incremental low-cost tonnage ramping throughout the year as well.

What we're expecting is pretty moderate production in the fourth quarter of this year like we talked about, once the mill construction is complete. And then next year what we've said is that we should be somewhere in that maybe 100,000 to 150,000 ton range next year.

There's obviously a little bit of seasonality around that based on the evaporation timing. And then that ramps to 150,000 to 200,000 tons in 2015.

The cash operating costs that we talk about, the $80.00 per ton, that's what I'd put in there for 2015. It may be a little bit higher in 2014, but it's still going to be significantly lower than what our average is here today. So, we'll really start to see the more significant benefit of that roll in beginning in 2014.

And then, with your access to low-cost capital, what is your view on maybe implementing a share repurchase here with the stock price where it is?

I think the important part for us to keep track of right now is getting the capital deployed and getting these projects completed. And that's really where the focus needs to be and making sure we keep the balance sheet very, very strong.

I think there's a right time for us to look at what we do in terms of evaluating other potential investments, whether we look at repurchases, whether we look at dividend policy, and it's probably as we get closer to wrapping up the HB and the North project.

As of right now, I don't know that I have anything from a policy perspective to talk through.

[Vincent Andrews, Morgan Stanley.]

This is Ted Drangula in for Vincent. I had a follow-on on the HB expansion, and it's kind of a bigger picture, longer term thing. As the HB mine comes on, with (inaudible) capacity and production in '14 and then you have competitors in Canada have projects, there's the Advance (inaudible) mine coming on I guess the later part of '14 into '15 and then Brownfield in North America as well.

How do you guys look at, in your long-term plans, how the competitive dynamics shape up in North America? I assume that we're not going to have a lot of growth in the market here. I'm just curious how you think that might play out over the next several years.

I'll start on it and Bob or Kelvin if you guys want to jump in too, please do.

Overall, Ted, what we see is, in the North America market, there is some growth to it. And I think that's something that we need to recognize as you continue to see more corn acres planted. You see expansion in the Dakotas and such. And without a doubt, it's one of the best markets to be in and it represents our backyard markets.

I think as we look to grow I think we need to keep the size of that growth, which is very significant to Intrepid, but recognize that it's not a huge component of overall North America and certainly the world capacity.

Certainly, the additional capacity that's coming on in Canada is very focused on serving China, India, Brazil, some of those markets which at some point you're just going to have to, I think we're going to see that increase in demand come.

So, we look really at our customer relationships and finding the right locations to work with our customers. And we feel confident that we'll be able to get those tons in the right markets.

I just want to add to that that we have very consistently and strategically increased our geographic footprint over the last several years and expanded our customer base, while still maintaining our high net realized sales price.

So, we've done that in a very focused fashion in terms of the customer relationships that we've created and being able to slowly add more tons in a more diverse geographic footprint, we've already begun and will continue to slowly expand.

But we think that we can bring on our tons as we have done and not necessarily impact the marketplace by continuing to build extremely strong customer relationships with not only our railroad relationships, our trucking relationships, and our ability to get into the marketplace in a non-disruptive fashion by delivering just-in-time inventory and some of the best product in the North America on a just-in-time basis.

Switching from the big picture long-term more to the near-term and how the second quarter plays out, it sounds like versus where we might have thought the second quarter playing out a few months ago, that April is probably slower due to weather. And then are you guys looking at maybe more concentrated sort of, I wouldn't call it craziness, but a very rapid moving May and maybe the typical sort of June versus a normal year? Is that how you guys would shape it up?

And I guess overall do you feel that your volume outlook for the first half, where you stand now is no different than where it might have been three months ago?

I think you describe it right, that it's going to be a pretty darn rapid season when we see those breaks in the weather. And what we look at is the ability of a farmer to get a crop in and to get their fertilizer down, it's measured in days and weeks now.

It's not measured in kind of 6 to 8 weeks sort of timeframes. Guys own all their own spreading equipment. So, they're not waiting in line for their turn. You see the warehouse system having been built up in larger markets.

We've worked very closely with our customers to make sure we've got tons in position. And we probably have more tons in that situation right now than we have.

So, I think we're really well-positioned for it. And like Kelvin touched on, there are some pockets of strength in the US markets that are continuing to move forward.

So, I think we're in pretty good shape on that. But I think you described it right. When it goes, it's going to go very, very quickly. And that's going to put some strain on the system which oftentimes ends up really being a benefit for us because you see a few more trucks move and I think we kind of see it as an opportunity.

Adam Samuelson, Goldman Sachs.

Maybe first just continuing on the discussion about spring. How is the weather, if at all, in kind of this really slow developing April impact any of your dealer behaviors, if at all? And any particular region where there's more or less concern about both the planting delays, any color there would be helpful.

I think there's a number of things going on. First of all, top of mind is some of the flooding going on in the Midwest. That's obviously concerning and delaying things there.

The customer base is very resilient today and they still believe that they're going to see most of those acres. So, I would say generally speaking they're pretty comfortable, concerned, I guess, if we continue to see these patterns of weather. But if we can get a dry window here, the belief is that they're going to still seed a lot of corn and have a pretty successful spring.

So, we've got a couple other regions. We're still relatively dry through the Texas panhandle and up through Kansas and Colorado. I'd love to see some of that moisture get spread around a little bit. But the reality is that one's delayed and some that's more cold weather related.

That's helpful.

We're pretty comfortable that we're going to see a decent amount of corn go in the ground. I think the USDA forecast is a little strong. We're probably 3 million below that today, somewhere in that 94 million acres.

Just a follow-up on Trio, I think you've seen some solid improvement on the cost side and the volume performance this quarter was good.

Maybe just a little bit more color on where we are in the deployment of the [LRIP] program and future key milestones that you're watching for.

And then finally, I just need some clarification on the differences in the Trio guidance. There's a reference in the press release to selling basically every ton that you have of Trio, but the high-end of the production guidance is above the high-end of sales guidance. So, I just wanted to understand that more clearly.

On the Trio plant, I feel like we've made some pretty significant steps on that. And we really started to see the benefit in the first quarter, like you saw in the numbers.

There's still some things we need to do. And the real benefit of starting to see the improved production is we now have a little bit more product that we can use to start doing what I would consider to be really that commissioning phase on the pelletizer component of the business.

And that pellet product is a highly desired product in the market. We need to get comfortable with that part of the manufacturing cycle. And that's a little bit of why you see those numbers be a little bit different right now as we recognize that we've got some work to do in that regard. And the pellet product is going to be where we really see that next opportunity on the Trio plant.

That being said, like Kelvin touched on, the market demand is very good. And you see that really in the pricing. That's a real success story. You look back a year ago and pricing was, what $302.00 a ton in the first quarter of 2012? And now we're at $351.00 a ton.

So, I think that's pretty demonstrative of the demand that's in the market.

I just want to re-emphasize how positive it is that we haven't used the pelletizer. We've been able to sell our standard at very high margins. We've been able to sell all of our natural granular at very high margins.

So, we haven't had to use our pelletizer. So, now we have the chance to add even more margin and we now have, we're going to make standard product available to us to run the pelletizer. So, the positive part of that is that we were able to sell everything at a much higher price and we're going to continue to implement the pieces that allow us to continue that margin.

And on that point, is there a timeline for when you think that that's online? And roughly speaking, what do you think the price premium, the pellet product, versus standard grade would garner in the marketplace?

On the timeline component, I think you're just going to see it continuing to improve that over the course of the year.

There's a little bit of art that goes along with the science of running a pelletizer because you're blending in a starch and you've got to form these pellets and it's just going to take a little bit of trial and error to get through there.

We've staffed that in a way that we have dedicated folks to it. We've got manufacturer's reps that are on site. And now is the time when we're ready to do that.

So, I think we're just going to see steady improvement on that really throughout the year is the way I would describe it. And Kelvin if you wouldn't mind touching on a little bit of what you see on the market side on Trio, that would be great.

I think in terms of the premium specifically we're targeting markets that are close to the plant. It brings us a better net back and there is a bit of a premium to our natural granular there.

But, you're right. We have some real strong demand not only in the US, but also in the international markets. And I don't see that decreasing. The reality is people see value in the magnesium and the sulfate in that product and in all markets and we certainly continue see that demand as a result.

So, I don't see anything changing here in this next few quarters.

Chris Perrella, BofA Merrill Lynch.

Could you just elaborate a bit more on the total potash COGS guidance for the second quarter? It seems to be coming out a bit higher than last year and your shipment volume is probably up year-over-year.

The piece that we continue to try to emphasize is the cash margin component. And I think that's where we've seen that very significant improvement.

I think sometimes where, I think the number you're probably looking at includes [DD&A], which obviously is going to be a reflection of some of the significant capital investment that's been put in place.

I think the piece that we keep trying to drive folks to though is our operation in the plant and the resulting improvements in what we're generating in terms of future cash flows is really what we're trying to make sure folks are keeping a close eye on.

So, we talk a little bit about that cash flow generation relative to capital expenditure and moving towards that situation in the fourth quarter where we start to become very free cash flow driven. But all that's possible because of two things. One, we're starting to see the [intensity] on CapEx come down a little bit, and we're seeing the cash flows driven by control over operating costs and the benefit of the capital investment start to have a bigger impact quarter-over-quarter.

Shifting gears to the market outlook and pricing, some of the benchmark pricing has come in a little bit on soft April. Do you expect pricing to improve in May and June on increased demand? And is that going to net out to about flat pricing quarter-over-quarter in the second quarter?

I think the pricing piece is going to be, it's something obviously we're keeping a very close eye on. I think you're right to recognize that there's been a little bit of maybe softening that gets reported in the markets.

We see pricing being relatively steady through the spring here. And if that means that it's going to be $5.00 plus or minus, $10.00 plus or minus, where we saw in the first quarter, I think within a band, there's going to be a fairly low amount of volatility really that exists right now.

Kelvin, I don't know if you have anything to add to that.

I think that's right. Short-term here, so long as we get into the field and get going here, it'll abate some of that nervousness that's out there. But right now we're not seeing a whole bunch of activity on the price side. And that's positive. Everyone still plans to supply the amount of potash that's required and people aren't getting too antsy yet.

So, what happens beyond that, it's a pretty cloudy picture right now. But we've got to get through the spring season before we start thinking about any [fill] or anything like that.

And just one quick question, with the spike in natural gas prices recently, have you see any material demand improvements to drilling rig customers?

We're seeing pretty steady activity on the industrial side. What was interesting last year towards the kind of middle of the early part of the fourth quarter is a lot of the [E&P] companies had spent through their CapEx budget and started laying down rigs. And everyone's budget shows them starting to get back up to business January 1. The reality is it tends to take a little bit more time.

That being said, our industrial business has been very consistent, kind of quarter-over-quarter, year-over-year. So, I think the opportunity there is positive in terms of increased demand as programs get more into their full swing through the spring, summer and fall.

The other thing is that we always do see a lag between a bump in the price of natural gas and rigs getting, standing up. So, I think there is always going to be a slight time lag between people standing up rigs and the price of natural gas.

Joel Jackson, BMO Capital Markets.

I wanted to follow up on one of the prior questions. Just on cost again, specifically on the cash cost, because [I] seem to be able to reconcile your guidance for Q2 and the full-year, it would seem to suggest that your cash costs for potash will go up in Q2 and then come down in the second half of the year. Whereas for Trio, looks like they may come down in the second quarter and go up in the second half. Can you talk about that a bit?

I think what it asks you to do is really, if you go back and look over the last year, two years, three years, what you see is that there is variability quarter to quarter [based] that results in COGS.

And it's one of the things I was trying to highlight in our comments is that's a result of production cycles. It's a result of sales mix, whether you've got more tons that particular quarter or that particular month coming out of Utah or coming out of the East facility.

And so, I wouldn't get too dug in on each individual quarter. What I would tend to look at is what does that trend look like over time? And I think if you look at that trend over the last couple years, what you'll see is that Intrepid has I think done a pretty darn good job of keeping those cash costs at least flat and starting to move them down.

If you look at what's going on at Mosaic, if you look at what's going on at Potash Corp., you see cash costs tending to have increased. And then when you look at what we see coming with really increased volumes through better production at East, the ability to start bringing on the volumes from HB, I think we're going to be one of those unique companies that is increasing volume and decreasing costs over time.

So, I would expect some variability and I would stay pretty focused on that year-over-year trend. And that year-over-year trend is very, very positive. Even when you don't, there's not a whole lot of HB coming in this year. So, this is very real cost control and very real operating efficiency that we're driving through the business.

And on the depreciation, can you give a little bit of quantitative guidance to sort of how depreciation is going step up maybe in the second half of this year, maybe '14, as HB comes on and some of your other projects?

We expect to see a little bit. But I think you can look at the, kind of the year-over-year all-in COGS pieces to see what the impact of that is and kind of average that in.

It shouldn't be too much more than it is right now, but we will have fair amounts of capital coming into the system. So, that's already included in our full-year numbers. And I think fairly reflective.

And finally, what sort of competition, if any, have you really seen on the river this spring from maybe some import product from Russian or Israeli sources, get a sense of that, please.

We are seeing a little bit more activity probably as the new entrants, or more Canadian tons, that we're seeing there. But we're also seeing some Israeli and some Russian materials there.

Is it more competitive? I guess the river is always competitive. So, we tend to, we sell a little bit there, but we try not to put all our eggs in that basket.

So, that's always, New Orleans will be the low point in potash returns for us and for the entire market. So, we try not to spend a lot of time over in that area.

If I recall, there was a little bit less Russian product last year. Are you suggesting a little bit more this year than last?

I guess I can't speak to how much they're going to put on the river. What we know is there's product from a number of sources there and available to folks. And we know that that's a very competitive market.

One thing that has changed though, Joel, is that you've seen, over the last couple years, a very intentional effort by, particularly Mosaic and Potash Corp. to some degree, to frankly make it harder for some of those import tons to come up the river because the warehouse space, a lot of that's already been secured.

So, I think we see that a little bit as well. And I think it really makes the folks from Russia and the folks from, or the Israeli and the Russian tons, just think a little bit about, okay, how am I going to have to move these tons? What's going to happen? How much should I bring in? But I think in some ways that's a positive in terms of what those dynamics look like.

Once again, Joel, just to add the change that we see in potential tons year-over-year is measured in tens of thousands of tons, not hundreds of thousands of tons.

So, in the aggregate, we see a consistent number of tons coming in from the Russians and the Israelis over the last 10 to 15 years. And the delta is really quite small when you look at the change.

So, we've answered this question over many years. And we just don't see any significant change and the increased or decreased amount of tons tends to be quite small.

Andrew Dunn, Keybanc Capital Markets.

You touched a little bit on this earlier, or started to, but in previous quarters you've mentioned at the dealer level they're really opting for just-in-time. Did you continue to see that trend in the quarter and kind of currently? Or do you get the sense that maybe they're taking some inventory now?

Kelvin, if you wouldn't mind jumping in here too. I think overall we see that as having some degree of permanence to it, like we've described before.

A lot of the agreements that we hear about that are in the industry are multi-year type agreements. And this is the time of year where people have worked pretty hard to get tons close to the market.

So, I think it's a pretty logical assumption that dealers are looking for ways to not have to put a lot of working capital to work. The other piece of it, kind of a fairly steady pricing market right now is they also want to make sure they're not going to miss those opportunities. Because like we've touched on, when the window is open, things are going to go pretty darn quick.

So, guys are looking to be willing to make sure they've got inventory on hand in their own system as well.

Andrew, maybe I'll just chime in a little bit. Generally, customers will enter the spring season with pretty full bins of all fertilizers. I think the real question is how much recharge or is there any recharge here during the spring season? And then really the fill behind that.

So, those are the pieces. And I guess we're ready for that peak demand and I guess just patiently waiting for the season to get going.

Thanks for the color on that. And then, you've talked a little bit about imports from outside North America, but as you look at the commentary from some of the other North American competitors and they're talking about their export volumes starting to look healthier and their outlook seems to be a little more positive in that sense.

Are you seeing any kind of tangible benefits from that currently in your markets? Or do you expect to kind of see some as your volumes increase going forward?

I think that's a key part of the business strategy for some of the other North American producers. And when product is moving at decent clips like it is right now, I think what we see is just an overall improved health in the potash market.

And I think that's really going to be one of the pieces that is important is that there become a little bit better, I don't know, approach to that international marketing piece to continue that flow, because that's really where a lot of the Canadian investment has been focused is on serving that international market.

Just one last question, looking a little farther out, I mean obviously you've mentioned several times as have others that we're expected a record corn crop this season. But I've also heard that if this is the case with stocks being very high there may be some backlash in the following season.

Is that something that you're looking at or concerned about at all? Or do you anticipate that, for example, even if that were the case, you'd be able to offset with the efforts you've been taking to grow your customer base and maybe take a little share in the domestic market here?

I guess the thing that I would like to remind people is that we represent about 10% of the United States market in terms of consumption. And so, our ability to have diverse markets, to have already expanded our geographic footprint, to build strong relationships, to have created warehousing opportunities, created relationships with the railroads, the trucking companies, the percentage of market that we represent, we just don't think we're going to have an impact on the overall market.

And we believe we're going to continue to be able to exhibit, as we've done so consistently, our ability to put our tons in the market at higher prices because of the diverse products and our ability to deliver the highest quality product known in the United States on a just-in-time basis.

So, we see it, but given the percentage of the market that we represent, we think we have very, very strong opportunities to continue to perform as we have.

Bill Carroll, UBS.

Following on an earlier question related to inventory levels, inventories across North American potash producers remain stubbornly high, if you compare those levels to five-year averages. But if we do get this more of a permanence to just-in-time ordering behavior, then do these longer term averages remain less meaningful? And then how do we get a better handle on inventories in the system?

Bill, I think that's a key question and it's one that I know I personally have theorized that the overall inventory levels really are not that different. It's just the fact that they're being captured on someone else's balance sheet and in a different reporting. Whereas if that inventory was on a dealer's balance sheet before, it wasn't captured in those North American statistics.

So, in some ways I think we've actually got better clarity today in the overall numbers. I think the, we started to see inventories come down a little bit in April. I think the export business or the international business by the Canadians, I mean that's 95 plus percent of those inventory numbers to be realistic. And a big chunk of that is probably standard product that's going into some of those larger markets.

So, it would be great if we had some clarity on whether or not that was standard or whether or not that was granular, because I think that would give a better clue of what markets that product could be directed towards.

But my sense is that the averages probably still are going to have some meaning to them. I think we just have to put it in context of what's going on with the overall market, like I think you're kind of pointing towards.

And then can you share what some of the major financial covenants are for the new debt offering? And remind us of those for the existing revolver.

There are two major covenants. One is basically a coverage test and those are numbered, I'm trying to remember the numbers off the top of my head on that right now. That's the leverage.

So, the leverage test is at 3.0. And then the financial coverage is below a 5. When we look at our stress tests on those, Bill, we look at those very closely. And we're not interested in getting near them.

I think the piece that's helpful is they're the same exact covenants in our revolver as it is on the senior notes. And the way we designed the senior notes is that that will have the ability to float if we're able to renegotiate on the revolver for more liberal terms, the senior notes will float automatically with that.

Michael Hoffman, Wunderlich.

On free cash flow, as it turns positive, you historically used to generate somewhere between $0.08 and $0.10 of revenues before the big capital spending wave. How do we think about where that cash goes back to once you start turning positive again?

We're looking at that very closely. And part of it is really developing and linking back in with one of the earlier questions. I expect we'll still continue to have a level of capital investment that represents investments in sustaining.

There continue to be a number of great opportunity projects that we're going to look at within our business. And look at ways to partner with customers, with others around ways to create value, upgrades for our products.

We want to make sure we've got the balance sheet to do that. And what we're really looking at is, is there a way to balance cash flow with capital reinvestment and look at is there a component of that cash flow generation that is available for any number of activities, whether it be, like we've talked about before, is there a dividend? Is there a buy-back? Are there other investments?

But I don't know that it's a static number. It's one that I think there's a right balance. And as I look into 2014, I would say our CapEx is probably going to be somewhere around $150 million. Obviously we haven't gone through the budgeting process in detail for 2014. But knowing what's on our future, I think that's a realistic number.

So, I think that gives you a sense of when you build in the models and the projections around HB and such, kind of what the capacity is for free cash flow generation.

Michael, I'd just like to remind that Hugh and I continue to be the two largest shareholders of Intrepid, so that we're totally aligned with our shareholder base in terms of returning cash to shareholders and making capital decisions versus distribution decisions. And that we have great alignment in terms of the significant inside ownership that we have in this company.

And then is there a point, or can you share with us your view of this, a point where it becomes too late to plant?

I guess we don't see that scenario. I would say that we've got such an efficiency at the field level today that folks don't need very many days and they can get the millions of acres done.

Obviously we're lagging behind the 10 year average and certainly if you look at last year, everyone is concerned if you're comparing year-on-year.

The reality is if we get a window of a few days, we'll get that seed in the ground. And we'll get moving. We do need some favorable weather to get that done, but it will happen. It's a matter of if it's two weeks away or three weeks away.

Once again, Dave touched on a little bit earlier in the call, is that some of the fundamentals in the agricultural industry have changed in terms of the farmer and their ownership of equipment, their ability to use their own equipment to get their crop in the ground.

They're not renting equipment anywhere near the way they used to, so there aren't scheduling issues. So, that when that weather window does occur, a farmer has the ability because he generally owns his equipment, to get things in the field much, much quicker.

So, in theory we could get to the very tail end of May and still get all this corn in if we get a window.

Absolutely.

And then on the dealer side, you've probably told me this a million times. I apologize for forgetting, but what percent of your business goes through dealers versus going direct?

Maybe you can ask that question a little bit different, Michael, because I'm not sure if I ---

You mean direct to a farm, we don't really sell direct to ---

I mean as opposed to having to use a middleman. I mean, some of the bigger cooperative farms, the larger users. Or is this all having to work its way through that middleman to get to the farmer?

In terms of how we distribute, our focus is to sell it to, if you want to call it a middleman, retail, whatever you want to call that. They typically will [bland] it, add some value through some of their equipment, whatever else. And then typically sell it to a farmer or to a Ma and Pa dealer at the next level.

So, we don't sell directly to large corporate farms or small farms. It just doesn't fit with our model and our number of people in the field.

I think that brings us to the end of today's call. We just want to thank everybody for your time and your interest in Intrepid and Brock, we can probably close the call now.

Thank you, sir. Thank you everyone for your participation. You may now disconnect your lines.