Intrepid Potash Inc (IPI) 2014 Q2 法說會逐字稿

This is the conference operator. Welcome to the Intrepid Potash 2014 Second-Quarter Conference Call. As a reminder, all participants are in a listen-only mode, and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. (Operator Instructions)

At this time, I'd like to turn the conference over to Gary Kohn, Vice President Investor Relations. Please go ahead.

Thanks, Brock. Good morning, everyone. Thank you for joining us for our second-quarter conference call. Presenting on today's call will be Bob Jornayvaz, our Executive Chairman; 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; Martin Litt, Executive Vice President and General Counsel; Brian Frantz, Vice President in Finance, Controller, and Chief Accounting Officer.

I would like to remind everyone that statements made on this call that are not historical fact, or that express a belief, expectation, or intention, including statements about our financial and operational outlook, are forward-looking statements within the meaning of the United States security laws. These statements are not guarantees of future performance, and are based on a number of assumptions which we believe are reasonable.

Forward-looking statements involve risks and uncertainties that could cause the actual results to differ from our expectations. You can find more information about these risks and uncertainties in our annual report on Form 10-K, and subsequent quarterly reports on Form 10-Q as filed with the SEC. We will be filing our second-quarter Form 10-Q later today.

During today's call, we will refer to certain non-GAAP financial and operational measures. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures are included in yesterday's press release. Our SEC filings and press releases are available on our website at intrepidpotash.com.

I will now turn the call over to Bob.

Good morning, and welcome everyone. Thank you for joining us. As you read yesterday, Dave Honeyfield will be leaving Intrepid on August 29 in order to pursue an opportunity with a new venture in the oil and gas industry. I, on behalf of the Board and the employees, want to personally thank Dave for his outstanding leadership and his unparalleled dedication to Intrepid during his six-year career with us. He was instrumental in the execution of the strategy to invest in our assets, and has driven an emphasis in process improvement that has significantly strengthened our company.

I appreciate Dave's thoughtfulness and his timing of his decision. His departure comes at a time when we are through the major capital investment phase; the trends in our business are moving in a much more positive direction; our cash and liquidity position is extremely solid; and we have in placed a world-class, well-functioning management team in Denver and at all of our sites.

We have an orderly succession and transition plan in place. Dave will be with us through the end of August, at which time Brian Frantz, who has held essential senior finance roles and has been an important member of Dave's team since 2010, will assume the role of interim CFO, and I will reassume the duties of President and Chief Executive Officer.

Since I founded the original Intrepid production corporation in 1984, nearly 30 years ago, which is still an ongoing and significant oil and gas company, and Hugh Harvey and I founded the mining company back in 2000, I've spent many years with direct responsibility for our day-to-day activities, and am eager and invigorated to step back into the role of growing this great company. So thank you, Dave, and we wish you great success in your new venture.

Now turning to our results. Through our focus on operations and our multi-year capital investment program, we are delivering on our plan of improved financial and operational performance. In fact, we returned to profitability in the second quarter and generated improved cash flows.

We accomplished this by successfully lowering our per-ton cash operating costs for the last two quarters by delivering on our sales plans and through stronger pricing for potash and Trio. We have created a more favorable trajectory in our business the last two quarters, and I'm confident in our ability to continue these positive trends.

Looking to the second half, our expectations are clear. We will continue to make progress in reducing our cash operating costs per ton for potash and Trio. We will increase production and optimize our operations. And we will plan for robust sales volume at the highest net average realized sales price in North America through our many advantages, including our distribution strategy and our diverse customer base and markets.

The ingredients to driving cash operating costs down remain unchanged -- increasing production of our lower cost Solar Solution tons, and reducing operating costs of our conventionally mined tons.

We had a successful initial harvest from our HB Solar Solution mine, with production of 31,000 tons during the first half of this year. This has us well on our way to achieving our HB production goals. Importantly, as we continue to ramp up according to plan, we are seeing the expected step down in HB's per-ton cash operating costs.

On the conventional mining side, the ongoing work at our West facility remains a key component in our plan. The West plant accounts for about half of our total potash production, so it has a significant impact on our overall per-ton cost structure. The projects underway at West are designed to stabilize and ultimately increase production with a corresponding reduction in cash operating costs per ton.

The North facility is fully operational now. With our completely new North plant, we are manufacturing the highest quality granular product that enhances our ability to deploy our close-to-the-customer strategy. The new plant has the capacity to granulate all of our West and HB production, which gives us the flexibility to pursue sales opportunities with the most attractive margin, be it for standard or granular product.

Furthermore, the improved capabilities at the North plant make possible the process modifications and recovery improvements at West, not available with our prior, dated compaction system.

These positive operational steps we have taken are complemented by another quarter of strong sales performance and improved pricing. Kelvin will now provide more insight on these accomplishments. Kelvin.

Thanks, Bob. The strong retail demand for potash and Trio in the second quarter left warehouses with little or no inventory. Farmers saw good value in potassium this spring and applied our products to maximize their return per acre.

Summer purchasing activity was also very strong. Typically, summer fill pricing is discounted to spring price purchasing levels to encourage a recharge of warehouses. In contrast to this historical pattern, we saw solid potash pricing for summer fill in response to good demand and tight inventory levels of granular potash in the market.

We sold 235,000 tons of potash in the second quarter, bringing the total sales volume for the first half of the year to 478,000 tons. This is a 30% increase from the first half of 2013.

We were able to significantly increase our load out rates and offset many of the logistical issues from the challenging rail service in the spring. Through our actions, we were able to deliver sales, sustain a price advantage, and strength customer relationships. We are seeing a market environment that supports continued strength in our sales in the second half of the year, as our outlook suggests.

We have a strong order book for the second half of the year, and consistent with our strategy, we expect to be selling into the market based on our production schedule.

We earned a net realized price for potash of $329 per short ton in the second quarter; $12 more per ton than we earned in the first quarter. This marks the first quarterly price increase we have realized in over three years. We expect pricing for potash to remain stable for the remainder of this year.

We had an even more successful sales quarter and first half for Trio. We sold 62,000 tons in the second quarter, and a total of 98,000 tons during the first half of 2014; a full 32% increase compared to last year's first half.

The demand in the domestic market for our granular and premium Trio continues to be strong. With this strength, we have focused our efforts on producing more of the high-value Trio products for the domestic market, and are seeing a positive result in sales volume, pricing, and margin. This resulted in an increase in net realized -- in net average realized sales price for the second quarter to $350 per ton for Trio, demonstrating the value of improving production flexibility that we have built into the system.

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

Thanks, Kelvin. Our return to profitability and strengthened cash position this quarter were attributable to our continued focus on the three main objectives that I highlighted as essential for our success at the beginning of the year.

First, we're executing on lowering our per-ton cash operating costs. Building on the trend that we started at the beginning of this year, we lowered our cash operating cost per ton 8% for potash and 11% for Trio from the first quarter.

Secondly, we're maintaining the appropriate sized SG&A cost structure, resulting in reduced SG&A expense of 24% in the first half of this year from the comparable period last year.

And third, we're managing our capital investment level. Our planned capital investments this year are in the range of $40 million to $50 million; a significant reduction from the approximate $250 million in each of the last two years.

The trend in the second half of 2014 is for per-ton potash cash operating cost to be lower than the first half, with the fourth quarter being the lowest single quarter for the year. There will be small quarter-to-quarter fluctuations along the way, and we're expecting that the stand-alone per-ton cash operating cost for potash in the third quarter will be slightly higher than what we reported this quarter. This is a direct result of the planned maintenance turnarounds scheduled at our East and West operations in the third quarter, and the seasonality associated with our Solar operations.

The planned maintenance work should take about a week at each facility. The reason for mentioning this is only to make you aware that this work and the impact have always been in our plan.

Our long-term trends of lowering our per-ton cash operating costs remain firmly intact as the harvest of the Solar Solution mine tons from our operations commences in the mid to late part of the third quarter, following the prime summer evaporation season.

Also, as a technical accounting note, I want to acknowledge that we have increased our second half cash operating cost outlook for potash by $5 per ton. It's important to understand that this change does not reflect an increase in anticipated gross costs, nor does it impact gross margin, profitability, or cash flows. Rather, this is a change in the classification on the income statement.

As the sales price expectation for potash improved since we last provided our outlook on April 30, we have less cost flowing through the lower-of-cost-or-market adjustment line in the second half of the year than previously expected, as these costs will now flow through normal cash operating costs.

Getting back to the business discussion. I just want to remind folks of a couple specific items related to the trend to lower cash operating cost per ton. The first is related to the new HB Solar Solution mine production. The continued addition of the low-cost HB tons in the second half, and into the future years, will continue to have a positive influence on our company-wide per-ton cash operating costs. When HB is running at its full production rate of 150,000 to 200,000 tons annually in late 2015, its cash operating cost is expected to be in the $80 to $100 per ton range.

The second item is the impact of the capital investment work that's nearing completion at the West mine. Through these investments, and the execution of our operating plan, we have lowered our per-ton potash cash operating cost at West from the high point of cost we saw in the fourth quarter of 2013. Our improved operating costs are the result of our proactive investments that we purposefully designed and committed to in order to address the expected variability of the ore body.

The last major component of the West upgrade plan is the completion of the thickener project. When completed in August, this final piece will complement the increased mining capacity that we have invested in during the previous years.

We are pleased with the trends in our business and what we have built upon in the first half of this year. We have either completed, or are nearing completion, of our major capital projects and are beginning to realize the benefits. Our cash operating cost per ton are trending in the right direction. Pricing has stabilized and even rebounded from the floor. We've achieved strong sales volumes by executing on our thoughtful and flexible marketing strategy. We've strengthened our cash position and overall balance sheet. And importantly, we're capitalizing on the margin and cash flow opportunity that we have created.

We expect the positive trajectory to continue as we build momentum and further realize the benefits from our competitive advantages of being well-situated, with distribution capabilities in key markets, of serving a diverse customer base with high-quality products, and operating our facilities at full production rates, and selling what we've produced to realize the best average net realized sales prices in North America.

With that, we're ready to turn it over for questions.

(Operator Instructions) Ben Isaacson, Scotiabank.

Hi, this is Christine Monroe here stepping in for Ben Isaacson. I just wanted to ask a question about the capital projects; as they're winding down, what the plans are over the next few years. We're just trying to get an understanding of how you think about capital allocation going forward.

I'll start with that. Fortunately, we are on the tail end of every one of the major components, and I think we'll easily be in the range that we've guided to, between $40 million and $50 million. I guess, are you asking about new capital projects, or are you asking about the wind down of the existing projects?

I think we're -- I mean we're asking a little bit about both, and then sort of thinking about what your thoughts are going forward for capital allocation in terms of whether there are new projects or not.

Well, we've got a lot of great ideas in the pipeline that we've been studying on an R&D basis. So, that's one of the great things about Intrepid is that we've had so many organic opportunities.

Our primary focus, definitely through the rest of this year and the early months of 2015, are optimizing these great assets that we've built, and taking the time, without the hundreds and hundreds of contractors that have been on site, to run these new plants at an optimal level.

Once again, there's no shortage of good, solid ideas that are very solid investment returns that we've been studying, that we've been working on from an R&D component. So, I think in the future, you will hear about some pretty exciting ideas. Dave, would you like to add anything to that?

Yes, I think maybe just on the wind down of the current year capital program. As you guys can see in the numbers, the focus has really been on wrapping up the work at HB. And all but a very small amount of that work was completed and wrapped up in the second quarter.

The North plant, as Bob touched on, we've completed the installation. We have all three lines of that new compactor plant up and running at this point, and that work is finished. And then we expect to complete the work on the construction of the new thickener tank really here in August, and we'll be commissioning that and bringing it online.

We also have some sustaining projects. Some of those were deferred into the back half of the year. As you've seen in the numbers, pretty modest capital expenditure level in the first couple of quarters. So all that work's scheduled. It'll take place in a very orderly fashion. And just continuing to make sure that the ongoing optimization work is taking place.

Thank you very much.

Mark Connelly, CLSA.

David, seems like now that all the hard work is done, Bob has jumped back in to take all the credit. (laughter)

Two questions. This is the second quarter that you've sold more product than you produced in both segments. Should we assume that your inventories are now closer to where you want them?

And then a second question on logistics. You talked about being able to take advantage of your approach to distributing product. Has that meaningfully changed your geographic distribution this quarter, and should we expect that to change again as logistics go back to more normal?

Mark, why don't I take the inventory level question. And Kelvin or Bob, if you guys want to touch on the logistic piece.

Certainly on the inventory level, Mark, you're right. We really had a great run here in the second quarter. And if you think about the number of different products we have and the different locations, I actually think that we'd like to build a little bit of inventory here right now because we've got some fairly low levels, particularly on the granular side. That said, we're making sure that we're working closely with our customers to time deliveries around that, coordinate with production schedule.

So we're -- I'd say we're probably a little bit lower than we'd like to be on finished product inventory, but feel good about our ability to take care of the book that Kelvin's built out here through the third and fourth quarter.

The other piece, it's a very integral piece of this, is since the North completion, we're now making some of the highest quality product in North America. And it has a much longer shelf life, and it has an ability to really have a very comprehensive logistic and distribution strategy that we really just didn't have the ability to enact before.

We've taken on customers that really, from a product quality standpoint, weren't as satisfied with us. And now that we have some of the highest quality product out there, we've got a very diverse and complete customer base that allows us to sell product literally as fast as we make it. So inventory is an issue to make sure that we service everyone that we do take on.

So, inventory has both plusses and minuses in that you're turning your product into cash as quickly as you can, but you also want to have the right amount of inventory to service all of your customers. We're not having to reach out geographically as far as you might think.

The great news is is that the rains that have occurred on the Southern Plains and throughout the state of Texas have done a great job in terms of returning some of our more normal truck markets that have existed for decades into much more robust markets, so that we're seeing a normalization of some of the local markets that we've had. Kelvin, you want to add a little bit to that?

I think you've covered most of it. But Mark, I'll maybe just add that you're questioning, or asking the question about our logistics and if we're closer to the market. And I would say that it's fair to say that we've taken on more warehousing positions and probably moved some inventory from plant positions to closer to the farmer. We see these farmers buying bigger equipment and able to put more product on in a shorter period of time. So we're trying to react to that and be ready for their demands. So that's fair to say. But in terms of geography, as Bob stated, it's very similar, and we're still a very netback focused organization.

Super. Thank you.

Chris Parkinson, Credit Suisse.

You mentioned additional potash opportunities in the industrial and feed markets. Can you quickly quantify the magnitude of these opportunities and your expectations going forward into the second half, please?

Chris, this is Dave. Let me just touch on where we're at in terms of product mix -- or sales mix here. So for the second quarter, and really for the first half of the year, the numbers are almost identical. Our ag sales were about 75% for the full year, industrial was about 20%, and the feed is about 5%. So those numbers are up a little bit as a percentage over 2013. I think the piece that's interesting to note is that our overall volumes are up as well.

I think it's good strength in those markets. Industrial continues to be very resilient, and we're seeing, as you can read, there's plenty of activity in that sector right now. So we're just in a good position to serve it, and making sure that we're balancing our production schedule to really focus on where we can get the best margins.

Perfect, thank you. And a quick follow up. Given your current run rates in Trio, can you just remind us of your longer-term assertations for production going forward, as well as the geographic market opportunities? Thank you.

Sure. Why don't I touch a little bit on that, and if you guys want to add a little bit more on the future piece. I think the -- what we continue to focus on predominately right now on the Trio plant is the production of the pellet product. And what you'll see when the Q comes out is that much more of our product went into the domestic market than it has in the past.

And what we have seen is the strength has been on the granular and the premium product. Moving that into the US market has just simply resulted in us realizing more value for the product. So the conversion of standard product to premium has really allowed us to make sure that we're getting the highest net realized price and really growing the margin overall on it.

The expectation in terms of productivity, we continue to look for ways to increase our recoveries out of that plant. I think the guidance that we have right now for the year is -- I think that that information is still very fair. I think there is some upside as we continue to improve our pelletization capabilities that exist. And that's really where our opportunity is in the near term.

The other thing I would add to that is that we've seen surprising geographic diversity in terms of the demand for that product. Just about everywhere in the United States that we offer some of that product, we've seen demand developing. Once again, our theme of once we got into the langbeinite, of growing the market rather than trying to buy the market, has served us quite well in that you'll see -- you'll continue to see continued geographic diversity in where we market that product in the United States.

Thank you.

Brett Wong, Piper Jaffray.

Thanks for taking my questions, and congrats on the nice quarter. I was just wondering on the strong expected demand that you see in the back half, is that driven by restocking or application? Obviously we've heard that inventory levels are significantly low, so just kind of wondering your thoughts there.

Kelvin, you want to start with that and I'll --?

Brett, I'll try and put some color to this one. I guess the first piece is the restocking. That's got to start before the demand kicks in from the farm gate. What we're really seeing is empty facilities across a large geography that we serve. A big part of that was the strong demand all the way through the back end of the season. We're seeing more demand on the pasture and hay land than we've seen in the past. We've got a stronger Southern Plains market that now has some moisture, so they're actually applying more potassium.

So I think we've had trouble kind of getting caught up at the end of, in the spring season. We saw excellent demand for the fill, if you will, and now we're just executing on the logistics for that.

We believe that there's going to be a pretty strong application season this fall. By all accounts, there's a very good crop out there, so there's lots of nutrient removal happening. And I guess the anticipation is that they're going to apply. What happened last spring is pretty current in a lot of customers' minds where they really got a tight window for application for various reasons. So I think they're looking to spread that out and spread some of that work load across a lot more months of the year.

So our expectation is that we're going to see a good application season as well, and then move into I guess a winter fill after that.

I just want to stress that having broken the drought in the southwestern part of the United States, especially the panhandle of Texas and Oklahoma, Northern New Mexico, Kansas, has a big impact when you have such a small cattle herd, and the amount of hay that's being raised and the multiple cuttings that they're getting with the moisture and the amount of potassium that that hay requires. If you were to go back and look at some of our delivery numbers back in the mid-2000s, going into the hay crops and going into those geographic areas, those are great truck markets for us, and we've seen a real rebound there.

And so we continue to believe we're going to see the strong part of that market that -- this doesn't get talked about. The hay and forage markets just don't get described and discussed as much as the corn and the bean markets, but they're very significant markets for us.

Great, that's excellent comment. Thanks a lot, guys. You talked a little bit about this in terms of the project pipeline, but just wondering if you can provide any more color on kind of the low-hanging fruit cost reduction opportunities out there. Obviously you mentioned some R&D projects, and of course the completion of HB Solar commissioning and the West mine. But anything that you kind of see right off the bat that could help lower those costs?

Well, the big picture is having several hundred contractors not trying to build things side by side with our operators. And so it's really hard to describe what it's like to have plants that now have individuals operating and optimizing these new plants without having contractors on top of them.

So, in terms of low-hanging fruit, having well-trained operators with new machinery, new systems, learning how to run those, and learning how to run those in a very concentrated fashion without contractors on top of them, has provided probably the lowest hanging fruit to start with, and we really expect that to continue to build and build.

The thickener at West, which is -- we've basically been operating with two very old thickeners running at less than 50% of capacity. We've built a brand new thickener that we'll then restore the old thickeners, we'll rehabilitate those. So instead of having 50% or 40% of two thickeners, we'll now have 100% of three thickeners that will give us a real opportunity to handle a higher slime ore, if you will.

And as we continue moving to some of our stacked ore bodies that have significantly higher ore grades, that's one of the great things about Intrepid is that we are now moving towards some ore bodies and ore zones that we've been anticipating gain to for a couple of years. It took a lot of development work to head in that direction. And now we'll have the thickener capacity to handle the slimes that are in there. So that's a real opportunity from a recovery standpoint.

Our North plant just continues to operate better and better more effectively. The pan on the pelletizer at the East plant, we continue to see weekly and monthly improvements on there. So those are all low-hanging operational opportunities.

In terms of the R&D part, I just want to say that there are a lot of things that we're looking at that really complement our knowledge of our brine systems. The amount of -- the minerals that occur in our brines and our ability to design and build plants around recovering minerals, there are opportunities out there in the future. In terms of -- Dave, is there anything I missed that you want to talk about in terms of additional low-hanging fruit?

No, I really think the point you made at the beginning of that, Bob, is the key one. That giving the operators a chance to have a much more singular focus really drives those operational improvements. And you get the opportunity to try a little test here and there. So Brett, I think the items Bob walked through there really are where you're going to see that trend and focus here over the next year to two years.

That makes a whole lot of -- that's great. That makes a whole lot of sense. I'm sure it's nice to have your facilities back in your own hands.

I guess the last question from me is kind of going back to the capital allocation strategy going forward. Apart from the CapEx piece -- obviously we're going to see a significant decline there -- what else, or can you talk to that strategy? Maybe potential return to shareholders, if you're talking about that? Any color there would be helpful.

Brett -- this is Bob -- as the largest shareholder, return of capital to shareholders is always at the top of my list. So you and I are pretty well aligned there.

We do have a lot of opportunities that we're looking at that are high rate of return opportunities. And so we will, as we go forward and continue to evaluate those, we'll just simply look at them in terms of making sure that they have very significant rate of return opportunities.

You will see continued investment in our distribution strategy. It allows us to move our tons in a very timely fashion. And it allows us to continue achieve the margins that we're achieving and the higher netbacks that we've been able to achieve, thereby generating the highest margins in North America. So, those are going to be small investments, but very consistent and well thought out strategic investments. They won't be large investments, but they'll make a difference. Dave, once again --

I think the Amax development, HB Amax that we're continuing to look at as well, Brett, on a longer-term basis is just that continuation of driving more tons into the system that are produced using Solar Solution mining and lots of work going on in the background on that. I think as we get a little bit more clarity around some timeline pieces, that's just something to keep an eye on here into the future as well.

All right, great. Bob, glad we're on the same page, and thanks again for all the color, guys.

Don Carson, Susquehanna Financial.

Couple questions. Just wondering what impact Mosaic's pending closure, their MOP operations in Carlsbad, has. Bobby talked about some of these high netback truck markets nearby. Does that increase your volume potential there?

And then just on your second half market outlook, clearly we're seeing strong demand, but you talked of stable prices. Does that mean you don't think you can get an increase over this 390 summer fill posting?

Let me answer your question in a couple of different stages. First, whenever a plant gets shut down, there's going to be employees that are going to lose their job, and so our sympathy goes out to those that -- it's always sad when a plant gets shut down.

I do think that we will be, I hate to use this term beneficiary, but there are some very positive impacts that will occur in the labor market as several hundred well-trained, highly-skilled workers come into the marketplace. That's the first piece.

The second is just not having Mosaic's presence in that truck market I think just makes our presence a bit stronger. It helps us from a variety of reasons with the regulators down there in terms of the amount of stress. Right now with the oil and gas activity down there, we see various regulators having to spend a variety of time. And having one less plant that they have to monitor makes it easier for us to get things permitted and turned around time-wise.

It's a much lesser demand on the water resources down there. We own significant water rights. And in some very small areas, we actually purchase water. Because of the large geographic footprint that we have in Southeast New Mexico, we both sell water and buy a very small amount of water. We're much more a net seller than purchaser. So it's going to help us in the water market, if you will.

As we've gone through it, corporately it's -- we really don't see any negatives whatsoever on Intrepid; only potential positives. We have made significant capital investments over the years on our products side of our business that they have chosen not to make, and that's why I think we're in good shape to take advantage of the situation. Does that pretty much answer your question, or any more depth on that? I think Kelvin's got a point he'd like to make.

Don, just a couple things. I think, to Bob's point, it's a relatively small impact. We're very well-positioned to cover all that Southern Plains market, and specifically the truck market that we talked to. So we're in good shape there, and we anticipate that we'll be able to continue to do that.

I think your second part of your question was regarding the market, and the talk about is it stable or does it have some upside. I think there's a couple things going on there. We know the inventory's very tight in terms of the supply. Demand's been strong. We've sold our summer fill, so we're moving through that. And it's really a logistics game today to make sure that we can cover everything that we've committed to. So, stable to some strength in the market is the way I'd position that.

And I -- certainly, we don't set the pricing in the marketplace, so we react to it. And I guess we feel like there's -- the commodity price is kind of driving a little bit of negative right now at the farm gate, but we're also weighing other items like inventory and logistics, and so you've got a bit of a balance right now.

Don, one more piece that I failed to mention is it's going to have a big impact on, positively on Intrepid's logistics with the railroad. Once again, we won't have the competition over power, over cars for their potash shipments that are leaving their mine. Same thing with truck logistics. So as we evaluate the entire situation, we're having trouble coming up with a negative for Intrepid Potash at that Carlsbad facility.

Thank you.

Vincent Andrews, Morgan Stanley.

Wondering if you could talk a little bit more about the rail situation. I remember back at 1Q, you kind of highlighted there was a risk to shipments in 2Q, depending on availability. That obviously proved not to be an issue. But I'm also hearing a lot of the grain handlers talking about the big crop that's coming and that's going to put further stress on the rail car situation.

So it just kind of feels like maybe this isn't a one-time issue; it's going to be an ongoing issue. What can you do over the medium to long term to mitigate this issue, and how can you benefit from it and where are the risks?

Hi, Vincent. This is Dave. I'll start out, and Kelvin, if you have some additional comments here that I don't cover, please jump in.

I think the, all the comments that you made there, Vincent, I think are spot on. That we certainly needed to wave the flag as we were going into the second quarter as we were seeing rail velocities really come under pressure.

What I will tell you is that we were able to manage that in large part because of -- frankly, there was a lot of brute force work that took place during the second quarter. Daily conversations with the scheduling/logistics folks, particularly within the BN. Our sales and marketing team moving trains around, based on what was happening in current weather situations. Us focusing on more unit train deliveries into warehouses that can handle larger loads. And really trying to move forward that strategy that we've been talking about for a while of just begin closer to the market.

So, it was the combination of those items that, maybe it's a little bit of a duck swimming in water that I think the end result might have looked pretty smooth and predictable, but there was a lot of effort to get there.

I also think your comment on the fact that it will continue to be a challenge I think is very fair. And that's certainly the sentiment that I'd say customers, as we got back from the Southwest Fertilizer Conference, echoed that not a lot of discussion or concern around price -- actually, fairly confident there -- but more concerned about logistics and getting product in place. And like Kelvin touched on earlier, some of that tightness that customers felt last spring, they're trying to be very thoughtful about.

We've talked to each of the railroads that serve us. We know that the BN is bringing on 500 new power units, 5,000 new employees. It's taking them time to get those delivered and people trained. Same thing on the UP, although that has a smaller impact on us.

So, I think people getting ahead of it is important. And certainly that's -- we're just staying close to our customers to make sure we're managing the timing on it. Kelvin, anything else to add there?

I think just, we were at the Southwest Fertilizer Conference here recently, and I think that one of the bigger themes that came out of that was logistics and distribution concerns from the farmer. And it really is tied back to what Dave mentioned; the concern for power and rail cars.

We are seeing an uptick in our truck traffic, as we talked about. Some of the things that customers are doing, I think they're reacting to the (technical difficulty), taking product a little bit earlier than we would have expected.

The one thing that we do have going for us is primarily we ship on single, one carrier to destination, whereas our competitors tend to ship on multi carriers. So, it's a little less complicated for us to get our product moved to the customer.

That's very helpful. Thanks very much.

Joel Jackson, BMO Capital Markets.

Where would we see, you've talked about how your costs for potash being somewhat flattish for the second half and bottoming a little bit in Q4. When would the next drop in your cost space be? Would it be more Q1 or Q3 of next year?

Joel, this is Dave. One thing we'd point you back to is in the press release, what you'll see is that there is a step down in the second half of 2014 compared to the first half. I think the flattish piece will really just be here in the third quarter, because that's the point in time that we have that the plan turnarounds and the Solution mine harvest starts for HB in mid-August here and then Moab starts up right after Labor Day. So the fourth quarter is really where you will see that pretty good size step down.

But I'd just direct you back to the guidance numbers, because that'll show you the impact of what we're expecting over the second half of the year. And then as I touched on earlier, when we get into full production on HB, those lower cost tons will even have a more pronounced impact in 2015.

Your warehousing and handling costs have gone down a fair bit the last couple quarters on a per-ton basis. Is that sort of the new run rate going forward?

There's a little bit of fixed cost component that you need to think about in warehousing and handling, Joel. We do have -- there are variable costs that go along with applying some of the de-dust agent or anti-cake agent from time to time. But when we're able to have full volumes going through the system like we have been this year, you are going to get the advantage that we weren't able to get the full leverage on last year when the shipping volume was a little bit lower.

And finally, one of your North American, non-chloride potassium fertilizer producers has, starting to look in some product development where they're looking at basically producing an SOP that's blended in micronutrients down the road here, trying to maybe compete with some of the langbeinite or Trio business. Have you done any work of possibly looking at some product development where you could produce a higher potassium grade of Trio?

I think the, maybe one of the points that you touch on there is that there continues to be demand for specialty products. We certainly recognize that. There may be opportunity there at some point. I'd say right now we're focused on the recovery on the Trio side, and really looking at what capabilities there might be in the mines. So I don't know that we really got much to comment on on that specifically.

We're extremely aware of the demand for the magnesium and the sulfur and the, I wouldn't say any real reduction in non-chloride products. And we're aware of opportunities, and I'm just going to leave it at that. We're very aware.

Okay, thank you.

Andrew Wong, RBC Capital Markets.

So with the last of your major CapEx projects being completed this year, can you just talk about what we can expect for a sustaining CapEx going forward? I think you've touched on it in the past, but I'm just wondering if there's any update on that.

Andrew, this is Dave. I can give you kind of a snapshot as we sit here today. We're just in the initial stages of kicking off our budget planning for 2015 as well, so these numbers may change a little bit. But what we've suggested is that sustaining, it'll be somewhere around that $35 million level. There may be a little plus or minus on that. But what we've really looked at over time is that we've got newer facilities. We have a maintenance planning schedule or program that is in place and actively being applied across all the mines.

So I think one of the important takeaways, from my perspective, is that there's a predictability to it now that maybe we didn't have five years ago. And we also have more mining equipment. We have an additional plant with HB. So, a little bit of a transition period here, but I'd kind of start plus or minus $5 million to that number.

And that's helpful, thank you. Could you compare that to just in prior years? You've mentioned some of the changes that's been going on with your operations. Maybe just where it's trending and touch on that a little bit?

Yeah, I think that we've been at levels a little bit higher than $40 million here for the last couple years in 2012 and 2013. And part of that was just getting things to where they needed to be. So hopefully we'll see a little bit of step down for the reasons I mentioned, particularly around having newer facilities.

Okay, great. And then just one quick question, just circling back on pricing. Can you talk about the industrial and feed markets versus the agricultural markets right now?

I think -- it's kind of interesting to have very specific discussions around that. I don't know that it's always tremendously helpful, because over time, they will directionally follow one another, but there is a little bit of a lag in lead associated with them.

You kind of go back and look at what we have done on a net realized price basis over the years. And we've continued to, frankly, deliver on a higher net realized price. I think our historical number, something like 24%. And that's been at periods of time where we've had a higher percentage of ag relative industrial, and points where we've had a lower. So I think it really is helpful to look at it on a blended base.

All that said, I'll tell you that Kelvin and the guys have done a very good job of pushing through the price increases that have been announced, very quickly. And we talked about this being the first quarter where we've seen a little bit of a rebound. Really, we saw that happen mid-first quarter. And when we look at what's going on overall, I think we were able to react more quickly.

You look at the results that have been reported to date, and we're something like $85 to $90 better on a short ton basis than what, on a combined basis, Mosaic and Potash have reported here. So we continue to drive that. I know you've heard Bob and I both emphasize it. It's an integral part of our plan, and we've got the flexibility and the plants to continue to drive that.

You know, Andrew, I guess I would just -- I would direct you back to our very solid nine-year track record of achieving a much higher net realized price than our competitors. And that's because we understand the diversity of our markets, the timing of our markets, how those markets are moving. Given our active participation in the oil and gas industry and knowledge of that, as well as the feed markets, it's given us an opportunity -- and our track record very solidly proves that -- of determining which market is better when and when to make those switches.

That's great. Thank you very much.

Brock -- excuse me, this is Gary -- we have time for one more question. And before you introduce it, I'd like to apologize. I understand for those of you listening on the webcast, there may have been a brief break in the audio. I'll remind you that the recording will be available shortly after the call at intrepidpotash.com, so feel free to dial in or listen to that webcast. And we apologize for that brief sound bite; there was a brief silent period. But Brock, if you would introduce the last question.

Mark Gulley, BGC.

Two questions, if I can. One, a lot of discussion about lower cost of goods sold, particularly in the prepared remarks. Can you remind us what that target might be for 2015 on the potash side? And probably given all the progress with Trio, maybe an update as to what your target is for that product.

Mark, this is Dave -- go ahead. Do you want to ask them both first here?

Yeah, the second question is with respect to, I'll just say it, Compass Minerals, they have indicated that they would like to be able to purchase more KCl going forward. They have sulfur, you have the potassium ions. Seems like a pretty good match. And you of course the most [frayed] logical from the standpoint of sending MOP to them. Is that something that you can perhaps talk about a little bit?

Mark, I guess -- we have a very diverse and complete customer base, and we're very aware of who's buying potash in the United States. And I'll kind of leave it at that. Once again, we'll stand by our track record of achieving higher net realized pricing and knowing the market. I appreciate the insight, and we're just extremely aware of the market. Dave, you want to --?

Yeah, I'll touch on the other question here quickly, Bob. Mark, there is some information in our investor decks that might be worth pointing to with regards to what the impact of HB is on the system. I think overall, we said that it's probably about a 10% decrease, once HB is up and running. And Bob went through a list of some of the other items that we continue to look at. So, I think that's a fair place to start when you look at the impact of the $80 to $100 per-ton cost on the potash side.

And then on Trio, a little more specific on that, what we've been doing is you remember back to the first quarter, we talked about some of the losses that we were having in our plant as we were manufacturing the pelletized product. So the emphasis that we have been putting on the plant is really around reducing those losses. And what we've seen are some really nice improvements where we're using less binding agent, where our recycle rate has gone down, and we continue to see improvements on that. So, the trend will directionally be heading in the right place.

I think as we continue to make improvements in the plant, it's a little bit more challenging for us to have an exact prediction of what that will be, but I'd love to. And I think we've got a very real capability to pull out another $10, $20 per ton. And certainly focusing on the recovery is where some of that upside is that I mentioned earlier.

Directionally, we'll be continuing to push on it. Giving you exact color on it, we're just going to need to see how each one of these steps progresses.

Thank you.

So, I think with that, we're wrapped up. And really just want to thank everybody for taking the time to dial in and appreciate your interest in Intrepid. And we'll look forward to speaking with everybody in the near future here.

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