Intrepid Potash Inc (IPI) 2016 Q2 法說會逐字稿

Thank you for standing by. This is the conference operator. Welcome to the Intrepid Potash second quarter and first half 2016 earnings 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)

I would now like to turn the conference over to Jennifer Olmquist, Investor Relations. Please go ahead.

Thanks, Anastasia. Good morning and welcome, everyone. I remind you that parts of our discussion today will include forward-looking statements as defined by the US Securities laws. These statements are not guarantees of future performance and are based on a number of assumptions which we believe are reasonable. These statements are based on information available to us today and we assume no obligation to update them. You can find more information about risks and uncertainties to our future performance in our periodic filings filed with the SEC.

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 this morning's press release. Our SEC filings and press releases are available on our website at intrepidpotash.com.

Presenting on the call today are Bob Jornayvaz, our Co-Founder, Executive Chairman, President and CEO; and Brian Frantz, Senior Vice President and Chief Accounting Officer. Jeff Blair, our Vice President of Sales and Marketing is also available for Q&A.

And with that I'll handle the call over to Bob.

Thank you, Jennifer, and good morning, everyone.

Before I dive into commentary regarding our second quarter and first half results, I would like to first address the developments related to the ongoing negotiations with our lenders as I realize this is top of mind for many of you. As you saw in our releases this morning in this past Friday, we have reached an agreement in principle on the terms of our senior notes. As part of these negotiations, we also agreed to extend the maturity date of our existing credit facility by two months, reduce that facility to $1 million for letters of credit only and received a commitment letter or an alternative lending facility which will replace our existing facility. While I stress that these agreements are subject to various conditions and definitive documentation, we are obviously pleased with the progress this represents in our negotiations.

We currently expect to have definitive documentation completed by the end of September. In the mean time, we have received a waiver on the current debt covenants for both our notes and for our existing revolver until September 30 to allow us time to get everything formally documented. It is too soon to divulge any further details. However, I can tell you today we believe these agreements will provide Intrepid with the liquidity to continue executing on our business plans.

Turning to the second quarter, this quarter represented a significant period of transition for the Company as we idled operations at West in early July and we transitioned East to a Trio-only facility. These activities had a meaningful impact on our results in the quarter so I would like to spend a moment giving you updates on where we are today.

We successfully transitioned West into care and maintenance in early July. We operated safely and at normal rates during the second quarter. Brian will give you more color on the financial impacts of the idling.

Though the idling of the West was necessary, it was very painful for us as we knew this would have a tremendous impact on our many loyal employees and their families. We want to thank them for their many contributions working hard and safely all the way through the idling and wish them the best in transitioning to new opportunities.

The ramp up of Trio at our East facility continues to go smoothly and our production has improved significantly since our April conversion. Our commissioning of the East facility will continue into the second half of 2016 and we remain on track to hit our expected annualized Trio production run rate in the fourth quarter of 2016 of at least doubling the 2015 Trio production.

As we work towards expanding our market for Trio domestically and globally, we believe our first four months of Trio production having them go better than plan provides support that are simplified production process can consistently produce material at higher rates for this historically supply constraint product. We have had very positive feedback from both new and existing customers regarding the increased production and have signed up several new warehouses in new geographies.

That said, we are sensing that this increase in the reliability of Trio supply may shift buying patterns which we anticipate will more closely align with seasonal buying patterns for potash. Specifically, we anticipate that some buyers may move towards a just-in-time purchasing model where historically these buyers purchase product as it became available because they were on allocation.

Given that Trio has historically been predominant a spring product in the US, we expect to build some inventory in the second half in anticipation of a strong spring. It is very important to remember that the potassium magnesium sulphate fertilizers are not new products and there's been global demand for this product dating back seven decades. As farmers around the world focus more on balanced fertilization practices and our additional production becomes available, we believe demand for Trio will be able to grow.

With the rapid ramp up in production at East, we have concurrently ramped up our sales efforts and our work in developing the logistical infrastructure to support new global markets. The customers we've spoken with so far have been enthusiastic about the potential to buy our product that they've struggled to get over the past several years.

From a pricing perspective, macro level softness in the fertilizer market pressured both Trio sales and volumes and pricing in the quarter which was expected. We continue to believe our specialty Trio product is currently a great value for chloride sensitive crops and is competitive on the magnesium deficient chloride permissible crops. While we anticipate some near-term pressure on Trio pricing as we expand sales domestically and abroad, we still believe the agronomic value of the product and the overall size of the market globally should provide resilience longer term.

Turning to potash, there continue to be indications that pricing may be at or near the bottom. However, US in global potash supply remains at issue as we look at the back half of the year. With these pricing and demand headwinds, we're focused on that which we can control specifically costs.

With our higher cost conventional mining facilities no longer producing potash, we are starting to see some of the cost benefit from the relative weight of the lower cost solar solution model and are more streamlined operations at East. Though we won't fully realize the benefit of this new model until 2017, we amendment our cost structure will continue to come down as product from the lower cost solar facilities become a larger part of our portfolio.

To sum up, the second quarter marked the beginning of some important changes for our business. While these changes will take some time to fully play out in the market, we believe these are the steps in the right direction as we work through this period of challenging headwinds for the industry.

With that, Brian will update you on the financial results and the outlook.

Thanks, Bob, and good morning, everyone.

For those of you that have been following the Company for a while, you have noticed we have presented our potash and Trio numbers differently than we have in prior periods.

We now report results for two segments, potash and Trio. Further, in response to recently issued SEC. guidance, we have reduced the non-GAAP measures that we're providing.

Our net loss and our adjusted EBITDA continue to be most impacted by declines in potash and Trio pricing which weighed heavy on our top line through the three and six-month periods. Top line sales declined 30% and 34% during the second quarter and year-to-date, compared with the same periods in 2015. These declines were led by year-over-year declines in potash sales, despite having achieved higher potash sales volumes in both 2016 periods.

Our average net realized sales price per ton decreased more than 40% in both the second quarter and year-to-date periods. Sales mix negatively impacted both top line sales and gross margin as sales into the industrial markets continue to be slow due to lower levels of oil and gas drilling activity. Declines in potash pricing yielded lower of cost to market adjustments of $2.9 million and $11.9 million during the second year and year-to-date periods, respectively.

For Trio, pricing and volumes were down in both the quarter and year-to-date periods resulting from overall softness in the fertilizer market in the trends Bob discussed earlier. These price declines, coupled with start-up costs for the newly transitioned East facility, weighed on the gross margin for the Trio segment in the second quarter and year-to-date periods.

During the second quarter of 2016, we incurred $1.1 million in abnormal production cost associated with the brief shutdown of the East plant as we transitioned it from a [mixed] facility to a Trio-only production.

During the second quarter, we incurred $1.9 million in restructuring charges related to the idling of our West facility and transition of the East facility, primarily for employee severance payments. Majority of these costs have been made in July and we do not expect -- anticipate any further charges related to this transition.

Interest expense is also increased in the quarter and year-to-date periods due to higher interest rates on our senior notes and expensing of deferred financing fees during the three and six-months period ended June 30, 2016 as a result of the changes we've made in our debt facilities. We also recognize $2.3 million related to one-time pre-tax gains in the second quarter of 2016 which are further described in our earnings release. We ended the quarter with cash and short-term investments of $47.6 million. Our outstanding debt balance which is now shown net of deferred financing fees on the balance sheet remained at $150 million.

Looking at the balance of the year, I would like to draw you were attention to a few trends and known factors you should be aware of as you look at our company going forward.

First, with the idling of the West facility now complete, we have greater clarity surrounding our total expected ongoing care and maintenance costs. We expect ongoing care and maintenance charges associated with West to be between $1.9 million and $2.5 million annually which include some of the ongoing overhead costs associated with care and maintenance. These charges will be reflected within other operating expense in our income statement in the future.

With West idled, and no more potash production at East, we will have less potash production in the second half of 2016 as compared to 2015. Our existing conventionally mined inventory produced prior to the idling of West is expected to be sold primarily in the second half of 2016.

While are transitioned away from conventional mining is anticipated to bring down our overall cost structure, we won't see the full benefit of our new operating model until the conventionally produced inventory is sold.

With that Operator, this concludes our prepared remarks and we are ready to take any questions

(Operator Instructions) The first question is from Christopher Parkinson of credit suites. Please go ahead.

Hi, good morning, everyone. This is Graham Wells stepping in for Chris. I was just wondering if you could add a little bit of color around regional trends you're seeing in terms of demand both for Trio and for MOP? And this is also just wondering if you can add a little commentary in terms of the pressures that you see on the Trio front moving forward. That would be very helpful, thank you.

This is Bob. Thanks for the question, Chris -- Graham. In terms of demand models, we really just don't see any significant changes to historic models. I mean we're seeing great moisture in our truck markets, soil moisture. And so when we look at the crops that are going to be growing in the state of Texas and surrounding areas, our footprint obviously because we're producing fewer tons of potash, is really going to be really guided around a very solid truck market.

So from a demand standpoint, given the fact that we are going to be a smaller producer, I think we are going to have better opportunities to select and choose the markets that we are really participating into.

On the Trio side, from a pricing perspective, we saw Mosaic take the price down but we are still seeing great opportunities from our customers as we sign up new customers and new geographies. This product has previously been constrained and so we see our opportunities to continue to continue to grow this market in a product that we just previously didn't have available to sell so it is very difficult to go grow a market when you don't physically have the product to offer into it. So as we see that opportunity, we just see it continue to expand. I hope that answers your question

Yes, certainly. Thanks for that.

The next question is from Mark Connelly of CLSA. Please go ahead.

Thank you. I was hoping, Brian, if you could just clarify for me. I think you talked about labor transition costing, primarily behind you and then you talked about the burn-off of the inventory. Are all of your primary transition costs behind you once the inventory is done?

I'm just trying to get a sense of whether there's something else that we should be expecting in this next quarter or two before you get to clean numbers.

And then second, can you talk about the distribution system and how that system changes now, how much more less flexible it will be and will you have more proportionately in consignment or less when all this inventories worked out?

Sure, Mark, this is Brian. I will take the West question and maybe Bob follow up on the distribution system question.

Yes. So on the idling of West, yes, we have recognized all of those costs that we anticipate to be incurred related to the idling of facility. Those came through in the second quarter so you see all of those.

As we go forward, the facility is under care and maintenance so we have a little bit of labor and associated costs with that to maintain the facility, bump the motors, check the shafts, things of that nature going forward so if we does that restart in the future we are able to do so. So you will see some of those costs going forward but in terms of the transition costs themselves, those have all been recognized.

As we sell down the inventory that is been produced, unfortunately we took those costs down to lower cost to market so assuming prices stay where they are, which Bob kind of addressed that we think we are at or near the bottom. We shouldn't see any incremental hits to the income statement related to those as well. So I think hopefully that answers your question. If not, we can --

Yes. Helpful.

As to the distribution system, we have increased the distribution system, if you will, in a variety of ways. I am not going to go into a lot of details quite frankly simply because I am just not going to lay out our marketing plan for Trio about I can tell you that we have significantly ramped up our ability to distribute it both domestically and globally. And what was the second part of you were question? I apologize

I just wanted to understand whether on the potash side you would have proportionately more or proportionally less on consignment once you blow through all of this inventory.

Yes. We should have significantly less -- a very small amount in fact. And so we have just got our good strong local trust markets that we have had before and selected warehouses that we are working with that provide us the opportunity to kind of stay out of the consignment world.

Super. Thank you very much.

The next question is from Sandy Klugman of Vertical Research Partners. Please go ahead.

Good morning. Thank you for taking my questions. But domestic potash prices have been particularly weak, particularly when taken in the context of the 94 million acre year for US corn.

One of your competitors this morning commented that the weakness we are seeing in off-shore prices is more a function of currency than market oversupply. Given how close you are to the domestic market, I was hoping you could maybe comment on what you perceive to be the biggest driver of the lower price environment that we are seeing?

Yes, I would say number one first and foremost, it was some of the imports that came in in the first half of the year. As you remember, we saw both Agrium and Mosaic try to take up the price $15 and then PCS's [field] program takes the price up $20.

So we are feeling a pretty solid bottom as we have seen the three major Canadian producers announce price increases and given the nature of the order book that started late last week, we feel like we have seen a bottom. Whether it's a long-term bottom or just a short-term bottom, we definitely felt a bounce pricing-wise in the short term.

But I would say the primary reason for the price declines that we saw in the first half were a lot of the competitive tons that came from both Russia and Bella Russia.

Okay. That is helpful. And as it relates to Trio, is your capacity increases? Are they sufficient enough to put pressure on pricing? And when you look at the off-shore markets, where do you see the best opportunities for growth in Trio demand?

You know, all I can tell you is that from a global standpoint we are having a tremendous amount of interest and so we'll get into various countries later as we move forward with executing on our marketing plan. But we are seeing very solid interest.

We don't believe that we should see a lot of pricing on Langbeinite, on Trio specifically, given the amount and nature of conversations that we are having with customers so we feel there is adequate demand out there and we finally have supply that is going to fill up pretty significant demand profile.

Thank you very much.

Want to add something? Jeff wants --

This is Jeff. I think when we talk about pricing, you have got to -- your pricing to go the customer, your net realized price back to us, I think our comments there, similar around our [fair lanes] obviously expand as we grow and look for new markets and so there is an impact on some pricing there.

But I think I would echo Bob's comments. We have had good interest. We are getting the logistics in place but some of those [fair lanes] just get -- they are going to get longer obviously to make sure we can find the right markets so that has an impact on our pricing back to the plant.

Okay, great, that's very helpful.

(Operator Instructions) The next question is from Josh Spector of UBS. Please go ahead.

Hey, guys. I was wondering if you could just help me understand how much production of potash came from West in the second quarter? And then also as you look to the second half and work through inventory and continue to ramp down potash production, what do you look for year-on-year so if you had 200,000 tons roughly last year in potash, are you able to give a rough feel for what you're looking at in the second half of this year?

Hey, Josh, this is Brian. I think I will take that. Typically, we don't talk about specific production levels from our facilities, though I would ask you to go back and take a look at our 10-K. And in our 10-K you will see estimated production capacity levels in there and I think our second quarter numbers are probably pretty reflective if you were to take a look at those and bring those back to a quarterly level. So thankfully we were able to operate West safely during the period of time in the second quarter there and I think those numbers would be in line with what you would have seen in our 10-K.

Okay. So it is pretty much in line roughly full quarter production.

Yes. I think that is a fair place to be thinking about it.

And do you guys talk about what you would expect for second half at all?

No. I mean certainly again going back to the 10-K numbers, if you can take out the West and the East facility production numbers from it and you look at just our solar numbers from an annual basis, I think, we are tracking towards that. At this point in time, it is still fairly early during the evaporation season I think but if you look at through 10-K numbers, that will get you where you want to be.

Okay. Got. Thanks a lot.

All right.

Thank you, everyone.

There are no more questions.

Go ahead.

Pardon me. I would like to turn it back over to Bob Jornayvaz for closing remarks.

Thank you everyone for taking the time to dialing in today. We appreciate your interest in Intrepid and look forward to speaking with everybody in the near future. Thank you again.

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