Intrepid Potash Inc (IPI) 2016 Q3 法說會逐字稿

Welcome to the Intrepid Potash Inc. third-quarter 2016 earnings conference call. (Operator Instructions)

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

Thanks, Joe. 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 the 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 reports 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 Cofounder, Executive Chairman, President and CEO; and Brian Frantz, Senior Vice President and Chief Accounting Officer.

With that I will turn the call over to Bob.

Thank you, Jennifer. And good morning, everyone. Before I dive into our third quarter and my thoughts on the market right now, I would like to take a moment to address Monday's release regarding the debt, as I know it is top of mind for many of you.

On Monday we announced the completion of our debt negotiations and finalization of our amended financing structure. This agreement represents the culmination of a lot of hard work from the Intrepid team as well as the various teams representing the eight separate debtholders, the past eight banks representing the old credit facility and the Bank of Montreal, our new credit facility lender.

I would like to take a moment to thank each of them and their advisors for their dedication to reaching final agreements. I'd also like to thank our shareholders, employees, vendors and customers for their patience during these negotiations.

I will let Brian hit the main financial points of the deal. Through these negotiations we have been able to bring down our aggregate outstanding indebtedness by $15 million through early repayments on the notes while revising our covenants to provide us with more room and flexibility to execute on our business plan.

As we worked through the negotiations, we decided the time was right to evaluate the various strategic alternatives available to us at Intrepid. We will be engaging an investment banking firm by the end of the month and will work with that firm to identify and prioritize the numerous different strategic alternatives available to us and that we believe provide the best value for shareholders.

Turning to our quarterly results, the third quarter was another transition quarter for our Company as we idled the West facility in July, completed our commissioning of our East as a Trio only facility and focused our efforts on further cultivating Trio sales, both domestically and abroad, and the restructuring of our sales group.

It's still early in the process of transitioning to our new business model, but we believe we are taking the necessary steps to position Intrepid for success.

Year-over-year potash demand ticked up for the second consecutive quarter as pricing began to solidify and customers felt more comfortable in placing orders. At this point we believe that we have reached the bottom of potash pricing, and as such we expected-quarter potash pricing represents a low point for us in the cycle.

Due to the timing and nature of sales, we believe it will be 90 days before we see the full impact of the recent price increases in our results. The fall filled season is currently underway, and thus far we have been experiencing good demand for some of our pottage products.

While some commodities have been pressured, while others are performing extremely well, we believe potash and Trio is currently a great value as farmers look to replenish soil nutrients ahead of next year's growing season. With West ceasing production in early July, we transitioned our potash segment to 100% solar production during the third quarter. These facilities have historically had a meaningfully lower cost structure for potash production compared with conventional facilities.

We have been experiencing normal levels of evaporation across our three potash production facilities after the past couple years of below-average evaporative conditions. As the solar potash harvest season begins, we believe we are in a good position to supply our customers with high-quality product, utilizing a more sustainable cost profile, given the current market conditions.

During the third quarter we completed the commissioning of East for Trio-only production and achieved, ahead of schedule, and annualized Trio production run rate of more than double our full 2015 Trio production. In doing so we have proven our ability to provide a consistent stream of production at these higher-volume levels. We are now in a position to supply the specialty product to meet demand at higher volume levels.

Regarding Trio sales we have made some good early progress in bringing our positive Trio storing to new customers, both domestically and abroad. With the product now readily available and a newly structured sales team with significant international experience, we continue to see the same shift in Trio-buying patterns we discussed last quarter towards more of a just-in-time purchasing model.

As prices for Trio and its competing products have decreased in recent months, this has also caused some hesitation from our customers in making purchasing decisions. Because Trio has traditionally been more of a spring product in the US, we continue to believe that this shift in purchasing patterns will drive more solid Trio sales volumes in the spring application season.

This resulted in an inventory build in the third quarter as we prepare for what we anticipate to be a solid spring season. We believe this product is a great value from both an agronomic perspective and compared with its component materials, particularly in light of recent pricing pressure.

Internationally, we continue to be encouraged by the interest we have seen for the Trio product. I've spent a good amount of time on the road with our sales team, meeting with prospective customers, many of which have struggled to get a consistent supply of langbeinite products in the past or who have never taken langbeinite before.

These meetings have been very encouraging. We believe we are making significant progress in the process of establishing relationships with new customers.

We also spent time this quarter on working on improvements to our logistical infrastructure to ensure that these customers get what they need when they need it. As we move through the end of the year with the transition of our production model behind us, we are focused on growing our domestic and global Trio footprint while continuing to monitor our cost structure.

At the same time, we believe our revised debt structure provides the added flexibility and time we need to navigate this part of the cycle.

With that, Brian will update you on the details of our debt amendments, financial results and the outlook.

Thanks, Bob, and good morning, everyone. I'd like to start with the review of the highlights of the debt deal we discussed on Monday.

Please note that a more thorough description of the note amendments and the new facility was included in the 8-K we filed yesterday as well as within our third-quarter 10-Q, which we anticipate will be filed later today. As we announced on Monday, we are pleased we have reached final agreements with our lenders which resulted in a new revolving credit facility, as well as amended terms on our senior notes.

The amendments to the notes increased our current interest rates charged on each series of the notes by 450 basis points above the original coupons. These rates may adjust quarterly and are initially set at the highest point on the pricing grid. The pricing grid provides us the opportunity to lower these rates based on our financial performance. Given market conditions, we expect these rates will remain static in the near term.

The senior note amendments also provide revised financial covenants that initially include minimum levels of adjusted EBITDA and liquidity. The amendments also incorporate revised leverage and fixed charge coverage ratios which began in mid-2018. As Bob mentioned earlier, we believe these revised financial covenants give us the time and flexibility to execute on our business strategy.

Shortly after quarter end we paid $16 million to the noteholders, of which $800,000 was a negotiated make-whole payment related to the $15 million early repayment of no principle. On Monday of this week we paid the noteholders an additional $500,000 as a negotiated make-whole payment. In turn, the noteholders agreed that we will not go any further make-whole payments on the next $35 million of principal reductions, which would come from asset sales or equity raises that may occur in the future. The notes are now secured by a first lien on substantially all of our noncurrent assets as well as a second lien behind Bank of Montreal on our cash receivables and inventory.

We also entered into a two-year asset-based revolving credit facility with Bank of Montreal, which provides up to $35 million in availability, subject to the borrowing base limitation. We believe this revised debt structure provides us with the additional room and liquidity to execute on our plans.

I echo Bob's sentiment in expressing my gratitude to all those who participated in the negotiations as well as our shareholders, customers, vendors and employees for their patience these last several months.

Turning now to our quarterly results, we generated a net loss of $18.2 million during the quarter, bringing our total net loss for the first nine months to $50 million as we continue to experience pricing headwinds across our product line, despite increases in volume on the potash side.

During the quarter potash sales volumes increased compared to the third quarter a year ago as indications of a floor in potash pricing became more evident. A third-quarter 2016 average net realized sales price of $178 per potash ton represented a 44% decline compared to the same period a year ago.

We did see increases in potash pricing late in the quarter. As Bob said, it typically takes about 90 days from a posted price increase before we fully realize the full benefit of the increase, so we will look for that late in the fourth quarter but won't fully realize it until the first quarter of 2017.

For Trio we saw significant price decreases this quarter as prices of Trio's component nutrients as well as competing products declined. Due to the timing of the most recent price decrease, we believe these price declines will weigh on our fourth-quarter average net realized sales price for Trio.

Potash production during the third quarter of 2016 was 52,000 tons, reflecting a 108,000-ton decline from the third quarter of 2015, primarily as a result of idling of the West facility and conversion of yeast earlier this year. Having completed the transition of these two conventional mining facilities, we exited the quarter with all of our potash production coming from solar facilities.

Our cost of sales during the quarter continued to reflect the sale of conventionally mind product from East and West prior to ceasing potash operations at those facilities.

Our lower cost to market adjustments totaling $5.2 million in the quarter, which was up sequentially from the second quarter of 2016. We expect our LCMs to decrease in the fourth quarter. Year to date our LCM inventory adjustments totaled $17.1 million.

During the quarter, interest expense was impacted by an additional $1.2 million in expense resulting from the write-off of deferred financing fees and the negotiated [MAACO] payment associated with the debt negotiations. Our quarter end balance sheet reflects $28 million in cash, cash equivalents and investments and outstanding principal on our senior notes of $150 million.

Please note these amounts are prior to the payment we made to the noteholders on October 3.

Before I wrap up I'd like to take a moment to point out some of the things we are considering as we look at the business going forward.

As I discussed earlier, due to the lag between pricing changes and revenue realization, while we expect some increase in the fourth quarter, we believe the recent price increases for potash won't fully be realized in our results until 2017. For Trio, we anticipate our net realized sales price to continue to be pressured throughout the fourth quarter.

From a production standpoint, having proven our ability to run at an effective capacity, we anticipate matching future production levels with anticipated demand. As we have said before, we don't expect to see the full benefit of our new production model until the conventionally produced inventory is sold out.

We expect the remaining red granular inventory to be sold in the fourth quarter and, therefore, we expect to begin to see the full margin benefit of our transition to 100% solar potash production model in the first quarter of 2017.

Potash production will be lower in the 2016 fourth quarter as compared to the fourth quarter of last year as we now only operate solar-only facilities. Please remember that the nature of solar potash production typically aligns with the seasons, where most of our potash production will occur in the first and fourth quarters of any given year, while during the second and third quarters we will have very little potash production as the evaporation process occurs.

During the third quarter, we incurred $1.7 million in care and maintenance expense at our West facility. Included in that amount or someone-off repairs for West which were not previously contemplated. Longer term, we will continue to expect routine care and maintenance charges for West to be between $1.9 million and $2.5 million annually.

Lastly, we now expect 2017 expenditures to be between $18 million and $22 million.

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

(Operator Instructions) Mark Connelly, CLSA.

So you warned last quarter that we were going to see Trio inventories go up, so that increase shouldn't be a surprise. But was the drop you saw in sales bigger than you expected? And how confident are you that the new season sales pattern won't leave you with too much product at the end of the season?

It's a good question, Mark. I think if you go back in time, you'll remember that for many, many years we had customers on allocation, and those customers are no longer on allocation. And then we had international customers that couldn't even get the product. And we had not built up the infrastructure to deliver that product to those international customers.

So while we are in the transition of a newly restructured sales team with a tremendous amount of international experience and we have new infrastructure capacities, I just think we are going to have a transition time here. I don't think it's as clear cut.

Yes, I wish we'd have had more sales. But we've got very robust data on who the customers are, who they were, what their buying averages were. And we feel very comfortable that it's much more of a timing issue than a loss of sales issue, if that makes sense.

Sure, that does make sense. And related to that and my last question is, does your distribution system have to change in any meaningful ways to accommodate this? And for example, would you be using more of a consignment type approach with Trio, the way you have sometimes done with potash?

Not necessarily. Domestically it really hasn't changed at all. We have beefed it up. I think we've added 10 new warehouses here in the United States -- I don't know the exact number, eight to 10 new warehouses in the United States -- that will handle Trio. And then internationally we have done a tremendous amount of work. I've literally been on the run since the middle of July, all over the world. And we've done a lot to create infrastructure so that we have the ability to deliver in bulk bag containers to a variety of customers around the world.

So we have set that infrastructure up and that's in place. So globally, yes, we have made some significant changes.

Vincent Andrews, Morgan Stanley.

This is Neel Kumar calling in for Vincent. This year you took some steps to reduce your SG&A expenses. I was just curious if you have any more cuts to operating costs going forward.

Well, we are sure working on it, Neel. That's a great idea. Everywhere that we can find to cut costs, we are going to work on it.

I don't know if that's enough of an answer. We've all got our sleeves rolled up, and wherever we can find them we are going to cut them.

This is Brian. We've made good progress over the last year but there are still some more gains to be had as moving forward. So just to echo Bob's comments, we're looking for those around every corner.

And another question related to Trio -- which other geographical markets besides for the US do you see as being opportunities for Trio demand?

I'm just going to say globally we see vast potential. And I'll leave it at that. There is no reason to give you specifics, as we have competitors.

Right.

Edlain Rodriguez, UBS.

Just one quick follow-up on Trio -- prices have been declining over the past couple of quarters. What's really driving that price decline? Is it competitive pressure from Mosaic, or is it something else? And how does that change going forward?

Well, I have a personal belief, and so you can take it with a grain of salt -- that while we were down that someone took a hard run at us. They knew we were negotiating. They knew we were negotiating a tough situation. And to whatever degree they could use to their benefit, I don't blame them, to put as much pressure on us during those negotiations. That's certainly what it felt like.

We didn't see customers demanding reductions; we saw producers dropping prices at vast rates at very interesting periods of time that were public about our negotiation.

So while we've seen some SOP price declines, we also saw a lot of very well-timed price declines in the langbeinite market. So I think that, given the running room that we believe we have with our noteholders and their belief in our long-term strategy, and my trips around the world, I think that this is a market that's got some legs to it. And I would expect to see some firming in this market.

Okay, that makes sense. And also, so now that you are converting mostly -- you are going to be 100% solar productions in potash, can you help us gauge what production costs would look like going forward, let's say versus like the third quarter or the second quarter of this year, like going forward, like what those production costs would look like now that you don't have conventional production anymore?

That's a difficult one to do. We have had such transition going on here during 2016, where we converted the East facility to Trio only during the second quarter and then we continue to ramp it up in the third quarter. We are working hard to keep all those costs under control.

We will start to see the benefit of that on the Trio side going forward. But we're still carrying some of that inventory that was produced during those periods where we had higher costs due to the transition. So it's going to be a little bit before we see that.

On the potash side of things, though, now that conventional inventory will be -- we should see the last of that sold here during the fourth quarter -- by the time we get to the first quarter of 2017 we will see the benefit of just a pure silver operation going forward.

So I'm not able to give you specific guidance around that but hopefully that gives you a little bit of information as to how we are thinking about it.

That makes sense. And then one last quick one, on potash prices. You talked about the price increases that you should see in a couple of months, the first, second quarter. Remind us again like how -- like what price increases have gone through and what should we expect to see when you finally realize them in Q1, Q2.

There were some increases that came in late in the quarter. Our prices are obviously impacted by where we are shipping, when those orders were made. We are continuing -- as we sell down the red inventory, what you are going to see is we will have less product and so we can be more selective around where that product goes, which will enable us to capture more of those increases that come along.

So we are continuing to work our way through that process, and again we will start to see the benefit. The third quarter should be the low point and then we are going to see an increase in the fourth quarter with, hopefully, more of that in early 2017.

Thank you very much.

Joel Jackson, BMO Capital Markets.

A few questions -- so your potash price realization versus benchmark pricing in the West has been quite low the last few quarters. Is that because you have been selling a higher next of red? Is that because you have been aggressive on putting up volume in Q3, much more than production, as you were drawing down inventory?

And then how would you expect some of your price realizations versus benchmark to improve as you have more of a white mix?

I think you hit the nail on the head that, as we were going through these negotiations, the primary motivating factor was not necessarily to run the business in the best way as you are negotiating with these bankers; it was to generate liquidity. And so we did that.

So I think that that had a big impact on it and we successfully did that. Now that things are resolved, settled, we can get back to running our business. It feels like for the last eight months we have not been able to run our business in a meaningful way, and we've got that ability now.

So I don't have a clear answer for you other than to give you two time frames, a before and after. You run it in one way on the before, and you run it in a historical way in the after. And so we now have our evaporation facilities with very nice natural geographic markets.

Those are geographic markets that we have historically done very well in. We know how to market in those and we have the time and the inventory, the customer base, the logistic know-how to maximize margins in those areas.

That's helpful. And also under your CapEx guidance you said, I think you said $18 million-$22 million for this year. Is that what we should expect going forward as a run rate maintenance capital spend? And would there be any -- it's lower than I think you've talked about before. Will there be any kind of capital, any spending you might be deferring from a maintenance perspective till some -- I don't know, a couple years from now?

Well, you got to remember that at the solar facilities the CapEx at the solar facilities is a lot less because you don't have underground mining equipment operating. You just got a very different mill on the surface because there are flotation plants, so the nature of the mining in the mill -- so you are paying for pumping costs.

So when you look at maintenance CapEx, you are talking about pump costs, well costs, things that are very different than when you have the East Mill, for example, and the West Mill. Those are very, very different maintenance CapEx kinds of numbers.

So a solar evaporation facility, just by definition, is going to have a lower maintenance CapEx cost. And then when you look at the Lang plant, it's a very, very simple plant. And so I think it's reasonable that we can continue to try to bring those numbers down because of the simplicity of just operations themselves.

And this might be a bit of a sensitive question. But if -- what kind of level, what kind of increases in potash to your price levels would you need to be at a sustainable positive free cash flow level in what you guys model?

We are watching that all the time. And, obviously, we are working toward that goal. And with our solar operations going to be providing 100% of our production beginning in 2017, we believe that we are going to have a good opportunity and should be able to achieve that goal at that point.

Our 2016 results have been impacted by a lot of the conventional stuff and a lot of the transition stuff. But we believe on 2017, once we get to 2017 we are going to be where we need to be.

Plus we now have the ability with having a right-sized production stream to focus on how much goes into the feed market. Believe it or not, there's still an industrial market. We are focused on our byproduct markets.

So there's a whole variety of things that go into our cost structure and then our price structure in terms of the markets that we really target. And as you well know, each of those potash markets have different pricing components.

Maybe I'll just sneak one more in. Thanks for that. So strategic alternatives, Bob, how broad a net are you looking here? Are you willing to not be the operator of these assets anymore, an outright sale, looking to sell, looking for partners? How broad a net are you casting here?

That's just a premature question. We have agreed to talk to investment bankers during the month of November and that's what we're going to do.

Fair enough, thanks.

Tyler Etten, Piper Jaffray.

Obviously we've seen a lift in potash prices in the near term. What is your confidence that we can see these prices stay at this bottom or not decline further in the spring, given the weak ag fundamentals?

Well, it depends on which ag fundamentals you are talking about. If you go around the world, and you look at the palm oil business, you look at the sugar business, you look at the coffee business -- we tend to look at just the corn and the soybean business. So if you are willing to look around the world at a variety of crops, there are some crops that are doing extremely well.

So I think you are also seeing, with some consolidation occurring in the marketplace, I'm not quite sure how that's going to play out in terms of stabilized pricing. But I would not say that all commodity pricing is as negative as people talk about because they just focus on corn and soybeans.

So I don't know if I'm answering your question, but it's a much, much more diverse market. And we are seeing curtailments of the impact.

Like I say, the impact of the curtailments that were announced late last year and early this year, as those producers have reduced their own production you are starting to see a reduction in inventory which should be supportive of what we're talking about as well.

And those curtailments are the same type of curtailments that we have seen over the last 40 years in the potash industry. So it's nothing new.

Fair enough. And for the solar production, could you talk about the degree which production is made in the first and fourth quarter compared to the second and third quarter, just for modeling purposes?

The way we look at it, Tyler, obviously over the summer when you've got most of the evaporation season occurring, that's when you need to have those hot, dry days. And we had a good summer across our average or at least across our solar facilities this year.

So at that point in time, between roughly September through the end of March or April, you've got pretty good visibility of where that's going to be. And then as you go through the following evaporation season there, you get some uncertainty looking forward. Obviously, we have good historical data as to what those averages are, and that's the way we run our business, always believing that things will revert to the norm over time.

But in terms of how that breaks down between Q4 and Q1, we run it more over seasons than anything else.

All right, thank you.

David Steinberg, DLS Capital.

You covered my questions, thank you very much.

Christopher Perella, Bloomberg Intelligence.

The question on the accounts receivable -- did you expect to see a positive cash flow from accounts receivable in the fourth quarter? Or has the low price environment changed the seasonality there?

The receivables are always a function of volume in the period right before that. So it will depend on those fourth-quarter volumes and where they shake out and not only that but the timing of those.

So as we wind up the fall season you may see a little bit, but it always depends on the timing of those sales at the end of the quarter.

All right. And just refresh my memory. Are you still working with PCS to ship Trio overseas? Or what was the relationship with them for marketing or shipping Trio?

No. About a year ago we terminated the Trio part of that relationship, and so we are doing all of that marketing ourselves. We have different marketing representatives. When I was talking about restructuring our sales crew, we have different marketing representatives in different parts of the world now that are helping us to make sales.

So we have a director of international sales and then a variety of sales agents throughout the world.

Okay. How is that cost-wise? Is there cost improvement on this new structure, then?

I would say yes, especially -- some of them are on a small retainer with the commission. So they are all a little different. And I'll just leave it at that, given their difference.

And then one final question -- what do you see as a good cash level for running the business now on the new, smaller footprint?

It's a great question. We are working through it now.

Obviously, you don't have the kind of catastrophic things that can go wrong in a solar operation that you do in a conventional mining operation. So we are really working hard to determine what is the right level of not only working capital but cash on hand. So it's a very different number than it is when you are running two significant underground mines.

So it's a great question. We hope to answer it in future calls. But it's something that we are very, very aware of. And we do know that it's a significantly lower number.

All right, and then last one -- why explore strategic alternatives now? You have just got everything worked out with the debt, the noteholders, the Company is resized at this point. Why pursue or why discuss strategic alternatives at this point?

Well, I guess I would turn that and say, why not? There's a tremendous amount of capital out there. We have been pinged in a lot of different ways. We've got groups that would like to partner, joint venture -- there's just a whole variety of opportunities out there to potentially grow our business even further.

So I think we'd be foolish not to listen to people who want to come talk to us. It has been an opportune time, given the trouble that we went through with the noteholders, for people to ping us incessantly a desire to come in and participate.

So this gives us a very organized way to listen to put the capital markets have to say and have capital markets -- how they want to participate.

All right. Thank you, guys, and good luck.

Thank you very much. And thank everyone for taking the time to dial in today. We appreciate your interest in Intrepid and look forward to speaking with everybody in the near future.