Intrepid Potash Inc (IPI) 2017 Q2 法說會逐字稿

Thank you for standing by. This is the conference operator. Welcome to the Intrepid Potash, Inc., second quarter 2017 earnings conference call. As a reminder, all participants are in 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 Matt Preston, Investor Relations. Please go ahead.

Thanks, Sagi. Good morning, and welcome, everyone. I remind you that parts of our discussion today will include forward-looking statements as defined by the U.S. 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 Co-Founder, Executive Chairman, President and CEO, and Joseph Montoya, Vice President and Chief Accounting Officer. I'll now turn the call over to Bob.

Thank you, Matt, and good morning, everyone. Our second quarter results highlight a strong spring season for Intrepid, with another quarter of solid potash margins and significant year-over-year increases in our Trio sales volumes. We more than doubled water sales compared to the first quarter of 2017, and made progress on our byproduct sales, selling more heavy brine and salt compared to the prior year.

During the quarter, we prepaid an additional $23 million in principal on our senior notes. We utilized remaining proceeds from our first quarter equity offering and $9.7 million in cash from operations during the second quarter.

Since September 30, 2016, we've reduced our total debt by $84 million, or 56%, of the original principal amount. The remaining principal on our senior notes is $66 million as of June 30, 2017. We remain focused on strengthening our balance sheet and reducing our debt.

Second quarter potash results remain strong, as the spring fertilizer season carried late into the quarter. The reduced production profile of our lower-cost solar operations allowed us to focus on higher-price markets and locations, driving significant year-over-year margin increases.

Heading into the second half of the year, we are encouraged by recent summer fill pricing announcements for potash and believe this will provide for a more predictable potash pricing environment in the near term. We believe potash is a great value to our customers, and we expect a good fall application season.

For Trio, our first half sales volumes of 135,000 tons was the highest first half volume since 2008. These increased volumes were offset by lower Trio prices due to price decreases announced last year and a higher percentage of international sales. We will continue to be thoughtful regarding our production and inventory levels, and we'll adjust production volumes to expected demand in the second half of the year as we monitor pricing and the execution of our global marketing plan.

As I mentioned earlier, we more than doubled our water sales compared to the first quarter of 2017 to over $1 million of sales in the second quarter. Demand continues to increase in the third quarter, with July sales alone totaling over $700,000.

We expect significant growth in water sales in the second half of 2017, and based on current available information and requested demand, which is the equivalent of our order book, we anticipate each remaining month of 2017 should easily meet or exceed July's sales total and continue to grow monthly into 2018.

We are working on a diverse set of water sales arrangements, with the goal of creating a significant long-term revenue stream. We remain on track and feel quite confident in our ability to achieve or surpass our goal of at least $20 million to $30 million in water sales in 2018 and annually for the next several years.

In addition, we continue to see increased sales of salt and heavy brine and are actively expanding our byproduct portfolio. We nearly doubled our salt and brine sales compared to the first half of 2016 to $2 million, and we are seeing great returns with our brine station in Carlsbad, a low-cost capital project completed last year. It has already paid back its capital investment. We plan to make similar low-cost investments in the coming months, designed to expand our offerings into the industrial markets.

As we continue to explore the potential to diversify our cash flow streams, we are reviewing all the resources at our properties, including salt, magnesium chloride, salt, KCl brine, fresh water, owned land, saltwater disposal opportunities, and the known but relatively small lithium resource in our Wendover ponds, to determine additional ways to monetize these assets.

These opportunities range from products we already produce and sell, such as salt and brine, to potential new ventures, such as the lithium, which is in the pre-feasibility stage of evaluation. We have also begun to provide additional services along with some of our products to add value and create more margin opportunity.

Moving forward, our plan is clear. We will continue to optimize our potash operations while being thoughtful in expanding our Trio markets and diversifying our cash flow through increased water and byproducts sales and services.

Before I turn the call over to Joseph, I'd like to take a moment to thank John Mansanti, our former Senior Vice President of Strategic Initiatives and Technical Services, for his contributions to Intrepid over the past seven years. Under John's leadership, we achieved significant improvements in safety and environmental compliance at our operations, and the he was the driving force in creating the culture of safety and responsibility under which we operate today.

John played a key role in our transition to lower-cost solar potash production, which includes not only the transition to line only production at our East facility, but also the permitting and construction of the HB Solar Solution mine, additional caverns at our Moab facility, and the numerous other projects, too many to list. We can't thank him enough for the value he brought to Intrepid and wish him the very best in the future.

I'll now turn the call over to Joseph, who will provide more color on the financial results and the outlook.

Thank you, Bob, and good morning, everyone. During the second quarter, we generated a net loss of $5.9 million. This was a significant improvement compared to both the first quarter of 2017 and the second quarter of 2016. We recorded consolidated gross margin of $3.7 million during the second quarter, which improved our first half consolidated gross margin to $0.8 million. This is our first quarter with positive gross margin since 2015 and evidence of the success of the transition strategy we began last year.

Our potash segment continued to deliver strong results. Good demand and our solar-only production profile resulted in segment gross margin of $4 million in the second quarter of 2017. This is a $9.3 million improvement compared to the second quarter of last year. Production volumes decreased compared to the first quarter of 2017 as our Solar Solution plants entered the summer evaporation season midway through the second quarter.

Looking ahead into the second half of the year, we expect potash sales volumes to exceed production. Due to the seasonality of the potash market, we expect the third quarter will be our lowest sales volume period of the year.

Regarding production volumes, the peak evaporation season is nearing an end, and we are pleased to report above-average evaporation so far in 2017. If this trend continues, we expect our 2018 potash production to increase compared to the current year. We plan to slow production at our HB facility next week and at our Moab and Wendover facilities in Utah in early September.

Moving to our Trio segment, second quarter sales volume increased by 79% compared to last year's second quarter. This was a result of continued marketing efforts and more competitive pricing. International sales grew to 29% of our Trio sales volume, compared to 12% in the second quarter of last year.

Average net realized sales prices decreased 38% from the second quarter of 2016 due to price decreases in the second half of last year and a higher percentage of international sales, which carried lower average net realized sales prices due to higher transportation costs and competition with other products.

The Trio segment generated a gross deficit of $0.3 million in the second quarter, a $4.9 million improvement, however, compared to the first quarter of 2017, primarily as a result of decreased lower cost for market adjustments.

Due to the domestic seasonality of our Trio sales, we expect Trio demand to be lower in the second half of the year as compared to the first half. Pricing is expected to decrease in the third quarter as we sell a higher percentage of tons into the international market and also due to a competitor's summer fill program, which decreased domestic Trio prices between $10 and $20 per ton compared to the second quarter pricing of this year.

We believe prices are scheduled to return to second quarter levels beginning in Q4. We also expect costs to be pressured in the second half as we continue to match production to expected demand.

During the first half of the year, we spent $3.6 million on capital investments. Our estimate for total capital investment for the year is unchanged at $13 million to $17 million.

During the second quarter, we recorded interest expense of $4.2 million. This included a $1.8 million make whole payment related to the $23 million repayment of notes in June, as Bob mentioned.

In conjunction with this repayment, we amended our note agreement and agreed to pay down an additional $6 million by the end of the year as well as another $10 million by the end of next year in exchange for changes to the calculation of certain debt ratios used to determine our interest rate.

Entering into the third quarter, the weighted average interest rate on our notes was approximately 8.3%. To remind everyone, the interest on our notes has decreased sequentially from $2.8 million in Q1 of this year to $2.0 million in Q2, and is projected to be approximately $1.4 million in Q3 based on our current outstanding principal.

We have an incentivized rate structure, as negotiated with our note holders last year and as amended last quarter. This structure allows us to continue to reduce the interest rates as we hit our targets on bank EBITDA and our debt balance. We believe as our financial condition continues to improve, we will achieve these reduced interest rates by the end of 2017.

That concludes our prepared remarks, operator, and we're ready to take questions.

(Operator Instructions) The first question is from Joel Jackson of BMO.

Hi, this is Fahad on for Joel. Just a few questions on the water sales. Next year, you're projecting $20 million to $30 million in sales. What needs to happen to get to the higher end of this range, the $30 million?

Well, as I mentioned earlier -- thank you for the question. We have the equivalent of an order book, and a lot of the oil companies who are out there building infrastructure -- so if you were to go out there and take a physical tour, you would see the frack ponds that they have built, the flat line pipelines that they have installed, the infrastructure that they are putting in. We're working very closely with a variety of the water distribution companies as well as directly with the operators to go through their schedules, so it's happening as we speak. Just you literally have to visit it and see it physically to understand and appreciate the amount of work that the oil companies have built and put in to prepare for the activity that they have on our order books.

Okay, great. And do these contracts -- do they have like guaranteed minimum volumes? What would happen if the oil prices fell to $40 or $35? Are there minimums? And how do those contracts work when it comes to contract minimums and volumes?

They're all very, very different, and we do that on purpose, because we contract with some of the smaller oil companies for a specific frack job, and we have some larger agreements with some of the larger oil companies that we believe, given their size and scope -- as we've mentioned on previous calls, we're dealing with the equivalents of ExxonMobil, Chevron, Occidental, that tend to drill through or frack through some of these downtimes, so we feel very comfortable in the nature of the many diverse agreements that we're making. That diversity gives us the ability to adjust pricing on many of the agreements, so it's not -- we don't have a standardized form, if you will. In fact, we're trying to do just the opposite so that we can have a very diverse group of customers and serve them in a fashion that we like to describe as the easy button. It's really easy to buy water from us and have it delivered. I don't know if that answers your question or not, but they're very diverse.

Okay. And just a last one from me. What's the margin expectation on the $20 million to $30 million of sales next year?

Bob Jornayvaz: That's a great question. It's very high. It's easily in the high 80s. I would put it potentially in the low 90s in terms of margin. The nature of water rights is that we pay royalties on a very, very small percentage of our water rights. We own them. The infrastructure is built, as we said. The cost is minimal on many of the transactions, where it's a -- the equivalent of a paper transaction, where we take a physical right and transfer it to a water well, so it's -- the New Mexico water law is very complicated, and as we mentioned earlier, on the last earnings call, we have a very diverse group of water assets in terms of just the variety of different rights that we own, the different well fields that we own, and the ways that we can extract the water to provide -- our footprint is over a very, very significant geography, and so we're very fortunate in that our water rights are equally as spread out over that geography that gives us a significant opportunity in our ability to deliver.

Fahad, this is Joe. I would follow on and echo Bob's comments with respect to the range. I would just generally continue to say it's a very high-margin business. Just keeping in mind what Bob said about the diversity of the different types of agreements, some will require more internal services than others, and every one of them is different. So I think the kind of more general response is it depends on the different agreements as to infrastructure and internal resources required, but, generally speaking, I echo what Bob said in terms of it's still a very high-margin operation.

The next question is from Christopher Perrella of Bloomberg Intelligence.

A question on the mix. I might have missed this earlier. What percentage of the potash shipments in the quarter were to oil-and-gas guys, and ag, and the feed companies as well?

So for the quarter, we have an increase in our industrial and feed over the quarter of -- same quarter of 2016, almost doubling in both cases. Our industrial is almost 10%, compared to 4% -- 9.4%, to be exact, compared to 4% last year, and the feed is 11.2%, more than double last year's 5.4%.

And are those still carrying a higher price point than the ag sales?

Yes.

All right. And then shifting over to Trio, when do you forecast positive gross margins on the Trio business? I know it's summer fill putting pressure on prices. Is that 3Q, 4Q, or are we 1Q '18?

That's a difficult question to answer, and I'll take a stab at it and let Bob weigh in. I would say, just because of the different variables involved in answering that question, we're not completely in control on price. We're continuing to manage our cost footprint, and that has continued to come down, and we're continuing to manage that. To the extent that we have no additional lower cost-to-market adjustments and pricing stabilizers, we could get there relatively soon. That being said, those are things that we don't completely all have control over, and so I'm reluctant to answer that question with a very specific point in time.

So the key variable would be price stabilization, though?

It's really about price.

The next question is from David Steinberg of DLS Capital.

Good job turning this whole business around. Just one question left on the water. Based on the way the contracts are set up, and your ownership, and the water rights and so forth, is that something that potentially could be on the plate to be monetized in the future, the way it's structured or the way it's all put together or could be put together?

You mean, sold as an independent business?

Yes, sold, spun off, so forth.

I just don't think that's really a question that I'd want to answer right now. We're doing such a darn good job at generating revenue, and we feel like we have the opportunity to significantly grow those revenues from our current goals, that we would want to really focus on the growth part of that while it's in front of us, and we're working with -- I just can't stress the number of people that we continue to work with to grow from the levels that we've discussed. So we'd want to capture a lot of that growth first before we'd even consider monetizing all or parts of that piece of our business.

David, if I can add from the finance and accounting view, I mean, we're really focused very narrowly on stabilization of our balance sheet. We think we've made a ton of progress from last year. We continue to do that, and I believe that the income stream from water is really going to help us get there more quickly. So in the short term, that's really the way we're looking at water proceeds, and for a more long-term perspective, I think Bob touched on your question.

Right. Well, listen, I just want to tell you guys in the last 12 months, you've done a spectacular job turning the business around, and you've invested your own capital in buying the stock. I know the question I asked was probably premature, but I just kind of wanted to get a sense of where your heads were at and if that was just theoretically possible. So, anyway, thank you for answering the question, good luck, and keep up the good work.

Thank you, David.

The next question is from Jason Ursaner of Bumbershoot Holdings.

Just looking at the balance sheet, since the covenant issued last year, you paid off $80 million of debt and turned it around, bringing the net debt down under $60 million. With the business starting to generate positive cash, it seems sustainable heading into the summer with the water activity. Just broadly speaking, do you now feel as if the business has totally come through the challenges of the past year, year and a half? And where do you see the capital structure headed over the next couple of years?

I think the first thing that we need to focus on is getting to the lower interest rates in our debt structure, and I don't want to go into a great level of detail. That document is public if anyone wants to go out there and read the details. But as I mentioned, we're still paying 8.3% interest on debt that we took on at a much, much lower rate, and so the focus in the very near term is to get that down. Once we get down to appropriate levels of debt and interest rates, at that point in time, we start taking a look at the capitalization of the company and determine what debt level, if any, is appropriate, but we're probably still a few quarters away from that, Jason. And to be clear on two points -- one, we paid down $84 million of debt since last year, and, unfortunately, our debt balance is north of $60 million, at $66 million, but we're working to get to where you think it is and will be soon, at under $60 million.

Yes, we don't see any issues with continued debt reduction to get that number down into the 50s, and we feel very, very comfortable about going into '18 given water sales and the ability to generate positive cash flow. So I think we're a quarter away from being able to start talking about what this company looks like on a growth basis versus -- we're long since past the survival basis. We've gone through the transition piece, and obviously the next phase is getting back to significant growth, and so I think we've laid the foundation to do all that. We've got that incentivized rate structure built into our note holder amendments that allow us to get back down to an interest rate that has a 4 handle on it. And so once your interest is -- once whatever that appropriate debt balance is, at 4%, just a touch over 4%, it is a very different environment, and so we're headed there as fast as we can get there. I don't know if I'm answering your question, but that's how we're viewing it right now.

Yes. No, I appreciate that. And on the water sales -- again, I appreciate the details on the monthly figures through July and kind of what's expected for the balance of the year. When you think about it, I guess, much longer-term, you mentioned continuing to work with some of the distributors and operators. Looking at what some of them have been saying -- I mean, ExxonMobil, for example, they're talking about 15 rigs in that area of -- the BOPCO acquisition in the Eddy/Lea County area for 20 years of development. So when you look out kind of beyond next year, the $20 million to $30 million numbers that you're talking about, is that -- I guess is that the sustainable rate that you think you could do for a long time? Is there incremental positive from there? Just kind of how are you thinking about the whole opportunity in that Permian area longer term?

Well, as I tried to mention earlier, that's why we're working on those longer-term agreements with a lot of the bigger operators, because they have much longer-term plans and we're the ones with sort of the largest water rights. So we believe that there is the opportunity for significant growth, but we're trying to give you what we can see, what we have pretty clear visibility on, but it's a part of our business that we're extremely excited about.

(Operator Instructions) The next question is from Rob Chang of Cantor Fitzgerald.

Good morning, gentlemen, and then congratulations on an excellent last 12 months. A question with respect to the water contracts. Could I get a sense of the average lengths that those contracts are for? And can we expect that those margins would be sustainable throughout those terms?

As to the margins, yes. We're really talking about 15 different agreements, and they truly vary from an individual frack job to annual contracts with 6-month pricing lookbacks, to some of which we're negotiating for longer terms, so it really is a diverse set. I don't think there is an average on there. And we like the diversity, because as the activity picks up, we think that will potentially give us pricing power, and I'll leave it at that.

Well, the only thing I would add to that is some of the contracts have evergreen provisions, so, yes, they're drawn up initially as 1-year volume contracts, but with, obviously, opportunities to renew.

To renew and adjust price.

Yes.

So would it be safe to assume that they're 1-year contracts? Would you have anything longer than that at the current moment?

I'm just not going to comment on that right now.

The next question is from Glenn Primack of Promus Holdings.

Another water question. On the $20 million to $30 million in sales for '18, what kind of capital do you need to put in in order to get to $20 million to $30 million?

The $20 million to $30 million requires virtually no capital.

Okay. So are those customers, then -- I'm guessing they're not trucking the water around.

No, they're laying flat line to us. As I described, there's an extremely diverse -- we have an extremely large geographic footprint that covers dozens and dozens of townships in southeast New Mexico, and we have several water fields, if you will, where we have water wells, water pipelines, et cetera, and then we have water rights on the Pecos River, and so we're currently drawing revenues and water from all of those different assets as well as some more creative transactions where we're transferring water in the form of a paper right to existing water wells. So it's a very diverse set of agreements that allow us to get there, and we think that diversity is the real linchpin to growing the business. It's not a single point diversion or something like that.

And Glenn, reiterating some of the comments we made on last quarter's call, there's already an existing infrastructure that exists, both, as Bob mentioned, flat line piping, but also existing physical piping that is and has been used in the water delivery business for some time, and so we're tapping into that, not requiring a lot of infrastructure or capital investment. That being said, I want to reiterate what Bob said earlier, that we're continuing to look at other opportunities, and that's not say that some future opportunities might require some capital investment, although we wouldn't expect that to be significant. And in addition to that, the pricing of the water that we would sell would have to compensate us for any necessary investments.

Sure. It's a really high return business.

Right.

I noticed, I don't know, a couple months back that Layne Christensen, which is one of those contractors that does the water wells and stuff, did like a -- I don't know, it was a 3-, 5-year deal out there in the Permian. And to your point, it seems like you've got to wait for some of that stuff to take place before -- the infrastructure is there, but whatever connections and stuff are made before you just start delivering to the end customer.

Well, it's all happening in real-time, and so the best way to see it is to physically go out there and see the vast amount.

Yes, I'm going to have to.

And so we feel very comfortable in that the additional discussions that we're having with the larger oil companies, who take a longer-term view both how they procure the necessary services that they need versus some of the smaller operators that would prefer to buy on a frack-by-frack basis. So we're trying to, as I said earlier, be the easy button in terms of trying to meet different oil companies' objectives, both short-term and long-term.

Got it. It's interesting, because the E&P companies that come in my office, it's night-and-day return profile on the ones that have their own water versus ones that have got to bring stuff in from outside, in terms of the return on the well.

Well, that's why it's so hard to give an answer that describes an average or describes a typical, because we're really -- as you just said --

Has everybody, yes. Okay.

We're trying to fit as many different people as we can.

Good problems.

Thank you.

Thanks.

This concludes the question-and-answer session. I would like to turn the conference back over to Bob Jornayvaz for any closing remarks.

I just want to thank everybody for their time and interest in Intrepid, and we look forward to meeting our goals and achieving our results, and thank you for your faith in us. Have a great day. Goodbye.

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