Intrepid Potash Inc (IPI) 2017 Q3 法說會逐字稿

Thank you for standing by. This is the conference operator. Welcome to the Intrepid Potash, Inc. Third Quarter 2017 Earnings Conference Call. (Operator Instructions) The conference is being recorded. (Operator Instructions) I would now like to turn the conference over to Matt Preston of Investor Relations. Please go ahead.

Thanks, Kyle. 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. Jeff Blair, our Vice President of Sales and Marketing, is also available for questions. I'll now turn the call over to Bob.

Thank you, Matt, and good morning to everyone. I want to thank everyone for taking the time to join us this morning to hear about our great progress and remember, or in some cases, actually learn a little about who we are.

We are Intrepid. Our name means we are unafraid, we are bold and we are courageous. We're entrepreneurs, and we're ready for the challenges the world brings. We're strong in character and prepared to face the daily realities of an ever-changing market. We're resolved to creating value and serving our customers, empowering our employees and serving our community and leaning into whatever situation is thrown at us.

Today, Intrepid is successfully pivoting to be more creative, more competitive and stronger. We continue to diversify and utilize all of our assets and available resources as we begin to grow again at the pace Hugh and I have demonstrated that we are able as we originally built this great company. And now I'll look at a few results.

Our third quarter continued the successful execution of our strategy which began last year. Our transition to lower-cost solar-only potash production increased our potash margins, and we grew our Trio sales volumes and we made progress in diversifying our income streams through water and by-product sales. Our results this quarter continued to demonstrate our ability to pivot during down periods in the cycle and further strengthen our confidence in our long-term strategy.

During the third quarter, we prepaid an additional $6 million of principal on our senior notes, bringing our total debt reductions to $90 million over the past 12 months. The third quarter prepayments satisfied our prepayment obligation earlier than the December 31 deadline under our revised note terms. Moving forward, we intend to continue to focus on strengthening our balance sheet that we are under no obligation to make further principal payments this year.

As a result of the improvements in our earnings and the reductions in outstanding principal on our senior notes over the past year, effective as of November 1, we have lowered our effective interest rates to nearly half of what they were a year ago and now have much more flexibility under our debt covenants. Based on the outstanding balance on our senior notes as of September 30, these lower rates represent a projected savings of $2.5 million a year.

Third quarter potash results remained strong as fall application season is now under way. Potash remains a great value to our customer -- customers and, as a result, we saw some really purchasing of fall application tons in the third quarter. Sales into the higher-priced industrial and feed markets remained similar to the prior year but increased as a percentage of our overall sales, supporting our potash margins for the quarter.

Our third quarter Trio results remained similar to previous quarters, with strong year-over-year increases in sales volumes, offset by lower Trio prices due to price decreases over the past year by one competitor and a higher percentage of international sales, which tend to carry lower prices. Trio production decreased compared to the third quarter of last year as we operated at near full rates for the majority of the third quarter in 2016 to prove our production capabilities. Having now demonstrated our capability to be a reliable supplier of Trio, our focus is shifting towards further optimization of our sales channels domestically and abroad.

Our strategy to diversify our income stream continues to progress. Our water team doubled our water sales for the second consecutive quarter, with the third quarter of 2017 generating $2.1 million of sales. Demand continues to increase in the fourth quarter, with October sales alone of approximately $1.3 million. We expect fourth quarter water sales to be between $3 million and $4 million, and we remain steadfastly on track to achieve our goal of at least $20 million to $30 million in water sales in 2018 and annually for the next several years.

Our industrial sales team doubled salt volumes compared to the third quarter of 2016, while the team's marketing efforts for our brine station in New Mexico allowed us to realize significant price increases during the third quarter while also expanding and continuing to diversify our customer base. Demand for brine continues to grow, with September sales alone generating over $50,000 of revenue, approximately a 60% increase compared to the second-largest sales month of 2017. And as of today, October sales are even greater than September sales. This rapidly expanding business provides us daily interaction with end users in the oil and gas industry and is currently repaying its original capital investment every 2 months.

We also continue to make progress on our pre-feasibility assessment of lithium, with 3 companies testing various recovery methods on the known or relatively modest lithium resource in our Wendover ponds.

Looking ahead, added flexibility in our debt covenants and the cash savings that will result from the reduced debt balance and lower interest rates have given us even more ability to aggressively pursue other revenue streams. We have identified several opportunities similar to our brine station, which we believe will provide additional cash flow streams to Intrepid in the coming quarters. As I've stated on previous earnings calls, we have a variety of resources at our properties and a continued focus on monetizing those assets.

I'll now turn to the call over to Joseph, who will update you on the financial results and the outlook.

Thank you, Bob, and good morning, everyone. As Bob discussed in his remarks, execution of our strategy continues to produce solid results. During the third quarter, we continued to see both year-over-year and sequential improvements in our net income and gross margin. Third quarter net loss of $1.9 million was a $4 million improvement compared to the second quarter of this year and was driven primarily by reduced interest expense, improved results from our potash segment and increased water sales.

Good demand and stable pricing for potash increased our potash segment gross margin to $5 million for the third quarter of this year. That's a $1 million improvement compared to the second quarter 2017 and a $12.3 million improvement compared to the third quarter of last year.

Production volumes increased slightly compared to the third quarter of 2016 as an earlier start to production at our solar potash facilities more than offset the absence of our production from our West facility, which, as you know, was idled in mid-July of last year.

Overall evaporation at our solar facilities is expected to be near average rates for the 2017-2018 solar production year. Late rains and below-average evaporation in Carlsbad during August and September moderated the above-average evaporation we had reported earlier in the year.

Moving on to Trio. Our Trio segment generated a gross deficit of $1.2 million in the third quarter, an increase compared to the third quarter 2016 gross deficit of $300,000 as a result of lower pricing and increased lower-of-cost-or-market adjustments. Average net realized sales prices decreased 32% from the third quarter of 2016 due to price decreases over the last year and the higher percentage of international sales.

We continue to see year-over-year improvements in sales volume as a result of international marketing efforts and domestic pricing at more competitive levels compared to this time last year. As we stated last quarter, we expect costs to be pressured as we continue to match production to expected demand and manage inventory levels.

During the first 9 months of 2017, we spent $6.2 million on capital investments. Our estimate for total capital investment in 2017 remains at the $13 million to $17 million range.

Also during the third quarter, we issued 500,000 shares of common stock under our at-the-market offering program for net proceeds of $1.9 million.

As Bob mentioned earlier, improvements in our trailing 12-month EBITDA and reduced outstanding principal on our senior notes improved our position relative to our debt covenants and will result in significantly lower interest rates on the senior notes going forward from an average of 8.3% down to 4.3% beginning next month.

Last year, we set out on a strategy to strengthen our balance sheet and improve results, partially in an effort to direct less cash to interest payments and more for opportunities, such as our brine station and our by-product portfolio. Achieving lower interest rates is a significant milestone in that we plan and we remain excited to pursue the opportunities in front of us.

That concludes our prepared remarks. Operator, we are ready to take questions.

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

I'm going to ask you a couple of questions. So on Trio, you seem to have pretty high levels of Trio inventory. You talked about cost being pressured in Trio, but you achieved really good cost. So should we expect cost to increase over the next few quarters? And maybe give a little color on that.

I think you should see Trio cost continue to decline. We continue to improve the process flow, if you will, without going into a lot of the nitty-gritty details. We just continue to make improvements to the process itself. And so I think you'll see costs continue to moderate lower. That market's out there, but when you've got someone -- one competitor out there talking that they're going to continually lower price, it did put a -- it's made buying slow down. But in spite of the difficulties, I think we're seeing our marketplace grow, we're seeing, internationally, certain groups come in for a second and even, in some cases, third orders. So we're definitely gaining traction in the markets that we want to gain traction in. And we're also significantly improving the process flow itself. So Joseph, is there anything you want to add to that?

Yes, if I could just chime in there, Joel, thanks for the question, I appreciate it and think it's a good question. As you know, there are efficiencies or economies of scale with production in our business and any other business. It's a tough question to answer because, as Bob mentioned, we have gone through a lot of exercises to bring down our costs and also a lot of work put in to prove out our production capabilities. And so it's really a matter of the sales volume coming through. I think at certain volumes, our costs can continue to come down. And if they were to remain low at the issues with respect to our international and competitors, they may be challenged, and that's why we put that language in there. I would say, our cost footprint, as Bob mentions, and our proven capability in terms of our production capacity, I would say, he's spot on.

Okay. So another similar question on the potash side. So we've been looking at your solar-only capacity, you were running at 50,000 tons production a quarter over the last couple of quarters, selling a bit more. But you're running at pretty low operating rates but achieved very good costs. So should we expect production rates to go up? And then would that increase costs because maybe you're really, I don't know, high-grading, is that the word you said, but you're really running at low grade cost? Or would higher production, because of scale, lead to lower cost?

It's a great question. I think if you're going to see higher production, it's going to be in the 5% to 10% range and it would -- that's extra production that you pick up, so it shouldn't -- it's not going to have a major impact on the cost structure. We've got other operating -- some very small operating changes that we're making to some of the flotation plants that increase the recoveries a bit. So I think you're just going to continue to see sequential small improvements on the cost structure going forward. And I know you're going to see continued creative marketing to improve our margins, our footprints in the markets that we serve.

If I could just add onto that. And just keep in mind our Q3 includes part of our annual evaporation outage, if you will. And so in terms of production, Q3 isn't necessarily our highest production quarter. The other thing that I'll remind you, Joe, if I may, is our cost structure is significantly, any more -- pretty significantly impacted by our by-product sales. And as those continue to increase, as we continue to focus on the brine and other by-products, the salts, the mag chloride, those have a significant impact on our costs. As you know, we record our by-product sales as a credit to our cost of goods sold. And so there is definitely an element of that, that you need to keep in mind and consider as you look at our cost structure. And we believe that's going to continue, so you probably should continue to model that into your analysis.

I have a follow-up on that. So what's the volatility or variability of brine, salt and mag chloride from quarter-to-quarter. Is Q3 particularly notable on those by-products versus other quarters?

No, not necessarily. I think it's more a ramp-up because of our focus. We started talking about more emphasis on by-products probably late in 2016 and continue that in the first quarter and second quarter. There's a lot more focus on that element of our sales strategy. I don't know if you remember, but I think in first quarter, second quarter, Bob mentioned bringing on a Director of Industrial Sales, we talked about that on one of our calls. And so it's more a matter of focus than it is cyclicality. But Jeff, I don't know if you want to weigh in there.

I think as we go forward and those segments grow, there will be some more cyclicality. Obviously, mag chloride and salt, depending on where you're selling the salt, there's a tremendous open market for the salt. But, obviously, getting ready for the winter months and some of that winter use is going to -- you'll see some variability on that, how big an impact it has on our stuff, I guess, of course, obviously, will depend on the volume of sales. So I think you'll see a little bit going forward, but I would agree with Joseph that, overall, it's really for us about ramping up into that market.

Yes, just once again, you're going to continue to see those volumes increase steadily.

(Operator Instructions) Our next question comes from Vincent Andrews of Morgan Stanley.

This is Neel Kumar, calling in for Vincent. On the $20 million to $30 million expected water sales for 2018, how much of that is already locked-in volumes from your existing customer contracts versus maybe additional growth opportunities?

I would say, the large percentage of that is locked in, and then there's more customers out there that continue to contact us every day. That's the great part about the water business, the brine business, the salt stations that we're creating, is that the daily interactions with the actual oil and gas companies have increased significantly. So instead of having 2 or 3 people in the middle, in a lot of cases, we have direct contact, we're directly working on their -- from the operators themselves, their schedules. And so we know and understand without having anyone in the middle what that schedule looks like, what that budget looks like. And we're interacting with their service companies, their surveyors, their contractors on building the schedule, if that makes sense.

Yes, that's helpful. And then, also in terms of your CapEx outlook. Is the $13 million to $17 million range for 2017 a good run rate, going forward? Or do you see additional opportunities to reduce CapEx?

I think -- we're not going to see any issues staying in that range, we're possibly in the lower end. If it does go up, it's simply going to be for opportunity capital that has significant rates of return. And so we continue to identify opportunities that have pretty significant -- just great rates of return. So we're not going to invest any opportunity capital unless it really makes a difference.

(Operator Instructions) Our next question comes from Jason Ursaner from Bumbershoot Holdings.

Just first, on the potash side, both MOP and Trio. Can you just talk a little bit more about the seasonality in terms of usage and production? I know it comes up a lot, but just as you mentioned a handful of things in the prepared remarks, with pull forward of demands and late rain and the volume on the Trio side versus last year. So maybe just making sure I'm understanding all of it in terms of accurately characterizing the quarter?

Jason, Joseph here. If I may, I just want to touch briefly on the comment about evaporation and, really, the only reason to put that in there was because in the second quarter, we said and we had seen, going into the spring, above-average evaporation rates. And with the weather that we got over the summer and into September in New Mexico, it brought down our expectation a little bit with respect to what we think we could produce. That being said, we don't think we're at risk of not being able to achieve our forecast by any sense of the word. I just was really trying to tone down a bit what I had said out in the last quarter. But it's probably really under our normal range of production. And I'll turn it over to Jeff to speak to the sales piece.

Yes. I think the way that -- looking at the sales side of things, you've got the fall and the spring season, and that fall season, obviously, your quarter end falls at the end of September, which is sort of right when the year is -- you're getting going into it, or if it's earlier versus late. So some of those sales will sometime shift forward to Q3, if people want to take sometimes earlier versus later. But you really want to think of it -- the potash sales season, to some degree, certainly, the Trio sales as well as a first half, a fall season and a spring season, I don't know if that's answering enough of your question, but...

The other thing, Jason, that I'd really reiterate is our efforts by bringing in an industrial sales team and focus on that is to reduce that seasonality to the degree we can. We're being much more proactive with our oil and gas customers. And given our daily interaction on the waterside and the brine side, it just really ramps up the opportunity for communication and opportunities to sell into the industrial markets as well as the feed markets. So that helps smooth out a lot of that seasonality.

Great. And specifically on the MOP side, just following up on the earlier question. Because cash operating cost looked like it came down substantially. And I know you've been running solar-only, I guess, for more than a year now. So is that almost entirely the by-products benefit?

I think that's a large part of it. There's also just inherent and maybe not inherent because as you pointed out, we've been running solar-only for a while, but there are additional reductions in costs that we're enjoying from some of the capital projects that Bob referred to. So I would suggest it's a combination of those 2. The other thing is the remaining product that we had from 2016 production of West, the red sales, so those were at a much lower volume but still impacted in the third quarter, and we should be done with that by the end of this year, but that had a slight impact as well. So it's a combination of a few different things. I think, as I mentioned to one of the other -- or answered one of the other questions, I think we should expect and anticipate those costs to remain at the lower levels based upon the production improvements as well as the by-products.

Okay. And just for the water sales, you mentioned the large percentage is fairly locked in. Just how are the deals with operators and distributors starting to take form? It kind of sounded like it was still materializing in the last few quarters of some people looking for shorter-term deals or trying to evaluate longer-term deals. How is that kind of taking shape?

Well, Jason, as we've said repeatedly, our goal is to be the easy button for a vast range of customers. And so we're dealing with even, what I would call, what we used to call small mom-and-pop operators. But even those guys have made acquisitions in our neighborhood in the billion dollar range. So we're dealing with some of the smaller operators all the way up to the largest oil company in the world. So every one of those arrangements looks very different as well as the deals that we're making with the water distribution companies. So the good news is that through diversifying our customer base and increasing the amount of -- the number of customers, the actual number of customers, and having daily interactions with them ourselves versus through a middleman, we just have a lot more confidence in what those numbers look like and the commitments that we've got. So we've got everything that ranges from full commitments to people that literally call up and say they want to frac a well in the next week, and we try to service them as well.

The next question comes from Joel Jackson of BMO Capital.

Getting emails, so I should ask questions. So can you give little more color on the lithium resource delineation or feasibility work that you're doing? Maybe give some possible scenarios, outcomes, timing?

Joel, as we've said before, we have a known lithium resource. It's in the pre-feasibility study. It's a resource, and not a reserve, and that's why we are testing it. We've got 3 different companies testing 3 different recovery or separation technologies in terms of how you would separate it from the magnesium. So we have known amounts of lithium. But the question is the commerciality and what's the cost, the capital cost to extract it and then the operating cost. And so because of the value of lithium and the fact that we're a permitted facility that owns and controls the lithium that's in our system, it's something that we're looking at extremely serious, and the 3 companies that came to us to do the testing are ones that volunteered their services. We didn't have to pay anyone to go out there and test. And so they're are all high-quality companies that are very involved in the lithium business. They know it and understand it. And so as we promised, as we learn more, we'll tell you more. But it continues to progress.

So the outcome of this work would be some work that they share with you about what a flow sheet would look at high level. I guess, sort of like a 3 scoping study they're providing as opposed to what I'd call, sort of a more rigorous prefeasibility study?

Well, as you know, because you've written the lithium piece, there's a couple of different ways to separate and recover lithium. And so depending upon the nature of the lithium resource or reserve, you pick a technology in terms of how you separate it out. And so the first piece is to pick the type of technology that you want to use, and then the second piece is to move to feasibility. And because we already have ponds, we already have a plant, we already have rail load-out, we already have so many pieces in place, in the event we get the kind of results we hope for, we can move pretty quickly. But you have to pick the technology first, that's the important part.

The next question comes from Jon Evans of SG Capital.

Your competitor talked about potentially raising prices in Chem -- [Chemag] and the fall applications to the distributors, et cetera. I'm just curious if -- can you talk a little bit about what you saw in that market? Did pricing stick at all? And should you have better realizations, then, in Q4 or not?

I can speak from personal use, is that the price to the end user has not gone down. So I buy a fair amount of Trio, myself, as an end user. So the price has stuck. I think there's a lot of opportunity there for pricing. And so I'll just -- the pricing has a great opportunity to be firm because demand is solid.

Okay. And so if pricing did firm, which you're not saying it's going to or not, you're just saying it has an opportunity, when would we start to see that, or you would start to realize that in the P&L? Would it be Q4? Or would we have to wait until the spring application though?

It really is a function -- Trio is a spring product, and the fill program for spring has not yet begun. And so we believe that there's -- we believe there's just strong opportunity because of the demand. And like I said, given the fact that I'm a pretty significant end user on my farms in Florida, I know what the pricing looks like to the end user. And because of the quality of Trio and langbeinite as a fertilizer product, those of us that buy it as end users know the benefits of it and what a great product it is. So it's just got a tremendous amount of opportunity.

Okay, got it. And then the other question I had for you, just relative to the waterside, I guess. Are you seeing intensity go up? Or is it staying the same in the frac job? I mean, a lot of the people that you're associated with, like Exxon, they talked about taking 10 more rigs to that area by the end of '18. But what I'm curious to understand is the intensity per lateral foot. Are you seeing that go up in the amount of water?

Absolutely. I mean, we're just seeing, as is reflected in our results, every single month a greater demand. But you've got to remember, those folks that made these multibillion-dollar acquisitions had to take them over, bringing their own employees, creating their own schedules, revitalize the man camps, get frac crews back out there. In our case, we had water systems that were already built and developed, but we've laid flatline to certain people, we're building ponds to service some of the bigger operators. So there's just a tremendous amount of activity going on each and every day. And when you're out there, you see it increasing each and every day. And because we're dealing directly with the oil and gas companies, everyone from the largest oil company in the world to the much smaller ones, talking to their drilling engineers, talking to the completion companies, talking to the frac companies, you just see the intensity and the scheduling as you're just getting a greater inflow of people, products, services coming to the region.

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 everyone for joining us today. We appreciate your time and your interest, and look forward to speaking with you in the future. Thank you again.

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