Intrepid Potash Inc (IPI) 2022 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 2022 Results Conference Call. (Operator Instructions) And the conference is being recorded. (Operator Instructions)

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

Thank you, Angela. Good morning, everyone, and thank you for joining us to discuss Intrepid's Second Quarter 2022 Results. With me on the call today is Intrepid's Co-Founder, Executive Chairman and CEO, Bob Jornayvaz; and Intrepid's CFO, Matt Preston. Also available to answer questions during the Q&A session will be our Vice President of Sales and Marketing, Zachry Adams.

Please be advised that our remarks today, including answers to your questions, include forward-looking statements as defined by U.S. securities laws. These forward-looking statements are subject to risks and uncertainties that could cause the actual results to be materially different from those currently anticipated. These statements are based on information available to us today, and we assume no obligation to update them. These risks and uncertainties are described in our periodic reports filed with the SEC, which are incorporated here by reference.

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

And I will now turn the call over to Bob.

Evan, thank you very much. Good morning to everyone joining the call. We really appreciate the attendance and interest in Intrepid. I'll begin my remarks with recent company highlights, then move to broader macro and market commentary and then with the financial results before passing the call on to Matt.

The first half of 2022 has no doubt been exceptional for Intrepid as the company's $92 million in adjusted EBITDA is the best first half performance in a decade. With a debt-free balance sheet, $85 million of cash as of July 31 and a positive outlook, we're in a great position to pursue internal growth projects and opportunistically return capital to shareholders. We have $35 million in the share repurchase program approved by our Board. And given the oversold market conditions that exist in the stock market, we firmly believe that buying back shares is one of the best ways we can deploy capital.

Now on to macro. So far this year, Fertilizers have gone from a relatively quiet space within the global commodity market to continually making headlines. The innovated impact on fertilizers and grains from both sanctions on Belarusian potash and the Ukraine conflict has been the biggest agricultural story in 2022. While the food crisis in Sri Lanka has shown the vital role that fertilizers play in affordable food production, they've also made the headlines. At Intrepid, we take great pride in being the only United States-based potash producer and one of the 2 commercial langbeinite producers in the world through our Trio product.

Focusing on our domestic market, the United States farmer economics continue to be quite strong. Based on USDA operating cost and yield projections, farmer cash margins are projected to be historically high this year and next, supported by very strong and high crop prices. As expected, any time fertilizer prices are at elevated levels, we expect a choppier sales order book, specifically for P and K outside the spring season, as farmers manage working capital by delaying application decisions whenever possible and buyers do their best to move to just-in-time purchasing.

The positive difference in today's market, if you're comparing the potash prices from years past, is that both the underlying economics remain very supportive while the supply disruptions that are causing unmet fertilizer demand to have no near-term fix despite the marginal announced production increases by a few small producers. As a relatively smaller potash producer with a distinct geographic advantage that serves a diverse set of markets in addition to agricultural, feed, industrial, organic and turf markets, we expect a good, solid second half of the year.

Moving on to financial highlights. Our second quarter consolidated adjusted EBITDA totaled $41.5 million, bringing our first half '22 adjusted EBITDA to $91.6 million. Overall, we're on track to put in the best year in a decade. And to put in perspective just how strong our financial performance has been, the $91.6 million in the first half of '22 alone would have been the best full year EBITDA since 2014.

In the second quarter, our average net realized sales price for potash was $738 per ton and for Trio was $493 per ton. These were year-over-year increases of roughly 130% and 82%, respectively.

In second quarter, our gross margin in the potash segment came in at roughly $25 million, a $15 million improvement versus the prior year, while our Trio gross margin totaled $13 million, a roughly $10 million improvement over the second quarter of 2021.

In step with strong EBITDA performance, we delivered $83 million in cash flow from operations through the first half of the year, which is allowing us to invest in our core mining assets to help drive more reliable and higher production, which in turn reduces costs. We've touched on growth projects at our Utah and New Mexico assets in recent earnings calls, but today, we're also excited to talk about a sand opportunity we are developing at our Intrepid South ranch.

As a reminder, this property comprises roughly 59,000 acres, strategically located in the heart of the Permian oilfield activity in the Northern Delaware Basin. As we stand today, the Permian has just under 50% of all U.S. land rigs operating today as well as more than 1,200 drilled but uncompleted wells, commonly known as DUCs. As for the initial scope of the project, we estimate that the total capital investment will be approximately $16 million, split equally between dollars already spent in 2022 and those that will be spent in the fourth quarter of 2022 and early 2023.

We've already purchased the major long lead time pieces of equipment, which are now manufactured and ready for delivery. We are further making progress on what should be a relatively simple permitting and regulatory process. Our goal is to begin operations and sales in the first quarter of 2023 with initial production potential of over 600,000 tons annually. And our first focus area on the ranch, which we define by the drilling of 43 core holes, which comprise less than 5% of the total ranch, we estimate for just as preliminary area at least 10 years of commercial reserves. And given the scale of our property as well as additional core holes, we conservatively estimate that the underlying resource potential at Intrepid South could be significantly higher than 10 years, which could support decades of sand production.

Moreover, we think that our South ranch location, which is literally surrounded by New Mexico oilfield activity, will give Intrepid a key competitive advantage, with Permian sand sourcing and supply having recently been key headwinds for the E&P companies. One of our primary corporate goals has been to continue to unlock value at Intrepid South and increase the revenue, cash flow contribution from our oilfield segment solution, and we think the well-defined sand resource presents a tremendous opportunity to help achieve these goals.

In summary, Intrepid has delivered exceptionally strong results in the first 2 quarters of the year as we head into the fall application season. We still see a long runway for robust, strong, firm fertilizer prices given the global supply issues that may persist for the next few years.

I'll now turn the call over to Matt for a more detailed review of our financial results and a bit more color on the outlook for the business.

Thanks, Bob. As Bob discussed, Intrepid delivered another quarter of strong financial performance, primarily owing to strong average net realized sales prices for potash and Trio.

Reviewing our potash segment. In the second quarter, we generated $25 million of gross margin on 56,000 tons sold. Sales volume was below prior year as we simply had less potash available to sell after our 2021 evaporation season and with fewer tons in inventory to start the year. We also saw customers more reluctant to replenish potash inventory after the spring season, instead choosing to wait for fill programs to be announced.

In late July, an MOP program was announced, and early response to the program has been measured as distributors work through carryover inventory from the spring and customers remain cautious around credit and inventory exposure. As a result, it's still too early to guide to potash sales figures for second half 2022, but we expect activity to pick up as harvest progresses and as we move into the fall application season.

In our Trio segment, second quarter was another period of good application, and owing to very good demand over the past 12 months, our granular inventories were near the floor at the end of the second quarter. We experienced more seasonality with our Trio product with sales weighted towards the spring, so unsurprisingly, we expect customers to be cautious in the near term and look to reengage on needs as we move into the latter part of the year. Production rates remained steady, and with inventory space available, we expect to maintain our increased operating shifts and production rates for the remainder of the year.

Putting this all together for a forward outlook, while it's still too early to guide to more precise levels of demand and sales figures, we expect the strong financial performance to continue, which should drive continued high levels of cash generation and allow us to fund our capital program and other initiatives through cash from operations.

Moving on to capital allocation and liquidity. Our priorities are unchanged: reinvesting in the core business and internal growth projects, opportunistically returning capital to shareholders and maintaining a strong balance sheet. We incurred approximately $17 million of capital expenditures in the second quarter and now expect our full year investment of between $65 million and $75 million as we accelerate more sustaining projects into this year and with the addition of the sand project Bob discussed.

As for liquidity, yesterday, we closed on an amendment to our revolving credit facility, which increased the size of our facility from $75 million to $150 million and extended the maturity by 3 years to August 2027. With much uncertainty in the financial and capital markets, we felt this was a prudent move to help ensure strong liquidity and access to capital.

This concludes our prepared remarks. Operator, we're ready for the Q&A session.

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

This is Alex on for Joel Jackson. I have a couple, if I may. I'll start one by one. Given the stronger financial results that we've seen and much more cash building on the balance sheet, can you maybe walk us through what your plans are with the cash and how you're thinking about the pace of share buybacks for the remainder of the year?

I guess all I can say is that we're going to be very opportunistic. We think that our stock is a great value right now, given everything that is going on, and our ability to invest in organic projects as compared to buying stock allows us both opportunities, given our strong free cash flow generation.

In terms of talking about the pace of it, our primary concern is to make sure that we're opportunistic as we're in a volatile stock market environment. So Matt, I don't know if you want to add to that at all. But...

It's a good question, Alex. I mean, kind of just go back to my prepared remarks, we certainly have a big capital investment program for the second half of the year, roughly go and get up to that $65 million to $75 million. And then as Bob said, we'll just remain opportunistic. We're not going to provide specific guidance on timing for share repurchases but see great value in that and look forward to executing that program as the months progress.

Okay. Appreciate that. And for my second question, could you maybe provide a bit of color on some of the evaporation issues, like if the situation has changed or has improved? And maybe can we expect similar sales volumes in that case for the rest of the year?

Yes. I'll go back to just the evaporation issues. I mean we've certainly been clear on our last few calls around 2021 and significant rain we had at our Carlsbad facility. For those familiar with our story, we've had so far a great 2022 with good early season evaporation. And as we get into the late season, we never want to get too far ahead of ourselves given some of the monsoon rains that can happen at our Carlsbad facility.

So so far, it's been a good year. We'll wait to see where it ends up. I mean, all things being equal, we should return to more normal levels of production with this 2022 evaporation season.

As far as sales, like I said in my prepared remarks, we're not going to guide on second half just given where the market is today. But certainly expect pretty strong demand when sales pick up, and then a very positive outlook heading in the fall and spring of next year.

Got it. And lastly, maybe you can comment a bit on what you think pricing will be in Q3 given what you're seeing today and maybe how that might change in Q4. As some of other competitors have noted some increase in Q3, I was wondering if you're expecting the same for average selling price.

We're just seeing a very strong market. And given our size, we're trying to be as selective in our sales to always achieve the best netback opportunity that's out there. So by being a smaller player, I would hope that we can continue to -- I don't want to say cherry-pick, but stay on the higher end of the market that's out there.

I think everyone in the fertilizer production business believes that we're in for several quarters, if not -- I don't want to go so far as to say years, but definitely several quarters ahead of us of continued firm pricing.

The next question comes from Vincent Andrews with Morgan Stanley.

This is Will Tang on for Vincent. So you made some comments on the press release about credit/possible inventory exposure for customers contributing to demand headwinds. I'm wondering if you could give us a little bit more color on what's happening there and then possibly, what that means for, I guess, a trough demand season, I guess, in between peak demand seasons as we exit this fall -- between this fall and next spring.

Yes. And this is Matt. We're coming off really 18 months of very strong demand in our potash Trio markets. So a compressed spring here, certainly high prices. Like I said in my prepared remarks, everyone is going to delay application decisions, look to move everything back-to-back just in time as they can. So in July time period, it's a normal lull in the market. Maybe a little bit more than we've seen in past years, just given like I said, 18 months of really strong demand.

So I would say it's not unexpected. Guys want to just be cautious, see what they can do on a just-in-time basis. As harvest progresses in the U.S., we certainly think the overall farmer demand, distributor demand will pick up significantly. And it's just a matter of time given underlying crop economics and overall very supportive environment.

I guess just to add to that, it's not like we're seeing a pullback in stated demand that will occur. What we are seeing is just-in-time purchasing. And so we're just trying to make the market aware, as we said in our remarks, that it's going to be a choppier order book because people are managing working capital in spite generating very, very high margins. And so there is a yin and a yang and -- but we are seeing people manage working capital.

And that's -- I wouldn't call it a debt crisis, a debt limit, a debt constraint. I wouldn't use any of those terms other than we're seeing more people focused on the management of their working capital.

Got you. Okay. And then I guess we're coming up on some of those stated potash capacity expansion/cost-reduction projects coming into service over the next few months. Could you give us an update on where you are in the construction process for each of them and then particularly with respect to Wendover, which I believe got pushed back from being in service from the third quarter to the fourth quarter now?

Yes. They're out there as we speak on that deep-brine well. And so we've got operations staff that are out there as we speak. Quite frankly, I don't know if we're actually drilling or mobing and demobing. And so -- but it's happening any day now is the best way to put it.

Yes. I'll provide a little bit more color. Our Moab cavern, we expect to have that again in service at the end of the year. Very perceptive on the Wendover deep-brine wells. We did move that from Q3 to Q4. That's really like a late September into an early to mid-October. So not a significant pushback there, as we see, just really getting the electrical and that's the main thing. We're on site doing the drilling, either have already started or just about to. So it's a very minor delay just from, like I said, late September into October.

Then at our HB facility, yes, remain on track there. First half 2023 with kind of the full system. And I think we'll look to kind of piecemeal that in with some replacement pipeline, hopefully, by the end of this year and get that full system in by mid next year.

I wouldn't say there's any major delays. We're looking at a few weeks here and there, but nothing as it relates to the -- that we feel like there's significant in terms of delays.

The next question comes from Josh Spector with UBS.

Just thinking about potash production and given the levels you've been at, what would be the max production you think you could actually have available to sell for the second half?

And I guess related with some of the timing and the questions around summer fill and just-in-time demand, is it actually better for you if you build inventories that sell later if prices are higher and you avoid that summer fill discount? Or is that worse for you? So just curious on that dynamic.

Well, from production availability, I mean, we're starting up at HB facility this week. We'll start our Utah facilities towards the end of August, early September. Given the way the overall solar evaporation process works, we'll be producing at our standard normal rates from start-up until the end of our harvest. When you have an evaporation season, if it's -- whether above or below, it just sort of extends how long your harvest will last into the spring of the following year.

So production will be normal levels here in the back half of the year, just given the dynamics of producing out of our solar evaporation ponds. And then sorry, Josh, the other half of your question was?

It's more just the dynamic of summer fill versus selling later. So to the extent that you guys only have so much production, I was just curious if potash prices stay stable. Is it actually a better earnings outcome if those tons are delayed into the fall when prices -- when you'd avoid like the summer fill discount? I mean, obviously, there's working capital ramifications there, but curious if does that logic check out? Or is there something I'm missing in that thought process?

You definitely have the right logic, and you're looking at it right. I just don't want to make a big deal that, that's going to have a material change to what's already going to be a very strong third quarter. And so I don't want to put it out of perspective.

The fact that we chose not to participate in the summer fill program in a material way did leave us inventory to be able to sell into a strong fall market that's going to happen. But I don't want to make it out like that's going to be a huge mover. It's definitely a benefit, it's definitely positive, but I can't really quantify the size of the potential increase.

No, that's fair. And I guess just curious on if you have a normal production season in the fall, you have your projects in place. If you were to think about your potash cost per tons this year versus next year, what would be kind of the buckets of what those things would add or, I guess, reduce your cost versus this year?

It's a fair question, certainly one we've touched on in the past. We've -- and we still believe we should see our cost per ton on potash to start to decrease here in Q3 and Q4 as we get back through those tons we produced during our down 2020 evaporation season.

As far as dollar numbers for next year, just still too early to guide on that. We'll see where this evaporation season ends up. But we do expect, as we said on previous calls, to see some improvement in there as we start to sell off of our 2022 evaporation season here in August and September with the recent start-up of our solar operation facilities.

Okay. And if I could squeeze in, I guess, one more, just the frac sand project. Is there any way to size what that could be in terms of revenue and earnings? This is, frankly, in a market I'm super familiar with, what that should look like.

Yes. Given the fact that we are in basin, and literally, the -- our sand mine is going to be surrounded by active rigs, I think it is very, very fair to say that we should see minimum margins generated in the $20 to $30 a ton in terms of margin generated. As you know, sand pricing ranges anywhere from $60 to $70 all the way up to $150 a ton, depending upon where you are. The majority of that is in logistics costs. So once we're in the market, we know that prices are going very, very high. That's why we'd like to focus on sort of minimum margins. We feel very comfortable that we're going to generate these minimum margins. I don't know if that answers your question or not.

Yes. No, that's really helpful. I appreciate it.

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 participating, for their interest in Intrepid and wish everybody a pleasant day. Thank you.

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