Thank you for your patience. This is the conference operator. Welcome to the Intrepid Potash, Inc. Q2 2021 Results Conference Call. Please remember that all participants are in listen-only mode and this conference is being recorded. After the presentation, there will be a chance to ask questions. I would now like to hand the call over to Matt Preston, Vice President of Finance. Please proceed.

Thanks, Sherin, and good morning, everyone. Thanks for joining us to discuss Intrepid's second quarter 2021 results. With me on the call today is Intrepid's Co-Founder, Executive Chairman and CEO, Bob Jornayvaz. Also available to answer questions during the Q&A session, following our prepared remarks, will be our President, Brian Stone and 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 the risks and uncertainties that could cause actual results to be materially different from those currently anticipated. These statements are based on the 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 Securities and Exchange Commission, 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 to the most directly comparable GAAP measures are included in yesterday's press release. Our SEC filings and press releases are available on our website at intrepidpotash.com. I'll now turn the call over to Bob.

Thank you, Matt, and good morning, everyone. Our second quarter was highlighted by another strong performance in our Fertilizer segments as strong demand and increasing prices resulted in strong bottom line results. We recorded second quarter adjusted net income of $7.4 million and adjusted EBITDA of $16.9 million, significant improvements above the prior year and the first quarter of 2021. As expected, cash flow from operations was impressive. With $32.3 million in cash flow in our second quarter alone, and $51.4 million for the first six months of 2021, already exceeding our cash flow from operations for the full year 2020. In addition to strong results, we received notice of full forgiveness on our Paycheck Protection Program loan from the SBA and paid down the remaining $15 million on our senior notes. Our balance sheet is clean and strong and will allow us to execute on the significant opportunities in front of us in the oilfield market. Second quarter results also benefited from $6 million received for the sale of another small 320-acre tract of land, located adjacent to our 60,000-acre Intrepid South Ranch and the associated saltwater disposal permits with it, generating satisfactory gain considering we purchased the assets about two years ago for $3 million. We ended the quarter with $55 million in cash on hand and approximately $30 million outstanding on our revolving credit facility and expect to pay that down in the third quarter. Earnings for our nutrient business improved dramatically in the quarter, as we continue to layer in sales at increasing price levels. Potash pricing has continued to improve in both the U.S. and global markets since our third-quarter price announcement and we're currently layering in spot agricultural sales at $250 per ton above the 2020 summer fuel price levels. We expect to continue to layer in spot sales during Q3 at increased pricing levels, leading to another quarter of higher average net realized sales prices in the quarter. Solid agricultural economics across the global cornucopia of crops from coffee, sugar, cotton, palm oil, soybeans, corn, wheat, and other Ag commodities help boost and further strengthen the global farming economy, which in turn provides a foundation for firm potash pricing. Good application rates across our markets, but most distributors low on inventory at the end of the spring season, and buyers have been eager to restock depleted inventory levels. We expect good demand will continue to the second half as increased farm income levels combined with the potential for an on-time harvest remain supportive of fertilizer application. Our Oilfield Solutions business improved compared to the second quarter of 2020, although margins were slightly reduced as we intentionally high-graded and deferred to layer schedule water sales on our South Ranch in anticipation of higher margin sales in the second half of the year from fracs that are closer to our wells and based on a sliding scale pricing tied to West Texas intermediate. Water sales are already picking up in the third quarter with approximately $1.5 million in sales in July alone. We have a great outlook for the rest of the year. Oil pricing remains supportive, particularly for the Northern Delaware Basin and our South water rights are fully committed in the second half of the year, and the runway into early 2022 looks very promising. Other revenue sources, which include a produced water royalty, caliche baring sales and surface use agreements improved significantly in the second quarter compared to the prior year, highlighting the improved oilfield activity near our operations. We continue the pivot to ESG-friendly full-cycle water management systems investing in additional recycling equipment during the second quarter and we look forward to expanding on the full-cycle water management products and services we offer in the Delaware. We expect to mobilize our first 70,000 barrel per day recycling unit in the next few weeks with the potential to steadily increase volumes to over 200,000 barrels per day over the next few quarters as we bring additional recycle units online. And now I'll turn the call over to Matt for a review of our financial results and outlook.

Thank you, Bob. As Bob noted earlier, strong fertilizer demand and rising prices kept the momentum going in the second quarter, driving significant improvements in our consolidated results across all segments. The Potash segment generated $10.1 million of gross margin in the second quarter as higher net realized sales prices and increased volumes drove significant increases compared to the prior year. Second quarter production saw the benefit of an above-average 2020 evaporation season as increased pond production allowed us to extend the harvest season compared to the prior year and enabled us to sell additional tons. The last few months saw steady increases in potash pricing as strong commodity prices across all industries and good weather led to above-average demands as farmers were eager to make up for below-average application seasons in the past two years. We announced a $20 increase to potash price in May and booked historic volumes for third quarter delivery as distributors restocked warehouses after a busy spring. Since the May announcement, potash pricing has moved up considerably in the barge and inland warehouse markets as buyers compete over limited supply for third quarter delivery. We expect third quarter average net realized sales price will be between $355 and $365 per ton with additional upside into the fourth quarter of 2021. Our Trio segment recorded a great quarter generating $3.2 million in gross margin on higher volumes and price compared to the second quarter of 2020. First half Trio sales volume exceeded the prior year by 5,000 tons as strong customer relationships and robust demand led to record domestic deliveries, which more than offset reduced international volumes. We increased Trio price $20 per ton in May and another $35 per ton in June as the potash market continued to move higher. We began taking orders for third quarter delivery after the $35 per ton price increase in June and expect to realize all of this increase in Q3 with an expected net realized sales price of between $310 and $325 per ton. Our posted price is now up $135 per ton compared to the summer fill levels and we are mostly booked through the third quarter. Total second quarter water sales were $2.8 million similar to the prior year as we manage our South Ranch in order to meet higher margin demand later in the year. As Bob mentioned, our other revenue sources increased in the second quarter, and we expect improving margins in oilfield segment results as our water sales increase in the second half. As Bob discussed, our debt position decreased to $30 million outstanding at quarter end, all of which was under our revolving credit facility with BMO. As of today, we have paid back all but $10 million under the facility and expect to pay down the remainder in the coming weeks. With the senior notes paid down and improving EBITDA, we now have full availability under our credit facility and we'll look at possibly expanding that facility in the coming quarters. We spent $6.6 million on capital investments through the first half of the year and now estimate 2021 capital investment of between $20 million to $30 million. That concludes our prepared remarks for today. We're ready to take questions.

We will now start the question-and-answer session. The first question comes from Joel Jackson with BMO Capital Markets. Please go ahead.

Hi, this is Bria Murphy on for Joel. Thanks for taking my questions. We're obviously seeing a surge in potash benchmarks recently including now around $600 per ton in the Midwest. But it seems a lot of global producers aren't transacting at these levels. How liquid do you think these benchmark prices are? And are you booking business with these levels in the fourth quarter?

That's a great question. I'll let Zach answer that. We've been very methodical about the timing of our orders. We're experiencing strong demand in our region, but I'll let Zach provide more details on that.

Yes, thanks for the question. I think as far as the first part around the liquidity of the current levels, most buyers in the market in the Midwest have the times in place or on order already for what they're going to need to get started this fall. So we don't see a lot of liquidity at those levels today. We certainly have transacted on some spot tons from our demand side to that point. Looking ahead to Q4, we've not booked any tons for Q4 yet on the potash side. We're going to hold off from booking tons there and the market remains tight and we feel comfortable with what we have for Q3 and we'll address Q4 later.

Thank you. Revenue in Oilfield Solutions was down year-over-year in the first half, but you've indicated the possibility of steady growth in the second half, likely due to higher margin sales. What level of growth do you anticipate?

Yes. It's a good question. Certainly Q2 was down considerably from Q1 of 2020 as we really just held back water and opportunistically scheduled that for the back half of the year. We expect to sell out of our acre feet of water on the South Ranch. Sorry, I can't give you a margin number, but yes, we will see significant growth in revenue towards the second half of the year. We're really hopefully in line kind of with where we had been pre-COVID.

Okay. Thanks. That's helpful. And then just the last one back on, I guess, potash and Trio, obviously pricing is expected to rise in the third quarter. How do you expect margins to trend your costs also rise or do you expect margins to expand?

Yes. So we're in kind of middle back half of the evaporation season right now. Our cost structure should stay pretty similar those tons are in inventory right now that we'll be selling and we're going to start up our production here at HB this week and our Utah facilities late August, early September. So the cost side is going to stay pretty consistent, obviously with some adjustments just based on where we're selling out of. And when we see higher pricing, and we see a lot of that fall to the bottom line, roughly 5%, 5.5% royalties. So with the $10 increase, we see 95% of that fall to the bottom line in most cases. And so we expect that in Q3.

The next question comes from Vincent Andrews with Morgan Stanley. Please go ahead.

Hi guys, this is Will Tang on for Vincent. Thanks for taking my question. I'm wondering if you guys can comment on your potash inventories and how you're thinking about sales versus production as we go through the year and exit all season?

I'll let Matt address the inventory issue, but as you know, we're a relatively small producer, regional producer. So we've always had the ability to sell out our inventory. I'll let Matt address the current levels and how we've tried to manage our book, seeing the strength of the agricultural commodity markets. There is no reason to believe that we're not going to see continued strength in the fertilizer markets. So we've been trying to manage our sales book in anticipation of the really strong agricultural economy. So Matt, I'll let you talk to this specific inventory levels.

Yes, certainly. We are coming off a very strong evaporation season in 2020. We had higher-than-average inventory levels, along with sales from previous down application years over the past year, as demand has consistently remained high since October 2020. I would say we are currently in the latter part of the evaporation season for 2021. While we don't have any updates regarding production and inventory for next year, we have been cautious about managing our inventory, supplying significant volumes to our high netback customers, and reserving some inventory for the fall season and early 2022, where we anticipate some price increases from current levels.

Got it. And then one more question, if I may, I'm wondering if there's any concern with given how high potash prices are now that farmers might turn to mine the soil and move the applications this fall and next spring. I guess, in other words, do you guys foresee any demand disruption happening related to the worst thing affordability?

We all live through the price increases above $708 in 2009, and once the demand destruction that occurred when potash prices got up in the $800, $900 range. I don't think we're remotely near pricing where we're going to see demand destruction. I think when you look at farmer economics; they're doing extremely well right now globally. We tend to look at all commodities that use significant amounts of potash and we're seeing strength across the board. So if you look at coffee prices hitting the prices, they have sugar, cotton, all too often people focus on corn and we like to remind people to look at everything else, because it provides such a solid foundation for where we are. So given the strength across the entire spectrum, we believe that we're finally at what is reasonable market pricing. I think we look at farmers economics, we've got plenty of room and we should not see any demand destruction at these levels. Zach, I'll let you add some color.

Yes. I think Bob covered it well. I mean, I think as long as we're at these levels of economics for growers, even at these heightened input levels for potash specifically still makes financial sense from a rate of return perspective for potash on the ground and bushels and I think we're seeing that, just the increase we saw for this fall around the fall demand from growers and just things we're picking up from business with our customers as well. We're not seeing a downtick in demand yet from growers.

The next question comes from John Roberts with UBS. Please go ahead.

Thanks and congratulations to Brian on promotion. You also added an energy board member during the quarter as well. Does Brian's background and the addition of energy know-how to the board signal any kind of step change plans here in advancing the water and oilfield strategy?

Absolutely. This is Bob. And John, thank you for the question. And I'll let Brian take his victory lap here in a minute. We're really proud of the addition of Lori Lancaster and really want to stress her financial expertise in the oil and gas energy space. So it's not just the energy experience, but the financial experience. We've clearly been describing and trying to articulate our pivot into full-cycle water management, our increased emphasis on recycling the units that we picked up, the units that were processed and putting to work, we're working on some interesting projects on the disposal side. And so we just continued that pivot that we've been describing over the past several quarters and lining up the expertise to execute on that. Brian, if you want to add anything to that?

No. I think you said that very well, Bob. I just think this pivot to full-cycle water management, we think that there's a willing market there from an ESG standpoint, we think it's politically and from a regulatory standpoint, what the market's asking for and we think is highly synergistic with our business in Carlsbad with a workforce of 300 plus employees. And so we think we're really well-positioned in that market.

And then on the land sale in Texas, does that mean that all water growth is going to be recycled water or would you be expecting to just grow the disposal wells elsewhere and you'll grow both disposed water as well as recycled water?

We clearly grow it, probably not through SWDs. We'll talk about that in the upcoming quarters. But we clearly have plans to grow our ability to handle disposal opportunities.

And also why the land sale in Texas has been?

It was nearby. We have better opportunities when we consider the disposal market. The land in question is 320 acres next to our 60,000 acres, which we have larger plans for. In Southeast New Mexico, it's like a large jigsaw puzzle where companies are exchanging pieces to create a more cohesive picture for their specific needs. Different operators and infrastructure pieces are being swapped, which is simply a practical way to allocate resources. There's nothing more to interpret than it being a straightforward exchange of pieces.

Yes. Bob, I think I'd also add that full-cycle water management requires large scale on-demand disposal, and we just felt this asset didn't meet those requirements. And we were able to sell it into 2x.

Thank you, John.

The next question comes from Matt Farwell with ROTH Capital Partners. Please go ahead.

Hi, thanks for taking my question. If you could just step back and on the oil services business and give us a picture of what the infrastructure and the business might look like in 2022 versus 2021 in the sense of, we've been talking about full-cycle water management to source water delivery, recycling, blending, disposal. What might it look like? How is the business going to evolve over the next 12 months?

That's a great question. Throughout the entire Southeast New Mexico portion, we now have the ability to deliver source water. Whether it's fresh water or brine or brackish water to operate all of Southeast New Mexico. We've got three full recycle units ready to go up and running and are currently under negotiation with a significant customer that we hope to announce literally any day. On the disposal side, we've got a very creative project that we've been working on with the state of New Mexico that we'll be talking about in the upcoming quarters. That'll put us smack in the middle of the disposal business, given our location and the location of our facilities within the footprint of some of the biggest units Poker Lake unit and the Big Eddy unit in Southeast New Mexico. So our goal hopefully by if not the fourth quarter, but the first quarter is to be able to deliver in the hundreds of thousands of barrels. I mean, right now we've got the capacity on the freshwater side or source water side to be delivering 300,000 to 400,000 barrels a day and recycling at those same levels, and hopefully disposing at those same levels going into 2022. Did that answer your question?

Yes, it did. Yes, that's very helpful. Thank you. In terms of how you're funding this, I imagine a lot of the funding is related to expenses, but is some of this funding going to be reflected in CapEx on the cash flow statement? If so, what will the majority of it look like in 2022?

The good news is that a significant portion of the capital has already been utilized. When you examine our pipeline infrastructure and the recycled units, you'll see that a large amount has been spent. We're now discussing smaller projects that can be easily financed through cash flow or minor withdrawals from our revolving credit facility. As I mentioned earlier, it's like a massive jigsaw puzzle that is gradually coming together. Therefore, all the opportunities we're exploring involve manageable capital expenditures that should be achievable through either cash flow or small draws on the revolving facility.

Okay, great. Is there any update on the litigation front and the commentary in the 10-Q regarding a customer deposit related to an alleged default on a sales contract? It would be helpful to have any insights you can share on either matter.

We are eagerly awaiting the results from Judge Wechsler in the adjudication trial. We can only assume he is taking his time to write a thoughtful opinion. I wish we had an update for you. We are looking forward to that as well. We have several significant water permits that are currently being adjudicated, and we would love to be able to announce when they are complete. The good news is that all the major expenses related to obtaining those permits, addressing the protests, and adjudicating the water rights are behind us. Now, we are just waiting for the outcomes.

That's a great comment. Regarding the litigation, the alleged default of the south contract was also included in your commentary.

Yes. The words are clear, and I will just leave it at that.

The next question comes from Jason Ursaner with Bumbershoot Holdings. Please go ahead.

Yes. Following up on the last question that you’ve been asking for a while, I feel there's no reason to hold back now. The answer regarding capital structure and allocation plans has been that it’s too early to discuss, as our immediate focus is on execution. However, now that you’ve mentioned our strong net cash position and looking ahead to next year with anticipated continued strength in potash and potential improvements in the oilfield, our cash position could grow significantly by the end of 2022. This might mean that cash could represent a substantial percentage of our market cap. So it’s not an issue, and it would be a good challenge to have. At what point will it be appropriate or even necessary to provide more details about the financial strategy? Are you open to sharing any insights today regarding the balance sheet or the role of buybacks in the strategy?

Jason, it's a great question. I would say if anything, that we are more inclined to some sort of a special dividend, if you will, we're looking at it, we're very aware of it. We would love nothing more than to return capital to shareholders as largest shareholder. I'm very much aligned with you. We're glad to be where we are. And so we're now having those discussions very earnestly. We feel like a buyback program would be much more tax efficient. And so we're working as hard as we can and eagerly so that the next time you ask that question, I can answer you with timing, size, and shape.

Okay, great. And for the last question, could you provide a quick follow-up on the land sale? I'm assuming if you sold the 50% interest in the 652 acres, did it actually get separated out on the 326 acres, or is it just the Texas property that you purchased?

The piece of that the 640 was partitioned into two 320 that we owned a 100% and the other company owned a 100%. And so what, as I said, it was a nice return and we virtually doubled our money in 2018. It was literally just a 320 tract of land right next to our 60,000 acre tract of land that made more sense to trade puzzle pieces, if you will.

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

We just want to thank you for your interest in Intrepid and your continued willingness to be a shareholder. We strive to perform and do our best. And once again, thank you for your interest and hope everybody has a great day. Thank you.

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