Intrepid Potash, Inc. Q1 FY2022 Earnings Call

Thank you for standing by. This is the conference operator. Welcome to the Intrepid Potash, Inc. Q1 2022 Results 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. I would now like to turn the conference over to Evan Mapes, Investor Relations. Please, go ahead.

Good morning, everyone. Thank you for joining us to discuss Intrepid's first quarter 2022 results. With me on the call today are 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 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 US Securities Laws. These forward-looking statements are subject to 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. And our SEC filings and press releases are available on our website at intrepidpotash.com. With that, I'll now turn the call over to Bob.

Thank you very much, and good morning to everyone for joining us, and we really appreciate the attendance on the call and interest in Intrepid. First, I want to apologize in advance for any coughing, sniffling, or sneezing. Everything is blooming in Denver, and we've all got allergies. I'd like to start with some commentary on the markets before diving into the first quarter and the outlook for Intrepid. As everyone is aware, we currently have a multitude of macro supply chain and geopolitical events helping drive commodity prices near decades highs, and even record high prices in certain cases. Spot West Texas intermediate started 2022 priced just over $75, but now is well above $100 a barrel. In mid-April, natural gas futures eclipsed $8 per MMBtu, which hadn't occurred since 2008. Looking at key crops in North America, corn is currently trading at roughly $8 a bushel, a price not seen since 2012. Wheat and soybean prices show similar trends, with wheat trading just over $10 a bushel, the highest price since 2008. While soybeans are at almost $17 a bushel, which is the highest price since 2012. Prices for all agricultural commodities still support extremely strong margins for farmers. The December corn contract is trading at just under $7.50, September wheat is just under $11 and November beans are at about $15. Further to that, key international commodities that also use significant amounts of potash are showing significant strength. Palm oil prices reached a record high of over $1,900 per ton in early March and currently remain close to all-time high levels. Coffee is at roughly $2.20 a pound, was at the highest level seen since 2011, while the price of cocoa has just surpassed $2,600 per ton, towards the upper boundary of the last five-year trading range. Lastly, cotton is trading at roughly $1.50 a pound, which is an 11-year high and has more than tripled since March 2020. While fertilizer prices are higher than we've seen in quite some time, and we're seeing what I would call a bit of demand thoughtfulness, some might call it destruction, owing to the high prices, but also due to certain buyers simply not being able to source their needed product, we think the underlying crop economics still support the application of fertilizers. Moreover, if we do see lower demand and less use of fertilizer this year, a likely outcome would be lower crop yields, which would be negative for supply and offer support for crop prices, which in turn help ensure solid demand for fertilizers in quarters ahead. With that out of the way, in the first quarter of 2022, the trend of high prices certainly across most fertilizer products continued, and we delivered an average net realized price of $703 per ton for potash and $469 per ton for Trio, which represent respective increases of approximately 150% and 100% compared to the first quarter of 2021. In our potash segment, our Q1 sales totaled just over $56 million, a 30% increase compared to the prior year’s quarter, and gross margin totaled $29 million. In our Trio segment, our sales totaled $41 million, a roughly 73% increase compared to the prior year’s quarter, and gross margin totaled $16.1 million. On a consolidated basis, in the first quarter, Intrepid's revenue of approximately $104 million was 46% higher than the first quarter of 2021 with higher revenue primarily driven by higher net realized sales prices for potash and Trio. Intrepid generated adjusted EBITDA of approximately $50 million, while net income totaled approximately $31 million for diluted earnings per share of $2.31 per share. This is Intrepid's most profitable quarter since the third quarter of 2012. During the first quarter, cash provided by operations came in at $34 million, while cash used in investing activities was only $7.7 million. As of April 30, our balance sheet and short-term investments balance stood at just over $80 million, a roughly $44 million improvement from December 31. Quickly on Oilfield Solutions, this segment continues to be a steady performer with first quarter gross margins of about $2 million. Performance in this segment is closely tied to activity in the Permian Basin. As of last week, the Permian has added over 40 rigs since the start of the year, while the Permian DUC count of just over 1,300 wells is about 65% lower than the July 2020 peak, indicating the need for more drilling. As Permian drilling and completions continue to increase, we'll keep looking for opportunities to increase our activity and capture additional margin. Overall, Intrepid's first quarter results clearly demonstrate a very strong start to 2022, and we expect the positive momentum to continue. Global potash supply will likely remain tight for the duration of 2022 as we've seen a severe supply shock that has impacted 30% to 40% of global potash production. Moreover, swing production capacity in North America and worldwide is quite limited. On the demand side, global markets demand-wise remained quite steady. Brazil has been particularly strong, with Brazilian potash prices of just under $1,200 per metric ton today, clearly being a very attractive market for the international supply versus the United States, where NOLA potash prices are currently about $800 per short ton. In summary, we think the U.S. market is tight on supply, while demand remains solid and driven by strong commodity economics. Now looking ahead for Intrepid, if fertilizer prices continue to remain elevated, which we believe they will, Intrepid will clearly continue to be a key beneficiary. That said, we won't be complacent in this market, and I quickly want to highlight some of our key initiatives to improve our per ton economics and increase our production. Starting with our East mine, in the first quarter, we continued to operate extra production shifts to increase production. We have added two new continuous miners, which are on order for delivery in the next few quarters. At the HB Solar Solution mine, weather last summer led to 2021 potash production of only about 117,000 tons or about 35,000 to 50,000 tons lower than previous averages. Although the double harvest of seven ponds helped offset the impact of lower production by adding a new injection pipeline in the works at HB and a more normal summer should help drive much higher volumes available for sale in 2022 to 2023 fertilizer season. Now looking at our Utah facilities, we have permitted, engineered, and are preparing to drill another cavern at Moab, which will also increase production there. Further, while we fully expect that upgraded wells at our Wendover facility will add production volume as early as the spring of 2023, we will continue to increase production alongside the existing cavern system. In summary, Intrepid delivered very strong results in the first quarter, and we expect the positive trend of high margins, cash flow generation, and improving cost per ton to continue. I'll now turn the call over to Matt for a review of our financial results and more details on the outlook.

Thanks, Bob. As Bob said, we had an outstanding quarter with $50 million of EBITDA and $31 million of net income or $2.31 per diluted share. For those modeling future results, I will note our first quarter tax rate was a bit lower due to a couple of state tax adjustments, and we still expect quarterly tax rates of about 26% going forward. On the nutrient side, the pricing outlook remains very positive, and we expect to be sold down to minimal inventories by the end of the summer across our potash facilities. From now until August and September, when we restart potash production, we will have all the tons necessary to meet our historic customers' needs, but also the inventory space and flexibility to move tons into other markets if necessary. During the first quarter, we ran into some wet weather in the Midwest and East and extremely dry weather in Texas and the West. Despite the challenging spring, we expect to be close to 130,000 tons sold for the first half. Spot pricing moved up again in April with a $50 per ton increase, which we have realized on spot sales and restock tons so far in the quarter. Second quarter average net realized sales price for potash is expected to increase to $720 to $730 per ton. We wrapped up our spring potash production season a couple of weeks ago, and we've seen a good start to the evaporation season, particularly at our HB facility as record dry weather continues to affect many parts of the Southwest. It remains early in the year, but we are encouraged by results so far, and we are on track to return to normal production rates with a much improved cost per ton in the second half of 2022. The Trio side, we delivered consistent volumes compared to last year, while expanding sales into key areas, as farmers continue to increase their focus on proper fertilization, particularly for secondary nutrients, such as sulfur and magnesium. We expect to be near the middle of our previous Trio guidance of 130,000 to 140,000 tons sold in the first half of 2022 and expect an average net realized sales price per ton of $480 to $490 in the second quarter. Our liquidity position continues to improve as we generate cash flow from operations of roughly $34 million and currently have approximately $154 million of liquidity. Given the positive outlook, we plan to accelerate some capital spend during the year on the key projects Bob discussed, along with some sustaining capital items to get ahead of potential supply chain issues and inflation. Additional capital this year includes the second continuous miner at our East facility, which we had previously expected to purchase next year, and some replacement pipe, casing, and other long lead-time items we can proactively purchase and store off-site until needed. We now expect capital spending of between $50 million and $60 million for the full year 2022. This concludes our prepared remarks. And operator, we're ready to take questions.

Thank you. We will now begin the question-and-answer session. The first question is from Joel Jackson from BMO Capital Markets. Please go ahead.

Hi. This is Alex Chen on for Joel Jackson. Thanks for taking my questions. My first question, given more cash on the balance sheet and a better liquidity position quarter-over-quarter. Can you elaborate on how that cash might be allocated? And if you can remind us of the expected pace of buyback and how that might have changed. For my second question, can you please, maybe provide us some color on how much of the Q3 potash order book where sales has been locked in? And how Intrepid might expect prices to move throughout 2022?

Alex, thanks for the question. I'll address the pace of buyback. As you know, as soon as we announced that buyback program, the market pretty much took off ahead of us. So, we're in the stages of formalizing our policy and how we're going to start to act on that and put that in place. I can only tell you that we've got a committee that's put together a formal process, and we hope to continue updating as that goes on. As to the balance of your question, I'll let Matt take that.

Sure. As far as the Q3 order book, I'll flip back to Zach for any additional color, but we haven't taken any orders for Q3 at this point and really expect prices to remain relatively in line with the first half as we look towards the back half of the year. Zach, anything else to add?

Yes, I would just add that kind of what Matt is saying, we expect crop prices to remain strong, and we expect that to support a good application through the second half of the year.

Yes. Just a quick follow-up. So do you expect the current prices in this environment to kind of flow into Q3, because you mentioned pricing staying relatively flat similar to the first half? So I would assume in the $720 million, $730 million range?

Yes. We don't see a situation where prices lighten up or come down. We think that there's a tremendous amount of strength in this market for at least a couple of quarters. We assume that prices will remain pretty stable. There's just nothing out there on the 12 to 18-month horizon that would give rise to prices coming back down. So happy to continue to discuss that if you like our thoughts on that.

Thank you. The next question is from Vincent Andrews from Morgan Stanley. Please go ahead.

Hi, guys. This is Will Tang on for Vincent. Thanks for taking my question. I guess, just as a follow-up to Alex's question, how are you guys thinking about your summer fill program, particularly given the high prices that we're seeing right now and possibly some inventory risk for distributors if they decide to hold any potash over the summer?

We don't really see a need for a fill program. Obviously, we don't drive the market, but we're basically selling as much as we can or need to. So, there's really no reason for a typical fill program. I'll let Zach elaborate, but I'd be surprised to see a fill program this year.

Yes. I would kind of echo what Bob said. I think if you look over the last several quarters, we really haven't seen what I would call a traditional fill program be pushed by the producers here in North America. So people just continue to layer in tons as they need them, and that's what we expect kind of going into the second half of the year.

Going back, Will, I just don't think we've seen a situation where you've got such a widely used commodity globally that is used by many different people around the globe where approximately 30% to 40% of the capacity has been removed from the market. So there's really nothing on the horizon that would cause anyone to utilize a fill program because of the capacity that has just actually come off the market.

Got it. Okay. And then I guess on the potash cost side, it looks like you guys have begun to work through some of that higher cost inventory leftover from last year. How quickly could we return to the cost level comparable to 2019 and 2020? Is that like a feasible goal for the second half of this year or would that be more of a 2023-type story?

Yes. Good question. Kind of the late 2019, 2020 cost levels, misses sort of all in what you see in the segments we show. Really, we're in the $230 to $240 per ton on potash, which has obviously grown here in the low 300s given the poor evaporation from 2021. We'll see that come down pretty quickly as we start harvesting tons from the 2022 summer evaporation season. So I think we'll see a pretty big step down for Q4 and then into Q1, we expect to be back at those normalized levels.

Got it. Thank you.

The next question is from Josh Spector from UBS. Please go ahead.

Yeah. Hi. Thanks for taking my question. Just you've got a few projects underway across potash and Trio to expand production and some of that goes to the previous question about reducing the cost to produce. Just curious if there's a way to give an early thought about where production could be based on the projects you have underway for potash and Trio in 2023.

Yeah. Still very early, Josh. I mean, I appreciate the question. Certainly, we've done caverns in Moab before. And so you drill that cavern, we'll start to put some very strong, very high-grade brine into our ponds and really start to see that benefit towards the back half of 2023. For HB and Wendover, we'll start to see that a little bit sooner. As to overall production increases, I don't have specific numbers for you right now, but I certainly think we'll do two things. One, we'll get back up towards the kind of the numbers we saw earlier for the HB facility when we first came online. And then they'll also help limit the downside of any four evaporation seasons we have, because we'll have additional brine and additional high-grade K. So it does two things for us. One, there's higher production potential, but two, it really limits the downside of a bad evaporation year overall in our system.

Okay. That makes sense. I appreciate that. And I guess, Bob, earlier, you offered to opine a bit on some of your thoughts about the potash outlook. I'd be curious on hearing that just from the stance of you kind of continue to mention that there's nothing that could really change the near-term outlook or medium-term outlook in your view. I guess we get the question a lot about this. Globally, we've become more concerned about food supply and food costs, if there's going to be some intervention or change in approach to how the world views fertilizers and perhaps help separate those from other sanctions and concerns still. I guess do you think that's something that could play out, or what are your thoughts at this point?

I would compare it to the Energy business. Many people want to reach what I call energy Disneyland, but there's no clear path to get there. The same applies to the fertilizer market. When examining nitrogen products, phosphate, and potash, we remember the potash challenges of 2009 and 2010, along with the yield losses that occurred. Given our current supply situation in major agricultural commodities, it's tough to see how reducing fertilizer use will maintain yield levels. For instance, in Brazil, a 20% or 15% decline in potash consumption will certainly lead to lower soybean yields and affect other crops, which ultimately strengthens farmer economics. I understand your concern about the impact on grocery shoppers. Consumers have become accustomed to abundant, inexpensive food, and we're now part of a broader national conversation about food security. We spent some time in D.C. recently and were asked questions about food security that we've never faced before. I believe we'll see strong, possibly inflationary markets in the coming quarters. I tell our team that we expect this situation to persist for at least 18 months to 2 years after the conclusion of the Russian-Ukrainian conflict. However, there's a tendency to overlook issues globally, and things won't remain this way indefinitely. The principles of a free market will eventually prevail; when that will happen is uncertain. We have good visibility for the next 12 to 24 months, and that's our focus. Even beyond that, returning to normal will be challenging. Once again, that's just my perspective. I'm not sure if that addressed your question.

No, that's helpful. I appreciate your thoughts. Thanks.

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

Good afternoon. Thanks for taking the question. Just kind of following up on the last one. There were a lot of questions you focused on price and I guess not the length of the cycle. And I think the term you used was demand thoughtfulness and I think nutrient on their call this morning, the demand rationalization rather than the idea of destruction. I guess, just can you walk through a little more of the underlying crop economics? And how do you see the length of the cycle playing out in terms of being multiyear and when some of this could get resolved over the next two, three, four years?

I believe there's some positive news as history often repeats itself. Looking back to 2007 through 2010, the agricultural sector was not trading at the same margins we see now. More significantly, Canadian producers still felt they could increase potash production. I suggest we're in a similar situation to 2008, where if the Canadians have the capacity, they are already selling product. Currently, we know that Eastern European production, particularly from Belarus, is halted, and EuroChem has paused all ongoing expansion projects, redirecting its production elsewhere. What's different this time—though I hesitate to say that because it often turns out to be untrue—is that the Russian and Ukrainian conflict has altered the landscape for a period. Today, farmers are experiencing exceptionally strong margins across various commodities like palm oil, coffee, cocoa, corn, and cotton, which was not the case in 2008 and 2009. In those years, some farmers could afford to take what was unprecedented—a potash holiday. Honestly, potash prices should have decreased back then because increased capacity entered the market in 2009. However, prices did not drop, leading to the idea of a holiday. Today, nearly all our contacts are at their limits. We've talked to several customers who cannot physically obtain potash, which was not the scenario in 2008 and 2009 where purchases were made from choice rather than necessity. I’m unsure of the best term to use, whether it’s rationing, scarcity, or selective ordering, but removing 30% to 40% of such a widely used commodity from the market has significant consequences, and we're witnessing those impacts now. So, Jason, I hope that clarifies our perspective on the matter.

People seem to be concentrating on short-term prices rather than considering how long the situation could last. With global demand expected to decline this year, that translates to reduced demand, lower fertilizers, decreased yield, and higher crop prices, which could extend the duration of these impacts. I'm curious whether there are any strategic, regulatory, or financial incentives that might encourage reopening West. Is there a specific cash threshold that would make you feel more secure about the decision to reopen, especially considering the potential risk of supply returning from Russia?

It's a great question. We've got a small team looking at it. I don't want to give any false hope. I think it's a long shot for us to reopen that in the short term. I think we're going to see how some of this plays out a little bit more.

Okay.

It's nice to have it. It's a great ore zone. And it's an ore zone that is definitely available for solution mining. So we've looked at it in a variety of ways. I'll just put that out there. It was mined in the first ore zone, which was the best ore zone at Carlsbad, New Mexico. So...

Right.

We're looking at it in a lot of different ways.

Okay. Regarding the HB mine, how are you evaluating the cost per ton, particularly concerning the charges you incurred in anticipation of a weather issue? This charge was recorded in Q4. How does that compare to what has actually been expensed now that you are selling? The charge was intended to reflect pricing levels, but I assume it's still higher compared to achieving normal production levels, especially without the new injector system. I hope my question is clear, but I want to understand how elevated the prices at HB are currently, even after accounting for the charges you took.

Yes. So certainly, a little more elevated compared to normal and kind of goes back to one of the previous questions. Just looking at our cost of goods sold to buy sales tons, we're at $319 per ton for Q1. And like I said, we expect that to come down pretty significantly here once we start production back up and kind of stair-step down in Q4 and Q1 back into the range of that $230 to $240 range pretty consistently.

Okay. And then the HB Green project, it had been set to start trial but how the phrase you used in the second half from last quarter, I didn't see any update or hear any update on that so far? Is that still tracking on progress?

Jason, Brian sitting here next to me. I apologize, we basically covered as many things as we could, but I'll have Brian give you an update on some of the things that they're actually ongoing and boxes that are getting checked.

Yes. Thanks, Jason, for asking that question. So, we're progressing towards a pilot project. I think that's the word you were looking for, which is being overseen by the New Mexico Environmental Department in the produced water consortium. We're in the process of doing design work, laboratory tests on produced water. So, we're on track with what we told you in the last earnings call. It's an interesting project, and it's moving towards a pilot project.

And don't forget, we're doing that in conjunction with the state, if you will, the New Mexico produced water consortium, which is part of the NMED in the state. So, we don't get to run on Intrepid time. We have to run on the state's time.

Got you. Okay. Appreciate the answers. 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 want to thank everyone for their time this morning, and their interest in Intrepid. I wish everybody a great day and look forward to talking to you next quarter. Thank you.

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