Intrepid Potash, Inc. Q2 FY2022 Earnings Call

Thank you for your patience. This is the conference operator. Welcome to the Intrepid Potash, Inc. Second Quarter 2022 Results Conference Call. Please note that all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be a chance for questions. I would now like to pass the conference to Evan Mapes from Investor Relations. Please proceed.

Thank you, Angela. Good morning, everyone and thank you for joining us to discuss 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 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 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 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'll now turn the call over to Bob.

Thank you very much, Devin, and 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 undoubtedly been exceptional, with the company's $92 million in adjusted EBITDA being the best first half performance in a decade. With the debt-free balance sheet and $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 the macro. So far this year, fertilizers have transitioned from a relatively quiet space within the global commodity market to consistently making headlines. The unabated impact on fertilizers and grains from both sanctions on Belarusian potash and the Ukraine conflict has been the biggest agricultural story in 2022. The food crisis in Sri Lanka has also showcased the vital role that fertilizers play in affordable food production. At Intrepid, we take great pride in being the only United States-based potash producer and one of the two commercial potash 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, with farmer cash market margins projected to be historically high this year and next, supported by very strong crop prices. As expected, anytime fertilizer prices are at elevated levels, we anticipate a choppier sales order book, specifically for phosphate and potassium outside of the spring season, as farmers manage working capital by delaying application decisions whenever possible. The positive difference in today's market compared to potash prices from years past is that the underlying economics remain very supportive, while the supply disruptions causing unmet fertilizer demand have no near-term fix, despite the marginal announced production increases from a few small producers. As a relatively smaller potash producer with a distinct geographic advantage serving a diverse set of markets, in addition to agriculture, including the industrial, organic and turf markets, we expect a 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 achieve the best year in a decade, and to put in perspective 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, representing year-over-year increases of roughly 130% and 82%, respectively. In the second quarter, our gross margin in the potash segment came in at roughly $25 million, reflecting a $15 million improvement versus the prior year. While our Trio gross margin totaled $13 million, marking roughly $10 million improvement over the second quarter of 2021. As a consequence of strong EBITDA performance, we've generated $83 million in cash flow from operations in the first half of the year, which allows us to invest in our core mining assets to help drive more reliable and higher production, which in turn, reduces costs. We've discussed 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're 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 and over 1,200 drilled but uncompleted wells, commonly known as DUCs. Regarding the initial scope of the project, we estimate the total capital investment will be approximately $16 million, split equally between dollars already spent in 2022 and those to be spent in the fourth quarter of 2022 and early 2023. We've already purchased the major long lead time equipment, which is now being manufactured and ready for delivery. We're 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 exceeding 600,000 tons annually in our first focus area on the Ranch, defined by the drilling of 43 core holes, which comprises less than 5% of the total Ranch. We estimate for just this 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, supporting decades of sand production. We believe our South Ranch location, surrounded by New Mexico oilfield activity, will provide Intrepid with a key competitive advantage in Permian sand sourcing and supply, having recently been a key headwind for the exploration and production companies. One of our primary corporate goals has been to continue to unlock value at Intrepid South and increase revenue cash flow contributions from our oilfield segments, and we believe 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 two quarters of the year as we head into the fall application season. We still see a long runway for robust fertilizer prices given 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 some outlook color 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 the 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, choosing to wait for field programs to be announced. In late July, an MOP program was announced, and the early response 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 the second half of 2022, while we expect activity to pick up as harvest progresses and as we move into the fall application season. In our Trio segment, the second quarter was another period of good application due to very strong 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 will be cautious in the near term and look to reengage our needs as we move into the latter part of the year. Production rates remain 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 in capital expenditures in the second quarter and now expect our full year investment to be between $65 million and $75 million as we accelerate more sustaining projects into this year, along with the addition of the sand project Bob discussed. Regarding liquidity, yesterday, we closed on an amendment to our revolving credit facility, increasing its size from $75 million to $150 million and extending the maturity by three years to August 2027. Amid 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.

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

Hi there. This is Alex on for Joel Jackson. Thanks for taking my questions. I have a couple of questions, if I may. I will start one by one. Given the stronger financial results we've seen and the cash building on the balance sheet, can you walk us through what your plans are with the cash? And how are you 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. Our ability to invest in organic projects relative to buying stock allows us opportunities, given our strong free cash flow generation. In terms of the pace of it, our primary concern is to make sure that we’re opportunistic since we're in a volatile stock market environment. So, Matt, I don't know if you want to add to that at all.

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

Appreciate that. For my second question, could you provide a bit of color on the evaporation situation, if it has changed or improved? Can we expect similar sales volumes in that case for the rest of the year?

Yes, pulling back to the evaporation issues. We have been clear on our last few calls regarding 2021 and the significant rain we had at our Carlsbad facility. For those familiar with our story, we've had a great 2022 with good early season evaporation, and as we enter 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 far it's been a good year, and we'll wait to see where it ends up. All things being equal, we should return to more normal levels of production with this 2022 evaporation season. As for sales, as I said in my prepared remarks, we're not going to provide guidance for the second half, just given where the market is today, but we certainly expect demand to be strong when sales pick up and have a very positive outlook heading into fall and spring of next year.

Got it. Lastly, could you comment on what you think pricing will be in Q3 given what you're seeing today and how that might change in Q4, as some of your other competitors have noted increases in Q3? Are you expecting the same for average selling price?

We're observing a very strong market, and given our size, we’re trying to be as selective in our sales to achieve the best netback opportunity available. As a smaller player, I hope that we can continue to maintain a higher position in the market. Everyone in the fertilizer production business believes that we're in for several quarters, if not years, of continued firm pricing.

The next question comes from Vincent Andrews with Morgan Stanley.

Hey guys, this is Will Tang on for Vincent. Thanks for taking my questions. You made some comments in the press release about credit and possible inventory exposure for customers leading to demand headwinds. I'm wondering if you could provide a bit more insight into what's happening there and what that means for a trough demand season as we exit this fall heading into next spring?

Yes. Matt here. We're coming off really 18 months of very strong demand in our potash and Trio markets. A compressed spring season certainly high prices. Customers will tend to delay application decisions and shift to just-in-time purchasing as harvest progresses in the U.S. We believe that farmer distributor demand will significantly pick up, and it’s just a matter of time given the underlying crop economics and the supportive environment.

To add to that, we're not seeing a pullback in stated demand; rather, we're witnessing just-in-time purchasing. We're making the market aware that it’s going to be a choppier order book because people are managing working capital despite generating very high margins. There’s a balance here; however, we are seeing customers focus more on managing their working capital.

Got you. We're approaching some of those stated potash capacity expansion and cost reduction projects coming online in the next few months. Can you provide an update on where you are in the construction process, particularly with respect to Wendover, which I believe got pushed back from Q3 to Q4?

Yes. They're working out there at the deep brine well, and our operation teams are out there as we speak. I can’t confirm if we’re actually drilling at the moment, but something is happening any day now.

Yes, just a bit more color on our Moab Cavern; we expect to have that in service by the end of the year. Regarding the Wendover deep brine wells, we did move that from Q3 to Q4; that's really a delay from late September to early to mid-October. It's not a significant pushback as we’re currently managing the electrical aspects now. On our HB facility, we remain on track for the first half of 2023 for the full system, aiming to integrate some replacement pipelines hopefully by the end of this year.

Got it. Thank you.

The next question comes from Josh Spector with UBS.

Yes. Hey guys, thanks for taking my question. Regarding Potash production and given the levels you've been at, what do you consider the max production you could have available to sell in the second half? Also, relatedly, if prices remain stable, is it preferable for you to build inventories for later sales to avoid summer-fill discounts?

Regarding production availability, we started up at the HB facility this week, and our Utah facilities will start toward end of August or early September, based on our solar evaporation process. We'll be producing at our standard normal rates from startup until the end of our harvest. On whether it's better to delay selling, yes, we've seen that logic in action. However, I don't want to overstate that it’s a decisive factor as we should still have a very strong third quarter.

You definitely have the right logic there. It's hard to make a big deal about materials that will change what is already likely to be a very strong third quarter. So, while we are not participating in summer-fill materially, this will allow us inventory to sell later into a strong fall market, but it might not create substantial movements in the overall outlook.

No, that's fair. I guess just curious, if you have a normal production season in the fall, and your projects are in place, can you share how your potash cost per ton this year compares to next?

It’s a fair question and certainly one we've discussed previously. We expect our potash cost per ton to begin decreasing in Q3 and Q4 as we transition through the tons produced during our down 2020 evaporation season. It's still too early to provide dollar numbers for next year, but we're anticipating improvements as we begin selling from our 2022 evaporation season in August and September with the startup of our solar operation facilities.

Okay. Lastly, regarding the frac sand project, could you estimate its potential revenue or earnings given that I'm more familiar with potash? Thanks.

Yes, considering we are in the basin and knowing our sand mine will be surrounded by active rigs, it's reasonable to expect minimum margins in the range of $20 to $30 per ton. Sand pricing varies significantly depending on location, with ranges from $60 to $70 to even up to $150 per ton, primarily due to logistics costs. We are confident about generating these minimum margins.

That's really helpful. Appreciate it. Thanks.

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

I just want to thank everybody for participating and for their interest in Intrepid. I wish everyone a pleasant day. Thank you.

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