Thank you for standing by. This is the conference operator. Welcome to the Intrepid Potash, Inc. Second Quarter 2023 Results Conference Call. As a reminder all participants are in a listen-only mode and the conference is being recorded. I would now like to turn the conference over to Evan Mapes, Investor Relations. Please go ahead.

Thank you, Kayla. Good morning, everyone. Thanks for joining us to discuss and review Intrepid's second quarter 2023 results. With me today is Intrepid's Co-Founder, Executive Chairman, and CEO; Bob Jornayvaz; and CFO, Matt Preston. Also available to answer questions during the Q&A session following our prepared remarks is our VP 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 differ materially from those currently anticipated and are based upon 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 refer to certain non-GAAP financial and operational measures. Reconciliations of these 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 pass the call to Bob.

Thank you, Evan, and good morning, everyone. We appreciate your interest in Intrepid and attendance for our second quarter 2023 earnings call. Positive company and industry fundamentals drove another solid quarter of results with our second quarter adjusted EBITDA totaling just under $16 million, bringing our first half figure to approximately $32 million. Strong sales were again a key highlight for Intrepid. In the second quarter, our potash sales volumes were approximately 40% higher than the second quarter of last year. And for the first half of 2023, our potash sales of 167,000 tons already represent about three quarters of the total volume we sold in 2022. Behind this improvement was increased potash demand from agricultural markets, with feed also remaining a very important market for us, comprising just under 20% of our product sales in the first half of this year. A combination of our geographic and logistical advantages along with sales into premium markets continues to support robust netbacks. In the second quarter, our average net realized sales price per ton for potash was approximately $480 or roughly 25% higher than average NOLA pricing in Q2. While we recently saw the announcement of the summer-fill program, resetting prices, we think the trend of strong netbacks for us will continue, which Matt will touch on in more detail in the call. As we look into the back half of 2023 and into 2024, the key theme of agricultural markets is that it continues to enjoy a positive backdrop in a market very much still intact with higher income levels. New crop futures for corn and soybeans trade meaningfully higher than levels seen over the last decade with futures for both markets seeing strength into 2025. Other key international commodities tell a similar story. Sugar and cocoa currently trade at decade highs, while palm oil futures are roughly 30% higher than the recent 10-year average. Overall, farmers around the world will likely enjoy a third consecutive year of very good profitability. Moreover, hot and dry weather in the United States, the unabated war in Eastern Europe, collapsing grain deals, i.e., the Russian wheat deal and now port disruptions all continue to contribute to supply risk and help drive home the importance of having reliable access to commodities such as potash. We do want to acknowledge that it's certainly not uncommon for agricultural markets to normalize after several years of close to record profitability. On this note, the market has been looking for parallel trends with a common comparison being to the 2012 drought and the period thereafter to offer some context. As the drop peaked in the late summer of 2012, key crop futures traded at historic highs, and aggregate US farm incomes were at then record levels. The following year in 2013, however, annual profitability slowly declined, and by 2016, US farm incomes had decreased to about half the levels from 2013. As for potash during 2013 to 2016, US demand actually still showed solid growth. Over this period, US potash demand experienced a cumulative annual growth rate of approximately 4%, while global potash demand grew at 3% CAGR. While this is just one historical example and recognizing that different market forces are at play, this can help inform a potential scenario for when we do eventually see a period of more normal farm profitability. That said, we again emphasize that we remain optimistic on the outlook and agree with third-party forecasts projecting potash demand growth by the US and the rest of the world in the coming years. I'll now end my prepared remarks with some commentary around our potash growth projects. These projects are designed to revitalize our potash operations by maximizing our brine availability and brine residence time underground, which will positively impact our business in two primary ways. First, higher and more consistent production will increase revenue and cash flow from simply selling more product tons and byproducts. Second, higher potash production will significantly improve our unit economics. We firmly believe that our three potash assets are top-tier operations, and when each facility experiences maximum brine availability, sufficient residence time, and normal evaporation, production at each facility can be significantly higher and more consistent than where we stand today. For reference, within the last decade or so, peak annual potash production at HB was approximately 175,000 tons, Moab was approximately 120,000 tons, and Wendover was approximately 105,000 tons for a total of approximately 400,000 tons, or almost 50% higher than our 2023 guidance of 260,000 tons. This helps frame why we've been investing higher levels of capital, our excitement for the business outlook, and why we have created these achievable goals. As for recent highlights, we successfully completed Phase 1 of the HB injection pipeline at our HB facility in Carlsbad, as well as Well 45 Cavern 4 and Well 46, various potash projects in Moab. At HB for Phase 1, the installation of a new 21-mile injection pipeline has proven injection rates of up to 2,000 gallons per minute, which is almost triple the average injection of approximately 700 gallons per minute over the previous five years. For the remainder of 2023, we'll continue to focus on Phase 2, which is the installation of a pigging system to help reduce scaling and ensure consistent flow rates. Until the completion of Phase 2, we anticipate operating at average injection rates of approximately 1,100 gallons per minute, which is still roughly 55% higher than rates prior to starting the project. Also at HB, we recently received the green light on permitting our HB Eddy shaft project to target an already measured high-grade brine pool. We expect to start putting brine from this project into our ponds in early fourth quarter this year. At Moab, the Well 45 project for Cavern 4 is a newly designed single well cavern system with three interlocking laterals that targets completely new ore in Potash Bed 9 and was commissioned successfully in July. Cavern 4 is designed to have a long operational life and brine measurement so far has shown a solid availability of high-grade ore. Well 46 is an additional horizontal drilling project designed to target high-grade brine in a pool in the original mine workings in Potash Bed 5 and was also recently commissioned. Well 46 serves three key purposes. First, it will contribute to our 2023 potash production when harvest begins in the third quarter; second, create medium to long-term reliable wellbore access to drill additional laterals to target unmined ore or access other stranded brine pools; and third, serve as a backup for other injection extraction wells. At Moab, after successfully commissioning Wells 45 and 46, we kept the rig and crew on site to drill one more horizontal lateral. For this last effort, we used an existing vertical well as an access point and then horizontally drilled a lateral or whipstock from the vertical well. This new lateral design provides better access and brine circulations to one of our other horizontal caverns. Similar to oil and gas workovers, our horizontal caverns at Moab occasionally need revitalization and reworking from time to time to help ensure we maximize our production and resources. Overall, I'm very encouraged by the strong project execution we've demonstrated so far this year. We remain confident that the capital we're spending will position our revitalized potash assets for higher and more consistent production and help ensure that we fully capitalize on the magnitude of the opportunity in developing our long-life potash reserves for many decades to come as well as a strong attempt to reduce the cyclicality that can be a result of lesser brine availability. I'll now turn the call over to Matt. Please go ahead.

Thanks, Bob. In the second quarter, we generated adjusted EBITDA of $15.9 million and adjusted net income of $4.3 million. Fertilizer pricing has continued to trend lower following peak seasonal demand, and our average net realized sales prices in Q2 for potash and Trio were $479 per ton and $333 per ton, respectively, which compares to last year's figures of $738 and $493 per ton. While fertilizer pricing has seen the expected reset, the market clearly found good value in the quarter, and our Q2 sales volumes of potash and Trio came in ahead of our expectations in early May. In our potash segment, our second quarter and first half 2023 sales volumes totaled 79,000 and 167,000 tons, respectively, which represent respective increases of approximately 41% and 33% compared to last year. Agricultural customers comprise roughly 80% of our total sales, up from 72% in the first half of last year, while feed comprised 18% of our potash sales. In July, we saw the announcement of a summer-fill program at $370 per short ton for Midwest warehouses for third quarter deliveries. After a very positive response during the order window, the price is now up $30 for spot tons in the third quarter. In Trio, our second quarter and first half 2023 sales volumes totaled 63,000 and 128,000 tons, respectively, roughly in line with how our sales were tracking last year. The first of two new continuous miners began operating during Q2, which drove improved production in the back half of the quarter. We also recently took delivery of the second new miner and expect to put it into operation by the end of August. Going forward, we plan to produce at a quarterly run rate of approximately 60,000 tons, although we should see higher efficiencies in getting to that figure with both new miners operating. Before moving on to our second-half guidance and capital program, I'll quickly touch on the Oilfield Solutions segment. During the first half of 2023, we sold less water owing to fewer large frac jobs and saw reduced surface use agreement revenue, which were the key drivers of the lower margins compared to last year. Our activity calendar currently looks better for the second half of the year, and we continue to make progress on our project to capitalize on the extensive sand resource at Intrepid South. As for the outlook of the year, we expect the combination of attractive fertilizer pricing, solid agricultural fundamentals, and a potentially earlier harvest to drive a strong fall application season in the US. For the second half of 2023, we currently expect our potash sales volumes to be in the range of 85,000 to 95,000 tons at an average net realized sales price in the range of $395 to $415 per ton. For Trio, we expect our sales volumes to be in the range of 75,000 to 85,000 tons at an average net realized sales price between $290 and $300 per ton. Moving on to our capital program, in the second quarter our capital expenditures of $21 million bring our first six-month spend to approximately $42 million, with the bulk of our spend being directed to our major potash projects at the Moab and HB Solar Solution mines. We expect our full-year capital program will be in the range of $65 million to $75 million, which will be dependent on market conditions and permitting process timelines. Key projects for the remainder of 2023 build on recent project successes and include Phase II of the HB injection pipeline and Eddy Shaft project at HB, and continued development of our sand project at Intrepid South. For our capital allocation priorities, we remain committed to maintaining a strong balance sheet. Our current net cash balance and liquidity of approximately $165 million puts Intrepid in a position of strength. As we finish the remaining major capital projects we've discussed over the past year, we will assess the production impacts and make further investments as needed, but we're very encouraged by our execution and already seeing positive impacts to our business.

And your first question comes from the line of Joshua Spector with UBS.

Hi, guys. It's Lucas Beaumont on for Josh. I just wanted to start on the potash volumes. It sounds like from your guide that the second half is basically going to kind of be flat year-on-year. I mean, you made a lot of progress during the quarter with the initiatives to improve production. So I was just wondering if you could kind of give us your latest view there on how that's actually going to flow through the volumes next year and into 2025?

Yeah. No, I appreciate the question. As far as volumes in 2024 or 2025, certainly, we're not prepared to give guidance on that just yet. But I think the execution of Cavern 4, the Well 45 project and Well 46 certainly puts us in a great position to see increased brine, increased residence time, and you'll start to kind of move back up that trend line towards the 350,000 to 390,000 tons of potash that we're certainly capable of.

I want to go through each facility. Looking at the HB pipeline, we are now injecting brine at rates that are 50% to 60% higher than a few years ago. By increasing brine injection into the mine, we have just started construction on the HB shaft, which will serve as an additional withdrawal point. We are also targeting IP 30B for the fourth quarter or first quarter as a replacement for the failed IP 30A Well. Moving on to Moab, Cavern 4, which includes Well 45 and Well 46, along with the whipstock off the existing vertical well in Cavern 3, have successfully tackled complex drilling challenges. Each has been executed well and is currently producing with additional brine online. The key takeaway is that we are injecting more brine at each location and are set to withdraw more brine at HB, with similar progress at Moab, and updates for Wendover will be coming soon. Thank you for the question.

Thanks. And then I just wanted to sort of touch on your capital expenditure on the projects and sort of the free cash flow. So I was just wondering if you could kind of give us an idea of sort of what you're thinking for free cash flow in the second half of this year. And then just on the CapEx side, obviously, your spend has been sort of executing on the projects. So I was just wondering how you're expecting that to kind of trend the next couple of years as you kind of continue to work through that there and sort of stay around the kind of $70 million a year or sort of drop back lower as that rolls off. Thanks.

We are not going to get ahead of ourselves for the second half of the year. Based on the guidance we provided, we have spent $42 million of our $65 million to $75 million budget in the first half. We anticipate a slowdown in sales, which is typical for the latter half of the year. Consequently, cash flow from operations will also slow down. That’s why we have our credit facility and a strong balance sheet to support the projects we need to carry out. Could you please repeat the second part of your question? I apologize for that.

Sorry, the CapEx, yes, the CapEx side, I was just trying to understand like...

As far as the run rate, yes.

What rather basically your spend is so I mean you're engaging in the projects so the spend is reasonably fixed the next couple of years while you execute on that, right? So just trying to understand what you think is your, I guess, more normalized maintenance level going forward versus what you're spending near term to kind of execute on the potash expansions.

Yes. Our sustaining capital trend is anywhere from $20 million to $30 million per year, just depending on kind of major replacement projects. But I think we've executed a lot of the big opportunity projects this year with our HP pipeline and our Moab caverns. And like I said, we'll see kind of how those projects progress and the improvement we get in the next evaporation season as we continue to increase residence time and brine availability. But we do expect that capital number to come down in 2024 and 2025, kind of the big slug of capital here in 2023 for kind of that low-hanging fruit in Moab and HB. And we never know exactly what the future holds, but we expect the opportunity capital side to be less in the coming years.

Right. Thanks. And then maybe just lastly on pricing. Sorry, was the pricing number that you gave for potash, was that the third quarter or second half?

That was second half for both potash and Trio.

I was wondering about your expectations compared to your competitors, who have noted a strong summer-fill program for the third quarter, with prices possibly rising in the fourth quarter. Benchmarks have also stabilized and begun to increase recently. If I consider your projections for the second half, are you anticipating any adjustments in the third quarter or an increase, or does it seem like it will remain fairly low to reach the overall average?

You're talking about a shallow correction or when you say shallow?

Sorry, yes. So your realized pricing was $480 in Q2. You're expecting sort of $395 to $415 in the second half. I assume we'll get a seasonal uptick in the fourth quarter. So just trying to understand how you're thinking about the third and fourth quarter sequential dynamics there on potash pricing?

Well, the fundamentals are extremely strong. So if you can separate fundamentals from reality, if we look at the entire commodity cycle, it's extremely strong. If we want to look at crude oil pricing, copper pricing, we want to look at cocoa, sugar, coffee, we see corn, wheat, soybeans at elevated prices. So if we look at the entire commodity cycle, there is no reason to believe that the entire commodity cycle shouldn't continue to be strong. Given global farmer economics, there is no reason from a supply-demand standpoint and fundamental economics for farmer income for prices to deteriorate very significantly from the levels where they exist today. Now markets are markets and different producers may choose to do different things, but the underlying fundamentals of both the commodity markets, and especially the agricultural markets, remain quite firm, which justifies current fertilizer pricing.

Right. Thank you.

And your next question comes from the line of Jason Ursaner with Bumbershoot Holdings. Your line is open.

Good afternoon, and thanks for taking the questions. Just to follow up, I wanted to try to get I guess some more of your thoughts on the summer fill just because it's a little confusing, and I know you guys don't set it, you're kind of continuing with it. But kind of to your point on the fundamentals, it felt like pricing had really strengthened significantly in 2021 before the invasion, then the invasion of Ukraine happened. There was a big fill at the distributor level where they were kind of getting ready. Farmers, I guess, basked on price a little bit, took the potash holiday, demand disruption, distributors then really ran down inventories. And now you're kind of in the situation where the fundamentals have kind of come right where I think people thought, which is that farmer yield is being impacted and distributors' inventory is super low. So I guess what are your thoughts on why the summer fill is kind of happening the way it is? I mean they seem surprised that demand will be extraordinary for the summer fill, but it almost feels like they're kind of rewarding people for taking the time off. So just trying to get your thoughts on how that summer fill is playing out.

It's a great question. As you've listened in over the years, you know that I'm not a proponent of fill programs. I think especially this summer, there was no need for a fill program. However, we don't drive that market. The producers that chose to have fill programs saw the demand that they knew that was there. I think they've simply conditioned farmers to wait for and then participate in a fill program. So I think it's a question better asked of some of the other producers why they choose that route. Because given the robust economics, we don't think it was necessary.

Okay. And then just on the cost side, you gave some great details on the revitalization programs. And I know you haven't communicated in terms of cash costs in a number of years, and I'm not asking specifically on that. But just to the extent you do have this common theme of more brine, withdrawing more brine, more time underground, and just kind of a more normalized year in general, what is the magnitude of what consistency could mean to the cost side of your operations, given where you are today, which seems pretty elevated?

I hate to just throw out percentages, but if you increase your production by 50% at a fixed cost operation, you should enjoy a cost reduction, not literally dollar for dollar, but you should see cost reduction. And once again, I'm going to throw out ballparks in the 20% to 30%. As these projects continue to successfully come online and deliver high-quality brine into the ponds, we measure the precipitates. We fully intend to be able to give much more targeted guidance on what those production levels look like and then allow us to address what kind of cost reductions we've achieved.

Okay. That's reasonable. Considering the capital expenditures opportunity, not returning to maintenance levels but staying below our current level, if pricing remains stable, which is beyond your control. But if that happens and your costs decrease, it appears that the model will generate strong cash flow, as you are already in a net cash position. So when you contemplate long-term capital allocation, where does that lead your thinking?

We always want to maintain a quote unquote a verbal strong balance sheet. We've said that year after year, and we've been able to do so. Once you've achieved the production levels that we feel we can get back to, then you can leverage a reasonable amount back on the balance sheet once you've achieved consistent sustainable production. Right now, our leverage profile, if and when we take on leverage, it's going to be at very modest levels. Once we finish out this capital program and are able to clearly evaluate the results, then you can begin to look at leverage in a different way. We've already shown our willingness to have a pretty significant stock buyback program and we hope to get back to that on a much more regular basis. I think we demonstrated in 2022 our willingness to buy back stock and that willingness remains.

Okay. Great. Appreciate your time. Thank you.

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

I want to thank everyone for taking the time to be on the line today. We appreciate the questions and the interest in Intrepid and look forward to seeing each of you on the road. Have a great day.

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