Intrepid Potash, Inc. Q1 FY2024 Earnings Call

Thank you, Rochelle. Good morning, everyone. Thanks for joining us to discuss and review Intrepid's First Quarter 2024 Results. With me today is: Intrepid's CFO, Matt Preston, and to be able to answer questions during the Q&A session is our VP of Sales and Marketing, Zachry Adams; and our VP of Operations, John Galassini. Please be advised that our remarks today include forward-looking statements, as defined by U.S. securities laws. These forward-looking statements are subject to risks and uncertainties that could cause our actual results to be materially different from those currently anticipated, 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'll refer to certain non-GAAP financial and operational measures. Reconciliations to the most directly comparable GAAP measures are included in yesterday's press release, and along with our SEC filings are both available on our website at intrepidpotash.com. I'll now turn the call over to Matt.

Thank you, Evan. Good morning, everyone. We appreciate your interest in Intrepid and attendance for our first quarter earnings call. As we first announced in an April press release, our CEO, Bob Jornayvaz, is currently on a temporary medical leave of absence. We continue to wish Bob a speedy recovery and while we anticipate and understand your interest, we don't have any new information to share with you today. We will, however, continue to issue updates on his recovery and status as it relates to Intrepid as we have them. Moving on to our first quarter results, our adjusted EBITDA totaled $7.7 million, a modest improvement sequentially, but down from $16.4 million in the prior year period. The key highlight in Q1 was robust demand for our fertilizer products for spring application, and we are pleased to report that our sales volumes and average net realized sales prices came in at the upper-end of our guidance. For potash, we sold 74,000 tons at an average net realized sales price of $395 per ton, while for Trio, our volumes totaled 91,000 tons at an average price of $300 per ton. Behind the strong demand, U.S. farmers have maintained their approach to yield maximization even with key crop futures, corn and soybeans coming back closer to historical averages. Also working to our advantage, potash pricing has seen relative stability over the past few months, which has been driven by several factors, including global potash demand returning to longer-term annual growth trends amidst a more balanced market; key international markets like Southeast Asia returning to higher potash application rates; and international crops such as palm oil, rice, cocoa and coffee continue to trade well above historical averages. As for our first quarter segment margins in potash, our gross margin totaled $5.6 million, which compares to $14.4 million in the prior year period. The key drivers of the declining year-over-year financial performance were a combination of lower pricing and elevated unit costs due to our reduced production in the 2023-2024 production year. As we've emphasized on prior calls, improving our unit economics is a priority for Intrepid, and spreading our fixed costs across higher production will be instrumental in achieving this goal. To that extent, the recent projects we've already commissioned and will be commissioning in the coming months give us a higher degree of confidence that our potash production will be inflecting higher in the back half of this year with increased momentum looking into the '25 production year. In Trio, our gross deficit narrowed sequentially in the quarter to $1.1 million, but was down compared to our gross margin of $1.5 million in the prior year period, with lower pricing being the key driver of the delta. The 91,000 tons sold exceeded our expectations, with historically strong demand being supported by a number of factors, including a tight domestic sulfate market. In light of the strong demand, we increased our Trio price by $25 per ton in the first quarter and expect to see the continued benefits of the price increase in our Q2 realized pricing. The 2 new continuous miners are also driving higher operating efficiencies, which allowed us to move to a reduced operating schedule at East, decrease our contract labor, all while maintaining our production rates. We expect to see continued benefits in our cost per ton in the second quarter as higher operating efficiencies and lower costs move through our inventory. For the full year 2024, we expect our cash production costs at East to decrease by approximately $8 million to $10 million, or 12% to 15% when compared to 2023. While the segment outlook is improving, we'll continue to limit our capital investment into East and further evaluate options to improve our margins going forward. Lastly, for oilfield solutions, our segment margin of $2 million was a $1.5 million increase from the prior year as higher water and brine sales drove increased revenues, while we effectively managed our costs through decreased contract labor and fewer water purchases. For second quarter guidance, we expect our potash sales volumes to be in the range of 50,000 tons to 55,000 tons at an average net realized sales price in the range of $390 to $400 per ton. For Trio, we expect our sales volumes to be in the range of 55,000 tons to 60,000 tons at an average net realized sales price of $310 to $315 per ton. Moving to project updates. We're excited to share that we've continued to show strong execution and after higher levels of investment over the past 2 years, we're close to seeing tangible improvements to our potash production. Starting with Wendover, we started to fill Primary Pond 7 with brine. With this new pond increasing our total evaporative area by about 1.5 times, we expect the pond to be full by the end of the year, which will improve our production rates starting in 2025. At HB, the new replacement extraction well IP30B and Phase 2 of the new brine injection pipeline continue to progress well. In April, we successfully drilled IP30B with commissioning expected by the end of May. This is a significant accomplishment for Intrepid and will allow us to continue to extract the already developed high-grade brine pool from the Eddy Cavern through early 2025. As we extract the brine, we'll backfill this cavern to create an additional brine pool for future production years, with IP30B serving as the long-term extraction well for the Eddy Cavern. For Phase 2 of the new injection pipeline in April, we received the final permits necessary to operate the pipeline and expect to have this commissioned in early Q3. The new injection pipeline will allow our brine injection rates into our Eddy, North and South caverns to be the highest in company history, resulting in overall brine injection volumes that exceed our extraction volumes. This is key for increasing our brine availability and creating the necessary underground residence time to develop high-grade brine, which in turn helps sustain higher production volumes over the longer term. For the Sand and Lithium projects, we're still working with potential partners on various deal structures, but are committed to limiting Intrepid's capital towards these projects. And while we wrap up this period of higher capital spend, we still sit today with approximately $47 million in cash on the balance sheet and no long-term debt. To end my remarks, as fertilizer and agriculture markets look to be entering more of a midcycle environment, Intrepid is uniquely positioned and we have catalysts on the horizon that should help drive value to our shareholders. First, we're only a few months away from seeing the first inflection to higher potash production. This will lead to better unit economics and allow us to fully capitalize on the many decade reserve lives of our potash assets. Second, we've taken a significant first step to improve our cost structure at the East mine with a 12% to 15% reduction in our full-year cash production costs. And lastly, our debt-free balance sheet and solid liquidity puts Intrepid in a position of strength as our broader market continues to navigate higher interest rates and inflation.

Operator, we're now ready for the Q&A portion of the call.

Yes. This is Lucas Beaumont on for Josh. Just starting on potash. So your first half guide is pretty similar to what you guys did sort of last year, and it lines up really well with your production from the second half, '23. So, I mean, you had solid production in the first quarter. I was just kind of wondering what you're expecting for production in the second quarter relative to the last couple of years that have been sort of quite low? And then, is that sort of a good proxy for us in terms of your volumes into the second half? So sort of that 110 range? Something like that.

Yes. No, thanks for the question, Lucas. Certainly. Q2 volumes are always down as we enter the summer evaporation season. Wendover and HB are wrapping up right now. Moab wrapped up the season a few weeks ago, so we always see the drop down in April as we just entered that season. As far as full year production, we had guided on the prior call 10% to 15% higher production rates in '24 compared to '23, and we're happy for. We're still really on track for that. Probably towards the high end of that guidance kind of 15% above 2023 volumes. So we'll certainly see that benefit towards the back half of the year as we start to see those capital projects we've talked about, the Eddy Cavern IP30B, and go back to Moab Cavern for last year, really start to improve our brine grades and our production rates in the second half of '24.

Yes, that's great. This likely indicates about 150 production in the second half, which should lead to a significant increase in your first half sales next year compared to about 125 this year.

Yes. Certainly second half volumes can be impacted. Obviously, you got to get through the evaporation season which is underway right now, and it can be a little affected by timing of startup, whether we start up mid-August or kind of the first week of September. But yes, as I said, kind of 15% above those '23 rates. We feel like we're seeing the progress we hope to see here in the first quarter.

Great. Regarding pricing, you are anticipating flat pricing sequentially, even though benchmark prices have slightly decreased. What is driving your order book in comparison to the market? Additionally, what kind of seasonal adjustments are you expecting this year? Do you anticipate a notable change in the third quarter, or are you expecting milder seasonality this year?

Yes. This is Zach here. So I think we see the global market as being very balanced and stable right now. Certainly there's always some seasonal price movements that you see as you kind of exit the application season and you go into that period of the summer timeframe where buyers kind of look to, in season, empty on inventory and kind of work on the timing of kind of when they're going to refill their positions ahead of the fall season. As it relates to kind of second half, I think we're optimistic about demand there. We think the prospect of ending the spring season empty on inventory will continue and we think buyers will be ready to step in at some point this summer for volumes. And the crop economics today still support our customers and farmers looking to maximize yield. So we think that's a positive bellwether for volumes in the second half and stable pricing going forward.

Our next question comes from Joel Jackson with BMO Capital Markets.

Good audible there on the name. Okay. On Trio like your Q1 volume, sales volume, is I think the best quarter you've ever done for a Trio in any quarter as a public company. The pricing looks like it's rising a bit in Q2, whereas potash price looks stable. And your Trio volume guys pretty good for Q2 as well. So you talk about tapping in Trio, seems like you're getting really good uptake on it, value and volume.

Yes. I'll let Zach touch on the volumes. If you're right, it was record domestic sales there in Q1. But Zach, go ahead.

Yes. No. Thanks, Joel. Yes, I think what we saw on the volume side was our customers entered the year with very low channel inventories on site. And across several regions in the U.S., we saw an early application period. So that really led to seeing some volumes that typically might transact in April, let's call it, kind of be pulled forward into March. And so even with that, overall first half volumes look strong for us. And Trio compared to Potash always has a little bit more of a tail on the application season to it, just because it's used in some side dress and top dress applications that kind of go out through late-May into early-June. So we expect to see good subscription, really through the end of the second quarter. And certainly we've seen that quarter-to-date so far.

Okay. Just on that potash production clarification. So not that my model is right, but I had that you were expecting about a 13% increase in production '24 and 23% production increase in '25. You're talking about 23% increase now, is that for '24-'25? Is my model right? Or are things going a bit better than you thought? Or am I wrong?

Yes. Reflecting on our Q4 call, we projected a 10% to 15% increase for 2024 and a further 15% to 20% for 2025. As I mentioned to Lucas, I believe we are leaning towards the 15% increase for 2024 at this point. We haven't made any significant changes for 2025 yet, but 2024 volumes are looking quite strong and are likely to be at the higher end of our guidance.

The next question comes from the line of Jason Ursaner of Bumbershoot Holdings.

It's great to see a strong start to the year. I appreciate your decision to stay, though I wish it was under better circumstances, and I'm hoping for Bob's full recovery and return soon. Regarding potash, it seems like the capital expenditures and IP30B are nearing completion. You've mentioned the progress we're hoping to see, and it feels like we've navigated through the toughest challenges. At this point, what do you see as the biggest obstacles to achieving our goals? Or is it more about gradually building confidence and ensuring that everything is currently on the right path for the potash sector?

Yes. I mean, you're right, Jason. We're certainly getting the IP30B well drilled. We're just completing kind of surface commissioning today. So kind of through the bulk of that capital spend and obviously where we ran into issues with IP30A, so great to have that behind us. It's obviously there's variability in a lot of our evaporation seasons. We've seen that over the years. And we need to continue to control our costs and execute on the projects in front of us. We'll see how the HB IP30B continues, as well as Moab Cavern 4, as well as the additional work we've done in Cavern 3, but I don't want to give the impression that we can sit back and sort of rest on our laurels now. We continue to stay focused on the project execution and kind of this 2-year plan we've been on to get our production rates back to historical levels. And so, yes, good progress so far, but still lots of work to be done. Really get through this evaporation season, and hopefully we can give some better guidance towards the back half of the year and into the Spring of '25.

Okay. I have a couple of questions about the volume aspect of production, particularly regarding the costs. Could you remind us of what you have been discussing, assuming progress continues? At this point, with much of the heavier work completed, is there growing confidence that the cost aspect is aligning with your expectations?

Yes, certainly as we see those production volumes materialize, we'll see an improvement in our unit cost. Certainly had a great first quarter for potash, around $350 per ton. But that was probably a benefit a little bit for more sales out of our Utah facilities, which are at a lower per ton cost. So not sure we'll be quite there in the Q2. But as we continue to see more production tons in the ponds, we still expect to see a pretty equivalent improvement in our per ton cost. So if we're 10% to 15% improvement in production, '24 versus '23, we'll see an equivalent improvement in our per ton cost as well.

Okay. Sitting here today, I hope Bob is back. From your perspective, could you frame where you see the company headed over the next year? You have cash on the balance sheet and have already spent a substantial portion of this year's capital expenditure. It seems like sand and lithium are both coming together. What do you think are the most important areas to focus on, besides execution, for the company's direction?

I think it’s just about continuing to execute our strategy. We’ve been discussing for the past two years our goal to bring potash production back to historical levels. The plan has been in place for a while, and it’s clear what everyone needs to focus on, from the completed capital projects to those we are still finalizing in Q2. The direction remains clear and unchanged as we move forward.

Okay. Great. Appreciate the commentary.

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

Thanks, everyone, for your interest and look forward to talking everyone again soon. Have a nice day.

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