Intrepid Potash, Inc. Q2 FY2024 Earnings Call

Thank you for standing by. This is the conference operator, and welcome to the Intrepid Potash, Inc. Second Quarter 2024 Results Conference Call. As a reminder, all participants are in a 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.

Thank you, Rochelle. Good morning, everyone. Thanks for joining us to discuss and review Intrepid's Second Quarter 2024 Results. With me today is Intrepid's CFO and Acting Principal Executive Officer, Matt Preston, and available for the Q&A session are 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 will 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 the SEC filings are available on our website and intrepidpotash.com. I'll now turn the call over to Matt. Please go ahead.

Thank you, Evan. Good morning, everyone. We appreciate your interest in Intrepid and attendance for our second quarter earnings call. As we announced in July, our CEO, Bob Jornayvaz, remains on a medical leave of absence and our Board has initiated a search process to identify his successor. While we understand your interest, we don't have any additional information to share on today's call. We will continue to issue updates on Bob's status as it relates to Intrepid and the CEO search as we have them. For our second quarter results, our adjusted EBITDA totaled $9.2 million, a $1.5 million increase sequentially, but down from $15.8 million in the prior year period as lower price levels and reduced potash sales weighed on our overall results. Our Trio segment results continue to be a bright spot as increased mining rates and lower overall production costs led to material improvements in our unit economics compared to the prior year. Moving to the macro outlook in our agricultural markets. Although key U.S. crop futures have softened throughout the year, growers are expected to continue their approach of maximizing crop yields, with potash helping that story. U.S. farmers remain in a solid financial position, which we believe will support steady potash demand in the second half of this year. As for the potash market specifically, global demand has been solid throughout 2024, and we expect relatively stable potash pricing during the full season after a good response to the summer fill program. Additionally, settlement of key potash contracts in China and India should help spur further demand in the back half of the year as pricing aligns with current values in Brazil and U.S. Barge Markets. Moving on to our second quarter segment results. In potash, our gross margin totaled $3.3 million, which compares to $12.9 million in the prior year period and $5.6 million in the first quarter. The key drivers of the declining year-over-year financial performance were a combination of lower pricing and sales volumes, as we work to reverse our trend of declining potash production over the past few years. That said, our second quarter potash production of 40,000 tons, which is up from 12,000 tons in the prior year period, provides the first indication that our production rates are moving higher, as improved brine grades at HB led to an extended spring season compared to the prior year. For our full year 2024 outlook, we still expect our potash production to be approximately 15% higher than last year. In Trio, our focus on cost improvement and operational efficiencies are materializing in our results. We generated a gross margin of $2.2 million in the second quarter, a $3.3 million improvement sequentially and a $1 million improvement from the prior year period, despite a lower realized price per ton compared to last year. Improved production in support of sulfate pricing resulted in 63,000 tons sold in the second quarter, bringing our first half sales volumes to 154,000 tons, a company record. On the cost front, when compared to the prior year, our first half cost of goods sold per ton has decreased by 11% to approximately $284 per ton. For the second quarter, this figure was even better at approximately $261 per ton or 18% lower than the second quarter of 2023. Oilfield Solutions continues to be a steady performer, with second quarter gross margin of $2.1 million, an approximately $800,000 increase from the prior year and flat sequentially. Brine sales and oilfield products and services revenues continue to trend up compared to the prior year, as we've been successful in increasing our price per barrel and improving our product availability while also reducing contract labor expense. For third quarter guidance, we expect our potash sales volumes to be in the range of 45,000 to 55,000 tons, at an average net realized sales price between $340 and $350 per ton, with volumes varying based on the timing of fall application and truck markets. For Trio, we expect our sales volumes to be in the range of 40,000 to 45,000 tons at an average net realized sales price of $300 to $310 per ton. Before opening up for Q&A, I will end my remarks with comments on Intrepid's current positioning and outlook. Starting with our current positioning, Intrepid has no long-term debt, balance sheet cash of $51 million, and no outstanding borrowings on our $150 million revolver that matures in August 2027. With potash prices finding their mid-cycle floor backed by a balanced global market, the key near-term priority continues to be improving our potash production and ensuring the company has enough cash to weather unforeseen down cycles. As our potash production trends higher, but more importantly, as our confidence in our two to five-year production outlook improves, because we've met our injection rate and brine availability goals, across our solar production profile, we can take a less cautious approach. Until then, we feel it's prudent for Intrepid to remain guarded with the backdrop of declining trailing earnings and to not lose sight of the fact that our potash cost per ton needs to improve. That said, as production rates improve and we get back to 300,000 tons of annual production over the next couple of years, we believe we will see a 20% to 30% improvement in our potash cost per ton compared to 2023, which will help improve our margins and cash flow even if potash pricing stays relatively range-bound in the near term. We will also focus on improving the smaller, but meaningful portions of our business such as brine sales, look for opportunities to reduce our SG&A expense, and continue to make steady progress on the longer-term upside projects like lithium without taking resources away from our core business. Finally, we will redirect efforts when projects aren't trending in a favorable direction, which we've done with our sand project. While this project is uniquely positioned as the only permitted sand operation in Southeast New Mexico, with softening market conditions across all oilfield services in the Permian, we are pausing our development of this project and focusing our internal resources elsewhere. We still have the necessary permits in place for both construction and operation if market conditions improve. To conclude, we remain optimistic on the long-term outlook for fertilizer and agriculture markets, and we are encouraged by the progress seen in our Q2 results. A constructive market and clean balance sheet will allow us to focus on what we can control, which is improving operating efficiencies, controlling costs, and continuing to make the right investments at the right time to ensure the long-term success of our operations and drive value to our shareholders. Operator, we're now ready for the Q&A portion of our call.

Thank you. The first question comes from Josh Spector of UBS. Your line is open.

This is Lucas Beaumont on for Josh. I just want to start on the potash volumes. So you guys had a really good production performance here in the first half, which has set you up strongly. You've kind of captured the target for the growth for the year at around 15%, which implies that the back half is going to grow about 5% a year, which is great but less than some of what you're seeing in the first half. So, I just wonder if you could talk us through the moving parts there, and how you're thinking about that flowing through, and then your setup looking into 2025? Thanks.

Yes. Thanks for the question, Lucas. As we said on a couple of calls prior, we had a goal of a 10% to 15% increase in our potash production for the calendar year '24, and we're happy to be kind of on the high side of that guidance right now. As we move towards '25, we initially indicated another 15% to 20% increase in volumes. You always have to kind of see where evaporation ends up, not just in the back half of the fall and what that means for the spring season. But I'm certainly encouraged by where we are today. Glad to be at the higher end of the '24 guidance. And seeing those improved brine grades at HB and the benefits of some of our Moab projects. While we aren't going to provide updated guidance on '25 calendar year, just given the movement between evaporation seasons and how long that spring season lasts, we're certainly encouraged by the progress so far.

Great. And then just on the Trio side. I mean you were previously expecting volumes there to kind of be flattish year-on-year, but you've had a really strong first half, particularly on the sales side. It looks like some of that probably pulled out of inventory with production being a bit higher, but not quite as strong as the strong sales growth that you had. I just wondered if you could help us frame how you're thinking about the full year there now. And so your production plans. If you keep adding similarly strong demand, it looks like things might be up a bit year-on-year. But just, how are you thinking about your ability to lift production to kind of meet that demand going forward as well? Thanks.

Yes. I'll touch a little bit on the production side and maybe pass it over to Zach as far as what we're seeing in the sales market. Certainly, getting those new miners underground and restarting our fine langbeinite recovery were great successes at the East mine in the first half of the year. Lower overall costs, less contract labor, and producing more tons than we did last year. So, the production side has been a success story for us at our East mine this year, which has given us more product available to sell. Zach, do you want to touch on the great spring season we had and the outlook towards the back half of the year?

Yes. I think in the first half of the year, we had a really good outcome there, with strong engagement across all of our regions, historically getting back to what I would categorize as more normal volumes from what we observed in previous years. What we continue to see is a strong emphasis on the value of sulfur and magnesium in Trio, in addition to potassium. As we look towards the second half, we expect our volume to be less than in the first half, but that’s purely because Trio is more of a spring-applied product rather than a fall-applied product. We still expect to see good engagement here in the second half, and we just completed a field program on Trio, receiving a good response for the near-term follow-up needs from our customers.

Great. Thank you.

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

Hi. Thanks for taking my questions. Just wanted to ask this quarter, it feels a little bit like a story of two halves. You're kind of looking backwards versus forwards, obviously a tough quarter from a GAAP perspective in terms of the comparison year-to-year and getting through this low production period, which may continue for another quarter or two with the summer fill. Looking forward, it sounds like everything is coming together. Production signals an upswing, and you're stabilizing at mid-cycle pricing, while CapEx is coming down. You mentioned cash on the balance sheet. Do I have that commentary right, that it's a tough balancing act right now?

Yes, I think that's fair, Jason. As I mentioned in the prepared remarks and we discussed on our last call, it unfortunately takes time with solar evaporation and the brine residence time and availability. We want to get a lot of confidence in that underground storage at HB and our primary ponds and what our brine storage is at Wendover and really have increased confidence on the two to five-year production outlook to take a less cautious approach. Early indications from the 2024 calendar year production are great, at the higher end of our guidance. We're seeing the benefits of those projects, but we still have to hit those injection rate goals. Our Phase 2 of our injection project should be complete here probably by the end of August or early September, and we hope to improve brine injection rates on a gallons-per-minute basis, possibly hitting 2,000 GPM. Once we hit those and achieve better brine availability and residence time underground, we can be more confident in our outlook going forward. So, yes, your take on our approach is spot on.

And just on the full-year outlook, can you clarify, because as I understand it, the production season doesn't really span a calendar year. When you harvest production, that then determines the selling cycle for the next year for those funds produced. So maybe you could provide some context regarding the brine in the ponds now with the Eddy shaft as a stopgap for this year to give you added brine availability for the current evaporation. Moving into next year with the guidance of a 15% to 20% increase on top of this year. It sounds like you're trying to map that production increase as it relates to the seasons versus the calendar year, and eventually moving into 2026 and beyond. Where do we stand relative to some of the nameplate capacity?

Yes. That’s a fair comment regarding the harvest year which spans from around now through the spring versus a calendar year production. We stuck with the calendar year, as it’s what we end up reporting in our annual report, going from 226,000 tons in '23, planning for that 10% to 15% increase in '24. When it comes to harvest year production, there are so many variables with evaporation, and we aren't going to provide those specific guidance right now. But as I mentioned to Lucas earlier, we are on track to achieve those targets and are encouraged by our progress so far.

The encouragement is the brine that's in the pond regarding the availability, the grade of the brine, or if you've just had favorable weather so far?

Yes, the benefits we've seen so far are certainly related to the brine grade at HB, which we're managing well now. This is due to our efforts on the Eddy Shaft project designed to gather high-grade brine at HB, which we achieved last fall, and we transitioned to IP30B in the spring. We're able to continue to keep high-grade brine in the pond. It's really about brine grade at HB being promising. We have had good management regarding brine availability, which isn’t only dependent on weather conditions. Additionally, at Moab, we are implementing a new cavern that should allow us to observe higher brine grades as that cavern matures. So, it becomes a brine grade story for both HB and Moab, and we are filling the new primary pond at Wendover with brine today. We're making sure we have sufficient brine availability in our primary ponds to maximize evaporation during the summer and move that brine at the right times. So, we're seeing benefits from our projects concerning brine growth and aren't solely dependent on what has been an average or slightly above-average evaporation year in 2024.

Okay. And just one last question on the cost side. I know people tend to focus more on the price of potash, but I think the story of the last year really has been on your own costs as you're starting to see these early signs of improvement. Can you remind us what we've discussed previously regarding the cost side? Are you trending in the right direction on cost reduction, efforts for this year, next year, or even long-term?

Yes. It’s a good time to highlight where the progress has been. I mentioned in our first quarter call that we can see quarter-to-quarter variability, depending on where we’re selling our product. In Q1, our potash cost of goods sold was approximately $349 per ton. It was elevated in Q2 to $386, primarily due to the higher costs we incurred from HB and Wendover compared to Moab. As we look at the second half of '23 versus the first half of '24, it dropped from $411 per ton down to $365. So, we’ve really seen that cost improvement in our potash, and I expect it to continue to trend favorably as we improve brine grades and availability across our solar production profile.

Okay. Awesome. I'll jump back in the queue. Thanks a lot, Matt.

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 joining the call and your interest in Intrepid. I hope you have a great day.

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