Intrepid Potash - Q2 2024

Transcript

Operator (participant)

Thank you for standing by. This is the conference operator, and welcome to the Intrepid Potash, Inc.'s 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. To join the question queue, you may press Star then one on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing Star and zero. I would now like to turn the conference over to Evan Mapes, Investor Relations. Please go ahead.

Evan Mapes (Head of Investor Relations)

Thank you, Michelle. 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 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 refer to certain non-GAAP financial and operational measures.

Reconciliations to the most directly comparable GAAP measures are included in yesterday's press release, along with our SEC filings, are available on our website at intrepidpotash.com. I'm now going to turn the call over to Matt. Please go ahead.

Matt Preston (CFO and Acting Principal Executive Officer)

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 a 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 fall 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 is right in line 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 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, and we generate a gross margin of $2.2 million in the second quarter, a $3.3 million dollar improvement sequentially and a $1 million dollar 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 have decreased by 11% to approximately $284 per ton, and 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, and 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 45,000-55,000 tons at an average net realized sales price between $340-$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 40,000-45,000 tons at an average net realized sales price of $300-$310 per ton. Before opening up for Q&A, I will end my remarks with the 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 rematures 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 costs per ton need 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%-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 oil field 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.

Operator (participant)

Thank you. We will now begin the question and answer session. To join the question queue, you may press star, then one on your telephone keypad. You will hear a tone acknowledging your request. If you are using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star, then one. We will pause for a moment as callers join the queue. The first question comes from Josh Spector of UBS. Your line is open.

Lucas Beaumont (Director and Equity Research Analyst)

Hi, this is Lucas Beaumont for Josh. Just want to sort of start on the potash volumes. So you guys had a really good production performance there in the first half, which ramped up strongly. You've kinda kept your target for the growth for the year at sort of 15%, which sort of implies that the back half is gonna grow sort of about 5% a year, which is still higher, which is great, but less than sort of what you're seeing in the first half. So I just wanted you to talk us through kinda the moving parts there and how you're thinking about that flowing through, and then your setup looking into 2025. Thanks.

Matt Preston (CFO and Acting Principal Executive Officer)

Yeah, thanks for the question, Lucas. You know, as, as we kinda said on, you know, a couple of calls prior, you know, we had a goal of 10%-15% increase in our potash production for the calendar year 2024, and we're, we're happy to be kind of on the high side of that guidance right now. You know, as we, as we move towards 2025, we initially indicated kind of another 15%-20% increase in volumes. You always, always have to kinda see where evaporation ends up for not just kinda this back half of the fall and what that means for the spring season, but certainly encouraged where we are today. You know, glad to be at the higher end of the 2024 guidance and, you know, seeing those improved brine grades at HB and seeing the benefits of some of our Moab projects.

So while we aren't gonna give some, you know, updated guidance on 2025 calendar year, just given kinda the movement between evaporation seasons and how long that spring season lasts, we're certainly encouraged by the progress so far.

Lucas Beaumont (Director and Equity Research Analyst)

Right. And then just on the, Trio side, I mean, you were previously sort of expecting volumes there to sort of be flattish sort of year on year, but, you've had a really strong first half, particularly on the sales side. I mean, 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. So just wanted to kinda help us frame how you're thinking about the full year then now, and so your production plans. So if you keep adding similarly strong demand, looks like things might be up a bit year on year, but just, I guess, how are you thinking about your ability to lift production to kinda meet that high demand going forward as well? Thanks.

Matt Preston (CFO and Acting Principal Executive Officer)

Yeah, I mean, I'll touch a little bit on the production side, and maybe pass over to Zach, as far as what we're seeing in the sales market. You know, certainly the getting those new miners underground and restarting our fine langbeinite recovery, we've had great results at East in the first half of the year. You know, lower overall costs, less contract labor, and producing more tons than we did last year. So the production side has been a great success story for us at our East Mine this year, which has given us some more product available to sell. I mean, Zach can touch on the great spring season we had and kinda the outlook towards the back half of the year.

Yeah, I think on the first half of the year, we had a really good, really good year there, really good engagement across all of our regions historically, getting back to what I would say, kinda more normal volumes from what we saw several years ago.

... And so what we continue to see there is an engagement on the value of the sulfur and the magnesium part of Trio, in addition to the potassium. And as we kind of look at second half, well, you know, obviously, we expect our volume in the second half to be less than they were in first half, but that's just more of a nature that Trio is more of a spring applied product versus a fall applied product. But we still think we'll see good engagement here in second half, and we just completed a field program on Trio here in the last few days, and saw a good response to that for near-term fall needs from our customers.

Lucas Beaumont (Director and Equity Research Analyst)

Great. Thank you.

Operator (participant)

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

Jason Ursaner (Portfolio Manager)

Hi, thanks for taking my questions. Just wanted to ask, you know, this quarter, it feels a little bit like a story of two halves. You're kind of looking backwards versus forwards optically. Obviously, a tough quarter from a GAAP perspective in terms of the comparison year to year and getting through this low production period and, you know, I guess continuing maybe for another quarter or two with the summer fill. But looking forward, it sounds like everything's kinda coming together. You know, production sounds like it's really on this upswing, and you're sort of stabilizing at the mid-cycle pricing while CapEx is coming down. You kinda mentioned the cash on the balance sheet. So I guess just, you know, do I sort of have that commentary right from you at the end there?

I mean, it just sounds a little bit like a tough balancing act right now, 'cause you're kinda head down in the short term, kinda getting through this period versus more head up, looking ahead to where things might be headed, you know, over the next year or so, but we're kinda not there yet. Is that kind of the commentary?

Matt Preston (CFO and Acting Principal Executive Officer)

Yeah, I think that's, that's fair, Jason. You know, as I said in the prepared remarks, and we talked a little bit about in our last call, you know, and unfortunately, it takes time with solar evaporation and the brine residence time and availability. We really wanna get a lot of confidence in, in that underground storage at HB or kind of how our, our primary ponds and what our brine storage is at Wendover, for example, and really have that increased confidence on the two to five-year production outlook, you know, to get to kind of a less cautious approach. Like I said, early indications from 2024 calendar year production are great, at the higher end of our guidance, and so we're seeing the benefits of those projects.

But, you know, we still have to hit those injection rate goals, and our phase two of our injection project should be complete here, probably end of August, early September. We'll hope to be up to, you know, really improved brine injection rates on a gallons per minute rate, possibly hitting 2,000 GPM. So once we hit those and get that brine availability and residence time underground, we can be more confident kind of in that outlook going forward. Yeah, I mean, I think your take on kind of our approach is spot on.

Jason Ursaner (Portfolio Manager)

Okay. And just on the full year production outlook, can you maybe... It's kind of a follow-up on Lucas's question, but just to clarify a little, 'cause I guess, as I understand it, the production season doesn't really span a calendar year in terms of, I guess, when you then harvest the production, and then that's the selling cycle for the next year for those tons produced. So maybe just, you know, kind of in context to the brine in the ponds now with the Eddy Shaft, that's kind of the stopgap for this year, to give you the added brine availability, for the evaporation currently and then moving into next year, on the, you know, kind of what you had given as the 15%-20% on top of this year is what it sounds like.

You know, just maybe, like, trying to map from a timing perspective, the production increases for a season versus the calendar year, and then eventually moving into, you know, 2026 and beyond, where we are relative to some of the main plate capacity.

Matt Preston (CFO and Acting Principal Executive Officer)

Yeah. No, and that's, it's a fair comment as far as kind of the harvest year, which spans from kinda right about now, through the spring versus a calendar year production. Yeah, we stuck with that calendar year just 'cause it's what we end up reporting in our, in our annual report, going from 226,000 tons in 2023, you up that 10%-15% in 2024. You know, when it comes to harvest year production, you know, we're not gonna. There's so much that kind of varies a little bit with evaporation. We're not gonna kinda give that guidance right now, but, you know, as I said to Lucas earlier, you know, still on track to kinda hit those targets and encouraged by our progress so far.

Jason Ursaner (Portfolio Manager)

And the encouragement, though, is the brine that's in the ponds in terms of the availability, the grade of the brine, or that you've actually just had pretty good weather so far?

Matt Preston (CFO and Acting Principal Executive Officer)

Yeah, I mean, that's certainly been the benefits we've seen so far. You know, going back to the Eddy Shaft project to kind of get that initial high-grade brine at HB, you know, which we did in the fall of last year, and then transitioning to IP-30B here this spring, where we can continue to put that high-grade brine in the ponds. It's really it's a brine grade story at HB, which is really promising, so this is stuff that we've been able to accomplish with our brine availability, not just the benefit of weather. Then in Moab, getting the new cavern in, you know, hopefully seeing some higher brine grades as that cavern continues to mature.

So it becomes a brine grade story for both HB and Moab, and then at Wendover, getting the new primary pond in, filling that with brine today. Well, that's really a brine availability story, just making sure we have the right brine availability in our primary ponds to be able to, you know, maximize evaporation during the summer and move that brine at the appropriate times. So, you know, we're certainly seeing the benefits from our projects from a brine grade standpoint and not just benefiting from what's been, I'd say, a pretty average, maybe slightly above average evaporation year so far here in 2024.

Jason Ursaner (Portfolio Manager)

Okay, and then just last one. On the cost side, 'cause I know people tend to be more focused on the price of potash, but for me at least, the story of the last year is more on your own costs. As you're starting to see some of these encouraging early signs, you know, are you, I guess, maybe remind what we talked about on the cost side, but are you sorta trending in the right direction on the cost reduction, you know, efforts, where, in terms of maybe this year, next year, or kinda long term?

Matt Preston (CFO and Acting Principal Executive Officer)

Yeah, and so I think it's a good time to highlight just sort of where the progress has been. I think I said in our first quarter call, you know, we can certainly see some quarter-to-quarter variability, just depending on where we're selling our product. Roughly $349 per ton was our Q1 potash cost of goods sold. It was increased in Q2 to $386. That's really just a function of sort of where we were selling product from, higher costs out of HB and Wendover compared to Moab. Really bring, you know, folks' focus, kinda looking at second half of 2023 versus first half of 2024, going from $411 per ton down to $365.

So yeah, we've really seen that cost improvement in our potash and kind of over the evaporation season, and continue to expect that to trend in a favorable direction here, you know, as we continue to improve our brine grades and brine availability across our solar production profile.

Jason Ursaner (Portfolio Manager)

Okay, awesome. I'll jump back into queue. Thanks a lot, Matt.

Operator (participant)

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

Matt Preston (CFO and Acting Principal Executive Officer)

Thanks, everyone, for joining the call and interest in Intrepid, and hope you have a great day.

Operator (participant)

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