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spk03: Thank you for standing by. This is the conference operator. Welcome to the Intrepid Podash, Inc. second quarter 2022 results conference call. As a reminder, all participants are in 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 this 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.
spk00: Thank you, Angela. Good morning, everyone. And thank you for joining us to discuss Intrepid's second quarter 2022 results. With me on the call today is Intrepid's co-founder, executive chairman and CEO, Bob Dronavis, and Intrepid CFO, Matt Preston. Also available to answer questions during the Q&A session will be our Vice President of Sales and Marketing, Zachary 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 information available to us today, and we assume no obligation to update them. These risks and uncertainties are described in 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 non-GAAP financial measures will be 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 intrepidpottage.com. And I will now turn the call over to Bob.
spk02: Kevin, thank you very much. 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 end with the financial results before passing the call on to Matt. The first half of 2022 has no doubt been exceptional for Intrepid, as the company's $92 million in adjusted EBITDA is the best first half performance in a decade. With a debt-free balance sheet $85 million of cash as of July 31st 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 a 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 gone from a relatively quiet space within the global commodity market to continually 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. While the food crisis in Sri Lanka has shown the vital role that fertilizers play in affordable food production, They've also made the headlines. At Intrepid, we take great pride in being the only United States-based potash producer and one of the two commercial Langmanite 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 costs and yield projections, farmer cash margins are projected to be historically high this year and next, supported by very strong and high crop prices. As expected, anytime fertilizer prices are at elevated levels, we expect a choppier sales order book, specifically for P and K outside the spring season, as farmers manage working capital by delaying application decisions whenever possible. and buyers do their best to move to just-in-time purchasing. The positive difference in today's market, if you're comparing to potash prices from year-fast, is that both the underlying economics remain very supportive, while the supply disruptions that are causing unmet fertilizer demand to have no near-term fix, despite the marginal announced production increases by a few small producers. As a relatively smaller potash producer with a distinct geographic advantage that serves a diverse set of markets in addition to agricultural, feed, industrial, organic, and turf markets, we expect a good, solid second half of the year. Moving on to financial highlights, our second quarter consolidated adjusted EBITDA totaled $41.59, bringing our first half 22 adjusted EBITDA to $91.6 million. Overall, we're on track to put in the best year in a decade. And to put in perspective just 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. These were year-over-year increases of roughly 130% and 82% respectively. In second quarter, our gross margin in the potash segment came in at roughly $25 million, a $15 million improvement versus the prior year, while our TRIO gross margin totaled $13 million, a roughly $10 million improvement over the second quarter of 2021. In step with strong EBITDA performance, we delivered $83 million in cash flow from operations through the first half of the year, which is allowing us to invest in our core mining assets to help drive more reliable and higher production, which in turn reduces costs. We've touched on 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 oil field activity in the northern Delaware Basin. As we stand today, the Permian has just under 50% of all U.S. land rigs operating today, as well as more than 1,200 drilled but uncompleted wells, commonly known as ducts. As for the initial scope of the project, We estimate that the total capital investment will be approximately $16 million, split equally between dollars already spent in 2022 and those that will be spent in the fourth quarter of 2022 and early 2023. We've already purchased the major long lead time pieces of equipment, which are now manufactured and ready for delivery. We are further 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 of over 600,000 tons annually. In our first focus area on the ranch, which we defined by the drilling of 43 core holes, which comprise less than 5% of the total ranch, we estimate for just this preliminary area 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 which could support decades of sand production moreover we think that our our south ranch location which is literally surrounded by new mexico oil field activity will give Intrepid a key competitive advantage, with permanent sand sourcing and supply having recently been key headwinds for the E&P companies. One of our primary corporate goals has been to continue to unlock value at Intrepid South and increase the revenue cash flow contribution from our oilfield segment solution. And we think 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, strong, firm fertilizer prices given the 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 a bit more color on the outlook for the business.
spk01: 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 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, instead choosing to wait for filled programs to be announced. In late July, an MOP program was announced and early response to the program 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 second half 2022, we expect activity to pick up as harvest progresses and as we move into the fall application season in our trio segment second quarter was another period of good application and owing to very good 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 on 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 of capital expenditures in the second quarter and now expect our full year investment of between $65 million and $75 million as we accelerate more sustaining projects into this year and with the addition of the sand project Bob discussed. As for liquidity, yesterday we closed on an amendment to a revolving credit facility, which increased the size of our facility from $75 million to $150 million and extended the maturity by three years to August 2027. With much 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.
spk03: 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 from the question queue, please press star one again. We will pause for a moment as callers join the queue. The first question comes from Joel Jackson with BMO Capital Markets.
spk08: Hi there. This is Alex for Joel Jackson. Thanks for taking my questions. I have a couple if I may. I'll start one by one. Given the stronger financial results that we've seen and much more cash building on the balance sheet, can you maybe walk through what your plans are with the cash and how you're thinking about the pace of share buybacks
spk06: for the remainder of the year?
spk02: 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 and our ability to invest in organic projects as compared to buying stock allows us both opportunities given our strong free cash flow generation. In terms of talking about the pace of it, our primary concern is to make sure that we're opportunistic as we're in a volatile stock market environment. So, Matt, I don't know if you want to add to that at all, but.
spk01: It's a good question, Alex. I mean, kind of just go back to my prepared remarks. We certainly have a big capital investment program for the second half of the year, roughly. you know, go and get up to that $65 to $75 million. And then, as Bob said, we'll just remain opportunistic. We're not going to provide specific guidance on timing for share repurchases, but see great value in that and look forward to executing that program as the months progress.
spk08: Okay. I appreciate that. And for my second question, could you maybe provide a bit of color on some of the evaporation issues? Like, if the situation has changed or has improved and maybe Can we expect similar sales volumes in that case for the rest of the year?
spk01: Yeah, go back to just the evaporation issues. I mean, we've certainly been clear on our last few calls around 2021 and significant rain we had at our Carlsbad facility. For those familiar with our story, you know, we've had so far a great 2022 with good early season evaporation. And as we get into the late season, we never to get too far ahead of ourselves given some of the monsoon rains that can happen at our carlsbad facility so so far it's been a good year and you know we'll wait to see where it ends up i mean all things being equal we should you know return to more normal levels of production um with this 2022 evaporation season you know as far as sales like i said with my prepared remarks we're not going to guide on second half just given where the market is today but certainly expect pretty strong demand once sales pick up and then a very positive outlook heading into fall and spring of next year. Got it.
spk08: And lastly, maybe you can comment a bit on what you think pricing will be in Q3 given what you're seeing today and maybe how that might change in Q4 as some of other competitors have noted some increase in Q3. I was wondering if you're expecting the same. for average selling price?
spk02: You know, we're just seeing a very strong market. And given our size, we're trying to be as selective in our sales to always achieve the best net back opportunity that's out there. So by being a smaller player, I would hope that we can continue to, I don't want to say cherry pick, but stay on the higher end of the market that's out there. I think everyone Everyone in the fertilizer production business believes that we're in for several quarters, if not, I don't want to go so far as to say years, but definitely several quarters ahead of us of continued firm pricing.
spk06: Okay, great. Thanks so much.
spk03: The next question comes from Vincent Andrews with Morgan Stanley.
spk09: Hey guys, this is Will Tang on for Vincent. Thanks for taking my question. So you made some comments on the press release about, you know, credit slash possible inventory exposure for customers contributing to, you know, demand headwinds. I'm wondering if you could give us a little bit more color on what's happening there and then, you know, possibly what that means for, I guess, you know, trough demand season, I guess in between peak demand season's you know, as we exit this fall, you know, between, you know, this fall and next spring.
spk01: Yeah, and this is Matt. You know, we're coming off really 18 months of very strong demand in our potash trio markets. So, you know, a compressed spring here, certainly high prices. Like I said in our prepared remarks, everyone's going to delay application decisions, look to move everything back-to-back just in time as they can. So, you know, July time period, it's a normal lull in the market, maybe a little bit more than we've seen in past years, just given, like I said, 18 months of really strong demand. So I would say it's not unexpected. You know, guys want to just be cautious, see what they can do on a just-in-time basis. As harvest progresses in the U.S., we certainly think the overall farmer demand, distributor demand will pick up significantly. And it was just a matter of time given underlying crop economics and overall very supportive environments.
spk02: I guess to add to that, it's not like we're seeing a pullback in stated demand that will occur. What we are seeing is just-in-time purchasing. And so we're just trying to make the market aware, as we said in our remarks, that it's going to be a choppier order book because people are managing working capital in spite of generating very, very high margins. There is a yin and a yang, but we are seeing people manage working capital. And that's, I wouldn't call it a debt crisis, a debt limit, a debt constraint. I wouldn't use any of those terms other than we're seeing more people focus on the management of their working capital.
spk05: Gotcha. Okay.
spk09: And then I guess we're coming up on, you know, some of those stated potash capacity expansion issues. slash cost reduction projects coming into service over the next few months. Could you give us an update on where you are in the construction process for each of them? And then particularly with respect to Wendover, which I believe got pushed back from being in service from the third quarter to the fourth quarter now.
spk02: Yeah, they're out there as we speak on that deep brine well. And so we've got... operations staff that are out there as we speak. Um, quite frankly, I don't know if we're actually drilling or moving and de-moving. And so, but it's, it's happening any day now is the best way to put it.
spk01: Yeah, probably a little bit more color. Our Moab cavern, we expect to have that again in service, uh, at the end of the year. Um, very perceptive on the, the Wendover deep brine wells. We did move that from Q3 to Q4. That's really like a late September into an early to mid October. So not a significant pushback there, as we see, just really getting the electrical in. That's the main thing. We're on site doing the drilling, either have already started or just about to. So it's a very minor delay just from, like I said, late September into October. Then at our HB facility, yeah, remain on track there. First half 2023 with kind of the full system. And I think we'll look to kind of piecemeal that in with some replacement pipeline, hopefully by the end of this year and get that full system in by mid next year.
spk05: Got it. Thank you.
spk02: I wouldn't say there's any major delays. You know, we're looking at a few weeks here and there, but nothing as it relates to the, that we feel are significant in terms of delays.
spk06: Yep. Thank you. I appreciate the color.
spk03: The next question comes from Josh Spector with UBS.
spk04: Yeah, hey guys, thanks for taking my question. Just thinking about potash production and given the levels you've been at, what would be the max production you think you could actually have available to sell for the second half? And I guess related with some of the timing and the questions around summer fill and just-in-time demand, is it actually better for you if you build inventories that sell later if prices are higher and you avoid that summer fill discount, or is that worse for you? I'm curious on that dynamic. Thanks.
spk01: Well, from production availability, I mean, we're starting up at HB facility this week. We'll start our Utah facilities towards the end of August, early September. Given the way the overall solar evaporation process works, we'll be producing at our standard normal rates from startup until the end of our harvest. When you have an evaporation season, if it's whether above or below it just sort of extends how long your harvest will last into the spring of the following year so production will be normal levels here in the back half of the year just just given the dynamics of producing out of our solar evaporation ponds and then sorry josh the other half of your question was it was more just a dynamic of summer fill versus selling later so to the extent that you guys only have you know so much production
spk04: I was just curious if potash prices stay stable, is it actually a better earnings outcome if those tons are delayed into the fall when prices, when you'd avoid like December filled discount? I mean, obviously there's working capital ramifications there, but curious if, does that logic check out or is there something I'm missing in that thought process?
spk02: You definitely have the right logic and you're looking at it right. I just don't want to make a big deal that that's going to have a material change to what's already going to be a very strong third quarter. And so I don't want to put it out of perspective. The fact that we chose not to participate in the summer field program in a material way did leave us inventory to be able to sell into a strong fall market that's going to happen. But I don't want to make it out like that's going to be a huge mover. It's definitely a benefit. It's definitely positive, but I can't really quantify the size of the potential increase.
spk04: No, that's fair. And I guess just curious on, if you have a normal production season in the fall, you have your projects in place, if you were to think about your potash cost per ton this year versus next year, what would be kind of the buckets of what those things would add or I guess reduce your cost versus this year?
spk01: It's a fair question, certainly one we've touched on in the past. We still believe we should see our cost per ton on potash to start to decrease here in Q3 and Q4 as we get back through those tons we produced during our down 2020 evaporation season. As far as dollar numbers for next year, just still too early to guide on that. We'll see where this evaporation season ends up. But we do expect, as we said on previous calls, to see some improvement in there as we start to sell off of our 2022 evaporation season here in August and September with the recent startup of our solar operation facilities.
spk04: Okay. And if I could squeeze in, I guess, one more, just the FracSAM project. Is there any way to size what that could be in terms of revenue and earnings? It's just, frankly, in our market, I'm super familiar with what that should look like. Thanks.
spk02: Yeah, given the fact that we are in basin and literally our sand mine is going to be surrounded by active rigs, I think it is very, very fair to say that we should see minimum margins generated in the $20 to $30 a ton in terms of margin generated. As you know, sand pricing ranges anywhere from $60 to $70, all the way up to $150 a ton, depending upon where you are. The majority of that is in logistics costs. So once we're in the market, we know that prices are going very, very high. That's why we'd like to focus on sort of minimum margins. We feel very comfortable that we're going to generate these minimum margins. I don't know if that answers your question or not.
spk06: Yeah, no, that's really helpful. Appreciate it. Thanks.
spk03: This concludes the question and answer session. I would like to turn the conference back over to Bob Chernobis for any closing remarks.
spk02: I just want to thank everybody for participating, for their interest in Intrepid, and wish everybody a pleasant day. Thank you.
spk03: This concludes today's conference. You may disconnect your lines. Thank you for participating, and have a pleasant day.
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