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Operator
Thank you for standing by. This is the conference operator. Welcome to the Intrepid Pawdash, Inc. first quarter 2023 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 stars and zero. I would now like to turn the conference over to Evan Mapes, Investor Relations. Please go ahead.
Evan Mapes
Thank you, Julianne. Good morning, everyone. Thank you for joining us to discuss and review Intrepid's first quarter 2023 results. With me today is Intrepid's co-founder, executive chairman and CEO, Bob Dronavis, and CFO, Matt Preston. Also with me today and available to answer questions during the Q&A session, following the prepared remarks, is our VP 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 US 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 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 of these non-GAAP financial 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 IntrepidPottage.com. I will now turn the call over to Bob. Please go ahead.
Julianne
Thank you, Evan, and good morning to everyone. We appreciate your attendance and interest in Intrepid. For the first quarter of 2023, I'm pleased to share that Intrepid was able to continue its recent run of solid quarterly performance, which was highlighted by a meaningful pickup in demand for our key fertilizer products with our sales volumes totaling 89,000 tons for potash and 65,000 tons for TRIO. When compared to our full year 2022 sales volumes, these first quarter figures represent approximately 40% of our total potash sales volumes. and 33% of our trio volumes, with the strong sales continuing into the second quarter behind higher demand from agricultural customers. While our sales have been strong to start the year, our profitability was lower, with our first quarter 2023 adjusted EBITDA totaling $16.4 million and our adjusted net income totaling $4.7 million, which compares to last year's respective figures of $50.2 million and $31.5 million, with the key driver being lower pricing. For some context around the lower pricing, the first quarter of 2022 saw a significant increase in potash prices due to concerns around the supply issues related to the Belarusian sanctions and Russia's invasion of Ukraine, which led to many global distribution distributors rushed to buy potash and build inventory. However, following last year's spring lackluster application season, potash inventories weren't depleted, and coupling this with buyers maintaining a just-in-time approach, pricing started to trend lower in the back half of 2022 and into 2023. That said, we do want to caution against only focusing on these year-over-year comparisons and quote-unquote missing the forest for the trees. For Intrepid, current potash price levels still provide robust netbacks, and for the broader potash industry, we still have the backdrop of potential supply concerns and disruptions from issues in Eastern Europe, while the outlook for the primary end user of potash, agricultural markets, continues to be quite strong. Looking specifically at U.S. agriculture, which is Intrepid's key market, Farmers are projected to have a third consecutive year of very solid profitability, have strong balance sheets, and their outlook continues to be supported by elevated crop futures. For corn, December 23 and 24 contracts still traded over $5.20 a bushel, while for soybeans, November 23 and 24 contracts are over $12.30 a bushel. Looking back over the past decade through the end of 2020, December corn futures averaged just under $4 per barrel, per bushel. I apologize. Well, November soybeans futures averaged just under $10 a bushel. So today's pricing is still a 25 to 30% improvement over this recent historical period. Moreover, farmer input costs have recently come down quite considerably, and we expect the trend of yield maximization and strong fertilizer application to continue. Going forward, we're optimistic on the outlook. And for Intrepid, our primary focus for the 2023 remains the successful execution on our potash growth projects to improve our brine grades through mining our extensive ore bodies, adding extraction wells in the known brine pools, which will increase our production, as well as our sand resource at the Intrepid South Ranch. Before I dive into project updates, I want to take a quick moment to provide some more background on our recent potash production trends. Over the past several years, our potash production has been lower than our productive capacity. For some of these years, this has been mostly due to external factors like weather and permitting delays. To name a few examples, we experienced heavy summer rainfall in Wendover 2019 impacting production and product availability for sale in 2020. and also had a significant rain event in Carlsbad in the summer of 2021, which was the key reason for the lower production continuing into 2022. Moreover, slow permitting in New Mexico has been a key reason for recent project delays at our HB facility, resulting in a lagging effect for bringing on new projects as quickly as possible. However, we're cognizant that external factors are also to blame. most namely the extraction well failure at HB this past fall. This extraction well failure is the primary reason for our lower 2023 production guidance of approximately 260,000 tons, and we estimate this negatively impacted our 2023 production by 40 to 50,000 tons. Absent this issue, our 2023 potash production should have resumed an upward trajectory. That said, our potash product projects are well underway, and our production goals are first to correct and sustainably reverse the recent downward trend, and then get our annual potash production back to at least levels seen in the 2018-2019 timeframe, or roughly 330,000 to 350,000 tons. We have a high degree of confidence on improving our near-term potash production by initially target targeting already known high-grade brine that is ready for extraction. But I want to emphasize that the potash projects I'll soon highlight are designed to have both an immediate positive production impact while also driving sustained higher levels of production for many years. We recognize our 2022 and 2023 capital programs are higher than recent historical levels, But we want to make sure that the factors that impact our production where we have more control, namely consistent injection rates, reliable extraction wells, and developing higher-grade brine, are seeing the necessary investment to help ensure our future production profile meets the internal goals I just outlined. So I'll now go into each project in more detail. Starting with HB, this facility has been the key reason for our recent declining production trend. and consequently is a key focus for us. We're with three primary projects in the works. The first project is a new brine injection pipeline, which is projected to roughly double our brine injection rates. With the second phase of this project, also having a pigging system on the fly continuous system, which is the infrastructure to clean the inside of the pipe and prevent scaling. which will help ensure more consistent flow rates. This is a long operational life project and will be key for sustaining higher injection rates, which in turn increase production levels over the long term. We expect the pipeline to be in place by the end of the quarter with the improved brine injection rates starting in the second half of the year. The pigging system is still being permitted with construction likely to begin by the end of the year. To target high-grade brine in the near term, we've identified a new lower capital project to extract a pool of high-grade brine from the Eddy shaft. Permitting and construction are both underway with operations expected to commence in the fourth quarter of 2023. We've taken several measurements of the Eddy shaft brine grade and are confident that the associated product times will have a meaningful impact on supplementing our other extraction wells for the next few years, with this production benefit starting in 2024. Lastly, we still plan to drill a replacement extraction well that will have long-term operational life to target the significant brine pool from the HB brine system. Although this project may get pushed to early 2024 due to the eddy shaft project being installed and New Mexico permitting issues, Now moving on to Moab, where we have multiple projects in the works. For the first key project, we successfully drilled a new three lateral potash cavern, which will be online in the second quarter. During the drilling process, we were able to stay in the target interval for longer than any of our previously drilled horizontal caverns, and the initial brine measurements show great availability of high grade brine. After we successfully completed drilling this new cavern, We moved the rig into an area that has multiple high-grade brine pools in the lowest parts of the old conventional mine, which are also referred to as SOMPs. This potash ore in the brine pool is part of the original conventional mine works and flooded area where we previously used vertical wells. However, for this new effort, the key difference is that we are now using horizontal laterals to more effectively target the multiple SOMPs we've identified. Our goal is to have the second project complete by July 2023 to allow us to pump this brine into our ponds for the 2023 evaporation season. At Windover, we have no major growth capital plan for this year, but I did want to mention that the deep brine wells we successfully drilled in the fourth quarter of 2022 are online and producing well. The very wet weather at Windover this winter should be an additional boost to brine availability for the upcoming evaporation and production seasons. Quickly, on the frac sand project, we continue to work through the permitting process and expect construction to begin by the end of 2023 with the eventual goal to ramp production up to a million tons per year once the project is operational. During the first quarter, we did start to engage with potential customers for commercial agreements, and due to the strategic location of our sand resource in the Delaware Basin, which is surrounded by oil field activity, we've seen notably strong interest from various parties. Overall, we feel very confident in the success of our growth projects and look forward to seeing the impacts of higher production and an improvement in our unit economics in the coming years. I'll now turn the call over to Matt. Please go ahead.
Evan
Thanks, Bob. In the first quarter of 2023, Intrepid generated total sales of $87 million, adjusted EBITDA of $16.4 million, and adjusted net income of $4.7 million. As Bob noted, the key difference compared to the prior year's first quarter was lower pricing, although this was partially offset by higher potash sales volumes. In the first quarter of 2023, our average net realized sales prices for potash and trio were 45 per ton and 344 per ton respectively, which compares to last year's respective figures of $703 per ton and $469 per ton. With the spring season well underway and the announcement of a key international potash contract in early April, we've seen modest potash price increases over the past few weeks as in-season demand has exceeded nearby supply. We still expect buyers to remain cautious as the spring season winds down and anticipate that most buyers will plan to have minimal carryover inventory heading into summer. Moving on to segment highlights, in potash, our first quarter 2023 sales volumes totaled 89,000 tons, and our production totaled 90,000 tons, which compares to year-ago figures of 69,000 tons and 103,000 tons, respectively. We saw agricultural customers drive most of the increase in demand, with this market comprising 82% of our potash sales in the quarter. Feed markets remained steady, and we still saw the benefit of higher pricing from the longer-term contracts that were set in previous quarters. Given the high fixed cost nature of our business and last year's lower production, we're experiencing a negative impact of higher carrying costs per ton, as well as continued inflationary pressures. The second quarter of 2023, we expect Q2 potash sales volumes in the range of 65 to 70,000 tons, with an average net realized sales price of 460 to 470 per ton. In our TRIO segment, our first quarter 2023 sales volumes totaled 65,000 tons, down from 71,000 tons in the prior year period, while our production totaled 49,000 tons down from 65,000 tons in the first quarter of 2022. During the first quarter, our TRIO plant experienced net unplanned downtime of approximately eight days related to a brine seep in our tailings pile, although we were able to move forward some of our normal planned maintenance days, which allow us to make up some of the lost time in future periods. Overall, we estimate this downtime negatively impacted our production by approximately 9,000 tons in the quarter. On a positive note, the first of two new continuous miners is now underground, and delivery of the second miner is expected in the third quarter of 2023, which should lead to improved efficiencies in production once in service. Looking toward the second quarter for TRIO, we expect second quarter 2023 sales volumes will fall in the range of 45,000 to 55,000 tons, with prices trending slightly lower in the range of 325,000 to 335,000 per ton. In our oilfield solutions segment, our sales decreased $2.8 million in the first quarter of 2023 compared to the prior year, which was driven by a $2.6 million decrease in water sales. We sold less water primarily due to timing of sales related to completion activity, although in early April, we did start a new frac job on our south branch, which should help second quarter sales. Reduced sales were partially offset by lower cost of goods sold as we do not purchase any third-party water in the first quarter. As we've discussed previously, this segment should see relatively steady performance on an annual basis, although there can be quarter-to-quarter variability related to timing reasons. Moving to our capital program, in the first quarter of 2023, we incurred $21 million in capital expenditures and still expect our full year capital spend to be in the $60 to $75 million range. The exact level will be dependent on market conditions and project timing, which is also impacted by the permitting process, where we've recently seen several delays, particularly in New Mexico. Bob did a great job of providing more details and updates on our capital projects, but I'll again quickly remind everyone that given the cycle of brine injection, residence time underground, and the summer evaporation and harvest seasons, these growth projects do take time before we see the investments pay off in the form of higher production. We are encouraged by our progress so far and look forward to seeing the benefits of these projects in upcoming evaporation seasons. Operator, we're now ready for the Q&A portion of the call.
Operator
We will now begin the question and answer session. To join the question queue, you may press star, then 1 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 1 again. We will pause for a moment as callers join the queue. Our first question comes from Vincent Andrews from Morgan Stanley. Please go ahead. Your line is open.
Vincent Andrews
Hi, guys. This is Will Tang on for Vincent. Thanks for taking my question. Have you guys completely sold out of that higher price inventory from the 2021-2022 evaporation season yet? And then as we look at the 260,000 tons of 2023 production guidance for potash that you guys gave, how do we think about that impact on cost? You know, maybe, I guess, if you could benchmark that to what you guys realized from that. you know, 2021-22 season. Thank you.
Evan
Sure. Yeah, this is Matt. I'll try and kind of reiterate some of the comments we made before. You know, going back to some previous calls, we certainly were looking forward to some improved costs of goods sold. But, you know, this has since changed, as we've mentioned, with the IP38 extraction well that failed in Q4. And so, our production year over year has been, you know, unfortunately pretty consistent in that 260 range. And so, those improvements really haven't materialized. So, sort of that improved product that we were selling down, you know, has been replaced with, you know, other product, kind of a similar nature, obviously updated a little bit with, you know, inflationary pressures and the like. So, you know, we're not seeing that improvement in our cost of goods sold just yet. Certainly the projects we're undertaking today, you know, accessing some of those sumps that Bob talked about, we should have some immediate impact and benefits to our brine here in the mid to late portion of our evaporation season should help. But, you know, that narrative has changed a little bit since Q4 with the extraction whole piece.
Julianne
Will, I just want to clarify your question. Were you asking about 2021 product inventory?
Vincent Andrews
Yeah, the product, like the inventory from that evaporation season.
Evan
Yeah, I mean, certainly that's turned over by now. But like I said, you know, that was impacting our cogs for a bit. But, you know, given some of the trends in production, weather, downtime of extraction wells, et cetera, You know, we haven't seen the benefit to COGS that we'll see once some of our current capital projects are complete and operational.
Vincent Andrews
And then I guess as a follow-up, I mean, if I look at, you know, the projects you have underway at HB and Moab, you know, how material will that be from like a cost improvement standpoint versus, I think, if my calculations are right, you guys are seeing something around like a $300, you know, per ton cost of production in the first quarter. Just to kind of give me a sense of, I guess, what kind of cost improvement that'll look like when that's all up and running.
Evan
Yeah, that's a good question. We certainly haven't provided any specific guidance on there, but if you look back to the 2018-2019 timeframe, the 330,000 to 350,000 tons compared to the 270,000, 260,000 we've mentioned, you know, and our fixed cost nature, and there's a material benefit to our per ton cost, and we can get back to those levels. So those are by far our cheapest tons we'll produce. Well, I won't give you a number today, just given some of the external factors, inflationary pressures, et cetera. We expect a material benefit to our across the goods sold once we see these projects come online and kind of have that time to get ramped up and see their full potential over a couple years.
Vincent Andrews
Got it. Thank you.
Operator
Our next question comes from Joshua Spector from UBS. Please go ahead. Your line is open.
Joshua Spector
Hi, this is Lucas Bowman on for Josh. So just on your hot ash pricing guide, so I'm not sure if I caught this correctly, but it sounds like you're expecting it to only be down $20 sequentially quarter on quarter. So if that's right, that'd be quite a bit more positive versus what competitors are expecting, you know, kind of down more like $125 to $150 and just kind of where spot prices are as well. So could you kind of help us understand
Lucas Bowman
why you're kind of expecting to kind of outperform there is that by some atomic of the sales or so what's driving that for you yeah thanks for the question this is zachary there's really a couple reasons for that our feed and industrial business really trades on long-term contracts and those are at a premium so we expect those to continue in the second quarter that'll provide overall benefits to our overall pricing and You know, this time of year, our agriculture business is primarily made up of, excuse me, nearby sales to our plants. And those are usually our highest netbacks as well on the ag side too. So that's why we're only kind of indicating a drop of about $20 there from what we saw in first quarter.
Joshua Spector
So I guess for the portion there that's on those long-term contracts, what would you say the reset period is generally where we would see it kind of correct to market levels?
Evan
Yeah, I'd say our fee contracts, mid-year is probably, you know, they're certainly layered in throughout the year. But, you know, after the spring season here, kind of starting in Q3, we'll see a reset on a lot of those contracts to kind of get more in line with. We do get a premium compared to some of our ag sales, but, you know, those will reset here probably, you know, mid-year.
Julianne
Yeah, if you go back and look at our earnings calls over the last 12 to 12 years, you'll see that those have always had a premium. And we expect that multi-year premium to continue to exist. Great, thanks.
Joshua Spector
Maybe just one on the volume side. So, I mean, you kind of got in at the upper end of the expectations in the first quarter, and you're looking, sorry, there's Ponash still, and you're looking like you're going to do 160 there in the first half. So, does it sort of make sense now that we maybe lift our expectations for the four-year a bit, so maybe 270 to 280 instead of the 260 we talked about previously?
Evan
Yeah, and we talked about this on previous calls. I mean, trying to predict Third quarter, fourth quarter demand is just kind of sometimes not a beneficial exercise. And so we don't have full year numbers, but certainly encouraged by the demand we've seen here in the spring. And we'll just see how the back half of the year plays out and what buyer incentives look like in the fourth quarter of the year. And that'll certainly drive that number up or down 10, 15,000 tons.
Vincent Andrews
Great. Thank you.
Operator
Our next question comes from Joel Jackson from BMO Capital Markets. Please go ahead. Your line is open.
Joel Jackson
Hi, good morning. Across the NPK dynamic and other crop inputs, it seems like there's maybe other commodities, too. There seems like there's definitely a reticence by distribution, by retailers to hold volumes here, to do more just in time, high interest rate environments, all of that. Are you seeing that in your world? And how might that change your business, how you sell and other things like that?
Julianne
You know, I think it's a great observation, and it's true. We're very fortunate that we've got a very high percentage of sales that are truck sales, you know, where we're not sending out unit trains. We've also got our feed and industrial businesses, which are much more localized sales. So I don't know if I'm answering your question, Joel, but we believe because of our, you know, strategic location and the geography that we service, we're going to have the benefit of that continued stronger pricing that we've always seen for years.
Joel Jackson
You touched on this a little bit across the call and some of the remarks, but when I look at costs for Potash and Trio, can you just elaborate a little more how costs might scale across the year or the cadence of costs across the year? Should we expect the types of costs we saw in the second half of 2022 to come back here in the next few quarters or maybe help me out. Thanks.
Evan
Yeah, I mean, certainly it'll be dependent on our summer evaporation season, which can be variable. But, you know, looking at Q1, I mean, we'll be pretty consistent for the year, you know, given our current pond inventories, expectations of extraction grades. And, you know, it's not going to factor in some of the inflationary pressures compared to last year. And it'll be pretty consistent throughout the year. Sorry, consistent from Q1 levels or? Yes.
Joel Jackson
Sorry if that wasn't clear. No, no, no, no. I think it was. And just one more question. I know, Bob, maybe a few months ago, you talked about, you know, Russian products been out in the Midwest since June or July of last year. Talk about what you're seeing for competition on the river. Tons from importers coming in. Is there still, is the Russian product still coming in as normal or have they slowed down?
Julianne
Yeah, I think there's a lot more Russian product in the United States than most people in D.C. realize. And so there's been, I think there's a perception that there's very little Russian fertilizer product in the United States when the exact opposite is true. If we go back and we look at the Russian imports, there's quite a bit of Russian product in the system. I will say it's unbeknownst to people in a lot of people in D.C. I don't know if I'm answering your question or not, but I think there is a perception that the Russians didn't bring tons in or that there were sanctions against the Russians. And they're clearly not sanctions against the Russians. And they continue to bring in significant amounts of product through their distribution assets.
Joel Jackson
Maybe I'll stick another one in. Just thinking longer term about sort of chloride-free potassium fertilizers like Trio, SOP, polysulfate, things like that. You know, there's been a lot of hopes over the last decade that we'd see maybe more demand from that, more fruits and vegetables, things like that. I know it's been a tough season for almond, a tough year or so for almonds and other crops. California's dry, where a lot of these fertilizers go. But talking about the market, where it's growing versus the potash market, future opportunities, future challenges? Thanks.
Julianne
Yeah, I would say that it's a great product. Both Mosaic's KMAG product and our TRIO product are stellar fertilizers. Have we seen the increase in demand because of the lack of chlorides? I don't think we've seen the demand that we had hoped would continue to grow. I'll let Zach speak to that as well.
Lucas Bowman
Yeah, I think the key there, Joel, is there continues to be a broader focus on just balanced fertilization in general. And obviously, with TRIO containing magnesium and sulfur, that's a big part of that. And so we see growth with our TRIO product in regions where the low chloride component of it may not be the selling factor. It's more the magnesium and the sulfur component that's really moving the volumes there. Thank you.
Operator
This concludes the question and answer session. I would like to turn the conference back over to Bob Gernavis for closing remarks.
Julianne
I just want to thank everyone for their interest in Intrepid, and we appreciate your time. Have a great day. Thank you.
Operator
This concludes today's conference call. You may now disconnect your lines. Thank you for participating and have a pleasant day.
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