Intrepid Potash, Inc.
Q1 2018 Earnings Call Transcript

Published: 24 Apr 2018

[Operator:]

Thank you for standing by. This is the conference operator. Welcome to the Intrepid Potash, Inc. First Quarter 2018 Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference over to Matt Preston, Investor Relations. Please go ahead.

[Matthew Preston:]

Thanks, Kyle. Good morning, and welcome, everyone. I remind you that parts of our discussion today will include forward-looking statements as defined by the U.S. securities laws. These statements are not guarantees of future performance and based on a number of assumptions which we believe are reasonable. These statements are based on the information available to us today, and we assume no obligation to update them. You can find more information about risks and uncertainties to our future performance in our periodic reports filed with the SEC. 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 this morning's press release. Our SEC filings and press releases are available on our website at intrepidpotash.com. Presenting on the call today are Bob Jornayvaz, our Co-Founder, Executive Chairman, President and CEO; and Joseph Montoya, Vice President and Chief Accounting Officer. Mark McDonald, our Vice President of Sales and Marketing, is also available for questions. I'll now turn the call over to Bob.

[Robert Jornayvaz:]

Thank you, Matt, and good morning to everyone for being here. Strong execution across our facilities, combined with our strategic moves over the past year to grow our by-product and water sales and improve our balance sheet, drove a great start to 2018. Net income of $1.8 million during the quarter was not only a significant increase compared to last year, but represented our first quarter with positive earnings since the beginning of a downturn in the cycle in early 2015. Good fundamentals in the potash and Trio markets during the first quarter spurred healthy demand, and we expect this to continue into the second quarter. Distribution channel customers are showing confidence in K pricing, booking new orders at the increased price levels for the potash and Trio prior to the end of the winter fill shipping windows. On the potash side, robust truck and rail movement into the Southern Plains, an important region for us, given the location advantage of our Carlsbad facility, drove a year-over-year increase in agricultural sales. Cool wet weather in the Pacific Northwest and recent snows in the Upper Midwest is leading to a later-than-normal season in those regions, and we expect field application to continue into early June. Import tons are at a more stable supply along the river, with most of the additional tons we saw in recent years moving into other countries. We also haven't seen nor do we expect much of an impact from the new production that came online in recent months and believe this will lead to a stable second half of the year for our potash tons. Increased confidence in K pricing was most evident in our domestic Trio sales volume during the quarter, which was up 18% compared to the prior year. Price increases that were affected on spot tons sold during the quarter and tons shipped beginning in March will be fully reflected in our second quarter results. While we're encouraged by these higher-price levels, overall nutrient pricing for Trio gives -- for the components of Trio, gives us reason to believe that there's still room for pricing upside for Trio from the actual market. During the first quarter, we saw a decrease in our international sales volume, due in part to normal variations in the timing of shipments but also as we start to focus on areas that provide the most favorable shipping lanes and margin opportunities. We're also seeing increasing competition in some international markets, although we believe our efforts to establish strong, long-term relationships with our customers will benefit us in the long term and reduce increased competitive pressure from one major competitor, which continues to weigh on an international pricing for the remainder of 2018. As expected, our water business took another significant step forward during the first quarter, with our dedicated water team driving another quarter of significant sales growth. Total sales, including byproducts, were a quarterly record of $5.5 million, a $2 million increase compared to the fourth quarter of 2017. In addition, we received $3.7 million in cash under a separate prearranged water commitment, bringing our total water activity during the quarter to $9.2 million. I want to repeat that, $9.2 million of water activity for the first quarter of 2018. Our water team continues to work on new deals with operators, distributors and oilfield services to grow that business and utilize our additional water rights. Most of our current contracts were negotiated with oil pricing in the mid- to high-40s, so current pricing above $60 per barrel gives us confidence in not only our water business but should also support our brine industrial KCl subs. We still expect water sales to be between $20 million and $30 million for 2018. With our first quarter results, we're clearly on track to achieve that goal. Our other initiatives, which include our Intrepid oilfield services and the expansion of our trucking fleet, continue to progress during the quarter as we work directly with oil and gas operators, service companies and established distributors in the area. We are also working with consultants on frac designs to increasingly promote the value of KCl as a drilling and completion fluid additive. In the last month, we added another industrial and byproduct salesman to our team and now have trucks and drivers available and licensed at our Carlsbad and Moab facilities, driving greater responsiveness with just-in-time delivery to our customers. We are also in the process of building out a company-wide salt strategy with the goal of at least doubling our salt sales in 2019. As a reminder, we have about 3 tons of salt available for each ton of potash we produce at the HB Mine. Similar to the brine sales plant we enacted over the past year, we have the salt available to us and are now building a marketing strategy to maximize its value. A larger sales team has allowed us to shift responsibilities around and have a more focused approach in the premium feed market, which includes pet food, equine nourishment, feed supplements and the organic fertilizer market. Our Trio product, which is armory and Safe Feed/Safe Food-certified, provides an incredible value in the growing market for organic food. As our stores struggle to meet customers' demands for organic food, we feel our Safe Feed/Safe Food fertilizer is a very undervalued part of our company, and we are actively working on promoting Trio into these markets. Finally, we are working with an experienced lithium extraction company to perform additional testing on the modest lithium resource in our Wendover brine. Based on initial test results, we both believe this resource is promising for the production of high-value lithium with a relatively low cost of production. Additional testing is scheduled to take place over the next few months. Before wrapping up my prepared remarks, I'd like to provide an update on the ongoing development of our long-term strategy. As we come up our first quarter of net income in several years and we reflect on our improved balance sheet, we are refocusing our efforts on developing a long-term strategy for sustained growth and a more diverse Intrepid. Our board recently formed a strategy committee, chaired by one of our independent directors, to oversee a formal collaborative effort among our senior management team. We look forward to expanding our long-term vision for Intrepid in the upcoming quarters. I'll now turn the call over to Joseph to provide more details on our financial results and outlook.

[Joseph Montoya:]

Thank you, Bob, and good morning, everyone. Net income of $1.8 million during the first quarter was a $15.5 million increase compared to the prior year, driven primarily by an increase in water sales, byproduct production and sales, and a reduction in our interest expense. Our potash segment recorded a gross margin of $4.9 million in the first quarter as increased production and sales of byproducts, which includes salt, magnesium chloride and brine, led to a decrease in our potash cost of goods sold. We saw a slight decrease of potash sales volume compared to the prior year as strong sales into the ag markets was offset by a decrease in industrial sales volumes. Production volume of 125,000 tons during the first quarter was an increase compared to last year, due once again to increased run time across our facilities. As a result to processing quicker than the previous year, our HB facility began its evaporation season at the end of March, while our Moab and Wendover facilities will continue to operate for part of the second quarter. Due to the timing of our summer shutdown at our facilities, we will produce fewer potash tons in the second quarter of 2018 when compared to the second quarter of last year. This will, however, benefit our production in future periods as we are increasing the overall evaporation time across our ton systems. We expect to restart production in early September at our potash facilities. Average net realized sales price per ton increased to $243 for the quarter, as increases in the prevailing market prices for potash were partially offset by a decrease in sales volume into the industrial market, which carries premium pricing. The $20-per-ton prices increase announced in January became effective on most of the spot tons sold during the first quarter and is now in effect for most of booked sales in April. Due to wet weather in parts of the U.S. that delayed some shipments in the first quarter, a small portion of our sales in the second quarter will still be at the winter fill pricing. Our Trio segment generated a gross deficit of $2.1 million in the first quarter, which is an improvement of $3.1 million compared to the prior year. The improvement was driven primarily by our focus on higher-margin international opportunities, which reduced a lower-of-cost-or-market adjustments related to international shipments compared to the prior year. Trio production of 47,000 tons in the quarter reflects a reduced production schedule that began in the summer last year. Shifting to our water business. As Bob mentioned earlier, we sold $5.5 million of freshwater during the quarter. Beginning this year, we are recording a sale of freshwater as revenue, and it is included in the other segment in the 10-Q, which will be filed later today. A portion of our water sales are a byproduct of our operations and are, therefore, shown as a credit to our potash or Trio cost of goods sold. Total byproduct sales of water during the quarter were $675,000. SG&A expense of $4 million in the first quarter was a decrease compared to last year and the sequential fourth quarter due to a decrease in admin wages and timing of travel expenses. We expect our quarterly run rate to be slightly higher for the remainder of 2018, with full year SG&A expense to be approximately $19 million. Moving on to capital investment and liquidity. We invested $3.5 million in capital projects in the first quarter and maintain our guidance of $12 million to $16 million in spending for the full year. Cash flow from operations totaled $13.9 million for the quarter, increasing our cash balance to $6.1 million and allowing us to reduce the outstanding debt of our asset-backed facility to $1.5 million at quarter-end. We expect the improvement in our liquidity position, bolstered by a stronger year-over-year outlook for cash generated from operations, will allow us to fund the required $10 million prepayment of our senior notes from cash on hand by December of this year. In addition, we anticipate staying in the lowest-pricing tier for our debt throughout 2018 as a result of the overall improvement in earnings and cash flow generation from our business. That concludes our prepared remarks. Operator, we are now ready to take questions.

[Operator:]

[Operator Instructions]. Our first question comes from Mark Connelly with Stephens.

[Joan Tong:]

This is actually Joan Tong for Mark Connelly. I have a couple of questions here. You mentioned that you have shifted your international focus with Trio sales. Can you discuss which markets look promising right now, whether the difference in netback is material?

[Robert Jornayvaz:]

We've got an intense focus on Central America and Latin America. And we're doing quite well in terms of growing our volumes and stabilizing our pricing in Central America and Latin America. We're finding that getting all the way over to Southeast Asia is probably a more difficult market, but it's a good market, and so we're working on that. But our Central American market is extremely strong.

[Joan Tong:]

Okay, that's great. And then your freight expenses actually increased during the quarter, even though it appears that international sales was lower in the mix. So how should we think about freight over the next couple of quarters?

[Robert Jornayvaz:]

As improving. We're working in a variety of different ways, in a variety of partnerships to schedule out our vessels on a more timely basis or a more predictable basis. And we have other projects that we're working on with other companies just to reduce both their cost of freight and our cost of freight as we go into similar markets together.

[Joseph Montoya:]

I would just add to that, Joan, if I may. This is Joseph. That, as you know, freight across-the-board or across the whole industry is increasing, not necessarily specific to Intrepid or to Trio domestic or internationally. So in addition to the things that Bob mentioned, we're also working on other things relative to our domestic freight. You talked a little bit on the call, and we talked in previous quarters about the truck fleet that we're building, and part of that is not only just-in-time delivery for our customers but also to help manage the freight expense.

[Joan Tong:]

Okay, got it. And then the next question I have, what do you think is a good target for inventory level for Trio? Will you continue to operate at a reduced schedule until you reach that level?

[Robert Jornayvaz:]

We're finding for different parts of our Trio product levels, that we need to carry actually higher inventories, as we've seen our first quarter and the order book that's developing after the second quarter. So we're looking at various ways to produce more types of certain products on the Trio side.

[Operator:]

Our next question comes from Joel Jackson with BMO.

[Fahad Tariq:]

It's Fahad on for Joel. My first question, for several quarters now, you've maintained the $20 million to $30 million target for water sales in 2018. Does this range represent the peak water opportunity? I guess, to put it in another way, how much of the peak water potential does this range represent?

[Robert Jornayvaz:]

I guess I don't understand your question. What do you mean? We have significantly more water rights, and we're very clear that we've got a water team dedicated to making additional sales. So if you could articulate your question a little better, it'd be helpful.

[Fahad Tariq:]

Yes, I mean, I guess what's the rationale for maintaining the $20 million to $30 million? I guess, the expectation might have been that, that range would have increased as these water, these new initiatives materialize, and maybe that range gets higher, maybe $30 million to $40 million or $40 million to $50 million. Just curious why maintain the $20 million to $30 million, what that means in terms of the broader opportunity?

[Robert Jornayvaz:]

Well, we want to remain conservative, honest, truthful in terms of what we know we can achieve. And so we, obviously, have goals, as we've said repeatedly, of trying to beat our goals. But these are very achievable goals and very realistic expectations. So once again, I just don't understand of why we would set something -- set a bar. We clearly want to beat our goals, but these are very realistic, worthwhile expectations. I mean, let's not forget, just 1.5 years ago, the number was zero.

[Fahad Tariq:]

Right. Okay. Unrelated question, on fuel, it looks like volumes increased a little bit sequentially, more domestic sales to your international sales, but the average selling price only increased about $4 a ton quarter-over-quarter. Can you talk a bit more about the pricing dynamic in the domestic market? And are you having to offer price discounts to, maybe encourage farmers to adopt Trio? Any color would be helpful.

[Robert Jornayvaz:]

No, if you look at the components of Trio, as we have said many times, Trio is composed of 42% SOP and 58% magnesium sulfate. So if you were to take those two components, those two are trading, the percentages of those two components are trading at about $120 to $130 premium over Trio. So our Trio struggles, if you will, continue to be as we've expressed. I think there's pretty intense competition with one competitor. And we believe that our goal is to continue to grow the market as we have done. We've added warehouses. We've added a lot of new customers. We've added a lot of new sales instead of cannibalizing sales. So we continue to believe in Trio as a great product. And just want to remind you, if you just go back 2 to 3 years before we got into debt covenant issues, how high the price of Trio was and how actively it was used. So we believe the volumes of Trio consumed in the United States over the last decade. We believe it's a good, solid, strong growing market. And we're going to continue to pursue it in a very dynamic way.

[Operator:]

Our next question comes from John Roberts with UBS.

[John Roberts:]

The $3.7 million received for the separate prearranged water commitment, that was all recognized in the quarter. There was no deferred revenue, I think, with that. At least, I couldn't see that. Does that involve future water rights that someone has? Or was it something delivered in the quarter? And if it's in the future, what's the future amount of revenue the customer has the ability to take under what -- under that payment?

[Robert Jornayvaz:]

I'll let Joseph explain it in detail. But as we've explained many times, we entered into a contract that they passed $3.875 million per quarter to be on call, have the water ready to deliver and be able to deliver. And as we deliver water, that water goes into revenue or into sales. But we got the cash, so we received the cash payment. And so month-to-month, they will take different amounts of water. And so that number will fluctuate. And so I'll let Joseph explain in more detail.

[Joseph Montoya:]

No, thanks for the question. So first of all, the answer to your -- the first part of your question is no. The $3.7 million is not included in the $5.5 million . The $5.5 million is purely revenue or cash that was recorded as sales. Part of it is revenue. And as I described in the prepared comments, part of it is in byproduct credit. The $3.7 million is completely separate and part of that under the new revenue recognition rules, ASC 606, which we adopted in Q1 for all public companies. You'll now see a contract liability as the new verbiage. We will start to diminish that contract liability of the $3.7 million as we deliver water against that, as Bob mentioned. So the $5.5 million is water delivered in Q1. The $3.7 million is on top of that, that will recognize to revenue and diminish the contract liability as we continue to distribute or deliver more water.

[Robert Jornayvaz:]

What's difficult from an accounting perspective is that we get the cash and we have to account for the revenue separately as the water moves out. But the cash is a guaranteed payment.

[John Roberts:]

So on your balance sheet, it's that accrued liabilities line of $8.168 million? That's where it's booked against the cash that you received?

[Joseph Montoya:]

I believe so, yes. I'm not looking at [indiscernible] at the moment. But yes, it's in our accrued liabilities.

[John Roberts:]

Okay, that's what I was looking for. And then what are water byproducts?

[Joseph Montoya:]

Water byproducts is product -- is water that's flowing through the plant. So in our processing facilities, for example, we may use freshwater to cool our potash that's coming off of the compactors. So we -- if we use it in the plant and then sell it, we call that a byproduct.

[John Roberts:]

Okay. And then lastly, why was industrial potash demand down?

[Robert Jornayvaz:]

Well, I had to say we're working on a variety of initiatives. You're looking at one quarter. And so let's just be clear in terms of weather in the Rocky Mountains and the restrictions on drilling, completing, et cetera, in the Rocky Mountains that occurs in that area where we're most focused. As we build on our sales team and we move it further south, I think you'll see those numbers go up pretty dramatically. But you've got to remember in the Rocky Mountains, you have all kinds of drilling, completion restrictions. We can't even have rigs working. So there's just -- there's regulatory reasons as to why that happens in any individual one quarter.

[Joseph Montoya:]

I want to go back to your question on the balance sheet classification of the $3.7 million. It's not in the accrued liabilities number of $8.7 million. It's on -- basically, in it's own line on other current liabilities of $3.7 million. So that's where the contract liability is. That's how much it is. The $8 million of accrued liabilities is just regular and recurring liabilities consistent with prior periods.

[Operator:]

Our next question comes from Jason Ursaner from Bumbershoot Holdings.

[Jason Ursaner:]

I just want to first focus on Trio, because I think it's the only piece of the business that really seems to be holding you back right now, and there obviously some confusion and probably some skepticism because obviously, Bob, you're clearly very confident in the strategy and the long-term value, but I think it's maybe fair to say that there's no visible signs yet on the change. So besides the freight issue, for people that don't use the product every day, could you maybe help explain the disconnect? Yes, you've talked about agronomic value before, and maybe just what's giving you confidence in the strategy that maybe we don't see in the numbers yet?

[Robert Jornayvaz:]

Well, as I've said before, Trio is composed of 2 primary products if you look at the rest of the fertilizer space, 42% SOP and 58% magnesium sulfate. So if you're a distributor and you're carrying those 2 products in your bands, you're carrying SOP at a much higher value because you're not carrying it in a form of 42% SOP. So if someone were to blend 42% SOP and 58% magnesium sulfate, which means they're carrying 100% of both of those products in 2 separate bands, they're achieving prices well in excess of $100 greater than Trio because chemical composition is made out of that breakdown that I just gave you. So if there weren't such a wide disparity between the chemical composition of the product, which is 1 granule versus a mixed blend of two, then I didn't have the great confidence in having lived through the Trio market over the last 15 years. I feel like I have a darn good understanding of who the customers are, what they're willing to do, what they're willing to buy and the competition that we are up against. And so we believe we bring incredible agronomic value, especially in the fact that it's armory-certified, it's Food Safe/Feed Safe. And as we look at the growth in the organic market, which is occurring as we speak on a much greater scale, as we see the value of the inputs, we see the initiatives that we're taking at the mine site to reduce cost, we believe it's a product that, as you know, used to add tens of millions of dollars to our bottom line. And so we don't have any reason to believe that we can't get back to that place given the strength and the value of K and the value of the magnesium and the location of the magnesium-deficient soils, which exists not only in the United States but internationally. We see the value of various sulfur products in terms of things like sulfur-coated bentonite. And so when we take the value of the 3 components, the potassium, the magnesium and the sulfur and the lack of chloride and what's going on in those other products and the pricing of those other products, Trio continues to be an anomaly. And when we visit with customers, it's an anomaly to the competition, 1 primary customer, 1 primary competitor.

[Jason Ursaner:]

Okay. And so when you talk about long-term upside in pricing, yes, I think people look at the gross deficit and kind of see that as we can get back to profitability on a segment basis. But I mean, you alluded to, this used to be significantly profitable, tens of millions of dollars. I mean, when you talk about long-term upside in pricing, it's not a couple of dollars on the margin when you're talking about $100-plus spread? I mean, there should be significant material upside over time, I would think, is more of what you're alluding to.

[Robert Jornayvaz:]

That's what we believe, and that's where we were. And so it would be a very difficult case to make if that's not where the pricing was.

[Jason Ursaner:]

Okay. And just focusing now on water for a second. The separate contract, the $3.7 million commitment, I understand, I guess, why that's not just considered a sale. But that's through a single -- that was the single major customer, that's a $15 million contract. That's just their component. and to be clear, it's not a onetime item, that's a continuing ongoing quarterly number?

[Robert Jornayvaz:]

Yes, it's actually higher. It's $3.875 million every quarter for the next 5 years, so this is our first quarter. And so what we owe them is water on our balance sheet, and we have plenty of water to deliver against that contract.

[Joseph Montoya:]

Yes, Jason, even though it's recorded in our liability section of our balance sheet, it's deferred revenue. And it's revenue that we will record as we deliver the water, as Bob points out. It's not a liability as in we're going to pay $3.7 million of cash to them or to anyone else. It's a liability in a sense that it's deferred revenue.

[Jason Ursaner:]

Right. But I guess I'm more at, is this -- because it's the first quarter that you recognize this? And then future quarters, it's going to come through as the sale with every -- with all the other water sales or [indiscernible]

[Robert Jornayvaz:]

Every quarter is going to be a little bit different as that customer takes more or less water. And so for example, about $200,000 of that payment, because it was the very first quarter, the ponds were filled up. That's what they took, but they're not taking water out of those ponds, and so you'll see the sales part grow and the separate prepayment discussion, it'll go up and then go down. The good news is to think of it in terms of water sales and a guarantee payment of $3.875 million in addition to water sales.

[Joseph Montoya:]

Jason, it's going to vary from quarter-to-quarter, again, as Bob pointed out, depending on the amount of water that's actually delivered.

[Jason Ursaner:]

Okay. And so the sales that are being reported, the $4.8 million, I guess when you think about visibility on those sales, are you not -- do you not have longer-term commitment to those more spot price sales? Or this one contract was just kind of executed differently?

[Joseph Montoya:]

As we've talked about it on calls in previous quarters, we've got agreements with many different water customers, and they vary in terms of lengths and price per barrel and lots of things. So yes, we have water that we recorded in the first quarter from all of our customers. The water that's recorded, the $5.5 million, part of which is in sales and part of it is in byproduct credit, the $5.5 million that we've delivered in water is all a function of the water that's been delivered in the quarter. And that's the way that we'll continue to report our water sales on a go-forward basis.

[Robert Jornayvaz:]

If we can come up with a better word than activity, we would. But the number to focus on is $9.2 million of water activity in the quarter. And so that's the best way to focus on it because you have water sales and then you have cash. And so from an accounting perspective, we have to break it out differently, and that's why we're trying to give you a view into what the overall activity look like for the quarter.

[Jason Ursaner:]

I fully understand that. I mean, it's a great number. I guess what I'm also getting at, the $5.5 million versus $3.5 million last quarter, which is obviously very good organic growth, it doesn't sound like there's anything in there that's atypical or that, [indiscernible]

[Joseph Montoya:]

No, it's just continued organic growth and focus on sales. It's apples-to-apples. It's just a bigger apple in Q1 than it was in Q4.

[Jason Ursaner:]

And the other customers that are of -- sorry.

[Robert Jornayvaz:]

The bottom line is, it's great news if you look at the growth and you look at the overall activity level of what we've achieved with our water team and what we continue to achieve. It's just confusing accounting terminology.

[Jason Ursaner:]

Sure. Sure. But just to follow up on Joel's question, you're not predicting any down quarters from here. You're just -- you don't have visibility. You'd like to -- it's more of a conservatism in keeping the range as it is rather than the [indiscernible]

[Robert Jornayvaz:]

It's the first quarter.

[Jason Ursaner:]

Yes.

[Robert Jornayvaz:]

It's the first quarter.

[Operator:]

Our next question comes DeForest Hinman from Walthausen & Co.

[DeForest Hinman:]

Just a couple of questions. Just so we're clear, I think you said in the prepared commentary, potash pricing, $20 price increases in effect as of April, is that correct?

[Joseph Montoya:]

Yes, again, there's a little bit of that. Due to weather delays, we'll still be at the winter fill pricing. But the majority of the sales will be at the $20 price increase.

[DeForest Hinman:]

And then just so we're clear again, Trio is up $15 a ton as well?

[Joseph Montoya:]

That's correct.

[DeForest Hinman:]

Okay. And then just so everyone's clear on this water liability, I think I understand the nuances on some of the accounting, but I'm going to definitely read through the Q. But at any point does that $3.875 million through the contractual arrangement remove itself as a liability, like it's a take or pay for 1 quarter, so that liability is always going to be in the range of like $3.8 million, $3.7 million? Or is this big customer isn't as active with frac-ing and they make that cash payment to you, does it continue to increase higher?

[Joseph Montoya:]

Yes, that's a fair question, and I don't really -- I don't want to prognosticate as to what I think the answer is. I think the way you're understanding it is spot on. The deferred revenue will remain deferred revenue until we deliver the water and it becomes revenue.

[Robert Jornayvaz:]

But they keep paying the cash.

[Joseph Montoya:]

So the contract is for five years, and it will be a quarterly payment. And how we account for that will either be deferred revenue or it'll be revenue, again depending on how much water is actually delivered under the contract. And so I think your understanding is spot on, DeForest.

[DeForest Hinman:]

Okay, and then just maybe another way for further clarification, this is not a take-or-pay contract?

[Robert Jornayvaz:]

You can characterize it in a lot of different ways. It's a guaranteed payment. I think take-or-pay is one good way to look at it. I mean, regardless of whether or not they take the water, they have to make the payment.

[DeForest Hinman:]

Okay. And then, from my understanding, I'm going to try to learn more about this stuff with the water, would you characterize -- this is probably some commentary and discussion you're going to get this from your customers, is first quarter reflective of lower level of activity from a seasonal perspective, and we should, in fact, expect an activity ramp in warmer weather months?

[Robert Jornayvaz:]

Well, first of all, you're talking about totally different geographies. So if you look at our primary industrial activity that we're focused on in terms of our oilfield services, our mixing, our trucking, it's up in the Rockies, whereas our water activity, as you know, is down near Carlsbad. So we're doing with 2 good different geographies that have 2 different geologic needs. So if we look at the use of KCl as a clay inhibitor in the Delaware Basin, it's different than it is in the San Juan basin, which is different than it is in the Uinta Basin or in the Peons basin or in the Powder River Basin. So the geologic formation that has different types of clay that require different types of clay inhibitors is different in each basin. So if we talk about water activity, we're talking about water activity much further south in the Delaware Basin or the greater Permian Basin or when we're talking about KCl industrial sales activity, that's happening up in the North, in the Rocky Mountains states in different basins that have more Cretaceous sands that have more requirements for clay inhibitors.

[DeForest Hinman:]

So I guess a more simplistic way to ask it is, should we anticipate a meaningful step-up in water sales in the second quarter versus that first quarter number?

[Robert Jornayvaz:]

We just don't gauge. We work with a lot of our customers on their frac schedules. And so right now, if you look at -- if you go drive around Midland, Odessa, Pecos, Texas, Carlsbad, New Mexico hubs Artesia, there's a lot of traffic. There's definitely a demand for frac crews. There's not as many frac crews up and running as there were in 2014. So there are just a lot of variables. But what we believe -- the good news for our water sales in the southern portion of our geography is it's $60 crude versus $45 crude is a very different environment in terms of level of profitability for the 3,000-plus DUCs, or Drilled but Uncompleted Wells, that surround us in the Delaware Basin.

[DeForest Hinman:]

Okay, that's helpful. A little bit different line of questioning. Really good number on operating cash flow side. Looks like we've spent kind of front-end loaded some of the CapEx. But you look at kind of your normal cadence on the AR, and it looks like from a working capital perspective, second quarter might be pretty good, too. You referenced it in the press release that the ability to pay the December note, it looks like it's going to be much easier to achieve. You talked about the Strategic Planning with the board. With this newfound cash flow, can you kind of help us understand may be first capital allocation and maybe some bigger picture opportunities that could be present that you've been thinking about? And I'm saying that in light of some previous commentary, I think it was around those AMAX holdings. Is there other opportunities on solution mining, building more ponds and things like that? So kind of a long way to question, but your thoughts would be very helpful.

[Robert Jornayvaz:]

Well, as we've seen in our brine business, we've seen in our trucking, in the oilfield services piece, we're able to make very bite-size investments that carry a high rate of return. And so we're going to continue to look at areas where we can make, what I'll call, bite-size investments that carry with them significant rates of return as the primary mechanisms to continue to diversify our revenue stream that makes us stronger to look at opportunities that are slightly larger each quarter and each year as we move forward. As you know, we came out of the year with a loss last year. And so now that we're back in the profitability and generating free cash flow, we're going to be very thoughtful and competent in how we spend that money to make sure that we're generating significant rates of return on the small amounts that we have the opportunity to invest to really complement and continue to increase our volumes in products that we already produce, and in some cases, our waste products that we're able to turn into a byproduct.

[Joseph Montoya:]

So an example of that, and we talked about this in more detail in, I think, the third quarter call would be the brine station that we set up in New Mexico. The cost to do that was less than $100,000, I think we talked about. And it's paid for itself multiple times over. And so continuing to focus on things that are immediately accretive and fit in with our strategy are things that we're continuing to look at. But your perception is good. We anticipate looking at other opportunities and continue to do that as the year progresses.

[Robert Jornayvaz:]

The other thing I would say is that over the last year, we've invested in strategic salesmen by adding two industrial oil and gas salesmen, which have been -- allowed us to free up people to work on the feed part of the business and the organic part of our business, which we feel has incredible upside as we look at some of the significant transactions that have taken place just, for example, in the grocery store space. And so we're going to work hard on really working on those markets where we have much higher margins. And because we're OMRI-certified, because we're Food Safe/Feed Safe, we believe we have great opportunities to continue to expand those high-margin markets by investing in people that help us really focus on those markets.

[DeForest Hinman:]

Okay. And last question, you mentioned the strategy committee with the board focusing on that long-term plan. Can you help us understand the timing of when that review will be complete and when we would hear more shareholders regarding that plan?

[Robert Jornayvaz:]

I think over the course of the year, you're going to hear excerpts as we continue to build it out. But the crucial element is that we've got an extremely dedicated board. I would always like to remind people, look at the resumes and the people that are on our board, they're of an extremely high quality. And they not only understand the oil business, but they understand the agricultural business and the opportunities that are available to us. And so as we continue to model out the opportunities that we're pursuing, we're going to try to get on the path that once again creates the most long-term value for our shareholders.

[Operator:]

The next question comes from Chris Perella from Bloomberg Intelligence.

[Christopher Perrella:]

With the buildup on the potash inventory, do you expect to run down that buildup in the second quarter? Or you're going to still hold on to some inventory headed into the summer months?

[Joseph Montoya:]

No, as you know, our potash is now completely produced from the solution facilities. We have no more conventional mining. So all of our production will be in the third and first -- sorry, in the fourth and first quarter with a little bit in the third quarter. But as we go into the summer months, then we can only sell down, we can't continue to build potash inventories. So this is our first quarter that we're able to talk about quarter-over-quarter, only having solar potash tons, so it'll be a little bit more consistent year-over-year with regular fluctuations in terms of market conditions or evaporation conditions, et cetera. It won't be exactly the same year-over-year but [indiscernible]

[Robert Jornayvaz:]

Yes. Our biggest concern is what is -- we're having discussions around what is the minimal amount of inventory that we can carry because we've got -- we just got very robust demand. I don't know if Mark would like to add anything to that.

[Mark McDonald:]

No, I think that good first quarter on the sales and we expect that momentum to move into the second quarter. And I think the other point that Bob made earlier is our geographic position of our facilities has really allowed us to take advantage of some of that early season growth opportunities.

[Christopher Perrella:]

All right. And then, I guess, most of the demand in the third quarter would be, I guess, some summer fill and then industrial demand. So frac-ing, it's really well. You could possibly see some uptick year-over-year demand in the third quarter for potash?

[Mark McDonald:]

Yes, I think, it's Mark here again. We certainly, as you indicated, we do expect or forecasting some increase in frac-ing activity as we move through, I think as Bob alluded to, as the weather improves. We should see some increase in our Rocky Mountains basin area. And then I think that if you look at the ag side of things, we're probably a little early at this stage to forecast too far in the third quarter. We really need to see how this first and second quarter play out, a slight delay here in summer seeding and planting activities, but we'll be prepared as we move to summer to take advantage of any increase in activity if that occurs.

[Christopher Perrella:]

All right. And the investment in trucking, would that be-- is that primarily for the oil and gas market? And then the ag markets would be served by your typical distribution partners?

[Robert Jornayvaz:]

No, what we've done is that we bought trucks with a variety of different types of trailers so that we can supply customers. If you follow trucking, the e-log requirements that have gone into place have made trucking availability more difficult and more expensive. And so our ability to have a fleet of trucks with a variety of trailers to service different customers and preload those trailers so that they're ready to go is just an additional service that we can provide that other producers can't because they're so far away from the market.

[Christopher Perrella:]

All right. And then my last question, from the way that the debt is structured now, does it makes sense to prepay any of that, say, in 2019 once you get through the next $10 million payment?

[Joseph Montoya:]

I would say it's a bit premature to answer that question. Obviously, we're starting to feel a little bit more stable in terms of cash flow generation and the business turning the corner, generating a profit in the first quarter for several years. So it's certainly something we're looking at. But as I mentioned in the prepared remarks, we're at the lowest pricing of our debt structure currently, and I think it's at market rates. And so certainly, while we continue to look at it and consider options, I think we're in a pretty good position right now.

[Operator:]

Our next question comes from Jon Evans with SG Capital.

[Jonathan Evans:]

Can I just ask you a question relative to the accounting issue again. And I guess what I was curious to understand is, when the current liability comes through the revenue line, what kind of margin are you going to use on it?

[Joseph Montoya:]

It's the same business, so it's absolutely the same margin.

[Jonathan Evans:]

So it's like you've talked about 85% to 90%. So I could assume 87%, kind of roughly in the middle?

[Joseph Montoya:]

It's low. It's high 80s to low 90s, absolutely. It's still a very high-margin business. The way that we account for it doesn't change that any way, whatsoever.

[Jonathan Evans:]

So just to be clear, if the sales had matched up with the prepayment, I mean, basically, you'd add about another $3.2 million to $3.3 million in EBITDA, right?

[Joseph Montoya:]

Absolutely. Absolutely.

[Jonathan Evans:]

Okay. And then the other question I have for you is if you would x out in your water business the prepayment from your large customer, what I'm curious to understand is, a lot of the people in the basin had talked about weather issues, frac crew issues, et cetera, and now as they're going into the second quarter, they're talking about this acceleration. You guys had a 50% sequential in water sales, and the basin was struggling. It seems like the basin is starting to accelerate. So is there any reason if the basin accelerates that you wouldn't participate in that acceleration?

[Robert Jornayvaz:]

That's a good analogy, but we're not going to predict the weather.

[Operator:]

[Operator Instructions]. Our next question comes from Mike Hughes with SGF Capital.

[Michael Hughes:]

I think you said in the past that right around the $30 million level, the water business could potentially become more capital-intensive. So I guess my question is, are you seeing some of the oilfield service players start to build out their infrastructure so it won't be necessary for you to make those capital investments to grow the water business beyond the $30 million level?

[Joseph Montoya:]

To be clear, I don't think that we've said that. And I don't rely on my memory for everything, but pretty sure we've said -- what we've said is that the contracts that we enter into with the different customers are all different. And while we've experienced little to minimal capital investment relative to our water contracts, that we get to enjoy based upon the people that we're working with, infrastructure that's already in place. And so I think we expect that to continue. I don't think there's anything magical that would say in order to go above $30 million, we will have to invest ex million dollars of capital.

[Robert Jornayvaz:]

Yes. I'd say quite to the contrary, we're seeing a lot of that infrastructure built out. And as we said in our comments, our water team continues to work on additional deals, projects, et cetera, but they're not looking to us to build out the infrastructure.

[Michael Hughes:]

Okay. And then one follow-up on the water. At the $30 million in revenue kind of level, what percentage of your acre fee does that represent?

[Robert Jornayvaz:]

It's still significantly less than 1/3. I'm going to say it's more on the -- because all the pricing varies, it's definitely less than 1/3. I would say it's closer to 25%. I apologize for not having the math. But you've got to remember, there are various deals at various prices, and so that has an impact.

[Michael Hughes:]

Okay. So obviously, there's significant upside still beyond the $30 million level on the water business?

[Joseph Montoya:]

Again, as Bob mentioned several questions ago, I think we're very comfortable and confident in the $20 million to $30 million range. And I think we need to stick by that.

[Michael Hughes:]

Right. I meant beyond to 2018, the number can grow significantly because we have the water rights that are unused at this point?

[Robert Jornayvaz:]

I think that's a very fair assumption, but please don't take that as guidance.

[Operator:]

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

[Robert Jornayvaz:]

I just want to thank everyone for their time this morning and their interest in Intrepid. We really appreciate it, and we look forward to further conversations and bringing up to speed on everything we're doing here. Thank you again. And once again, we really appreciate your time and interest.

[Operator:]

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