Intrepid Potash, Inc.
Q4 2016 Earnings Call Transcript

Published: 28 Feb 2017

[Operator:]

Thank you for standing by. This is the conference operator. Welcome to the Intrepid Potash Inc. Fourth Quarter and Year End 2016 Earnings 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. [Operator Instructions] I would now like to turn the conference over to Matt [Indiscernible], Investor Relations. Please go ahead.

[Unidentified Company Representative:]

Thanks, Gilica [ph]. 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 are 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 Brian Frantz, Senior Vice President and Chief Accounting Officer. Jeff Blair, our Vice President of Sales & Marketing is also available for Q&A With that, I'll turn the call over to Bob.

[Bob Jornayvaz:]

Thank you, Matt, and good morning to everyone. Potash demand remained strong in the fourth quarter with year-over-year sales volumes improving for the third consecutive quarter. We have sold our remaining granular inventory from the West and East facilities and are fully booked for the spring season. The transition to solar only potash production has allowed us to focus on our local and regional agricultural and industrial markets, both of which are experiencing good demand and strong fundamentals so far in 2017. This transition combined with the realization of price increases announced last fall is expected to benefit our potash average net realized sales price in 2017. The spring season is now underway for our domestic Trio market and as we have expected, we're experiencing good demand for the first quarter of 2017. Domestic Trio pricing has firmed in early 2017 providing stability to that market. Internationally, we are casting a wide net in our sales efforts. Since June, our international sales team has visited over 20 countries, met with dozens of prospective customers, continue to expand our global presence. These efforts have begun to convert to sales and we're currently selling more product internationally than previous quarters. We have confirmed sales in 10 different countries in 2017 and expect to more than double our international footprint in the next few quarters. This compares favorably to 2016, which we sold to only a few countries outside the United States. Although some of the individual sales volumes are modest, we believe the early success is meaningful and an early indicator of the global potential for the specialty fertilizer. As we introduce and reestablish Trio in the international market, we are offering product at competitive prices to engage new customers and displace competing products. We expect our average net realized sales price to increase over time as volumes increase and we optimize our trade lines [ph]. We are still very early in the stages of growing our international Trio market, but we're excited by the positive momentum generated so far. Beyond our potash and Trio markets, we are increasing our focus on marketing byproducts. We produce and sell magnesium chloride, multiple grades of feed and industrial salt, and a variety of brines from our facilities in New Mexico and Utah. We're excited about the potential of these markets as we increase our focus on their profitability. In addition we have extensive water rights in Southeast New Mexico, which ensure that Intrepid has long-term supply to water to support our operations. Where appropriate we're focused on monetizing our excess water rights through water sales that primarily serve the oil and gas markets in the Permian Basin. While water and byproducts sales have been modest historically, when compared to product revenue, they provide meaningful cash flow for Intrepid and are steadily growing. Before I wrap-up will make a quick note about the progress we've made to-date with our investment banker Cantor Fitzgerald. We're evaluating the strategic alternatives available to us. Though we are not in a position yet to disclose the details of our conversations or speculate on what the ultimate outcome of these conversations will be, we will update the market at the appropriate time. We appreciate your patience and understanding as we thoughtfully make our way through this process. I'll now turn the call over to Brian who will update you on the financial results and outlook.

[Brian Frantz:]

Thank you, Bob, and good morning everyone. During the fourth quarter, we generated a net loss of $16.6 million as potash pricing continue to weigh on our 2016 results. Fourth quarter potash sales volumes improved significantly compared to the prior year, up 45,000 tons from last year's fourth quarter to 134,000 tons of potash in the fourth quarter of 2016. We experienced the first sequential increase in our average net realized potash pricing per ton in nine quarters. Although we won't realize the full benefit of the fall price increases until the first quarter of 2017. Potash production decreased compared to the fourth quarter of 2015 as beginning in mid-2016, we are no longer mining potash conventionally. Solar production remains on-track for this harvest season. Potash segment generated a gross deficit of $4.1 million in the fourth quarter as we sold potash that was subject to orders prior to the price increases from last fall. We expect our potash margins to improve in the first quarter now that we have transition the selling solar only potash tons. Fourth quarter Trio sales volume was unchanged from the previous year as decreasing Trio prices and increased product availability caused byers to delay purchases as they shifted to a just-in-time purchasing model. As we articulated during our third quarter call, our fourth quarter Trio result began to reflect price decreases that went into effect last quarter. Our average net realized sales price for Trio decreased 30% compared to the fourth quarter a year ago and 16% compared to the sequential third quarter of 2016. Our Trio segment recorded a gross deficit of $2.9 million for the fourth quarter, which was $3.1 million more than the fourth quarter of 2015. We expect our Trio average net realized sales price will be lower in the first quarter of 2017 compared to the fourth quarter of 2016 as the recent domestic Trio price decreases come through and as we increase our Trio exports which will have lower net realized sales price than our domestic sales. Our fourth quarter SG&A was $4.2 million, a $1.4 million decreased compared to the fourth quarter of 2015, reflecting our efforts to reduce costs. In addition we expensed $3.1 million of legal and professional fees associated with the amended and restated Note Purchase Agreement we announced during the fourth quarter. Our quarter end balance sheet reflects $4.5 million in cash and investments and the outstanding principal on our senior notes of $135 million as of December 31. Also note in the first quarter of 2017, we repaid an additional $5.5 million of the notes in connection with the sale of an asset. As a reminder, we also have a $35 million asset based credit facility with the Bank of Montreal available to us as well. We spent $17.9 million on capital investments during 2016 which was at the low end of our expected range as we tightly manage cash throughout the year. Our 2017 capital investment spending will be lower than 2016 due to the overall cost to maintain our solar facilities. We expect 2017 capital investment to be between $13 million and $18 million. Finally, I'd like to highlight the fact that our auditor's report which will be filed with the SEC on our Form 10-K later today contains an unqualified opinion. That concludes our prepared remarks and we're ready to take questions.

[Operator:]

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Joel Jackson with BMO. Please go ahead.

[Fahad Tariq:]

Hi, this is Fahad on for Joel. Just wanted to talk a bit about Trio volume. So, I noticed in the quarter there was a strong buildup of Trio inventory in Q4. The highest level [Indiscernible] been historically. Can you talk a bit about that that was purposeful and if that's really -- what the intention is for that the high Trio inventories that have now build up?

[Bob Jornayvaz:]

Yes. First and foremost, it's an accomplishment and that we achieved higher capacities much, much quicker than we thought we would. So, when we converted the plan last spring, it went from making maximum capacity around 175,000 tons to where we established capacity at about 420,000 to 430,000 tons. So, the ramp-up in capacity happened much sooner than we thought. So, we made a lot more Trio than we had in our own budgets. At the same time because we're anticipating a slower ramp-up in achieving some of our goals, our international sales team had really gotten up to speed and started with the contacts and the movement -- and moving things out. And I'd say thirdly it's dispersing that inventory throughout the United States. Fourthly, now the product is available and customers are not on allocation, we're seeing much more just-in-time buying which is what we stated in our script about -- we're now seeing a strong spring demand. So, those are the reasons.

[Fahad Tariq:]

Okay, great. That's very helpful. Just a quick follow-up. In the release you had mentioned reduced operating schedule at East for Trio, can talk about what -- bit more about -- like the magnitude of that? And how long that's expected to last? Thanks.

[Bob Jornayvaz:]

Well, I think it goes back to my previous answer. We achieved a much higher rate of capacity much quicker than we thought we would. So, we've got to get our sales in line with our production. So, we cut back our production as we ramp-up and as you listen to our script, you heard that since June, we're already selling into 10 new countries and we expect to double that within the next few quarters. So, as we build up that international effort and that domestic effort has increased with an abundance of new warehouses that we've added here in the United States. Those two should equalize. So, I really don't have a timeframe for you.

[Fahad Tariq:]

Great. Thank you.

[Operator:]

The next question is from [Indiscernible] with Walt Hoffman Company. Please go ahead.

[Unidentified Analyst:]

Yes, just building on that question on underground, was curtailment or lower rate -- was at high into an abnormally long holiday shot? And then people came back and were working normally or were running on like two shift versus three shifts or any color you can add there will be helpful.

[Bob Jornayvaz:]

Are you talking about the [Indiscernible] plant?

[Unidentified Analyst:]

Yes. Underground.

[Bob Jornayvaz:]

The underground portion of it or above the -- Brian why don't you--.

[Brian Frantz:]

Yes, this is Brian. It goes back to what Bob was saying, I mean so we're just trying to match our production level to where the -- as the international sales are ramping up. We're having some good early success in that international market. So, it's more than just a holiday down and we're just monitoring that literally each quarter as we go forward. But as Bob said we don't have any timeframe as far as when we expect that to come back.

[Unidentified Analyst:]

Okay. And then maybe just a little bit more color on level of the payables, do we have vendors asking you paid sooner, you paid in cash and does that kind of get back to more normalized level in 2017 as we kind of move through the debt restructuring?

[Brian Frantz:]

No.

[Bob Jornayvaz:]

Yes. First we never had that in the first place. So, I don't know where you got that impression, but I'll let Brian speak to the absence of going concern language in the 10-K.

[Brian Frantz:]

Yes. I mean we've got adequate cash reserves, we got availability under our line of credit, we're paying all of our invoices as they come due, which is the same thing that we did all the way through 2016 even as we work through all the debt issues, the going concern opinion that we had a year ago. We've continue to pay all of our payables on-time on-schedule.

[Unidentified Analyst:]

Okay. Thank you.

[Operator:]

[Operator Instructions] The next question comes from Christopher Perrella with Bloomberg Intelligence. please go ahead.

[Christopher Perrella:]

Thank you for taking the call. A question on your cash cost as we look at 2017, assuming normal production rate from the solar solution mines and I guess with the moving parts around Trio, how should I think about cash costs for both of those production or products for 2017?

[Brian Frantz:]

Hi Chris, this is Brian. Thanks for that question. As we work through 2016, we worked really hard and had to make a lot of difficult decisions, which centered around seizing our underground potash conventional mining operations, both over at East where we converted the plant to Trio only, as well as suspending operations at West. As you would imagine conventional mining costs are higher than what you have on the solar solution mining facilities and so now that we have sold through all of the remaining conventionally produced potash inventories, now that we go into 2017, all we have left are solar solution mining produce tons which are going to carry a lower cost as we go through 2017. So, we feel good about where our cost structure is going-on on the potash side as well as the Trio side. We're working hard to reduce those costs wherever we can. And now that we see improved pricing coming through, particular on the potash side of things, we see some good opportunity to increase those margins going through in 2017.

[Christopher Perrella:]

All right. And the 4Q potash production of 110,000 tons, that is all solar, how should I think about quarterly production now for 2017, is there seasonality in that production or it is a sort of 100,000 tons a quarter all year?

[Bob Jornayvaz:]

Yes, Chris that's a good question. Thanks for asking that. So, as we have transitioned now to solar only production from the potash side of things, you're exactly right, you're going to see some seasonal production there where we essentially harvest potash produced harvest -- or produce potash from around mid-August or early September and that will go through your, call it the end of March maybe into April, depending upon schedules and how much potash is in the ponds. And then from that mid-April timeframe through mid-August, again, we won't have any potash production going forward. On the Trio side, however, you should see pretty normalized production through that as we go through 2017.

[Christopher Perrella:]

All right. And then one quick follow-up other than the CapEx, are there any other cash payments that are hitting the cash flow statement this year?

[Brian Frantz:]

No. we think we're beyond all of those. We are pleased that we have our debt agreement in place. We were pleased to be able to sell one of the assets that came out of shutting down our facilities. We generated proceeds there $5.5 million which we were able to use to reduce debt. But no other big cash payments that we foresee on the horizon.

[Christopher Perrella:]

What asset was that that you sold?

[Brian Frantz:]

It was one of the ones as we transitioned away from conventionally produced potash, we had an asset that we were no longer going to be using and so we were able to sell that.

[Christopher Perrella:]

Okay. Thank you.

[Operator:]

The next question is from Don Carson with Susquehanna Financial Group. Please go ahead.

[Don Carson:]

Yes, Bob, a question on your potash realizations both in fourth quarter, what you're expecting this quarter. If you had not sort of presold some of your potash, what would realizations been like and kind of what are your realizations this spring? I assume that with much lower volumes, you're selling more into premium price truckload markets, is that accurate?

[Bob Jornayvaz:]

That is. We still have some holdover agricultural commitments that we're going to honor. But we have a lot more flexibility with the rig count picking up in all of the areas where we have facilities and our feed business is going strong. We're very focused on our local markets, truck markets, regional markets if you will.

[Don Carson:]

And what would price -- if you should have separate those two different markets, what was the pricing in your ongoing markets in the fourth quarter and current bids?

[Bob Jornayvaz:]

It's really all over the Board as prices begin to move. We didn't -- we saw industrial pricing maintain its premium that it generally had as well as the feed market achieve its pricing and then the ag market was depending upon where we were was different. So, I don't think the rule of using the -- I think historically we've said that you can use the Western Cornbell [ph] 85% of that.

[Brian Frantz:]

Yes, Don, this is Brian. I think you got a combination of a couple of things going on. As we have just as you spoke we're reducing some of the geographic footprint that were going. So, we're capturing -- we're including less freight which has the benefit of increasing our net realized prices, despite -- or with even without a price increase, so then you'd take the price increases on top of that. And then further as Bob was speaking with what's going on particularly in Permian in the oil and gas business, we're able to sell more of that premium stuff. So, it's difficult to separate the impact of those. I think the short way to say it is pricing in Q1 of 2017 will be higher than it was in Q4 of 2016.

[Don Carson:]

Thank you.

[Operator:]

The next question is from Chris Damas with BCMI Research. Please go ahead.

[Chris Damas:]

Yes, hi. Could you give some color on how and where you're exporting Trio -- I mean countries, channels, type of buyers?

[Bob Jornayvaz:]

No. This is Bob

[Chris Damas:]

This Q or was it last Q, 38,000 tons isn’t that much.

[Bob Jornayvaz:]

I'm sorry.

[Chris Damas:]

You said you were exporting to 20 countries?

[Bob Jornayvaz:]

We said we visited 20 countries, we've made sales in the 10 and we expect to double that within the next few quarters.

[Chris Damas:]

Okay. Well, could you give a little color, I mean I think you're railing at the Long Beach and exporting it by ship, is it Asia or is it Mexico, I hope not?

[Bob Jornayvaz:]

Well, as you know we only have one competitor in this market and we have chosen really not to walk through the intricacies of where we're selling and exactly how we're -- we do have a warehouse. Its public knowledge down in Galveston that we rail down to and then we load vessels and ship out of there and we're able to go globally from Galveston. So, in terms of what countries we're going into? It's pretty logical, our South American presence or Central American presence and then our far Eastern presence.

[Chris Damas:]

Great. And secondly it's been a very warm spring and early spring in Continental United States, has that accelerated application for hay and forage, I'm thinking Texas, what's going on there? How is the truckload?

[Bob Jornayvaz:]

Well, the great news about Texas is number one it's got a great soil moisture content. So, as a local truck market, if you look at the price of hay, especially, the price of cotton which is done extremely well. The cotton growers are literally right at our back door. We're seeing good demand for Trio in that market. So, we're seeing the Texas market begin to develop early because of the weather.

[Chris Damas:]

Great. And one last one. Now that things are finally looking slightly better with the first sales price increase in nine quarters, why are we looking at strategic alternatives? Was that in response to a particular investor or why we -- what we would we expect to hope from this given that we've suffered through a few years with downturn?

[Bob Jornayvaz:]

Well, part of our negotiations with the noteholders was that we would look into it and so we're in the process of running that process and completing that process and it's -- if you read our previous press releases, it's very well described as to what our obligations were under the Note Agreement and we feel like we are very close to having satisfied all that. So, I don't if that answers your question, but if you just -- I don't have the press release in front of me--

[Chris Damas:]

No, that's okay. I'm negligent that I haven’t kept up with some of these given--

[Bob Jornayvaz:]

We have an obligation. We feel like we've -- we're meeting that obligation and so I don't really know what else to say.

[Chris Damas:]

Okay. Thanks.

[Operator:]

The next question is from Jason Ursaner with Bumbershoot Holdings. Please go ahead.

[Jason Ursaner:]

Good morning. Thank you very much for taking my question. Just going back to the question on cash costs, obviously, there's a lot going on going into 2017 where you're no longer going to have the traditional asset production, but just as you look at the solar tons specifically, Brian, I think you mentioned kind of the production cycle. When we think about matching the costs of production to when you sell it, can you maybe walk through that timeline again? And then just in terms of the solar production, can you maybe talk about brine quality and the weather just year-to-year for that production specifically as we think about into heading into 2017 and beyond?

[Brian Frantz:]

Yes, Jason, this is Brian. Without getting too deep into it, obviously, when we produce tons, we take the cost that are associated with those and we put them up on the balance sheet as part of our inventory. So, even though production will be suspended during the summer evaporation season as we sell tons during that period of time, you still will have cost of goods sold related to those tons that will come through on the production side of things. So, obviously, still matching sales dollars with production dollars as those occur. Does that answer that question?

[Jason Ursaner:]

Sort of. I guess and then just on the weather specific, especially at the HB Mine, I guess the crucial period that August to September, there was some rain and just walking through maybe how that works from a brine perspective?

[Brian Frantz:]

Yes, it's interesting. Right now our brine qualities are pretty good on average as we look across the facilities there. So, we don't have any significant concerns right now in terms of how those production volumes will come off of the solar facilities. Obviously, we have good visibility here into the spring season and then as we go through the summer evaporation season, we'll hope for a hot, dry weather during that timeframe and assuming that things go up to averages -- historical averages, we should be just fine to hit some of the productive capacity numbers that you'll see in our K later today.

[Jason Ursaner:]

Okay, great. Appreciate the question. Thanks.

[Operator:]

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

[Bob Jornayvaz:]

I just want to thank everyone for taking the time and for their interest in Intrepid and we looking -- we look forward to talking to you more in the future. Thank you.

[Operator:]

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