Intrepid Potash, Inc.
Q4 2015 Earnings Call Transcript

Published: 29 Feb 2016

[Operator:]

This is the Chorus Call conference operator. And welcome to the Intrepid Potash fourth quarter 2015 earnings conference call. [Operator Instructions] At this time, I'd like to turn the conference over to Gary Kohn, Vice President, Investor Relations. Please go ahead, Mr. Kohn.

[Gary Kohn:]

Thanks, Joe. Good morning, everyone, and welcome to our call today. I will remind you that parts of our discussion will include forward-looking statements, as defined by 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 are not assuming any 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. Reconciliation 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. Kelvin Feist, our Senior Vice President of Sales and Marketing is also available for Q&A. With that, I'll turn the call over to Bob.

[Robert Jornayvaz:]

Thank you, Gary, and good morning, everyone. In this morning's press release, you saw that our auditors were required to add going concern language to their audit opinion. I want to address this first. We announced on January 15 that we had amended our debt covenants for both our credit line and our senior notes to take into account the then current potash pricing environment and expectations for spring demand. That amendment was designed to get Intrepid through an anticipated low-price environment to the conversion of our East facility to Trio-only production. However, considering the further potash price declines, we now expect that we will not be able to maintain compliance with our revised debt covenants throughout 2016. We have been engaged with our lenders during the last few weeks to come to an updated agreement, but unfortunately, despite the cooperative nature of our discussions, we were not able to reach another new agreement, before our 10-K filing deadline today. If we are unable to meet compliance with our covenants, our lenders would have the ability to demand repayment of all amounts due to them, as we might not have adequate liquidity to pay the balance in full at that point in time the going concern language is required. To provide us with the time and flexibility to continue working with our lending group, we have obtained a 30-day waiver as to the going concern language. We finished the year with more than $60 million of cash on hand and do not anticipate our cash balance going to zero this year. In other words, absent a failure to comply with our covenants and subsequent demand by our lenders to repay amounts outstanding to them, we expect to have sufficient liquidity to meet all of our obligations without having to rely on our credit facility. Our operational focus remains twofold. Take steps to navigate the short-term market pressures, while also continuing to transform Intrepid into a stronger, more profitable company for the long term. This includes the evaluation of the viability of West in the event of a prolonged depressed potash price environment. In the short term, we took action to reduce our 2016 cost by more than $17 million, including eliminating 5% of our work force, changes to salaries and benefits, reducing our corporate office space and implementing other general and administrative savings. Several quarters ago we implemented a continuous operational improvement plan, which is yielding significant results and we continue to work daily on cost savings measures. On the transformation of Intrepid, we continued to take very specific prudent steps toward our goal of long-term profitability. We are in the process of transitioning east, so we can remove our highest cost potash production and overtime replace it with more financially attractive Trio. The results from two bypass test we conducted in December and January further validate our belief in the conversion plan. The first benefit is expected to come when we complete the initial phase of the transition, which is expected to occur in mid-2016. We expect our potash cash operating cost per ton to be lower, as we will remove from the mix our highest cost potash production. We will also be permanently taking productive capacity of over 200,000 tons off the currently oversupplied market. This adds to what we estimate, based on market commentary, to be 2016 production curtailments of more than 5 million tons, as global producers are showing more discipline. The second benefit is expected to come from the additional production and sales of higher value Trio. Immediately following the conversion, we anticipate increasing Trio production run rates. As we exit the fourth quarter of this year and we expect commissioning to be completed, we plan to be on an annualize Trio production run rate of nearly 300,000 tons. Our infrastructure at east is more than adequate to handle, our expected Trio production. We believe that the Trio market has been undersupplied and that demand will continue to outpace supply. Our sales team has begun to execute a plan to introduce Trio into new geographies, where we believe we are developing the potential for brand new markets. We have also been working to secure new customers and to reengage previous customers, whom we were unable to consistently fully supply in the past. We have immediate access to the needed langbeinite ore for Trio-only production. This ore is more than enough to support our current production targets, while we continue to develop additional attractive langbeinite ore reserves, which exist in a different untapped zone. Testing has indicated that by focusing on a single ore type, we see significantly improved ore grades and recoveries to level sufficient to achieve our production targets. The simplified process, combined with expected increases in production from higher langbeinite ore grades and in turn improve recoveries, supports our expectations for Trio cost per ton to continue to improve from current levels. Our ultimate goal is for Trio to be very cost competitive with the only other producer in the space. Making Trio a larger percentage of our portfolio, represents an attractive EBITDA opportunity. We are moving quickly to capture this opportunity. Once East potash is permanently shutdown, West will be our only conventional mine and a most expensive facility to operate. We are evaluating this facility in light of the current and projected price environment. Our objective is clear, take the necessary steps to navigate this difficult cycle, while also better positioning Intrepid for the future. We are rebalancing our portfolio by increasing Trio's contribution to our profitability and cash flow, and eliminating higher cost potash production. We have reduced our cost structure with several initiatives. We are working to modify our loan agreements to provide us the flexibility and time to complete our plan. Now, Brian will update you on the financial results and the outlook.

[Brian Frantz:]

Thanks, Bob, and good morning, everyone. Fourth quarter financial results were down from last year's fourth quarter, influenced by the same factors others in the industry have been addressing. Specifically, we experienced softer potash volumes and declining prices. When looking at our reported results, there are two large non-cash charges detailed in the tables accompanying this morning's release that I want to touch on. First, we recognized impairment charges related to our conventional assets in Carlsbad. The impairment result from the decline in potash prices relative to the book value of these assets, and stems from the capital previously invested when potash pricing was higher. Related to the impairment of our conventional assets in New Mexico is an increase in the valuation allowance against our deferred tax assets. Keep in mind that Intrepid will still be able to utilize its deferred tax assets in the future, and will be able to reverse current valuation allowances once we again begin to generate taxable income. Because of our significant NOLs, we don't anticipate paying cash taxes in the near future. As we articulated on the third quarter call, we did have additional lower-of-cost-or-market and abnormal production charges in the fourth quarter. The LCM adjustment of $22 million in the quarter and $32 million for the year is a result of having cost per ton, which exceed the current market potash prices. The LCMs primarily stem from our conventional production facilities. Abnormal production costs for the quarter were $3 million and for all of 2015 were $10 million. These costs are associated with the temporary shutdown at West from the maintenance activities related to the West production shaft issue and from the test days conducted at East, that Bob referred to earlier. We ended 2015 with cash and investments totaling $64 million. We generated $23 million of cash flow from operating activities and used $46 million of cash for our capital expenditures. With that, operator, our prepared remarks are concluded, and we're ready to take some questions.

[Operator:]

[Operator Instructions] The first question today comes from Adam Samuelson with Goldman Sachs.

[Adam Samuelson:]

Maybe, first, I just want a clarification on the 30-day waiver on the going concern language. Can you just explain what that actually means in a practical sense between filing with the SEC and dealing with your lenders and the covenants?

[Brian Frantz:]

In our current bank agreements we had a provision that if there were a going concern opinion that could be construed as an event to default. And so what we've done with that is obtained a 30-day waiver, such that by the end of -- if that has not cured by the end of March, cured or waived, then it would be an event of default at that point in time. But as we sit here today and for the next 30 days, that is not going to be construed as an event to default.

[Adam Samuelson:]

And then, as you look at the production base moving forward, I think, clearly, East potash is going away in the middle of the year and becoming Trio. Evaluating West, can you talk about where you are in terms of evaluating the competitiveness of West or if you think there is a price level on a sustained basis, FOB Midwest or whatever benchmark you want to choose that that asset no longer makes sense to run? And then, finally, any kind of view on what Trio cost structure actually looks like once you converted East to Trio-only?

[Robert Jornayvaz:]

Adam, I'll take that. We're not going to give you a specific target at West. We've had lot of success literally month-over-month, quarter-over-quarter at continuing to reduce costs. As we'll be the one of two Trio producers in United States, both dollar-based producers, putting our cost numbers out there for our only other competitor is not something we -- I know that makes it difficult for you to build a model. But we believe we are cost competitive. We see that in the marketplace. And I'll leave it at that. We have great ore bodies. Our ore grades will be going up significantly as we transition. Ore grades always help your cost structure. And we have the luxury of having very significant untapped langbeinite ore reserves that will help us to reduce our cost structure. The numerous langbeinite-only test days that we've run have given us confidence that we can run at the run rates that we have talked about. And hopefully eventually, sequentially quarter-over-quarter we'll place those expensive potash tons with langbeinite tons. So as to today, and not giving you the guidance to build as robust a model as I know you'd like to, we're just not going to provide those numbers today.

[Operator:]

Next question comes from Chris Parkinson with Credit Suisse.

[Chris Parkinson:]

Bob, you hit on this a little bit. But just can you give a little more details on how you're marketing Trio, specifically versus MOP in terms of relative K2O contents as well as other nutrients, as well as addressing some of the comments you had on some untapped volume opportunities?

[Robert Jornayvaz:]

As you know, Trio is a very, very different product than MOP. First, there was a one deposit of it in the world. It's located in southeast New Mexico. Mosaic has been mining there for decades and decades and decades, and we are just beginning to go back and reenter certain areas where we have very high-grade langbeinite ore reserves as well as drilling a drift down to the third ore zone. So number one, from having a dollar-based competitor located across the street who has been mining there for years, we're not competing with people that are coming in United States looking for currency. And I think we'd all be fooling ourselves not to admit that a lot of the potash issues that we're seeing today are currency related. And so as both dollar-based producers, I think that's one thing that we have to focus on. Neither party is going to have a significant freight advantage and we believe that we can be very cost competitive. As we have traveled the world and look at what we believe that there are areas that don't need as much K as someone might want to buy using, say, an SOP product. The non-chloride market is a very large and growing market. It's got a good CAGR on it. It's reflective in the pricing and how the price has very clearly bifurcated from MOP. One, it's highly commoditized, has become highly commoditized in the current environment through the difference in currency exchange rates and the overcapacity that the producers chose to lead to oversupply in the market, which has driven it down. While langbeinite pricing or Trio pricing has remained quite stable, especially when you look at in comparison to MOP. Our goal is and always has been to go out and grow this market, because of its non-chloride status, the magnesium and the sulfur that it has. When you go out and you talk to retailers, there are others that suggested that people can come up with these complex blends to avoid buying Trio, but the one thing that we find is that retailers would rather have bin space for one product that services all those needs rather than multiple bins with multiple products. And so that's what we're experiencing in the market. So I hope I'm answering your question. But it's a multifold strategy around growing it globally, growing it domestically, growing the market. And then doing a better job of servicing those customers that we do have that we've had on allocation, as we continue to literally sell every time that we've been producing, and as we speak today are once again virtually out of inventory. So, Chris, does that answer your question?

[Chris Parkinson:]

It certainly does. And then just a quick question on the MOP side. You saw, obviously, one of your local competitors get out of your key market. But in terms of longer-term netback maximization, can you just comment on -- I mean, is there anything that can happen in some of your key markets near your mines such as West Texas or anything west of the Mississippi, where you could potentially, let's say, decouple yourself a little bit from Midwest pricing, simply because it's more difficult for Nola imports or Canadian products to reach those areas?

[Robert Jornayvaz:]

We see that now. We're having -- the great news is Texas is having ideal weather, and we're having a great truck season right now. If there is something positive that we're seeing, we're seeing very, very good movement into Eastern New Mexico, and into the state of Texas, Oklahoma, where they are having good weather. So we're seeing the beginnings of a good robust spring truck market. And that part, we're very pleased with. But we are seeing other producers, and especially, the trading community that has put pressure on pricing, but our truck market has been very robust. And I think we're seeing great weather in state of Texas. And when Texas is moving, that's a wonderful market for us, and that we're seeing. So once again, I hope, I'm answering your question. We do get the differences in the various markets and our ability to serve them with geographical opportunity.

[Operator:]

Next question is comes from Mark Connelly with CLSA.

[Mark Connelly:]

Just two things, Bob. Are you still targeting a one-to-one transition ratio for Trio at East? And is it going to be a ramp before you get to that sort of a ratio or just a normal conversion ramp? And second, is it fair to say that, in the past inventory, your cost of inventory tons is moving up? And do we have to wonder about a write-down there?

[Robert Jornayvaz:]

Well, let me first talk about the ratio. Our long-term ratio is to produce significantly more Trio than we used to produce potash. That will be a ramp up scenario that will occur sequentially quarter-over-quarter. Our hope is that you will see our Trio production, as we have continued to improve our palatalization rates very significantly, as we are with our test days seeing much more natural granular being produced. We feel like, we have a great opportunity there to replace those tons, as we have spoken about before. And the rate at which we do that will continue to give guidance, as we complete the transition and follow-up the ramp. And so all of the test days that we have invested heavily on indicate that we have that ability. As to the inventory question, I'll let Brian answer that. Did that answer the question about the replacement of the potash tons?

[Mark Connelly:]

Yes, that's perfect.

[Brian Frantz:]

I guess a couple of things on the write-down question. We took a comprehensive review, as is required by GAAP, to look at all of our assets there in the fourth quarter, and resulted in that impairment charge that you see out there about $323 million. And as I stated earlier, I mean that's related to those conventional assets in New Mexico. At the same time, again in accordance with our normal practices, we always take a look at inventory to make sure it's properly stated at the lower-of-cost-or-market. So in terms of future write-downs, on the fixed asset side, on those conventional assets side, I don't anticipate much of that coming out, since we've written those assets down. And then on the inventory side, we'll continue to monitor that going forward. Obviously, as Bob said, we're trying to improve our cost structure and as we improve our cost structure that should limit those opportunities. But obviously we're in a volatile potash pricing environment right now. So hopefully that gives you a little more coloring responsive to that question.

[Mark Connelly:]

Yes, sure. I just wanted to understand that it had been part of the review, so that's very helpful.

[Operator:]

Next question is from Ben Isaacson with Scotiabank.

[Oliver Rowe:]

This is Oliver Rowe in for Ben Isaacson. You mentioned the use of a consultant previously to identify areas for cost savings, and that you're working on the savings daily. And you've implemented some pretty significant savings. So I'm just wondering how much more of this process is left? What avenues do you see additional savings possibilities? And sort of how much of a size are you looking for there?

[Robert Jornayvaz:]

As much as possible. Its ongoing daily, multiple times daily. I don't mean to be flippant in my answer, but it's a very iterative dynamic process that once it begins, and you have procurement officers reporting weekly on savings, and how they're finding ways for savings, things complete restructuring of how we have startups, which affect our peak demand usage at certain plants that then affect our electricity bills, the savings that we will incur by reducing our natural gas costs, all I can say is that we are as engaged in a cost savings measures as I can describe. Trying to give you a sense of the volume. We recognize the environment that we're in and we're reacting as quickly as we possibly can to reduce cost as fast as we can. And so I feel like that's an incomplete answer. I apologize for not being able to give you more clarity around those numbers, but I can only assure you that we're working with the utmost urgency to continue to cut cost.

[Operator:]

The next question is from Brett Wong with Piper Jaffray.

[Brett Wong:]

Just wondering, if you can talk a little bit more about the market dynamic for Trio? We watched pricing in the quarter fall sequentially in line with production you realized in potash pricing. And typically, Trio fundamental is holding a little bit better in terms of the price. So just wondering what's happening there and what market dynamics are driving that?

[Robert Jornayvaz:]

I think that was a -- let me think of the right way to phrase this. Our customers who are paying the prices -- gladly is the wrong word. I do think that we have a competitor that is concerned about having a new entrant into the market. And so I think, we just believe that the Trio market -- I'm actually a Trio customer throughout the United States, and so I know what I pay at various farms and ranches that I own around the United States. And so I just feel like that the market dynamics are very positive for this market. I know what we pay, I know the value that we get at our various farms and ranches that I own. And I don't know how else to answer that other than you're right, the price did go down, but we didn't feel a lot of pressure coming from our customer base on that piece.

[Brett Wong:]

So it seems more like a competitive aspect. And if that's the case, what's the risk of that continuing going forward of concern of new entrants? And I mean, I know there're really [multiple speakers] available.

[Robert Jornayvaz:]

There's only going to be two producers, and if we're cost competitive then that speaks for itself. And so someone trying to be preventative is one step. But I can just state with my own feeling and sense of clarity that it wasn't as market-driven from a customer perspective as one might perceive.

[Brett Wong:]

And then just talking about the solar solution tons. Can you just talk about production there, and obviously, whether that has been more favorable? Can you just talk to any production issues or anything that you've seen there?

[Robert Jornayvaz:]

There is no issues. I think all the guidance that we have previously given remains intact. If we just have good normalized weather, then those facilities, we believe, can and will compete with just about anybody else and so those facilities are operating at very, very high mill operating rates. And as you know that those can have weather variability. And we've been unfortunate last two years, and that at two of our facilities we had 100-year rain events, but so far so good. I don't know how else to answer that.

[Operator:]

The next question comes from Don Carson with Susquehanna.

[Don Carson:]

Just two questions. Bob, where do you see the floor in Midwest pricing, given the delivery costs of some of the Saskatchewan producers, which would suggest something maybe in the Corn Belt around $200, $205? And then secondly, I noticed your price premium versus your competitors declined sequentially on KCl, both in dollars and percentage terms in Q4. Is that just reflective of the Canpotex proving run that was done in a very competitive marketplace? And how would you see that price premium unfolding going forward?

[Robert Jornayvaz:]

Well, as you know, we've got a decade long track record on that. I think that one of the Canadian producers with the Canpotex run was extremely aggressive in where they put those tons. I would imagine some of those tons given where we think they went had a negative margin. It's just a gas. So I mean, we're just going to have to see how it plays out. I think historically, it's hard to throw out 15 years of history and to believe that 15 years of history is going to reverse on one quarter. Let's be honest, this was an extremely volatile chaotic quarter, both from farmer and decision created within the -- what the trade rags that farmers were reading. We saw a lot of price pressure from importers. We saw traders that were trying to seek liquidity in very quick and rapid fashions. We had a Canpotex run. We had commodity price volatility. We've had major, major currency fluctuations. I mean, when we look back at this quarter, we'll remember, it is one of the more volatile that we've seen in the history and we've survived it. And we believe we'll continue to survive and eventually prosper as a smaller, but much more profitable company. So we're just not going to -- I'm glad, the quarter is behind us. We've put a lot of a news out there for people to digest. Once again, I hope, I've answered your thoughts, your concerns with as much clarity as I can possibly give.

[Operator:]

This concludes the time allocated for questions. I will now hand the call back over to Bob Jornayvaz for closing comments. End of Q&A

[Robert Jornayvaz:]

I want to thank everyone for taking the time to dial-in. We really appreciate your interest in Intrepid. We look forward to speaking with everyone in the near future, and thank you again, for your interest. Have a great day.

[Operator:]

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