Intrepid Potash, Inc.
Q2 2010 Earnings Call Transcript
Published:
- Operator:
- Good morning and welcome to Intrepid Potash second quarter 2010 earnings conference call. (Operator Instructions) I would like to remind everyone that this conference is being recorded today Thursday, August 5, 2010 at 8
- William Kent:
- Good morning and thank you all for joining us for our second quarter 2010 earnings conference call. I would like to start by introducing today's participants from the company. We have with us on the call today Bob Jornayvaz, Executive Chairman of the Board, David Honeyfield, President and Chief Financial Officer, Martin Litt, Executive Vice President and General Counsel, R.L. Moore, Senior Vice President of Marketing and Sales, and John Mansanti, Vice President of Operations. I would also like to remind everyone that statements made on this call, which express a belief, expectation or intention, as well as those that are not historical fact, are forward-looking statements within the meeting of the United States securities laws. A number of assumptions, which we believe are reasonable, were made in connection with the expectations reflected in such forward-looking statements. The forward-looking statements involve risks and uncertainties, which could cause actual results to differ from our expectations. For material information with respect to the risks, uncertainties and factors which could cause our actual results to differ from our forward-looking statements, we direct you to our news release issued last night and the risk factors described in our filings with the SEC. All forward-looking statements are qualified in their entirety by such factors. Our earnings news release, which is posted on our website at intrepidpotash.com, includes a reconciliation of certain non-GAAP financial measures to the most directly comparable GAAP measures, including EBITDA which will be used on this call. All references to tons are to short tons of 2,000 pounds. I'll now turn the call over to Bob Jornayvaz.
- Bob Jornayvaz:
- Thanks, Will, and thanks to everybody for joining our discussion about Intrepid's second quarter 2010 results. As we have entered the heart of the summer growing season, we have seen sales volumes activity pickup over the last few weeks. As dealers have begun to take on inventory in preparation for what many in our industry believe will be a very robust fall. As we have stated previously, we believe that we are seeing a much more normal agricultural demand cycle similar to the periods before the 2008-2009 fertilizer year. During the second quarter of 2010, we sold 129,000 tons of potash at an average net realized price of $376 per ton. Intrepid's advantage net realized sales price represented a $74 per ton advantage over the average of the other North American producers. This price advantage once again demonstrates that our location is a key component of our profitability and a distinct competitive advantage. When we put it all together, we earned about a nickel per diluted share on net income of $3.6 million, generated $13.3 million in EBITDA, and continue to bolster our cash position exiting the quarter with $136 million in cash and investments. On the sales front, we saw strong demand for product during April and most of May as the spring planting season was in full swing. Further, as we exited May and entered June, demand declined as spring fertilizer applications were completed. Further, the markets lacked clarity as to what the Canadian producers' summer fill program pricing might be. Dealers sought to enter the summer season with minimal inventory on their books. The activity we saw during the spring season indicates that farmers are once again replenishing the nutrients in their soil. We are also seeing more strength in the overall commodity markets and more specifically in the grain markets over the last month. The December 2010 corn contract, the key benchmark for overall crop economics, recently went well above $4 per bushel adding confidence that farmers should have an economic opportunity to replace the nutrients drawn from the soil. The outlook for farmers return on their crop appears favorable due to the crops generally being planted earlier than normal this year and good weather in much of the country during the summer growing season. The anticipated early harvest and strong farm incomes provide both a wide fall application window for potash and the cash to invest in soil nutrients. The second quarter of 2010 presented us with a number of opportunities and a few challenges. We continue to build on our solid cash position, which will allow us to execute on a number of important capital projects, like our previously announced Langbeinite recovery improvement project, our new compaction plan at Moab, and the HB Solar Solution Mine, which are key to the future of Intrepid. Progress on the HB Solution Mine includes the recently announced issuance by the New Mexico Environmental Department of Ground Water Discharge permit for the HB mine. Obtaining the state regulatory approval is a key milestone in the development of the HB project. These projects should not only increase our marketing flexibility, but should also provide for greater operational efficiencies and increased productivity, thereby, lowering our per ton costs. John Mansanti, our vice president of operations, will take the call from here and give you an update on the status of these projects and give you some detail on our operational performance during the quarter. John?
- John Mansanti:
- Thank you, Bob. We produced 165,000 tons of potash during the second quarter of 2010, right in line with our operating plans. This compares to 131,000 tons produced in the second quarter of 2009. We also produced 39,000 tons of Trio during the second quarter of 2010, which compares to 45,000 tons produced in the second quarter of last year. Increase in potash production was a result of our successful effort to ramp up Carlsbad after a production curtailment in 2009. We successfully met our targets for ore production in Carlsbad by utilizing and effective employee recurring program obtaining employees for temporary levels have increased over time and capturing the benefits of our ongoing capital programs. During our last call, we detailed our efforts to hire employees in Carlsbad in order to fully staff these facilities. Scheduled staffing levels for mining personnel ramped up through July and leveled out through the remainder of 2010. We are currently at target. Adequate staffing is always an important issue for any mining company and we will continue to monitor the local labor market. We continue to improve employee retention which limits a risk that employees turnover can cause. Given our recent influx of new employees, our focus the remainder of the year will be on training and on increasing the proficiency of our new personnel. Sales of standard sized product in Utah continues to lag historic benchmarks, so we are focused on producing as much granular product as possible and on adding additional compaction capacity in Moab. As a result of the reduced market demand for standard sized product and some local inventory constraints, we are operating our Wendover facility below capacity. As in Moab, we are operating our Wendover compaction facilities full time to produce granular product for the agricultural market. As Bob mentioned, we have also undertaken the construction of a larger compactor facility at Moab. This larger unit should be capable of compacting 100% of our anticipated Moab production. Engineering is basically complete. The compactor is on site in Moab and construction of the new compactor building begins next week. In an effort to maximize the conversion of standard sized product to granular sized product, we will continue to operate the current compactor full time until the new compaction facility is commissioned. During the second quarter, we encountered some operational challenges to our Carlsbad East facility that resulted in higher potash costs and contributed to lower Trio product volumes. One of the specific action items we have initiated among others is to introduce more predictive maintenance in our maintenance management systems. This will enhance our operational efficiencies and lower our overall per ton costs. Switching to production of Langbeinite, the decrease in Trio production in the second quarter of 2010 relative to 2009 was largely the result of normal fluctuations in the mineral mix of the East ores. This decrease was exacerbated by low recoveries resulting in part from decreased plant availability. In pursuit of a more favorable Langbeinite mix, continuous miners were reassigned to different panels while modifications were undertaken with our maintenance management systems. Even with the attention on these two issues, we expect that our Langbeinite production in the third quarter of 2010 will be below budget as a result of the heavy rainfall in Carlsbad area. And the potential impact of the August and September raining season in New Mexico. During July of 2010, we shut our Langbeinite plant at our East facility down for a total of 14 days due to unusually heavy rainfall. To put this in perspective, the Carlsbad New Mexico region received approximately nine inches of rain during late June and July of 2010 or about two thirds of the 14 inches of rainfall that Carlsbad sees in a typical year. This puts us on pace to see a rainfall total not seen in nearly 20 years. The unusually heavy rainfall that Carlsbad experienced underscores one of the reasons why the Langbeinite recovery improvement project is so important for Intrepid. Beyond the designed improvements to recovery and the more flexible production capabilities, one of the key benefits of this project is it will greatly reduce our freshwater usage in the production of Langbeinite, thereby, reducing the impacts from unusually heavy rainfall like we have just experienced. In the interim, we are committed – we have committed more resources to the already ongoing construction for additional capacity to our storm water management system. In addition, we are making improvements in the storm water controls attempting to minimize future production disruptions due to rainfall. Finally, capital investment in our operating facilities was approximately 10 million in the second quarter. We expect capital investment in the third and fourth quarters to increase as we move forward with two of our larger projects, the Langbeinite Recovery Improvement project and the Moab [ph] compaction facility. Now, I will turn the call over to R.L. Moore, our senior VP of marketing and sales.
- R.L. Moore:
- Thank you, John. We sold 129,000 tons of potash during the second quarter of 2010. This compares to 80,000 tons sold in the second quarter of 2009. We also sold 63,000 tons of Trio during the second quarter of 2010 compared to 45,000 tons of Trio sold in the second quarter of last year. As Bob noted, the sales volume in the second quarter were in line with what a more historically normal spring season looks like. While we had the opportunity to sell additional tons, those tons would not have generated an acceptable net realized price. At the Southwestern Fertilizer Conference that was held last week, almost every fertilizer dealer we met with informed us that they intentionally finished the spring season with their storage bins as empty as possible. Dealers were unsure of where NPK prices were headed and did not want to have the price risk associated with inventory. Over the last few weeks, we have seen a significant uptick in order activity. There seems to be recognition in the marketplace that we may experience an early harvest, which means there should be a more favorable application window for potash. In preparation for what we had expected to be a pickup in fall demand, we began to build a modest amount of granular potash inventory during the second quarter in order to cover our customers' requirements for their upcoming fall season. With the rail orders that were generated in July, coupled with our commitment to supply our consignment warehouse customers and truckload customers, we will likely come close to depleting existing inventories and production through the end of the third quarter. From experience, I can tell you that what we have seen thus far in 2010 in terms of demand is much more typical of the fertilizer application and growing cycle. The demand patterns that we saw in 2008 and 2009 were not typical of the demand patterns that I have seen during my career. Going into the fall, dealers are now indicating a willingness to take inventory risk, are more confident that demand has returned to normal patterns and are not expressing concerns about current price levels. Industrial markets in our Carlsbad east plant continue to show signs of improvement. We have not seen the same improvement in the Rocky Mountain industrial markets, as mentioned earlier. We are addressing this issue through the addition of a new compaction plant in Moab, which will enable us to convert 100% of Moab standard sized product into granular sized product for sale in the agricultural market thus reducing our dependency on sales into the industrial market for oil and gas drilling. Sales to our animal feed market remained steady. With healthy beef and pork prices we anticipate this portion of our business continue to afford us growth opportunities. I will now pass the call to Dave Honeyfield, our president and chief financial officer, to wrap up our prepared comments.
- David Honeyfield:
- Thanks, R.L. I want to cover a couple items that I think are key to understanding our performance during the quarter, and more importantly to properly understand our business in future quarters. The quarter met our expectation as did sales volumes and we communicated those expectations to the Street back in early June. We realized a better average net realized sales price compared to other North American producers, in part due to our geographic location and the corresponding transportation advantage that Intrepid enjoys and also in part to intentionally choosing which orders to accept. We believe that our granular sized product inventories are at prudent levels going into the fall buying season and that the opportunities to sell tons exceed our anticipated production. We intend to participate in the sales market in the third quarter with a focus on margins and run the plants as efficiently as possible. Suffice it to say, the nature of our business is one of quarterly and seasonal variability. We continue to believe that our annualized results will largely meet our plan, yet I believe too much external focus is put on timing of events from quarter-to-quarter. The inherent variability of our business as to production rates, operating schedules, trying to pick the exact week that dealers will begin to take inventory, when product will start to move in the fields, and other variables means that we need to manage our business with a somewhat macro seasonal view and an ever watchful eye on projects and operations that move us towards our goals. These goals are increasing recovery, increasing reliability, increased productivity and reduced per ton costs. The results are not going to be immediate and we're fully prepared to accept that with our efforts to integrate new processes, to deploy capital, and to make the necessary personnel changes there will be days that don't feel so good. And we need to keep these things in perspective, remind ourselves and the market about our focus on the long-term objectives. 2010 has been yet another year of transition for the North American potash market. We have seen a more historically normal agricultural demand cycle emerge. We're encouraged by the activity we have seen and believe that we're taking the right steps to enhance our operations and grow the business profitably. The next 18 to 36 months will be quite significant on the capital front. The projects we're working on allow us to bring much more marketing flexibility to the table and reduce our reliance on any single group of buyers. The Langbeinite Recovery Improvement project will help us operate our east plant more efficiently, while at the same time increasing recoveries and increasing the amount of granular sized Trio available to sell into this growing market. The continued progress on the HB Solar Solution Mine is positive. A project that's designed to bring on between 150,000 and 200,000 tons of low cost potash. These are the projects that get the headlines and they're supported by numerous other projects that drive increases in productivity greatly enhance our abilities to operate our plants more efficiently and improve overall reliability of the facilities. In closing, we're compelled by the direction that the market for potash is heading and believe that our investments in people and our various capital projects will bolster Intrepid's ability to participate and compete successfully. We will now open the line for any questions.
- Operator:
- (Operator Instructions) your first question comes from the line of Edlain Rodriguez, Broadpoint AmTech
- Edlain Rodriguez:
- Thank you. Good morning, guys. I jumped into the call little late so I'm not sure if you addressed some of those issues. So given your expectation for a strong fall application, will all your facilities be running at full capacity I guess at the end of the third quarter going into the fourth quarter? And can you remind us again like what's a full quarterly production look like?
- David Honeyfield:
- Hi, Edlain, this is Dave. What we're anticipating is that we will be at full production at our Carlsbad facility as we get into the fourth quarter. That's when we'll have all the shifts in place at our west mine and people pretty well through the training processes. So that includes west and east in Carlsbad. Moab, if you remember, has the seasonal evaporation period and we start production up sometime in mid-September. And then our Moab plant, as we touched on earlier – or pardon me, our Wendover plant, as we touched on earlier, is the only plant that we're running at a little bit reduced capacity right now really in reaction to the standard market and some storage constraints. So if you take a step back, the numbers that we have published in the 10-K in terms of total annual productive capacity are about 900,000 tons on the potash side annually and about 210,000 tons, if I remember right, on the Trio side. So that should give you a good sense of what full productive capacity would look like when we get into the fourth quarter.
- Edlain Rodriguez:
- Okay, thank you. A quick follow-up on the cost structure for potash, I mean it seems like – I mean it remains really high. Can you give – when does that reverse actually and how does it look like for the second half of the year compared to the first half of the year in terms of the cost structure?
- David Honeyfield:
- We – this is pretty – actually, the numbers are pretty consistent with the way we thought they would work out for the year, albeit the operations at east in June was not what we had expected. Directionally, what we're seeing, Edlain, is that the third and fourth quarter those costs per – those COGS numbers per ton start to come down really in reaction to the investment in the plant and running things at more full capacity. And we'll really start to see that manifest itself more in the fourth quarter than in the third, but directionally we're going to be heading the right way.
- Bob Jornayvaz:
- Edlain, this is Bob. One point that I really want to make clear that sometimes is hard to understand is that it is, we bring on new processes, for example, our big thickener, we commission new processes that are within an overall potash producing system at east. We're going to have stops and starts and fits and starts as we commission a portion of a new potash operating system. So when you look at what east looks like after thickeners, new mining equipment, the Langbeinite recovery plant that then takes out the variability of rain, you just have to keep your eye on the longer term ball because as we commission each of these pieces as part of a much bigger system, there's a commissioning process. And so I just would urge you to continue to look at the long-term ball and how we continue to build each of these pieces that are part of a much bigger system.
- Edlain Rodriguez:
- Okay, thank you.
- Operator:
- Your next question comes from the line of Vincent Andrews.
- Vincent Andrews:
- Thanks. Good morning, everybody. My question is really it's clear we're T-ed up to have a pretty strong fall season between the harvest and where prices of corn and beans have gone in recent weeks. My question is just, do you think we're finally poised to sort of breakthrough the threshold that we are coming out of the fall season, the dealer will feel like, "hey, you know what, let me not have the bin empty. Let me have some inventory as we go into the spring because maybe I'm not so sure that prices are going to go up dramatically but I don't think they're going to go down anymore."Do you think there's a chance that we finally crossed that threshold? And maybe my guess as to why we're finally going to do it as it seems like the reason why we're getting such a nice run-up in the commodities is that there are some structural things happening with certain areas of the world that aren't going to unwind themselves necessarily over the next six months. Thanks.
- Bob Jornayvaz:
- I totally agree. I think it's a great observation. I think when you look at – we have talked over the last six to eight months about how we're putting in a longer term agricultural bottom and I think we're seeing it now. And so when we look at how dealers are looking at fertilizer pricing, they have seen their nitrogen products and their phosphate products see nice price run-ups. When we were at the Southwest Fertilizer Conference, we had the opportunity to sell bigger volumes of tons that we chose to back away because we believe that some of the price increases – that price increases will occur as we go into the fall. We have announced price increase for our Trio product; it's been accepted into the marketplace. And so I think you have expressed it quite well that we're seeing a longer term bigger bottom put in place as evidenced in all the commodity pricing. I mean, look at the strength of wheat pricing and that's truly a supply demand fundamental issue. We're seeing corn, even though we're going to have a phenomenal corn crop, we're still seeing significant demand so we're in a demand driven market there. When we look at hog and beef prices, we're seeing a very long-term agricultural cycled bottom put in that takes time and we're now seeing its impact on fertilizer pricing. Much more strength in the pricing and much more opportunity and the dealers saw it and expressed it in the Southwest Fertilizer Conference.
- Vincent Andrews:
- And maybe just as a brief follow-up to that. From a sentiment perspective, it just seemed to me from my conversations with the end-user, the farmer or the dealer that they were a little more receptive to nitrogen and phosphate going up faster simply because it had come down so much when the cycle turned at the end of '08, but there seemed to be sort of a quiet conspiracy against potash prices going up. And do you think if that – are you still getting – I mean, A, do you agree with that sentiment that that sentiment was there and B, do you think it's starting to turn?
- Bob Jornayvaz:
- Well, there's no question that in 2009 that there was, as we talked about on our calls, something we called emotional demand destruction and there was no question that the farmer was frustrated with potash producers. I think we're through that period. I mean, we go out and talk to farmers today and we talk to dealers today we're not hearing that same sentiment. I mean, I think price of potash is extremely well priced and I think it's priced too low, it's priced quite fairly. And I think we're going to see strengthened potash pricing based on demand. I mean, we're seeing it as we speak today. So I think we have turned a corner and I think that we're very confident about the pricing that we think we can achieve in the third and fourth quarter.
- Vincent Andrews:
- Perfect. Thanks a lot and I'll pass it along.
- Bob Jornayvaz:
- Thank you.
- Operator:
- Your next question comes from the line of Mark Connelly.
- Mark Connelly:
- Thank you. Just a couple of questions and keeping in mind that this bumpiness is going to be there when you have got as many projects going on as you do. One question on Moab, depending on the markets demand for granular when this capacity does come up, is that going to meaningfully impact your margins one way or the other? Not your margins, but your costs side, leave price out of the equation. I'm just curious whether this granulation capacity significantly shifts your costs whether it's running or not running full.
- Bob Jornayvaz:
- Well, I'm going to let Dave address the cost piece, but let me talk real quick about the industrial demand piece in the Rocky Mountains. As we know that – we saw gas drilling fall off in the Rocky Mountains because of the basis differential that exists between Rocky Mountain natural gas and other natural gas sales opportunities throughout the country. The pipeline construction that's occurring in the Rocky Mountains is going to give us takeaway capacity, which we're already seeing some of the major operators in the Rocky Mountains gearing up to start drilling again. So I think that the lack of industrial demand that we have seen is going to pretty significantly change over the next 12 months as we see operators in the Rocky Mountains begin to gear up to get ready to drill again to get ready for the new pipeline capacity that's coming on that's going to shrink the basis differential and make gas drilling more opportunistic and profitable. Now, the compaction plant that we're building in Moab creates tremendous flexibility in our marketing. So I just want to make it clear that what it does, it allows us to move significant tons when Intrepid is ready to move tons rather than being dependent upon an industrial market that we have seen – just in the last 10 years we have probably seen two cycles in the drilling that has occurred. And so once again we're trying to build in operational flexibility. As to the difference in margin opportunity and the cost difference, I think our ability to market those tons on a timely basis when Intrepid is ready to sell those tons always helps us from a margin perspective because it allows us to pick and choose the sales that we want to make. Now, from a per ton cost standpoint, I'll let Dave address what that's going to look like on a per ton cost basis.
- David Honeyfield:
- Yes, Mark. It really doesn't – on the compaction at Moab, it really doesn't change the cost component very much at all. When you think about it, we typically run that compaction facility five days a week and we're running it seven days a week now. The flexibility and the opportunity to sell those granular tons, as Bob described, is key to making sure that you're managing that product inventory well. And then the new compactor project it's a much larger piece of equipment and a much more efficient piece of equipment that allows us to go from compacting approximately half of what we produce in an annual cycle at Moab to being able to produce – or pardon me, compact what we produce today plus any anticipated gains that we may have from additional projects that are put in place there. So, like I said, it really doesn't do much on the cost side it just creates a lot of flexibility and opportunity for us.
- Mark Connelly:
- So you'll be able to capture on the bottom line almost all of that increased flexibility then is more or less what you're saying, I think.
- Bob Jornayvaz:
- Well, I think our marketing department is so good that they're going to – now that they have got that kind of flexibility that they're going to be able to pick and choose their markets on a much more timely basis and any cost differential, which is very minimal because of the efficiency of the much larger compaction equipment, our ability to instead of hauling back our standard to compact it, which creates losses which we currently do today, we'll compact it as it goes through on the first cycle. I think one thing that we haven't done a good job of communicating is that when we compact at Moab we basically have two compaction runs. One is as it goes through on the first cycle. So in other words, as we're producing the product itself we compact it. A certain stream is industrial or standard and a certain percentage of that stream goes through the compaction plant. We now have the opportunity – and then right now when we want more compacted material, we haul back that standard and compact it, thereby, creating losses in the system. The new system won't have those losses because we'll be able to compact it on the first round through. So from a margin opportunity and an efficiency standpoint, we eliminate those losses. And also I'm going to let R.L. – we're going through this quite a bit because this is a huge step for Moab. R.L.?
- R.L. Moore:
- Mark, this is R.L. One other thing during the script we discussed that Wendover was not operating at 100% capacity due to the inventory levels that we're constrained at. Once we put this compactor in at Moab and compacting, if we elect to compact 100% of the standard there, the standard customers that we have been covering out of Moab can be shifted to Wendover. That allows us to increase that production at Wendover once again and still meet the needs of our standard and granular customers. I commented that we are basically thinking that we can sell all of our production through the end of the year, I meant to say granular production and that's what we're looking at. We're going to have some great opportunities out here I think from now through December and from now through next spring to move a lot of granular product. And this is going to look a whole lot better for us this time next year when we have that compactor in place in Moab.
- David Honeyfield:
- Mark, this is Dave. I have got one other thing and really this is a little bit of – if you remember back to the first quarter, we talked a little bit about the product mix and where the sales were coming from. To the extent that we're able to source those sales out of our Utah operations, particularly out of Moab, those are our lowest cost tons in the company on a per ton basis. So you're going to see as we get back to more of that normal distribution of sales based on the production ratios, you're going to see that margin piece pickup as a result of that as well.
- Mark Connelly:
- Okay. That clarifies a lot of things. Thank you very much for that. One big picture question on Trio, certainly we have seen some competitive pricing in the short run. But, Bob, you have talked about wanting to increase the breadth of your customer base there. Can you give us a sense of how that looks in the second half of the year or do you really even – do you need to increase the customer base with the turn that we're seeing in demand?
- Bob Jornayvaz:
- Well, right now on the granular side we can sell every ton of granular, in fact, virtually every ton of granular Trio that we're going to produce in second half is spoken for. So we could sell a lot more granular Trio. On the standard side, the addition of two agronomists who have now begun traveling the world increasing our industrial market capacity has worked quite well. So as we look at the second half, we see strong demand for our Trio product as we get out there and tap into the markets that we're seeing growing. When we look at everything from the strength of the cocoa market, the palm oil market, we're seeing tremendous strength in our opportunities in Trio. We're already allocating our sales and we just – I can't tell you how strong we believe that market is today and will continue to be.
- Mark Connelly:
- So they are standard in the second half?
- Bob Jornayvaz:
- I'm sorry?
- Mark Connelly:
- You're referring to standard in the second half?
- Bob Jornayvaz:
- Well, both granular first and foremost –
- Mark Connelly:
- Well, sure. Sure. I mean the agronomists efforts are focused primarily on standard?
- Bob Jornayvaz:
- That's correct. And we're seeing those opportunities developing as we speak.
- Mark Connelly:
- Terrific. Thanks very much.
- Operator:
- Your next question comes from the line of Elaine Yip.
- Elaine Yip:
- Hi, good morning.
- David Honeyfield:
- Good Morning.
- Bob Jornayvaz:
- Good Morning.
- Elaine Yip:
- So a question on pricing. I understand that the announced fill programs by competitors lowered prices for this summer. But I was surprised to see how low your price is going to be and it seems like it'll be below the 1Q levels. Can you talk about why it is so low? And then have you begun selling product at higher prices for a later delivery yet?
- David Honeyfield:
- Elaine, this is Dave. Let me start off and then we'll fill in as we need to here. The product mix piece, it is a key part of the piece of the equation here. The net realized price advantage that we enjoyed in the second quarter of, what was that? $74 that reflects the marketing effort and choosing where those sales go and the location advantage. Now what we're anticipating is that we're going to sell more tonnage of that red granular product as we move into the fall season. So when you look at the mix of price points that we get, that's why you see a little bit more of an erosion. The price programs that the Canadians announced this summer, I don't know if they were necessarily an announcement of a bringing down the price as much as an acknowledgement of what the market is in that Midwest area. So I think that's one of the things that you need to keep in mind. I would expect that we'll continue to have a net sales price advantage over our Canadian competitors here going into the fall.
- Bob Jornayvaz:
- Yeah, let me give a little more color on that. We were surprised the prices went as low as they did. If you'll remember back – we like to take people back to the fourth quarter of last year when we had that great weather window and we were selling potash for 400, $450 a ton. And we were selling our red granular product as quickly as we could and we weren't getting any farmer pushback as to pricing at that time. We saw strong – Intrepid saw strong pricing in the first and second quarter in our markets. However, the Canadians still had inventory that they needed to work off. I think you'll see that international sales throughout the world have begun to pick up substantially. But there was a period in time where – that existed in the first and seconded quarters where the Canadians were moving inventory throughout their systems. And in order to ensure that they were going to move that inventory, they lowered pricing. So in answer to your question, were we surprised that the price went as low as it did? The answer is yes, we were surprised that it went as low as it did and we don't know that it needed to. So we think that the market has returned to much more normalized demand. And given where dealer inventories are today, we're very, very confident in what the future holds.
- Elaine Yip:
- Then with the weather issues that you have had at your Langbeinite plant and they need to put customers on allocation, does that give you the opportunity to raise prices on those products?
- Bob Jornayvaz:
- Well, we currently have an announced price increase in our granular Trio for September 1. And so we have already announced that price increase and our customers are all aware of it and we're not seeing any pushback on that pricing from our customers. So as the market develops and the market continues to strengthen, we're going to use every opportunity that we can to continue to enhance our margins and focus on marketing our product given as tight as it will be.
- Elaine Yip:
- And then finally on your CapEx program, can you talk about what's driving your lower CapEx assumptions for this year?
- David Honeyfield:
- Elaine, this is Dave. Yeah, and just to make sure we level set folks, the range that we announced at the beginning of the year was $125 to $155 – or pardon me, 125 million to $155 million. I think as you saw and we touched on I know some time around the first quarter announcement, You know John and I had sent some projects back to the guys to do some additional documentation. Our folks were working diligently on making sure that we were going through all the necessary steps that we needed to. And so there was probably a little bit of a slowdown there in the first part of the year. As we sit back and look at it now, we know that the timing of some delivery of items that are going through the fabrication process around the Lang recovery project, that's going to come in close to year end. Some of it'll be right at the end of 2010; some will be right at the beginning part of 2011. I think the important part in the message to takeaway is the range that we have now, now we have got that 105 to $125 million range. We're moving forward with all of our projects. This is not an exercise like we did last year where we were really trying to marshal cash and control the pace of spending. What we're doing now is those numbers are reflective of what we think we will get done this year. We are moving forward with the Lang project on plan on schedule. The compaction project at Moab is expected to be up by the end of this year. We're continuing to move forward with the warehouse program. A lot of the instrumentation, you know there's some deliveries of product associated – or deliveries of materials associated with the HB that may come in next year, but it's still coming in before the anticipated permitting date. So I wouldn't describe it as anything to be necessarily concerned about. I think it's really a better message that controls around that are very tight and we know we have a pretty good feel of where we're going to be for the year at this point now that we're six months in.
- Elaine Yip:
- Okay, great. Thank you very much.
- Operator:
- Your next question comes from the line of Don Carson [ph].
- Don Carson:
- Yes, thank you. Clarification, I joined the call late. But did you give out any specific third quarter volume guidance on potash? You made the comment that, obviously, you could have sold out at the new lower prices if you matched the Canadians. But just wondering, are you deliberately holding back from the market so that you can sell at higher prices in the fall? So if you can just comment a bit on your volume outlook.
- David Honeyfield:
- This is Dave. We did not give any specific guidance around the fall. What we said is that we think we're entering into a much more normal season and that we're choosing which sales to take. I think that we think we're in balance in terms of if you look at inventory levels and production that we're going to pretty well sell through our granular product into the third and fourth quarters. So I think I would just – when I sketch it out on paper I'd say just look back at what you think a more normal volume is and that's really the guidance that we have provided.
- Don Carson:
- I assume that you're holding back and I mean not – and doing as little as you can or just choosing your highest net back markets. I mean, if you assume that this $35 decline could reverse itself by fourth quarter.
- David Honeyfield:
- I think that we certainly have some committed sales in the third quarter. We have our consignment programs that we continue to sell into to participate in those markets. We're holding some tons back for our truck markets because those do tend to be higher margin sale. So there's a balancing point and I would tell we're managing the inventory levels and the sales levels to do what we think are the right things for us.
- Don Carson:
- Okay. And then turning to operations, Bob, you talked about how obviously as you commission new projects there'll be a bit of a hiccup as you bring them online. But it also seems that just some of your operational practices have contributed to the higher cost. You mentioned how you're changing some of your maintenance programs at the East mill. So can you comment on that because I know you made this comment that you're going to experience a few operational challenges along the way? I assume that's more than just commissioning new projects.
- Bob Jornayvaz:
- Well, I'm going to let John speak to specifics in just a second. But the one thing that I really want to take people back to is that, at East, we're building an entirely different potash and Langbeinite producing system. We're changing the way in which we are recovering Langbeinite. I'm going to let John go into the specifics in how those processes are different so that when you bring on – and let's not forget that, at East, we produced a mixed ore body so that we're producing both potash and Langbeinite from the same ore. So as we make a change to the potash side of the equation, it sometimes affects the Langbeinite side of the equation that is getting totally rebuilt. So sometimes it's two steps forward and one step back as you bring on a potash piece of the equation or a potash process and you still haven't built the corresponding Langbeinite piece of that equation that goes into this overall system at East. I know that sounds confusing but I'm going to let John talk about how we're going to be producing Langbeinite on a going forward basis versus how we're producing it today. What a tremendous change that makes in our water balance issues and then just what it's like to commission something as big and significant as our whole new thickener system out there.
- John Mansanti:
- Further to what Bob is saying, is capital investment to lower cost has been kind of a theme that we have had at Intrepid and we have seen the benefit of that at the West plant. The East plant is now under our focus and, as Bob said, we're putting money into the Langbeinite facility and the other parts of that. What we're seeing in is there's a combination of capital investment opportunity and a combination of dealing with our operating management systems and our maintenance management systems. And those in turn are necessary to prove the uptime. One of the things that compounds our downtime or our ability to run is the weather events currently. And, as Bob was saying, by the modifications we're doing to our Langbeinite facility, the whole water balance issue in our facility changes dramatically such that we're able to actually produce more material at a higher recovery rate and we're less susceptible to the weather related issues in that area. As far as the commissioning, any time you commission a new facility and especially newer technologies, there's going to be some hiccups. So we'll do what we can ahead of time to plan through those and to work through them. But I think it's prudent to anticipate those as we go into any type of startup and that's what we're doing as we move forward on those projects.
- Don Carson:
- Thank you.
- Operator:
- Your next question comes from the line of Mark Gulley.
- Mark Gulley:
- Good morning. Three questions if I can. First of all, you did talk about trying to focus us on the long-term productive capacities of your two units. Can you also complement that with how should we be thinking about long-term cost per – costs of goods sold per ton, let's say, out in the ‘11 timeframe both on the potash side and the Lang side.
- David Honeyfield:
- Mark, this is Dave. We're really not going to head down the path of giving specific guidance around that. I think the information that we provided earlier to Edlain is as far as we're going to go. Directionally, we anticipate that we'll see our cost per ton numbers come down through this part of the year and we anticipate that those will be pretty reflective in the fourth quarter of what we'll see for a little period of time. And there is always, as John has touched on and we have touched on through the call here, I think that's the right way to look at it as that's the directional focus. But we're just not going to give specific spot on guidance here.
- Mark Gulley:
- Okay. Secondly, with respect to Lang, you talked about the fact that you're sold out on granular but you're doing some new marketing programs on standard product. Maybe help me understand this, is it possible, is it feasible or even desirable to shift all that – to compact all that product and make it granular? Maybe I'm missing something in terms of the markets and the productive issues here.
- Bob Jornayvaz:
- Well, let's be clear here. The new Langbeinite facility will give us the option to compact 100% of it. We don't have to compact 100% of it. And so once again what Intrepid is trying to build into all of its facilities and all of its projects is the operational flexibility that then creates marketing flexibility so that we can go out and capture the best margin. And so once again, it's to build in as much flexibility into the system. So the new Langbeinite recovery project, we don't have to compact 100% of it. As we build those standard markets we can then right size the amount of product for the right market to enhance – to capture the best pricing, thereby, getting to the best bottom line. So I don't know if that answers your question as to the compaction piece. But once again, it really gets back to operational flexibility.
- Mark Gulley:
- That helps a lot. And finally I'll just ask my traditional question about the split with respect to your sales volume tons on potash that we'll eventually see in the 10-Q.
- David Honeyfield:
- Sure, Mark. For the third – pardon me, for the second quarter of 2010, that split was 72% into the agricultural sector, 18% industrial, and then the feed was 10% of our total product mix.
- Mark Gulley:
- Thank you.
- Operator:
- Your next question comes from the line of David Silver.
- David Silver:
- Yeah, hi, good morning. I'll just preface my remarks by saying unfortunately I had to step away for a minute or two so if I force you to repeat yourself I apologize. First thing is kind of like I guess a housekeeping question. In the release you talked about capital spending of $9.8 million at a couple of points. And yet when I look at the cash flow statement property plant and equipment is more like 23.7 million. Is there a distinction between what you're talking about capital spending and what shows up on the cash flow statement?
- David Honeyfield:
- David, this is Dave Honeyfield. There is a distinction around that. The 9.8 is really the number that we try to have people focus on because that's indicative of the activity level. The cash flow statement, the way the cash flows work that just relates to truly when you write the check. So if we have some work that's in progress, we'll capture that in our capital spending number that we report. And then if we don't get a bill for it for a month and a half we have already have those dollars accrued and the cash flow statement just reflects when the cash actually moved. So they are always going to be different. This quarter was a pretty big difference which I think is really reflective of how much capital came on in the last part of last year and then early part of this year. A lot of checks for those were written in the second quarter.
- David Silver:
- Okay, very good. I had a question – I have a couple of questions here I guess on the marketing side. So one of your North American competitors reported yesterday and in their potash segment for the second quarter in a row they had, not only a very high overall level of shipments, but there was a decided tilt towards the domestic market. So when I look at their trend in either absolute tons sold into the domestic market or the year-over-year improvement, it's kind of dramatically higher than the numbers that Intrepid was able to put up. And I guess that just makes me wonder about whether there's some aggressive marketing or some competitive dynamics in the domestic market that are maybe changing things and are causing some differences in how individual companies respond to the improving market conditions.
- Bob Jornayvaz:
- Let me address that on a macro basis and then I'm going to let Dave address it as to specific percentages. On a macro basis, there was no question that the Canadians had inventory that they probably weren't sure they were going to sell as they looked at their first and second quarters. And so there's no question that I think the Canadians were aggressive in certain areas because we had the opportunities to make more sales that we chose not to make. We were thinking that the market was going to firm and is going to continue to firm and so we chose to pass on certain sales looking forward to what we think is going to be a darn good third and fourth quarter. From a market share perspective, if you will, I'll let Dave address what those numbers look like. Dave, do you want to?
- David Honeyfield:
- Yes, I think we need to take a little bit of a step back and if you look at the comparative numbers, and I believe you're probably talking about Agrium, in North America they sold basically 10 times as much potash the second quarter of this year than they did the second quarter of last year. I think the piece that you need to keep in mind is that what they did last year they hardly sold any and we sold 125,000 tons. So we didn't see the same fall off that they did. So, as we touched on, we continued to move product even though the last year numbers at relatively stronger percentages. When we look at the market share numbers that we have for North American sales in the second quarter, those are very much in line with what we have seen on historical annual numbers in the North American sales market. Hopefully that adds a little clarification, Dave.
- David Silver:
- Okay. Now I appreciate that. I had another question, which I think maybe piggybacks off a question I heard earlier, but it refers to your comments about marketing selectivity or marketing selectively I guess during the third quarter. And you have done a great job explaining kind of the overall dynamic and it makes perfect sense to kind of channel your product into a rising market in a certain way. I understand that, but operationally how difficult is that in the current market? And by that I mean you had a very high level of sales a couple of years ago and my sense is that if you are going to restrict or limit sales people do look to past order patterns. And in the recent past your customers could maybe say we bought at a higher level than what you're allowing us here. And I just wonder how you manage that on a customer by customer basis if certain customers get more of a normal allocation and other customers are restricted to less. I mean, I don't want to speculate too much, but is this a case where you might deemphasize sales into the non-agricultural market at the expense of agricultural? I mean could you just talk about operationally how you put a selective marketing strategy into effect.
- Bob Jornayvaz:
- Well, I tell you it's by building the type of plants or rebuilding the plants that we're building. And once again I'll kind of take you on a tour of our plants and everything that we're doing that's different. For example, at our West plant where we now sell some of our red standard into some growing markets that we'll talk about later on. But it's that ability to have operational flexibility by adding new screening at our West compaction – or north compaction plant with our West product we created a more diverse product mix that allowed us to reach out to a whole variety of different markets that existed. At our current East plant, we're basically restricted in that we can only produce so much Trio Langbeinite – I'm sorry, so much Trio granular product and we're forced to accept a certain amount of industrial product that comes by how our plant is currently setup. The same with the white potash standard and the white granular. As we're totally changing out the whole production system at East, we're going to have complete operational flexibility. So as R.L. goes out and develops a certain industrial market, we can produce the right amount of industrials product to sell into that marketplace. The same thing at Moab. By having the opportunity to produce 100% of the compact granular product doesn't mean we have to, it means we have the option to, which gives our marketing guys tremendous flexibility. And so none of our facilities have had the kind of flexibility, marketing flexibility because they haven't had product flexibility. So by changing out these plants and making the capital investments that we are, we can now dial in on how much compaction we want to run so that we know how much granular product we'll have versus industrial product. And it's that marketing strength that R.L. is now going to have to go out and right size into the market. So I think you're going to see over the next couple of years significantly increased margin opportunity because of the flexibility we have created for ourselves. I don't know if I – does that answer your question?
- David Silver:
- I might follow up, yes, it touched on it. Just a couple of quick things. Has Intrepid officially matched the summer price lists put out by Potash Corp and I think Agrium? In other words, have you officially matched the summer fill terms or are you doing it more on a customer by customer basis?
- Bob Jornayvaz:
- I guess – am I hearing the question, did we lower our prices as far as they did?
- David Silver:
- Yes.
- Bob Jornayvaz:
- In certain circumstances we did in others we didn't have to.
- David Silver:
- Okay. And then could you quantify what your Trio price hike for September 1 is?
- Bob Jornayvaz:
- It's $15.
- David Silver:
- 15. And then last question, I appreciate the patience here. Could you just remind me what your last bottleneck or your last task or two that you need to complete before you can start with the Rustler water – injecting the Rustler water into the HB mine. Is that the EIS or are there other kind of regulatory or administrative bottlenecks there before you can start?
- Bob Jornayvaz:
- It's simply the EIS.
- David Silver:
- It's just the EIS. Terrific.
- Bob Jornayvaz:
- David, as that's finished we start construction.
- David Silver:
- Terrific. Okay, thank you very much.
- Operator:
- Your next question comes from the line of Fai Lee.
- Fai Lee:
- I just had a question regarding the potash price list and the summer fill program. In terms of your competitors, they announced an increase of $30 per short ton for March and not all of it was achieved and now the summer program they're kind of giving it back whatever they did achieve. And I'm just wondering in terms of Intrepid that $30 price list increase, how much did you actually achieve?
- David Honeyfield:
- Fai, this is Dave. What we saw was – we saw a good chunk of that come through and, like Bob touched on, each of the markets was a little bit different. I'd say that those larger price announcements are definitely geared more towards that most commoditized part of the market, which is going to be your Midwest where the volumes are. And those are the places where I don't know that anybody got the full price increase. So, R.L., do you want to add to that?
- R.L. Moore:
- Dave, what I'd say we did get the full $30 price increase on our truck tons that were shipped and went to our backyard markets, both out of Carlsbad and the Utah plants. What you have to realize when you have a $30 increase like that the location that are close by you can capture it but we do have to ship out of Carlsbad and those Utah plants and compete against river locations where you have import barges moving up the river, Canadian product coming down. We got part of the 30 on just about everything we moved but we definitely got all of the 30 on most of our truck shipments out of those facilities.
- Fai Lee:
- Okay. So in terms of the $35 per ton decline expect in net realized price, is a way to think about that you're going to be giving up about I guess the increases you did achieve plus there's probably some additional freight costs due to where you're shipping the product, logistics costs. Is that how it gets to the $35?
- David Honeyfield:
- Fai, this is Dave. Part of the answer to that really comes back to the product mix piece again.
- Fai Lee:
- Yeah.
- David Honeyfield:
- And when we saw that slowdown we talked about in the agricultural market, what that meant is that the prices we were receiving in the markets that we did continue to sell into in the second quarter where you might get a little bit higher net realized price were proportionately more. So when you're having product move into that very competitive area in the Midwest, you're going to see a little bit lower net realized price on it. So it's not – I'd love to tell you that it's exactly this dollar, this dollar, this dollar, the product mix is a component of it. We are going to see some lower pricing here in the third quarter compared to second quarter because of the announced summer fill program and also because we anticipate having more sales come into the agricultural part of that than we had correspondingly in the second quarter, if that helps.
- Fai Lee:
- Yes, it's that second part I was trying to understand. So you're shipping it a bit further into the, say, the U.S. Midwest, which will cost you a bit a more and you'll get a lower realized price in that case.
- David Honeyfield:
- It's certainly a very, very competitive market, as you know.
- Fai Lee:
- Yes. Okay. And just back to David Silver's question regarding Agrium, I guess. I think the surprise was really in terms of, not year-over-year, but versus that Q1 of this year that they didn't really see the decline in – well, didn't see any much of a decline in their sales and they attributed it to their size, which I assume Intrepid would share as an advantage, as well as their distribution capability. And I'm just wondering it kind of brings up this Moab compaction if you had this project in place, do you have a sense of how much higher your sales volumes could be with that additional flexibility in the quarter?
- David Honeyfield:
- Fai, this is Dave again. I think the – a part of Agrium – you guys know these companies better than we do probably from an analyst perspective. But my sense is they may have been able to fill some of their own retail with part of their product and that may be an element to look at, I'm not certain. But I would take you back to the market share overall and we have continued to maintain our market share in North America. My sense is that had we been sitting there with all the product we have in Moab in a granular form, yeah, we would have been able to move more of that.
- Fai Lee:
- Okay. And I just wonder how much more do you think you could have moved?
- David Honeyfield:
- I don't know that I can get to you answer on that one right now, Fai.
- Bob Jornayvaz:
- Significantly more. I mean, I think –
- Fai Lee:
- Okay. That's what I was trying to get at.
- Operator:
- Your final question comes from the line of Horst Hueniken.
- Horst Hueniken:
- Good morning. I'm just wondering what your expectations would be with regards to product mix as they relate to the $35 per ton number. You mentioned part of it is mix part of it is the summer infill program. Obviously, the summer infill program ends but there's still the issue of mix. Could you comment on that with respect to what you might see in the fourth quarter?
- David Honeyfield:
- Horst, this is Dave. I would say it'll probably be a pretty normal distribution in the fourth quarter as expectation. So I don't know that there's much more I can really add off of the other comments that we have had throughout the call here.
- Horst Hueniken:
- All right. I'll work with that. Thank you.
- David Honeyfield:
- Okay.
- William Kent:
- I think at this time – go ahead, please.
- Operator:
- And there are no further questions at this time.
- William Kent:
- Okay. Well, we'd sure like to thank everyone for joining today's call and for taking the time to learn more about Intrepid. Have a great day.
- Operator:
- This concludes today's conference call. You may now disconnect.
Other Intrepid Potash, Inc. earnings call transcripts:
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