Intrepid Potash, Inc.
Q1 2013 Earnings Call Transcript

Published: 2 May 2013

[Operator:]

Good morning, and welcome to the Intrepid Potash 2013 First Quarter Conference Call. [Operator Instructions] I would like to remind everyone that this conference call is being recorded today, Thursday, May 2, 2013, at 8

[Gary Kohn:]

Thanks, Brock. Good morning, everybody, and thank you for joining us on our First Quarter 2013 Earnings Conference Call. Presenting on the call today are Bob Jornayvaz, Executive Chairman of the Board; Dave Honeyfield, President and Chief Financial Officer; and Kelvin Feist, Senior Vice President of Sales and Marketing. Also in the room with us today are Hugh Harvey, Executive Vice Chairman of the Board; John Mansanti, Senior Vice President of Operations; Martin Litt, Executive Vice President and General Counsel; Brian Frantz, Vice President of Finance and Chief Accounting Officer; and Ken Taylor, Vice President of Business Development & Research. I would like to remind everyone that statements made on this call that are not historical facts or that express a belief, expectation or intention, including statements about financial and operational outlook, are forward-looking statements within the meaning of the United States security laws. These statements are not guarantees of future performance. 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 more information with respect to the risks, uncertainties and other factors, which could cause our actual results to differ from our forward-looking statements, we direct you to the news release we issued yesterday and the risk factors and management's discussion and analysis of financial condition and results of operations in our most recent annual report on Form 10-K that's filed with the SEC. All forward-looking statements are qualified in their entirety by such factors. Also during today's call, we may reference certain non-GAAP financial measures, including adjusted EBITDA, adjusted net income and adjusted net income per diluted share, which we believe provide useful information to investors. Our earnings news release, which is posted on our website at intrepidpotash.com, includes reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures. With that, it's my pleasure to turn the call over to Bob.

[Robert P. Jornayvaz:]

Thanks, Gary. Good morning, and welcome to everybody. We appreciate your time and interest in Intrepid. In the first quarter, we delivered on the elements of the business that we can control. We had healthy sales, improved production, lower unit costs. We made great progress on our major capital projects. As we've noted before, we've taken a very deliberate approach to growing and diversifying our customer base in the markets we serve. We are confident that our numerous product offerings, marketing flexibility, geographic advantage and the strong customer relationships that we've invested in and built over the long term position us to prosper even in the event of less than optimal market conditions. Our first quarter sales results demonstrate this quite well. We capitalized on the array of sales opportunities in our regional markets and despite the weather-related delays in spring applications, we delivered healthy sales results for both potash and Trio. On the operations front, we continue to build on the momentum we established throughout 2012 at our East facility. We saw the benefit of the execution of our long-term improvement plan with higher production and in lower per ton costs good sold for both potash and Trio. At our East facility, we produced 56% more tons of potash in the first quarter compared with the same period last year. We achieved the highest Trio production results in the last 2 years. In fact, we improved Trio production 53% in the first quarter of 2012 to 46,000 tons. While we still have work to do at East, the benefit of our deliberate approach taken by our operations team is obvious when looking at our consolidated first quarter cash operating costs of the goods sold for potash and Trio. Our cash operating costs of goods sold for potash was $174 per ton, which represents an 11% improvement from the same period last year. Through the increased Trio production, we reduced our Trio cash operating cost of goods sold by 19% to $180 per ton. These improvements at our East Facility on both the potash and Trio sides are a testament to the focused, hard-working, innovative and extremely determined folks we have here at Intrepid. Another opportunity we have been investing in to expand our margin and increase cash flow is our HB Solar Solution Mine. When in full production, we will produce an incremental 150,000 to 200,000 tons of potash at an estimated cash operating cost of less than $80 per ton, making HB one of the lowest cost potash facilities in North America. We are confident that we can achieve this because of the long-term success we have achieved in combining solution mining with our solar evaporation in our Utah operations. You have heard me say it before. Simply put, Intrepid has a long, consistent track record of generating more cash to the bottom line for every ton of potash we sell than any of our North American competitors. While some talk about their lower costs, when factoring in diverse products, proximity to markets, royalties, production taxes and higher net realized sales prices, Intrepid consistently delivers more margin per ton. We believe margin and the resulting cash flow are the most important aspects of a business. Our 5-year track record of generating the highest margin is not an aberration. It is us creating value over the long term by investing in our assets with a focus on the opportunities that lower our production cost per ton and by marketing our product in a responsible manner with a dedicated focus on achieving the highest average net realized sales prices in North America. Now Kelvin Feist, our Head of Sales and Marketing will update you on our sales results and market conditions.

[Kelvin G. Feist:]

Thanks, Bob. We sold 185,000 tons of potash in spite of the unfavorable weather conditions during the first quarter. The sustained cooler temperatures and wet condition delayed planting and nutrient applications across the markets we serve. This compares to the first quarter of 2012 when we saw much warmer conditions, which allowed for an early start to spring planting and potash applications. Weather patterns vary and impacts on our business -- impacts our business differently from year-to-year, highlighting the importance of being flexible in our approach and to making investments in the relationships we have with our customers. The buying patterns of our customers will have ups and downs. The piece that we can control is making sure we are well positioned for the upcoming compressed time frame for nutrient application. We are utilizing warehouse space and leveraging our close proximity to customers to sell our planned potash tonnage in the second quarter. Our approach will allow us to respond quickly to serve our customers when the application window opens and the peaks in demand materialize. While our customers are concerned about the recent weather, most areas still have a positive outlook and expect a decent spring season. It is always important to maintain perspective, and the fact is that there's some strong pockets of activity in the United States. The USDA corn planting estimate remains unchanged at 97 million acres in the U.S. And even if this number decreases slightly, we are still going to see a strong agriculture market in the United States, and we are well positioned to meet the demand and to supply our customers. In the near term, we expect pricing to stay fairly stable. I was particularly pleased with the results for our specialty product, Trio, in the first quarter. The average net realized sales price of Trio increased by $49 to $351 per ton from the first quarter last year and was up an additional $4 per ton from this past fourth quarter. We sold 39,000 tons compared to 28,000 tons a year ago. We expect continued success with Trio in 2013 and plan to sell every ton we produce. Thanks, and I will now turn the call over to Dave.

[David W. Honeyfield:]

Thanks, Kelvin. I am really pleased with our -- both our operational and our financial performance in the first quarter. I attribute our achievements to our long-term, disciplined approach to growing our business and increasing our production of lower cost tons, all of which make it possible for us to deliver the highest all-in cash margin in North America. We have shown the discipline to stay focused on the longer-term goals of our business. This is critically important because the reality is that there will always be quarterly variations in our cost of goods sold due to production cycles, the mix of sales from different -- our different facilities and the seasonal nature of the business. What remains important to us is having a management team in place that expects and understands these variations, having plans in place and flexibility in our operations and having the balance sheet and dedication to a long-term plan of growing production of lower cost tons and delivering the best margins in North America. While Kelvin touched on the sales volume for the quarter, I want to highlight the success we had on the pricing during the period. We earned an average net realized sales price for potash of $417 a ton due to our strategic, geographic advantage, our diverse markets and our marketing abilities and in part, to our discipline in converting the right opportunities in the market. I also want to make sure people recognize the amount of margin beginning to be delivered on the sales of our Trio product. This specialty product is delivering value to both Intrepid and to our customers. We strive to lower cost of goods sold year-over-year and are making the right moves to obtain a positive trend as measured over time. We're pleased with the improvements in the first quarter as a result of the increase production at East, the solid results of our Utah operations, which overcame some real challenges in January due to extreme cold weather and the consistent and reliable production from our West and our North facilities. We finished the quarter with cash and investments totaling $7.6 million, and we have not had to draw on our unsecured $250 million credit facility. As expected, we received $149.3 million in net proceeds from the funding of the senior notes in April. Our cash flow, balance sheet and access to long-term, low-cost capital afford us the ability to grow our business and invest in essential capital projects. Intrepid's capital projects are designed to drive flexibility, growth and margin. Our estimated capital invest -- our -- yes, our estimated capital investments for 2013 remain steady in the range of $235 million to $285 million, with the vast majority being invested in our 3 major capital projects. The team made great progress in the first quarter with $64.2 million in total capital investment. Looking forward and specific to the remaining investment for the HB Solar Solution Mine, North Compaction and the third horizontal cavern system in Moab, we expect that approximately $120 million to $130 million will be invested over the remainder of this year for these 3 projects. As these 3 major projects either are completed or near completion and the related capital intensity decreases in the fourth quarter of this year, we expect to reach an inflection point when cash flow from operations begins to exceed capital investment once again. It's pretty impressive to see how the investment in the HB Solar Solution Mine continues to progress, driven by the skill and teamwork of those working on this project. The team is delivering against a very tight schedule. To date, we've completed the majority of the pond work. We filled many of the ponds with brine, and construction of the mill is in full swing. We're optimistic about being able to begin processing through the mill and delivering first production late in the fourth quarter this year. Additionally, the team overseeing development of the new North Compaction plant is producing similar success. We remain on schedule to have the first and second compaction lines in service in mid-2013, well in advance of the expected production from our HB Solar Solution Mine and the increased production from the existing West mine. We're building this high-capacity and more efficient granulation facility, so that we will have increased flexibility to produce the products that our customers want when they want them. The flexibility we built into our operations allows us to target the highest margin sales. It's probably worth noting that our comments tend to focus on these 3 major projects, but I want to remind folks that we have a team of highly qualified people that are making good progress on a large number of other smaller-scale capital investments that include both sustaining and opportunity projects. In closing, we have a clear set of strategic priorities and are delivering on these. The strength of our first quarter results and longer-term trends demonstrate our ability to lower costs over time, increase production and drive sales by growing our markets. We're off to a good start this year. We are pleased to be delivering on our promises to shareholders. We'll now open the lines for any questions.

[Operator:]

[Operator Instruction] Our first question today comes from Mark Connelly of CLSA. Kurt Schoen - Credit Agricole Securities (USA) Inc., Research Division This is Kurt Schoen in for Mark. I was hoping you could give us kind of an update on how you see the HB volumes ramping into 2014 and how you see the incremental low-cost tonnage ramping throughout the year as well.

[David W. Honeyfield:]

Sure, Mark -- or Kurt. This is Dave. What we're expecting is pretty moderate production in the fourth quarter this year like we talked about once the mill construction's complete. And then next year, what we're -- what we've said is that we should be somewhere in that maybe 100,000-, 150,000-ton range next year. Though there's obviously, a little bit of seasonality around that based on the evaporation timing. And then that ramps to 150,000 to 200,000 tons in 2015. The cash operating cost that we talked about, the $80 per ton, that's what I'd put in there for 2015. It may be a little bit higher in 2014, but it's still going to be significantly lower than what our average is here today. So we'll really start to see the more significant benefit of that roll in beginning in 2014. Kurt Schoen - Credit Agricole Securities (USA) Inc., Research Division Okay. And then with your access to low-cost capital, what is your view on kind of maybe implementing a share repurchase here with the stock price where it is?

[David W. Honeyfield:]

I think the important part for us to keep track of right now is getting the capital deployed and getting these projects completed, and that's really where the focus needs to be in making sure we keep the balance sheet very, very strong. I think there's a right time for us to look at what we do in terms of evaluating other potential investments, whether we look at repurchases, whether we look at dividend policy, and it's probably as we get closer to wrapping up the HB and the North project. So as of right now, I don't know that I have anything from a policy perspective to talk through.

[Operator:]

The next question comes from Vincent Andrews of Morgan Stanley.

[Ted Drangula:]

This is Ted Drangula in for Vincent. I had a, I guess, a follow-on, on the HB expansion and it's kind of, I guess, a bigger-picture, longer-term thing. But as the HB Mine comes on with significant capacity and production in '14, and then you have competitors in Canada have projects. There's the advanced coal [ph] mine coming on, I guess, the later part of '14 and into '15 and then brownfield in North America as well, how do you guys look at, in your long-term plan, how the competitive dynamics shape up in North America? I mean, I assume that we're not going to have a lot of growth in the market here. I'm just curious how that -- how you think that might play out over the next several years.

[David W. Honeyfield:]

Ted, this is Dave. I'll start on it, and Robert, Kelvin, if you guys want to jump in, too, please do. Overall, Ted, what we see is in the North American market, there is some growth to it. And I think that's something that we need to recognize as you continue to see more corn acres planted, you see expansion in the Dakotas and such. And without a doubt, it's a -- one of the best markets to be in, and it represents our backyard markets. I think as we look to grow, I think, we need to keep the size of that growth, which is very significant to Intrepid. But recognize that it's not a huge component of overall North America and certainly, the world capacity. Certainly, the additional capacity that's coming on in Canada is very focused on serving China, India, Brazil, some of those markets, which, at some point, you're just going to have to -- I think we're going to see that increase in demand come. So we look really at our customer relationships and finding the right locations to work with our customers, and we feel confident that we'll be able to get those tons in the right markets.

[Robert P. Jornayvaz:]

This is Bob, Ted. I just want to add to that, that we have very consistently and strategically increased our geographic footprint over the last several years and expanded our customer base while still maintaining our high net realized sales price. So we've done that in a very focused fashion in terms of the customer relationships that we've created, and being able to slowly add more tons in a more diverse geographic footprint, we've already begun and we'll continue to slowly expand. But we think that we can bring on our tons as we have done and not necessarily impact the marketplace by continuing to build extremely strong customer relationships with not only our railroad relationships, our trucking relationships and our ability to get into the marketplace in a nondisruptive fashion by delivering just-in-time inventory and incredible -- some of the best products in the United States -- in North America on a just-in-time basis.

[Ted Drangula:]

And I guess switching from the big picture, long term, more to the, I guess, near term and how the second quarter plays out. I mean, it sounds like -- versus where we might have thought the second quarter playing out a few months ago, that April is probably slower due to weather, and then are you guys looking at maybe more concentrated sort of, I wouldn't call it craziness, but a very rapid moving May and maybe a typical sort of June versus a normal year? I mean, is that how you guys would shape it up? And I guess, the -- overall, do you feel like -- that your volume outlook for the first half where you stand now is no different than where it might have been 3 months ago?

[David W. Honeyfield:]

Ted, this is Dave. I think you describe it right, that it's going to be a pretty darn rapid season when we see those breaks in the weather. And what we look at is if the ability of a farmer to get a crop in and to get their fertilizer down, it's measured in days and weeks. Now it's not measured in kind of 6 to 8 weeks sort of time frames. Guys own all their own spreading equipment, so they're not waiting in line for their turn. You see the warehouse system having been built up in larger markets. We've worked very closely with our customers to make sure we've got tons in position, and we probably have more tons in that situation right now than we have. So I think we're really well positioned for it. And like Kelvin touched on, there are some pockets of strength in the U.S. markets that are continuing to move forward. So I think we're in pretty good shape on that. And -- but I think you described it right. I think it's going to -- when it goes, it's going to go very, very quickly. And that's going to put some strain on the system, which oftentimes ends up really being a benefit for us because you see a few more trucks move, and I think that we kind of see it as an opportunity.

[Operator:]

The next question comes from Adam Samuelson of Goldman Sachs.

[Adam Samuelson:]

Maybe, first, just continuing on the discussion about spring. I mean, how has the weather, if at all, in the kind of this really slow developing April, impacted any of your dealer behaviors if at all? And any particular region where there's more or less concern about the planting delays? Any color there would be helpful.

[Kelvin G. Feist:]

Yes, Adam, it's Kelvin here. I think there's a number of things going on. First of all, the top of mind is the -- some of the flooding going on in the Midwest, and that's obviously concerning and delaying things there. The customer base is very resilient today, and they still believe that they're going to see most of those acres. So I would say, generally speaking, they're pretty comfortable, concerned, I guess, if we continue to see these patterns of weather. But if we can get a dry window here the believe is that they're still seed a lot of corn and have a pretty successful spring. So we've got a couple of other regions. We're still relatively dry through the Texas Panhandle and up through Kansas and Colorado. Would love to see some of that moisture get spread around a little bit. But the reality is that one's delayed, and that some of that's more cold-weather related.

[Adam Samuelson:]

Okay. That's helpful. Sorry...

[Kelvin G. Feist:]

No, we're pretty comfortable that we're going to see a decent amount of corn go in the ground. I think the USDA forecast is a little strong. We're probably 3 million below that today, somewhere in that 94 million acres.

[Adam Samuelson:]

Okay. That's helpful. And then just a follow-up on Trio, I think you've seen some solid improvement on the cost side, and the volume performance this quarter was good. Maybe just a little bit more color on kind of where we are in the deployment of the LRIP program and future key milestones that you're watching for. And then finally, I just -- maybe some clarification on the differences in the Trio guidance. There's a reference in the press release to selling basically ton that you have, Trio, but the production -- the high end of the production guidance is above the high end of sales guidance, so I just want to understand that more clearly.

[David W. Honeyfield:]

Sure. Adam, this is Dave. On the Trio plant, I feel like we're -- we've made some pretty significant steps on that. We really started to see the benefit in the first quarter like you saw in the numbers. On the -- there's still some things we need to do, and the real benefit of starting to see the improved production is we now have a little bit more product that we can use to start doing what I would consider to be really that commissioning phase on the pelletizer component of the business. And that pellet product is a highly desired product in the market that we need to get comfortable with that part of the manufacturing cycle, and that's a little bit of why you see those numbers be a little bit different right now as we recognize that we've got some work to do in that regard. And the pellet product is going to be where we really see that next opportunity on the Trio plant. That being said, like Kelvin touched on, the market demand is very good, and you see that really in the pricing. It's been a -- that's a real success story, wherein you look back a year ago and pricing was, what, $302 a ton in the first quarter of 2012, and now we're at $351 a ton. So I think that's pretty demonstrative of the demand that's in the market.

[Robert P. Jornayvaz:]

Yes. I just want to reemphasize how positive it is that we haven't used the pelletizer. We've been able to sell our standard at very high margins. We've been able to sell all of our natural granular at very high margins. So we haven't had to use our pelletizer. So now we have the chance to add even more margin, and we now have -- we're going to make standard product available to us to run the pelletizers. So the positive part of that is that we were able to sell everything at a much higher price, and we're going to continue to implement the pieces that allow us continue that margin.

[Adam Samuelson:]

And on that point, I mean, is there a timeline for when you think that, that's online? And roughly speaking, what do you think the price premium, the pellet product versus standard grade would garner in the marketplace?

[David W. Honeyfield:]

This is Dave. On the timeline component, I think you're just going to see us continuing to improve that over the course of the year. There is a little bit of art that goes along with the science of running a pelletizer because you're blending in a starch, and you've got to deform these pellets, and it's just going to take a little bit of trial and error to get through there. The guys are -- we've staffed that in a way that we have dedicated folks to it. We've got manufacturers reps that are on site, and now is the time when we're ready to do that. So I think we're just going to see steady improvement on that really throughout the year, is the way I would describe it. And Kelvin, if you wouldn't mind touching on a little bit of what you see on the market side on Trio, that'd be great.

[Kelvin G. Feist:]

Yes. I think in terms of the premium specifically, we're targeting markets that are close to the plant, that brings us a better net back, and there is a bit of a premium to our natural granular there. But you're right. We have some real strong demand not only the U.S. but also in the international markets, and I don't see that decreasing. The reality is people see value in the magnesium and the sulfate in that product and in all markets, and we certainly continue to see that demand as a result. So I don't see anything changing here in these next few quarters.

[Operator:]

The next question comes from Chris Perella of BoA Merrill Lynch.

[Christopher Perrella:]

Could you just elaborate a bit more on the total potash COGS guidance for the second quarter? I see they're coming in a bit higher than last year, and your shipment volume is probably up year-over-year.

[David W. Honeyfield:]

Sure, Chris. This is Dave. The piece that we continue to try emphasize is the cash margin component, and I think that's where we've seen that very significant improvement. I think sometimes we're -- I think the number you're probably looking at is -- includes DD&A, which obviously, is going to be a reflection of some of the significant capital investment that's been put in place. I think the piece that we keep trying to drive folks to is our operation in the plant and the resulting improvements in what we're generating in terms of future cash flows is really, really what we're trying to make sure folks are keeping a close eye on. So we talked a little bit about that cash flow generation relative to capital expenditure and moving towards that situation in the fourth quarter where we start to become very free cash flow driven. But all that's possible because of 2 things

[Christopher Perrella:]

All right. And shifting gears, I guess, to the market outlook and pricing. Some of the benchmark pricing has come in a little bit on soft April. Do you expect pricing to improve in May and June on increased demand? And is that going to net out to about flat pricing quarter-over-quarter in the second quarter?

[David W. Honeyfield:]

Yes, I think the pricing piece is going to be -- it's something, obviously, we're keeping a very close eye on. I think you're right to recognize that there's been a little bit of maybe softening that gets reported in the market. We see pricing being relatively steady through the spring here. And that means that it's going to be $5, plus or minus, $10, plus or minus where we saw in the first quarter. I think within a band, there's going to be a fairly low amount of volatility really that exists right now. Kelvin, I don't know if you have anything to add to that.

[Kelvin G. Feist:]

I think that's right. Short term here, so long as we get into the field and get going here, it'll abate some of that nervousness that's out there. But right now we're not seeing a whole bunch of activity on the price side, and that's positive there. Everyone still plans to supply the amount of potash that's required, and people aren't getting too antsy yet. So what happens beyond that is really, it's a pretty cloudy picture right now. But we got to get through the spring season before we start thinking about any bill or anything like that.

[Christopher Perrella:]

All right. And just one quick question, with the spike in natural gas prices recently, have you seen any material demand improvements to drilling rig customers?

[David W. Honeyfield:]

We're seeing pretty steady activity on the industrial side. What was interesting last year towards the, I don't know, kind of middle of the early part of the fourth quarter is a lot of the E&P companies had spent through their CapEx budget and started laying down rigs. And everyone's budget shows them starting to get back up to business January 1. The reality is that it tends to take a little bit more time. So that being said, our industrial business has been very consistent kind of quarter-over-quarter, year-over-year. So I think the opportunity there is positive in terms of increased demand as programs get more into their full swing through the spring, summer and fall.

[Robert P. Jornayvaz:]

Yes. The other thing is that we always do see a lag between a bump in the price of natural gas and rigs getting -- having -- standing up. So I think there is always going to be a slight time lag between April standing up rigs and price of natural gas.

[Operator:]

The next question comes from Joel Jackson of BMO Capital Markets.

[Joel Jackson:]

I wanted to follow up on one of the prior questions here, just on costs again, specifically on the cash cost because you seem to be able to reconcile your guidance for Q2 and the full year. It would seem to suggest that your cash costs for potash will go up in Q2 and then come down in the second half of the year. Whereas for Trio, it looks like they may come down in the second quarter and go up in the second half. Can you talk about that a bit?

[David W. Honeyfield:]

Joel, this is Dave. I think what I'd ask you to do is really -- if you go back and look over the last year, 2 years, 3 years, what you see is that there is variability quarter-to-quarter, okay, that results in COGS. And it's one of the things that I was trying to highlight in our comments, is that's a result of production cycles. It's a result of sales mix, whether you've got more tons that particular quarter or that particular month coming out of Utah or coming out of the East Facility. And so getting -- I wouldn't get too dug in on each individual quarter. What I would tend to look at is what does that trend look like over time. And I think if you look at that trend, over the last couple of years, what you'll see is that Intrepid has, I think, done a pretty darn good job of keeping those cash costs at least flat and starting to move them down. If you look at what's going on at Mosaic, if you look at what's going on at PotashCorp, you see cash costs having -- tending to have increased. And then when you look at what we see coming up with really increased volumes through better production at East, the ability to start bringing on the volumes from HB, I think we're going to be one of those unique companies that is increasing volumes and decreasing cost over time. So I would expect some variability, and I would stay pretty focused on that year-over-year trend, and that year-over-year trend is very, very positive. I mean, even when you don't -- there's not a whole lot of HB coming in this year. So this is very real cost control and very real operating efficiency that we're driving through the business.

[Joel Jackson:]

And on the depreciation, can you give a little bit of quantitative guidance, just sort of how depreciation is going to step up maybe in the second half of this year, maybe '14 as HB comes on and some of the other projects?

[David W. Honeyfield:]

Yes, we expect to see a little bit, but I think you can look at the -- kind of the year-over-year all-in COGS pieces to see what the impact of that is and kind of average that in. It shouldn't be too much more than it is right now, but we will have fair amounts of capital coming into the system. So that's already included in our full year numbers and I think fairly reflective.

[Joel Jackson:]

Okay. And finally, what sort of competition, if any, have you really seen on the river this spring from maybe some import product from Russia and the Israeli sources, get a sense of that, please?

[Kelvin G. Feist:]

Yes. Joel, it's Kelvin here. We are seeing a little bit more activity probably as the new entrants are more Canadian tons that we're seeing there. But we're also seeing some Israeli and some Russian materials there. Is it more competitive? I guess, the river's always competitive. So we tend to -- we saw it a little bit there, but we try not to put all our eggs in that basket. So that's always -- new earnings will be the low point in potash returns for us and for the entire market. So we try not to spend a lot of time over in that area.

[Joel Jackson:]

If I recall, there is a little bit less Russian product last year. Are you suggesting a little bit more this year than last?

[Kelvin G. Feist:]

Well, I guess, I can't speak to how much they're going to put on the river. What we know is there's products from a number of sources there and available to folks, and we know that, that's a very competitive market.

[David W. Honeyfield:]

And one thing that has changed though, Joel, is that you've seen, over the last couple of years, a very intentional effort by particularly Mosaic and PotashCorp to some degree to, frankly, make it harder for some of those import tons to come up the river because the warehouse space, a lot of that's already been secured. So I think we see that a little bit as well, and I think it really makes the folks from Russia and the folks from -- or the Israeli and the Russian tons, just think a little bit about, okay, how I am going to have to move these tons? What's going to happen? How much should I bring in? But I think in some ways that's a positive in terms of what those dynamics look like.

[Robert P. Jornayvaz:]

Once again, Joel, just to add, the change that we see in potential tons year-over-year is measured in tens of thousands of tons, not hundreds of thousands of tons. So in the aggregate, we see a consistent number of tons coming in from the Russians and the Israelis over the last 10 to 15 years, and the delta is really quite small. When you look at the change. So we just -- we've answered this question over many years, and we just don't see any significant change. And the increased or decreased amount of tons tends to be quite small.

[Operator:]

The next question comes from Andrew Dunn of KeyBanc Capital Markets.

[Andrew Dunn:]

You touched a little bit on this earlier, started to, but in previous quarters, you've mentioned that at the dealer level, they're really opting for just in time. Are you continuing -- did you continue to see that trend in the quarter and kind of currently? Or do you get the sense that maybe they're taking some inventory now?

[David W. Honeyfield:]

Andrew, this is David, and Kelvin, if you wouldn't mind jumping in here, too. I think, overall, we see that as having some degree of permanence to it like we've described before. A lot of the agreements that we hear about that are in the industry are multi-year type agreements. And this is the time of year where people have worked pretty hard to get tons close to the market. So I think it's a pretty logical assumption that dealers are looking for ways to not have to put a lot of working capital to work. But the other piece of a kind of a fairly steady pricing market right now is they also want to make sure they're not going to miss those opportunities. Like we touched on, when the windows open, things are going to go pretty darn quick. So guys are looking to be willing to make sure they've got inventory on hand in their own system as well.

[Kelvin G. Feist:]

Andrew, maybe I'll just chime in a little bit. It's Kelvin here. Generally, customers will enter the spring season with pretty full bins of all fertilizers. I think the real question is how much recharge or is there any recharge here during the spring season, and then if we need to fill behind that. So those are the pieces and I guess, we're ready for that peak demand and I guess, just patiently waiting for the season to get going.

[Andrew Dunn:]

And then you've talked a little bit about imports from outside North America, but if you look at the commentary for some of the -- from some of the other North American competitors and they're talking about their export volumes starting to look healthier, and their outlook seems to be a little more positive in that sense, are you seeing any kind of tangible benefits from that currently in your markets? Or do you expect to kind of see some as your volumes increase going forward?

[David W. Honeyfield:]

I think that's a key part of the business strategy for some of the other North American producers. And when you're -- when product is moving at decent clips like it is right now, I think what we see is just an overall improved health in the potash market. And I think that's really going to be the -- one of the pieces that is important as that they'll become a little bit better, I don't know, approach to that international marketing piece to continue that flow because that's really where a lot of the Canadian investment has been focused, is on serving that international market.

[Andrew Dunn:]

Got you. And then just one last question, looking a little farther out, I mean, obviously, you've mentioned several times as has others that we're expecting a record corn crop this season. But I've also heard that it's the case with stocks being very high that there may be some backlash in the following season. Is that something that you're looking at or concerned about at all? Or do you anticipate that, for example, even if that were the case, you'd be able to offset with the efforts you've been taking to grow your customer base and maybe take a little share in the domestic market here?

[Robert P. Jornayvaz:]

I guess the thing that I would like to remind people is that we represent about 10% of the United States market in terms of consumption. And so our ability to have diverse markets to have already expanded geographic footprint, to build strong relationships, to have created warehousing opportunities, to have made -- created relationships with the railroads, the trucking companies, the percentage of market that we represent, we just don't think we're going to have an impact on the overall market. And we believe we're going to continue to be able to exhibit, as we've done so consistently, our ability to put our tons in the market at higher prices because of the diverse products and our ability to deliver the highest-quality product now in the United States on a just-in-time basis. So we see it, but given the percentage of the market that we represent, we think we have very, very strong opportunities to continue to perform as we have.

[Operator:]

The next question comes from Bill Carroll of UBS.

[Bill Carroll:]

Following on an earlier question related to inventory levels, inventories across North American potash producers remain stubbornly high if you compare those levels to 5-year averages. But if we do get this more of a permanence to just-in-time ordering behavior, then do these longer-term averages remain less meaningful? And then how do we get a better handle on inventories in the system?

[David W. Honeyfield:]

Bill, I think that's a key question, and it's one that I know I personally have theorized that the overall inventory levels really are not that different. It's just the fact they're being captured on someone else's balance sheet and in a different reporting. Whereas if that inventory was on a dealer's balance sheet before, it wasn't captured in those North American statistics. So in some ways, I think we've actually got better clarity today in the overall numbers. I think the -- we started to see inventories come down a little bit in April. I think the export business or the international business by the Canadians, I mean, that's 95-plus percent of those inventory numbers to be realistic. And a big chunk of that is probably standard product that's going into those -- some of those larger markets. So it'd be great if we had some clarity on whether or not that was standard or whether or not that was granular because I think that would give a better clue of what markets that product would be directed towards. But my sense is that the averages probably still are going to have some meaning to them. I think we just have to put it in context of what's going on with the overall market like I think you're kind of pointing towards.

[Bill Carroll:]

That's helpful. And then can you share some -- what some of the major financial covenants are for the new debt offering and remind us of those for the existing revolver?

[David W. Honeyfield:]

Sure. There are 2 major covenants. One is a, basically, a coverage test, and those are numbers -- so I'm trying to remember the numbers off the top of my head on that right now, Brian. What's the leverage? Yes, So the leverage test is a 3.0, and then the financial coverage is below 5, isn't it?

[Unknown Executive:]

Yes.

[David W. Honeyfield:]

And when we look at our stress tests on those bill there, we look at those very closely, and we're not interested in getting near them. I think that the piece that's helpful is they're the same exact covenants in our revolver as it is on our -- on the senior notes. And the way we designed the senior notes is that, that will have the ability to float if we're able to renegotiate on the revolver for more liberal terms. The senior notes will float automatically with that.

[Operator:]

The next question comes from Michael Hoffman of Wunderlich.

[Michael E. Hoffman:]

On free cash flow, as it turns positive, you historically used to generate somewhere between $0.08 and $0.10 of revenues before the big capital spending wave. How do we think about where that cash goes back to once you start turning positive again?

[David W. Honeyfield:]

Mike, this is Dave. We're looking at that very closely, and part of it is really developing and linking back in with one of the earlier questions. I expect we'll still continue to have a level of capital investment that represents investments in sustaining. There continue to be a number of great opportunity projects that we're going to look at within our business and look at ways to partner with customers, with others around ways to create value upgrades for our products. But we want to make sure we've got the balance sheet to do that. And what we're really looking at is, is there a way to balance cash flow, capital reinvestment and look at is there a component of that cash flow generation that is available for any number of activities, whether it be like we've talked about before, is there a dividend? Is there a buyback? Are there other investments? So I don't know if it's a static number. It's one that I think there's a right balance, and as I look into 2014, I would say our CapEx is probably going to be somewhere around $150 million. Obviously, we haven't gone through the budgeting process in detail for 2014. But knowing what's on our future, I think that's a realistic number. So I think that gives you a sense of when you build in the models and the projections around HB and such, kind of what the capacity is for free cash flow generation.

[Robert P. Jornayvaz:]

And Michael, I'd just like to remind that you and I continue to be the 2 largest shareholders of Intrepid, so that we're totally aligned with our shareholder base in terms of returning cash to shareholders and making capital decisions versus distribution decisions and that we have great alignment in terms of the significant inside ownership that we have in this company.

[Michael E. Hoffman:]

Okay. That's great. And then is there a point or can you share with us your view of this, a point where it becomes too late to plant?

[Kelvin G. Feist:]

It's Kelvin here, Michael. I guess we don't see that scenario. I would say that we've got such an efficiency at the field level today that folks don't need very many days, and they can get the millions of acres done. Obviously, we're lagging behind the 10-year average, and certainly, if you look at last year, everyone's concerned if you're comparing year-on-year. The reality is if we get a window of a few days, we'll get that seed in the ground, and we'll get moving. We do need some favorable weather to get that done, but it will happen. It's a matter of if its 2 weeks away or 3 weeks away.

[Robert P. Jornayvaz:]

Yes, once again, Dave touched on a little bit earlier in the call is that the -- some of the fundamentals in the agricultural industry have changed in terms of the farmer and their ownership of equipment, their ability to use their own equipment to get their crop in the ground. They're not renting equipment anywhere near the way they used to, so there aren't scheduling issues so that when that weather window does occur, a farmer has the ability because he generally owns his equipment to get things in the field much, much quicker.

[Michael E. Hoffman:]

Okay. So in theory, we can get us to the very tail end of May and still get all this corn in if you we get a window?

[Robert P. Jornayvaz:]

Absolutely.

[Michael E. Hoffman:]

Okay. And then on the dealer side, I know you've probably told me this a million times. I apologize for forgetting. But what percent of your business goes through dealers versus going direct?

[Robert P. Jornayvaz:]

Maybe you can ask that question a little bit different, Michael because I'm not sure if I -- you mean direct to a farm? We don't really sell direct to the farm.

[Michael E. Hoffman:]

Well, direct to the -- as opposed to having to use a middleman, I mean, some of bigger cooperative farms, the larger users? Or is this all going -- all having to work its way through that middleman to get to the farmer?

[Kelvin G. Feist:]

Yes. Michael, it's Kelvin. I -- in terms of how we distribute, our focus is to sell it to, if you want to call it, a middleman, retail, whatever you want to call that. They typically will blend it, add some value through some of their equipment, whatever else and then typically sell it to a farmer or to a ma-and-pa dealer at the next level. So we don't sell directly to large corporate farms or small corporate farms -- or small farms. That just doesn't fit with our model and our number of people in the field.

[Robert P. Jornayvaz:]

Well, I think that brings us to the end of today's call. We just want to thank everybody for your time and your interest in Intrepid. And Brock, if you want to, we can probably close the call now.

[Operator:]

Thank you, sir. Thank you, everyone, for your participation. You may now disconnect your lines.