Intrepid Potash Q3 2024 Earnings Call Transcript

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Provided by Quartr
November 5, 2024

There are 6 speakers on the call.

Operator

Thank you for standing by. This is the conference operator. Welcome to the Intrepid Potash Inc. 3rd Quarter 20 24 Results Conference Call. As a reminder, all participants are in a listen only mode and the conference is being recorded.

Operator

After the presentation, there will be an opportunity to ask questions. I would now like to turn the conference over to Evan Mapes, Investor Relations. Please go ahead.

Speaker 1

Good morning, everyone. Thank you for joining us to discuss and review Intrepid's Q3 2024 results. With me today is Intrepid's CFO and Acting Principal Executive Officer, Matt Preston. Also available to answer questions is our VP of Sales and Marketing, Zachary Adams and our VP of Operations, John Gallasini. Please be advised that the remarks today include forward looking statements as defined by U.

Speaker 1

S. Securities laws. These forward looking statements are subject to risks and uncertainties, which could cause Intrepid's actual results to be different from those currently anticipated, are based upon information available to us today, and we assume no obligation to update them. These risks and uncertainties are described in reports filed with the SEC, which are incorporated here by reference. During today's call, we will also refer to certain non GAAP financial and operational measures.

Speaker 1

Reconciliations to the most directly comparable GAAP measures are included in yesterday's press release and along with Intrepid's SEC filings are available at intrepidpotish.com. I'll now turn the call over to Matt.

Speaker 2

Thank you, Evan. Good morning, everyone. We appreciate your interest in Intrepid and attendance for our Q3 earnings call. Before getting into our commentary, I wanted to first acknowledge and thank our Co Founder and former Chairman and CEO, Bob Jornavas for his many years of leadership. We're grateful for his contributions to Intrepid and the communities where we operate over the past 25 years.

Speaker 2

Bob and his family remain in our thoughts and we continue to wish him well in his recovery. The Board's CEO search process is ongoing and there are no additional updates to provide at this time. In the Q3, our adjusted EBITDA totaled $10,000,000 a slight increase sequentially, but a $7,800,000 improvement compared to the Q3 of last year. Our improved performance was driven by several factors, including positive results from our successful project execution over the past 2 years, evidenced by 2 quarters in a row of higher potash production compared to the same prior year periods. With the successful commissioning of Phase 2 of the new HB injection pipeline in September, we've now completed the key projects related to our asset revitalization process, which we expect to drive improved production rates in upcoming potash production seasons.

Speaker 2

As we stated before, producing more tonnes is the most effective way to improve our unit economics and margins, and this was evident in the Q3 as our potash segment cost of goods sold per ton improved by 14% compared to the prior year. Before getting into more segment details, I'll quickly touch on the macro outlook starting with U. S. Agriculture. Compared to the past couple of years, we've clearly moved into a different market.

Speaker 2

Crop futures for corn and soybeans are back at historical averages and farmers continue to be impacted by inflationary pressures. That said, the trend of yield maximization is expected to continue and moderating costs for key inputs, including potash, should help lead to better value and steady demand for our fertilizer products. As we've highlighted in recent earnings calls, even during the last period of decreasing farmer incomes, U. S. Potash demand remained quite resilient.

Speaker 2

Furthermore, Intrepid continues to be supported by our geographic advantage and our sales diversification into specialty markets. As for the global potash market, pricing continues to be supported by several factors. First, we see a balanced market with global demand returning to historic levels and growth rates of 1% to 2% per year offsetting new supply coming online in the next few years. 2nd, solid demand in the Asian markets during the second half of the year has set a stable floor on global pricing and granular markets, particularly in Brazil, have started to reengage for first half twenty twenty five needs. Overall, we remain constructive on the fertilizer market as we finish the year and head into 2025.

Speaker 2

Moving on to Q3 segment highlights. In potash, our segment gross margin showed modest increases both sequentially and year over year, which underscores the positive impacts of higher production even with lower pricing. For the 1st 9 months of the year, our production totaled 178,000 tonnes as improved brine grades and above average evaporation season and a faster start to our fall production led to higher potash production than originally anticipated. As a result, we now expect our full year 2024 potash production to be in the range of 280,000 to 290,000 tonnes. Since our last call, our overall production expectations haven't changed and we want to be clear that by processing more tonnes in the second half of twenty twenty four, we are essentially pulling forward tonnes we previously expected to produce in the first half of twenty twenty five.

Speaker 2

As a result, we now project relatively flat production in the calendar year 2025 of between 280,000 to 300,000 tonnes, but remind folks that this is in line with our expectations to start the year. When looking at harvest year production, which typically runs from August until mid spring, we removed the variability of start up timing or processing rates from our solar solution mines and we can clearly see the benefits of our recent capital projects. In our 2023, 2024 harvest year, we produced 249,000 tonnes of potash. And looking ahead to this current year, specifically the production we expect from August 2024 through the spring of 2025, we expect to produce approximately 280,000 to 300,000 tonnes, a 16% increase compared to the prior year at the midpoint. Our Trio segment again performed well in the Q3 with our sales volumes totaling 45,000 tonnes at a net realized sales price of $3.12 per tonne.

Speaker 2

Operational improvements and higher production led to a solid improvement in our unit economics and in the Q3 our cost of goods sold totaled $2.72 per tonne, which compares to $3.41 per tonne in the same prior year period. This helped contribute to Trio generating positive gross margin of about $600,000 in the quarter, which compares to a gross deficit of $4,300,000 in the Q3 of last year. For 2024, we also now project that our Trio cash production cost savings will be at the higher end of the $8,000,000 to $10,000,000 range we've previously provided when compared to the prior year. Lastly, for Oilfield Solutions, our segment margin of $3,100,000 in the 3rd quarter was more than double the prior year and up by approximately $1,000,000 sequentially, due primarily to increased water sales associated with a large frac at Intrepid South. As we've noted before, our segment margins can fluctuate due to the timing of completion operations on the South Ranch, similar to the increased water sales we reported in the Q4 of 2023.

Speaker 2

Although we remain encouraged by the oilfield activity in Southeast New Mexico, we expect our oilfield solutions margins to return to first half rates in the Q4 of 2024. As for Q4 guidance, we expect our potash sales volumes to be in the range of 45,000 to 55,000 tonnes at an average net realized sales price in the range of $3.40 to $3.50 per tonne. For Trio, we expect our sales volumes to be in the range of 40,000 to 50,000 tonnes at an average net realized sales price of $3.15 to $3.25 per tonne. As for other key initiatives, our discussions regarding our lithium project at Wendover continue to progress well, although we remind investors that this would be a longer term project with a multi year timeline for commissioning once a partner selected. We also started the permitting process to drill a test well at the A MAX cavern, which we have never mined and is the largest cavern at HB.

Speaker 2

Permitting A MAX is a natural next step as we look to our longer term production profile in the normal course of resource development, and we expect to have more to share on this in 2025. To end my comments, I think it's worth repeating that having no long term debt and good liquidity puts Intrepid in a position of strength. In addition, the amendment to the cooperative development agreement we completed last year with XTO has both another guaranteed $50,000,000 payment and the potential of an additional $100,000,000 in payments, although the timing of these payments is uncertain and not guaranteed for the latter. Overall, we're encouraged by the trajectory of our business and continue to focus on positioning Intrepid for long term

Speaker 3

sustained success.

Speaker 2

Operator, we are now ready for the Q and A portion of the call.

Operator

Thank you. We will now begin the question and answer session. Our first question comes from the line of Joshua Spector with UBS. Please go ahead.

Speaker 4

Good afternoon. This is Lucas Bogan on for Josh. Thanks for taking my question. So we've sort of been hearing some concerns from growers about the income levels heading into next season and the common areas that have sort of been called out for potential cost cutting and sort of being crop chems and then across like P and K on the fertilizer side. So I mean your demand outlook sounded like you're still pretty confident in things improving into next year.

Speaker 4

But I guess how would you frame any risks around getting some demand destruction for next season despite potash being relatively affordable again at the moment?

Speaker 3

Thanks for the question. This is Zachary. Global demand in 2024 as Matt mentioned has trended back to normal levels and we expect that normalization to continue into 2025. In our business with customers as recently as last few weeks, they've commented that potash at the current price levels represent a good value to the grower and in the rates that they've been seeing applied this fall in a number of geographies. Facing those rates to be relatively normal with little to no cuts on those.

Speaker 3

So we expect good demand in the spring of next year. And again part of even in a weaker ag price environment yield maximization is still a key and potash is a part of a balanced fertilization strategy to maximize yields.

Speaker 4

Great. Thanks. And then I guess just on the cost side in potash, I mean, we're really starting to see that cost leverage sort of improve and come through. Now your cash COGS are sort of down $12,000,000 sort of year to date and down a lot on a per ton basis, which is the best sort of results you guys have had for 6 or 7 quarters now. So it seems like the year is probably on track for about $60,000,000 sort of in cash spending there.

Speaker 4

Obviously, your per tonne costs are going to improve even more as your production volumes come back up. I just wanted to get a feel for you on whether you think there's more room to go there sort of in terms of the absolute base below the $60,000,000 or is that kind of a good way to think about sort of the base to go into next year? Thanks.

Speaker 2

Yes. Thanks for the question, Lucas. I mean, I think we're certainly on track. When you go back to some prior calls, we had talked about a 20% to 30% improvement in our cost of goods sold compared to that 2023 level, which was right around $3.87 per tonne. So we started to see the benefits.

Speaker 2

It will take some time as we get through this harvest season and then of course into the next one. And so we'll kind of see I mean, you'll see some bumpiness throughout the year as we have variability in where we sell our tons from, whether it kind of in from our Wendover Moa facilities or from HB. But yes, overall, we're on a good track. I mean, I think as we get to the second half of twenty twenty five, we expect to be kind of probably at that lower end of the range of what we had guided to previously, down 20% from that $3.87 per tonne. But yes, we certainly already see it and encouraged by the results.

Speaker 2

I mean, go back to the second half of twenty twenty three where the art cost of goods sold were north of $400 per tonne. The quick benefits from increased production are clearly evident and we're pleased by that.

Speaker 4

Great. Thanks. And then I guess just on the Oilfield Solutions side, so I mean you had a strong step up there in both your sales and profitability there from the new well. So I guess with that now in place, I just sort of wanted to get your thoughts on how we should kind of think about the run rate sort of going forward in that business. Is that kind of $10,000,000 sort of on the sales side kind of how we should think about the new base from here or anything that's sort of, I guess, temporary in there to kind of pull out from that side?

Speaker 4

Thanks.

Speaker 2

Yes. We certainly have major fluctuations when there is completion operation on the South Ranch. I'd say, as I said in my kind of prepared remarks, the first half rates we saw are really quite steady for our business. We've seen some nice kind of moderate upticks over the past couple of years on brine sales as well as freshwater sales. But those first half margins and sales rates are pretty consistent for our business.

Speaker 2

I wish we had some better visibility into large completion operations on South into 2025, but we just don't right now. So I think a good baseline is those first half rates. And certainly, as we have more information and clarity on your potential large sales of water, we'll let folks know.

Speaker 4

All right. Thank you.

Operator

Our next question comes from the line of Jason Ursaner with Bumbershoot Holdings. Please go ahead.

Speaker 5

Hey, Matt. Congrats on all the progress and thanks for taking my questions. Just first one, a bit of a follow-up on Lucas' question there. There's a lot of headlines, Belarus President proposing cutting production with Russia, obviously, not a direct impact on you guys, but has a direct impact on the global market. So just in terms of some of the compression in farmer income in the U.

Speaker 5

S, obviously, I'm sure everyone would love the lowest prices possible with lower usage and still having great yields. But I guess at what point any insight into the supply demand kind of more directly at your retail distributor level and maybe their customer in terms of inventory replenishment fall application because the last time some of these cuts started happening, people got everyone wanted the cut, but really didn't see that at all and kind of went the other way?

Speaker 2

Yes. Thanks for the question, Jason. I'll kind of touch on, I'd say, the more global view of this and let Zach tie and talk about specific distributor inventory levels. But yes, I mean, certainly saw the news yesterday and I mean, it's still much too early to kind of put any stock in that right now. I think what it does point to is a really balanced global market today from a supply demand standpoint where even the potential cuts, call it 2,500,000 tons on the high side, it would be a pretty big shake up to the current market as it is today.

Speaker 2

So who knows the likelihood of that happening, but I think certainly it just points to that we're in a nice balanced market and Zach I'll let you touch on sort of the U. S. Implications and where we are today.

Speaker 3

Yes, Jason kind of in regards to your question just around distributors. We saw a good subscription to the summer fill period, but as we fall in the spring and last fall, we saw that subscription really specific to just what anticipated fall needs were. So what we continue to see is really a really focus on not to carry over any times from one application season to another by distributors or retailers And that's not driven right now as much by what I would call a fear of any price downside, but just more of an intentional decision for those distributors and retailers to manage their available capital amid a constrained environment. So we continue to talk with retailers as we visit with them and our customers. I mean, they continue to project good potash demand out into spring of next year.

Speaker 3

And we think that once the winter fill program comes out, whether that's late in Q4 or early Q1, we think we'll see good subscription again for what they anticipate their fall needs or spring needs to be.

Speaker 5

Okay. Thanks. And on the cost side of things, I guess how is the byproduct sales working in some of the projections just because you've had a pretty nice benefit in the cash costs at least the old way, it was calculated. So I guess I'm wondering any outlook on the continuation of strength in the byproduct sales? And then how does that play into the update on the production costs with the inflection in production that you're seeing kind of sitting here today?

Speaker 2

Yes. We certainly breakout our various byproducts, both in our earnings press releases and our Qs and Ks. It's been pretty steady markets. I'd say as production increases, certainly we'll have a little more byproduct tons to sell. But I don't expect significant changes in our byproduct outlook going forward with an increase in potash production.

Speaker 2

When it comes to production costs, we've made a change, this would be years ago. There's really no change in our potash production costs with the production of byproduct. It's split out now and separate. And so we're not taking that as a credit against our potash production like we did many years ago.

Speaker 5

So when you talk about the improvement in cost, you're not talking it's not that's not helping to benefit. It's just purely what you're benefiting on. It's

Speaker 2

purely more potash production over what's a very large fixed cost basis.

Speaker 5

And the commentary on the production, just to kind of make sure I understood it. So what you're trying to say from August this year through spring of next year, you're kind of right in that midpoint still of the 15% improvement in production. But so it's really the pull forward kind of the flat outlook year to year is that this year is next year sort of because you're pulling forward the tons now that you're going to sell next year.

Speaker 2

Yes, that's exactly right. If you go back to kind of the early guidance we gave in early 2024, we're coming off 224,000 tons of potash in calendar year 'twenty three and we projected a 10% to 15% increase off that number, which due to the reasons I mentioned improved brine grade at above average evaporation season, but also pulling some tonnes forward. We've kind of blown that out of the water here from a calendar year basis. And want to be very clear on the call that while we have seen good results, some of that is just some tons pulling forward from 2025. And just want to be very clear on that.

Speaker 2

But yes, you've got it exactly right.

Speaker 5

And when do you think you might be in a position to talk about, I guess, 2026 or August 2025 through spring of 2026 and kind of a continuation of improvement or like when do you expect to see sort of the full benefit of some of the project?

Speaker 2

Yes. It's a good question. I mean, we're always hesitant when it comes to the evaporation season to give any sort of harvest year guidance. And so, certainly, a little too soon right now. I mean, as we start to really ramp up extraction rates and in the spring of 2025, I think we'll have a better indication and start to highlight that at that time.

Speaker 5

Okay, awesome. I think that's it for me. Congrats on all the progress.

Operator

Thanks, Chase. This concludes the question and answer session. I would like to turn the conference back over to Matt Preston for any closing remarks.

Speaker 2

Thanks everyone for your interest in Intrepid and hope you have a great day.

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Earnings Conference Call
Intrepid Potash Q3 2024
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