Q3 2022 Intrepid Potash Inc Earnings Call
Thank you for standing by this is the conference operator.
Welcome to the Intrepid Potash, Inc. Third quarter 2022 results conference call.
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I would now like to turn the conference over to even make an Investor Relations. Please go ahead.
Thank you Lisa good morning, everyone. Thanks for joining us to discuss and review Intrepid third quarter 2022 results.
With me today is <unk> co founder executive Chairman and CEO Bob <unk>.
President, Brian Stone and CFO , Matt Preston.
Also with me today and available to answer questions during the Q&A session.
Vice president of sales and marketing exactly Adams.
Please be advised that our remarks today, including answers to your questions include forward looking statements as defined by U S Securities laws.
These forward looking statements are subject to risks and uncertainties that could cause actual results to materially different from those currently anticipated.
These statements are based upon the information available to us today, and we assume no obligation to update them.
These risks and uncertainties are described in our periodic reports filed with the Securities and Exchange Commission, which are incorporated herein by reference.
Today's call, we will refer to certain non-GAAP financial and operational measures.
Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures are included in yesterday's press release.
Our SEC filings and press releases are available on our website at Intrepid potash Dot com.
I will now turn the call over to Bob.
Evan Intrepid continues to show strong execution and what has been an exceptional year for the company.
In the third quarter, we delivered adjusted EBITDA of approximately $27 million and adjusted net income of approximately $13 million. This brings adjusted EBITDA for the first nine months of the year to approximately $119 million and adjusted net income to $69 million.
When comparing both figures to total sales of $271 million for the first nine months of the year results in respective margins of 44% and 25% both of which are among the highest in intrepid history. The.
The strong financial performance has primarily been driven by high fertilizer prices with our average net realized sales price for potash and trio coming in at $734 per ton and $488 per ton respectively in the third quarter.
As well as $718 per ton and $482 per ton respectively for the first nine months of the year.
For those tracking potash, it's no surprise that we've seen a moderate pullback in pricing in the past few months with key drivers being the preference for just in time purchasing in the agricultural markets and seasonally higher global inventories, which in turn drove lower third quarter market transactions while in <unk>.
<unk> wasn't completely sheltered from what turned out to be a slower than expected market in the third quarter.
The strength of having diversified sales outlets into the feed and industrial markets was on full display.
In the third quarter feed and industrial sales comprised almost 40% of our total sales, helping offset delayed sales in the agricultural markets Mauro.
Moreover, our contracts for feed and industrial typically our longer term, which helps add stability to our companywide average net realized sales price while the strategic geographic location of our operations also helped drive higher net backs to intrepid.
Moving on to broader commentary on the agricultural markets United.
The United States farmers are benefiting from crop prices not seen in almost a decade.
This has held true for much of the year and as fall harvest wraps up spot corn is trading in the high $6.
For both short range spot soybeans are just under $14 50 per dollar per bushel.
Spot wheat is in the mid $8 per bushel range, even with higher input cost inflation, the resiliency of crop pricing.
Should still drive very healthy profits.
Crop pricing into the next year's harvest is also very strong with December 2023 futures for corn trading at roughly $6 25, a bushel November 2023, soybeans in the high $13 per bushel range. While September 2023, wheat futures are actually higher than current spot prices trading at just under nine.
Per bushel.
Looking even further out which is critical to.
December 2020 for futures contracts for corn.
Supported gloves trading at just under $5 75 per bushel.
Today's future futures market.
The potash industry with a significantly healthier and more robust outlook. Then was present in the 2008 2010 period. The last time, we saw large runup in potash pricing.
I urge everyone to compare today's longer term outlook back to the 2008 situation to understand how positive are current fundamentals are.
Potash is of course, a global market and for key international crops spot Palm oil is currently trading at around 4000, Malaysian ringgit as per ton up from roughly 3000 in late September with futures all the way into January 2024, still trading above the 4000 level.
That said palm oil is down about 50% from the 2020 highs, but the current price level is still at the high end of the range over the past decade.
Quickly on.
On the other key international crops spot sugar is at roughly 18 cents a pound down slightly from the high seen earlier in 2022, but still the highest level since 2016 with futures into next year trading at just under 17 per pound.
Hot coffee is trading at $1 75.
Per pound, while it's down about 25% from the highs the current spot price and low end of the trading range over the past year is still the highest since 2014.
Tying this back to Intrepid, we think the near and medium term outlook looks very positive farmers around the world are enjoying strong crop economics in the backdrop of a volatile global supply situation.
Which should help support steady potash demand and pricing.
More specifically in the United States harvest progress for corn and beans is nearing completion.
At about 76, and 88% respectively.
All application has also started and we expect good demand for nutrients during the fourth quarter that will draw down warehouse inventory levels and result in buyers needing to reengage on building nutrient positions for spring 2023.
Beginning in late Q4.
With the market commentary out of the way I will now provide some updates on our major projects that have an intense focus on increasing our solar potash tons.
Intrepid small cavern drilling program is expected to start within the month with a significant long lead times pieces of equipment purchased and already on site.
We are on track to have Brian production from the new cabinet in early Q1 of 2023. This Brian will be available for the 2023 of operation season, which insurer, which in turn should increase Mas potash production we.
We anticipate keeping that rig and drilling seven additional horizontal laterals into the original Moab mine to drain high grade potash, Brian from low spots or some if you will which we believe have collected significant quantities of high grade brine or.
This too will generate Bryan for the production of future additional tons.
At our HB solar solution mine, we remain on track to significantly increase injection rates into the solution mine in the first quarter of 2023.
The installation of this improved pipeline system is designed to significantly increase total fluid volume and flow capacity through the pipeline to efficiently inject greater volumes of fluid into the HB solar solution mine.
This improved system, we use various water rights to meet the water demands of our HB mine, while also helping to avoid historic pipeline scaling issues more Brian injected directly.
Correlates to the future production of additional tons.
At Wendover for the first time in several years, we recently and successfully completed our first new deep, Brian well and we're well within budget, we are achieving the expected flow rates and Brian grades that will increase overall, Brian availability, which will help us to better manage variability in weather and evaporation rates in the coming.
Evaporation seasons.
We further anticipate the drilling of additional wells in 2023 to sustain the expected increased production for numerous years to come.
At the at our Intrepid South Ranch, the Sandman Sand mine project, which we introduced during our last call continues to move forward with major capital items, either onsite or scheduled for delivery in the first quarter of 2023.
Since our last call we have drilled 65 additional core holes and multiple areas for a total of 108 core holes, which has significantly expanded the scope of the resource that we've identified in southeast New Mexico.
Initial production could be as soon as the end of the first quarter in 2023, although timing around the receipt of appropriate permits remains uncertain due to the overwhelming demand on the BLM as well as state agencies in new Mexico and as a result, our first production could be delayed into the second.
Half of 2023 will.
We will be ready to start immediately upon the receipt of the necessary permits.
In addition to our capital projects, we began repurchasing stock under our share repurchase program in the third quarter with approximately $2 9 million spent under our $35 million share repurchase program in the third quarter.
However through the end of October our share repurchases have increased to approximately $5 million and tough.
Overall, while equity and broader markets are facing some headwinds we think that both intrepid in the potash industry are uniquely well positioned I'll finish my prepared remarks by highlighting a few factors driving our sustained constructive outlook.
Persistent global supply volatility should be supportive for potash prices farmer.
Farmers throughout the world are benefiting from strong crop economics, and our farming for maximum yield given the historically strong futures market prices many quarters out.
This should create steady demand for potash despite input cost inflation.
Our debt free balance sheet and strong cash flow given trepid the ability to put growth capital to use to increase our productive capacity and in turn lower our production cost per ton.
Finally, our solid balance sheet also enables us to fund execute and potentially increase our share repurchase program.
Again, thank you to everyone, who dialed in today I will now pass the call to Matt to present more details on our financial performance and outlook.
Thanks, Bob as Bob noted high net realized sales prices for potash and trio helped drive another strong quarter of financial performance for Intrepid, despite sales volumes being slower to ramp up than we initially expected.
In our potash segment sales volumes in the third quarter totaled 46000 tons down from 62000 tons in the prior year as distributors ended the 2022 spring season with more inventory than expected and buyers continue to focus on just in time purchases for potash.
Total potash cost of goods sold per ton increase compared to the prior period as the slow start to fall sales led to more tons being sold from our HB facility, which carry a higher relative cost of sales as we move into Q4, we expect overall cost of goods sold per ton to improve although we continue to be hampered by persistent inflation and <unk>.
<unk> labor cost increases across our sites.
Third quarter potash production was similar to the prior year as we begin our solar operations midway through the quarter.
Year to date production is down compared to the same period in 2021 due to the below average evaporation rates, we experienced across our facilities last year, which shortened our spring 2022 production season.
We've seen slightly better evaporation in 2022 would have experienced decreased Brian griese and extraction well availability at our HB facility. During the last few months. In addition to lower overall, Brian availability at our Wendover mine.
We're all we expect an improved production season from now through the spring of 2023, but we will not be back at the rates. We saw in the 2000 22021 production year.
The good news is we are actively addressing these issues through the capital projects that Bob mentioned and the outlook for our potash facilities remains bright.
Looking at the fourth quarter buyers continue to remain mostly on the sidelines, even as fall harvest wraps up across most of the country.
Despite the sales timing uncertainty, we remain confident that the winter spring application season will be quite strong and tons will transact, even if it looks like sales could get pushed into Q1 of 2023 for.
For now we expect to sell between 45 to 55000 tons of potash in the fourth quarter at an average net realized sales price per ton of 60 $65 to 675.
Moving to the trio segment sales volumes, followed a similar trend as potash in Q3 with 39000 tons sold down from 46000 tons sold in the prior year as carryover inventory and a preference for just in time shipments limited restock during the quarter, particularly given the increased seasonality of our trio products. Despite the slower.
Start we are using the opportunity to place tons in strategic locations ahead of what we expect will be another great application season in the coming months.
We expect fourth quarter sales volumes to be between 35% and 40000 tonnes at an AD at an average net realized sales price of $4 65 to $4 75 per ton.
Trio production remains consistent with the prior year as we've incurred increased downtime with our current mining fleet, which has limited our process tons. Despite increased run days, we have two new continuous miners on order and we expect these will be onsite in the first half of 2023, which should improve our efficiency and production rates.
Turning to our liquidity our cash flow generation in recent quarters has been impressive and as Bob highlighted we firmly believe one of the best uses of cash is to invest in our core mining and minerals business to enhance the production capabilities of our solar solution mines assets that all have reserve life measured in decades through.
Through the first nine months of the year, we generated cash flow from operations of approximately $69 million, even after repaying the approximately $33 million customer prepayment in the third quarter and we spent approximately $37 million on Capex, Our 2022 capital investment plan remains at $65 to $75 million.
As our major projects begin to ramp up spending in the fourth quarter. Although cash spent on capital investments is expected to lag slightly behind given the significant activity in the last couple of months of 2022.
That concludes our prepared remarks, operator, we're now ready for the Q&A portion of the call.
We will now begin the question and answer session.
Join the question queue. You May Press Star then one on your telephone keypad, you will hear a tone acknowledging your request.
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To withdraw your question Press Star then one.
We will pause for a moment as colleagues joined the queue.
The first question comes from the line of Joel Jackson with BMO capital markets.
Good afternoon, everyone. This is Joseph on for Joel Jackson.
Wanted to ask on the Wall Street Journal article published earlier this week discussing how oil and gas drilling activity going on in new Mexico and your production sites are infringing on your minds. So I was just going to be impacting any of your production or expansion plans in the area going forward and what would be your plans to mitigate those risks.
Yeah.
Well, we're working closely with the BLM.
The secretarial order of 2012 gives the potash industry, what I would call primacy and so it's up to the BLM.
To engage and enforce the regulatory roadmap that clearly exists.
That oil and gas companies do not infringe on our reserves.
So we are we are very stringently.
Writing for that position.
To not only ensure the safety of our miners.
But to make sure that there is no destruction of.
Our reserves.
Okay. Thank you.
Next question comes from the line of Vincent Andrews with Morgan Stanley .
Hey, guys. This is <unk> on for Ben Thanks for taking my question here.
I mean, it looks like your potash costs increase quite significantly on a sequential basis I know you called out.
Natural gas and more tons being sold that Youre having.
<unk>.
But I'm wondering.
Can you help us understand how much of that contributed to the higher cost.
First maybe under absorption of your fixed costs due to the lower volumes or I guess hold over of inventory from.
The weak evaporation in 2021 and then.
As well in kind of the magnitude of cost decreases you're expecting to get to the fourth quarter here, so be thinking more of a blip.
<unk> or <unk> levels or is still kind of elevated.
Sure.
Okay.
Yes, a fair question and I appreciate it so certainly as I mentioned on the call. We've had some decrease overall, Brian grades and Brian availability, you kind of look back at the I mentioned, the 2020 2021 production year that was roughly 330000 tons.
The 'twenty one 'twenty two was about 250000 tonnes. This has really taken a Q3 to Q2 look this one we're harvesting those tonnes. So we'll be slightly above that we expect going forward.
For the 2022 2023 year, but he said not back to that $3 30 level and so it kind of give you a <unk>.
Sense of magnitude of kind of how far we fell off in the past year due to the bad evaporation as far as overall Cogs I mean, I want to remind you were still carrying obviously with higher prices at a higher overall royalty expense in there roughly 5% of our sales as far as HB goes we sold roughly 60% of our tons at HB in Q3, which is above the normal.
Which is usually 40% of our tons come out of our HB facility. So while certainly a small contributor I would say overall inflation and just overall production rates of the main the main drivers going forward.
Just to add to that.
Really want to emphasize the intense focus on generating more brine at our solar evaporation facilities.
Our significant investment approximately a $30 million investment in our HB pipeline system that'll be up and operational in the first quarter.
At Moab, the beginning of the of an intense Catherine drilling program as well as our program to drain.
Low spots or what we'd call sums in the original Moa potash mine as well as at wind over we've already drilled deep Brian Wells and are on track to drill more wells to increase our Brian availability. So there is an intense focus on increasing high grade brine supply, which in turn relates to.
Two additional product tons that lower your costs on.
On a fixed cost basis.
I just can't stress that focus enough that we started late in 2020 I'm sorry late in 2021 with the acquisition of all the appropriate long lead time items and equipment. So that we can make these various projects.
Execute on time.
Gotcha, Okay and then.
I believe early on the call you commented that you kind of expected to fall application activity to remain pretty strong but.
You guided for I think 45 to 55000 tons of potash in the fourth quarter, which is pretty significantly below kind of.
Your historical level.
I'm wondering how to reconcile those two statements.
The lower volume kind of a function of that lower production rates that you've had.
The recent production season, we just mentioned there's a couple of years.
I think it's a combination of both.
It's hard to tell folks to look at potash on an annualized basis, but when we look out in terms of the robust economics that exist for global farmers.
They are extremely robust and we urge people to go back and look at the difference between the.
Potash price run up we saw in 2008, and 2009 and the futures market outlook in those years compared to what we're facing today in terms of positive fundamentals.
So it's hard to say look at us on an annualized basis, but we definitely see farmers.
Delaying their purchasing while being steadfast in the fact that theyre going to farm for Maxim EMEA well by definition, if you're farming for maximum yield youre utilizing as much balanced fertilization rates as you can.
No.
I apologize for the mixed message or the message that says wait and see but the fundamentals that occur in the marketplace and the volatility of supply I think is going to create the underlying fundamentals that create this positive outlook.
Got it thank you.
Once again, if you have a question. Please press Star then one.
Your next question comes from the line of Josh Spector with UBS.
Yeah, Hi, Thanks for taking my question I guess, just a follow up on potash.
Comment there is similar to other peers that have reported already but curious if you can comment on what's the risk in your view of a wait and see attitude persisting into early next year say into the first quarter or into spring is their inventory to allow that or do you see this as inevitable and thanks Terry.
Okay.
When I look at first of all I think you've got to look at farmer economics, and Farber farmer economics remain extremely robust.
That takes you to what will farmers do they will farm for the highest potential yield because their economics are historically strong.
When we look at potash inventories theyre being drawn down as we speak and given what the 2023 season looks like I think we're going to see extremely robust demand. Despite the fact that farmers have a wait and see attitude.
I don't want to say, it's we're staring each other down.
I guess, a simple analogy that I would use.
Okay. Thanks that makes sense and just wanted to clarify your comment on the industrial and feed portion of your mix I think typically.
Think about those as being lower price, but more stable longer duration.
I think you mentioned that there were higher price does that is that normal or is that something that shifted given the price run ups over the last year.
I'll, let zack answer them.
Yes, thanks for the question.
Typically we see a premium on the price point for our industrial and feed sales. So that's not.
Not unusual as we noted with OSB and excuse me without being 40% of our sales.
In the quarter.
That really impacted our overall price for the quarter on potash.
Okay.
Okay. Thanks, if I could just ask one more just on the oilfield.
<unk> the gross margin compression given the sales were pretty strong I guess, how should we be thinking about the performance of margins in that segment over the next quarter or a year and some of the pressures dissipate is it pricing is it unique if you didnt expand there that'd be helpful.
Yes, I think we said pretty steady margins in our oilfield segment going forward as we mentioned in our Q that we'll file here shortly and in some of our remarks and our press release, we did experienced some increased third party water purchases and increase overall Cogs and sales in our third quarter compared to the prior year, but overall I mean demand <unk>.
<unk> remains very strong what we're generating from surface use agreements, Brian sales caliche sales kind of other oilfield products and services remains pretty robust and pretty strong cash flow generated from us even if youre the cogs that youre seeing in some of the margin you could hamper some of the depreciation is just general amortization, we have in our segment.
Okay.
To clarify I guess, when you say margin I mean, obviously your first half gross margin is closer to 40% this quarter was close to five.
<unk>, 40% the right run rate is at much less than that what would you think about.
Yes, I mean, it really varies with that third party water purchases a lot of that ends up being slight pretty low margins with pass through so is that sort of adjust depending on how much we solve our own water versus third party. Those those can really shift around but when I look towards.
Either a higher margins at lower overall.
Sales levels or kind of that more compressed period, if we're going to have higher third party water purchases that makes sense, Josh Josh just to clarify.
When we say third party water.
We're able to use our infrastructure to run back to back sales that have a positive margin. So in other words we.
By water, that's got a balanced book.
And the margin on that water is less than the water that we actually own. So it's the ability to maximize the usage of our existing infrastructure, but youre seeing the compression in those margins, but more in terms of revenue.
Okay, well, thank you for that.
Okay.
This concludes the question and answer session I would like to turn the conference back over to Bob <unk> for any closing remarks.
I want to thank you thank everybody for their time today and their interest in Intrepid, we really appreciate it we look forward to talking to anyone with with additional questions and follow ups have a great day.
This concludes today's conference you may now disconnect. Your lines. Thank you for participating and have a pleasant day.
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