Intrepid Potash Inc. Q1 2023 Earnings Call
Thank you for standing by this is the conference operator, welcome to the Intrepid Potash, Inc. First quarter 2023 results conference call.
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I would now like to turn the conference over to Evan mate Investor Relations. Please go ahead.
Thank you Julien good morning, everyone. Thanks for joining us to discuss and review Intrepid is first quarter 2023 results.
With me today is <unk> co founder executive Chairman and CEO , Bob <unk> and CFO , Matt Preston.
Also with me today and available to answer questions. During the Q&A session. Following the prepared remarks is our VP of sales and marketing Zachary Adams.
Please be advised that our remarks today, including answers to your questions include forward looking statements as defined by U S Securities laws.
Forward looking statements are subject to risks and uncertainties that could result that could cause actual results to materially different from those currently anticipated. These.
These statements are based upon information available to us today.
We assume no obligation to update them. These risks and uncertainties are described in our periodic reports filed with the SEC, which are incorporated herein by reference.
During today's call.
Certain non-GAAP financial and operational measures.
Filiation. So these non-GAAP financial measures to the most directly comparable GAAP measures are included in yesterday's press release.
You see filings and press releases are available on our website at Intrepid potash Dot com.
I will now turn the call over to Bob. Please go ahead. Thank you Kevin and good morning to everyone. We appreciate your attendance and interest in Intrepid.
For the first quarter of 2023, I'm pleased to share that Intrepid was able to continue its recent run of solid quarterly performance, which was highlighted by a meaningful pickup in demand for our key fertilizer products with our sales volumes totaling 89000 tons for potash and 65000 tons for trio when.
Third our full year 2022 sales volumes. These first quarter figures represent approximately 40% of our total potash sales volumes and 33% of our trio volumes with the strong sales continuing into the second quarter behind higher demand from agricultural customers.
While our sales have been strong to start the year, our profitability was lower with our first quarter 2023, adjusted EBITDA totaling $16 $4 million and our adjusted net income totaling $4 7 million, which.
Which compares to last year's respective figures to $52 million and $31 5 million.
The key driver being lower pricing.
For some context around the lower pricing the first quarter of 2022.
The significant increase in potash prices due to concerns around the supply issues related to the dollar Russian sanctions and Russians invasion of Ukraine, which led to many global distribution.
Distributors rushed to buy potash and build inventory.
However, following last year's spring last lackluster application season, potash inventories weren't depleted coupling this with buyers maintaining a just in time approach pricing started to trend lower in the back half of 2022 and 2023.
That said, we do want to caution against only focusing on these year over year comparisons.
And quote unquote missing the forest for the trees ranch.
For Intrepid current potash price level still provide robust net backs and for the broader potash industry. We still have the backdrop of potential supply concerns and disruptions from issues in eastern Europe .
While the outlook for the primary end user of potash agricultural markets continues to be quite strong.
Looking specifically at U S. Agriculture, which is intrepid is key market farmers are projected to have a third consecutive year of very solid profitability have strong balance sheets.
And their outlook continues to be supported by elevated crop futures.
Corn December 'twenty, three and 'twenty four contracts still trade at over $5 20, a bushel for soybeans November 23, and 'twenty four contracts are over $12 30, a bushel.
Looking back over the past decade through the end of 2020 December corn futures averaged just under $4 per barrel.
Bush I apologize.
On November soybeans futures averaged just under $10 a bushel.
So today's pricing is still a 25% to 30% improvement over this recent historical period.
Moreover, farmer input costs have recently come down quite considerably and we expect the trend of yield maximization and strong fertilizer application to continue.
Going forward, we are optimistic on the outlook.
And for Intrepid, our primary focus for the 2023.
The successful execution on our potash gross projects to improve our Brian grades through mining our extensive ore bodies, adding extraction wells and the non Brian pools, which will increase our production as well as our sand resource at the Intrepid South ranch.
Before I dive into project updates I want to take a quick moment to provide some more background on our recent potash production trends.
Over the past several years, our potash production has been lower than our productive capacity.
For some of these years this has been mostly due to external factors like weather and permitting delays.
Name a few examples we experienced heavy summer rainfall in Wendover 2019.
Impacting production and product availability for sale in 2020.
And also had a significant rain event in.
In Carlsbad in the summer of 2021, which was the key reason for the lower production continuing into 2022.
Moreover, slow permitting in new Mexico has been a key reason for recent project delays at our HB facility, resulting in a lagging effect for bringing on new projects.
Quickly as possible.
However, we are cognizant that external factors are also to blame most namely the extraction well failure at HP This past fall.
This extraction well failure is the primary reason for our lower 2023 production guidance of approximately 260000 tonnes and we estimate this negatively impacted.
Our 2023 production by 40 to 50000 tons.
Absent this issue our 2023 potash production should have resumed an upward trajectory.
That said, our potash products projects are well underway and our production goals are first to correct emphasis sustainably reverse the recent downward trend and then get our annual potash production back to at least levels seen in the 2018 2019 timeframe.
Or roughly 3300 30 to 350000 tons.
We have a high degree of confidence on improving our near term potash production by initially target targeting already known high grade brine that is ready for extraction.
I want to emphasize that the potash projects I'll. Soon highlight are designed to have both an immediate positive production impact while also driving sustained higher level of production for many years.
We recognized our 2022 and 2023 capital programs are higher than recent historical levels.
But we want to make sure that the factors that impact our production, where we have more control.
Namely consistent injection rates reliable extraction wells and developing higher grade brine are seeing the necessary investment to help ensure our future production profile makes the internal goals I just outlined and.
So I'll now go into each project in more detail.
Darting with HB this facility.
The key reason for our recent declining production trends and consequently is a key focus for us.
With three primary projects in the works.
The first project is a new brine injection pipeline, which is projected to roughly double our Brian injection rates with.
With the second phase of this project also having.
A pigging system.
On the fly continuous system, which is the infrastructure to clean the inside of the pie and prevents scale.
Which will help ensure more consistent flow rates. This is a long operational life project will be key for sustaining.
Higher injection rates, which in turn increased production levels over the long term we.
We expect the pipeline to be in place by the end of the quarter with the improved Brian injection rates starting in the second half of the year.
Pegging system is still being permitted with construction likely to begin by the end of the year.
To target high grade brine in the near term, we've identified a new lower capital project to extract a pool of high grade brine from the <unk> shaft.
Permitting and construction are both underway with operations expected to commence.
In the fourth quarter of 2023, we've taken several measurements of the Eddie.
<unk>, Brian grade and are confident that the associated product tons will have a meaningful impact on supplementing our other extraction wells for the next few years with this production benefits starting in 2024.
Lastly, we still plan to drill a replacement extraction, well that will have long term operational lie.
To target the significant Brian pool from the HB Brian system.
Although this project may get pushed to early 2024 due to the yeti shaft project being installed.
In new Mexico permitting issues.
Now moving onto mobile App, where we have multiple projects in the works for the first key project, we successfully drilled a new three lateral potash cavern, which.
Which will be online in the second quarter.
During the drilling process, we're able to stay in the target interval for longer than any of our previously drilled horizontal caverns and the initial Brian measurements show great availability of high grade Brian .
After we successfully completed drilling this new cavern, we moved the rig into an area that has multiple high grade Brian pools, and the lowest parts of the old conventional mine, which are also referred to as sops. This potash or in the Brian Poole as part of the original conventional mine works and flooded area.
Where we previously used vertical wells however.
However for this new effort. The key difference is that we are now using horizontal laterals to more effectively target the multiple swamps thumps we've identified.
Our goal is to have the second project complete by July 2023 to Alaska pump This Brian indoor ponds for the 2023 evaporation season.
At Wendover, we have no major growth capital plan for this year, but I did want to mention that the deep Brian Wells, we successfully drilled in the fourth quarter of 2022 are online and producing well.
The very wet weather at Wendover. This winter should be additional boost to Brian availability for the upcoming evaporation production seasons.
Quickly on the Frac sand project, we continue to work through the permitting process and expect construction to begin by the end of 2023 with the eventual goal to ramp production up to 1 million tons per year. Once the project is operation.
During the first quarter, we did start to engage with potential customers for commercial agreements and due to the strategic location of our sand resource in the Delaware Basin, which is surrounded by oilfield activity we.
We have seen notably strong interest from various parties.
Overall, we feel very confident in the success of our growth projects and look forward to seeing impacts of higher production and an improvement in our unit economics in the coming years.
I will now turn the call over to Matt. Please go ahead.
Thanks, Bob in the first quarter of 2023, Intrepid generated total sales of $87 million adjusted EBITDA of $16 4 million and.
And adjusted net income of $4 $7 million as Bob noted the key difference compared to the prior year's first quarter was lower pricing. Although this was partially offset by higher potash sales volumes.
In the first quarter of 2023, our average net realized sales prices for potash and trio were <unk> 45 per ton and $3 44 per ton, respectively, which compares to last year's respective figures of $703 per ton and $4 69 per ton.
With the spring season, well underway and the announcement of a key international potash contract in early April we've seen modest potash price increases over the past few weeks is in season demand has exceeded nearby supply we still expect buyers to remain cautious as the spring season winds down anticipate that most buyers will plan to have minimal carryover inventory heading into summer.
Moving onto segment highlights in potash, our first quarter 2023 sales volumes totaled 89000 tonnes in our production totaled 90000 tonnes, which compares to a year ago figures of 69000 tons and 103000 tons respectively.
We saw agricultural customers drive most of the increase in demand with this market comprising 82% of our potash sales in the quarter.
Feed markets remained steady and we still saw the benefit of higher pricing from the longer term contracts that were set in previous quarters, given the high fixed cost nature of our business and last year lower production, we're experiencing a negative impact of higher carrying cost per ton as well as continued inflationary pressures.
The second quarter of 2023, we expect Q2 potash sales volumes in the range of $65 to 70000 tons with an average net realized sales price of $4 60 to $4 70 per ton.
And our trio segment, our first quarter 2023 sales volumes totaled 65000 tons down from 71000 tons in the prior year period, while our production totaled 49000 tons down from 65000 tons in the first quarter of 2022.
During the first quarter, our trio plant experienced net unplanned downtime of approximately eight days related to O'brien steepen, our tailings pile, although we were able to move forward as one of our normal planned maintenance days, which allow us to make up some of the lost time in future periods overall.
Overall, we estimate this downtime negatively impacted our production by approximately 9000 tonnes in the quarter.
On a positive note. The first of two new continuous miners is now underground and delivery of the second miner is expected in the third quarter of 2023, which should lead to improved efficiencies and production once in service.
Looking towards the second quarter of trio, we expect second quarter 2023 sales volumes will fall in the range of $45 to 55000 tons with prices trending slightly lower in the range of $3 25 to $3 35 per ton.
And our oilfield solutions segment, our sales decreased $2 $8 million in the first quarter of 2023 compared to the prior year, which was driven by a $2 $6 million decrease in water sales, we sold less water, primarily due to timing of sales related to completion activity. Although in early April we did start a new frac job on our South branch, which should help second quarter sales.
Reduced sales were partially offset by lower cost of goods sold as we do not purchase any third party water in the first quarter.
As we've discussed previously this segment should see relatively steady performance on an annual basis, although there can be quarter to quarter variability related to timing reasons.
Moving to our capital program in the first quarter of 2023, we incurred $21 million in capital expenditures and still expect our full year full year capital spend to be in the $60 million to $75 million range. The exact level will be dependent on market conditions and project timing, which is also impacted by the permitting process, where we've recently seen several delays, particularly in <unk>.
New Mexico.
Bob did a great job of providing more details and updates on our capital projects, but ill again quickly remind everyone that given the cycle of Brian injection residents time underground and the summer evaporation and harvest seasons. These growth projects do take time before we see the investments pay off in the form of higher production.
We're encouraged by our progress so far and look forward to seeing the benefits of these projects and upcoming evaporation seasons.
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 Youll hear atone acknowledging your request.
If you are using a speakerphone. Please pick up your handset before pressing any keys to withdraw your question. Please press Star then one again.
We will pause for a moment as callers join the queue.
Our first question comes from Vincent Andrews from Morgan Stanley . Please go ahead. Your line is open.
Hi, guys. This is will hang on for Vincent Thanks for taking my question.
Have you guys completely sold out of that higher priced inventory from the 2021 2022 evaporation season, yet and then as we look at the 260000.
On the 2023 production guidance for potash that you guys gave how do we think about that impact on costs.
Maybe I guess you could benchmark that to what you guys realize from that.
2021 season.
Thank you.
Sure. Yes. This is Matt I'll try and kind of reiterate some of the comments, we made before going back to some previous calls we certainly we're looking forward some improved cost of goods sold.
This is unchanged as we mentioned with the VIP <unk> extraction world that failed in Q4, and so Europe production year over year has been unfortunately pretty consistent in that $2 60 range and so those improvements really haven't materialized, so sort of that improve product that we were selling down has been replaced with other product or kind of a similar nature obviously.
<unk> updated a little bit with you and inflationary pressures and the like so no we're not seeing that improvement in our cost of goods sold just yet certainly the projects. We are undertaking today youre accessing some of those sums that Bob talked about which should have some immediate impact and benefits to our Brian here in the mid to late portion of our evaporation season should help but.
That narrative has changed a little bit since Q4 with the extraction Maltese well I just wanted to clarify your question were you asking about 2021 product inventory.
Yes.
Like the inventory from that of operation season.
Yes, I mean, certainly that's turned over by now, but like I said that was impacting our cogs for a bit but given some of the trends in production weather downtime of extraction wells et cetera, we haven't seen the benefit to Cogs that will see once our some of our current capital projects are complete and operational.
And then I guess as a fee.
Follow up I mean, if I look at the projects, we have underway at <unk> lab, how material would that be from a cost improvement standpoint.
I think if my calculations are right you guys are seeing something around the $300 per ton cost of production in the first quarter.
To kind of give me a sense I guess, what what what kind of cost improvement that will look like when that's all up and running.
Yes, it's a good question and we certainly haven't provided any specific guidance on there, but if you look back to that 2018 2019 timeframe to 330 to 350000 tons compared to the $272 60, we've mentioned.
And our fixed cost nature, and there is a material benefit to our per ton cost we can get back to those levels. So those are by far our cheapest tons will produce well I won't give you a number today just given some of the external factors inflationary pressures et cetera, we expect a material benefit to our across the goods sold once we see the these projects come online and kind of have that time to get ramped up and see there.
<unk> potential over a couple of years.
Got it thank you.
Our next question comes from Joshua Spector from UBS. Please go ahead. Your line is open.
Hi, This is Lucas finite answer Josh So just on your potash pricing God I'm not sure if I caught this correctly, but it sounded like you're expecting it to highlight the gallon $20 sequentially quarter on quarter.
That's right.
That would be quite a bit of a positive versus what competitors are expecting.
I got it down more like 125 to $1 50.
And just kind of where spot prices out as well so could you kind of help us understand.
Why youre kind of expecting to kind of outperform there or is that based on the timing of the sales or sort of what's driving that.
Okay.
Yes. Thanks for the question. This is Zachary it's really a couple of reasons for that.
Our feed in.
Industrial business really trades on long term contracts and those are at a premium. So we expect those to continue in the second quarter.
I will provide overall benefit.
Fit to our overall pricing and.
This time of year, our agriculture business is primarily made up of.
Nearby sales to our plants and those are usually our highest FX as well on the AG side too. So that's why we're only kind of indicating a drop of about $20. There from what we saw in first quarter.
Sorry, yes.
For the portion Thats on those long term contracts what would you say the reset period is generally where we would say trying to correct Tanaka.
At market levels.
Yes, I'd say our fee contracts in mid years, probably theres certainly layered in throughout the year, but after the spring season here kind of start in Q3, we will see a reset on a lot of those contracts.
More in line with when wells get do get a premium compared to some of our AG sales, but those will reset here probably mid year.
If you go back and look at our earnings calls over the last 12 to 12 years Youll see that does have always had a premium and we expect that multi year premium too to continue to exist.
Alright. Thanks.
And then maybe just one on the volume side. So I mean, your category and at the upper end of the expectations in the first quarter.
And Youre looking sizes potash sale and Youre looking like.
160, there in the first half.
So instead of nice since now that we need to lift our expectations for the full year a bit.
<unk> 780, <unk> instead of the 2016, we talked about previously.
Yes, when we talk about this on previous calls I mean trying to predict third quarter fourth quarter demand is just kind of.
Sometimes not a beneficial exercise and so we don't have full year numbers, but certainly encouraged by the demand we've seen here in the spring and we will just see how the back half of the year plays out and what buyer incentives looked like in the fourth quarter of the year and that will certainly drive that number up or down 10 to 15000 tons.
Alright, thank you.
Our next question comes from Joel Jackson from BMO Capital markets. Please go ahead. Your line is open.
Hi, good morning.
The NPA dynamic at other crop inputs. It seems like there is maybe any other commodities to there seems like there is definitely a reticence by distribution by retailers to hold volumes here.
Two more just in time high interest rate environment all of that.
Are you seeing that in your world.
And how might that senior business, how you sell and things like that.
I think it's a great observation and it's and it's true we're very fortunate that we've got a very high percentage of sales that our truck sales.
<unk>.
We're we're not sending out unit trains. We've also got our feed and industrial businesses, which are much more localized sales.
So I don't know if im answering your question Joel but.
We believe because of our strategic location and the geography that we service.
<unk>.
We're going to have the benefit of that continued stronger pricing that we've always seen for years.
You touched on this a little bit across the call in prior remarks, but when you look at costs.
For potash and trio can you just elaborate a little more how cost might be.
Scale across the year.
Cost across the year like.
Should we expect.
Types of costs, we saw in the second half of.
<unk> 22 to come back here in the next few quarters or maybe help me out Kinks.
Yes, I mean, certainly it will be dependent on our summer evaporation season, which can be variable, but looking at Q1, I mean, we will be pretty consistent for the year.
Given our current pond inventories expectations of extraction grades.
It's not going to factor in some of the inflationary pressures compared to last year and it'll be pretty consistent throughout the year.
Sorry, consistent from Q1 levels or yes.
Sorry, if that wasn't clear.
I think it wise.
And just one more question I know, Bob maybe a few months ago.
You talked about Russian products spin out.
In the Midwest.
June or July of last year talking about what youre seeing from competition on the river.
From importers coming in is there still is the Russian products, so coming in as new.
Normal or abate that slow down.
Yes, I think Theres I think theres, a lot more Russian product in the United States than most.
Most people in D C realize and so there has been.
I think there's a perception that there is very little Russian fertilizer product in the United States.
When the exact opposite is true if.
If we go back and we look at the Russian imports.
There is quite a bit of Russian product in the system.
So.
I will say, it's unbeknownst people and a lot of people in DC.
I don't know if im answering your question or not but.
I think there is a perception that the Russians didnt bring tons in or that there were sanctions against the Russians and Theyre clearly not sanctions against the Russians.
They continue to bring in significant amounts of product.
Through their distribution assets.
Maybe I'll sneak another one in just sticking longer turn about sort of.
Chloride free potassium.
Fertilizer trio.
Sop poly sulfate and things like that.
Theres been a lot of hopes over the last decade that we would see maybe more demand.
From that more fruits and vegetables, and things like that I noticed that top season for a tough year so for Aman.
Other crops, California's dry where a lot of mechanics garages go but capable of the market, where it's growing versus the potash markets.
These future opportunities challenges thanks.
Yes, I would say that.
It's a great product, but <unk> K mag product in our trio product.
Our our stellar fertilizers.
Have we seen an increase in demand because of the.
The lack of chlorides I don't think we've seen the demand that we had hoped would would continue to grow I'll, let <unk> speak to that as well.
I think the I think the key there Joel is there continues to be a broader focus on just balanced fertilization in general in <unk>.
And obviously.
With trio had containing magnesium and sulfur that's a big part of that and so.
We see we see growth with our trio product and regions were below the low chloride component of it may.
May not be the selling factor, it's more in the magnesium and the sulfur component that's really moving the volumes there.
Thank you.
This concludes the question and answer session I would like to turn the call conference back over to Bob to novice for closing remarks.
I just want to thank everyone for their interest in Intrepid and we appreciate your time.
Great day, Thank you.
This concludes.
Today's conference call you May now disconnect. Your lines. Thank you for participating and have a pleasant day.
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