Q2 2023 Intrepid Potash Inc Earnings Call
Thank you for standing by this is the conference operator welcome to the interpreted potash Inc. Second quarter 2023 results Conference call. As a reminder, all participants are in a listen only mode and the conference is being recorded.
After the presentation, there will be an opportunity to ask questions to join the question queue. You May Press Star then one on your telephone keypad should you need assistance during the conference call you may signal, an operator by pressing star zero.
I'd now like to turn the conference over to Evan Nate's Investor Relations. Please go ahead.
Thank you Kayla.
Everyone. Thank you for joining us to discuss and review Intrepid second quarter 2023 results.
With me today is <unk> co founder executive Chairman and CEO , Bob <unk> and CFO , Matt Preston.
Also available to answer questions. During the Q&A session. Following our prepared remarks is our VP of sales and marketing Zachary items. Please.
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 kind of anticipated and are based upon 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 SEC, which are incorporated herein by reference.
During today's call, we will refer to certain non-GAAP financial and operational measures.
Conciliation of these 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 dotcom.
Pass the call to Bob.
Kevin and good morning, everyone. We appreciate your interest in Intrepid and attendance for our second quarter 2023 earnings call.
Positive company and industry fundamentals drove another solid quarter of results with our second quarter adjusted EBITDA totaling just under $16 million, bringing our first half figure to approximately $32 million.
Strong sales were again, a key highlight for intrepid and in the second quarter, our potash sales volumes were approximately 40% higher than the second quarter of last year.
For the first half of 2023, our potash sales of 167000 tons already represents about three quarters of the total volume we sold in 2022.
Behind this improvement was increased potash demand from agricultural markets with feed also remaining a very important market for us comprising just under 20% of our potash sales in the first half of this year.
Combination of our geographic and logistical advantages along with sales into premium markets continues to support robust snap backs and in the second quarter. Our average net realized sales price per ton for potash was approximately $480, a roughly 25% higher than <unk>.
Average NOLA pricing in Q2.
While we recently saw the announcement of a summer fill program resetting prices, we think the trend of strong net backs for us will continue which Matt will touch on in more detail in the call.
Look back as we look into the back half of 2023 and into 2024. The key theme of agriculture markets is that it continues to enjoy a positive backdrop.
In a market very much still intact with higher income levels.
New crop futures for corn, and soybeans trade meaningfully higher than levels seen over the last decade with futures for both markets seeing strength into 2025.
Other key international commodities tell a similar story.
<unk> and Coke are both currently tried a decade highs palm oil futures are roughly 30% higher.
And then the recent 10 year average.
Overall farmers around the world will likely enjoy a third consecutive year of very good profitability. Moreover.
Moreover, hot and dry weather in the United States Unabated War in Eastern Europe , collapsing grain deals I E. The Russian wheat deal and now.
Disruptions.
Ill continue to contribute to supply risk and help drive home the importance of having reliable access to commodities such as potash.
We do want to acknowledge that it's certainly not uncommon for agricultural markets to normalize after several years of close to record profitability.
On this note the market has been looking for parallel trends with a common comparison being the 2012 drought and the period thereafter.
To offer some context is the drop peaked in the late summer of 2000 2012.
Key crop futures traded at historic highs and aggregate U S farm incomes.
What was then record levels the following year 2013 <unk>.
However, annual profitability slowly declined by 2016 U S farm incomes had decreased to about half the levels from 2013.
As for potash during 2013 to 2016 demand in the U S actually still showed very solid growth.
Over this period U S potash demand experienced a cumulative annual growth rate of approximately 4%, while global potash demand grew at 3% CAGR.
Well. This is just one historical example, and recognizing that there's certainly different market forces at play. This can help inform a potential scenario for when we do eventually see a period of more normal farm profitability.
That said, we again emphasize that we remain optimistic on the outlook and agree with third party forecast.
Projects steady potash demand growth for the U S and the rest of the world in the coming years.
I'll now in my prepared remarks, with some commentary around our potash growth projects.
As a reminder, these projects are designed to revitalize our potash operations by maximizing our Brian availability and Brian residents time underground, which will positively impact our business in two primary ways.
First higher and more consistent production will increase revenue and cash flow from simply selling more product tons and byproducts.
Second.
Higher potash production will significantly improve our unit economics, we firmly believe that our three potash assets our top tier operations.
H facility experiences maximum Brian availability.
Sufficient residence time than normal evaporation production at each facility can be significantly higher and more consistent.
And where we stand today.
For reference within the last decade, or so peak annual potash production at HB was approximately 175000 tons.
<unk> was approximately 120000 tonnes in Wendover was approximately 105000 tons for a total of approximately 400000 tons were almost 50% higher than our 2023 guidance of 260000 tons.
This helps frame, while we've been investing higher levels of capital our excitement for the business outlook and why we have created these achievable goals.
As for recent highlights we successfully completed phase one of the HB injection pipeline at our HB facility in Carlsbad as well as well 45, Catherine four and <unk> 46.
Various potash projects in Marlborough.
At HB for phase one installation of a new 21 mile injection pipeline, we've proven injection rates at up to 2000 gallons per minute, which is almost triple the average injection of approximately 700 gallons per minute over the previous five years for the remainder of 2023, we'll continue to.
Chris on Phase II, which is the installation of a pigging system help reduce scaling and ensure consistent flow rates.
Until the completion of phase II, we anticipate operating as average injection rates of approximately 1100 gallons per minute, which is still roughly 55% higher than rates prior to starting the project.
Also at HB, We recently received the Green light on permitting our HB at a shaft project the target and already measured high grade Brian pool.
We expect to start putting Brian from this project into our ponds and early fourth quarter. This year.
At Moab, the well 45 project or Katherine for a newly designed single well cavern system with three interlocking laterals that targets completely new ore in potash Red nine and was commissioned successfully in July .
<unk> four is designed to have a long operational life and Brian measurement, so far have shown.
A solid availability of high grade ore.
While 46 is an additional horizontal drilling project designed to target high grade Brian .
<unk>.
A pool and the original mine workings and potash bad five and was also recently commissioned.
While 46 serves three key purposes first contribute to our 2023 potash production when harvest begins in the third quarter.
Second create a medium to longer term reliable wellbore access to drill additional laterals to target unmanned or access other stranded Brian bold.
And third serve as a backup for other injection extraction wells at.
At Moab after successfully commissioning wells 45, and six we kept the rig and crew.
Onsite to drill one more horizontal lateral.
Last effort, we use an existing vertical well has an access point and then horizontally drilled a lateral or whipstock from the vertical well with this new lateral designed to provide better access and Brian circulations to one of our other horizontal caverns.
Similar to oil and gas well workovers are horizontal caverns at Moab occasionally need revitalization reworking.
From time to time to help ensure we maximize our production and resources.
Overall I'm very encouraged by the strong project execution, we've demonstrated so far this year.
We remain confident that the capital, we're spending will position, our revitalized potash assets for higher and more consistent production.
And in turn help ensure that we fully capitalize on the magnitude of the opportunity in developing our long like potash reserves for many decades to come as well as a strong attempt to reduce the cyclicality that can be a result of lesser Brian availability.
I'll now turn the call over to Matt. Please go ahead.
Thanks, Bob.
In the second quarter, we generated adjusted EBITDA of $15 $9 million and adjusted net income of $4 $3 billion fertilizer pricing has continued to trend lower following peak seasonal demand and our average net realized sales prices in Q2 for potash and trio were $479 per ton and $333 per.
Ton, respectively, which compares to last year's figures of $738 and $493 per ton.
While fertilizer pricing has seen the expected reset the market clearly found good value in the quarter and our Q2 sales volumes of potash and trio came in ahead of our expectations in early may.
In our potash segment, our second quarter and first half 2023 sales volumes totaled $79 and 167000 tons, respectively, which represents respective increases of approximately 41% and 33% compared to last year.
Agricultural customers comprise roughly 80% of our total sales up from 72% in the first half of last year, while feed comprised 18% of our potash sales in.
In July we saw the announcement of our summer fill program at $370 per short ton for Midwest warehouses for third quarter deliveries.
After a very positive response during the order window the prices now up $30 for spot tons in the third quarter.
And trio, our second quarter and first half 2023 sales volumes totaled 63000, and 128000 tons respectively.
Roughly in line with how our sales were tracking last year.
First of two new continuous miners began operating during Q2, which drove improved production in the back half of the quarter.
We also recently took delivery of the second new miner and expect to put it into operation by the end of August .
Going forward, we plan to produce at a quarterly run rate of approximately 60000 tons, although we should see higher efficiencies in getting to that figure with both new miners operating.
Before moving onto our second half guidance and capital program I'll quickly touch on the oilfield solutions segment.
During the first half of 2023, we sold less water opened a few fewer large frac jobs and saw reduced surface use agreement revenue, which were the key drivers of the lower margins compared to last year.
Our activity calendar currently looks better for the second half of the year and we continue to make progress on our project to capitalize on the extensive sand resource at Intrepid South.
As for the outlook for the remainder of the year, we expect the combination of attractive fertilizer pricing solid agricultural fundamentals and a potentially earlier harvest to drive a strong fall application season in the U S.
For the second half of 2023, we currently expect our potash sales volumes to be in the range of 85 to 95000 tons at an average net realized sales price in the range of $3 95 to $4 15 per ton for.
For trio, we expect our sales volumes to be in the range of 75 to 85000 tonnes at an average net realized sales price between $2 90 to $300 per ton.
Moving onto our capital program in the second quarter, our capital expenditures of $21 million brings our first six month spend to approximately $42 million.
With the bulk of our spend being directed to a major potash projects at the Moab and HB solar solution mines.
We expect our full year capital program will be in the range of $65 million to $75 million, which will be dependent on market conditions and permitting process timelines.
Key projects for the remainder of 2023 build on recent project successes and include phase two of the HB injection pipeline and Eddie shaft project at HB and continued development of our sand project at Intrepid South.
For our capital allocation priorities, we remain committed to maintaining a strong balance sheet and our current net cash balance sheet and liquidity of approximately $165 million puts intrepid in a position of strength as.
As we finished the remaining major capital projects, we have discussed over the past year, we will assess the production impacts and make further investments as needed, but we're very encouraged by our execution and RBC and positive impacts to our business. Operator, we're now ready for the Q&A portion of the call.
We will now begin with the question and answer session.
And the question queue. You May Press Star then one on your telephone keypad, you will hear a tone acknowledging your request if you.
We are using a speakerphone please pick up your handset before pressing any keys to withdraw your question. Please press Star then one.
And your first question comes from the line of Joshua Spector with UBS. Your line is open.
Okay.
Hi, guys Simon Im sorry, Josh.
So to start on the potash volumes it.
It sounds like they have from year ago at the second half is basically get to kind of be flat year on year. I mean, you've made a lot of progress here in the quarter with the initiatives to improve production. So I was wondering if you can kind of give us your kind of latest view there.
That's really going to plough through the volumes next year and in 2025.
Thanks.
Yes, and I appreciate the question.
As far as volumes 2020 for 2025, we are certainly not prepared to give guidance on that just yet, but I think the execution of cavern for the well 45 project and 146, certainly puts us in a great position to increase Brian increased residents time, and Youll start to kind of move back up that trend line.
Towards the 350 390000 tonnes of potash that we're certainly capable of.
Really wanted to just go by facility by facility. If you look at the HB pipeline, we're now injecting at rates, 50% to 60% higher than we were just a few years ago. So by injecting more brine into the mine itself.
We'll be completing we just started construction on the HB shaft, which would be an additional withdrawal point as well as IP <unk> is targeted for the fourth quarter first quarter as a replacement to the failed IP 30 day well.
And then we move on to Moab cavern for which as well 45.
Well 46.
The whipstock off the existing vertical well into existing cavern three all have been very successful executions of pretty complex technological issues.
Revolving around drilling.
Each one.
Has been executed successfully.
Each one is now producing and has Brian additional Brian online and so the common theme that we really like you to take away is that each place. We're injecting more brine we're on a path to withdraw more Brian at HB. The same thing at Moab and Youll be hearing about updates at Wendover here very shortly.
So thank you for the question.
Thanks, and then.
Just wanted to sort of touch on your capital expenditure on the projects instead of a free cash flow. So I just wonder if you can kind.
Kind of give us an idea of what youre thinking for free cash flow in the second half of this year.
And then just on the Capex side, obviously your spend in Spain clients sort of executing on the projects. So I was just wondering how you're expecting that to kind of trends.
The next couple of years as you kind of continue to work through.
There instead of stay around the kind of $70 million a year.
Or sort of dropped back Laura as that rolls off.
Certainly not going to get out too far ahead of ourselves for the back half of the year I think from the guidance. We've given you are spending $42 million of our $65 to 75 million in the first half I mean, we will certainly see sales slowdown as is normal for the back half of the year and so cash flow from operations will slow down in the second half.
Why we have our credit facility and the strong balance sheet to continue to execute the projects we need to.
As far as.
And sorry, the second half of your question do you mind repeating that I apologize.
Sorry, the cap the Capex, yes, the Capex I was just trying to understand like wallet as far as the run rate I think we spend is.
So I mean youre engaging in the project's sanction spendings reasonably fixed the next couple of years, while you execute on the broad side just trying to understand what you think is your I guess more normalized maintenance level.
Going forward versus what you're spending.
And to kind of execute on the potash expansions.
Our sustaining capital trends anywhere from $20 million to $30 million per year, just depending on kind of a major replacement projects.
We've executed a lot of the big opportunity projects this year with our HB pipeline in our Moab caverns and we.
We can say, we will see you have kind of how those projects progress and the improvement we get here in the next evaporation season, as we continue to increase resident assignment, Brian availability, but we do expect that capital number to come down in 2024, and 2025 kind of the big slug of capital here in 'twenty three for kind of that low hanging fruit in moab and HB and.
Never know exactly what the future holds but expect the opportunity capital side to be less in the coming years.
Alright. Thanks.
And then maybe just lastly on pricing sorry was the pricing number that you get potash was that third quarter or second half.
It was second half for both potash and trio.
Okay.
Yes, So I was just going to kind of ask about your expectations there.
Relative to kind of I guess your competitors instead of talking about.
Very strong kind of summer fill program here in the third quarter with pricing.
Essentially that moving up into the fourth quarter.
On the benchmarks of wholesale sort of stabilized and started to move higher in recent weeks I mean, it sounds like if I was going to kind of.
Take your second half number you're probably.
Are you expecting any reset at all in this quarter, there and it moves up or I mean, it seems like it's going be pretty shallow to kind of get to that average overall.
If youre talking about a shallow correction or a shift when you say shallow.
Sorry, yes, so your realized pricing was for <unk> and <unk>.
You're expecting sort of 393% to 415 in the second half should look at a seasonal uptick in the fourth quarter.
So just trying to kind of understand how youre thinking about the third and fourth quarter sequential dynamics there on potash pricing.
The fundamentals are extremely strong.
If you can separate fundamentals from reality, if we if we look at the entire commodity cycle.
It's extremely strong if we want to look at.
Crude oil pricing copper pricing, we want to look at.
Cocoa sugar coffee.
We see corn wheat soybeans at elevated prices. So if we look at the entire commodity cycle.
There is no reason to believe that the entire commodity cycle shouldnt continue to be strong and given global farmer economics. There is no reason from a supply demand standpoint, and fundamental economics for the farmer income for prices to deteriorate.
Very significantly from the levels, where they exist today.
So now markets are markets.
And different producers may choose to do different things, but the underlying fundamentals of both the commodity markets and especially the agricultural markets remain quite firm, which justifies current fertilizer pricing.
Alright, thank you.
And our next question comes from the line of Jason <unk> with Bumbershoot Holdings. Your line is open.
Good afternoon. Thanks for taking the question just to follow up wanted to try to get some more of your thoughts on the summer fill just because it's a little confusing and I know you guys said that you are kind of continuing with it but kind of to your point on the fundamentals.
Felt like pricing had really strengthened significantly in 2021 for the invasion then the invasion of Ukraine happen there was a big still.
At the distributor level, where they were kind of getting ready farmers I guess locked on price a little bit the potash holiday demand disruption.
Distributors, then really ran down inventory.
And now you are kind of in the situation, where the fundamentals have kind of come right, where I think people thought which is that farmer yield will be impacted and distributors inventory is.
Hello.
No.
I guess what are your thoughts on why why is the summerville and happening the way. It is I mean, they seem surprised that demand.
Extraordinary for the Summerville, but it almost feels like there.
Kind of rewarding people for.
Taking the time off.
Want to get your thoughts on how that.
Summerville is playing out Jason.
Great question.
As you've listened and over the years, you know that I am not a proponent of fill programs.
I think especially this summer there was no need for a fill program.
However, we don't drive that market and so.
The producers that chose to have fill programs.
Solve the demand that they knew that so I think simply condition to farmers.
To wait for and then participate in a fill program and so I think it's a question better asked of some of the other producers why they choose that route.
Because given the robust economics, we don't think it was necessary.
And then just on the on the cost side, you gave some great detail on the revitalization.
<unk> programs and I know you Havent communicated in terms of cash cost and a number of years and I'm not asking specifically on that but just to the extent you do have this common theme.
Team of more Brian .
Withdrawing more Brian more time underground and just kind of a normal a more normalized year in general how what is kind of the magnitude of.
What consistency could mean to the cost side of your operations, given where you are today, which it seems pretty elevated.
I hate to just dropped percentages, but if you increase your production by 50% at a fixed cost operation.
You should enjoy a cost reduction.
Not necessarily dollar for dollar, but you should see cost reduction.
Again, I'm going to throw out ballparks in.
In the 20% to 30%.
So.
As we as these projects continue to successfully come online and deliver the high quality brine into the ponds, we measured the precipitate.
We fully intend to be able to give much more.
Targeted guidance as to what those production levels look like and then allow us to address what kind of cost reductions we've achieved.
Okay.
And just with the capital Capex program opportunity capital not going back to the maintenance of being less than where we are now.
If pricing stays roughly where it is which obviously isn't in your control, but if it does and your costs are coming down.
It seems like just kind of the model youre going to be making pretty good cash flow you're already in a net cash position.
So when you start to think about capital allocation longer term.
Where does that kind of lead you to thinking.
We have always wanted to maintain.
A quote unquote, a verbal our strong balance sheet, we've said that year after year and we've been able to do so.
Once you've achieved the production levels that we feel we can get back to.
Then you can put leverage.
Reasonable amount of leverage back on the balance sheet once you've achieved the consistent sustainable production that we want to achieve.
So right now.
Our leverage profile, if and when we we take on leverage is going to be at very modest levels.
And once we finish out this capital program and.
And are able to clearly.
<unk>. The results then you can begin to look at leverage in a different way.
We've already shown our willingness to have a pretty significant stock buyback program.
We hope to get back to that and be on a much more regular basis, but I think we demonstrated in 2022, our willingness to buy back stock and that willingness remains.
Okay, great I appreciate that thanks.
Yeah.
And this concludes the question and answer session I would now like to turn the conference back over to Bob <unk> for any closing remarks.
I want to thank everyone for taking the time to be on the line today, we appreciate the questions and the interest in Intrepid.
Look forward to seeing each of you on the road have a great day.
And 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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