Edited Transcript of IPI earnings conference call or presentation 7-May-20 4:00pm GMT

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DENVER May 8, 2020 (Thomson StreetEvents) — Edited Transcript of Intrepid Potash Inc earnings conference call or presentation Thursday, May 7, 2020 at 4:00:00pm GMT

* Matthew D. Preston

Intrepid Potash, Inc. – VP of Finance, Principal Financial Officer & Principal Accounting Officer

* Robert P. Jornayvaz

Intrepid Potash, Inc. – Executive Chairman, President & CEO

Matthew D. Preston, Intrepid Potash, Inc. – VP of Finance, Principal Financial Officer & Principal Accounting Officer [1]

Thanks, Claudia. Good morning, everyone. Thanks for joining us to discuss Intrepid’s first quarter 2020 results. With me on the call today is Intrepid’s Co-Founder, Executive Chairman, President and CEO, Bob Jornayvaz.

As we announced yesterday in our Q1 press release, due to the stay-at-home restrictions still in effect for Denver County, we will not be able to hold a question-and-answer session during today’s call. We have scheduled another call for Monday, May 11, at 12 p.m. Eastern Time to respond to investor questions. We will accept e-mail questions before the call and then hold a live question-and-answer session on Monday to answer both e-mail and live questions. Please see yesterday’s press release for more information.

Please be advised that our remarks today 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 be materially different from those currently anticipated. These statements are based on 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 here by reference.

During 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 intrepidpotash.com.

I’ll now turn the call over to Bob.

Robert P. Jornayvaz, Intrepid Potash, Inc. – Executive Chairman, President & CEO [2]

Thank you, Matt, and good morning to everyone. Before I get started on my review of the business, I want to take a moment to address the current environment and how Intrepid is addressing the challenges presented by the COVID-19 pandemic. First and foremost, our thoughts go out to those directly impacted by the virus, particularly those who are sick or on the front lines treating patients as well as those continuing to work in essential services to ensure the well-being of our communities. We acknowledge the many challenges the United States and the world faces. In light of this pandemic and as an essential service provider, we endeavor to be a part of the solution as the world navigates through this unprecedented disruption.

As the pandemic has unfolded, our focus has been on managing the risks around COVID-19 and ensuring that we are taking the necessary steps to protect our employees, support the community and manage through this challenging period. In early March, we took decisive action to safeguard our employees, contractors and visitors essential to our operations. For our support staff, we quickly established work-at-home policies across all locations. We implemented social-distancing measures at our mine sites, supported by staggered staffing schedules and appropriate hygiene measures and cleaning protocols in accordance with the Center for Disease Control and Prevention. We continue to provide all of our employees with the resources to support their well-being. In addition, we have looked for ways to support the local communities in which we operate. In March, we donated our stockpile of personal protective gear to the local hospital in Moab, Utah.

Secondly, I want to explain the format of the conference call. To allow for a complete and robust discussion, we have changed the format of our question-and-answer session for this call. Moving it to Monday allows our team to more effectively answer both your e-mail and live questions, while still complying with Denver’s extended stay-at-home order. We hope the change will not be too much of an inconvenience for our investors. Please refer to our press release and Matt’s final comments for more detailed information.

Further, because our nutrient and oilfield solution businesses are characterized as essential by the state governments of New Mexico and Utah, we have continued to operate in those states through this unusual time. We take seriously our role as an essential supplier to the agricultural, animal feed and oil and gas industries, and our focus is steadfastly on supporting the efforts to ensure adequate food supply through the production of essential crop nutrients. As we manage through this period of uncertainty, our diversified revenue streams, business model and strengthened balance sheet are to our benefit. We will survive this pandemic. First, the very nature of our solar solution mining does not require the same level of staffing and maintenance as traditional room and pillar mining, particularly now as we exit our annual potash harvest season.

Our solar solution mines transitioned to the summer evaporation season in early April, which naturally lowers the overall cash cost to operate these mines for the next several months.

Likewise, an important aspect of our oilfield solutions business has been the minimal headcount and fixed cost it requires to operate. As a result, oilfield solutions is uniquely positioned to weather the sudden change in demand brought on by this pandemic and recover quickly once demand rematerializes. We have taken steps to ensure our workforce remains intact, trained and ready for this recovery.

Second, we have invested appropriately in our potash and Trio assets, such that we have the flexibility to temporarily pull back on our capital program without sacrificing safety standards or production. Like most other companies, we also continue to focus on cost reductions across the organization.

And lastly, over the last several years, our commitment to driving greater balance sheet health and lowering our overall leverage profile as well as the very nature of our lenders transitioning from large insurance companies to banks, such as Bank of Montreal, which left us with a relatively healthy debt-to-EBITDA ratio of 1.6 at the end of this quarter, which leaves appropriate availability under our credit facility. This, combined with the cash position we have established through recent cash preservation efforts, puts us in a more stable position than many other small and micro-cap companies looking to manage through this pandemic.

I want to take a minute to thank Bank of Montreal for their strength of guidance and reliability as a lending part. Intrepid continues to closely monitor on a daily basis COVID-19 disease progression, testing, trials and therapeutics. While it is impossible to predict how or when the world economy will recover, we are encouraged by the global support and goodwill we have seen as the world looks to eradicate the impacts of COVID-19. Working together, we look forward to seeing the United States and the world emerge from this pandemic stronger than before.

Turning to our results. First, we encourage our listeners to please read Intrepid’s 10-Q, which will be issued later today, for more detailed discussion, especially in the M&A section to provide a more complete and robust understanding of the many issues. Further, we delivered double-digit year-over-year sales growth and strong cash generation in the first quarter as we capitalized upon market opportunities presented by good weather across each of our key regions. During the quarter, strong execution drove potash and Trio volumes, up 13% and 36%, respectively, while water sales were a record $8.5 million. This, in turn, drove better-than-expected cash generation, which position us to repay and retire our Series A notes in April. Immediately after this paydown, we had $26 million in cash on hand, $44 million of borrowing capacity and a total borrowing of $60 million, split evenly between our senior notes and our credit facility. As a result, we now have a stronger balance sheet, solid liquidity and a long runway until our next required debt repayment in 2023. All factors that put us in acceptable position as we navigate the current economic downturn.

During the first quarter, our oilfield solutions business delivered double-digit revenue growth and margin expansion as completion activity increased significantly under new 2020 budgets. Water sales in the quarter were a record $8.5 million, resulting from strong demand and higher volumes of water to sell owing to our acquisition of Intrepid South. This strong performance is a testament to the value of our diversified revenue streams and the strategic moves we’ve made to, not only expand our water rights, but also improve our water transport infrastructure, allowing more dollars from the increased water sales to fall to the bottom line. In fact, our February South ranch water book was oversold at good solid margins, and we had significant increases in total water demand as producers operated under their 2020 budgets. Let’s not forget that in January and February, Intrepid made incredible progress in execution of its growth and diversification, as our February water book reflected. We also made progress in diversifying water resources at Intrepid South by utilizing Intrepid water delivered through the select JERA pipeline to serve customers on the North end of the Intrepid South Ranch. Since then, demand and oil commodity price destruction, as a result of the COVID-19 pandemic, has resulted in the postponement of completions and we expect a significant decrease in water demand. We are still in discussions with operators regarding completion schedules and are working to maintain our margins on the South ranch despite decreased demand.

As Intrepid looks to the future and continues its growth and diversification into oilfield solutions, we believe our timing could not be better. Intrepid faces this challenging time with confidence and is uniquely positioned to take advantage of the generational opportunities. These challenges will provide in a market that has been affected by the COVID-19-related loss of oil demand.

Rig count in the entire Permian Basin has dropped from 403 rigs on January 1, 2020 to 219 rigs as of May 1, 2020, and completions are expected to drop significantly during this crisis, with completion crews already having dropped from 134 to 39 over the same time frame. That said, in both rig count and completions, the decline in the Delaware Basin is expected to be less pronounced than other oil and gas regions. There are currently an estimated 2,050 drilled but uncompleted wells, or DUCs, in the Delaware Basin. Up to now, DUC counts appear to be relatively steady as rigs and completion crews balance. Oil commodity price destruction has resulted in the postponement or rescheduling of completions. At the beginning of the year, Intrepid’s water book was sold out at solid per barrel margins. At current commodity prices and due to volatility in projections, our forecast volumes will be affected negatively, the degree to which remains to be seen. Although these reductions in demand are painful, they are much less severe than in other oil and gas basins.

The Delaware Basin in Southeast New Mexico is highly prospective and cost-efficient for oil and gas producers. We believe that the resiliency of the basin, coupled with the high-quality of oil and gas operators will shield Intrepid from some of the more drastic effects of the oil and gas turndown. Indeed, it is a testament to the quality of the basin that some completions are still scheduled.

Now that we’re 1 year out since the acquisition of the Dinwiddie Ranch, let’s look at some of the results. A year ago, Intrepid purchased the Dinwiddie Ranch in Southeast New Mexico, which included 60,119 gross acres of land, of which 22,154 of those acres were fee and 37,965 were both state and BLM and associated property rights. The ranch has since been retitled Intrepid South Ranch. Around the same time, Intrepid purchased a 50% undivided interest in the Ross Track, which is 640 acres just across the border in Texas. Intrepid purchased the Dinwiddie Ranch for $51 million, which was later adjusted for a $1.6 million purchase price reduction or a net $51.4 million purchase price, equivalent to $2,320 per acre. Included in the Ranch were 1,111 acre feet of immediate commercial water rights with significant additional rights in the process of being permitted. There are also significant deposits of sand, caliche and other valuable revenue-generating items, all of which are essential to the oil and gas industry.

Intrepid also purchased an undivided 50% interest in the Ross Track for $3 million, which NGL is our partner. A year ago, we believe the acquisition of the ranches would be highly accretive to Intrepid legacy operations and large water rights in Southeast New Mexico, and that has decidedly proven to be the case.

Over the past year, Intrepid has moved quickly to integrate the ranches into its new Mexico operations. That integration, coupled with onetime legal and transaction fees, represented significant but nonrecurring expenses and skewed 1 year profitability. During the first 12 months, the ranch has generated approximately $16.6 million in revenue and other income as well as an additional $1.6 million in cash from the purchase price adjustment. Net income from the first year of operation was just over $10 million. Because of the synergies with legacy operations in Southeast New Mexico, Intrepid has been able to redeploy its existing labor force from fertilizer operations without hiring additional employees for the ranches. These shared labor costs and other nonrecurring expenses, such as legal costs to permit additional wells, totaled nearly $2 million over the past 12 months.

In the first quarter, we made a highly — in March of the first quarter, we made a highly restricted sale of 320 of the ranch’s 22,154 fee acres to 1 of our operators for $4.8 million, the equivalent of $15,000 per acre, while reserving many of our economic and access rights to the acreage with specific emphasis on retaining the water rights. In the last year, Intrepid has invested in revenue-generating projects that include construction of water pits, pipelines, roads, source water trucking stations, brine trucking stations and water disposal facilities on the Intrepid South Ranch, which are now paid for and completed and stand ready to generate revenue. We have also recently partnered with an operator to treat hydrogen sulfide through an acid gas injection well system and participated in our first-produced water recycling and blending job. Myriad other midstream opportunities are present, including oil and gas storage, gathering, processing and treating, sand, caliche sales and expansion of Intrepid core mineral sales of magnesium chloride, potassium chloride and sodium chloride into the Delaware Basin oilfields. Intrepid’s initial investment in the ranches and subsequent investments have built and support a significant midstream book of business with high-quality producer operators, including Concho, EOG, Ameredev, Caprock, Matador, Marathon, Devon, Apache, KAZA, Oryx and others. Our area of mutual interest with NGL has brought an experienced operator to manage the produced water side of the business on Intrepid South. Through this AMI, we have drilled our first-produced water well and installed the related pipeline on the Ross Track to provide produced water disposal to oil and gas operators under long-term 10-year contracts.

Our original business case for the purchase of the Intrepid South Ranch is even more appropriate and more valid than ever. Significant investments in the ranch have been made. Onetime legal and permitting costs have been spent. And today, the ranch has a strong foundation to perform. The acquisition is providing significant revenue from high-margin fee-based services provided with strong partners to quality producers and operators. Despite recent uncertainty from the COVID-19 pandemic, there is more room to grow. This successful acquisition has delivered on its promise and sets intrepid up to be a major player in the oil and gas midstream in the premier oil and gas basin in the United States. It is also encouraging that is Intrepid continues its growth and diversification with the oilfield solutions that defines unique and different business opportunities, depending upon which talking heads you listen to, the newspapers you read or the analysts you follow, all believe the Northern Delaware Basin will see the first signs of return to activity.

Recently, during this commodity downturn, we have been contacted by producers and operators to expand our existing midstream services. Producers looking to reduce overhead have contacted intrepid to utilize it significantly, highly trained employee base, its equipment and resource capabilities to provide required essential services on a fee-based system. Intrepid continues to screen these opportunities to provide distressed oil operators with required fee-based services and to work with the debt and equity providers that support these management teams and asset bases. We believe that the unique opportunities present in this current market downturn are generational and transformative to well-managed companies and forward-looking, such as Intrepid.

For our nutrients businesses, we delivered strong volumes in the first quarter as mild weather accelerated this spring’s application season. We estimate spring application to be 2 to 3 weeks earlier this year than in weeks past, which likely shifted sales into the first quarter compared to the prior year.

For potash, margins were pressured in the quarter, driven by lower pricing as the industry worked through the high inventory levels of our competitors at the start of 2020. We had good reception to our winter fill program, particularly from agricultural customers looking to take advantage of the lower prices and the good weather. This as well as lower sales to industrial customers, pressured pricing and margins. We saw early acceptance of higher pricing after winter fill programs in certain regions, but we expect that market disruption due to the pandemic will likely hold average pricing for the first quarter levels in the near term. We continue to see solid agricultural demand and expect industrial sales to be slightly pressured through the balance of the year.

For Trio, we saw solid demand, both domestically and abroad during the first quarter. Similar to potash, we expect pandemic-related uncertainty is likely to constrain pricing for the second quarter. Internationally, we grew Trio sales volumes by 48% in the first quarter, focusing on higher-margin markets, while domestic subscription was also robust due to higher agricultural demand resulting from the warm weather.

By product sales were down in the quarter as a result of constrained supply of magnesium chloride after a wet 2019 in our Wendover facility and increased competition for salt. Overall, we believe we have executed well and are well on our way to resolving much an ending old legacy litigation, which has taken up valuable management time and drained financial resources, which paves the way to strategic growth and future prosperity. We executed well and put intrepid in a much stronger position, at the right time, as we enter this period of considerable uncertainty. These strong results, combined with strategic moves we’ve made to diversify our revenue streams and strengthen our balance sheet, put us in a position to be part of the COVID-19 solution as we continue to provide essential services to our food producers.

Looking forward to the balance of 2020, we have worked to resolve long outstanding issues that have detracted from our growth momentum and work to clear the path to take advantage of the exceptional opportunities in the oil and gas and fertilizer markets. Intrepid is highly optimistic and realistically focused on the potential opportunities presented by the challenges we face, in spite of the tragic nature of this pandemic.

And now I’ll turn the call over to Matt for a review of the financial results.

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Matthew D. Preston, Intrepid Potash, Inc. – VP of Finance, Principal Financial Officer & Principal Accounting Officer [3]

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Thank you, Bob. I’ll echo Bob’s comments regarding those impacted by COVID-19 and add my thanks to those on the front lines. First quarter sales were up 11%, and driven by record water sales and strong volumes in our nutrients business. For potash, gross margins were down 54% as higher volumes were offset by lower pricing, higher cost of goods sold and a decline in byproduct sales. Average net realized sales price for potash was $255 in the quarter, down 11% year-over-year. Due to lower winter fill pricing and a shift in mix away from industrial sales towards a higher proportion of agricultural sales. During the quarter, potash gross margins were unfavorably impacted by higher per ton production costs resulting from the below-average evaporation here in 2019.

Sales declined year-over-year as increased market availability of salt and a limited supply of magnesium chloride pressured volumes in the quarter. As a reminder, wet weather at our Wendover facility in 2019 and limited the amount of product harvested and available for sale as we enter 2020. We expect to return to normal magnesium chloride production and sales towards the end of the second quarter.

During the quarter, we lowered our salt production at our Moab facility, which increased the number of days dedicated to potash production. As a result, potash production was up 25% year-over-year.

For Trio, sales volumes were up both domestically and abroad, the lower pricing and higher costs due to increased sales of premium Trio, our highest cost product pressured margins. We saw success in selling into higher-priced international markets, though because international sales tend to carry lower margins, the net effect lowered gross margins in the quarter when compared with the previous year. Our oilfield Solutions segment performed well in the quarter with a 17% increase in sales as a result of record first quarter water sales. This was offset by a $1.8 million decline in sales of potash in our high-speed mixing service.

During the quarter, we sold 320 acres of fee land at Intrepid South for $4.8 million, with the buyers subject to numerous restrictions, yielding a gain on the sale of $4.7 million. In the sale, we retained all water rights, surface access to the property and limited use of caliche found on the property to only development on the subject land in order to prevent any decrease to our other caliche sales. Given the strategic location of our Intrepid South Ranch, we will continue to explore new opportunities to monetize the range, including additional sales of land.

In April, we settled outstanding litigation with Mosaic, bringing to conclusion to a trial that was again delayed this time as a result of the COVID-19 pandemic. The settlement allows us to avoid the costly expense of a trial and once the settlement is signed in May, the matter will be closed. As a result of the settlement, we accrued a onetime expense of $10 million. We expect to pay the settlement at the end of May.

Looking ahead, we recognize the unprecedented disruption caused by the pandemic is likely to have meaningful impacts on our results. While the extent of the impact to our nutrients business is unclear, we have already seen a significant decline in demand for water as oil and gas companies paused their 2020 drilling plans in light of global oversupply. Given these circumstances and the lack of near term visibility, we are suspending our water sales guidance for 2020.

Turning to liquidity. As Bob mentioned, a good start to the spring season and our diverse revenue streams will help us manage through a considerable uncertainty caused by the COVID-19 pandemic. During the quarter, we generated $14.8 million in cash from operations, and first quarter capital expenditures totaled $5.7 million. As discussed in our April 16 press release, we have lowered our CapEx guidance for 2020 to $15 million to $20 million, of which approximately $10 million is for sustaining capital. In April, we also received a $10 million loan under the CARES Act Paycheck protection program. We will use the loan to fund payroll and other eligible expenses. And based on discussions with multiple legal firms, we believe the majority of the loan will be forgiven pursuant to current guidelines under the CARES Act. We continue to proactively manage our capital plans as we navigate through the challenges presented by the COVID-19 pandemic and its associated economic impacts.

That concludes our prepared remarks on the first quarter and outlook. Before we wrap up and for anyone that joined after the call began, we are not able to hold a question-and-answer session today due to the extended-stay-at-home restrictions in effect for Denver County. We will hold another call on Monday, May 11 at 12:00 p.m. Eastern Time to respond to investor questions. In the meantime, we encourage everyone to read our 10-Q, which will be filed later today and to e-mail questions directly to me or our Investor Relations team ahead of the meeting. On our Monday call, we will respond to both e-mail and live questions. Please see yesterday’s press release for more information on Monday’s call, including dial-in details.

We appreciate everyone’s interest in Intrepid and look forward to speaking with everyone soon.

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Operator [4]

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This concludes today’s conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.

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