Intrepid Potash, Inc (
IPI)
Q2 2008 Earnings Call Transcript
August 14, 2008 11:00 am ET
Executives
Karla Kimrey – Director, IR
Robert P. Jornayvaz – Chairman and Chief Executive Officer
Patrick L. Avery – President and Chief Operating Officer
R.L. Moore – Senior VP of Marketing and Sales
David W. Honeyfield – Executive VP, Chief Financial Officer and Treasurer
Analysts
Steve Burns – Merrill Lynch
Xavier Hawley – Meyers Associates
Majid Khan – Cobalt Capital
Presentation
Operator
Good morning. My name is Ashley and I will be your conference operator today. At this time, I would like to welcome everyone to the second quarter 2008 quarterly results conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions) If you’d like to ask a question during this time simply press *, then the number 1 on your telephone keypad. If you’ve already done so please press the pound sign now, then press*1 again to ensure your question is registered. If you’d like to withdraw your question, press the pound key. Thank you. Ms Kimrey you may begin your conference.
Karla Kimrey – Director, Investor Relations
Good morning. Thank you for joining us today for our second quarter 2008 earnings conference call. I’d like to start by introducing today’s participants from the company. First, Bob Jornayvaz, the Chairman, CEO and co-founding stockholder of Intrepid. Next, Pat Avery, President and Chief Operating Officer; and David Honeyfield, Executive Vice President, and CFO and Treasurer. Also joining is R.L. Moore, Senior Vice President of Marketing and Sales.
I would also like to remind everyone that statements made in this call that express beliefs, expectations or intentions as well as those that are not historical facts are forward-looking statements within the meaning of the US Securities Laws. A number of assumptions which we believe are reasonable were made in connection with the expectations reflected in such forward-looking statements. The forward-looking statements involve risks and uncertainties which could cause actual results to differ from our expectations.
For material information with respect to the risks, uncertainties and factors which could cause our actual results to differ from our forward-looking statements, we direct you to our news release issued yesterday and the risk factors described in our filings with the SEC. All forward-looking information and statements are qualified in their entirety by such factors. The news release from last night, which is posted on our website includes a reconciliation of certain non-GAAP financial measures to the most direct comparable GAAP measures. All reference to tons, are short tons.
I now turn the call over to Bob Jornayvaz.
Robert Jornayvaz
Thank you, Karla, and thanks to those who are taking time this morning to learn more about Intrepid and our second quarter results. In the second quarter, Intrepid’s employees executed well at every level, enabling us to meet our production, expansion, cost and corporate objectives and allowing us to capitalize on a robust potash fundamentals. We are pleased with the results and look forward to sharing the highlights.
As for our second quarter financial results, pro forma income was $32.4 million, which compares favorably to last year’s second quarter pro forma income of $4 million, and 68% greater than our first quarter 2008 pro forma income. Our second quarter 2008 EBITDA was $55 million, which compares favorably to the $8 million in the same quarter last year. As for sales and pricing, our results were driven by the sale of 213,000 tons of potash and 47,000 tons of langbenite at an average FOB price or net sales price of $425 per short ton of potash and $188 per short ton of langbenite. As a point of reference, our second quarter 2008 net sales price for potash is $130 per ton higher than our first quarter 2008 net sales price and $243 per ton higher than our second quarter 2007 net sales price. Our income growth demonstrates the leverage we have to potash prices.
Speaking of price changes, we raised our potash pricing for red granular FOB Carlsbad $200 per ton effective August 1, and we expect that increase to result in further income growth in the third and fourth quarters this year. Our posted price for red granular FOB Carlsbad has increased progressively through 2008 from $317 per ton at the end of 2007 to the current posted price of $782 per ton. Our posted langbenite price has also increased from $156 per ton at the end of 2007 to $356 per ton for new orders placed after mid-July 2008. Next, I’d like to share some of Intrepid’s strategy for growth. As many of you know, our potash mines are a consolidation of previously underutilized potash assets in western United States. Under our management, the focus has been to maximize the production at an attractive extraction and processing cost basis. We make sure our business is conducted in a way that focuses on the long-term results to the company and our stockholders. We continue to utilize new technologies and adopt technologies from other industries to increase production, improve reliability and add to our available reserves.
As an example, during the second quarter, we increased our hoisting capacity at the West Mines with the adoption of innovative rope technology and minor modifications to our skiffs. This improvement should gradually increase our productions in the West Mine with no additional fixed costs. As previously mentioned, our capital investment program is focused on projects that improve reliability, increase production, lower average production costs, and facilitate resource recovery. Our ore reserves should allow us to produce potash well beyond our lifetime. This allows us to focus on long-term sustainable production while taking advantage of more immediate production improvements given the current pricing environment. A great example of our capital strategy is our focus on adding potash production that uses solution mining combined with solar evaporation to deliver low cost tons rather than having to use large amounts of expensive natural gas.
We expect to add potash production at our existing solar evaporation facilities in Moab and Wendover, and are in the process of reopening the HB Mine in Carlsbad as a solution mine combined with solar evaporation. We expect our solar evaporation project and de-bottlenecking projects to progressively expand our potash and langbenite production over the next few years. While we are focused on our expansion opportunities, we also like to note that our location in the southwest United States affords us certain advantages. First, we market products primarily in the United States in sophisticated, diversified and very consistent agricultural market. The core area in which we market consumes multiples of what we produce, which allows us to target sales to customers close to our mines, thereby reducing transportation costs that might otherwise reduce our net sales revenue per ton delivered. As a result, over the course of 2007, our net sales per ton results were approximately $40 per ton higher than our peers. This coupled with our marketing effort has increased our net sales advantage over our North American peers to over $70 per ton in the second quarter of 2008. A second financial advantage we enjoy relates to our royalty rights. Our royalty payments averaged 3.5% to 4% of our net revenues and we are not subject to a profit or capital tax. This allows us to capture over 95% of any price increase as operating income.
Finally, I’d like to comment on the pricing of potash compared to other commodities. Many commodities trade on an exchange and have an active futures market which potentially allows for speculative bubble. Commodities that trade on an exchange typically can be quite volatile such as oil and natural gas. Potash, however, does not have a futures market so the price is based on negotiation between suppliers and buyers of the commodity.
