Intrepid Potash Inc. (IPI)
Q4 2008 Earnings Call Transcript
March 6 2009 11:00 a.m. ET

Executives

David Honeyfield – Chief Financial Officer and Treasurer
Bob Jornayvaz – Chairman and Chief Executive Officer
R.L. Moore – Senior VP of Marketing and Sales
Hugh Harvey – Executive Vice President of Technology
William Kent – Director of Investor Relations

Analysts

Steve Byrne – Merrill Lynch
Don Carson – UBS
Joseph Gomes – Oppenheimer & Co
Christopher Willis – Impala Asset Management
Mark Gulley – Soleil Securities
Robert Koort – Goldman Sachs
Vincent Andrews – Morgan Stanley
Fai Lee – RBC Capital Markets
Jason Votruba – UMB
David Silver – UBS

Presentation

Operator

Good morning. My name is Thea and I’ll be the conference operator today. At this time I’d like to welcome everyone to the fourth quarter and year end 2008 earnings conference call. (Operator Instructions) All lines have been placed on mute to prevent any background noise. After the speaker’s remarks there will be a question-and-answer session. If you’d like to ask a question at that time simply press “*1” on your telephone keypad. If you’d like to withdraw the question press the pound key. At this time, I would like to turn the conference over to William Kent, Director of Investor Relations. Sir, please go ahead.

William Kent – Director of Investor Relations

Good morning, Thea. Thank you all for joining us for Intrepid Potash’s fourth quarter and year end 2008 earnings conference call. I’d like to start by introducing today’s participants from the company. We have with us, Bob Jornayvaz, the Chairman and Chief Executive Officer, Hugh Harvey, Chief Technology Officer, David Honeyfield, Executive Vice President and Chief Financial Officer and Treasurer, and R.L. Moore, Senior Vice President of Marketing and Sales. I would also like to remind everyone that statements made in this call, which express the belief, expectation or intention, as well as those that are not historical facts, are forward-looking statements within the meaning of the United States securities laws. A number of assumptions, which we believe are reasonable or 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 last night and the risk factors described in our filings with the SEC. All forward-looking statements are qualified in their entirety by such factors.

The news release, which is posted on our website, includes a reconciliation of certain non-GAAP financial measures to the most directly comparable GAAP measures. All reference to tons are short tons of 2000 pounds. As a reminder, this conference call is being recorded today Friday, March 6, 2009 at 9:00 am mountain time.

I will now turn the call over to Bob Jornayvaz.

Bob Jornayvaz

Thanks Bill and thanks to those who’ve taking this time this morning to learn more about our fourth quarter and our year end results. Our fourth quarter realized potash price, rose nearly $140 per ton, from our third quarter average to $762 per ton, and our fourth quarter realized price per Trio, our langbeinite product, rose 14% as compared to our third quarter realized price to $323 per ton. Our balance sheet remains very solid with $98 million in cash at the beginning of March, zero debt and $125 million available through our credit facility. Our fourth quarter 2008 EBITDA was $41.4 million, which is a 251% increase over the same quarter last year. EBITDA for the full year was $215.1 million, which equates to an EBITDA margin of greater than 50%. Potash sales volumes in the fourth quarter declined 54% compared to the third quarter of this year due to a slowdown in both our agricultural and industrials segments. Further, during the fourth quarter in response to a slowing market demand, we made the decision to reduce production in order to manage inventory more closely.

Our net sales price advantage in the fourth quarter expanded as we realized the best net sales price per ton of potash amongst the North American producers and we continue to benefit from a more favorable royalty and tax structure. We believe that the long-term fundamentals of our business remain quite strong as the world continues to need potash to produce enough food to feed a growing population. That being said, the fourth quarter was challenging for Intrepid as it was for many other fertilizer producers. We began to see the reduction and deferral of sales in the quarter and these conditions have somewhat persisted into the current year. In response to this, we have taken elective production curtailments with a view towards managing production to maximize margin. We have deferred certain discretionary capital and maintenance investments and are actively managing costs in this environment.

You will hear me say this repeatedly, but I want to emphasize that through this market turmoil we are committed to maintaining our strong balance sheet because we truly believe that balance sheet strength gives Intrepid, marketing and operational flexibility as we navigate these unpredictable times. I look forward to walking you through our results this morning with other members of our management team. Let’s begin with our fourth quarter and full year financial results. In the fourth quarter of 2008, our net income was $22.7 million, which represents a greater than four-fold increase from last year’s fourth quarter pro forma net income of $4.7 million. For the full year, pro forma net income grew to $124.1 million. Our net sales price advantage relative to our North American competitors, expanded in 2008 to $88 per ton compared to $39 per ton in 2007. Our continued ability to obtain higher net realized prices compared to our North American competitors by capitalizing on the location of our mines demonstrates one of Intrepid’s unique attributes.

As a company, we remain focused on our internal growth opportunities. Additionally, we believe that our location in the southwest Untied States affords us a certain financial advantage. First, we market potash primarily in the United States, a sophisticated and normally consistent agricultural market. The core area in which we market typically consumes multiples of what we produce allowing us to target sales to customers close to our mines and thereby lower transportation cost that otherwise reduce our net sales revenue per ton. This, coupled with our market effort, has increased our net realized sales price of our North American peers to greater than $200 per ton in the fourth quarter of 2008. We continue today as we speak to execute on this strategy.

Next, I’d like to address the current market for potash in the United States and our outlook. We make a concerted effort to talk to our customers on a daily basis. The health of the American farmer is a key metric we monitor. When we look at our consumer base, the farm producer is one of the healthiest groups of consumers in the world today. Farmers are coming off two record income years in a row. We believe they’re balance sheets, as well as the balance sheets of agricultural lenders, are reasonably strong. In addition, the availability of farm credit in the United States appears to be fairly stable, especially when compared to other markets. Farmers do remain hesitant. Further, we cannot ignore the fact the impact of raw motion and many have not yet made their key planting decisions. The farmer does not need a lot of convincing in terms of the value products he brings to his bottom lines, especially in terms of yields. Farmers are sophisticated businessmen but they’re farmers like any other buyer in the world today.

I don’t care if you’re buying iPods, computers, cars or real estate, if you have cash in today’s market and you’re buying something, you feel entitled to a lower price. That’s just the way the world is working today. Farmers are waiting because they believe they will be able to buy their raw materials at lower prices in the future. I would like to take a moment to briefly address application rates, which are also an unknown. There’s been talk about reduced application rates around the country and the farmer’s opportunity to mine the soil for nutrients this year. We have every indication that application rates will be lower in 2009. We just don’t know how much lower.

We also know that it’s going to be an erratic and unpredictable spring and that we’re going to have to work hard to manage the business and production levels in response to the market. Now having said that, we continue to ship product quite regularly, if not daily, at prices we believe to be quite attractive. In spite of this near-term uncertainty, long-term industry fundamentals are strong because population growth continues and we have to feed the world on a fixed amount of land. Potash as part of a balanced fertilization program enables the higher yields necessary to feed the world. There is no way to ignore the fact that we have seen a demand slowdown. This spring season is taking longer to develop but in the coming weeks spring will come, crops will be planted, farmers will farm, farmers will fertilize. The inventory that is in the dealer warehouses will eventually be applied. And finally, I can assure you that Intrepid will continue to focus on margin. By focusing on margin, we believe we can create the most value for our stockholders.