Intrepid Potash, Inc. (IPI) Q2 2012 Earnings Report, Transcript and Summary

Good morning, and welcome to the Intrepid Potash Second Quarter 2012 Earnings Conference Call. [Operator Instructions] I would like to remind everyone that this conference is being recorded today, August 2, 2012, at 8 a.m. Mountain Time. It is my pleasure to turn the conference over to William Kent, Director of Investor Relations. Mr. Kent, please go ahead.

Thank you, Satchi, and thank you all for joining us for our second quarter 2012 earnings conference call. Participants from the company include Bob Jornayvaz, the Executive Chairman of the Board; David Honeyfield, the President and Chief Financial Officer; and Kelvin Feist, Senior Vice President of Marketing and Sales. Also in the room with us today are Hugh Harvey, Executive Vice Chairman; Martin Litt, Executive Vice President, General Counsel and Secretary; John Mansanti, Senior Vice President of Operations; Brian Frantz, Vice President of Finance and Chief Accounting Officer; and Ken Taylor, Vice President of Business Development & Research. During today's call, Bob Jornayvaz will recap second quarter results, provide highlights on capital projects and talk briefly on corporate strategy. Kelvin Feist will cover sales and marketing, and David Honeyfield will wrap things up with some additional capital investment detail and a high-level review of operations. I would like to remind everyone that statements made on this call that are not historical fact or that express a belief, expectation or intention, including statements about our financial and operational outlook, are forward-looking statements within the meaning of the United States securities laws. These statements are not guarantees of future performance. 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 more information with respect to the risks, uncertainties and other factors, which could cause our actual results to differ from our forward-looking statements, we direct you to the news release which we issued last night and the risk factors and management discussion and analysis of financial conditions and result of operation in our most recent annual report on Form 10-K and subsequent quarterly reports on Form 10-Q, as filed with the SEC. All forward-looking statements are qualified in their entirety by such factors. Our earnings news release, which is posted on our website at intrepidpotash.com, includes a reconciliation of certain non-GAAP financial measures to the most directly comparable GAAP measures, including adjusted EBITDA, which we use on this call. All references to tons are to short tons of 2,000 pounds. I'll now turn the call over to Bob Jornayvaz.

Thanks, Will, and thanks to those joining us today to learn more about Intrepid's second quarter 2012 results and current market trends. Our second quarter results exceeded our expectations and reflect the strength of our marketing program and the benefits of our investments in the business over the last few years. We earned $0.25 per diluted share on net income of $19 million, and our adjusted EBITDA was $43 million. Once again, we delivered the best margin per ton when compared to the North American potash producers that have already reported, building on our long track record of value creation and delivering the highest margins. Our balance sheet remained debt free with $186 million of cash and investments. At the end of the quarter, we deployed $62 million towards the execution of our robust capital investment plan, putting us on pace to invest between $225 million and $300 million this year to grow and enhance our operations. There are so many great things going on in Intrepid. Our recent and continued operational success shows that the investments we're making in the business are clearly paying off. Our West Facility continues to perform well, both in the underground and surface operations. During the quarter, we achieved 3 daily hoisting and processing records at this facility. West has been the focus of a number of debottlenecking and technology investments over the last several years, and our return on these investments is being realized as our people execute against our plan. When I speak about those records, I want to make it clear that those facilities have been in operations since 1962, so those milestones, in terms of hoisting and processing records, are truly achievements. Our Utah operations continue to perform well as well. At our Wendover, Utah facility, we are seeing strong recoveries and increased throughput. Our Moab, Utah mine is expressing a good, solid evaporation season and is making significant progress on the addition of 2 multi-well horizontal cavern systems. These wells are state-of-the-art and will help grow our low-cost solar evaporation production and further our growth strategy and objectives. Our compaction investments at both Moab and Wendover continue to perform extremely well, giving us production flexibility and enhancing our product quality, giving us significant opportunities to market that product throughout the entire United States. Construction of the HB Solar Solution Mine has moved forward rapidly and remains on track for first production by the close of 2013. Since we last spoke, we have cleared and prepared nearly 1 square mile of ground, moved almost 600,000 cubic yards of material, are nearing completion of the first 18 solar ponds, have installed 250,000 square feet of liner just in the last week. We have begun drilling water, brine injection and extraction wells and have fused over 43 miles of HDPE pipe. Given this pace, we expect to start initial brine injection towards the end of the third quarter. Our North compaction plant made a significant -- made significant progress during the quarter, and the project remains on track to be in service in 2013. 250 truckloads of concrete, the foundation of the new compaction structure is essentially complete, and the steel skeleton for the new compaction building is growing every day. This project is expected to be completed in time to compact new tons being produced from the HB mill, as well as for the expected production increases at our West Mine. The Langbeinite Recovery Improvement Project has come in on budget, and the Dense Media Separation component is working as well and as designed. Since our last conference call, we've seen significant and continuous improvement on the sylvite side of the East plant, which is helping to boost the feedstock to the langbeinite plant, leading to higher Trio recoveries. These type of capital investments, focused on increasing our productivity and decreasing our per-ton cost, remain at the core of our growth strategy. Given the strategy and the current strength of our balance sheet, we thought it prudent to begin to explore business development opportunities in a much more formal fashion. Along these lines, we have created a business development team to develop market opportunities that support our diverse business plan that are a good fit with our capabilities and that grow our business and will continue to add to our margin supremacy. We plan to approach this initiative, as we do with all things at Intrepid, with systematic, rigorous and deliberate analysis and execution. Before turning the call over to Kelvin, I want to briefly cover the drought situation impacting so many people. The drought has created significant volatility in all areas of the agricultural economy and has had a dramatic impact on commodity prices. There's no doubt that the drought has had a devastating effect on many farmers in the U.S.. We do believe, however, that these weather impacts will create opportunities going forward with farmers around the world likely to increase planted acreage in the next crop year, which should drive greater nutrition and consumption around the world. The drought serves as a powerful reminder of the value of servicing diverse markets, with our sales going into not just agriculture but also the industrial and animal feed sectors, as well as the benefit of servicing various geographies based on our plant locations. Our geographic advantage, our marketing strategy, our production flexibility and our strong customer relationships allow us to continue to deliver strong results. Kelvin Feist will take the call from here and provide a brief market update.

Thanks, Bob. Intrepid sold 184,000 tons of potash during the quarter, which was higher than we had anticipated. We believe our results are attributable, at least in part, to incremental potash moving to field in order to supply the larger acreage of corn and soybeans planted in the spring. In addition, we have confirmed that dealers and retailers eventually exited the spring with 0 to minimal potash inventories. Sales at the end of the second quarter were also supported by an earlier-than-anticipated summer potash fill program, which spurred demand. Even with dealers' increased caution, the summer fill has progressed well with good demand for product across all regions. The fill offerings that have been announced by our North American competitors, coupled with the import activity on the river channel, however, moved potash prices lower by about $20 to $25 per short ton from the levels we saw in the second quarter. When we stop for a moment and evaluate the overall market, we see a solid foundation for our business based on expected stock levels for grain, commodity prices, nutrient levels in the soil and our acreage expectations for next year. This huge factor is creating a supportive scenario for potash this fall and into next spring. Demand in the industrial potash markets and animal feed businesses remained solid in the quarter. Given the current drilling rig utilization and related contract commitments, we expect to see continued stability in the industrial sector. Transitioning to Trio, demand remained strong for all grades, and we saw a sequential $20 improvement in net realized sales price to $322 per ton in the second quarter of 2012. On August 1, we increased our posted granular Trio price to $355 per ton from $340 per ton FOB Carlsbad. We expect the strong demand and solid pricing to continue due to the current tight market conditions for this specialty product and a growing recognition of its agronomic value. With that, I will turn the call over to Dave Honeyfield to provide some final remarks.

Thanks, Kelvin. On balance, things are going quite well at our facilities, and the execution of our capital project plan remained on track and on budget. We successfully showcased the diligence of our technical, operational and supervisory staff, and we remain committed as an organization to deliver strong returns on invested capital and to lower our overall production costs. As Bob highlighted, the HB Solar Solution Mine is moving full speed ahead, on schedule with a number of activity surrounding the project occurring simultaneously. We expect to begin injecting brine into the mine working sometime in September of this year. What is often overlooked is that the brine being injected is expected to be delivered from non-potable groundwater, making productive use of this otherwise non-valued resource. The project remained on budget with about $61 million invested thus far of an expected total investment of $200 million to $230 million. The North compaction project is also moving along very well. This project is on budget and on schedule with $17 million of the expected $95 million to $100 million budget that's been invested as of the end of the second quarter. Another capital investment highlight during the second quarter is the drilling of the first 2 new horizontal wells that will be part of a brand-new, multi-well cavern system in Moab, Utah, complementing the existing network of wells that we've drilled since we acquired the facility. This is a great development for the Moab operation that confirms our ability to successfully replicate and grow the production -- our Moab production base using advanced drilling techniques for solution mining. During the quarter, we substantially completed the commissioning of the Dense Media Separation component of our LRIP and the construction of the premium Trio granulation component of the plant. We have performed some limited testing on the granulation facility, and the results are quite favorable. As we begin to produce larger quantities of Trio product, we'll be ramping up production of premium Trio in anticipation of the spring 2013 demand. We continue to implement the long-term improvement plan at the East surface facility, which we first highlighted last quarter. We are seeing steady and incremental progress from our work under this plan with production levels at East during the second quarter being sequentially higher than in the first quarter of 2012. The improvement plan is a well-designed and documented process, which we're committed to move forward in a very deliberate manner. We expect plan execution to continue through the remainder of 2012 and into early 2013. As we've stated before, people should expect variability of production results at our East Facility as we work through the improvement plan. More specifically, the plan may impact our production levels for potash and Trio and cause some variability in our cash cost of goods sold. Before I wrap up, I also want to highlight the success that our operations team has had remaining focused on managing costs. In the face of some real operational challenges, sometimes people lose focus on cost management. Well, we didn't take our eye off the ball. And as a result, our cash cost of goods sold is tracking both on a quarter and a year-to-date basis, and we expect to finish 2012 in the $175 to $190 per ton range, which is slightly lower than the range we set out at the beginning of the year. In closing, during the second quarter of 2012, we continued to make significant investments that will grow our production, lower our overall cash cost per ton and increase our marketing flexibility. Our results reflect the ability to meet the needs of our customers in a dynamic agricultural market. We remain confident in the direction of the business, and we look forward to sharing with you our continued success. We'll now open the lines for any questions.

[Operator Instructions] The first question is from Edlain Rodriguez of Lazard Capital Markets.

A quick question. I just had a question on langbeinite. Like what exactly are the operational issues going on there? And when do you expect those issues to be resolved? And once everything is resolved, like how much of langbeinite can you expect to sell and produce, let's say, in 2013?

Do you want to start, Bob?

Edlain, thanks for the question. I think what's really important to appreciate about the langbeinite facility is that that's part of the overall East plant. And what the East plant really generates or what the sylvite plant at East really generates are 2 things: one is potash and one is feedstock for the lang production. And that goes into the new LRIP and into the pellet plant. So when we started to describe some of the challenges at the East, that has had an effect on our ability to produce Trio because we haven't been able to deliver quite as much feedstock. So what I think is really important to take away is that the capital investment for the DMS plant -- the DMS is working just like we had expected it to. We're seeing the pellet plant produce very good premium Trio product. So really, it's part of that overall East improvement plan that we're talking about. So we'll see -- continue to see progress through -- into 2012 here and then into 2013. What we're expecting -- if you look in our Qs and Ks, what you'll see is that our -- we believe our productive capacity out of that facility is 270,000 tons of Trio, and there's no reason why we don't expect to get there. So I think, if you look forward into next year, those are the levels that we're planning on, those are the levels that the marketing program is being built around. And so we're pretty confident that we're going to get there. And keep in mind that's about a 50% uptick over where we're at on our annual run rate for this year. So a pretty meaningful step toward.

Edlain, this is Bob. Thanks for the question. Once again, at the East plant, we're producing from a mixed ore body so that the ore has the potash and langbeinite encompassed in the ore. And as well as producing for that mixed ore body, we're also producing from a sylvite-only ore body as well that tends ore zone. And so when those -- when that increased throughput -- because we've done substantial work over the last few years on the underground, and underground is now hoisting at very significant higher rates than it used to. As that higher underground throughput begin to come through the old East plant, as we then had it on the new langbeinite facility, we realized that we needed to just take a step back and update the crystallizers, the boilers and all of the middle part of that processing plant that captures the potash. And so we've been undergoing significant changes to the crystallizers, the boilers, et cetera. We've also changed everything from being basically a manually operated plant to a very sophisticated process control plant so that, that plant is now much more with --

With a digital system.

A digital control system. And so we totally modernized that plant and rebuilt that plant, both on the potash side and on the langbeinite side. Well, along with that, you have to upgrade the personnel that are used to operating a kind of a hand-driven or mechanical system to a thoroughly automated system. And so all of the changes, we've been making and improving and upgrading as we're going along. So on top of the fact that we're dealing with a complex mineralogy coming from a complex ore zone, we've totally revamped the plant, both in terms of -- I'm giving you a very long answer, and rarely do we go into the weeds operationally, but I want you to get a feel for the magnitude of the changes that we've done as well as on the changes that we've made to the langbeinite side from the original langbeinite facility that Hugh and I built back in 2005. So I just wanted to give you a little extra color, that there is a lot of detail to it, there's a lot of engineering, that's a lot of technical aspects. There's been a lot of personnel changes to go from sort of an old-school style of management to a new, state-of-the-art digital control management system. So hopefully, that gives you just a little more color and a little more feel for what we've done.

No, that was really helpful. Another question on potash. Essentially, in terms of what's going on in the Midwest right now with the drought conditions, what's your take of the debate going on right now in terms of the residual potash and phosphate in the soil and what farmers might end up doing for next year? I mean, I'm just trying to get your thought on where you think this is going.

Edlain, I'll take that one. It's Kelvin here. We've been watching it pretty close and getting feedback from a lot of our customers, trying to understand it better as well. I think it's pretty early to tell exactly what the impacts are. Every region is a little bit different. But I think the reality is, every farmer is taking a different approach to his land. Some of them are plowing it under early on, others are feeding cattle, some are creating [indiscernible] with that material. So every different system removes different amounts of nutrients. I think the reality is we're seeing strong demand and a belief that next year is going to be an excellent year and that the nutrient levels in the soil are not significantly -- or there's going to be a significant removal and not a significant decrease in the amount of volume or demand for this fall or into next spring.

The next question is from Vincent Andrews of Morgan Stanley.

You guys referenced imports coming into the Gulf, and I just want to get a sense of sort of where you think the U.S. market is. I know you said dealers ended empty and the summer fill is proceeding well. But what level of competition do you think we should expect in the Gulf in the fall? And if you combine that with sort of your conversations with dealers and their expectations with how they want to leave the fall, where -- when do you think we're going to get inventory levels sort of back to normal at the dealer? And is what's happening in the Gulf posing a risk to that, I guess, is the question.

I think that what's happening in the Gulf is just -- it's anomalous. And it's out there, but it's not that significant. I think that we feel very comfortable with the guidance that we've put out there in terms of our abilities and what we think we're going to achieve. When you look at the overall market, you've just got to look at it in different spots. There's going to be farmers that are going to have incredibly banner years, and then farmers, as Kelvin touched on, have different attitudes. We're seeing the occasional barge come into the United States. It is disruptive. But it is what it is. It's not as big as we've seen in years past. So I don't know if I'm answering your question. We -- it's out there. It's having an impact. I think a couple of the -- our North American competitors probably started off the summer, before the drought was really fully known, a little more aggressive. And so we've seen some of that aggressiveness tail off some because people believe we're seeing it, is that we're going to see growth in the potash markets worldwide kicking in a pretty dramatic fashion. I mean, let's just face it, at these corn prices, people are going to be going to corn, wheat and beans all over the world and we're now seeing the rumblings and the feelings of that happening. I mean, we could -- it's just happening as we speak right now. So I think our core markets in the United States are going to remain just fine. When we look at Texas, Texas has had substantial amounts of rain. Same in certain parts of Oklahoma. So we're seeing in our core markets things are going to be just fine. I don't -- Vince, I don't know if I'm answering you.

Yes, no, that's good. I mean, maybe just as a follow-up to that, one of the -- maybe you can help us sort of -- obviously, one of the debates that's out there right now is whether application rates go down next year because there's P and K left in the soil. But my view remains that there was so much de-loading this year at the dealer level and at the farmer level that even if applications went down slightly because the de-load was probably 20%-plus, shipments have to be up next year. It sounds like you would agree with that. I'm just wondering if you have a sense of -- or when you think we'll have a sense of how much reloading will take place.

Maybe I'll take a run on that one, Vincent. It's Kelvin here. You talked about normal inventory levels and getting back to normal. And I think what we're seeing is some significant change at the retail level. And you're seeing these bigger IPNI numbers in terms of inventory. I think the reality is a bit of a shift, a de-risk from the retailer or dealer. And so there's a lot more inventory that the producer owns at I'll call it the retail level. So you really got to take into account the retail and producer inventories when you're looking at that. And all of us are -- had a pretty good summer fill, and, in my view, we certainly did. I think that's part and parcel of what we're seeing in terms of the commodity price and the willingness to grow a significant crop next year. So -- but we're pretty confident that because guys were empty, the big fill and an expectation that we're going to get some rainfall here this fall and actually get a plow down season in the Midwest should be very favorable to us.

And just as a last thought, we're you saying, Kelvin, that you think that sort of there's been a structural shift in the sort of inventory dynamics in the channel whereby the manufacturer is going to wind up holding on to more inventory than, say, in the past as we move even into the peaks of the season?

I think, Vince, I guess we would characterize it instead of a structural shift in this specific industry, we're seeing that in terms of risk management across all industries across the world. And so a very consistent theme has been that farmer is no different than any other person in business around the world. And we're seeing that people have found ways to mitigate and manage risk and try to put risk off, whether you're in the automobile distribution business or whether you're in the fertilizer distribution business. And so I think that's what we're seeing in the short term. The other thing that I wanted to add is that we've gone back and looked at previous drought years and what did potash application rates look like after, say, the drought of '88. And we don't see any significant cutbacks. In fact, we saw slightly increased levels. So we're just not that -- we're not that concerned about where we are. I think the more important part is the fact that commodity prices are extremely strong, and that's what's going to drive kind of the world consumption, which always seems to have a dramatic effect on our own backyard.

The next question is from Joel Jackson of BMO Capital Markets.

Maybe talking about some of the things going on at East. And would you expect your potash production levels and your cost levels in 2013 to be similar to 2012?

Joe, this is Dave. And John, don't hesitate to jump in here if there's something else you'd like to add. Yes, on the potash side, specifically, you're going to see, as a blend, that there's a couple of things that we really have coming on in 2013, Joel, that we expect to see potash production levels at East being higher as we get more tons processed through the facility, as all the bits and pieces that Bob described get upgraded and fully implemented. And like I mentioned, the guys have done just a great job of managing the overall cost side of the equation. Don't forget we're going to see the HB tons that are expected to come on in the latter part of 2013. We expect to see the greater capacity at the North compaction facility, which will allow us to process a little bit higher rate for the tons that are coming out of West. And we'll start to see a little bit of the benefit of the well system from Moab. So my expectation is that when you look at that range that I described on the cash cost of goods sold, that you'll see a lower number in 2013. I think similarly on the Trio side, you're going to see that number go down on a per-ton basis each quarter on the cash cost per ton side on Trio as we get all the changes that -- in place and updated. And if you look back to maybe the very beginning of the year, that still is our view of where those Trio costs are going to get to once that facility is -- the East facility is running and hitting on all cylinders.

Okay. Now with pricing moving down in the last little while after summer fill here, so what are your views here on sort of short-term price development? Do you expect prices to stay kind of flattish? Do you think prices will come down a little bit with some higher competition on the river from ICL and BBC? And then I guess longer term in terms of price development and also cost development '13 and '14, assuming sort of flattish prices, as you have more ability for granular here, how should we think about '13 and '14 prices and costs? And would the incremental -- increments to both of those kind of balance out?

Well, let me start on -- sorry, this is Bob, on the short-term piece. I think people made price movements, and I'd say our North American competitors made price movements, prior to how much we knew about the severity of the drought. So there were things that occurred that were prior to kind of knowing where we were in overall commodity pricing. But some of the -- that downward take that we saw was unfortunately, I think, pretty mature given where we're seeing commodity prices today. I would say that we're seeing a firmness from what occurred. I don't see us going down much further just given the discussions that we're having and the needs that are out there. So I think, in my very humble opinion, the worst is behind us is due to price decrease. As to going out farther into '13 and '14, I don't want to hazard any guesses as to pricing other than to say we're going to see very, very robust agricultural activity all around the world, which is going to have a positive impact on demand for potash. And we're seeing that just literally at every level that we're talking to, that, that is truly the discussion, whether it's in Russia, whether it's going -- in Australia, whether what we're seeing happening in China. India is really wrestling with what they need to do, and I think India, at some point, will come to the table. So we're just setting the stage for what should be a very, very good 2013. On the cost side, I'll let Dave address that.

Yes. And I think actually on a -- I think you really need to incorporate Bob's comments with looking at our results relative to the other potash producers as well. And once again, this quarter, our net realized sales price was significantly higher than the folks that have already reported, and we've earned more margin per ton. So we try to help people understand and to see with some of our investor presentations and such that's been a very consistent theme for us, and we've continued that. And so we tend to see that relationship stay regardless of what's happening on the price side, regardless on what's happening on the operational side because we're -- we have that flexibility of our markets and we can manage around it, right? I think if you add the comments that I described earlier around where we expect to see cash costs on potash and Trio, I think that you have to go back to what is Intrepid doing, and it's driving incremental growth through lower-cost tons. And really trying to put those together, Joel, I think is pretty key to understanding the Intrepid story.

I guess what I was trying to find out a little bit more was not necessarily that guys ask you of what pricing in '13 and '14. Let's assume that pricing stays flattish for both standard and granular in '13 and '14. With your mix shift here potential -- with more compaction capacity and a -- hopefully for a potential for more granular mix here, I guess I was kind of wondering, assuming flat prices, what should we expect in terms of price increases, the cost increases as well. But would it -- would the margin impact be better or flattish?

Well, I think if you look at what we're trying to do on the cost side in that environment, our margins would grow, and we'll see growth in that scenario using the assumption that you have, that the pricing essentially held flat.

Okay. Finally, on Trio. Maybe you can -- obviously, Trio pricing as a percentage of potash has been increasing the last several quarters. You've talked about the increasing value for magnesium and sulfur. I mean, is it likely here that as you bring on more Trio capacity over the next little while, and possibly, there's been some speculation that one of your competitors for langbeinite has had some reduced production, is it likely that the premium or, actually, that the discount of Trio versus potash could increase over the next couple of years?

Yes, I'll take that one. It's Kelvin here. The way we look at it is it's really a unique specialty product, the Trio material. It -- a lot of the material goes on for, like, sensitive crops that are high-value crops. So from that perspective, I guess we don't really look at them and compare them to closely to exactly where the potash material goes. We've been successful in moving the price up and haven't seen a significant amount of resistance, I guess, because of some of the value that our customers are seeing. And some of that value is in the form of the sulfate material in it and magnesium in it. I think we've got to keep a close eye on the demand side of that. And if that one comes into question, we'll have to reconsider. But today, we're seeing excellent strength there. And it is a tight market, and I think it's a market that can grow significantly. So we -- we're looking forward to '13 and having more material to put into the market.

Yes, I just can't stress how much larger that market is and our ability to supply it. We worked really hard agronomically at going out and growing that market, and I wish we had more supply because we'd be selling it.

The next question is from Mark Connelly of CLSA. Kurt Schoen - Credit Agricole Securities (USA) Inc., Research Division: This is Kurt Schoen filling in for Mark. Can you expand on your rationale in building Trio inventory? In this environment, it seems kind of a -- kind of like -- kind of a risky decision. And did you have any kind of soft or hard confirmation from your customers regarding building inventory to ship larger shipments?

Kurt, this is Dave. I think we need to put it all in perspective here. And when we talk a little about intentionally building inventory, what we're seeing are 5,000 and 10,000 tons. And imagine trying to run a store or run a business where you have one item of inventory sitting on a shelf. It was just becoming very challenging to manage our customers' needs and to manage our own sales and load-out function when we were essentially selling exactly what we were producing. So all we've done is build a little bit of stock for the shelves so that frankly, we can manage that business better, deliver it to our customers when they need it, make sure that we build up some inventory on the standard side for some of the larger, bulk export orders that, frankly, we haven't been able to fill. So it's not a situation where there's a lack of demand or anything along those lines. I think it's just important to recognize that this is something we really had to do to make sure that we were meeting the needs of our customers and able to run our business in a much more efficient manner.

The other thing to point out is that we have completed -- we've built and completed and have tested our drilling facility for our Trio product to create that premium product. Well, in order to run that brand-new compactor and sell that premium product, we have to store an inventory to run through it. And so that would be the highest-value product. So once again, there are just extremely good, very rational reasons why we are, "building an inventory," so that we can then make that product and service our customers better and sell it at a higher margin. I hope you can appreciate all that. Kurt Schoen - Credit Agricole Securities (USA) Inc., Research Division: Yes, sure. So, I mean, it was kind of one-quarter thing, and we should expect higher inventories going forward, from what it sounds like.

Yes, we may -- certainly, as we go into the end of the fall here, like I mentioned before, Kurt, we're starting to run that premium Trio pelletization plant or granulation plant, and we need to -- that's primarily a spring market on that, so we may see even a little bit more build on that here into the fall. But it's all very purposeful and very intentional in terms of making sure that we've got the product there to fulfill the needs that our customers have.

The other thing to point out, Kurt, is that a lot of our Trio -- I mean, this is where I'm really proud of our marketing effort because we are really working with our customers to know and understand their needs and their demands. A lot of our Trio customers don't have inventory space, yet they want to make significant purchases of Trio. And so we're working with several of our customers to keep inventory on-site and hopefully to begin to turn that into premium product or shipments early into 2013 or late into -- in 2012. I just want you to really appreciate the degree to which this is a well-managed, well-thought-out inventory program. It's significantly different than managing potash. Kurt Schoen - Credit Agricole Securities (USA) Inc., Research Division: Okay, that's helpful. And then shifting to Moab, the new well system. How much capacity will that add to that mine? Or is it just merely replacing that which is being lost?

Kurt, this is Dave. I'm going to start on it real quick. And John, if you can add a little bit of additional color, that'd be really great. Keep in mind what we're doing that is we're expanding our capabilities to grow that Moab production. And for example, up until 2013, we had drilled 13 wells. In -- up until 2012, we had built 13 wells. We -- we're going to probably drill 13 to 14 wells this year, all told. Part of those wells are going into the existing cavern system, and part of them are new systems. So in terms of what we're going to see in growth, we'll really start to see that in 2013. And John, if you can talk a little bit more maybe about the systems and what we expect to see there.

You bet. Thanks, Dave. The -- if we look at Moab and where our production comes from historically, we produced potash from the old open-mine workings. And as those resources were depleting, we added additional synthetic wells, artificial wells in a new zone. What we are actually doing is, doubling that in our sylvite mine. And as Dave said, we had 13 wells before. We probably have 13, 14 different wells this time around. So we're -- we've actually doubled that. But what that allows us to do, it partially offsets the depletion. But more importantly, it actually expands what we're going to be able to do at Moab. And we see ourselves being able to produce at a higher level of potash given there's a higher production on really some of our lower-cost tons in the whole company. So if you look at it from a margin standpoint, these are some of the best-margin tons we're going to have in all of the company. But in effect, we're doubling the capacity in the sylvite mine there, which part of it is offsetting just the normal P-K of the old wells, but another component of it is actually incrementally adding to the production profile of that site.

The next question is from Bill Carroll of UBS.

Your CapEx guidance range hasn't changed, and it's still relatively wide given that we're 7 months into the year and your main projects remain on track. Is that range mainly a function of the timing of when money may get spent rather than you building in a cushion for cost inflation, cost overruns and the like?

It's exactly that, Bill. If you look at the pace of CapEx, the fact that we were able to get, what was the number, $60 million -- $62 million deployed in the second quarter, I think, is pretty reflective of the pace that we're now on. And the big 3 projects, like we've touched on our HB, the North compaction project and Moab, and those are all moving at a very, very good pace. So I think if you look towards the mid-point of that range, that's simply why we haven't updated that number, is we still think that we're -- the mid-point's a really good target for us. So I don't really expect to see much on the cost inflation side. Most of the contracts have been less, contractors have been lined up and we feel very good about the budgets that we've presented and the fact that we're going to come in right on those budgets. So I wouldn't worry too much about the cost side of it.

Okay. That's helpful. And one more, if I may, do you expect any potential logistics issues in moving product due to lower river levels resulting from the drought?

Kelvin, do you want to touch on that?

Yes, Bill, I'll take that one. Yes, as you're aware, we are a big player on the river. And so the story goes that there's a lot of people who think there are some issues there, but we personally don't see any issues with our logistics. We typically ship either by truck or by rail out of our facilities, whether that be Utah or Carlsbad. So we're not seeing that. We're not hearing it from the railroad that there's extra congestion as a result of that, and our expectation is that we'll ship as normal through the back half of the year.

The next question is from Adam Schatzker of RBC Capital Markets.

I just wanted to return, if I could, back to the questions on the East mine. The first quick question is, what would you say will be the capacity factor that you ran for both potash and Trio in the last quarter?

John, do you have a sense to maybe how to answer that fairly.

As for the...

Capacity factor.

It's the percentage of capacity. So we were probably at -- probably close to 50% capacity, I would think.

Yes, that feels about right.

Okay. And you mentioned a number of things that were changed as the boilers or crystallizers and the automation. So that we can sort of benchmark this going forward, can you just give us a quick highlight of what has been done, what have yet to be done on installation? And with respect to personnel, how is that coming along? Have you been able to find the people? Or has that been something that was a challenge so we can expect that to linger a bit?

Adam, let me start with that, then I'll let John get into the weeds a little more. On the personnel front, I think we have the absolute best team, right team in place that are some newer younger guys that we've -- we acquired from some other mining facilities that were used to working in complex process environments with a digital control system. So I just couldn't be happier with the people that have started there with us and really started -- brought those groups on in the first and second quarter. I'm going to let John go into the complete boiler rebuild system in a little more detail to give you some flavor there and then a complete kind of realigning of all of our crystallizer systems because what we realized is we've made so many great changes underground and our ability to hoist significantly more than we had previously ever hoisted in the history of the East Mine to create that increased throughput. And then what we're doing on the langbeinite system to sort of continuously improve how we recover langbeinite that comes off of the backside of the sylvite plant. So remember, when we hoist this mixed ore material, it goes into the sylvite plant first, and then it comes out in a brine from the sylvite plant into the langbeinite plant. And so the sylvite plant has to be running in a very optimized level to get the best recoveries for the langbeinite side. I think when we first went into this, we focused too much time and effort on the langbeinite side. We didn't realize the benefits and opportunities that we really had to upgrade everything on the sylvite side. And so I'll let John get a little bit into the weeds on some of that.

Yes, to be honest -- so I'm not going to get too far into the weeds. But the bottom line is that our East plant is a thermal process and it works well at higher temperatures that allows us to differentiate the sylvite from the other mineralogy there. And so the boilers are a critical component of that. They're old boilers. They basically served their purpose, and we have a replacement plan that we're working through. Part of that strategy includes a rental boiler as we manage deliveries and we go forward. Obviously, anything you do that has a combustion source as permit component tied to it. So we -- we're managing through those pieces of it as well. That's why some of these things take until 2013. You've got deliveries, you've got permit issues. And that -- that's pretty much the boiler side. Our intent is to use a rental boiler and then bring in some new boilers and retire some of the older, less efficient boilers that we're using. And that would give us higher reliability in that part of the plant. On the crystallizer circuit, it's pretty much what Bob said. I mean, those crystallizers have been for a long time, too. Any time you're dealing with a hot chloride environment, it's a pretty corrosive environment. And so there's a little TLC that, that part of the plant needs, and that sort of program is geared towards. It's a systematic review of what they need, putting plant programs together so we can manage the maintenance and the refurbishment cost. And that's we're executing on as we go forward.

Yes, and I don't want to get too political, but I do want to give you a flavor for the fact that we're going to be replacing 3 old boilers with 2 new state-of-the-art, very efficient boilers, but the permitting process as well as everything down. And so it's -- we're still living in a permitting environment that is making it very difficult to do things as quickly as those of us that have an entrepreneurial spirit want to get things done. So I don't want to editorialize too much, but I do want people to appreciate that things like that do impact even small potash companies.

And where are you what that permitting now? Is that completely behind you? Or is there still stuff left to go?

We are in the permitting process as we speak?

Adam, this is Dave. I think the other thing, that there's always seems to be a silver lining that we find in these, is recognizing that, that permitting process takes some time. Frankly, we're looking at some alternative ways that may ultimately lower some of our steam requirements through mechanical systems that, frankly, may end up helping us out even more so on the long run. So the challenge has made us think harder, and we're seeing some real good ideas come out of that.

[Operator Instructions] The next question is from Mark Gulley of Gulley & Associates.

Just want to return to the subject of application rates for the next planting season. I mean, if it looks like corn yields are going to be 20% to 25% below original expectations and soy yields sort of in the 10% below expectation area, and I'm going to exclude wheat for the moment here, it just seems to me that by the time we get to spring of next year, that farmers will simply require that much less P and K and more nitrogen here for the next growing season. So, I mean, it's just a question of simple math, it seems to me. Am I missing something? And now...

Yes, very much so.

Flipping to application rates, I'm not talking about shipments from the potash suppliers.

Yes, let's talk about application real quick because it really is a function of what each specific farmer did. Certain farmers got their corn stocks grown to a certain point at which -- and then they plowed them under. That doesn't necessarily mean that they replaced all of that potassium back into the soil. We have -- a lot of farmers that we've talked to, they've turned cattle out on their -- on their silage. And so as you know, it's hard to find -- corn is expensive, so we have innumerable farmers that we've talked to that have allowed cattle to get turned out on what's left. So I think the way that you're going about your math is not necessarily the proper way because so many farmers are doing different things with how they're handling and how they're managing their own individual disaster, if you will. So when we go back and we look at application rates in prior droughts, we don't see significant drop-offs because we saw similar behaviors. Also, given the insurance programs, we're not sure how many farmers are going to try to grow something. And so there's just -- there's lot of factors at work, and I think a very simplistic mathematical approach is not the right way. I'm going let Kelvin add a little more color to that.

And Mark, I think you also have to look at the level of K in the soil from previous. And we know that there's a lot of acres out there that are getting very close to a critical level or have some type of deficiency. So we've been really mining the soil of K for a number of years, and that's an important component. And when you're coming into a year where there's another great opportunity, in 2013, with the higher commodity prices, it really suggests that the farmer is going to have to consider that and look to higher rates to make sure that it's just sort of like an insurance policy where he's applying the appropriate level to get the appropriate or the maximum yield. So that's the way we view it. There are some areas that if they are plowing it under, we'll see some slight decreases. But there's also areas when you're taking a vegetative -- add a grain off of that acre, they'll actually see a need for more potash then they normally would put on. So as a whole, we don't see a significant change in the level of demand across the U.S.

So that's helpful. So you're saying that grazing of cattle in silage is removing vegetation, but plowing under is not, that's obviously going back into soil?

Correct.

Okay. But if they yield is still 25% below, that never showed up in whatever growth there was. So I'm sort of getting confused.

But you're getting yield. Don't forget that a lot of potassium goes into the stalk, not necessarily the kernel. And so you're trying to put everything into the kernel of corn, and you're forgetting the amount of potassium that goes into the stock and the root system.

Okay. I will follow up later on that. And then the next question I had, had to do with, again, this issue of application rates. The industry is certainly trying to talk a lot about this IPNI study. And it may or may not be accurate, but what is the level of awareness out there on the part of farm extension agents, farmers, consultants, that sort of thing? It seems to me even if the data is accurate, there's an educational process that will have to occur to make people who matter make different decisions regarding application rates.

Let's start...

Yes, I'll take that one, Mark. It's Kelvin. I think the first thing you have to think about is farmers are astute businessmen that know that they need to apply an appropriate level to get it to maximize their yield. So these guys are very well educated, in many cases, and understand soil nutrition and whatnot. We've added an agronomist to work a little more closely on some of these things. It's an important piece for us to promote more balanced nutrition. And I think that's going to be a continued approach on our side to make sure that everybody across all regions is understanding how best to maximize yield because that's going to be a very important component going forward in the next few years.

Okay. Well, it'll be very interesting to see how these application rates actually turn out.

The next question is from Matthew Corn of Barclays.

Just a simple question left on my list. Looking at your guidance for Trio over the third quarter and for the full year, it implies a fairly wide range of possibilities for production and sales in the fourth quarter. And I'm just wondering is, if from what it sounds like the level of demand is very strong, pretty consistent, so it's not a question on whether the demand will be there. Is it more a matter of whether or not you can get these new boiler system, crystallizers, permits? Is that the main detriment to -- that will cause you to be at the lower end?

Matthew, this is Dave. I think the -- just knowing that we're going through that process at East, I don't -- we just don't want to necessarily set expectations at some very precise level of production because we know there's going to be variability as we work through this plan in a very deliberate way. So I think you've hit on the point that we're trying to make there. And I would just look at it almost on a sequential basis in terms of the progress that we're seeing. And if I look here into July, we're seeing a better month than we saw in June; and in June, we saw a better month than we saw in May; and in May, we saw a better month than we did in April. So please know that we are making -- every month has been better than the last. And when you string a few days together, you can measure weeks, and when you string a few weeks together, you can measure months. And so we're just trying to make sure we help people appreciate kind of how we're thinking about the improvement plan over at East.

Got it. So really, the takeaway is that there's more uncertainty based on the production side and where the system's going to be overall as opposed to the current level of demand and the demand outlook?

Yes, that's fair. I don't think the range is really that much wider than what we've typically put out there, though, on a quarter or an annual basis but maybe a little bit more on the annual side because I think we did expand that a little bit. But I feel like we're going be solidly, again, in the middle of those, I hope, and -- but recognize there's a little unpredictably there.

There are no more questions at this time. I will now turn the call back over to David Honeyfield for closing remarks.