Thank you for standing by. This is the conference operator. Welcome to the Intrepid Potash, Inc. second quarter 2017 earnings conference call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. [Operator Instructions]. I would now like to turn the conference over to Matt Preston, Investor Relations. Please go ahead.

Thanks Saji. Good morning and welcome everyone. I remind you that parts of our discussion today will include forward-looking statements as defined by the U.S. Securities Laws. These statements are not guarantees of future performance and are based on a number of assumptions, which we believe are reasonable. These statements are based on the information available to us today and we assume no obligation to update them. You can find more information about risks and uncertainties to our future performance in our periodic reports filed with the SEC. 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 this morning's press release. Our SEC filings and press releases are available on our website at intrepidpotash.com. Presenting on the call today are Bob Jornayvaz, our Co-Founder, Executive Chairman, President and CEO and Joseph Montoya, Vice President and Chief Accounting Officer. I will now turn the call over to Bob.

Thank you Matt and good morning everyone. Our second quarter results highlight a strong spring season for Intrepid with another quarter of solid potash margins and significant year-over-year increases in our Trio sales volumes. We more than doubled water sales compared to the first quarter of 2017 and made progress on our byproduct sales selling more heavy brine and salt compared to the prior year. During the quarter, we prepaid an additional $23 million in principal on our senior notes. We utilized remaining proceeds from our first quarter equity offering and $9.7 million in cash from operations during the second quarter. Since September 30, 2016, we have reduced our total debt by $84 million, or 56% of the original principal amount. The remaining principal on our senior notes is $66 million as of June 30, 2017. We remain focused on strengthening our balance sheet and reducing our debt. Second quarter potash results remained strong as the spring fertilizer season carried late into the quarter. The reduced production profile of our lower-cost solar operations allowed us to focus on higher price markets and locations driving significant year-over-year margin increases. Heading into the second half of the year, we are encouraged by recent summer fill pricing announcements for potash and believe this will provide for a more predictable potash pricing environment in the near term. We believe potash is a great value to our customers and we expect a good fall application season. For Trio, our first half sales volumes of 135,000 tons was the highest first half volume since 2008. These increased volumes were offset by lower Trio prices due to price decreases announced last year and a higher percentage of international sales. We will continue to be thoughtful regarding our production and inventory levels and we will adjust production volumes…

Thank you Bob and good morning everyone. During the second quarter, we generated a net loss of $5.9 million. This was a significant improvement compared to both the first quarter of 2017 and the second quarter of 2016. We recorded consolidated gross margin of $3.7 million during the second quarter, which improved our first half consolidated gross margin to $0.8 million. This is our first quarter with positive gross margin since 2015, an evidence of the success of the transition strategy we began last year. Our potash segment continued to deliver strong results. Good demand at our solar-only production profile resulted in segment gross margin of $4 million in the second quarter of 2017. This is a $9.3 million improvement compared to the second quarter of last year. Production volumes decreased compared to the first quarter of 2017 as our solar solution plans entered the summer evaporation season, midway through the second quarter. Looking ahead into the second half of the year. We expect potash sales volumes to exceed production. Due to the seasonality of the potash market, we expect the third quarter will be our lowest sales volume period of the year. Regarding production volumes, the peak evaporation season is nearing an end and we are pleased to report above average evaporation so far in 2017. If this trend continues, we expect our 2018 potash production to increase compared to the current year. We plan to start production at our HB facility next week and at our Moab and Wendover facilities in Utah in early September. Moving to our Trio segment. Second quarter sales volume increased by 79% compared to last year's second quarter. This was a result of continued marketing efforts and more competitive pricing. International sales grew to 29% of our Trio sales volume compared to 12%…

[Operator Instructions]. First question is from Joel Jackson of BMO. Please go ahead.

Hi. This is Fahad, on for Joel. Just a few questions on the water sales. Next year, you are projecting $20 million to $30 million in sales. What needs to happen to get to the higher end of this range of $30 million?

Thank you for the question. Well, as I mentioned earlier, we have the equivalent of an order book and a lot of the oil companies were out there building infrastructure. So if you were to go out there and take a physical tour, you would see the frac ponds that they have built, the flatlined pipelines that they have installed, the infrastructure that they are putting in. We are working very closely with a variety of water distribution companies as well as directly with the operators to go through their schedules. So it's happening as we speak. Just you literally have to visit it and see it physically to understand and appreciate the amount of work that the oil companies have built and put in to prepare for the activity that they have on our order books.

Okay. Great. And do these contracts, do they have like guaranteed minimum volumes? Like what would happen if the oil prices fell to $40 or $35? Are there minimums? Like how do those contracts work when it comes to contract minimums and volumes?

They are all very, very different and we do that on purpose because we contract with some of the smaller oil companies for a specific frac job and we have some larger agreements with some of the larger oil companies that we believe, given their size and scope, as we have mentioned on previous calls on we are dealing with the equivalents of Exxon Mobil, Chevron, Occidental, that tends to drill through or frac through some of these downtimes. So we feel very comfortable in the nature of the many diverse agreements that we are making. That diversity gives us the ability to adjust pricing on many of the agreements. So we don't have a standardized form, if you will. In fact, we are trying to do just the opposite so that we can have a very diverse group of customers and serve them in a fashion that we like to describe as the easy button, that it's very easy to buy water from us and have it delivered. I don't know if that answers your question or not. But they are very diverse.

Okay. And just a last one for me. What's the margin expectation on the $20 million to $30 million of sales next year?

That's a great question. It's very high. It's easily in the high-80s. I would put it potentially in the low-90s in terms of margin. The nature of water rights is that we pay royalties on a very, very small percentage of our water rights. We own them. The infrastructure is built, as we said. The cost is minimal on many of the transactions where it's the equivalent of a paper transaction where we take a physical right and transfer it to a water well. New Mexico water laws are very complicated and as we mentioned earlier on the last earnings call, we have a very diverse group of water assets in terms of just the variety of different rights that we own, the different well fields that we own and the ways that we can extract the water to provide. Our footprint is over a very, very significant geography and so we are very fortunate in that our water rights are equally as spread out over that geography that gives us a significant opportunity in our ability to deliver.

Fahad, this is Joseph. I would follow on and echo Bob's comments with respect to the range. I would just generally continue to say, it's a very high margin business. Just keeping in mind what Bob said about the diversity of the different types of agreements, some will require more internal services than others. Every one of them is different. So I think the more general response is, it depends on the different agreements as to infrastructure and internal resources required. But generally speaking, I echo what Bob said in terms of it's still a very high margin operation.

Great. Thanks for that color.

The next question is from Christopher Perrella of Bloomberg Intelligence. Please go ahead.

Hi. Thank you taking my call. A question on the mix, I might have missed this earlier. What percentage of the potash shipments in the quarter were to oil and gas guys and ag and the feed companies as well?

So for the quarter, we have an increase in our industrial and feed over the same quarter of 2016, almost doubling in both cases. Our industrial is almost 10% compared to 4%, 9.4% to be exact, compared to 4% last year. And the feed is 11.2%, more than double last year's 5.4%.

And are those still carrying a higher price point than the ag sales?

Yes.

All right. And then shifting over Trio, when do you forecast positive gross margins on the Trio business? I know it's summer fill putting pressure on prices. Is that a 3Q, 4Q or 1Q 2018?

That's a difficult question to answer and I will take a stab at it and let Bob weigh in. I would say, just because of the different variables involved in answering that question, we are not completely in control on price. We are continuing to manage our cost footprint and that has continued to come down and we are continuing to manage that to the extent that we have no additional lower of cost or market adjustments and pricing stabilizes we could get their relatively soon. That being said, those are things that we don't completely all have control over and so I am reluctant to answer that question with a very specific point in time.

So the key variable would be price stabilization, though?

It's really about price.

Okay. All right. Thank you very much.

The next question is from David Steinberg of DLS Capital. Please go ahead.

Hi guys. A good job turning this whole business around. Just one question left on the water. Based on the way the contracts are set up and your ownership and the water rights and so forth, is that something that potentially could be on the plate to be monetized in the future as the way it is structured or the it's all put together or could be put together?

You mean sold as an independent business?

Yes. Sold, spun off and so forth, you know.

I just don't think that's really a question that I would want to answer right now. We are doing such a darn good job at generating revenue and we feel like we have the opportunity to significantly grow those revenues from our current goals that we would want to really focus on the growth part of that while it's front of us and we are working with, I just can't stress the number of people that we continue to work with to grow from the levels that we discussed. So we would want to capture a lot of that growth first before we would even consider monetizing all or parts of that piece of our business.

David, if I can add from the finance and accounting view, we are really focused very narrowly on stabilization of our balance sheet. We think we have made a ton of progress from last year and we continue to do that and I believe that the income stream from water is really going to help us get there more quickly. So in the short term, that's really the way we are looking at water proceeds and for more long-term perspective, I think Bob touched on your question.

Right. Well, I just want to tell you guys, over the some last 12 months, have done a spectacular job turning the business and you have invested your own capital in buying the stock. I know this question I asked was probably premature, but I just kind of wanted to get a sense of where your heads were at and if that was just theoretically possible. So anyway, thank you for answering the question. Good luck and keep up the good work.

Thank you David.

The next question is from Jason Ursaner of Bumbershoot Holdings. Please go ahead.

Thank you for taking my question. Just looking at the balance sheet, since the covenant issue last year, you have paid off $80 million of debt and turned it around bringing the net debt down under $60 million. With the business starting to generate positive cash and it seems sustainable heading into the summer with the water activity, just broadly speaking, do you now feel as if the business has totally come through the challenges of the year, year-and-a-half and where do you see the capital structure headed over the next couple of years?

I think the first thing that we need to focus on is getting to the lower interest rates in our debt structure. And I don't want to go into a great level of detail. That document is public if anyone wants to go out there and read the details. But as I mentioned, we are still paying 8.3% interest on debt that we took on at a much, much lower rate. And so the focus, in the very near term, is to get that down. Once we get down to appropriate levels of debt and interest rates, at that point in time, we start taking a look at the capitalization of the company and determine what debt level, if any, is appropriate. But we are probably still a few quarters away from that, Jason. And to be clear, on two points, one we paid down $84 million of debt since last year and unfortunately our debt balance is north of $60 million at $66 million, but we are working to get to where you think it is and it will be soon at under $60 million.

Yes. We don't see any issues with continued debt reduction to get that number down into the 50s and we feel very, very comfortable about going into 2018, given water sales and the ability to generate positive cash flow. So I think we are a quarter away from being able to start talking about what this company looks like on a growth basis versus -- we are long since pass the survival basis. We have gone through the transition phase and obviously the next phase is getting back to significant growth. And so I think we have laid the foundation to do all that. We got that incentivized rate structure built into our noteholder amendments that allow us to get back down to an interest rate that has a fore-handle on it. And so once whatever that appropriate debt balance is at 4%, just a touch over 4%, it is a very different environment and so were headed there as fast as we can get there. I don't know if I am answering your question, but that's how we are viewing it right now.

Yes. I appreciate that. And on the water sales, again I appreciate the details on the monthly figures through July and what's expected for the balance of the year. When you think about it, I guess much longer term, you mentioned continuing to work with some of the distributors and operators looking at what some of them have been saying, Exxon Mobil, for example, they are talking about 15 rigs in that area of the BOPCO acquisition in the Eddy County area for 20 years of development. So when you look out beyond next year, the $20 million to $30 million numbers that you are talking about, is that the sustainable rate? Do you think you could do for a long time? Is there incremental positive from there? Just kind of how you are thinking about the whole opportunity in that Permian area longer term?

Well, as I tried to mention earlier, that's why we are working on those longer term agreements with a lot of the bigger operators because they have much longer term plans and we are the ones with the largest water rights. So we believe that there is the opportunity for significant growth, but we are trying to give you what we can see, what we have pretty clear visibility on. But it's a part of our business that we are extremely excited about.

Okay. Great. I appreciate the details. Thanks.

The next question is from Rob Chang of Cantor Fitzgerald. Please go ahead.

Good morning gentlemen and congratulations on an excellent last 12 months. A question with respect to the water contracts. Could I get sense of the average length that those contracts are for? And can be expect that those margins would be sustainable throughput those terms?

As to the margins, yes. We are really talking about 15 different agreements and they truly vary from an individual frac job to annual contracts with six-month pricing look backs to some of which we are negotiating for longer terms. So it really is a diverse set. I don't think there is an average on there. And we like the diversity because as the activity picks up, we think that will potentially give us pricing power. And I will leave it at that.

The only thing I would add to that is, some of the contracts have evergreen provisions. So yes, they are drawn up initially as one-year volume contracts. But with obviously opportunities to renew and adjust price.

So would it be safe to assume that there are one-year contracts, would you have anything longer than that at the current moment?

Just not going to comment on that right now.

Fair enough. Right. Thank you then.

The next question is from Glenn Primack of Promise Holdings. Please go ahead.

Hello. Good morning. Another water question. On the $20 million to $30 million in sales for 2018, what kind of capital do you need to put in, in order to get to $20 million to $30 million?

The $20 million to $30 million requires virtually no capital.

Okay. So are those customers then, I am guessing they are not trucking the water around?

No. They are laying flatline to us.

Okay.

As I described, there is extremely diverse -- we have an extremely large geographic footprint that covers dozens and dozens of townships in Southeast New Mexico and we have several water fields, if you will, where w have water wells, water pipelines et cetera. And then we have water rights on the Pecos River. And so we are currently drawing revenues and water from all of those different assets as well as some more creative transactions where we are transferring water in the form of a paper right to existing water wells. So it's a very diverse set of agreements that allow us to get there and we think that diversity is the real linchpin to growing the business. It's not a single point diversion or something like that.

And gladly reiterating some of the comments we made on last quarter's call. There is already an existing infrastructure that exists both, as Bob mentioned, flatlined piping, but also existing physical piping that has been used in the water delivery business for some time. And so we are tapping into that, not requiring a lot of infrastructure capital investment. That being said, I want to reiterate what Bob said earlier that we are continuing to look at other opportunities and that's not to say that some other future opportunities might require some capital investment, although we wouldn't expect that to be significant and in addition to that the pricing of the water that we would sell would have to compensate us for any necessary investments.

Sure. It's a really high-return term business. I noticed, I don't know, a couple of months back that Layne Christensen, which is one of those contractors that does the water wells and stuff, did like, I don't know, it's like a three or five year deal out there in the Permian. And to your point, it seems like you got away for some of that stuff to take place before, the infrastructure is there but whatever connections or stuff are made, you just start delivering to the end customer.

Well, it's all happening in real-time. And so the best way to see it is to physically go out there and see the vast amount. And so we feel very comfortable in the additional discussions that we are having with the larger oil companies who take a longer term view, about how they procure the necessary services that they need versus some of the smaller operators that would prefer to buy on a frac-by-frac basis. So we are trying to, as I said earlier, be the easy button in terms of trying to meet different oil company's objectives both short term and long term.

Got it. It's interesting because the IPI company that come in my office, it's a night and day return profile on the ones that have their own water versus ones that bring stuff in from outside in terms of the return on the well.

Well, that's quite so hard to give an answer that describes an average or describes a typical because we are really, as you just said --

Everybody, yes.

We are trying to fit as many different people as we can.

Good problems.

Thank you.

Thanks.

This concludes the question-and-answer session. I would like to turn the conference back over to Bob Jornayvaz for any closing remarks.

I just want to thank everyone for their time and interest in Intrepid and we look forward to meeting our goals and achieving our results and thank you for your faith in us. Have a great day. Good bye.

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